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Document of

The World Bank

Report No: T-7065 BIH

TECHNICAL ANNEX

BOSNIA AND HERZEGOVINA

RECONSTRUCTION ASSISTANCE PROJECT

October 31, 1997

Resident Mission Bosnia and HerzegovinaCountry Unit Bosnia and HerzegovinaEurope and Central Asia Region

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WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRONYMS

BH Bosnia and Herzegovina

EBRD European Bank for Reconstruction and Development

EKBL Elektrokrajina Banja Luka

EPBL Elektroprenos Banja Luka

EPRS Elektroprivreda Republika Srpska

EU European UnionFA Force Account

FAO Food and Agriculture Organization of the United Nations

FRY Federal Republic of Yugoslavia

FY Fiscal Year

IFAD International Fund for Agricultu6rl Development

IDA Intemational Development Association

IS Intemational Shopping

IFC Intemational Finance Corporation

IMF Intermational Monetarv Fund

IMG Intemational Management Group

LIB Limited Intemational Bidding

MAFWR Ministry of Agriculture. Forestiy and Water Resources (RS)

MUHC Ministrv of Urbanism. Housing and Construction (RS)

NS National Shopping

NGO Non-Govemmental Organization

OHR Office of the High Representative

PCU Project Coordination Unit

PIU Project Implementation Unit (in ZVRS)

PMAU Procurement Monitoring and Audit Unit

PMG Project Management Group (in EPBL)

RS Republika Srpska

SNCB Simplified National Competitive Bidding

UNHCR United Nations High Commissioner for Refugees

ZVRS Zavod za Vodoprzvreda. RS (Institute for Water Works, RS)

GOVERNMENT FISCAL YEAR

January 1 - December 31

Vice President Johannes linnCountry Director Christiaan PoortmanSector Director Ricardo HalperinResident Representative Rory O'SullivanStaff Member Michael Koch

BOSNIA AND HERZEGOVINA

RECONSTRUCTION ASSISTANCE PROJECT

TECHNICAL ANNEX

CONTENTS

A. INTRODITCTION ........................................... I1

B. SECTOR BACKGROUND ............................................ 1Agriculture Sector ........................................... 1lHousing Sector ............................................ 2Water and Sanitation Sector ............................................ 3Electric Power Sector ............................................ 4

C. BANK RESPONSE AND STRATEGY ........................ 5...5Bank Strategy ....... ;.5Rationale for Bank Involvement ..................................... 7Lessons Leamed from Previous Bank/ IDA Experience ..................... ................. 7Relationship with other Bank-financed Projects ...................................... 8

D. PROJECT DESCRIPTION ....................................................... 8Project Objectives ............................................ 8Project Components ............................................ 8Project Cost and Financing Plan ........................................... 12Economic Justification ........................................... 13Environmental Impact ........................................... 14

E. PROJECT IMPLEMENTATION ......................................... 15Organization and Implementation Arrangements ......................................... 15Onlending and Cost Recovery .......................... 1.6Procurement .......................... 16Disbursements .......................... 20Accounts and Auditing .......................... 21Supervision, Reporting and Monitoring .......................... 21

F. BENEFITS AND RISKS ............................... 21

G. AGREEM ENTS REACHED ................................ O23

APPENDICES1. Agriculture Component2. Housing Component3. Water and Sanitation Component4. Electric Power Component5. Implementation Support Component6. List of Supporting Documents in the Project File

MAPS

IBRD 28531 and 28532

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Technical AnnexPage 1 of 24

A. INTRODUCTION

1. The proposed Reconstruction Assistance Project is a multi-sector emergency-type investmentproject aiming to address some of the most urgent reconstruction needs of Republika Srpska (RS), one ofthe two Entities that form Bosnia and Herzegovina (BH). This Technical Annex complements the Creditdocumentation prepared by the Bank in support of this Project. The sectoral Appendices to the TechnicalAnnex provide more detailed information on the four economic sectors covered by the Project.

2. The declaration of independence of BH at the end of 1991 was quickly followed by anexhausting war that lasted three and a half years. The war completely shattered the economy and leftextensive human and physical devastation. By 1995, BH's GDP had shrunk by 70 percent from its pre-war level, and its per-capita GDP had declined to US$ 600. Separate economic management systemswithin the country developed during the war. RS adopted the FRY Dinar as well as its tax, trade, andbanking legislation. Within the Federation of Bosnia and Herzegovina, separate fiscal and financialpolicies and management were implemented in the majority Bosniak and Croat areas.

3. While post-war economic recovery is well underway in the Federation where industrialproduction rose by 60 percent during the first nine months of 1996, recovery in RS is lagging behind andbegan only slowly after the removal of intemational sanctions in March 1996. Following the removal ofsanctions, trade and the supply of basic commodities have improved to a certain extent. Nevertheless,the difficult post-war situation in supply and production, particularly in non-agricultural sectors, remainslargely unchanged. Current estimates place RS production in late 1996 at 8-10 percent of its pre-warlevel. Because of the very low level of economic activity and tax rate reductions early in the year, 1996tax revenues of RS fell below their 1995 level, which forced further expenditure restraint in order tomaintain the budget balance. Credit and monetary expansion were also limited under FR Yugoslavia'stight monetary program.

4. War damage and resulting urgent reconstruction needs are large and widespread across alleconomic sectors of both Entities of BH. However, the existence of economic sanctions on RS,difficulties of access to and communication with RS, and issues of compliance by RS with the provisionsof the Paris/ Dayton Peace Agreement have led many donors to target their initial financial support to theFederation of Bosnia and Herzegovina. For 1997, there is increased interest among the donor communityto establish a better balance for financial support between the two Entities of BH. Support by the BankGroup for BH, since mid-1996, has included both Entities, but only 5 percent of Bank lending in 1996was allocated to benefit RS; during 1997, Bank lending to BH benefited both Entities in about equalshares. Overall, there has been no major effort by the donors to date to finance urgent reconstructionneeds of RS in the agriculture, housing, water and sanitation, and electric power sectors. Given theexpectation of increasing refugee returns into RS starting in mid-1997, and in view of possible furtherpopulation movements within RS, active reconstruction in these four economic sectors will be of criticalimportance to allow for the integration of returnees and displaced people into their former or newcommunities. This is the framework within which the proposed Project has been prepared.

B. SECTOR BACKGROUND

Agriculture Sector

5. Bosnia and Herzegovina is essentially rural, its 540,000 small private farms prior to the waraccounted for more than half of all households. Primary agricultural production alone comprised 14


percent of GSP'. While being a net importer of food, mainly of grains, exports of livestock products,vegetables and wine were important. Unlike in other former Yugoslav republics, some 96 percent of theagricultural land is in private ownership. Republika Srpska itself is geographically divided into twoareas: the northem and westem area centered on Banja Luka and bounded to the north by the Sava River;and the southern and eastern area bounded in the east by the Drina River. From the confluence of the tworivers near Bijeljina in the north, running westwards up the Sava valley towards Prijedor there is anextensive area of relatively flat, fertile land. The share of arable land decreases sharply towards the eastand south of RS, giving way to pastures. CliInate is generally continental, rainfall is mostly adequate.

6. War damage to agriculture in RS has deprived private farmers of their means of production,shelter, food, employment and income. Damage is heavily localized, such as in the southern part of theBanja Luka region, known as the Anvil Area where the population was displaced several times and largeshares of livestock and farm machinery were lost. Because the rural economy has been effectivelydestroyed in this area, rural families have tended to remain either in refugee status or lodged in localtowns where they impose an additional burden on already fragile housing conditions. Overall damageestimates to agriculture in RS are 30 percent for livestock and 40 percent for farm machinery. Withoutlivestock, farm families returning to areas with heavy agricultural losses are denied the opportunity togenerate cash income, and without farm machinery they can neither grow crops nor provide fodder forany livestock they may intend to acquire. Even a return to manual methods is often unlikely because ofthe loss of hand tools.

7. In summary, the main constraints towards agricultural recovery are as follows:

* Lost assets. Total war damage to agriculture in BH is in the multi-billion dollar range. Replacinglost livestock and farm machinery, along with provision of seasonal inputs, is a priority.

* Uncertain land ownership. Temporary user rights to the land may be needed for the displaced andrefugees until contested ownership rights can be settled.

* Small and fragmented farms. With an average size of 3 to 5 hectares, the average farm is small andlargely inappropriate for modem mechanized farming. Consolidation through land markets isneeded.

* Poor technical perfonnance. Low crop yields and substandard livestock performance call forestablishment of agricultural extension and strengthening of veterinary services and research.

* Lack of credit. Farmers are worst affected by the weakness of BH's banking system. Rural financialservices, possibly through local NGOs, need to be developed.

* Lack of markets and farmer organization. Agricultural product markets tailored to the private farmsector need to be developed, fanner cooperation through associations should be strengthened.

8. Unlike in the Federation of Bosnia and Herzegovina, no major reconstruction as taken place inthe agriculture sector in RS since the end of the hostilities. The Food and Agriculture Organization of theUN (kAO) and NGOs have provided urgent fann inputs such as seed, fertilizer and pesticides, also handtools, however in relatively small quantities. Bilateral aid has contributed some animals and agriculturalinputs.

Housing Sector

9. Of the RS pre-war population of 1.3 million, only 20 percent lived in urban areas, most of themin Banja Luka which was the second largest city in BH. The population was well housed with privatehousing representing 80 percent of the stock. Urban areas had a mix of both public and private housing.

Within the former Yugoslavia, the measure of national income was Gross Social Product (GSP), ameasure which excludes services, except those involved in the transport and distribution of goods.


Public housing in the form of multi-family medium and high-rise brick or prefabricated panel housingwas concentrated in the largest towns of RS (Banja Luka, Brcko, Doboj, Prijedor) where it accounted for30 to 50 percent of the housing stock. Public housing was funded through a salary tax. Public apartmenthouses were built by large public construction firms on behalf of socially-owned enterprises as well associal and public institutions which then allocated units for rental to their employees. Tenure in publichousing units bestowed many of the benefits of full ownership, including inheritance rights.

10. Housing conditions in RS have deteriorated greatly due to war damage and massive displacement ofthe population. An estimated 24 percent of the housing in RS has been damaged and about five percentdestroyed.2 The value of the damage to the housing stock is estimated at around US$ I billion. About 27 ofthe 45 RS municipalities have experienced some form of damage to their housing stock. Accommodation incities largely untouched by the war is in short supply due to the influx of displaced persons. Some 10,000people in RS remain in crowded collective centers. Most of the larger RS municipalities have establishedprocedures for allocating vacated units to displaced families or placing them with host families, givingpreference to finding accommodation for people in collective centers. War damnage to housing has beenexacerbated by collateral damage caused by weather conditions, lack of maintenance and the deterioration ofinflrstructure installations and connections to networks. Some vacated houses have been deliberately burnedand others have been subject to looting.

11. These are the key issues to be addressed for a recovery ofthe housing sector:

• Conflicting ownership and tenant rights. Recent laws are considered to be contrary to the provisionsof Annex 7 of the Paris/ Dayton Peace Agreement and to interfere with the right of owners andoccupants to reclaim their units. The RS authorities recognize the need to change this legislation.The conflicting claims and legislation will take time to resolve. In the interim, procedures need to beset up to review the status of ownership and occupancy of houses targeted for repair.

- Limited funding available. Donor-financed investments should be extended as loans to beneficiaries,rather than grants, to allow for cost recovery and the use of reflows for future repair investments.

- High level of damage requires selectivity of investments. Repairs should target low to mediumdamage first and focus on creating incremental living space.

• Transition from supply to demand-driven sector policy. Private sector investment into housing needsto be supported through clear and enforceable property rights; privatization of housing stock; rentalcharges that ensure cost recovery; development of housing finance; privatization of the constructionindustry; and streamlining of regulations relating to land use and housing development.

12. Efforts at reconstruction of housing in RS during 1996 have been fairly limited. UNHCR hasdistributed materials for the repair of about 2,700 units in the Pale and Banja Luka regions. UNHCR'sTarget Area Initiative, which is intended to facilitate the return and reintegration of refugees anddisplaced persons, covers a few municipalities in RS for a total of about 9,000 housing units in theSipovo, Ribnik and Bratunac municipalities. Selected NGOs supported by bilateral donors have assistedwith repair of private houses. Some municipalities have undertaken repairs of roofs in lightly damagedpublic housing to accommodate displaced households and preserve this stock. Surveys of housingdamage in RS have been completed by IMG. A survey by the RS Ministry of Urbanism, Housing andConstruction indicates a need for urgent public housing investments of US$ 70 million in 27municipalities.

Water and Sanitation Sector

13. Water supply services in BH used to be of satisfactory coverage and quality. About 70 percent ofthe urban population was served, 24-hour service was the norn. Some 35 percent of the rural population

2 Damage estimates for the Federation are 50 percent of the stock, with an additional six percent destroyed.

Terhnical AnnexPage 4 of 24

were connected to piped water supply systems, the remaining population had on-site water supplyfacilities such as springs or wells. In the area of RS, prior to the war, there were some 50 urban watersupply systems covering 56 percent of the pre-war population, and about 9,800 village water supplysystems providing service to 44 percent of the population. Regarding sewerage services, about 60percent of the urban population and about 10 percent of the rural population were covered in RS. Mostof the remaining population had on-site sewage treatment and disposal facilities. Large industries hadtheir own water supply and waste water disposal systems. Operation and maintenance of water andsanitation services was not cost-covering, requiring financial support from public budgets. RS has at itsdisposal adequate water resources and sufficient precipitation.

14. The war has seriously disrupted water supply and sanitation services in RS, full-time supplyservice is no longer the normn. Due to lack of proper water treatment, water quality may not comply withdrinking water standards. Sewers are blocked, treatment plants are out of order, landfill sites fail toprotect water courses, river pollution is on the rise. Physical damage is concentrated along formerconfrontation lines affecting facilities located primarily above the ground level such as water pumpingstations, treatment plants, reservoirs, and river dikes. War impact also relates to the loss of servicevehicles, lack of mechanical and electrical equipment, loss of staff, and unfinished construction works.The most severe impact is felt from system malfunctions due to lack of maintenance and replacementinvestments during and after the war period. Contamination caused by land mines is a firther issue.Overloading of water supply and sanitation services due to heavy population shifts, and disruption ofwater services in areas where water source and water supply areas have been separated by the Inter-EntityBoundary Line add to the post-war problems.

15. The water and sanitation sector faces numerous challenges in order to recover from the war:

* High unaccounted-for water losses. Losses vary between 40 and 60 percent. Developing newresources and systems may be more econbmic than investments to reduce water losses.

- Poor sewage systems. Systems are designed for combined collection of sewage and storm water anddischarge raw sewage into rivers. Separate systems and new sewage treatment plants will be needed.

- Rise in water-borne diseases. Reducing health risks is a priority, requiring repairs to leaking andblocked sewers, inoperative water and sewage treatment plants, pumping stations and septic tanks.

* Poor cost recovery. Municipalities need to increase charges and collections to be able to operate andmaintain water systems. Financial support from the public budget will no longer be available.

* Need for public divestiture. The water construction and consulting industry needs to transfer frompublic to private status and ownership. Remaining public sector institutions require strengthening. -

16. Reconstruction in the water and sanitation sector in RS since the end of the hostilities has beenlimited to initial assistance by the European Union, the United Kingdom, the Red Cross, Norway, andsome NGOs for the supply of the most urgently needed materials, works, equipment and spare parts. Thecombined value of this assistance, during 1996, is estimated at US$ 5 million. Consultants supervised bythe International Management Group have prepared a comprehensive Emergency Reconstruction andDevelopment Plan for the water sector of RS, based on which major reconstruction can be initiated.

Electric Power Sector

17. Prior to the hostilities, a single enterprise, Elektroprivreda Bosnia i Herzegovina, wasresponsible for electricity generation, transmission and distribution. In 1992, this single enterprise wasbroken up into public utilities serving the areas under majority Bosniak, Croat, and Serb control,respectively. Since June 1992, the electric power sector in RS is operated by Elektroprivreda RepublikaSrpska (EPRS). In 1995, electricity generation in the territory of RS was 2,355 GWh (or 56 percent of

Technical AnnexPage S of 24

the total generation in Bosnia and Herzegovina), and electricity consumption was 2,264 GWh.3

Electricity exchange with the Federal Republic of Yugoslavia in 1995 amounted to imports of about 400GWh and exports of some 327 GWh. Most of the plants have suffered throughout the war from the lackof maintenance on installed equipment.

18. The electric transmission system in RS includes two parts: western RS around Banja Luka, andeastern RS south of the Posavina corridor, interconnected by 110 kV lines. The transmission networkand control system were largely damaged, particularly in those areas located close to the formerconfrontation lines. Total capacity of the transmission substations is about 4,220 MVA. The RSdistribution network includes Banja Luka, Doboj, Bijeljina, Pale and Trebinje. Networks include 67,884km of overhead lines, 9,114 km of cables, and 3,129 MVA transformer stations capacity. Many of thedistribution networks have been significantly destroyed as a result of localized fighting and lack ofmaintenance. Transformer stations, civil works structures, telecommunications and maintenanceequipments are also darnaged or destroyed.

19. Principal problems and areas in need of support in the electric power sector include thefollowing:

• Distribution system overload. Damnaged systems are unable to cope with rising consumption due tousage of electricity for space heating. Distribution system repairs are urgently needed.

* Poor cost recovery. Billings and collections are inadequate to cover current system operating andmaintenance costs. The power entities will need the firm support by the RS Government to enforcecollections and raise revenues to required minimum sustainable levels.

e Entity linkage. Power generation sources are concentrated in the eastem part of RS, while the majorload center is located in the western part. Existing transmission linkage between eastern and westernRS is weak. Improved cooperation between RS and the Federation to exchange power is critical.

* Weak institutions. The breakup of the former single electric utility company has yet to result in adistribution of liabilities between the successor enterprises. The existing situation of largely separatepower systems constitutes an obstacle to safe, efficient and economic operations.

20. Since 1996, a number of donor-financed repairs, of limited value and scope, have been initiatedin RS. Rehabilitation of the Ugljevik thermal plant and associated coal mine has been started.Reconstruction of a 400 kV transmission line between Ugljevik and Banja Luka has begun. A section ofthe 220 kV transmission line running through Central Bosnia from Trebinje to Bihac has been completed.Completion of these lines, particularly the 220 kV line, will restore the linkage between the RS and the

Federation power grids. Repair of a 110 kV line between the cities of Visegrad, Gorazde and Foca wascompleted in 1996 and will improve power ability in Gorazde. Rehabilitation of a part of the distributionnetworks in Doboj, Bijeljina, Srebrenica, Gorazde, Foca and Mrkonjic Grad has been started.Nevertheless, availability of electric power is still limited, especially in western RS where economicrecovery is constrained by insufficient power supply.

C. BANK RESPONSE AND STRATEGY

Bank Strategy

21. On April 1, 1996, Bosnia and Herzegovina fulfilled the conditions of succession to the formerSocialist Federal Republic of Yugoslavia's membership in the Bank, IDA and IFC. Membership isretroactive to February 25, 1993. The resolution of Bosnia's arrears with the World Bank, through

3 This compares with a pre-war generation, in 1990, for all of Bosnia and Herzegovina of 13,090 GWh andan electricity consumption of 11,181 GWh.


consolidation of its IBRD debt, allowed regular Bank lending to begin in June 1996. With a war-devastated economy, low post-war per capita GDP and lack of creditworthiness, Bosnia was declaredIDA eligible.4

22. Since early 1995, the Bank Group has been deeply involved in developing, with the BHauthorities, a blueprint for reconstruction of the country's economy. A three- to four-year PriorityReconstruction Program totaling some US$ 5.1 billion was presented to and endorsed by a donors'conference co-sponsored by the Bank and the European Union, following signing of the Dayton-ParisPeace Accords in December 1995. This conference, and a second in April 1996, led to 1996commitments of about US$ 1.8 billion from some sixty bilateral and multilateral donors for immediateand priority reconstruction activities. A third donors' conference held in July 1997 secured additionaldonor commitments of US$ 1.2 billion for 1997.

23. Of the total estimated value for this Program of US$ 5.1 billion over a three to four year period,urgent needs assessments for RS resulted in an estimated financing requirement of some US$ 1.4 billionfor reconstruction investments within RS. The existence of economic sanctions on RS in early 1996,difficulties of access to and communication with RS, and issues of compliance by RS with the provisionsof the Paris/ Dayton Peace Agreement have led many donors to focus their initial financial support on theFederation of Bosnia and Herzegovina. As a result, only about 2 percent of the 1996 financial pledges ofdonors were directed at reconstruction in RS. In 1997, there has been increased interest among the donorcommunity to establish a better balance for financial support between the two Entities of BH.

24. During 1996, the Bank followed an assistance strategy aimed at jump-starting economic activitythrough support of a broad range of economic sectors. Leveraging Bank resources with significantfunding from donors was an important element of this strategy. Before arrears resolution, IDA supporteda series of immediate assistance programs through a special US$ 150 million Trust Fund for Bosnia andHerzegovina (TFBH). Seven emergency operations were approved under the TFBH, included rebuildingof government institutions and funding of a line of credit to small business, as well as support forrehabilitation in the agriculture, water and sanitation, transport, health, education and heating sectors.

25. Since the start of regular IDA lending in mid-1996, US$ 257.6 million in IDA resources havebeen committed, supporting two of the operations under the TFBH and an additional 11 operationsfocused on clearing of landmines, reconstruction of electric power, transport infrastructure, housing,hospitals and schools, establishment of a guarantee facility for industry, and three programs to supportrecovery of employment through public works, re-training and loans to microbusinesses. IDA'sassistance program also supported the initial phase of the government's macroeconomic and institutionalreforms: a Transition Assistance Credit, approved by the Board in September 1996, was the firstoperation focusing on institution-building in the Federation and a series of structural reforms needed foradvancing the transition to a market-economy; and under the second transport project, approved by theBoard in August 1997, an adjustment component supports similar key structural reforms in the RS. TheIFC has also committed US$ 2 million to an equity fund and US$ 0.7 million for a microbusinessproject.

26. While emphasis during the first post-war year was on moving quickly with emergencyreconstruction across a range of sectors, IDA's country assistance strategy for FY 98 and 99 shifts thefocus on sustainability and ensuring the medium- to long- term viability of policies and investments.Significant donor resources are needed for the next several years; however, BH must increasingly becomemore self-reliant in preparation for the time when these inflows are no longer available. This will mean

4 Membership, arrears resolution and a limited country assistance strategy are outlined in the Memorandumof the President titled "World Bank Membership for Bosnia and Herzegovina and Proposed FinancialAssistance," dated March 4, 1996.


viable government institutions, sustainable government budgets, improved cost-recovery policies andmechanisms and structural reforms that stimulate private investment. Three overarching objectives willguide Bank Group strategy: (i) further development of the basic institutional infrastructure for economicmanagement; (ii) transition to a market economy through deepening of major structural reforms; and (iii)continued, selective support of physical reconstruction.

27. Further policy-enhancing investment or adjustment operations are envisaged to supportinstitution-building at the State and Entity level, as well as key reforms in the areas of public finance andenterprise and bank privatization. In the area of reconstruction, future IDA operations will support keyareas such as the network infrastructure sectors of gas and transport, as well as agriculture, the socialsector and other sectors essential to economic recovery. Limited IDA resources will continue to makepartnerships with other donors essential: Mobilizing co-funding for future operations, and coordinatingstrategies -- e.g., eventual exit from those sectors where other donors are more fully engaged or havegreater comparative advantage -- will be important elements of this partnership.

Rationale for Bank Involvement

28. The proposed Reconstruction Assistance Project is fully consistent with the Country AssistanceStrategy (CAS), discussed in August 19, 1997. The Project is the first operation dedicated entirely tosupport reconstruction in RS. Since 1996, the Board of IDA approved ten projects providing financialsupport to both Entities in BH. However, none of them covered basic reconstruction needs in the RSregarding municipal infrastructure (housing, water and sanitation, electric power) and support for ruralcommunities (agriculture), while all of these areas have been addressed within the Federation of Bosniaand Herzegovina through Bank-supported emergency projects since 1996. The proposed ReconstructionAssistance Project would assist RS to carry out urgent repairs and investments in these areas.

29. Through its involvement, since 1996, the Bank has been able to mobilize substantial additionaldonor support for projects in the Federation in the four sectors of agriculture, housing, water andsanitation, and electric power. The Bank's presence and oversight over project implementation hasprovided reassurance to donors and led to important financial cofinancing commitments. A similarimpact is expected through the Bank's support for the proposed Project in RS. Without the Bank'sinvolvement, it likely that less donor resources could be mobilized quickly for investments in RS withinthe four sectors concerned.

Lessons Learned from Previous Bank/lDA Experience

30. A multitude of important lessons has been learned from Bank-supported emergency projects inthe Federation of Bosnia and Herzegovina since 1996, covering agriculture, housing, water andsanitation, and electric energy. Further experience has been gained from a variety of pre-war projects inthese sectors in which the Bank was involved. These lessons are set out in detail in the attached foursectoral Appendices. At a cross-sectoral level, the Bank has learned important lessons as to theinstitutional framework necessary to allow timely and sustainable reconstruction investments to takeplace in BH. The Country Portfolio Performance Reviews of 1996 and 1997 highlight these lessons asfollows:

Project organization and management. The number of separate project implementation units shouldbe limited, existing government structures should be reinforced. Project implementation staff shouldhave regularized employment status, be employed based on contracts and agreed salaries, and shouldwork following detailed job descriptions.

* Project accounts and audits. A uniform system of accounts should be used for all projects. Projectsshould provide for the cost of end-year extemal financial audits.


* Procurement management. An agency to monitor and audit procurement implementation is required,both to support and to supervise project units on their adherence with agreed procurement guidelines.

* Projects financial sustainability. To ensure that reconstruction investments are sustained, workablebudget systems have to be set up and adequate cost recovery policies are to be implemented.

* Coordination with donors. Donors need to be invited to actively involve the project implementationunits of the government in planning and implementation of donor-financed reconstruction projects.

* Allocation of project resources. Given the vast assistance needs of BH, least-cost solutions are to befollowed and economic sustainability must be ensured for infrastructure and social sector projects.

Relationship with other Bank-financed Projects

31. The proposed Reconstruction Assistance Project would complement a number of other Bank-supported projects that are either already in implementation in RS or are planned for Board consideration.These linkages have been described in detail in the attached sectoral Appendices. Complementarity also

exists between the four investment Components of the Project itself by generating employment andincome opportunities for retuming refugees and displaced persons, one of the central themes of donorsupport for BH for 1997 and the following years. Since the proposed Project will be implementedthrough a single Project Coordination Unit with four sectoral departments, it will be possible to targetselected RS municipalities where two or more Components of the Project would provide benefits to thesame population, thus following an integrated area approach to economic reconstruction.

D. PROJECT DESCRIPTION

Project Objectives

32. The proposed Project has four primary objectives:

* to assist economically-disadvantaged and war-affected farmers restart and strengthen their farmingactivities

e to increase the quality and quantity of the public housing stock* to restore water, sanitation and solid waste services to a level that will satisfy basic human needs,

mitigate public health risks and support the return of economic activity* to improve reliability, availability and quality of electricity supply

33. Secondary objectives of the Project are as follows:

* to raise agricultural and food production, help reduce the need for imported donor food aid, andimprove food security

* to initiate sustainable sector recovery by introducing cost recovery for infrastructure investments in

housing, water and sanitation, electric power* to help build up the institutional capacity required for developing and implementing housing, water

and sanitation, and electric power system repair programs* to support the local economy, promote private construction enterprises, and create employment and

income through labor-intensive repair works* to assist the RS authorities to develop a medium-term strategy for investments in the water sector

Project Components

34. To support the above objectives, the Project will have the five Components, as follows: (i)agriculture; (ii) housing; (iii) water and sanitation; (iv) electric power; and (v) implementation support,including establishment of the Procurement Monitoring and Audit Unit in RS.


35. Given the Brcko Arbitral Award, delivered on February 14, 1997 in accordance with theprovisions of the Dayton/Paris Accords, the Legal Documents for the proposed Project would distinguishinvestments within the Brcko arbitration area as a separate Brcko Component. This would allow for therequired flexibility should a final decision by the Brcko Supervisor alter the current allocation ofresponsibilities of the two Entities or create a separate Brcko district. The Project investments within thisBrcko Component that are IDA-financed would cover housing repairs (civil works US$ 1.3 million) andwater system repairs (civil works US$ 0.6 million, consultant services US$ 36,000). These investmentsare included in the descriptions for the sectoral Components that follows.

Component 1: Agriculture (USS 10.2 million)

36. The Agriculture Component has three elements: (i) livestock development; (ii) farmmechanization; and (iii) farm surveys and technical support (see Appendix I for a detailed description).The following three RS municipalities have been identified as target areas for the AgricultureComponent: Mrkonjic Grad, Ribnik and Sipovo.

37. Livestock Development To assist in the initial rebuilding of the RS herds for milk and meatproduction, the Project would finance the purchase of breeding cattle, to be kept by private individualsmall-scale farmers. Livestock would be distributed to farmers on the basis of in-kind supply and creditarrangements. A total of about 3,000 pregnant heifers would be imported for distribution to farmers whohave lost cattle and have the necessary experience and capability of caring for them. The Project willalso finance the cost of mandatory quarantine in livestock stations, the cost of local transport from thequarantine areas to benefiting municipalities, and the cost of one-year contracts with local veterinarystations to monitor the health and productivity of imported heifers.

38. Farm Mechanization. Lack of farm power is one of the major constraints to increaseagricultural production in the war-tom areas of RS. As a result, large areas of arable land are notcultivated at present. The Project would provide an initial emergency supply of critically needed farmmechanization equipment, including 400 single-axle motor-cultivators in the 7-9 kW engine range, and150 small- to medium-size two-axle tractors in the engine range of 25-35 kW. Tractors would beprovided in packages including all required implements, basic spare parts, and a trailer. The Project willalso finance the reception, assembly, initial servicing, handling, and local transport of tractors to therecipient farmers.

39. Farm Surve vs and Technical Support. The Project would finance detailed farm surveys as abasis for confirming specific farner interest and identifying eligible farmers. The Project will alsofinance essential technical support from expatriate advisors, and the establishment and running for 12months of a Component monitoring and impact evaluation system.

Component 2: Housing (US$ 15.2 million)

40. The Housing Component has two elements: (i) emergency public housing repairs; and (ii)technical support (see Appendix 2 for details). The following five RS municipalities have been identifiedfor inclusion under the Housing Component: Derventa, Brcko, Modrica, Mrkonjic Grad, and Sipovo.

41. Emergency Public Housing Repairs. The Project would finance the repair of damage tocommon elements in multi-story non-system built socially-owned apartment buildings, along with thecost of designs, management and supervision by local consultants. About 36,000 publicly owned unitsare estimated to be damaged in urban areas throughout RS. The Housing Component is designed torepair approximately 250 buildings containing some 4,500 residential units. This represents some 12.5percent of all damnaged social apartnent units in RS. The selection of municipalities has been carried out


primarily based on the extent of physical war damage and the expected demand by the present populationand potential returnees for reconstructed housing facilities. Individual apartment buildings to be repairedwould be selected so as to maximize the number of units that could be made habitable in eachmunicipality. Proof of public ownership of buildings, the absence of disputed property claims, andfulfillment of a number of established damage criteria will be required.

42. The repair works would restore common building elements and utilities. These works wouldweather-proof the building envelope so as to prevent further deterioration and to facilitate repairs of theinterior of apartment units by tenants or through complementary donor-funded programs. Typical worksfinanced under this component element would include repair of damage to roofs, external walls,windows, entrances, staircases, halls, corridors, and building utility systems, and are described in moredetail in Appendix 2. Works would be undertaken by contractors selected through competitive bidding.

43. Technical Support. The Project would also finance technical support from an expatriate housingadvisor and local consultants to carry out on-site quality control inspections. The cost of developingdetailed designs and bidding documents is included in the cost of civil works.

Component 3: Water and Sanitation (US$ 22.1 million)

44. The Water and Sanitation Component has four elements: (i) urgent works; (ii) refuse collectionequipment; (iii) technical support; and (iv) institutional strengthening. A total 20 RS municipalities havebeen identified for inclusion under this Component, as set out in Appendix 3.

45. Urgent Works. The Project would finance urgent rehabilitation works, including requiredmaterial and equipment, to restore water supply and sewage services in 18 selected RS municipalities.Works will include rehabilitation and repair of water sources, supply pipelines, water treatment plants,distribution networks, the cleaning and repair of sewers, and rehabilitation of sewage pumping stations.

46. Refuse Collection Equipment. The Project would finance the purchase of 21 refuse trucks and315 refuse collection containers, together with critical spare parts. Equipment and materials wouldbenefit 20 RS municipalities.

47. Technical Support. The Project would also finance technical assistance and consultant servicesfor preparation of detailed designs and tender documents, for on-site supervision of rehabilitation works,and for the development of urgent studies to prepare future investments in the water sector. An expatriateadvisor would also be financed.

48. Institutional Strengthening. The Project would support the Institute for Water Management ofRS, Zavod za Vodopnvreda, RS (ZVRS) so as to strengthen its administrative and engineering capacityto manage and monitor project implementation. The Project would finance office equipment andsupplies, vehicles and a share of the incremental operating costs and consultants of ZVRS.

Component 4: Electric Power (USS 15.9 million)

49. The Electric Power Component has six elements: (i) 110 kV transmission rehabilitation; (ii) 35kV distribution rehabilitation; (iii) Banja Luka distribution repairs; (iv) telecommunication repairs; (v)testing equipment and maintenance tools; and (vi) engineering and management (see Appendix 4 for adetailed description). Banja Luka is the target area of this Component.

Technical AnnexPage I1 of 24

50. 110 kV Transmission Rehabilitation. This Project would finance rehabilitation of foursubstations with a total capacity of 200 MVA, and repairs to six transmission lines with a total length ofabout 1 13 km. Costs include imported equipment and civil works for installation.

51. 35 kV Distribution Rehabilitation. The Project would finance the rehabilitation of threesubstations with a total capacity of 20 MVA. Costs include imported equipment and civil works forinstallation.

52. Banja Luka Distribution Repairs. The MV and LV distribution networks around Banja Lukaare extremely deteriorated due to war-related damage, aging and high overloads. The Project will coverthe rehabilitation of the distribution network in the municipal area of Banja Luka from the 20/10 kVsecondary substations and step-down transformer substations to LV distribution networks. This willinclude supply and installation of 4,000 household meters for consumers without meters in the BanjaLuka urban area.

53. Telecommunication Repairs. Prior to the war, the telecommunication system for the BanjaLuka - Prijedor - Mrkonjic Grad distribution network provided voice communication, data acquisition,and tele-control functions for the network. During the war, this telecommunication system was heavilydamaged in the Banja Luka area. To retain control of the distribution network and to operate itefficiently, repair of this telecommunication system is an urgent necessity. This Project would finance atam-key package for repairing telecommunication towers and replacing equipment, along with HFdevices and a telephone exchanger.

54. Testing Equipment and Maintenance Tools. Testing equipment and maintenance tools fortransmission and distribution facilities are worn out and in very short supply. The Project will cover aminimum amount of testing equipment and maintenance tools for the Banja Luka service area.

55. Engineering and Management The Project will finance required engineering services toprepare detailed designs and tender documents and to manage and supervise all Component-related tasks.

These services will be delivered and financed by Elektroprivreda RS through Elektroprenos andElektrokrajina. To support engineering and Component management within Elektroprenos andElektrokrajina, the Project will finance the supply of basic office equipment and supplies.

Component 5: Implementation Support (US$ 1.5 million)

56. The Implementation Support Component has two elements: (i) establishment of the ProjectCoordination Unit; and (ii) establishment of the RS Office of the Procurement Monitoring and AuditUnit (see Appendix 5 for a detailed description).

57. Project Coordination Unit (PCU). The PCU will have overall responsibility for implementingthe Project. It will have direct implementation responsibility for the Agriculture and HousingComponents, and supervise ZVRS and Elektroprivreda RS in implementing the Water and Sanitation andElectric Power Components, respectively. The PCU will carry out all procurement, disbursements,accounting and reporting ftmctions under the Project. The PCU will be established under the RSMinistry of Finance in Banja Luka. The Project will finance the local staff of and expatriate advisors tothe PCU, necessary office equipment and supplies, vehicles, and incremental operating costs.

58. Procurement Monitoring and Audit Unit (PMA LU. At the level of the Federation of Bosnia andHerzegovina, in November 1996, a PMAU was established to monitor and audit the procurement carriedout by governmental implementing agencies, relating to reconstruction projects that are funded by theBank or financed by funds that are administered by the Bank for other donors. Under the proposed

Technical AnnexPaye 12 of 24

Project, the existing PMAU mechanism would be extended into Republika Srpska. For this purpose theRS Government will enter into an agreement with a qualified foreign consultant firm to assist the RSauthorities to set up and maintain the RS Office of the PMAU over a two-year period, under terms ofreference acceptable to the Bank. The Project will finance local PMAU staff and a full-time expatriateadvisor, office equipment and incremental operating costs. The Project would also cover the cost of thefirst year-end financial audit of the overall Project by expatriate auditors, under terms of referenceacceptable to the Bank.

Project Cost and Financing Plan

59. Project Costs. The total estimated costs of the Project are shown in Tables 1 and 2. Physicalcontingencies of three percent on goods and seven percent on works are included. No price contingencieshave been applied given the expected short disbursement period of this emergency project. The Projectwill have a two-year implementation period and Project financing is expected to be disbursed over 30months. Cost estimates are net of taxes and duties, donor-financed items under the internationalreconstruction program are tax-exempt in RS. Detailed cost estimates for each of the five Componentsare provided in the attached Appendices.

Table 1: Project Cost Summary by Component(US$ '000)

Totals including Contingencies1997 1998 1999 Total

1. Agriculture 4,432.0 5,783.4 - 10,215.42. Housing 2,374.5 6,124.5 6,750.0 15,249.03. Water and Sanitation 3,320.6 11,068.5 7,748.0 22,137.04. Electric Power 3,982.5 11,947.5 - 15,930.05. Implementation Support 751.0 729,0 - 1,480.0Total Project Cost 14,860.5 35,652.9 14,498.0 65,011,4

Table 2: Project Cost Summary by Expenditure Category(US$ '000)

Totals including Contingencies1997 1998 1999 Total In %

L Investment CostsA. Livestock 2,061.0 2,419.5 - 4,480.5 6.9B. Farm Machinery 1,907.6 2,861.3 - 4,768.9 7.3C. Agricultural Services 262.9 320.1 - 583.0 0.9D. Housing Repair Works 2,250.0 6,000.0 6,750.0 15,000.0 23.1E. WaterRepair Works 2,589.0 8,630.0 6,041.0 17,260,0 26.5F. WaterEquipment 377.2 1,257.2 880.0 2,514.4 3.9G. Electric Power Equipment 2,987.5 8,962.5 - 11,950.0 18.4H. Electric Power Installation Works 882.5 2,647.5 - 3,530.0 5.4I. Engineering, Design, Supervision 255.3 817.8 362.5 1,435.6 2.2J. TA, Training and Studies 779.8 1,295.0 389.2 2,464.0 3.8K. Office Equipment 138.0 72.5 24.5 235.0 0.4L. Vehicles 164.3 47.5 33.3 245.0 0.4

Total Investment Costs 14,655.1 35,330.9 14,480.5 64,466.4 99.2IL Recurrent Costs

A. Incremental Operating Costs 36.3 68.2 17.5 122.0 0.2B. Consultants, Local Staff 169.2 253.8 - 423.0 0.6

Total Recurrent Costs 205.5 322.0 17.5 545.0 0.8Total Project Costs 14,860.5 35,652.9 14,498.0 65,011.4 100.0

Technkal AnnexPare 13 of 24

60. Financing Plan. Of the total Project cost, IDA would finance US$ 17 million. Firmcommitments for cofinancing and parallel financing have been provided by the European Union (usingEU's implementing procedures), the International Fund for Agricultural Development (IFAD), Austria,Italy, Norway, and the United Kingdom. Further donor cofinancing is being sought actively. Given themodular nature of all investments to be financed, delays in securing further donor financing would haveno impact on the timely start-up and implementation of the five Components. Financing for all essentialtechnical support services has been secured. The summary Project financing plan is shown in Table 3.Detailed financing plans by sectoral Component are provided in the attchments. No retroactivefinancing has been considered given the lack of financial resources available to the RS authorities for pre-financing of Project activities.

Table 3: Project Financing Plan by Component(USS '000)

Agriculture Housing Water and Electric Implem. TotalSanitation Power Support

rDA 1,000 5,700 5,000 4,000 1,300 17,000EFAD 5,000 0 0 0 0 5,000European Union (paralel) 0 0 12,731 0 0 12,731Austda 0 0 500 0 0 500Italy 0 0 0 2,340 0 2,340Norway 0 0 [to be set] [to be set] 0 10,230United Kingdom 0 0 0 0 180 180Elektroprenos 0 0 0 1,770 0 1,770Elektrokrajina 0 0 0 2,160 0 2,160Donors to be identified 4,216 9,549 [3,906] [5,660] 0 13,101Total Project Cost 10,216 15,249 22,137 15,930 1,480 65,012

Note: Parallel financing from Norway is expected to support investments in the water and sanitation and theelectric power components. The exact allocation of this financing has not yet been determined.

61. Project Preparation Facility. The emergency-type reconstruction project was originallyintended to provide some first visible results on the ground in RS well before the arrival of the 1997/98winter. In order to allow project preparation to be completed and to start at least some limited urgenthousing and water repair works in priority refugee-return areas before the start of the 1997/98 winterseason, an advance of US$ 2.0 million has been requested by the Borrower and agreed by IDA, againstthe proposed IDA US$ 17.0 million Credit.

Economic Justification

62. The primary objective of this emergency-type Project is to address selected, most urgentreconstruction needs of RS in the agriculture, housing, water and sanitation, and electric power sectors.For all goods and works to be financed, a least-cost approach has been followed. Livestock and farmmachinery financed under the Project would yield economic and financial rates of return in excess of 12percent since these items would enable farmers to re-start agricultural production on otherwise fallowland. Food produced by a farm household would replace purchased food items, excess production wouldbe sold or bartered locally. The value of two calves bom by an imported heifer during the first yearswould be sufficient to cover the cost of the investment; the sale of dairy products would add further cashincome. Farm tractors imported would generate an incremental estimated production of 15,000 tons ofgrains and some 3,000 tons of potatoes, in addition to fodder production used as livestock feed. Furtherincome and benefits would result from plowing and transport services for fellow farners withoutmechanized farm power.


63. The Project would replace critical elements of damaged municipal infrastructure so as to improveliving conditions and satisfy basic human needs of shelter, water and electricity in war-affected areas ofRS. Economic rates of return would be very high on such investments since they would address keybottlenecks that prevent the existing housing, water and electric infrastructure from operating nonnally.For housing and water investments, rehabilitation works carried out now will help save futurereplacement investments which, in the absence of the Project, would otherwise have to be carried outeventually at a high cost so as to replace entire public apartment buildings and water systems. TheProject would create an estimated 4,200 pernanent jobs in agriculture and some 40,000 person-months oftemporary employment resulting from repair works under the Housing, Water and Sanitation, andElectric Power Components. See the four sectoral Appendices for more detailed information.

Environmental Impact

64. As an emergency-type operation, the Project has been placed in environmental category B. Allgoods and works procured which present an opportunity for environmental enhancement will be specifiedaccordingly. Item usage and works will be monitored during supervision to ensure that there is nodegradation to the environment. The Housing Component would have a positive environmental impactas a result of rehabilitating damaged units where municipal infrastructure facilities are likely to exist orare in the process of being repaired, and where otherwise buildings would stand empty to deterioratethrough weathering or vandalism. The Water and Sanitation Component would also have a positiveenvironmental impact as a result of reduced water losses, a safer water supply, improved sewagecollection, and proper disposal of solid waste.

E. PROJECT IMPLEMENTATION

Organization and Implementation Arrangements

65. The Project would be implemented over 30 months. The Project Coordination Unit (PCU) in theRS Ministry of Finance in Banja Luka has overall responsibility for implementing the Project. The PCUis headed by a PCU Director who reports to the RS Minister of Finance. The PCU Director is appointedby the RS Government. The PCU Director appoints other local PCU staff. The PCU is composed of aCentral Support Section as well as four sectoral departments. The Central Support Section will: procureall office equipment, fumiture and vehicles; supervise and support procurement and contracting carriedout by the four sectoral Departments; carry out all financial transactions and maintain the projectaccounts and records; carry out project reporting requirements; and liaise with donors.

66. The four sectoral Departments have implementation responsibilities for each respective sectoralComponent, as set out below. Given the still limited administrative capacities of the RS Ministry ofAgriculture, Forestry and Water Resources, and of the RS Ministry of Urbanism, Housing andConstruction, strong sectoral Departnents will be needed in these sectors, supported by expatriatetechnical assistance. More project implementation capacity is available in the water and sanitation sector(ZVRS) and the electric power sector (EPRS), making it possible to limit the role of the PCU to that ofapproval and supervision of project activities carried out outside of the PCU. The structure and staffingof the PCU is set out in detail in Appendix 5.

67. Agriculture Component. The Agriculture Department will be responsible for implementation ofthe Agriculture Component. Specifically, the Agriculture Department will: finalize detailed technicalspecifications for livestock and farm machinery; prepare bidding documents; carrv out tenders; enter intocontracts with foreign suppliers and domestic service providers and consultants; supervise the selectionof eligible fanners and maintain a detailed farmer database; organize the distribution of livestock andfarm equipment, set up the project monitoring and impact evaluation system; and carry out reporting


requirements. Based on the experience gained in the 199t Federation agriculture project, it is notexpected that specialized procurement agents would need to be engaged. To facilitate the reception,storage and distribution of livestock and farm machinery, regional agricultural experts located in thetarget area for the imported items will be engaged. Final distribution of imported farm equipment andlivestock will be carried out through and by the municipalities. For the Bank-financed part of theAgriculture Component, at least 50 percent of final selected benefiting farmers would be either retuningrefugees or returning internally displaced persons. Detailed farmer eligibility criteria and the process forselection of farmers under the Project are set out in the attached sectoral Appendix.

68. Housing Component. The Housing Department will implement the Housing Component. TheHousing Department will: enter into subsidiary implementation agreements with municipalities, asdescribed below; select detailed project sites and buildings; contract out and review detailed damageassessments of buildings; contract out and review final designs and tender specifications, prepare biddingdocuments, and carry out tenders; enter into contracts with building contractors and local consultants;supervise contracted works and advise the PCU Financial Controller on progress payments to be made tocontractors; and carry out reporting requirements. The Housing Department will put in place localmunicipal project units that prepare projects and monitor construction, with reliance on contract staff asnecessary. These units would work with municipalities on day-to-day management of local repairprojects according to the procedures established for the Component. The local consultants working withthe municipalities would select the buildings to be repaired; undertake damage assessments; define workspecifications; monitor construction progress; and certify completion of works for payment. See theattached sectoral Annex for more details.

69. Water and Sanitation Component. The Banja Luka office of the Institute for WaterManagement of RS, Zavod za Vodoprivreda, RS (ZVRS) would have the primary responsibility for theexecution of the Water and Sanitation Component. This office would establish a Project ImplementationUnit (PIU), consisting of several experienced staff from ZVRS and of outside consultants. The PIUwould be responsible for day-to-day project management, engineering, coordination and supervision. Itwould be supported and supervised by a small Water Department in the PCU. In particular, the PIUwould: draft terms of reference for and enter into contracts with consultant-engineers preparing designsand bidding documents; review final designs and bidding documents and forward them to the WaterDepartment for subsequent bidding; prepare bid evaluation reports for the Water Department; draft termsof reference for and enter into contracts with consultants for on-site construction supervision; verify billsprepared by contractors and checked by site supervisors and forward them to the Water Department forpayment; and organize distribution of refuse collection equipment to the municipalities. See the attachedsectoral Annex for more details.

70. Electric Power Component. The implementing agencies and beneficiaries under the ElectricPower Component would be Elektroprenos Banja Luuka which is the transmission company for RS, andElektrokrafina Banja Luuka which is the distribution company for the Banja Luka area and the largest ofits kind in RS. Both organizations form part of Elekiroprivreda Republika Srpska (EPRS). A ProjectManagement Group (PMG) will be set up in Banja Luka under EPRS's supervision and be responsible toorganize and supervise the rehabilitation of the transmission system and distribution networks in theBanja Luka area under the Project. The office of the PMG which will be responsible for day-to-dayproject management, engineering, coordination and supervision, will be established within ElektroprenosBanja Luka. The PMG would be supported and supervised by a small Electric Power Department in thePCU. Since the replacement of transmission and distribution equipment needs to be carried out underoperational conditions, installation and related civil works would be implemented through force accountusing technical staff and the workforce of Elektroprenos and Elpktrokrajina. See the attached sectoralAnnex for more details.


Onlending and Cost Recovery

71. Onlending Arrangements. Regarding the IDA Credit, funds will be lent to the State of Bosniaand Herzegovina on IDA terms under a Development Credit Agreement. Receipt of a legal opinion thatthe Development Credit Agreement has been duly executed and is legally binding in accordance with itsterms would be a condition of credit effectiveness. The State will on-lend the Credit to Republika Srpskaunder a Subsidiary Finance Agreement, acceptable to IDA. RS will make the proceeds of the Creditavailable for project implementation to the PCU, to ZVRS, and to Elektroprivreda RS. In addition, IDAand Republika Srpska will enter into a Project Agreement. The execution of the Subsidiary FinanceAgreement and the Project Agreement, with terms and conditions satisfactory to IDA, and receipt ofrespective legal opinions, would be conditions of effectiveness of the Credit.

72. Cost Recovery. In summary, the arrangements for cost recovery under the four sectorComponents are as follows:

* Agriculture. Benefiting farmers enter into supply and credit agreements with the PCU. Forlivestock, credit maturity is five years including one year grace, for farm equipment the terms areeight years including two years grace. Annual credit interest will be no less than DEM-Libor plus300 basis points. Repayments will be made half-yearly on the basis of annuities. Local creditinstitutions will be selected as collecting agents for the RS government.

* Housing. Benefiting municipalities enter into subsidiary implementation agreements with the PCU.The agreements specify the scope and value of repairs financed and define the repayment terms asfollows: through increased rental charges, repair costs are to be recovered over no more than 30years, including 5 years of grace, at no less than 1.75 percent interest per annum. In addition, prior tothe financing of repairs, municipalities are required to provide a plan and time schedule for re-instating rental rates that allow full coverage of operation and maintenance costs within a five yearperiod, along with a plan for maintenance of elements that have been repaired through the Project.

* Water and Sanitation. Benefiting municipalities enter into credit agreements with the PCU, coveringthe cost of urgent works and of refuse collection equipment. The onlending terms are 30 yearsmaturity at zero interest including seven years grace. In addition, prior to financing of repair works,municipalities are required to submit to ZVRS a time-bound program for raising water charges andcollections so as to recover recurrent costs of operation and maintenance within three years, and allcosts including capital investments within seven years.

* Electric Power. IDA funds will be on-lent by the PCU, representing the RS Government, toElektroprenos and Elektrokrajina, at the IDA service charge over a 20-year maturity, including fiveyears of grace. The amounts on-lent represent the value of equipment and materials supplied forrepairs to transmission (Elektroprenos) and to distribution (Elektrokrajina) facilities, respectively.

Procurement

73. The proposed procurement arrangements for the Project are summarized in Table 4. Detailedprocurement plans, describing the value and number of packages to be financed by the Bank under eachsectoral Component, are provided in the attached four sectoral Appendices. Whenever applicable, theBank's Standard Bidding Documents will be used for all procurement activities set out below.

74. Goods. Limited International Bidding (LIB), tendering by invitation, will apply for goodscontracts above US$ I million contract value, and also for contract packages below that value asidentified further below. LIB will be used for procurement of farm equipment (one LIB package of two-axle tractors, valued at US$ 0.9 million), as well as for procurement of electric power equipment (one


package for steel structures, US$ 1.2 million; for paint, US$ 0.5 million; and for MV/ LV equipment,US$ 1.4 million). The list of LIB bidders will be as broad as possible. Tfhis list will be based on theexpressions of interest received in response to the General Procurement Notice which was published inDevelopment Business on March 16, 1997, as well as other sources of information. Geographicaldistribution of invited bidders will be considered to the maximum extent possible. The Bank's StandardBidding Documents will be used. The LIB contracts will require prior approval of the Bank relating tothe list of suppliers.

Table 4: Summary of Proposed Procurement Arrangements (US$ million)Items Procurement Method (US$ m) a/

LIB IS SNCB OTHER NBF TOTAL1. Goods1.1 Livestock, Farm Equipment 0.9 8.4 9.3

(0.9) (0.0) (0.9)1.2 Water and Sanitation Equipment 0.8 1.7 2.5

(0.8) (0.0) (0.8)1.3 Electric Power Equipment b/ 3.1 0.6 0.3 8.0 12.0

(3.1) (0.6) (0.3) (0.0) (4.0)1.4 Office Equipment, Vehicles c/ 0.4 0.1 0.5

(0.4) (0.1) (0.5)Subtotal 4.0 1.8 0.4 18.1 24.3

(4.0) (1-8) (0.4) (0.0) (6.2)2. Works2.1 Housing Repair Works d/ 5.5 9.5 15.0

(5.5) (0.0) (5.5)2.2 Water Repair Works e/ 3.0 0.2 14.1 17.3

(3.0) (0.2) (0.0) (3.2)2.3 Electric Power Repair Works 3.5 3.5

(0.0) (0.0)Subtotal 8.5 0.2 27.1 35.8

(8.5) (0.2) (0.0) (8.7)3. Services3.1 Agricultural Services fl 0.1 0.4 0.5

(0.1) (0.4) (0.1)3.2 Engineering, Designs, Superv. g/ 0.2 1.2 1.4

(0.2) (0.0) (0.2)

3.3 TA, Training and Studies g/ 1.7 1.2 2.9(1.7) (0.0) (1.7)

Subtotal 2.0 2.8 4.8(2.0) (0.0) (2.0)

4. Incremental Operating Costs 0.1 0.1(0.1) (0.1)

TOTAL PROJECT COST 4.0 1.8 8.5 2.7 48.0 65.0(induding contingencies) (4.0) (1.8) (8.5) (2.7) (0.0) (17.0)

NBF = Not Bank Financed; LIB = Limited International Bidding; IS = International Shopping; SNCB = Simplified NationalCompetitive Biddinga Figures in parenthesis represent Bank financing.b LIB for steel structures (US$ 1.2 million), paint (US$ 0.46 million), and for MV/ LV equipment (US$ 1.4 million). IS

for testing and maintenance equipment (US$ 0.58 million). "Other" for office equipment (US$ 50,000, under NationalShopping), and for proprietary items (US$ 0.31 million for overhaul of transformers, under Direct Contracting).

c "Other" for National Shopping for small office equipment, furniture and supplies, at individual contract values belowUS$ 50,000 (aggregate amount US$ 0.11 million).

d SNCB contracts for housing repairs are valued at less than US$ 400,000 equivalent per contract, with an expectedaverage of US$ 230,000.

e SNCB contracts for water repairs are valued at less than US$ I million equivalent per contract, with an expected averageof US$ 400,000. "Other" for Force Account, limited to USS 50,000 per contract (aggregate amount US$ 0.19 million).

f Local agricultural services (handling, storage, assembly, local transport) would be procured in accordance with Bankguidelines which shall include both competition and sole sourcing. The sole sourcing would be justified in each case

g Consultant services consist of a number of individual consultants. Their services would be procured in accordance withBank guidelines which shall include both competition and sole sourcing. The sole sourcing would be justified per case.


75. International Shopping (IS) will be used for procuring equipment and materials or standardspecification commodities, valued between US$ 200,000 and US$ 1.0 million per contract. IS is basedon comparison of at least three price quotations obtained from at least two countries. An IS document,including contract conditions, has been prepared by the Bank and will be used for IS contracts. The Bankwould finance: (i) three IS contracts for refuse collection trucks and containers, valued at less then US$0.4 million each, at an aggregate value of US$ 0.8 million; (ii) one contract for electric power-relatedtesting and maintenance equipment, valued at US$ 0.6 million; and (iii) about six contracts for officeequipment and vehicles, at an aggregate value of US$ 0.4 million.

76. National Shopping (VS) will be used for small office equipment, fumiture and supplies, atindividual contract values of less than US$ 200,000. NS is based on comparison of price quotationsobtained from at least three national suppliers. The Bank would finance several small contracts, at valuesbelow US$ 50,000 per contract, for an aggregate amount of US$ 0.11 million.

77. Under the Electric Power Component, the Bank will finance one contract package under DirectContracting (DC) procedures for proprietary items due to reasons of compatibility and standardization.This DC package is for equipment and parts for the overhaul of electric power transformers, at a contractvalue of US$ 0.3 million. All DC contracts require prior Bank review. Any Direct Contracting beyondthe described package will require prior Bank approval.

78. Works. Simplified National Competitive Bidding (SNCB) will generally be used for civil workscontracts for housing and for water and sanitation-related repair works, for works valued at less than US$1.0 million per contract. Works contracts will be lump-sum, fixed price contracts awarded on the basis ofquotations obtained from at least three pre-qualified contractors. Pre-qualification criteria of contractorswill be subject to prior approval by the Bank. The selection of contractors to be invited to bid for workscontracts will include the pre-qualified contractors that are judged to be capable to carry out the works inquestion. Bid invitations for works shall provide a detailed description of the works, including technicalspecifications, the required completion date, a basic form of agreement acceptable to the Bank andrelevant designs and drawings where applicable. The capacity of the local construction industry, in RSand within BH as a whole, to carry out civil works under the project, using SNCB procedures, has beenassessed and is judged to be adequate (see Appendix 2). All efforts would be made to ensure that a widerange of contractors, including foreign contractors, would be invited to bid. State-owned constructionenterprises must meet the Bank's eligibility criteria of autonomous legal status and absence ofgovernment subsidies for their operations.

79. Under the Housing Component, the Bank would finance about 25 civil works contracts for publicsector housing repairs, procured under SNCB. The average contract size is estimated at US$ 230,000,and contracts are not expected to exceed US$ 400,000. The total value of Bank-financed housing repairworks is US$ 5.5 million. Prior approval by the Bank will be required of the first ten contracts for publicsector housing repairs and any contracts exceeding a value of US$ 400,000 equivalent. Prior to theinitiation of any procurement action, the Housing Department of the PCU will provide the Bank with aprocurement plan detailing the number of contracts to be procured, bid invitation dates, as well asexpected start and end dates for each contract.

80. Under the Water and Sanitation Component, the Bank would finance about eight civil workscontracts for repair and rehabilitation of water and sewage systems, procured under SNCB. The averagecontract size is estimated at US$ 400,000. The total value of Bank-financed water and sanitation repairworks, under SNCB, is US$ 3.0 million. Prior approval by the Bank will be required for the first fivecontracts for urgent works and any contracts exceeding a value of US$ 400,000 equivalent. Prior to theinitiation of any procurement action, the Water and Sanitation Department of the PCU will provide theBank with a procurement plan detailing the number of contracts to be procured, bid invitation dates, aswell as expected start and end dates for each contract.

Technical AnnexPale 19 of 24

81. Water and sanitation-related repair works procured under Force Account (FA) would be financedby the Bank up to an aggregate limit of US$ 190,000. Force Account would be used for the installationof equipment and minor repair works within the capability of the staff of municipal water, sanitation andsolid waste organizations and valued at less than US$ 50,000 per contract. Using Force Account forthese small works would save time and costs. To qualify, organizations would need to demonstrate thatthey have the equipment, capacity and experience to undertake the work. Force Account would be paidon the basis of pre-agreed prices. An appropriate accounting and supervision mechanism will be put inplace to ensure cost-effectiveness.

82. Services. The Bank would finance agricultural services for handling, storage, assembly, initialservicing and local transport of imported farm equipment, at an aggregate value of less than US$ 0.1million. The Bank would also finance consultant services for engineering, designs, preparation ofbidding documents and works supervision, at an aggregate value of US$ 0.2 million. Furthermore, Bankfinancing would be used to procure local and expatriate consultant services for technical assistance,training and studies, at a total value of US$ 1.7 million. All of the above services would be procured inaccordance with Bank guidelines which shall include both competition and sole sourcing. Sole sourcingwould be justified in each case. Such justification may be the timing constraint, continuity, uniqueexpertise, and lack of candidates given the post-conflict situation in RS. No assignments have been pre-identified for sole sourcing. The "Guidelines for the Use of Consultants by World Bank Borrowers andby the World Bank as Executing Agency" (dated August 1981) will be used for procurement.

83. Incremental Operating Costs. The Bank would finance incremental operating expenses of thePCU, the PMAU, and ZVRS, up to an aggregate value of US$ 0.13 million. Eligible expenses includesalaries, utilities, communication expenditures, office and vehicle rental, vehicle maintenance andoperating costs, and office supplies. Annual budgets and work programs will be agreed with the Bankand will be monitored quarterly by the Bank.

84. Bank Review. Specific prior review requirements for LIB, DC and SNCB contracts have beenset out above. In summary, prior Bank review is required for: (i) goods contracts for farm equipmentusing LIB; (ii) any goods contracts using DC; (iii) the first ten SNCB contracts for housing repairs, andany housing repair contracts exceeding a value of US$ 400,000 equivalent; and (iv) the first five SNCBcontracts for water system repairs, and any water system repair contracts exceeding a value of US$400,000 equivalent. The Bank will carry out ex-post review of goods procured using IS and NS, and ofworks procured under FA. For service contracts, prior review would be required for: (i) all consultants'terms of reference; (ii) contracts above US$ 100,000 for firms; (iii) contracts above US$ 50,000 forindividuals; and (iv) all sole source contracts. Consultant contracts in a form acceptable to the Bankwould be used. Prior Bank review would also be required for foreign training or study tours, if any. Postreview monitoring of procurement will be facilitated through quarterly reporting, which will be part ofthe regular quarterly progress reports under the overall Project.

85. Procurement Capacity. From the substantial and encouraging experience gained under the fourparallel sector projects in the Federation of Bosnia and Herzegovina, which are in implementation sincemid-1996, it is not expected that procurement agents would need to be engaged. The ProjectCoordination Unit, assisted by experienced expatriate advisors, including a qualified resident PCUProcurement Advisor, is expected to be able to carry out all procurement activities quickly andefficiently. The Bank is planning to continue to carry out procurement training seminars for RSGovemment staff involved in implementation of Bank-financed projects. A Project launching mission,including a procurement workshop, would be held within four weeks after Credit Agreementeffectiveness.


Disbursements

86. The proposed IDA Credit of SDR 12.3 million (US$ 17 million equivalent) is expected to bedisbursed over a period of 30 months after the date of effectiveness. Anticipated IDA disbursements areshown in Table 5. The IDA Credit would finance the categories of expenditures outlined in Table 6. TheProject is expected to be completed by June 30, 2000. The Project's closing date would be December 3 1,2000.

87. Special Account. To facilitate timely project implementation, a Special Account would beestablished in a commercial bank, acceptable to the Bank. The Authorized Allocation would be US$ 3.0million. This allocation is slightly higher than a standard value of four months of project expendituressince, given the experience from the equivalent four projects in the Federation of Bosnia andHerzegovina, it is expected that the Agriculture and Housing Components would be largely completedover the first year, requiring higher initial liquidity. Management of the Special Account would bedelegated by the State and RS authorities to the PCU to fiuther facilitate rapid project implementation.Replenishment applications would be forwarded to the Bank with reconciled bank statements and otherappropriate documentation.

Table 5: Estimated Disbursement Schedule(US$ million)

CY 1997 CY 1998 CY 1998 CY 1999 CY1999 CY2000 TotalQ3/4 Q1/2 Q3/4 Q1/2 Q3/4 Ql/2

Semester Amount 0.6 2.8 5.5 4.0 2.4 1.7 17.0Percent 3% 17% 32% 24% 14% 15% 100%

Cumulative Amount 0.6 3.4 8.9 12.9 15.3 17.0Percent 3% 20% 52% 76% 90% 100%

Note: Expected CY 1997 disbursements are based on the PPF for the project.

Table 6: Disbursement Categories

Categories Amount % of Expenditures to be financed(US$ equivalent)

1. Works 6,484,000 100 % (net of taxes)2. Goods 5,627,000 100% of foreign, 100% of local (ex-factory

cost), and 85% of local expenditures forother items procured locally

3. Consultant Services (technicalassistance, local staff, training, 1,624,000 100%studies)

4. Agricultural Services (local transport,handling, storage, assembly) 50,000 100 %

5. Incremental Operating Costs(of PCU, PMAU, and ZVRS) 65,000 100 %

6. Refunding of Project Preparation 2,000,000Advance

7. Unallocated 1,150,000TOTAL (incl. contingencies) 17,000,000


88. Documentation of Expenditure. Disbursements would be based on full documentation ofexpenditures for the following: (i) goods contracts over US$ 400,000; (ii) works contracts over US$400,000; (iii) service and consultant contracts over US$ 50,000 for individuals and over US$ 100,000 forfirms; and (iv) foreign training and study tours, if any. Disbursement for all other expenditures would bemade on the basis of Statements of Expenditures certified by the PCU Director. The required supportingdocuments would be retained by the PCU for at least one year after the receipt by the Bank of the auditreport for the year in which the disbursement was made. This documentation would be made availablefor review by auditors and by visiting Bank staff upon request.

Accounts and Auditing

89. The PCU would be responsible for overall financial management of the Project and wouldestablish accounting systems acceptable to the Bank, with technical assistance, as required. The PCUwould be subject to annual external audits by independent auditors, under terms of reference satisfactoryto the Bank. The external auditing finn will be responsible for auditing of all project accounts, theSpecial Account, and all disbursement requests made against Statements of Expenditures. The PCU shallsubmit project financial statements to the Bank no later than four months after the end of each fiscal year,and certified copies of the external audit report no later than six months after the close of each fiscal year,including income and expenditure statements and the auditor's opinion on whether the PCU is achievingits objectives in a cost-effective way and whether internal controls are adequate to minimize the misuseof fimds. In addition to these standard auditing requirements for project records, the financial statementsof Elektroprenos Banja Luka and Elektrokrajina Banja Luka would be audited annually by independentauditors under terms of reference acceptable to the Bank.

Supervision, Reporting and Monitoring

90. Bank Supervision. Due to the complexity of this multi-sector emergency-type Project, andgiven the need for early and visible effects on the ground, intensive supervision is required by the Bank.Close supervision would be facilitated by having both the Task Team Leader and a ProcurementSpecialist based in the field at the Resident Mission in Sarajevo. In addition, during the first project year,quarterly supervision missions of three-week duration each would be required by specialists in the areasof housing, water and sanitation, and electric power, totaling 36 staff weeks of input. During the secondand third project years, supervision input by sector specialists would be 24 staff weeks annually. Aformalized mid-term review is not envisaged due to the planned continuos supervision by the Bank.

91. Reporting. The PCU would submit quarterly project implementation reports to the Bank,according to an agreed format, summarizing implementation progress for each Component and attachingdetailed financial statements. The specific reporting requirements that are set out in Appendices Ithrough 4 for each Project Component would be complied with and fulfilled through the quarterlyimplementation reports.

92. Monitoring and Impact Assessment. Performance monitoring indicators have been developedfor each sectoral Project Component and are listed in Appendices I through 4. These indicators reflectthe four primary Project objectives. Bank supervision of the Project will closely monitor theseindicators. In addition, under the Agriculture Component, a separate monitoring and impact assessmentsystem will be put in place at the farmer level, under financing by the Project.

F. BENEFITS AND RISKS

93. Benefits. Major project benefits would include: (i) the fulfillment of some five to ten percent ofurgent needs to re-install farm power and provide livestock, which would create of about 4,200 rural jobs


on fanms located in war-affected areas of RS, raise agricultural and food production, help reduce the needfor imported donor food aid, and improve food security; (ii) the repair to habitable standards of some 250public apartment buildings containing an estimated 4,500 flats, or 12.5 percent of the total damagedpublic housing stock in RS, which would improve quality and quantity of living space in urban war-damaged areas and create an estimated 25,000 person-months of temporary construction labor; (iii) therestoration of essential urban water, sanitation and solid waste disposal services, in 18 RS municipalities,to levels that would make urban centers livable, reduce health risks and support the return of economicactivity; and (iv) the repair of damaged electric transmission and distribution networks which wouldrestore reliable supply of electricity to the Banja Luka area, a pre-condition for normal economic life toreturn to this part of RS. All Project activities would either directly, through provision of livestock andfarn machinery, or indirectly, through municipal infrastructure repairs, benefit returning refugees andinternally displaced persons.

94. Risks. Project risks are substantial. There is the general risk of a resumption of hostilities in theregion; it is hoped that rapid reconstruction, in both Entities of BH, would help cement the peace process.The main five project-specific risks are: (i) delayed project start-up and implementation; (ii) a continuedshort-fall of donor cofinancing, preventing early and full implementation of all the investment sub-components; (iii) farmers' inability to service their credits in a timely manner; (iv) the inability ofmunicipalities to operate and adequately maintain repaired houses and water systems in the future; (v) theinability of Elektroprenos and Elektrokrajina to finance their share of local costs and to carry out electricsystem repair works under the Project. 5

95. The first risk of implementation delays will be addressed by making available to the PCU muclof the standard procurement and sample contracting documentation used under the four parallel sectorprojects in the Federation during 1996. Substantial supervision and start-up assistance will also beprovided by Bank staff and expatriate long-term consultants to the Project. Available donor grantfinancing for project preparation has been used to advance the drafting of detailed designs and biddingdocuments for civil works, to develop technical specifications for goods to be procured, and to set up thePCU, prior to project approval by the Bank. The second risk of a continued Project funding gap wouldreduce the envisaged impact of the Project. However, none of the activities to be carried out fromavailable financing would depend on mobilization of the full envisaged funding volume. Financing ofrequired key technical assistance and implementation support has been ensured. The Bank will makeevery effort to mobilize additional donor cofinancing, and experience from the parallel Federationprojects suggests that there are good prospects in this respect.

96. The third risk relates to a possible lack of incremental farm cash flow of benefiting farmers torepay the in-kind credits. Farm models demonstrate that farmers will be able to repay the five-year loan atthe interest proposed. Similarly, repayments on tractor loans over the eight-year maturity period shouldpose no difficulty, provided farmers rent out their equipment when is not being used by themselves. Thefourth risk relates to low billings and collections for housing and water services, and hence insufficientcost recovery. Charging of fully cost-covering flat rents and water service fees will take time. However,to facilitate this process and reduce the associated Project risk, each benefiting municipality is required tosubmit to the Bank a specific plan to recover recurrent and investment costs over time. The fifth risk hasbeen addressed through an agreement that, in the event that Elektroprenos and Elektrokrajina are unableto carry out and finance the local costs associated with electric system repairs in a timely manner, the RS

A further potential Project risk is the presence of landmine contamination along former confrontationlines which could slow down project implementation. However, based on the experience underreconstruction projects in the Federation, areas affected by landmines could either be avoided or wouldbe cleared of mines using local contractors and funding available under various donor-financed landmineprojects in the country.


Government will cover any resulting financial gaps through grants or subordinated debt to these twoenterpnses.

G. AGREEMENTS REACHED

97. The following are agreements reached at negotiations:

98. Agriculture Component:

* Agreement on the component area: the RS municipalities of Mrkonjic Grad, Ribnik, and Sipovo.. Agreement on the mechanism for selecting benefiting farmers, including mandatory and other

eligibility criteria, as described in Appendix 1.• Agreement on the selection criteria for participating credit institutions.* Agreement on the type and value of farm equipment to be financed by the World Bank: about 50

units of two-axle tractors (25-35 kW engine power) with implements, including associated costs forhandling, servicing and local transport.

* Agreement on the terms and conditions of the supply and credit agreements for farm machinery:eight year maturity including two years grace, at an annual interest rate of no less than DEM-Liborplus 300 basis points.

* Agreement on the supply of no more than one tractor with implements per benefiting farm family.* Agreement on the staffing and maintenance of the Agricultural Department within the Project

Coordination Unit for the Project.* Agreement on reporting requirements specific to the Agriculture Component, set out in Appendix 1.

99. Housinz Component:

* Agreement on the component area: the RS municipalities of Derventa, Brcko, Modrica, MrkonjicGrad, and Sipovo.

* Agreement on the limitation of the type of repair works to be financed, as set out in Appendix 2.* Agreement on the terms and conditions of the subsidiary implementation agreements to be entered

into between the Housing Department and each municipality: repayment by the municipalities of thevalue of repairs through increase of rental charges for the buildings concerned; the increase in rentswill lead to the recovery of repair costs over no more than 30 years, including 5 years of grace, at noless than 1.75 percent interest per annum.

* Agreement that municipalities are to provide a plan and time schedule, prior to the start of works, forreinstating rental rates that would allow full coverage of operation and maintenance costs within afive year period, along with a plan for maintenance of elements repaired under the Component.

* Agreement on the staffing and maintenance of the Housing Department within the ProjectCoordination Unit for the Project.

* Agreement on reporting requirements specific to the Housing Component, as set out in Appendix 2.

100. Water and Sanitation Component:

* Agreement on the specific RS municipalities to be included for financing by the Bank.* Agreement that, within six months after effectiveness of the Credit, every municipality under this

Component will be required to submit to ZVRS a time-bound program for raising water charges andincreasing collections of billed charges to a level that would permit recovery of operating costswithin three years and recovery of all costs, including capital investments, within seven years.

* Agreement that the RS Government, through ZVRS as its agent, would make available Bank andother donor funding to municipalities on the basis of credit agreements, covering the cost of urgentworks and of refuse collection equipment. The onlending terms would be 30 years maturity at zerointerest including seven years grace.


Agreement that the submission of time-bound programs for raising water-related revenues would be acondition of effectiveness of the credit agreements between RS and each municipality.

* Agreement on the staffing and maintenance of the PIU at the Banja Luka office of ZVRS.* Agreement on the staffing of the Water and Sanitation Department within the Project Coordination

Unit for the Project.Agreement on reporting requirements specific to the Water and Sanitation Component, as set out inAppendix 3.

101. Electric Power Component:

* Agreement that, in the event that Elektroprenos and Elektrokrajina are unable to carry out and financethe local cost element of this Component in a timely manner, the RS Government will cover anyresulting financial gaps through grants or subordinated debt to these two enterprises.

. Agreement that the RS Government would make available Bank funds to Elektroprenos andElektrokrajina through on-lending at the IDA service charge over a 20-year maturity, including fiveyears of grace.

* Agreement on the staffing and maintenance of the Electric Power Department within the ProjectCoordination Unit for the Project.

* Agreement on the staffing and maintenance of the Project Management Group within ElektroprenosBanja Luka.

* Agreement on reporting requirements specific to the Electric Power Component, as set in Appendix4, including submission of annual audits of the financial statements of Elektroprenos Banja Luka andElektrokrajina Banja Luka, carried out by independent auditors under terms of reference acceptable tothe Bank.

102. Implementation S5oDort Component:

* Agreement on the staffing and maintenance of the Project Coordination Unit.* Agreement on the establishment of the RS Office of the Procurement Monitoring and Audit Unit* Agreement that project accounts will be maintained in accordance with sound accounting practices

and audited annually by independent auditors acceptable to the Bank, and that project financialstatements and audit reports will be furnished to the Bank no later than four and six months,respectively, after the end of each fiscal year. The accounting system will include sufficient data andperformance monitoring indicators so as to fulfill project reporting requirements for eachComponent.Agreement on the project reporting requirements, as set out above.Agreement that the management of the Special Account would be delegated by the State and RSauthorities to the PCU to facilitate rapid project implementation.

103. The following would be conditions of effectiveness of the IDA Credit:* Receipt of a legal opinion that the Development Credit Agreement has been duly executed and is

legally binding upon the parties in accordance with its terms.* Execution of the Subsidiary Finance Agreement between the State of Bosnia and Herzegovina and

Republika Srpska, with terms and conditions satisfactory to IDA.* Execution of a Project Agreement between IDA and Republika Srpska.* Receipt of legal opinions that the Subsidiary Finance Agreement and the Project Agreement have

been duly executed and are legally binding upon the parties.* Establishment and maintenance of the Project Coordination Unit.

There would be no conditions of disbursement.

Appendix 1Paee 1 of 23

Bosnia and HerzegovinaReconstruction Assistance Project

AGRICULTURE COMPONENT

A. BACKGROUND

Agriculture in Bosnia's Economy

1. Prior to the war, Bosnia and Herzegovina (BH) had a population of about 4.4 million people, ofwhom some 68 percent or 3.0 million were of employable age (15-64). Of these about 2 percent wereemployed by state or socially owned farms while a fiuther 16 percent were private sector farmers or farnworkers. In 1990, primary agriculture's share of GSP' comprised 14 percent and that of forestry, 2percent. Overall, BH was a net importer of temperate agriculturl products. The net export of livestockproducts, particularly milk to the Dalmatian coast, was offest by imports of grains and protein meals forlivestock as well as products for human consumption.

2. Because BH is essentially rural, with only 20 percent of the population living in the 10 largesttowns prior to the war, agriculture impacts on a large proportion of households. The 1981 censusindicated that there were some 540,000 farm households. Thus, at that time, over half of all householdswere agricultural. It is likely that until 1991, the situation was broadly similar.

3. Unlike some other former Yugoslav republics, only a relatively small part of BH's agriculturalresources were in the 'social sector' - 6.1 percent of agricultural land, negligible numbers of ruminantlivestock, and about a quarter of the intensive livestock. Forestry, on the other hand is largely State-owned. Over three quarters of the forest area, 88 percent of the timber stocks, 88 percent of the annualgrowth increment and about 90 percent of the off-take are within the social sector. Until the late 1980s,agro-industry of any significant scale was entirely a social sector business. Only on-farm processing suchas kitchen-scale production of meat and milk products, or local slaughtering could have been categorizedas private.

Agriculture in Republika Srpska

4. The Republika Srpska (RS) is geographically divided into two areas: the northem and westemarea centered on Banja Luka and bounded to the north by the Sava River, and the southem and eastemarea bounded in the east by the Drina River. The two areas are joined in the north thorough the Posavinacorridor between Brcko and Derventa. As for the Federation of Bosnia and Herzegovina, the topographyof RS is basically mountainous, ranging in altitude between 100 m and 2,000 m, draining mostlynorthwards to the valley of the Sava River or eastwards to the Drina. From the confluence of the tworivers near Bijeljina, running westwards up the Sava valley towards Prijedor there is an extensive area ofrelatively flat, fertile land. Soils in the northem area tend to be neutral and relatively fertile while in theeastem area they are thinner on karst limestone base.

Within the former Yugoslavia, the measure of national income was Gross Social Product (GSP), ameasure which excludes services, except those involved in the transport and distribution of goods.

Appendix 1

5. Climate is generally continental with high summer temperatures, reaching up to 41 degreesCelsius in Banja Luka and cold winters with minimum temperatures as low as -28 degrees Celsius inBanja Luka or even -35 degrees Celsius in Sokolac. Snow may lay for three months or more at altitudesabove 700 m. Ground water availability and rainfall are generally adequate but it is estimated by the RSauthorities that over 100,000 hectares would benefit from irrigation, vs. 4,000 hectares that are irrigatedat present. Flooding is a problem in some areas along the river valleys. Drainage systems cover some70,000 hectares but a further 200,000 hectares could be improved by drainage. Average annual rainfallvaries between 950 mm in the Sarajevo area and up to 1,500 mm in mountainous areas. In the southerntip of RS around Trebinje where closeness to the Adriatic Sea provides a warmer climate, there is ashortage of water and a particular need for irrigation.

6. Of the estimated land area of RS of about 2.5 million hectares, about half is consideredagricultural land, the remainder being largely mountain and forest. Given an estimated population of upto 1.3 million, there is slightly less than 1 hectare of agricultural land per person. Agricultural land in RSis composed of arable land and meadows (46 percent), orchards (4 percent) and pastures (50 percent).Meadows may be natural lowland grazing or leys in rotation with other crops while pastures includeextensive tracts of natural grazing on the mountains. The distinction is partly one of slope: arablefarming is possible on land with slopes up to 20 percent; intensive forage production may be possible onland up to 25 percent slope; however, land over the 35 percent limit is only suitable for pasture and eventhen may require attention to hazards of erosion. In RS, the proportions of the first category decline in asoutherly direction while the proportions of the last category increase towards the south and east (seeTable 1). Significantly, about 20 percent of the arable land was dedicated to forage crops (from 9 percentin Trebinje to 23.4 percent in Vlasenica) while a further 22 percent (and up to 48.5 percent in Trebinje)was either fallow or meadows on arable land.

Table 1: Exploitation of Agricultural Land by RS Region (in percent)

RS Region Arable Land Pasture LandPlough Land Orchards Meadows Total Arable

LandBijeljina 84.6 8.6 4.8 98.0 2.0Doboj 77.6 7.7 7.1 92.4 7.6Banja Luka 60.5 4.0 14.5 79.0 21.0Vlasenica 59.6 7.4 8.8 75.8 24.2Sokolac 11.9 2.6 23.7 38.2 61.8Trebinje 10.7 1.7 3.0 15.4 84.6Source: "Agricultural Resources and Agriculture": Statistics Institute of RS, 1996

Pre-war Structure and Characteristics

7. Land ownership throughout BH had previously been largely private with about 94 percent ofagricultural land belonging to individuals2 . As a result of the war and considerable movement ofrefugees, the issue of land ownership is critical within an agricultural development strategy in themedium-term. With an average size of 3 to 5 hectares, the average farm is small and largelyinappropriate for modem mechanized farming. This is exacerbated by land fragmentation. Thisfragmentation is particularly constraining in the flatter areas where mechanization would otherwise bepossible. In the hill areas, farm size is typically larger than in the plains and units are more often

2 The pasture area which accounts for some 37 percent of private land is thought not to be generally ownedby individual farmers but rather to belong to farmers communally.

Appendix 1Page 3 of 23

consolidated. The substantial movement of population which has taken place during more than threeyears of war has caused that, in many areas, people who are occupying land are not those with legal titleto it.

8. Private farming systems in BH are largely mixed. In 1981, there were 370,000 full time workerson the 233,000 private farms with workers - about one worker per three hectares of cropped land.Generally, low-output mixed farming systems are followed; small areas of cereals and other crops areproduced as well as vegetables and fruit (principally plums and apples) for the household. Most farmstend to have some livestock also, cattle being the most widely held type. Indeed, in 1981 more thanseventy percent of all private farms had at least one cow. Additionally, over half of al farms exceeding 3hectares in size, kept pigs. Sheep were less widely owned with only 20 percent of farmers owning anysheep at all, but among these, some 24,000 farmers (about 5 percent of all farms) had at least 20 head.Substantial sheep flocks are most common in areas with access to communal mountain pasture.

9. Crop yields in BH prior to the war were generally poor when compared with those of FormerYugoslavia as a whole. Yields of cereals averaged nearly 20 percent below those for Yugoslavia as awhole. Performance of potatoes and vegetables was relatively worse. Only with tobacco did BH achievea higher average yield than Former Yugoslavia as a whole. Compared with westem Europe, BH averageyields are only about half for cereals, potatoes and vegetables, and less than half for clover. AlthoughBH conditions are not ideal for the crops grown, yield levels reported on some of the more efficient unitsin the past suggest there is substantial room for technical improvement.

10. The organization of agricultural support services is in a transition phase both in RS and theFederation of Bosnia and Herzegovina. Before the war there were some 1,200 professionalagriculturalists (including animal husbandry) in BH. New agricultural extension services for privatefarmers are not yet operational. Municipal agricultural staff is providing advice to farmers, but not in aplanned and structured manner. Agricultural research is to be carried out in Agricultural Institutes, butdue to staff and funding shortage and destruction of facilities, only limited research is presently beingundertaken.

Farm Mechanization

11. Farm mechanization levels in pre-war BH were relatively high. In the mechanization drivewhich followed the establishment of a tractor and combine manufacture in Former Yugoslavia, in the1950s, farmers were offered subsidized prices and highly attractive credit terms for the acquisition offarm machinery. Figures provided by the Ministry of Agriculture, Forestry and Water Resources(MAFWR) of RS indicate a rate of one tractor per 41 hectares of arable land, or roughly I HP perhectare.

12. These figures reveal a somewhat different picture in RS from that found in the Federation ofBosnia and Herzegovina where much high higher levels of mechanization prevailed, reported at 14.6hectares per tractor or some 2.8 HP per hectare. This is probably due to the larger number of part-timefarmers in the more industrialized Federation area where a higher level of capital investment in farmmachinery prevailed. There was and still is today a larger degree of reliance on single-axle motor-cultivators in the area of today's Federation of Bosnia and Herzegovina, while this type of smallequipment is less common in the area of RS.

13. In RS, every third to fourth farming family is said to have had a 40 HP tractor and a fairlycomplete set of implements for cultivation, seeding and fodder production, even though no more thantwo or three hectares might be cultivated per farm. The comparison of reported tractor numbers for 1991of 14,250 units with the arable land area and average farm size suggests that the number of farms per

Appendix IPage 4 of 23

tractor was somewhat higher (11.5) than the above reported number. Prior to the war, there was a highdegree of multi-farm use of fann equipment through informal arrangements between relatives andneighbors, recompensed in kind rather then in cash. Also, tractors were widely used throughout BH fortransport and fuelwood production during the winter season. Grain harvesting by contract with localcombine-owning cooperatives (Zadrugas) was virtually the only operation for which farmers relied onoutside assistance.

14. About 80 percent of pre-war tractors in BH were of the IMT brand produced in Belgrade underforeign license, and implements, too, were locally produced. Support services were available from anetwork of local workshops and parts stockists dependent on nation-wide machinery tradingconglomerates and import/export companies. Also, associated with the near monopoly enjoyed by themain domestic tractor manufacturer and the consequently high degree of standardization, a strong body ofskills and expertise in operation, maintenance and minor repair was built up among the farmer-owners ofthe equipment as well as local mechanics and part outlets.

Livestock Production

15. Livestock production is important in both Entities of BH, particularly cattle and sheep. Whilethe area of main crops grown in BH only represented 12 percent of that in the former Yugoslavia, its herdof breeding cows and of breeding sheep amounted to 25 percent and 18 percent respectively of the formernational totals. The vast majority of livestock were in the private sector. Only with intensive livestock,especially poultry (37 percent) and pigs (19 percent) did the socialist sector control a significantproportion of the herd.

16. Pre-war technical performance from livestock was quite poor and generally below that in otherparts of the formner Yugoslavia except in the case of sheep meat production. For example, the milkproduced per cow per year, which is a key dairying performance indicator, is under 1,500 liters in BHand only 83 percent of the average for the former Yugoslavia. This is only about one third of thatachieved by average dairy fanns in western Europe. RS authorities aim to raise average milk productionto 2,000 liters by the year 2,001 and to 3,500 liters over the following decade. Poor livestockperformance is due to limited availability of feed as well as the lack of extension service to privatefarmers; professional agricultural services were devoted to large-scale farns in the socially-owned sectoron which extensive management systems were practiced and where reasonable yields, regardless ofeconomic considerations, were obtained.

17. The pre-war cattle population of BH of some 950,000 head were largely maintained by privatefarmers. These were kept on small-holdings and individual herd sizes were small, frequently of less thansix heads. Simmental and Brown Swiss dual purpose type cattle were kept for the production of meatand milk. Milk is mostly sold privately. Some 4 percent of the cattle population were maintained onState farms. These institutions kept Holstein-Friesian type cows, largely on intensive zero grazingsystems, typically making corn silage as the maintenance ration and feeding concentrates for production.A limited number of Holstein-Friesian cattle are also kept by the private sector.

18. Prior to the war, the sheep population of BH is estimated at 1.3 million. Sheep fulfill a triplepurpose role producing milk for cheese making, a light yield of coarse wool, and meat. The pre-war goatpopulation is estimated at 95,000. Goat husbandry would be complementary to cattle and sheephusbandry. Pigs were kept on a fairly large scale in BH by State farns, more commonly in the north ofthe country on today's RS territory. Most farms fattened two or three pigs, slaughtered their own pigsand produced smoked meat and sausages for the winter period. Poultry were also produced on Statefarms both for eggs and broiler production. Poultry keeping is common throughout the country in


backyard systems, but also in larger numbers in cages and in deep litter houses. With the rapidreproductive capabilities of pigs and poultry, importations of these species appear not be of priority.

19. An examination of livestock numbers in January 1992 compared with the feed availability forthem indicates that BH was in significant livestock feed deficit. The apparent shortage of feed isconsistent with the poor livestock performance achieved. Clearly the development focus within thelivestock sector should be to equate numbers with feed availability, specialize and concentrate onimproving technical performance. Destruction of livestock during the war period has largely correctedthe livestock food imbalance.

20. The animal health situation in BH used to be comparable with westem Europe and diseasecontrol measures have been implemented for many years. Where war has largely disrupted vaccinationprograms there is concem about the re-emergence of rabies. With the unsettled situation in the area, withrefugee movements with livestock continuing, and with the prevailing disease situation in countries to theeast, FMD and possibly rinderpest are potential threats. The condition of veterinary stations in RS isreported to vary from partial destruction to adequate and, in a limited number of cases, elaborate. TheVeterinary Institute in Banja Luka is generally operational. Throughout BH artificial inseminationservices are provided by the field veterinary stations. The RS authorities desire to raise artificialinsemination coverage from a present 20 percent to 35 percent by the year 2,001.

War-related Damage and Current Situation

21. Unlike in the Federation of Bosnia and Herzegovina, war-related damage to agriculture in RS isvery much dependent on the specific circumstances in each region and the extent and duration ofhostilities as well as the number of times teiritory changed hands. For example, in the southern part ofthe Banja Luka region, including the municipalities of Mrkonjic Grad, Ribnik and Sipovo which isknown as the Anvil Area, the local population was displaced several times and large shares of livestockand farm machinery were lost. In addition, the former confrontation lines were heavily mined. Becausethe rural economy and in particular agricultural production has been effectively destroyed in this area,rural families have tended to remain either in refugee status or lodged in local towns where they imposean additional burden on already fragile housing conditions.

22. For RS as a whole, reliable current livestock and farm machinery numbers are not available.Estimates indicate a significantly smaller reduction of livestock due to the war in RS than in theFederation of Bosnia and Herzegovina where, in some areas, up to 70 percent of the pre-war livestockwas lost. Overall damage estimates for war-related livestock losses in RS are in the 30 percent range.Priority import requirements suggested by the RS Government equal 16,000 pregnant heifers, 260,000sheep, 190,000 pigs, and 14,000 horses. In the most war-affected areas of RS, the potential for sustainedlivestock production, in the absence of livestock imports, is well below that in 1991 as a result of thediminished herds. Regarding farm machinery, the RS authorities estimate a loss of 40 percent of the pre-war farm machinery which they translate into an urgent replacement requirement of some 5,700 tractors,1,800 combines, and 13,000 other agricultural machines.

23. In Mrkonjic Grad alone, some 5,000 farming families of a pre-war total of 8,000 farms reportedlylost all their livestock, including 17,000 breeding cows, 80,000 sheep and 18,000 pigs. A similar pictureemerges in Sipovo. In both municipalities only about 10 percent of tractors was found when thepopulation returned after the end of hostilities. The complete lack of mechanized farm power in heavilywar-damaged areas implies that neither cultivation nor harvesting can be undertaken at the present time.This applies particularly to the production of fodder crops, including hay. Without livestock, farmfamilies returning to areas with heavy agricultural losses are denied the opportunity to generate cash

Appendix IPaae 6 of 23

23.income, and without farm machinery they can neither grow crops nor provide fodder for any livestockthey may intend to acquire. Even a return to manual methods is often unlikely because of the loss ofhand tools.

Reconstruction Achievements in 1996

24. No major reconstruction as taken place in the agriculture sector in RS since the end of thehostilities. Starting in Spring of 1996, mostly privately organized efforts in RS lead to repairing ofhouses and farm buildings. In some cases, farmers have been able to borrow cattle and equipment fromrelatives elsewhere in RS or in neighboring FRY. In other cases cows have been purchased from statefarms in exchange for hay. As much as ten tons of hay, harvested manually, has reportedly been chargedfor a cow of indifferent quality and more hay then had to be stocked for winter feed.

25. During and after the war, the Food and Agriculture Organization of the UN (FAO) and a numberof NGOs have contributed to provide RS farmers with urgent farm inputs such as seed, fertilizer andpesticides, also hand tools, however in relatively small quantities. Bilateral aid has contributed animalsand agricultural inputs to about 1,000 families in the Banja Luka area, and also fruit, vegetable andlivestock inputs in the Srbinje region located in south-eastern part of RS. In summary, while there hasbeen some initial success during 1996 in making farm houses habitable and assist a small number offarmers with urgent inputs, little has been achieved in the most war-damaged areas of RS to re-startagricultural production, especially in RS municipalities located along the former confrontation line.

B. BANK RESPONSE AND STRATEGY

Bank Strategy

26. To assist the Bosnian authorities to rebuild the agriculture sector of BH, the Bank is committedto assist the Federation of Bosnia and Herzegovina and RS to address the most basic and urgentreconstruction needs through emergency-type projects. In the Federation, in March 1996, the Bankapproved a US$ 20 million Credit for an Emergency Farm Reconstruction Project (FY96). Together withother donor partners such as the European Union, the Intemational Fund for Agricultural Development(IFAD), and the governments of Saudi Arabia, Germany and the Netherlands, through that project theBank is assisting the Federation authorities to import and distribute to some 10,000 farmers livestock andessential farm equipment, along with repairs to some 40 veterinary service stations. The proposedReconstruction Assistance Project is the equivalent emergency project designed to assist the RSauthorities in a similar manner. The Bank is also committed to support an Emergency Wood Supply andForest Management Project which is covering urgent reconstruction needs in the forestry sector in bothEntities of Bosnia.

27. The Bank's support to Bosnia's agriculture sector is part of the agreed internationalreconstruction and rehabilitation program for agriculture and the rural areas of BH of about US$ 300million, to be implemented over three to four years, which the Bank has helped to develop in a jointeffort with the country and the donor community.3 The agriculture sector program calls for an energeticcampaign to restore devastated farms and to intensify ongoing efforts to provide the desperately neededequipment, livestock, and farm inputs that will augment agricultural production (see Table 2).

3 See: "Bosnia and Herzegovina: The Priority Reconstruction Program", Vol. 3, Reconstruction SectorReports, made available for the Donor Information Meeting in Brussels, January 1997.


28. At the same time, efforts will be made to establish a solid policy frarnework and provide otherkey investments to assist agriculture to evolve into a competitive and productive economic sector in thefuture. Agricultural sector work during 1997 will provide the basis for further Bank involvement inBosnia's agriculture sector beyond the initial emergency reconstruction period. The key sectoral issuesto be addressed in the medium term are as follows: raising farm productivity by introducing agriculturalextension and other farmer support services, including agricultural credit; clarifying contested ownershiprights to agricultural land and farm buildings; promoting sector growth by building up agriculturalproduct markets and helping farmers to associate with each other to jointly purchase inputs and marketoutputs; and restructuring and privatizing state farms and agro-processing enterprises.

Table 2: Three-Year Assistance Program in Agriculture

(in US$ million) . 3-4 Year 1996 1997 1998-1999Program Commitments Requirements Requirements1996-99

Iiiipoiied Seasonal Farm Inputs 20.0 12.0 5.0 3.0Livesteck and Farm Equipment 85.0 45.0 35.0 5.0Seed Multiplication Development 7.0 3.0 3.0 1.0Fruit Trees & Vineyards Rehabilitation 30.0 0.0 20.0 10.0Forestry Rehabilitation 40.0 0.0 35.0 5.0Rural Financial Markets Development 20.0 0.0 5.0 15.0Rural Industries and Services 40.0 0.0 0.0 40.0Farmer Support Services Development 30.0 3.0 7.0 20.0Agriultural Policy Development/ TA 7.0 0.0 3.0 4.0Incremcntal Recurrent Costs 21.0 2.0 7.0 12.0Total 300.0 65.0 120.0 115.0


29.. Through the early start of the Emergency Farrm Reconstruction Project in the Federation ofBosnia and Herzegovina, the Bank was able to assist the Federation to secure substantial additional donorcof.nancing to quickly rebuild small private farms. The presence of the Bank and its oversight overproject implementation provided comfort to many donors. It is expected that the Bank's support for anagricultural rehabilitation program in RS would result in a similar success to raise donor funding. TheBank's emergency-type support for rebuilding Bosnia's farms is based on a number of objectives: First,to reduce the country's dependence on donor-financed imported food aid by jump-starting domesticagricultural production; second, to provide rural employment and income opportunities, including forreturning refugees and displaced persons, and especially in areas of heavy war damage since agriculturewill often be the only source of rural employment for years to come; and third, to improve the country'sprospects to re-start exports of high-value agricultural products such as meat and dairy products, fruitsand vegetables, and wine.

Lessons Learned from Previous Bank/ IDA Experience

30. There are several key lessons leamed from the Emergency Farm Reconstruction Project whichhas been implemented and substantially completed in the Federation since April 1996. These have beenincorporated into the proposed project and are as follows:

* Breeding cattle and small-scale farm equipment are the most suitable farm inputs to quicklyreactivate farming and agricultural production, and there is very strong domestic demand for them.

* Farm machinery is best supplied in complete packages, including all required implements.


* Veterinary follow-on support is an integral part of a farmer credit package, ensuring veterinarycoverage for a one-year period after delivery of the livestock to the farmers.

* Project areas are best confined to a small number of well-defined priority regions. While an Entity-wide implementation may be more equitable, it adds to implementation complexity.

* In order to ensure that retuming refugees and internally displaced persons benefit from the project,the implementing agency needs to reach out early on to UNHCR and other institutions where thesepersons are registered. An agreed specified percentage of project beneficiaries should be refugeesretuming from abroad, provided their present wealth and income situation merits support.

* Finally, early installation of the project monitoring system will allow for baseline farm surveys andthe timely establishment of an impact evaluation survey framework.


31. The agriculture component of the Reconstruction Assistance Project will complement, in part,the other components of this project (housing, water and sanitation, and electric energy) by generatingemployment and income opportunities for returning refugees and displaced persons. Since there will beone joint Project Coordination Unit established for all four components, it will be possible to targetselected municipalities where two or more project components provide benefits to the same population,thus following an integrated area approach to economic reconstiuction. Complementarity also existswith respect to other Bank-supported projects in RS: the Local Initiatives Project (FY97) which aims tosupport pennanent employment through loans to micro and small businesses in RS, some of which couldbe farms seeking to finance the purchase of seasonal farm inputs; and the IFC-supported commercialmicro-credit bank which would provide loans to small enterprises, which may include agro-processingbusinesses in the vicinity of farmers benefiting from the Reconstruction Assistance Project, thus creatingdemand for their produce.

C. COMPONENT DESCRIPTION

Component Objectives

32. The primary objective of the Agriculture Component is to assist economically-disadvantagedand war-affected farmers in RS restart and strengthen their farming activities and make the transitionfrom dependence on humanitarian assistance to active, independent rural employment. This will beachieved by providing farmers with in-kind credits for livestock and farm machinery. The primary targetgroup are retuming refugee-farmers and internally displaced persons. The project will aim at the privatefarm sector, with a priority for full-time farmers. The emergency reconstruction phase in RS calls forprojects with fast, direct impact on the ground; hence component design has been kept straightforwardsuch as to allow for speedy implementation.

33. The secondary objective of the Agriculture Component is to raise agricultural and foodproduction in war-affected areas of RS. Increasing farm production will help reduce the need forimported donor food aid, improve food security, assist in the development of local green markets,provide needed inputs for agro-processing enterprises in RS, and eventually enable RS to trade andexport food products.

Component Elements

34. To support the above objectives, the Agriculture Component has three elements: (i) livestockdevelopment; (ii) farm mechanization; and (iii) farn surveys and technical support.


Element 1: Livestock Development

35. To assist in the initial rebuilding of the RS herds for milk and meat production, the project wouldfinance the purchase of breeding cattle, to be kept by private individual small-scale farmers. Livestockwould be distributed to farmers on the basis of in-kind supply and credit arrangements, described furtherbelow. The livestock development element has the below-described sub-elements. See Table 3 fordetailed cost estimates.

36. Importation of cattle. A total of about 3,000 pregnant heifers of the Simmental, Brown Swiss,Grey Tyrol, and/or Holstein-Friesian breeds would be imported for distribution to farmers who have lostcattle and have the necessary experience and capability of caring for them. These breeds are wellaccepted in the respective areas and being dual purpose breeds have both meat and milk potential.Technical specifications and bidding documents are readily available for these four breeds since theywere imported during 1996 under the equivalent program in the Federation. The final numbers ofdifferent breeds to be procured will depend on farmer demand, expressed through farm surveys. The costestimate includes delivery by the supplier to specified quarantine areas within RS. The number ofimported cattle for this emergency project is substantial, but nevertheless modest enough to take intoaccount the considerable logistical problems of the transport of large numbers of animals to 'war-tomareas.

37. Quarantine. handling. local transport. The project will finance the cost of mandatory quarantinein livestock stations within RS. Experience from the 1996 Federation. project suggests to keep thequarantine period at a minimum, say no more than two weeks. Contracts will be entered into betweenthe Project Coordination Unit and the respective quarantine stations, covering supply of feed and water,as well as all required veterinary inspections and clearances. The project will also finance the transportby local transporters from the quarantine areas to benefiting municipalities. Standard contracts areavailable from the 1996 Federation project.

Table 3: Livestock Development - Detailed Cost Table

Item Unit Quantity Unit Cost - Total Cost(US$) (US$)

Imported cattle (pregnant heifers) head 3,000 1,450 4,350,000Quarantine! handling per head 3,000 75 225,000Local tansport to fanners per head 3,000 30 90,000Veterinary support services for 1 year per head 3,000 60 180,000TOTAL Base Cost 4,845,000

38. Veterinary support for one year. The project will finance one-year contracts with local veterinarystations to monitor the health and productivity of imported heifers. Contract payments will be linked tosuccessful birth of the first calf and subsequent artificial insemination during the first year. Contractswill be entered into between the Project Coordination Unit and the mostly private veterinariansconcemed.

Element 2: Farm Mechanization

39. The project would provide an initial emergency supply of critically needed farm mechanizationequipment, including single-axle motor-cultivators and small- to medium-size two-axle tractors. Tractorswould be provided in packages including all required implements and basic spare parts. Spare parts for


existing machinery are not considered at the moment because (i) the machinery is rather aged and doesnot merit major repairs; (ii) the project would aim to provide fanrers with only major equipment thatthey cannot afford from their own financial resources at the present time; (iii) the cost of logisticsrequired to provide the needed spare parts through the project would probably not justify the expectedbenefits since, even after repair, most of the remaining farm equipment is likely not to deliver satisfactoryperformance. All equipment would be provided on the basis of in-kind supply and credit arrangements.See Table 4 for dc.ailed cost estimates.

40. The supply of machines and implements through the project would involve, where appropriate,existing dealers or worl'shops for agricultural machinery in order to promote private sector initiatives inthis sector. Suppliers of machines would be obliged to provide training for dealers and workshopsregarding repair, maintenance and handling of the new machines. They would also ensure that the futuresupply of spare and replacement parts is guaranteed through commercial channels. These arrangementshave proven to be successful in the Federation.

41. Two-axle tractors. Lack of farm power is one of the major constraints to increase agriculturalproduction in the war-tom areas of RS. As a result, large areas of arable land are not cultivated atpresent. In view of the difficult topography of BH and the small farm structure in the private sector, largetractors cannot be used. 'Under the Sroject, a total of about 150 standard two-axle, two-wheel drivetractors would be provided in the engine range of 25-35 kW. Each tractor would be accompanied by a setof equipment comprising a trailer, plough, rotaiy cultivator, and mower. This would provide for basicprimary and secondary cultivation operations, fodder harvesting and transport. Detailed technicalspecifications and bidding documents in line with Bank guidelines are available from the 1996Federation project.

42. Single-axle tractors/ 4notor-cultivators. For the provision of single-axle tractors, the samerationale applies as for the two-axle tractors. The main objective is to increase availability of farmpower, especially for very small farms or in extremely hilly areas. As the use of these single-axle tractorsis mainly for agriculture, and in view of the heavy soils that are predominant in some parts of RS, a totalof 400 medium- to large size single-axle tractors will be provided under the project in the 7-9 kW range.gets will include implements including trailer, plough, rotary cultivator, and grass mower. Half of thetrailers would be PTO-driven for use in mountainous communities. As for two-axle tractors, technicalspecifications and bidding documents are readily available.

Table 4: Farm Mechanization - Detailed Cost Table

Item Unit Quantity Unit Cost Total Cost(US$) (US$)

Two-axle tractors (25-35 kW) piece 150 17,000 2,550,000Single-axle tractors (7-9 kW) piece 400 5,200 2,080,000Initial servicing/ handling per piece 550 100 55,000Local transport to farmers per piece 550 60 33,000TOTAL Base Cost 4,718,000

43. Initial servicing. handling. local transport. The project will finance the reception, assembly,initial servicing, handling, and local transport of tractors to the recipient farmers. Contracts will beentered into between the Project Coordination Unit and the respective local mechanized farm servicestations as well as local transporters.


Element 3: Farm Surveys and Technical Support

44. The project would finance detailed farm surveys, to be carried out in the agreed RS target areasas a basis for confirming specific farmer interest and identif~ying eligible farmers. Survey questionnaireshave been prepared. Surveys would be undertaken by qualified local consultants with a background inagriculture. The project will also finance essential technical support from expatriate advisors with abackground in livestock production and farm mechanization. They would support and advise the ProjectCoordination Unit throughout the process of procurement, contracting, reception and distribution ofimported livestock and farm machinery. To the extent possible, the same individuals would be engagedwho helped start up the equivalent Federation project during 1996. RS Government resources would beused to extend this expatriate technical support beyond the planned period, if required. The operatingcosts of the staff of the Agriculture Department of the Project Coordination Unit itself are included in theImplementation Support Component of the overall project.

45. The project would also finance the establishment and running for 12 months of a projectmonitoring and impact evaluation system. This would involve domestic agronomists as well as supportfrom an expatriate monitoring expert. The system will need to be operational prior to delivery of the firstlivestock or tractor to allow for baseline farm surveys. Relevant experience on the establishment of sucha monitoring system is available from work carried out by FAO in the Federation in early 1997.

Table 5: Farm Surveys and Technical Support - Detailed Cost Table


Farm surveys (local experts) man-months 36 500 18,000Expatriate livestock advisor man-months 9 15,000 135,000Expatriate mechanization advisor man- 9 15,000 135,000

monthsMonitoring system (local experts) farm visit 1,000 50 50,000Expatriate monitoring expert man-months 3 15,000 45,000TOTAL Base Cost 383,000

Component Cost and Financing Plan

46. The total estimated cost of the component is shown in Table 6. Physical contingencies of 3percent on goods (livestock and farm equipment) are included. No price contingencies have beenincluded given the expected short disbursement period of this emergency project. Donor-financed itemsunder the intemational reconstruction program are tax-exempt in RS.

Table 6: Agriculture Component - Cost Summary

(in US$ '000) Livestock Farm Farm Surveys and Total CostDevelopment Mechanization Technical

SupportLivestock (heifers) 4,350 0 0 4,350Farm machinery 0 4,630 0 4,630Agricultural services 495 88 0 583Technical ass., training, studies 0 0 383 383Total Base Cost 4,845 4,718 383 9,946

Physical contingencies 131 139 0 270Total Component Cost 4,976 4,857 383 10,216


47. Of the total component cost, the World Bank would finance US$ 1.0 million equivalent. TheWorld Bank contribution would finance the import of about 50 units of two-axle tractors (25-35 kWengine power) with implements, including associated costs for handling, servicing and local transport,and in part the cost of the expatriate farm mechanization advisor and some of the local consultantservices. Donor cofinancing for the balance of component costs has been committed in part by theInternational Fund for Agricultural Development (IFAD) at an amount of US$ 5.0 million, financing thelivestock development element of this component. Additional financing of US$ 4.2 million equivalent isbeing sought from other donors (see financing plan shown in Table 7).

Table 7: Component Financing Plan

(in US$ '000) Livestock Farm Fann Surveys and Total CostDevelopment Mechanization Technical

SupportWorld Bank 0 880 120 1,000IFAD (committed) 4,976 0 24 5,000Donors to be identified 0 3,977 239 4,216Total Component Cost 4,976 4,857 383 10,216

Financial and Economic Justification

48. The component is designed to meet between 5 and 10 percent of the urgent needs to re-installfarm power and provide livestock breeding material to make up for war-related damage in RS. Theresulting benefits of these activities refer both to a return to productive use of land currently not inproduction, and to increased output on land already in production. As a main benefit, in addition toincremental farm and food output, the component would generate employment and income for the ruralpopulation in war-tom areas of RS. This would particularly benefit retuming refugees and internallydisplaced persons, through increased opportunities for full-time work and farming on lands formerlyfarmed on a part-time basis only. Based on an estimated incremental, permanent rural employmentimpact of I employed person per imported cattle, 2, employed persons per motor-cultivator and 3employed persons per two-axle tractor, the project would generate up to 4,200 new jobs.

49. The expected agricultural production increase from farm mechanization is being supported by thesupply of donor-financed urgent farm inputs, such as seeds, fertilizer and pesticides, during 1997 and1998 for the spring and autumn planting seasons, organized under the umbrella of the FAO. Themachinery provided under the proposed project would typically be used to cultivate land not plantedduring the previous year. The 150 two-axle tractors and 400 motor-cultivators are likely to result inincremental cultivation of some 5,000 ha (20 ha per tractor and 5 ha per motor-cultivator). The increasein food crops (mainly cereals and potatoes) is estimated at some 15,000 tons of grains and some 3,000tons of potatoes, in addition to incremental fodder production as livestock feed. Other income andbenefits would stem from plowing and transport services for fellow farmers without mechanized farmpower. With benefits valued at current intemational prices, the farm mechanization component isexpected to yield economic rates of return in excess of 12 percent. Incremental production as a result ofthe livestock component would consist of additional milk, cheese, and meat. Rates of return on thelivestock component would also be high and at least above the 12 percent level. Additional substantialbenefits would arise from the reduction and eventual phase-out of donor-financed food aid deliveries intoRS through substitution of the incremental domestic agricultural production for imported food. Theamounts saved on food aid would be available for firther donor investments in agricultural production.


50. The main component risks relate to delays in implementation and farmers' potential inability torepay credits on time. Implementation may be delayed substantially due to a slow start-up ofprocurement, farmer selection, and preparation of farmer credit contracts. To reduce this risk, most of theprocurement and sample contracting documentation used for the parallel project carried out during 1996in the Federation will be made available to the Agriculture Department. The selection of farmers throughfarm surveys will be carried out as early as possible. Experienced expatriate experts that helped start upthe Federation project will be deployed to RS. The second main risk relates to a possible lack ofincremental farm cash flow of benefiting farmers to repay the in-kind credits. From the Federationproject, the experience gained is that many farmers started to pre-pay on their credits, hoping to obtainadditional livestock and equipment, although this was mostly done out of non-farm income. Farmmodels demonstrate that farmers will be able to repay the five-year loan at the interest proposed.Similarly, repayments on tractor loans over the eight-year maturity period should pose no difficulty,provided farmers rent out their equipment when is not being used by themselves.

Environmental Aspects

51. The Reconstruction Assistance Project has been placed in environmental category B. All itemsprocured under the Agriculture Component which present an opportunity for environmental enhancementwill be specified accordingly, and item usage will be monitored during supervision to ensure that there isno degradation to the environment.

D. INSTITUTIONAL ARRANGEMENTS AND IMPLEMENTATION

Component Organization

52. An Agriculture Department for implementation of the Agriculture Component of the proposedproject will be established within the new Project Coordination Unit in the Ministry of Finance of RS,located in Banja Luka. Staff of this Agriculture Department will be seconded from the MAFWR of RS.The Department will be headed by a Department Director who will report to the General Director of theProject Coordination Unit. In addition to the two expatriate advisors for livestock development and farnmechanization, the Agriculture Department Director will have five local staff: a livestock expert, amechanization expert, an agricultural economist, and two support staff. The staff and operational cost ofthe Agriculture Department are included in the Implementation Support Component of the overallproject. The Agriculture Department will initially be operating for a 12 month period, to be extendedunder RS Government financing if required.

53. The Agriculture Department will be responsible for all aspects of implementation of theAgriculture Component, except for aspects of Credit disbursements and payments to suppliers which willbe handled by the PCU Financial Controller. Specifically, the Agriculture Department will: finalizedetailed technical specifications for livestock and farm machinery, prepare bidding documents, carry outtenders, enter into contracts with foreign suppliers and domestic service providers and consultants,supervise the selection of eligible farmers and maintain a detailed farmer database, organize thedistribution of livestock and farm equipment, set up the project monitoring and impact evaluation system,and carry out reporting requirements. Based on the experience gained in the 1996 Federation project, it isnot expected that specialized procurement agents would need to be engaged.

54. To ensure better local implementation of the reception, storage and distribution of importedlivestock and farm machinery, the Agriculture Department will engage the services of regionalagricultural experts located in the target area for the imported items. These experts will be hired as


consultants on a short-term basis starting from the time of livestock and equipment arrival through theperiod of delivery of the last items to the farmers. The Agriculture Department will arrange for workspace and office facilities for these experts at the municipalities in the target area where they are based.Final distribution of imported farm equipment and livestock will be carried out through and by themunicipalities in the target area for the Agriculture Component, assist by the agricultural expertsemployed by the Agriculture Department.

Selection of Eligible Farmers

55. To allow for effective reconstruction of selected rural war-damaged communities in RS, theAgriculture Component will focus on a target area that is commonly called the "anvil area", locatedgenerally south of the city of Banja Luka where heavy fighting during the hostilities has caused verysubstantial damage to the agriculture sector. The three main benefiting areas will be the municipalities ofMrkonjic Grad, Ribnik, and Sipovo. Other war-affected target areas and municipalities may be agreed onduring project implementation, provided this is based on mutual agreement between the financing donorsand the RS authorities.

56. Based on the recent project experience gained in the Federation of Bosnia and Herzegovina, thefollowing farmer selection process will be followed in RS:

* First, municipal farm damage and needs surveys will be carried out by the Agriculture Department inthe target area, using local consultants. Surveys will include all present farmers in the area,providing evidence on their fulfillment of the below-stated eligibility criteria, and specifying theirinterest to purchase livestock and/or farm machinery under the project.

* Second, the Agriculture Department will contact UNHCR and a variety of NGOs to obtain names ofrefugee farmers living abroad, or farmers intemally displaced within Bosnia, that are interested toreturn to their farm and property located within the above target area. UNHCR and NGOs will beprovided with the same survey forms used for the municipal farm surveys, and interested refugeeswill be required to demonstrate their eligibility and to indicate their interest to purchase livestockand/or farm machinery.

* Third, the Agriculture Department will reconcile both lists of farmers for each municipality. Farmerswhich fail to demonstrate compliance with the mandatory elements of the eligibility criteria will betaken off the lists. On the basis of the consolidated lists, the Agriculture Department will allocate theaggregate numbers of livestock heads and farm machines to each of the municipalities in the targetarea.

* Fourth, the municipalities will be provided with the consolidated lists of farners for theirmunicipality, and the total available number of livestock and farm equipment allocated to their area.Each municipality will make the final selection of farmer-beneficiaries and communicate the finallistings to the Agriculture Department.

57. For the World Bank-financed part of the Agriculture Component, at least 50 percent of finalselected benefiting farmers must be either returning refugees or returning internally displaced persons.

58. The following eligibility criteria will be applied by the municipalities in the target area to selecteligible farmers. Fulfillment of these criteria is based on self-declaration by the farmers on the surveyforms. Misrepresentation of the truth by farmers will lead to the cancellation of the credit through theAgriculture Department, making the outstanding credit balance payable immediately. Mandatory criteriamust be fulfilled by all benefiting farmers. Other eligibility criteria should be fulfilled to the largestextent possible. Livestock and farm equipment will only be provided to private, individual small-holderfarmers, not to State-owned farms or enterprises (more than 50 percent of capital in State ownership).


Mandatory Criteria:

* Farmer-beneficiaries need to be experienced livestock producers and/or crop farmers and must havesuffered the loss of livestock/ a tractor due to the war.

* Benefiting farmers must have legal title or a written user right to the farm land and farm buildings.* For livestock, benefiting farmers must have adequate shelter and access to a land area that allows the

animals to be supported.* For tractors, benefiting farmers must have adequate servicing and storage conditions for the

equipment and, in the case of two-axle tractors, own a minimum of 10 hectares of land.* At the time of signing the supply and credit agreement, the benefiting fann family household

disposes of no more than: (i) DEM 10,000 equivalent of total assets other than the farm land andbuildings, and (ii) DEM 500 equivalent of household cash income per month.

Other Elizibilitv Criteria:

* Farmers should demonstrate their intention to rebuild and operate the farm by undertaking repairs tofarm buildings and facilities and restarting agricultural activities.

* Farmers should have access to adequate marketing facilities (farmer/cooperative markets, cooperativeprocessing centers, agro-processing enterprises, etc.).

* For livestock, farmers should have access to veterinarian support and artificial insemination services.* For tractors, farmers should be able to hire or purchase some tractor implements and buy spare parts

through service centers within the local area.

Component Implementation

59. To allow for swift implementation of this emergency-type operation, procedures forimplementation are being kept highly straightforward. The two main component activities areprocurement and distribution of livestock and farm machinery. In order to secure early arrival andexpedient distribution of procured items, a detailed implementation schedule has been developed for thiscomponent and is attached. The component is designed to allow for substantial completion of allactivities relating to procurement and distribution within a 12-15 month time frame.

60. Recruitment of local staff and the setting up of the Agriculture Department has been initiated andwould be finalized by the time of Credit approval by the Bank. In order to ensure an early start ofactivities, two of the intemational staff positions have already been filled through altemative interimfunding arrangements such as donor trust funds. Identification of the potential farmer-beneficiaries,following the agreed set of criteria, has also been initiated. This will start through the municipal farmdamage surveys in the target area.

61. For livestock and farm machinery, preparation of tender documents is underway through theexpatriate livestock and mechanization advisors to the Agriculture Department, to be supported by theoverall expatriate procurement manager assigned to the PCU as of March 1997. Tender documents willprovide for delivery of livestock to pre-determined quarantine areas, and for farm equipment to localservice stations and reception areas. Livestock to be imported would be inspected and selected in thecountry of origin by a team including representatives of Agriculture Department and the MAFWR as wellas the expatriate livestock advisor. Each benefiting farmer will receive a limited number of livestock, notexceeding three heads per farm family. Tractor sets are limited to one per farm family. Provision oflivestock and tractors to the same family would be an exceptional case.


Cost Recovery and Onlending Arrangements

62. All farmers are reqnired to enter into supply and credit agreements with the AgriculturalDepartment of the PCU, representing the RS government. The maturity of the credits are as follows: forlivestock, five year maturity including one year grace; for farm equipment, eight year maturity includingtwo years of grace. The annual credit interest rate would be determined by the RS govermment, but willnot be below DEM-Libor plus 3 percent per year. The interest rate will be fixed during the life of thecredit, and credit repayments will be expressed in annuities. Credit repayments by farmers would bethrough local credit institutions, selected based on their fees and quality of service in handling accountsfor the RS government. An alternative arrangement for collection of farmer credits would be the use oflocal NGOs associated with the Local Initiatives Project, in implementation in RS since early 1997. Thecredit institution or NGO(s) collecting the credits will provide at least quarterly farm credit repaymentstatistics to the RS govemment and the financing donors.

63. The supply and credit agreements will set out: (i) the value of the goods supplied, based on theimport value, expressed in convertible currency; (ii) the total value of the supply and credit agreement,not to exceed DEM 100,000 equivalent per farm family and agreement; (iii) the interest rate and maturityalong with the detailed credit repayment schedule; (iv) the requirement for the borrower to provideguarantees in the form of three co-signatures; (v) detailed credit repayment arrangements through localcredit institutions or NGOs; (vi) requirements for adequate servicing and storage of items, including theneed to maintain service and performance records; (vii) the obligation to purchase insurance against lossand damage to the livestock and/or the tractor; and (viii) a clause stating that any misrepresentation of thetruth by farmers, as well as the sale of the livestock or tractor, will lead to the cancellation of the credit,making the outstanding credit balance payable immediately.

Procurement

64. The proposed procurement arrangements are summarized in Table 8, the procurement plan forthe Agriculture Component is attached. In case of parallel financing by other donors, the applicableprocurement procedures of the respective financiers would be used.

65. The Bank will finance one LIB package of two-axle tractors, valued at US$ 0.9 million. The listof LIB bidders invited to provide offers will be based on the expressions of interest received in responseto the General Procurement Notice as well as other sources. The list will be as broad as possible.Geographical distribution will be considered to the maximum extent possible. The Bank's StandardBidding Documents will be used. The LIB contract will require prior approval of the Bank relating to thelist of suppliers and technical specifications.

66. The Bank will also finance US$ 0.1 million of consultant services and services of localagricultural service providers. The services will be procured in accordance with Bank guidelines whichshall include both competition and sole sourcing. Sole sourcing of services will need to be justified ineach case. Such justification may be the timing constraint, continuity, unique expertise, and lack ofcandidates given the post-conflict situation in RS. No assignments have been pre-identified for solesourcing. Any sole sourcing during implementation will be subject to the Bank's approval. Follow-upassignments will be permissible to the extent that this will be indicated in the initial Terms of Reference.

67. As stated above, from the experience gained of the parallel project in the Federation of Bosniaand Herzegovina, it is not expected that procurement agents would need to be engaged. The AgriculturalDepartment of the Project Coordination Unit, assisted by qualified and experienced expatriate advisors, isexpected to be able to carry out procurement of the LIB equipment contract and of consultant service


contracts quickly and efficiently. Post review of procurement actions will be carried out on a quarterlybasis by Bank supervision missions, assisted by the Procurement Specialist in the Bank's ResidentMission in Sarajevo. Furthermore, post review monitoring of procurement will be facilitated throughquarterly reporting, which will be part of the regular quarterly progress reports under the overall project.

Table 8: Proposed Procurement Arrangements (US$ million)

Items Procurement Method (USS m) a/

LIB OTHER NBF TOTAL

1. Goods1.1 Farm mechanization equipment (two-axle 0.9 3.9 4.8

tractors, motor-cultivators/ single-axle tractors) (0.9) (0.9)b/

4.5 4.51.2 Imported livestock (breeding heifers) (0.0)

0.9 8.4 9.3Subtotal (0.9) (0.9)

2. Services2.1 Local agricultural services (handling/ storage, 0.05 0.45 0.5

quarantine, servicing and assembly, local (0.05) (0.05)transport and distribution c/

2.2 Technical assistance, training and studies d/ 0.05 0.35 04(0.05) (0.05)

Subtotal 0.1 0.8 0.9

(0.1) (0.1)

TOTAL COMPONENT COST 0.9 0.1 9.2 10.2(including contingencies) (0.9) (0.1) (1.0)

NBF = Not Bank FinancedLIB = Limited International Biddinga Figures in parenthesis represent Bank financing.b The Bank would finance: one LIB package (US$ 0.9 million) of two-axle tractors, 25-35 kW, including implements.c Local agricultural services would be procured in accordance with Bank guidelines which shall include both competition

and sole sourcing. The sole sourcing would be justified in each case.d Consultant services consist of a number of individual consultants. Their services would be procured in accordance with

Bank guidelines which shall include both competition and sole sourcing. The sole sourcing would be justified in eachcase.

Disbursements

68. The disbursement plan is given in Tables 9 and 10. Disbursements are expected to be completedwithin a period of two years from the date of effectiveness. The Bank Credit would finance thecategories of expenditures outlined in Table 1 1. Further details on disbursement procedures, includinguse of the Special Account and of Statements of Expenditures, are provided in the main text of theoverall project.


Table 9: Component Disbursement Schedule (US$ million)

Component Elements CY 1997 CY 1998 CY 1998 CY 1999 TotalQ3/4 Q1/2 Q314 Q1/2

Livestock Development Amount 0.3 2.0 1.7 1.0 5.0Percent 6% 40% 34% 20% 100%

Farm Mechanization Amount 0.5 1.4 1.5 1.4 4.8Percent 10% 30% 30% 30% 100%

FarmSurveysand Amount 0.1 0.1 0.1 0.1 0.4Technical Support Percent 25% 25% 25% 25% 100%

TOTAL Amount 0.9 3.5 3.3 2.5 10.2Percent 9% 34% 32% 25% 100%

CUMULATIVE Amount 0.9 4.4 7.2 10.2Percent 9% 43% 75% 100%

Table 10: World Bank Credit Disbursement Schedule (US$ million)

CY 1997 CY 1998 CY 1998 CY 1999 TotalQ3/4 Q1/2 Q3/4 Q1/2




Categories Amount (US$ % of Expenditures to be fmanced under theequiv.) World Bank Credit

1. Goods (farm equipment) 800,000 100% of foreign, 100% of local (ex-factorycost), and 85% of local expenditures for

other items procured locally2. Consultant Services (technical

assistance, training, studies) 50,000 100%3. Agricultural services (local transport,

handling, storage, assembly, servicing) 50,000 100 %4. Unallocated 100,000TOTAL (incl. contingencies) 1,000,000

Accounts, Auditing, Reporting and Performance Monitoring

69. Separate and auditable accounts would be established by the PCU for expenditures within theAgrieulture Component of the project. Details on these accounts, as well as on auditing and supervisionprocedures to be followed, are applicable to all project components and are therefore set out in the maintext of the overall project documentation.


70. The Agriculture Department will provide to the PCU management quarterly inputs for progressreports showing the status of implementation of the Agriculture Component, including summaryinfornation on procurement contracts, in a format acceptable to the Bank. Specific reporting elementsfor the Agriculture Component include the following project information and performance monitoringindicators:

* Procurement information for livestock and farm equipment: number and value of contract packagesthat have been let/ signed/ for which the advance payment has been made.

* Procurement status for contracts with local agricultural service providers (quarantine stations, farmservice stations, local transport firms, farm surveyors, monitoring and impact evaluation consultants)

* Number and regional distribution of farms that received/will receive livestock and/or farm equipment* Assessment of the degree of compliance of selected farmers with the agreed eligibility criteria* Demographic information on benefiting farm households: number of family members, refugee

status, total farm household asset value (net of land and buildings), monthly farm household incomeprior use of livestock/ farm tractor, size of owned/ leased land, main farm products

* Health status and production records of the livestock and the calf; data on the percentage andmonetary value of incremental marketed dairy products

* Productivity and pattern of usage of the farm tractor; data on the percentage and monetary value ofincremental marketed crops; incremental income from tractor services provided to others

* Assessment of incremental permanent farm labor as well as farm income created per farm* Farm credit repayment records maintained by the collecting local financial institution

Agreements Reached

71. During Credit negotiations, the following agreements were reached regarding the AgricultureComponent:

* Agreement on the component area: the RS municipalities of Mrkonjic Grad, Ribnik, and Sipovo. Agreement on the mechanism for selecting benefiting farmers, including mandatory and other

eligibility criteria, as described above* Agreement on the selection criteria for participating credit institutions.* Agreement on the type and value of farm equipment to be financed by the World Bank: about 50

units of two-axle tractors (25-35 kW engine power) with implements, including associated costs forhandling, servicing and local transport

* Agreement on the terms and conditions of the supply and credit agreements for farm machinery:eight year maturity including two years grace, at an annual interest rate of no less than DEM-Liborplus 300 basis points

* Agreement on the supply of no more than one tractor with implements per benefiting farm family* Agreement on the staffing and maintenance of the Agricultural Department within the Project

Coordination Unit for the project* Agreement on reporting requirements specific to the Agriculture Component, as set out above

Attachments:Implementation Schedule -Agriculture ComponentProcurement Plan - Agriculture ComponentSummary Technical Specifications for Livestock and Farm Equipment

Appendix 1Page 20 of-23

Attachment 1: Implementation Schedule - Agriculture Component

TASKS RESP. month I month 2 month 3 month 4 month 5 month 6Appoint all staff of Agricultural Depart. (AD) PCUPurchase and install office equipment in AD PCUSelect and mobilize expatriate advisors to AD AD _Establish auditable project accounts & PCUrecordsDevelop detailed component impl. schedule ADOrganize and carry out farm damage surveys ADObtain refugee data from UNHCR/ NGOs ADPrepare final lists of eligible farmers ADFinal selection of farmers muniep.Draft supply & credit agreement outline ADNegotiate agent agreement with financial ADinst.Obtain signed credit agreements from municp.farmersFinancial inst. to maintain farmer credit lists Fin.Inst.Carry out baseline surveys consult.Implementation of the monitoring system ADLIVESTOCK DEVELOPMENTFinalize technical specifications, bid ADdocumts.Tendering for livestock ADBid evaluation & contract signature livestock ADContracting with quarantine stations ADRepairs to quarantine stations, feed stocking Q.Statn.Livestock selection in country of origin ADDelivery of first batch of livestock to RS Suppl.Quarantine of first batch of livestock Q.Statn.Livestock delivery to farmers |municipLivestock selection in country of origin ADDelivery of second batch of livestock to RS Suppl.Quarantine of second batch of livestock Q.Statn.Livestock delivery to farmers municip._Sign one-year contracts with veterinarians ADFARM MECHANIZATIONFinalize technical specifications, bid AD,documts.Tendering for tractors ADBid evaluation & contract signature ADContracting with machinery service centers ADProduction of equipment by manufacturer Suppl.Delivery of farm equipment to RS Suppl.Equipment assembly and initial servicing S.CenterTractor delivery to farmers municip.REPORTINGQuarterly reporting to the Bank AD

Notes:The above accelerated schematic implementation schedule is based on the experiences gained during the parallel 1996 projectcarried out in the Federation of Bosnia and Herzegovina. Actual implementation dates will depend on the date of Crediteffectiveness, availability of donor cofinancing, and seasonal conditions (especially for livestock deliveries).Component supervision through the World Bank would be carried on a continuous basis through staff of the Resident Missionin Sarajevo.

Appendhx IPage 21of2

Attachment 2: Procurement Plan - Agriculture Component

Package Description Units Total Procu- Invita- Submis- Sin Conple-Cost in rement tion to sion of ilg of tlio of

US$000 Method BW BW Con- PacageQuote Quotes tacts

L GOODS

TRACTORS

1 Two-axle tractors, two-wheel 100 1.751drive, 25-35 kW (with implements) 1.751 NBP

Package total

2 Two-axle tractors, two wheeldrive, 50 87625-35 kW (with implements) 8

Package total

3 Single-axle tractors, 7-9 kW (withimplements) 400 2 142

Package total 2.142 NBP

LIVESTOCK

4 Imported cattle (preg. heifers) 3000 4.481 NBFPackage total

'. SERVICES

5 Consultant services5.1 Mechanization adviser 6 m/months 90 Cs5.2 Farm surveys 36 18 CS5.3 Local monitors m/months 35 CS5.4 Other consultant services lump sum 240 NBF

Package total

6 Agricultural services6.1 Tractor service & handling lump sum 26 CS6.2 Other agricult. services 557 NBF

Package total S8

GRAND TOTAL

GOODS .9,250SERVICES. 966

TOTAL PROCUREMENT .10,216

Notes:Actual procurement dates depend on effectiveness of the IDA credit and availability of cofnancing.LIB Limited International BiddingCS Consultant selection according to standard Bank guidelines which shall include both competition and

sole sourcing. Sole sourcing would be justified in each case.NBF Not Bank-financed


Attachment 3: Summary Technical Specifications - Agriculture Component

Livestock (Pregnant Heifers)

1. Pure bred pregnant heifers of the Simmental, Brown Swiss, Grey Tyrol, and/or Holstein-Friesian breeds.(All subsequent specifications are subject to further changes.)

2. Animals should be pure bred and representative of their breed type, but not necessarily registered in the herdbook of their country of origin. The sire of the dam and the sire of calf of the pregnancy should be registeredand progeny tested for milk, fat and protein. The first lactation of the heifers' dam should not be less than4,000 kgs milk and 3.8% butterfat in 305 days lactation.

3. All heifers to be guaranteed in-calf by veterinary examination and certification, to an insemination or naturalservice received between the age of 15-24 months. Pregnancies of more than six months at the time ofexportation will not be accepted.

4. The agreed purchase price shall include the value of the animal, the pre-export satisfaction of diagnosticexaminations, tests and vaccinations as prescribed for importation to BH and for transit through Croatia andtransport to the designated reception point in BH.

5. Procurement of cattle:a) Prospective agents for the purchase of the heifer to be contacted by the procurement agent by contact withthe Farmers' Union of the identified countries of origin and an expression of interest obtained.b) A preliminary visit/s to selected export agents by specialists selected by government of BH to explainrequirements of types and specifications with visual examination of presentative samples.c) Satisfaction of pre-export diagnostic examinations, tests and vaccinations by official (authorized)veterinarians of the country of origin.d) Animals to be inspected visually and approved by specialists from the government of BH at a collectingstations in the exporting country, with submission of a schedule of inspections conducted.e) Exporting agent to organize transport to the designated destination and to provide at least two weeks noticeof the date of shipment and estimated date of arrival.f) Consignments of heifers to be procured in specified batches, each of approximately 120 animals fordelivery during the periods: May to mid-June and/or mid September to end-October.

Required Sanitary Conditions for the Importation of Breeding Cattle

a) Each consignment of breeding cows intended to be imported into BH to be accompanied with a certificateof origin and health, in which the official (authorized) veterinarian of the exporting country certifies thatthe cattle in the consignment conform to the conditions laid down in the International Zoosanitary Code(OIE);

b) The animals were inspected at loading, and it was found that the animals were healthy and not suspectedof any of the infectious diseases transmissible by that species and that each animal was identified by alegible brand, ear-mark, tag or tattoo number;

c) In the country of origin there is no evidence of the following diseases: contagious bovinepleuropneumonia, rinderpest, bluetongue and vesicular stomatitis during the past twelve months, and thatvaccinations against bovine brucellosis are not conducted;

d) In the country of origin there has been no recorded case of foot and mouth disease in the precedingtwentyfour months, and vaccination against this disease have not been conducted in that country duringthe past twelve months;

e) The cattle have been kept by the last owner for at least three months preceding the shipment;f) The cattle originate from holdings which during the past twelve months have been free of bovine

brucellosis, leptospirosis, listeriosis, bovine tuberculosis, avian tuberculosis, where in the last two yearsthere have been no cases of paratuberculosis, trichomoniasis, vibriosis, infectious bovine rhinotracheitis(IBR/IPV) or other coital infections;

g) The cattle originating from areas where distomiasis (fasciolasis) occurs have been treated with anapproved medication against the disease thirty days prior to shipment;

h) Samples of blood have been taken from each animal in the consigmnent and have been subjected totesting in the official laboratory of the exporting country, thirty days prior to shipment, with negativeresults in respect of the following diseases:


1. serum agglutination test for brucellosis with reaction of less than 30 IU agglutinations per 1 ml.of serum;

II. brucellosis complement fixation test with negative result;III. enzootic bovine leucosis serological test (precipitation in agar-gel);IV. infectious bovine rhino-tracheitis (IBR/IPV) serum neutralisation test;V. leptospirosis, microscopic agglutination test for leptospira interrogans (serotypes: canicola,

icterohaemorrhagiae, hardjo, sejroe, pomona, mitis, australis, grippotyphosa and bataviae), witha result of less than 50% in agglutination in 1:100 dilution or that animals have been treatedtwice with 25 mg of streptomycin at an interval of fifteen (15) days prior to shipment;

VI. listeriosis, serum agglutination test showing the result of less than 50% agglutination at 1:160dilution.

i) The cattle have been tested for tuberculosis by the comparative intradermal test with bovine and aviantuberculin, with negative result prior to shipment;

j) Cattle on the way to the point of loading and shipment to BH have not passed through areas ofinfectious animal diseases;

k) Fodder and litter consigned with the cattle do not originate from areas in which foot and mouth diseasehas been diagnosed;

1) The transporter should ensure disinfection of the vehicle before loading and upon completion of theshipment;

m) The importer shall inform the official veterinary inspector of the arrival of the cattle;n) The importer shall adhere to the quarantine regulations specified by the veterinary authorities of BH,

including the specified quarantine period and the requirement of the specified tests.

Farm Equipment (Aericultural Tractors)

Tractor sets. Each 25-35 kW tractor will be accompanied by a set of equipment comprising a trailer, plough,rotary cultivator and mower. This will provide for basic primary and secondary cultivation operations, fodderharvesting and transport. Proposed summary specifications, subject to further changes, are as follows:

• Tractor: - diesel-powered with a multi-cylinder, direct injection engine giving 33 - 45 BHP (25 - 35 kW)with emission ratings to European standards; gearbox with minimum 8 forward and 2 reverse gears;independent PTO giving 540 RPM at 1,500 - 1,800 engine RPM; hydraulic 3-point hitch, Category I, withposition and draught control and trailer hitch; trailer brake servo, air or hydraulic actuated by the tractor brakepedals; instruments to include fuel gauge, engine hour gauge and RPM indicator and tractor to be equippedwith front and rear road and working lights, trailer tipping, braking and electrical comnections and roll-overprotection to OECD standards.

* Trailer: - single-axle tipping trailer of about 3 tons capacity. Rear mounted axle to provide weight transfer tothe tractor. Air or hydraulic brakes compatible with the tractor. Complete with ring hitch, front, side and tailboards and all connections for electric, air and hydraulic systems.

* Plough: - Two-furrow, mounted (Cat. I) reversible plough with bar-point shares and disc coulters.* Rotary Cultivator: - Working width about 160 cm; multi-speed gear box; fitted with adjustable skids.* Mower: - Rear-mounted (Cat. I) PTO-driven sickle-bar mower

Motor Cultivator Sets. Motor-cultivators will be offered together with a standard set of implements to include aplough, rotary cultivator, grass mower and trailer. In mountainous communities a PTO-driven trailer will beoffered while communities on flatter land will have classic (non-PTO-driven) trailers. Proposed summaryspecifications, subject to further changes, are as follows:

* Motor-cultivator: - Diesel-powered by a single cylinder, direct injection engine producing between 7 and 9kW with recoil start; gearbox with minimum four forward and four reverse gears.

* Trailer: - Ride-on trailer with about 500 kg capacity, complete with brakes and front, side and tail boards.* PTO Trailer: - as for classic trailer but with PTO-drive complete with PTO drive shaft with safety guard.* Plough: - Single-furrow reversible plough compatible with motor-cultivator.* Rotary Cultivator: - compatible with motor-cultivator* Mower: - Sickle-bar front-mounted mower.



HOUSING COMPONENT

A. BACKGROUND

Housing Sector in RS

1. The Republika Srpska's (RS) prewar population of 1.3 million was predominantly rural withonly 20 percent living in urban areas. The majority of urban dwellers were located in Banja Luka whichwas the second largest city in the Bosnia Herzegovina (BH) in 1991. Overall, the population was wellhoused with private housing representing about 80 percent of the stock. Urban areas had a mix of bothpublic and private housing. Public housing in the form of multi-family medium and high-rise brick orprefabricated panel housing was concentrated in the largest towns cf RS (Banja Luka, Brcko, Doboj,Prijedor) where it accounted for 30 to 50 percent of the housing stock.

2. Public housing was funded through a salary tax, and public apartment houses were built by largepublic construction firms on behalf of socially-owned enterprises as well as social and public institutionswhich then allocated units for rental to their employees. Tenure in public hoising units bestowed manyof the benefits of full ownership including inheritance of the unit by family members living in the unit.Management of this stock of housing was generally delegated to Municipal Housing Maintenance andManagement Enterprises which were responsible for rent collection, maintenance and management andacted as an agent of the Housing Fund which represented the owners of the units.


3. Housing conditions have deteriorated greatly due to war damage and massive displacement of thepopulation. An estimated 24 percent of the housing in RS has been damageu and about five percentdestroyed.' The value of the damage to the housing stock is estimated at around US$ I billion. About 27 ofthe 45 RS municipalities have experienced some forrn of damage to their housing stock, while others have beenuntouched.

4. The heaviest damage is concentrated in a few municipalities, such as Derventa, Sipovo, Modrica,Mrkonjic Grad, and Brcko. located in the norlthem and westem part of RS. However, pressures on the housingstock are not limited to war damage. Accommodation in cities that were largely untouched by the war (forexample Banja Luka and Visegrad) is in short supply due to the influx of displaced persons. Some householdsare living in units damaged by shells, while others have had to be housed either with host families or in vacatedprivate and social housing, and about 10,000 people remain in crowded collective centers. Most of the largerRS municipalities have established procedures for allocating vacated units to displaced families or placing themwith host families, giving preference to finding accommodation for people in collective centers.

5. War damage to housing has been exacerbated by collateral damage caused by weather conditions, lackof maitenance and the deterioration of infrastructure installations and connections to networks. Some vacatedhouses have been deliberately bumed and others have been subject to looting of all windows, doors, intemalfixtures and roof tiles resulting in a rapid deterioration of the units in the harsh winter conditions.

Damage estimates for the Federation are 50 percent of the stock, with an additional six percent destroyed.


6. Complicating the issue of addressing housing needs are the dramatic changes in the geographicdistribution of the population. The war has resulted in an exodus of refugees to other countries, internalpopulation shifts within RS, and an influx of people from the Kraijna region in Croatia as well as from areaswithin the Federation. While there has been a massive exodus of Croats and Bosniacs from RS, the currentpopulation is estimated to be not much below the pre-war level of 1.3 million inhabitants. About 30 percent ofthe current population represents displaced families fron the Federation, Croatia and areas damaged within RS.The large number of displaced people in many of the larger towns has led to crowding in available

accommodations vacated by other groups, or crowding with resident host families. Movement of the displacedpopulation back to their own homes, during 1996, has generally been among those who are intemally displacedfrom municipalities within the RS.


7. Efforts at reconstruction of housing in RS during 1996 have been fairly limited. Donor activitieshave come primarily through UNHCR in the form of materials distribution for the repair of about 2,700units concentrated in the Pale and Banja Luka regions. UNHCR's Target Area Initiative, which isintended to facilitate the return and reintegration of refugees and displaced persons, covers a fewmunicipalities in RS for a total of about 9,000 housing units in the Sipovo, Ribnik and Bratunacmunicipalities. The target area initiative is intended to focus on towns where lack of infrastructure andhousing, rather than political or security concems, represents the main deterrent to the return of displacedpeople or the repatriation of refugees. The objective is to focus donor efforts on a concerted effort torehabilitate housing as well as social and physical infrastructure in selected municipalities whereUNHCR has estimated a particular potential for return of displaced persons. This approach does not andis not intended to address the needs for return of displaced people and refugees whose homes are in areaswhere they would constitute a minority.

8. In addition to UNHCR, selected NGOs supported by bilateral donors have assisted with repair ofprivate houses in heavily damaged RS towns such as Modrica and Derventa. Some municipalities haveundertaken repairs of roofs in lightly damaged public housing to accommodate displaced households andpreserve this stock. In very few instances, municipalities have initiated construction of a limited numberof new housing to accommodate displaced persons, using donated materials and the labor of displacedpopulation groups. Moreover, displaced groups are encouraged to participate in the repair of the unitsthey occupy. Surveys of housing damage in RS have been completed by IMG in December of 1996.Furthermore, the RS Ministry of Urbanism, Housing and Construction has prepared its own survey ofpublic housing. The latter survey indicates that a total of US$ 70 million in urgent investments is neededto repair public housing in 27 war-affected municipalities of RS.

Issues for Future Reconstruction

9. The construction industry in RS relied primarily on large companies of the public sector alongwith medium size private contractors working in large urban areas such as Banja Luka. There were also alimited number of small companies building individual private housing or undertaking repairs andsubcontracting. Prior to the war, contractors based in former Yugoslavia were pre-eminent in theconstruction sector, both on domestic and external markets. In RS, between 10 to 15 of the publicconstruction companies are expected to remain state-owned in the medium term while the remainder ofconstruction firms is likely to be privatized. Most companies are considerably reduced in size comparedwith pre-war levels. However, contractor capability is not considered to be a problem and competitionbetween private and public companies should lead to greater efficiency and improved performance.Materials are either locally available or are being imported from FRY (see the attachment for moredetails). The engineering capacity for detailed housing damage and cost assessments in local, municipal


technical departments is uneven. However, as noted previously, some capacity exists as municipalitieshave undertaken repairs to lightly damaged housing.

10. The level of damage to public apartment buildings in RS is generally below 40 percent (damagecategories A and B). Cost of repairs for the most prevalent levels of damage should remain within thecost target for equivalent repairs carried out in the Federation during 1996 which range between US$2,000 and US$ 2,500 per flat. However, certain RS municipalities, most notably Derventa, suffered ahigher level of damage which needs to be addressed by donors if living conditions are to improve in theseareas. In contrast, many of the lightly damaged buildings have been repaired, or at least efforts have beenmade to salvage the roofs in order to preserve the buildings. When donors target the higher categories ofhousing damage (over 40 percent) for repairs to roofs and other external installations, buildings shouldonly be selected after a structural inspection and an assessment of the cost of rehabilitating internal units.Preliminary estimates of repair costs in selected RS municipalities are presented in Table 1.

Table 1: Public Housing Repair Cost Estimatesfor Selected RS Municipalities

Sipovo Mrkonjic Derventa Modrica Brcko Shares/Grad Averages

Population (1996) 7,990 16,123 37,220 27,169 35,784Population (1991) 15,553 27,379 56,328 35,413 n.a.No. of Damaged Flats 435 826 1,623 713 2,490 100 %of which: Cat.A(upto 15%) 57 178 228 442 1,657 42%

Cat. B (16 - 40%) 28 90 205 180 680 19%Cat.C(41-60%) 271 420 870 75 115 29%Cat. D (above 60%) 79 138 320 16 38 10%

Repair Cost Estimates (US$) 2.8 mill. 4.9 mill. 10.2 mill. 2.5 mill. 7.9 mill. $ 4,650of which: Cat. A (up to 15%) 128,250 400,500 513,000 994,500 3,728,250 $2,250

Cat. B (16 - 40%) 126,500 405,000 922,500 810,000 3,OcO,000 $ 4,500Cat. C (41 - 60 %) 1,829,250 2,835,000 5,872,500 506,250 776,250 $ 6,750Cat. D (above 60%) 711,000 1,242,000 2,880,000 144,000 342,000 $ 9,000

Source: RS Govenument, IMG

Financial Issues

11. Regarding cost recovery, the majority of municipalities that suffered extensive damage have notcollected rents for the last four years from either legal tenants or the displaced people who have beengiven temporary occupancy rights. Other municipalities with minimal or no war damage are chargingreduced rental rates, and collection levels are low due to lack of household income. Achieving full costrecovery, or even prewar rental levels, will take time. However, efforts must be initiated as carly aspossible to introduce some element of cost recovery in housing repair initiatives for both public andprivate housing. This will allow for more sustainable levels of investment and would help increase theefficiency in the use of scarce donor resources. Repairs to public housing need to be linked to an increaseof per-flat rental charges by an amount equivalent to recover the cost of repairs over time.

12. For private housing repairs financed by other donors, even if financed out of bilateral grants, thesame principle of cost recovery should apply. As the administrative capacity of both Entity governmentsincreases and as the level of information on demand and beneficiary characteristics improves, it willbecome possible to establish a system that would combine targeted housing grants with commercial loansat market interest rates, based on house-owners' ability to pay.


Institutional Issues

13. The Ministry of Urbanism, Housing and Construction (MUHC) of RS is the institution in chargeof the housing sector. In addition, during the war period, other ministries and the municipalities haveassumed specific roles in repair of housing and allocation of units to displaced persons. The MUHCoffices are split between Pale and Banja Luka, with the majority of staff located at the latter location,while some additional staff is represented in other larger RS municipalities. The Ministry is responsiblefor urban planning, housing, the construction and building industry as well as preparation andpresentation of legislation relating to housing, urban planning and the construction industry. It appearsthinly staffed, and its institutional capacity and experience for implementing major housing repairprograms is limited.

Legal Issues

14. The legal framework in RS governing property rights and pre-war rights of legal tenants has beencomplicated due to the passage of legislation seeking to facilitate the housing of displaced persons invacant units. A Law on the Use of Abandoned Properties was passed in RS in March of 1996. This lawmakes it possible for municipalities, through housing or refugee commissions, to allocate vacated privateand public dwelling units to displaced persons, assigning them temporary occupancy rights. While itrecognizes the right of property owners to reclaim their units, it is silent on the right of legal tenants toreclaim their dwellings. This law is considered to be contrary to the provisions of Annex 7 of the DaytonPeace Agreement as it essentially interferes with the right of owners and occupants to reclaim their units.The RS authorities recognize the need to change this legislation so as to conform to the Daytonprovisions and in order to follow respective instructions by the Office of the High Representativeregarding this law. A more detailed discussion of legal housing issues is attached.

15. The authority of locally created commissions on refugees to allocate housing units (in somemunicipalities all abandoned property has been turned over to local refugee commissions) couldcomplicate the existing legal framework regarding how rents are set and collected, and could confuse thepicture with respect to the rights of the owners of the units (the enterprises) to allocate and sell theseunits. It is, therefore, necessary to establish, at the outset of donor-financed public housing repairprograms, the roles and responsibilities regarding setting of rental rates and collection of rental charges atthe municipal level.

Short- and Medium Term Objectives

16. Repair of housing, if combined with repair of community infrastructure and with employmentgeneration, will facilitate the return of the displaced and refugees to their homes in areas where physicaland economic conditions are the primary constraints to return. Moreover, repair of war-damaged housingis an essential precondition to medium-term recovery and long-term reform of the housing sector, giventhe extent of damage to the stock. While extemal resources that can be mobilized will always fall shortof what is required to repair most damage, donor-financed programs can jump-start the process of repairs.As the economy recovers and households have the means to undertake repairs on their own, generalrepair programs will become less needed, and more reliance will be placed on targeted assistance for theneediest population segments. Given the large number of damaged units and the uncertainty as to thereturn of the displaced and refugees, new housing construction does not seem warranted at this juncture.

17. The following considerations for repair programs applied during 1996 remain valid for 1997,especially for RS where little donor-financed repairs have taken place so far:


* Support must aim at an immediate increase in the amount of the useable housing stock in areas wheredamage is largest and where needs of the displaced are highest.

* Given limited resources, returns on invested funds need to be particularly high. Hence, units selectedshould require limited works; areas selected need to offer real potential for resuming economicactivity and attracting other infrastructure repairs; and project management must be efficient.

* Cost recovery should be introduced early on, both for public and private housing repairs, andirrespective of whether repairs are grant-financed or credit-financed by the donors.

18. Donors should continue to assist the authorities to carry out repair programs for both public andprivate housing. Repairs to public housing offer several advantages: (i) they bypass potential propertyrights issues and, hence, can be launched quickly; (ii) due to low per-flat costs they benefit a largenumber of individuals; and (iii) they allow for easy introduction of cost recovery through rental charges.Focusing housing repairs on the common elements in public apartment buildings allows to deal with thattype of damage which is most difficult to address by individual occupants, and the repair of which is anessential precondition for subsequent repairs to individual units. Clearly, in rural areas, only repairs toprivate housing will address housing needs since public housing is concentrated in the cities.

19. In the short term, there is an important role for the Entity Govenmients to manage emergencyhousing repairs and in setting direction for donor assistance programs, especially so as to enable thereturn of refugees and displaced persons. Over the medium and long term, however, recovery of thehousing sector will require that attention be given by the Entity Governments to manage the transitionfrom the supply-driven model of the past towards market-oriented housing policies. A policy andregulatory framework will be needed that encourages private sector investment and housing marketdevelopment. Prior to the war, Bosnia's private sector demonstrated a considerable capacity to constructand fund new housing stock. There is every reason to expect that the private sector will resume this roleeven more vigorously, within an adequate enabling policy framework, as economic recovery progresses.To allow this to happen, several policy areas will require attention: establishment of clear and enforceableproperty rights; privatization of housing stock; introduction of rental charges that permit to coverbuilding maintenance and investments; introduction of competition in the management and maintenanceof public housing; development of housing finance as part of overall financial sector reforms;privatization of the construction industry; and streamlining of regulations relating to land use as well asinfrastructure and housing development so as to ensure a more flexible supply response by the privatesector.


Bank Strategy

20. The Bank is committed to assist both Entities of BH, the Federation of Bosnia and Herzegovinaand RS, to address the most urgent housing reconstruction needs through emergency-type support. Forthe Federation, in July 1996, the Bank has a approved a US$ 15 million Credit for an EmergencyHousing Repair Project (FY97). Numerous other donor partners have joined the Bank to support thisproject, including the European Union and the governments of Saudi Arabia, Italy, Germany and theNetherlands. Through that project the Bank is assisting the Federation authorities to carry out repairs topublic apartment buildings containing some 17,000 flats, with about 60 percent of repairs completed asof end-1996. The proposed Reconstruction Assistance Project is the equivalent emergency projectdesigned to assist the RS authorities in a similar manner.

21. The Bank's support to Bosnia's housing sector is part of the agreed international reconstructionprogram for housing of BH of about US$ 700 million, to be implemented over three to four years, which


the Bank has helped to develop in a joint effort with the country and the donor community.2 The housingsector prograrn aims to create conditions to enable the retum of refugees and the intemally displaced, andto rapidly expand the non-usable housing stock for the entire population (see Table 2). Works are limitedinitially to emergency repairs that will create minimum habitable standards, such as repairs to commonelements of the public housing stock. In a second stage, reconstruction of more heavily damaged privateand public housing units is being undertaken. A separate program element is focusing on the city ofSarajevo where more than 50,000 units, half of the stock, were darnaged. The program is also aimed tostart addressing issues of financial, legal and institutional sustainability and establishing a policyframework to ensure a long-term recovery of the housing sector.

Table 2: Three-Year Assistance Program for Housing

(in US$ million) 34 Year 1996 1997 1998-1999Program Commitments Requirements Requirements1996-99

Emergency Repairs 232.0 170.0 22.0 40.0Reconstruction 318.0 76.0 72.0 170.0Sarajevo Program 123.0 23.0 50.0 50.0Technical Assistance 20.0 4.0 6.0 10.0Total 693.0 273.0 150.0 270.0


22. Through the early start of the Emergency Housing Repair Project in the Federation of Bosnia andHerzegovina, the Bank was able to assist the Federation to secure substantial donor cofinancing forhousing repairs. As of end-1996, nearly three Dollars of additional donor support were mobilized forevery Dollar provided by the Bank. It is expected that the Bank's presence and its oversight over projectimplementation would also provide comfort to donors for supporting an emergency-type public housingrepair program in RS. In addition to raising donor funding, the Bank has assisted the FederationGovernment to set up an efficient housing project implementation and sector planning unit which wouldnot exist in this form without the Bank's involvement; the same impact is expected for the project in RS.Furthermore, the Bank is in a position to advise the Entity Governments on housing policy issues, basedon the Bank's recent involvement in a number of other post-conflict countries and former centrally-planned economies. The Bank is also seen as an important member of the Housing Sector Task Force inSarajevo where donors and the Entity Governments meet regularly to exchange technical and policy-related views.


23. There are a number of lessons leamed from the Emergency Housing Repair Project which is inimplementation in the Federation since the Summer of 1996, as well as from other housing prograrnsfinanced by donors in Bosnia during 1996. These have been incorporated into the proposed project andare as follows:

* Contracting for integrated civil works, rather than merely providing building materials and relying onresidents' self-labor, has been an effective way of repairing housing stock on time and within cost.



* The local private construction industry is able to recover quickly from the war, importing materialswhere necessary and mobilizing rapidly to carry out repair works that were procured competitively.

* Selection of units, assessment of damage, and oversight of repairs is best delegated to municipalproject offices, supported by skilled local consultants, while contract procurement and projectdisbursement should be concentrated in a central project office.

* Actual demand for housing by the displaced and refugees should guide the funding allocation forhousing repairs. More active coordination with UNHCR and other competent agencies is needed.

* Housing repairs are to be integrated with other investments into the social and physical communityinfrastructure. Given scarce resources, donor coordination is especially critical in this respect.


24. The Housing Component of the Reconstruction Assistance Project will complement the othercomponents of this project (agriculture, water and sanitation, and electric energy) by generating therequired shelter for retuming refugees and displaced persons. The joint Project Coordination Unit for allfour components will engage to target specific areas where two or more project components providebenefits to the same population, thus aiming at an integrated area approach to economic reconstruction.



25. The primary objective of the Housing Component is to increase the quality and quantity of thepublic housing stock in war-affected areas of RS. Resulting benefits are aimed at both the presentpopulation in these areas and at refugees and displaced persons which intend to return to theircommunities. The emergency reconstruction phase in RS calls for projects with fast, direct impact on theground; hence component design has been kept straightforward such as to allow for speedyimplementation.

26. The secondary objectives of the Housing Component are as follows: (i) to initiate sustainablesector recovery by introducing the principle of cost recovery; (ii) to help build up the institutionalcapacity of the RS authorities for managing housing repair programs; and (iii) to support the localeconomy and create employment through competitive procurement of labor-intensive housing repairworks.

Component Elements

27. To support the above objectives, the Housing Component has two elements: (i) emergencypublic housing repairs; and (ii) technical support.

Element 1: Emergency Public Housing Repairs

28. This element would cover the repair of damage to common elements in multi-story non-systembuilt socially-owned apartment buildings, along with the cost of designs, management and supervision bylocal consultants. About 36,000 publicly owned units are estimated to be damaged in urban areasthroughout RS. The Housing Component is designed to repair approximately 250 buildings containingsome 4,500 residential units. This represents some 12.5 percent of all damaged social apartnent units inRS. The following five municipalities have been identified for inclusion under the Housing Component:Derventa, Brcko, Modrica, Mrkonjic Grad, and Sipovo (see Table 3 for cost estimates).


29. The selection of municipalities has been carried out on the basis of two main criteria: (i) theextent of physical war damage suffered by the public housing stock in each municipality; and (ii) theexpected demand by the present population and potential returnees for reconstructed housing facilities.The latter is based on information provided by UNHCR and other competent organizations dealing withissues of return of refugees and displaced persons. The physical municipality selection criteria can besummarized as follows:

* population size (in 1991) of more than 10,000 inhabitants* public housing stock represents more tharn 20 percent of total municipal housing stock* share of damaged stock as percent of total municipal public housing stock is over 30 percent* the majority of damaged public housing stock has less than 40 percent damage to external fabric* municipalities agree to apply cost recovery for repair costs and to present a plan for full coverage of

operation and maintenance costs within five years (see further below)

30. Further criteria applied for the selection of municipalities are the expected capacity at the locallevel to prepare repair projects and supervise their implementation, and also the prospects for restoringnecessary local infrastructure such as heating where existing systems have broken down. Furthennore, inthe municipalities selected there are a variety of on-going or planned donor-financed reconstructionprograms, including repairs to schools, hospitals, roads and water systems, as well as projects aiming togenerate income and employment. Hence, the objective of an integrated community developmentprogram has been addressed.

Table 3: Emergency Public Housing Repairs - Detailed Cost Table

RS Municipalities Total Cost Budget Assumed Average Estimated Number(US$) Cost per Flat (US$) of Benefiting Flats

Derventa 6,000,000 5,000 1,200Brcko 4,000,000 2,400 1,670Modrica 1,000,000 2,200 450Mrkonjic Grad 2,000,000 4,500 450Sipovo 1,000,000 4,800 210Other Municipalities 1,000,000 2,000 500TOTAL Base Cost 15,000,000 4,480

Note: Cost estimates for works include costs of detailed damage assessments (I percent) and costs forpreparation of designs and works supervision (2.5 percent).

31. Individual apartment buildings to be repaired would be selected according to the followingcriteria which would aim to maximize the number of units that could be made habitable in eachmunicipality. The focus will be on damaged but structurally sound buildings so as to ensure thatpreparation for and implementation of works can be completed rapidly and in a cost-effective manner:

* Building owners are civilian enterprises or the municipality and no ownership disputes exist.* The municipality can provide proof that it has appropriate authority from building owners to

undertake repairs and to implement cost recovery through an increase of rental charges.* Buildings fulfill the following physical criteria:

* they are constructed to traditional designs and with traditional materials (no system-build)* they have limited damage (not exceeding 40 percent) to their external envelope* they are structurally sound* together they form part of, or constitute a community group* they have existing infrastructure services, or these services are about to be restored* they are located in areas cleared, or declared free of land-mines


repairs to external building elements will result in a large number of useable units

32. The repair works would restore common building elements and utilities. These works wouldweather-proof the building envelope so as to prevent further deterioration and to facilitate repairs of theinterior of apartment units by tenants or through complementary donor-funded programs. Typical worksfinanced under this component element would include repair of damage to roofs, external walls,windows, entrances, staircases, halls, corridors, and building utility systems, and are described in moredetail in the attachment. Works would be undertaken by contractors selected through competitivebidding, as set out further below.

Element 2: Technical Support

33. The project would finance technical support from an expatriate housing advisor. This supportwould cover the organization, supervision of and training in: damage assessments, cost and qualitycontrol, procurement activities, review of municipality and building selection decisions, on-sitesupervision of repair works, as well as support in adherence to accurate and timely reporting by localproject management. RS Government resources would be used to extend this expatriate technical supportbeyond the planned period, if required. The project would also finance local consultants which will assistthe Housing Department in the Project Coordination Unit to carry out on-site quality control inspections,in addition to the local supervision arrangements made for each contract. The operating costs of the staffof the Housing Department itself are included in the Implementation Support Component of the overallproject.

Table 4: Technical Support - Detailed Cost Table


Local consultants (quality control) man-months 48 500 24,000Expatriate housing advisor man-months 15 15,000 225,000TOTAL Base Cost 249,000

Table 5: Housing Component - Cost Summary

(in US$ '000) Emergency Public Technical Total CostHousing Repairs Support

Housing repair worksDerventa 6,000 0 6,000Brcko 4,000 0 4,000Modrica 1,000 0 1,000Mrkonjic Grad 2,000 0 2,000Sipovo 1,000 0 1,000Other municipalities 1,000 0 1,000

Technical assistance, training, studies 0 249 249Total Component Cost 15,000 249 15,249


34. The total estimated cost of the component is shown in Table 5. No physical contingencies forworks have been included, given that the exact number of buildings and units to benefit under the

Appendix 2Paee 10 of 24

Housing Component is not pre-determined and will depend on the actual cost of repair contracts resultingfrom detailed damage assessments and competitive bidding procedures. Price contingencies have notbeen included given the expected short disbursement period of this emergency project. Donor-financeditems under the international reconstruction program are tax-exempt in RS.

35. Of the total component cost, the World Bank would finance US$ 5.7 million equivalent. 95percent of the World Bank contribution would be allocated for repair works in the selectedmunicipalities, financing about one third of the total cost of planned repairs in each municipality. Thebalance of Bank funding would finance technical support through local and expatriate advisors.Additional financing of US$ 9.5 million equivalent is being sought from other donors (see financing planshown in Table 6). Given the fully modular nature of housing repairs, where repairs to one building areindependent of repairs to other buildings, the initial lack of donor financing would have no impact on thetimely start-up of Bank-financed repair works.


(in US$ '000) Emergency Public Housing Technical TotalRepairs Support Financing

Total Cost FinancedAmount

World Bank (US$ 5.451 million)Derventa 6,000 2,000Brcko 4,000 1,300Modrica 1,000 300Mrkonjic Grad 2,000 600Sipovo 1,000 300Other municipalities 1,000 951

Subtotal works 5,451 5,451Techn. ass., training, studies 249 249

Other donors to be identified 9,549 o 9,549Total Component Cost 15,000 249 15,249


36. The Housing Component is designed to return to habitable standards some 250 buildingscontaining an estimated 4,500 flats, or 12.5 percent of the total damaged public housing stock in RS.The benefits of repairing war damaged buildings and contributing to the process of housing displacedpersons in their communities are obvious and represent in themselves a justification for the HousingComponent. However, there are tangible economic and financial benefits as well. Unless housing repairsare carried out now, further rapid deterioration of the damaged units can be expected, endangering evenmore the quality of housing. Eventually, after several years of no repairs, the damaged units willdeteriorate to a degree where full reconstruction would be required, estimated to cost on average aboutUS$ 30,000 per flat. The expected per-flat cost of the proposed buildings repair works of about US$3,300 represents only 11 percent of the cost needed for complete reconstruction.

37. Of the total proposed investment into repairs of US$ 15 million, about one third or US$5 millionwould represent labor income for employed construction workers. Given the small expected averagecontract size, local resources are likely to used extensively, offering small local contractors anopportunity to re-start their businesses after the war. At a gross average monthly labor cost of aboutDEM 300, the Housing Component could create as much as 25,000 person-months of temporary


construction labor over the implementation period. Labor and income generation will benefit the localeconomy. The Housing Component would also contribute to revitalizing the local building materialsindustry and support trade businesses. Finally, through introduction of cost recovery, the Componentwill lay the ground for sustainable public housing maintenance and management beyond the immediatereconstruction period. The Component will also create a readily available implementation vehicle forother donors intending to support the RS authorities to rebuild the damaged public housing stock.

38. There are two main Component risks, beyond the general danger of a resumption of hostilitiesand possible delays in the economic revitalization of RS and BH as a whole. These risks relate to delaysin start-up and implementation and risks resulting from a shortfall of donor cofinancing for thisComponent. Start-up may be delayed due to failure by the RS authorities to prepare repair projects in atimely fashion. To reduce this risk, the procurement and sample contracting documentation used for theparallel project in the Federation will be made available to the Housing Department in RS. Work ondetailed housing damage and cost assessment has started in early 1997 using available Japanese grantfinancing. An experienced expatriate expert that helped start up the Federation project has already beendeployed to RS. 'he second risk of a continued component funding gap would reduce the envisagedimpact of the project. However, none of the works to be carried from available financing would dependon mobilization of the full envisaged funding. Funding for required technical assistance andimplementation support has been secured. The Bank will make every effort to mobilize additional donorcofinancing, and experience from the parallel Federation housing project suggests that there are goodprospects in this respect.


39. The Reconstruction Assistance Project has been placed in environmental category B. TheHousing Component would have positive environmental impacts as a result of rehabilitating damagedunits where municipal infrastructure facilities are likely to exist or are in the process of being repaired;where the reoccupation of property will result in the tending and cultivating of associated land; and whereotherwise buildings would stand empty to deteriorate through weathering or vandalism.


Component Organization and Implementation

40. Given the limited implementation capacity and experience of the Ministry of Urbanism, Housingand Construction (MUHC) of RS, a Housing Department for implementation of the Housing Componentof the proposed project will be established within the Project Coordination Unit in the Ministry ofFinance in Banja Luka. Staff of this Housing Department will be seconded from the MUHC or recruitedfrom outside of the Government. This proposed structure of creating a dedicated project unit, supportedby selected local staff in the municipalities, has proven effective in managing the implementation of theEmergency Housing Repair Project in the Federation during 1996. The Housing Department will beheaded by a Departnent Director who will report to the General Director of the Project CoordinationUnit. In addition to the expatriate housing advisor, the Housing Department Director will have at leastseven local staff: a project accounts officer, an accounts database technician, a technical manager, one(or several) project manager(s), and two support staff. The staff and operational costs of the HousingDepartment are included in the Implementation Support Component of the overall project. The HousingDepartment will initially be operating for an 18 month period.


41. The Housing Department will be responsible for all aspects of implementation of the HousingComponent, except for aspects of Credit disbursements and payments to suppliers which will be handledby the PCU Financial Controller. Specifically, Lie Housing Department will: enter into subsidiaryimplementation agreements with municipalities, as described below; select detailed project sites andbuildings; contract out and review detailed damage assessments of buildings; contract out and reviewfinal designs and tender specifications, prepare bidding documents, and carry out tenders; enter intocontracts with building contractors and local consultants; supervise contracted works and advise the PCUFinancial Controller on progress payments to be made to contractors; and carry out reportingrequirements. More details on the staffing and responsibilities of the Housing Department are attached.

42. Many of the institutions that existed to fund, manage and maintain social housing and collectrents are now defunct in most cities. Some towns are trying to reconstitute these institutions but it isunclear how much emphasis will be given to this task since there is a presumption that social housingwill be privatized and that these functions could be eventually provided by private contractors. In suchinstances the municipalities themselves have taken over the function of organizing repairs. Therefore, theHousing Department will assess municipal capacity early on, both regarding the technical departnents ofmunicipalities as well as conceming the maintenance and management enterprises of municipalitieswhere these still exist. The Housing Department will put in place local municipal project units thatprepare projects and monitor construction, with reliance on contract staff as necessary. These units,reporting to the Housing Department, would work with municipalities on day-to-day management oflocal repair projects according to the procedures established for the Component. The local consultantsworking with the municipalities would select the buildings to be repaired; undertake damageassessments; define work specifications; monitor construction progress; and certify completion of worksfor payment.

43. A detailed Component implementation schedule has been developed and is attached. TheComponent is designed to allow for completion of all repair activities over an 18-month time frame. Toachieve this goal, early preparation of damage and cost assessments is needed. Using available donorgrant financing, the first set of assessments has been brought under way. Recruitment of local staff andthe setting up of the Housing Department is at an advanced stage and would be finalized prior to Creditapproval by the Bank. The international housing advisor position has been filled in February 1997through funding from donor trust funds.


44. IDA funds will be on-lent from the State of BH to RS. The RS Ministry of Finance will makethese funds available to the Project Coordination Unit. Subsequently, the Project Coordination Unit,represented by its Housing Department, will enter into subsidiary implementation agreements with eachbenefiting municipality. Subsidiary implementation agreements will specify the scope and value ofrepairs to be financed, along with the repayment terms and conditions which will depend on the costrecovery terms imposed on tenants. Given the emergency nature of the project and the difficult incomesituation of both households and municipalities in RS, concessionary financing of repair works isjustified. The urgency of restoring a vital social and economic asset, housing, destroyed by force majeureargues for a gradual introduction of cost recovery.

45. To introduce cost recovery through payments by tenants, incremental rental charges would becalculated so as to recover repair costs over no more than 30 years, including 5 years of grace, at no lessthan 1.75 percent interest per annum. These terms would be somewhat less favorable than IDA terms,but are considered to be affordable so that residents can recover from the economic impact of the war andstart regular rental payments. Monthly rental increases would be around US$ 14 equivalent per flat afterthe grace period, assuming average repair costs of about US$ 3,300 per flat. As the repairs would


prevent further deterioration of common systems and facilities, they should lower overall maintenanceexpenditures in the immediate term. Hence, before financing of repair works will start, each benefitingmunicipality will be required to enter into a subsidiary implementation agreement with the HousingDepartment of the PCU, covering the applicable repayment terms and setting out the increase of futurerental charges along the lines specified above. Incremental rents collected by the municipalities will betransferred to an account of the Ministry of Finance of RS.

46. Beyond the need to recover the investment cost of repairs under the Housing Component, it wilibe necessary for municipalities to start recovering recurrent costs of managing the public housing stock.Therefore, prior to the financing of repairs, municipalities targeted under the project will also be requiredto provide a plan and time schedule for reinstating rental rates that allow full coverage of operation andmaintenance costs within a five year period, along with a plan for maintenance of elements that havebeen repaired through the project.

Procurement

47. The proposed procurement arrangements are summarized in Table 7, an indicative procurementplan for the Housing Component is attached. In case of parallel financing by other donors, the applicableprocurement procedures of the respective financiers would be used.


Items Procurement Method (US$ m)al

OTHER NBF TOTAL

1. Civil Works (Housing repair works) bI 5.5 9.5 15.0(5.5) (0.0) (5.5)

2. Consultant Services c/ 0.2 0.0 0.2(0.2) (0.0) (0.2)

TOTAL COMPONENT COST 5.7 9.5 15.2(including contingencies) (5.7) (0.0) (5.7)

NBF = Not Bank FinancedLIB = Limited International Biddinga Figures in parenthesis represent Bank financing.b The Bank would finance housing repair works based on Simplified National Competitive Bidding procedures. Individual

repair contracts would in most cases not exceed US$ 400,000 in value. The first ten works contracts and any contractexceeding US$ 400,000 equivalent would require prior review and approval by IDA.

c Consultant services consist of a number of individual consultants. Their services would be procured in accordance withBank guidelines using competitive procedures.

48. The Bank will finance about 25 civil works contracts for public sector housing repairs which willbe procured on the basis of Simplified National Competitive Bidding procedures (SNCB). The averagecontract size is estimated at US$ 230,000, and contracts are in most cases not expected to exceed US$400,000. The total value of Bank-financed works is US$ 5.5 million. Works contracts will be lump-sum, fixed price contracts awarded on the basis of quotations obtained from at least three pre-qualifiedcontractors. Bid invitations shall provide a detailed description of the works, including technicalspecifications, the required completion date, a basic form of agreement acceptable to the Bank and


relevant designs and drawings where applicable. Prior approval by the Bank will be required of the firstten contracts for public sector housing repairs and any contracts exceeding a value of US$ 400,000equivalent. Prior to the initiation of any procurement action, the Housing Department will provide theBank with a procurement plan detailing the number of contracts to be procured, bid invitation dates, aswell as expected start and end dates for each contract.

49. A streamlined pre-qualification of contractors will be carried out. For this purpose, a short noticewill be published in the press and announcements will be made in each municipality inviting local andnational, private and state-owned contracting firms to express their interest in different levels of contractvalues. Pre-qualification criteria will be subject to prior approval by the Bank. Interested bidders shallprovide information using standard forms issued by the Housing Department and shall meet thefollowing minimum qualifying criteria:

* demonstrated capacity as a contractor to successfully complete works in an amount up to theaggregate contract value specified

. demonstrated experience as a contractor in the construction of similar works of nature andcomplexity to the proposed works

- demonstrated ability to provide all essential workers for completion of the works specified in the bid

50. Pre-qualification will result in a listing of contractors with individual established contract limits.State-owned construction enterprises must meet the Bank's eligibility criteria of autonomous legal statusand absence of govenmment subsidies of their operations. Contractors will be invited to submit bids forrepair contracts up to their established upper contracting limit. Along with the signature of workscontracts, the Housing Department will enter into supervision contracts with local independentconsultants. These consultants will typically be part of the technical department of the municipality orbelong to the municipal housing maintenance and management enterprise. The Housing Department willtrain these local consultants as needed.

51. In addition to repair works, the Bank will also finance US$ 0.2 million of consultant serviceswhich will be procured in accordance with Bank guidelines. No assignments have been pre-identified forsole sourcing which would require prior Bank approval. Follow-up assignments will be permissible tothe extent that this will be indicated in the initial Terms of Reference.

52. From the experience gained of the parallel project in the Federation of Bosnia and Herzegovina,it is not expected that procurement agents would need to be engaged. The Housing Department of theProject Coordination Unit, assisted by a qualified and experienced expatriate advisor, is expected to beable to carry out procurement of works contracts quickly and efficiently. Sample documentationavailable from the Federation project should facilitate the procurement task in RS. Post review ofprocurement actions will be carried out on a quarterly basis by Bank supervision missions. The Bank'sProcurement Specialist in the Resident Mission in Sarajevo will assist with prior review of the first 10works contracts. Furthermore, monitoring of procurement will be facilitated through quarterly reporting,which will be part of the regular quarterly progress reports under the overall project.

Disbursements

53. The disbursement plan is given in Tables 8 and 9. Disbursements are expected to be completedwithin a period of less than three years from the date of effectiveness. The Bank Credit would financethe categories of expenditures outlined in Table 10. Further details on disbursement procedures,including use of the Special Account and of Statements of Expenditures, are provided in the main text ofthe overall project.



Component Elements CY 1997 CY 1998 CY 1998 CY 1999 CY CY TotalQ3/4 Q112 Q3/4 Q1/2 1999 2000

Q3/4 Q1/2

Emergency Public Amount 0.7 1.5 3.0 3.0 4.5 2.3 15.0Housing Repairs Percent 5% 10% 20% 20% 30% 15% 100%

Technical Support Amount 0.0 0.1 0.1 0.0 0.0 0.0 0.2Percent 10% 40% 40% 10% 0% 0% 100%

TOTAL Amount 0.7 1.6 3.1 3.0 4.5 2.3 15.2Percent 4% 11% 20% 20% 30% 15% 100%

CUMULATIVE Amount 0.7 2.3 5.4 8.4 12.9 15.3Percent 4% 15% 35% 55% - 85% 100%


Component Elements CY 1997 CY 1998 CY 1998 CY 1999 CY CY TotalQ3/4 Q1/2 Q314 Q1/2 1999 2000

Q314 Q1/2

Emergency Public Amount 0.3 0.6 1.1 1.1 1.6 0.8 5.5Housing Repairs Percent 5% 10% 20% 20% 30% 15% 100%

Technical Support Amount 0.0 0.1 0.1 0.0 0.0 0.0 0.2Percent 10% 40% 40% 10% 0% 0% 100%


CUMULATIVE Amount 0.3 1.0 2.2 3.3 4.9 5.7Percent 5% 17% 38% 57% 85% 100%


Categories Amount (US$ % of Expenditures to be financed under theequiv.) World Bank Credit

1. Works (housing repairs) 5,000,000 100%2. Consultant Services (technical

assistance, training, studies) 200,000 100%3. Unallocated 500,000TOTAL (incl. contingencies) 5,700,000


54. Separate and auditable accounts would be established by the PCU for expenditures within theHousing Component of the project. Details on these accounts, as well as on auditing and supervisionprocedures to be followed, are applicable to aUl project components and are therefore set out in the maintext of the overall project documentation.


55. Given the need for expedited implementation, the Housing Component would be supervisedcontinuously by Bank staff based in the Resident Mission in Sarajevo, with fornal evaluation of progressevery three months after effectiveness. The review would assess the need for any adjustments, based onimplementation experience to date.

56. The Housing Department will provide to PCU management quarterly inputs for progress reportsshowing the status of implementation of the Housing Component, including summary information onprocurement contracts, in a format acceptable to the Bank. Specific reporting elements for the HousingComponent include the following project information and performance monitoring indicators:

An updated Component Procurement Plan, detailing the names of municipalities included under theComponent, number of public apartment buildings, number of flats per building (of which: nothabitable prior to the start of works), name of owner of each building, description of buildingdamage, type and cost of works envisaged, value of design and supervision contracts

* Procurement information for civil works contracts: number of contracts let, all applicable contractprocurement dates (invitation to quote, evaluation, award, signature, start of works, current worksprogress, expected works completion), progress payments made to date, name of contractors

* Photographs of every building prior to the start of works and after works completione Copies of the subsidiary implementation agreements entered into with each municipality, detailing

repayment modalities and cost recovery• Information on current rental charges for every building and municipality under the Component* Assessment of the labor impact caused by civil works financed and carried out to date

Agreements Reached

57. During negotiations, the following agreements were reached regarding the Housing Component:

* Agreement on the component area: the RS municipalities of Derventa, Brcko, Modrica, MrkonjicGrad, and Sipovo

* Agreement on the limitation of the type of repair works to be financed, as set out in the attachment• Agreement on the terms and conditions of the subsidiary implementation agreements to be entered

into between the Housing Department and each municipality: repayment by the municipalities of thevalue of repairs through increase of rental charges for the buildings concerned; the increase in rentswill lead to the recovery of repair costs over no more than 30 years, including 5 years of grace, at noless than 1.75 percent interest per annum

• Agreement that municipalities are to provide a plan and time schedule, prior to the start of works, forreinstating rental rates that would allow full coverage of operation and maintenance costs within afive year period, along with a plan for maintenance of elements repaired under the Component

. Agreement on the staffing and maintenance of the Housing Department within the ProjectCoordination Unit for the project

* Agreement on reporting requirements specific to the Housing Component, as set out above

Attachments:Implementation Schedule -Housing ComponentProcurement Plan for Bank-financed Works -Housing ComponentAvailability of Labor and Building Materials in RSProperty Rights Issues in HousingScope of Housing Repair Works to be Carried OutStaffing and Responsibilities of the Housing Department


Attachment 1: Implementation Schedule - Housing Component

TASKS RESP. month 1 month 2 month 3 month 4 mon. 5 month 6PROCUREMENT PREPARATIONAppoint all staff of Housing Depart. (HD) PCUPurchase and install office equipment in HD PCUSelect and mobilize expatriate advisor to HD HDEstablish auditable project accounts & PCUrecordsDevelop detailed component procurement HDlplanDevelop standards for damage assessment HD *FINAL SELECTION OF MUNICIPALITIESFinalize list of municipalities to be included HI)Assess capacity of & appoint local HDIconsultantsSign sub. implement. agreements with municp.municp.ASSESSMENT OF CONTRACTORSIssue invitations to contractors to qualify HDIReview applications, assign financial limits HDIDAMAGE ASSESSMENTTrain local project consultants, as necessary HDICarry out assessment of damage consult.Agree on specific properties to be repaired HD)TENDER DOCUMENTS AND TENDERING |____Prepare contract and bidding documents HDIssue tender documents HDEvaluate bids, recommend awards HDIBank review of first IO contracts BankSign housing repair contracts ADMake advance payment to contractors PCUSUPERVISION ll lllSupervise performance on each contract consult.Monitor progress, certify payments consult.Maintain full records consult.REPORTING l_ l l_Quarterly reporting to the Bank HDI

Notes:

The sequence of activities is based on the experiences gained during the housing repair project carried out in the Federation ofBosnia and Herzegovina in 1996. Actual dates for implementation will depend on the effectiveness of the IDA credit andavailability of donor cofinancing.Reporting by the HD would continue on a quarterly basis until the last contract financed has been fully implemented and allCredit funds have been disbursed.Component supervision through the World Bank would be carried on a continuous basis through staff of the Resident Missionin Sarajevo.


Attachment 2: Procurement Plan for Bank-financed WorksHousing Component

Municipality/ Minimum Bank- Procure- First First First CompletionPackage Number of financed ment Invitation to Submission Signing of of First

Contract Contract Method Quote of Quotes Contracts WorksPackages Values

1. Sipovo 1 0.30 Simplified Sept. 97 Oct. 97 Nov. 97 March 98NCB (actual) (actual)

2. Mrkonjic Grad 2 0.60 Sept. 97 Oct. 97 Nov. 97 March 98(actual) (actual)

3. Derventa 5 2.00 Sept. 97 Oct. 97 Nov. 97 March 98(actual) (actual)

4. Modrica 1 0.30 Sept. 97 Oct. 97 Nov. 97 March 98(actual) (actual)

5. Brcko 4 1.30 Dec. 97 Jan. 98 Feb. 98 May 986. Other municip 1 0.95 Jan. 98 Feb. 98 Mar. 98 June 98


Attachment 3: Availability of Labor and Building Materials in RS

1. In RS, construction labor and building materials are generally available. Any significant increasein the demand for labor and materials is not expected to result in constraints.

Labor

2. The labor required to carry out repairs under the Housing Component is expected to be readilyavailable locally in RS. Inquiries made in the municipalities of Rogatica, Visegrad, Derventa, Modrica,Brcko and Doboj revealed that there is still significant reliance on state-owned construction companies.There are about 15 such companies operating in RS, some quoted to employ about 100 workers. Smallprivate contractors exist as well but appear to be rather unevenly distributed across the RS territory. Pre-qualified firms from both groups will be invited to bid, and contractors will be registered with theMinistiy of Urbanism, Housing and Construction. There is also a large idle pool of building workers thatcould be used. Each of the above municipalities has already organized some limited repair works,generally to a satisfactory standard.

Materials

3. Before the war, former Yugoslavia was pre-eminent in international contracting and alsomaintained a strong national construction program. Many building materials were obtained nationallyalthough some items, such as glass, were imported. The war resulted in a virtual cessation of localmaterials production but there are now multiple examples of a regeneration of domestic production. Thecapacity of the local building materials industry is of vital importance for the housing rehabilitationprocess, especially for large-scale reconstruction programs. Materials can be imported by donors, but thelocal economy will not benefit much unless it regains its domestic production and marketing capacity.

4. The materials needed for building repairs are cement, aggregates, clay products (blocks, rooftiles), timber, glass, sanitary/ plumbing items, electrical wiring and fittings and decorative paints. Thesematerials are readily available either within RS, in the Federation, or in neighboring FRY and Croatia.Furthermore, demand for materials resulting from the Housing Component as well as from the overalldonor-funded reconstruction program for BH will necessarily lead to re-emergence of certain localmanufacturing capabilities, and the local supply situation will improve with time.

5. The following table summarizes the availability of the principal building materials in RS at thepresent time:

Product AvailabilityConcrete building materials ............................. Partly localCement ............................. YugoslaviaClay tiles ............................. Partly localGlass ............................. YugoslaviaSteel ............................. YugoslaviaClay bricks ............................. LocalSanitary ware ............................. LocalPlywood, timbers, windows and doors ......... .................... LocalElectrical components ............................. Partly localPlumbing and pipes for water and seweraae . ........................... Partlv local


Attachment 4: Property Rights Issues in Housing

1. The legal framework in BH governing property rights and pre-war rights of tenants in socially-owned units has been complicated during the war and the period after the war due to the passage oflegislation seeking to facilitate housing for displaced people. Both the Federation of Bosnia andHerzegovina and RS passed respective laws dealing with "abandoned" units in an effort to allow their useby displaced people. The Law on the Use of Abandoned Properties was passed in RS after the DaytonPeace Agreement, in March of 1996. This law applies to both public and private property. Property isconsidered abandoned if the owner or the holder of the right to use such property has deserted it. The lawrecognizes the right of the property owner to reclaim his or her property if it is vacant, or if alternativeaccommodation can be found for the occupant and he or she is paid compensation for repairs. The law is,however, silent on the rights of legal tenants to return to their properties.

2. Prior to the passage of the law in RS, authorities could apply prewar laws which stipulated lossof occupancy rights in instances where units were vacated or rent was not paid. At the present time,municipalities appear to interpret this law to mean that vacant public housing units are to be reallocatedby them, rather than by the legal owners which were principally enterprises and other social institutions.This reallocation is generally through a municipal commission of refugees, or a housing commissionwhich comprises representatives of various institutions including the Ministries of Construction andRefugees, municipal authorities, and the property registry. When the municipality declares a propertyabandoned, the municipal council on refugees may allocate the property to other families for at least oneyear and certificates to that effect are issued. However, while this allocation process is set out clearly inthe law, there are units that have been occupied by displaced people without formal allocation.

3. The Office of the High Representative is concerned about the impact of this law of RS on theability of households to voluntarily return and to occupy their homes, whether public or private. The lawis considered to be contrary to the provisions of Annex 7 of the Dayton Agreement, as it essentiallyinterferes with the right of both owners and legal occupants to return to their properties. The RSauthorities are aware of this issue and of the need to change the law to conform to the Dayton provisions.Given the shortage of habitable housing in many municipalities, however, it is difficult to foresee thatmunicipal authorities would easily find alternative accommodations for current occupants in order toreinstate the rights of returning original tenants even where there is a willingness to do so.

4. Additional pressure and claims on property will result from the desire of many host-countries tosupport the return of refugees. The expectation is that they would be accommodated either in their ownunits or in alternative units owned by others. To date, very few of the displaced have returned to areaswhere they are minority groups. It is therefore reasonable to assume that a return of refugees fromasylum countries is likely to follow the same initial pattern of return to majority areas, which are notnecessarily where their original homes are located. Thus, housing would need to be found for theserefugees in a manner that is consistent with the Dayton provisions which allow temporary location ofdisplaced people in vacated units. Annex 7 assigns the Real Property Claims Commission the authorityto not only receive and rule on claims, but also to declare units abandoned, lease such units, settle claimsand provide compensation to owners or occupants who do not wish to return to their property. TheCommission has been established in March 1996 but has yet to start to register claims. Moreover, it isunclear that this Commission will have the resources and necessary support to enforce its decisions.

5. The conflicting claims and legislation will take time to resolve. In the interim, procedures needto be set up to review the status of ownership and occupancy of units targeted for repair financed bydonors. The objective needs to be to address both (i) claims of owners and tenants to return to theirhomes, and (ii) temporaty occuparcy or leasing rights and terms for those individuals who may have noalternative accommodation to which they can easily return to for security or other reasons.


Attachment 5: Scope of Housing Repair Works to be Carried Out

Work Objectives

I . Repairs to public apartment buildings shall be confined to the common elements and envelope ofthese buildings, such as roofs, external fabric, common entrances, stairs, and utilities. The works aim toprovide: (i) a water tight dwelling unit; (ii) intruder-proofing to dwelling units (e.g. windows, doors andlocks as appropriate); (iii) weather-proofing of common access areas; and (iv) services (water, electricityand drainage) to a single point for each dwelling unit. In order to achieve this level of repairs to commonfacilities some or all of the elements of works may be undertaken but shall collectively remain within theoverall set budget for the property.

Standards, Materials and Workmanship

2. The standards of materials and workmanship to be applied to house repairs shall not be less thanthose applying to new building works in Bosnia and Herzegovina or in other parts of former Yugoslavia.To achieve satisfactory performance contractors shall ensure that the best materials of the proposed typeshall be used in strict accordance with the manufacturer's instructions, to be installed by labor that hasbeen adequately trained for that purpose.

Roofs. Reconstruction of a roof shall include durable tiles or sheeting, battening, damp-proofmembrane, insulation and, where appropriate, roof timbers properly sized and secured. Flat roofswill be repaired with materials and methods appropriate to the original construction. Works to theroof shall include flashings, edge boarding, gutters and downpipes as appropriate.

External Walls. Patching to extemal walls will include cutting back locally damaged areas toform a key, priming and the application of a suitable render. Where damage has occurred to thestructure of the wall, bricks shall be cut out and whole bricks of the samne type or better shall bemortared in place. Balconies will normally not qualify for repair and access will be locked.

External Openings. Damaged or missing window frames will be repaired or replaced to matchthe undamaged frame type. All windows will be fitted with a single 3 mm pane of glass,correctly puttied in place such that where the franes are capable of accepting a second pane, itcan be fitted at a later date. Where applicable, one extemnal door will be provided complete withsecurity fittings comprising a key operated latch lock and an internal bolt.

Internal Walls. Internal walls of the common areas will have damaged blockwork made goodand plaster patched to an even finish prior to decoration. Any work to fixing electrical conduitsor similar shall have been completed prior to plaster repairs.

Ceilings. Where ceilings to the common areas are of a prefabricated concrete type, they will beplastered and finished to the same standard as the walls. Where such ceilings are of a woodenstructure, repairs to the timberwork shall be carried out first. In no case will this work be carriedout in buildings where the roof has not been rendered water-proof.

Floors. Damaged ground floor concrete slabs in the common areas shall be covered with aminimum 2 mm layer of tar, bitumen or similar. This membrane shall be protected with acement screed. Elsewhere in the common areas, damnaged areas will be cut back to soundconstruction, primed, filled and cured to the original strength, blocks or tiles shall be cut out andremoved to be replaced with cement mortar. Untreated wooden floor panels shall only be fittedover a layer of thermal and hydro-insulation.


Doors. Doors will only be fitted to the entrance to the building, any access to the roof and to theindividual dwelling units. The type will be similar to the original of that predominating in thebuilding. Except at the entrance all such doors will be lockable.

Electrical and Lighting. Each dwelling unit will be equipped with a connection to adistribution board including a mains isolator, four fused circuit supply ways and a meter. Onlylighting to the common areas will be repaired. As far as possible vandal resistant fittings will beused.

Water Supply. A riser main to each dwelling unit will be provided with stop-cock within theunit. Where necessary this supply will be pumped.

Sewerage. A damaged connection to the communal sewerage system will be repaired to providea single disposal connection to each unit.

Decoration. The exterior of the building will not be decorated.


Attachment 6: Staffing and Responsibilities of the Housing Department

Department Staffing

1. The Housing Department will be part of the Project Coordination Unit for the overall project.Initial staffing of the Department will comprise a central management section supported by site-basedstaff of project managers and inspectors of works. The following staff are part of the Department:

Department Director: A professionally qualified engineer or architect having suitable 15 years minimumexperience. Responsible for the satisfactory perfornance of the unit, for promoting the interests of theMUHC and the housing repair program - in particular with international donors -, and for maintainingfull reporting on the progress of the project.

Proiect Accounts Officer: A professionally qualified accountant or finance officer having suitableexperience. Responsible for monitoring and facilitating of the flow of funds within the project,overseeing the financial aspects of civil works contracts established, and generally assisting the FinancialController of the PCU to manage the accounts of the Housing Component.

Accounts Database Technician: With sufficient experience of accounts and database applications.Responsible for the establishment and maintenance of financial databases, project monitoring databases,their maintenance, as well as regular reporting to the government and donors.

Technical Mananer: Professionally qualified building engineer or architect with relevant experience.Responsible for damage assessment review, contractual matters and performance of repair contracts.

Proiect Managers: Responsible to assist with damage assessments and to supervise the implementationof works and consultant contracts, including frequent site visits.

Secretary and Intervreter of the DeRartment

Department Responsibilities

General Component Management

* overall project coordination, monitoring and progress reporting

* selection of cities where project will be implemented

* establishment and advise on implementation of detailed procedures for damage assessment

* coordination of donor funding of the project component

* procurement of works, goods and technical assistance under the project, in conjunction withPCU management

* management of component implementation, works and consultant contracts

Technical Support Section

* advice and assistance for municipalities regarding selection of buildings

* establishment of detailed implementation procedures for damage assessments, contractorevaluation and shortlisting, the tendering process including conditions of contract,instructions to contractors and performance specifications


* review and assessment of the existing technical and accounting capacities of eachmunicipality selected for housing damage repairs and, where appropriate, provision ofmanagement support to strengthen local staffing for the period of the works; provision oftraining to the staff of municipalities

* recruitment of local project staff in accordance with the qualifications agreed

* creation and maintenance of a database of contractors' rates, unit costs, as well as anddamage schedules for each property

definition of contractor performance guarantees required; preparation and signature withselected contractors of performance standard agreements

* pre-qualification of contractors, issuance of invitations to bid, bid evaluation, contract awardand management of contracts

* verification of completion of works and certification of payment

Finance and Administration Section of PCU. supporting the Housing Department

* management of funds of the Housing Component

* verification of payment requests from project municipalities, payment for works and services

* proper maintenance of project accounts and project records

* audit of municipal project accounts

* preparation of replenishment requests for transfer of funds into the Special Account

* preparation of necessary forms and detailed procedures for the management and execution ofthe above functions

Local Proiect Offices

* identification and proposal of buildings according to the established criteria

* preparation of damage assessments of buildings

* together with Housing Department, invitation of local contractors to apply for pre-qualification

* assistance to the Housing Department to evaluate bids

* monitoring and supervision of the performance of each contract

* maintenance of a register and copy of all contract documents

* submission to the Housing Department, on a fortnightly basis, a formal report on worksprogress achieved and expenditures committed

* certification of contractor vouchers for payment and submission to the Housing Department

preparation of local project completion reports



WATER AND SANITATION COMPONENT

A. BACKGROUND

Sector Characteristics

1. Prior to the war, water supply services in Bosnia and Herzegovina (BH) were of largelysatisfactory coverage and quality. About 70 percent of the urban population was covered, and a 24-hourservice was the norm. In rural areas, about 35 percent of the population were connected to piped watersupply systems, the remaining population had on-site water supply facilities such as springs or wells.

2. In the area of Republika Srpska (RS), prior to the war there were some 50 urban water supplysystems covering about 56 percent of the pre-war population, and about 9,800 village water supplysystems providing service to 44 percent of the population. Regarding sewerage services, about 60percent of the urban population and about 10 percent of the rural population were covered. Most of theremaining population had on-site sewage treatment and disposal facilities such as septic tanks. Domesticsewage treatment plants were available in the towns of Trebinje, Celinac and Tmovo.

3. Large industries in BH had their own water supply and waste water disposal systems. Their totalwater production exceeded the urban domestic production by some 50 percent. River pollution throughindustrial and domestic waste water was a significant issue, as many mumicipalities and industriesdischarged their waste waters without treatment into domestic rivers. On the other hand, solid wastecollection was generally well managed throughout BH, leaving urban areas largely litter-free. Solidwaste disposal was canied out by use of landfills, but only few sites did comply with proper sanitarylandfill standards. Except for three documented cases, industrial solid wastes were not separated andwere deposited along with domestic garbage. Operation and maintenance of water and sanitation serviceswas not a cost-covering business, requiring partial financial support from the public budgets.

4. RS has at its disposal adequate water resources and sufficient precipitation. It is estimated thatabout 80 percent of the domestic water demand is covered by ground and spring water, which requires ingeneral only chlorinating in order to comply with drinking water standards. However, water turbitityproblems may arise after heavy rain storms. Less safe is the Karst ground water since Karst aquifers lackthe filtering characteristics provided by aquifers within granular media. Surface water is often pollutedand requires expensive treatment. The average precipitation in RS amounts to approx. 1,250 mm peryear, with a range of 900 mm in the Sava River valley in the north and 1,600 mm in the Karst areas ofthe south.

Sector Organization

5. Prior to the war, the primary responsibility for provision of water supply, solid waste andsanitation services rested with the municipalities. In contrast, policy setting, master planning, sectorregulation, technical support to municipalities, flood control and the construction of regional watersystems were central government functions. The government also provided to the municipalities most ofthe financing required for major investment projects. The responsible government ministry was theMinistry of Agriculture. Water Management and Forestry, and its implementing agency was the


Vodoprivreda BiH (VBH) with a staff of about 350. The municipalities provided water, sewerage andrefuse collection services through Komunalcos (municipal service companies) that functioned likemunicipally-owned joint stock companies. In the past, project proposals for investments were generallyinitiated by these Komunalcos. If projects were of local nature and did not require federal funding, theywere also planned and carried out by the Komunalcos. In the event that projects were of regional scope,they were implemented by VBH.


6. The war had a major impact on the existing institutions, both from an organizational point ofview and regarding their effectiveness to carry out their responsibilities. The division of responsibilitiesbetween the central government and the municipalities remains the same as prior to the war. However, atthe Entity government level, the Federation of Bosnia and Herzegovina and the RS now haveindependent water management organizations, Vodoprivreda BiH (VBH) in the Federation and Zavod zaVodoprivreda Republika Srpska (ZVRS) in RS.

7. The head office of ZVRS which at the beginning of the war was established in Ilidza nearSarajevo was shifted to Pale after conclusion of the Dayton Peace Agreement. ZVRS branch offices arelocated in Banja Luka, Bijeljina and Trebinje. Staffing levels are down both at the central governmentand the municipal levels. The major personnel losses have been from the ranks of the most qualifiedstaff who have left the country. ZVRS also faces other difficulties such as limited, inadequate officespace and the loss of basic engineering and statistical data on the water and sewerage systems that hadbeen collected prior to the war.

8. The war has affected the water supply and sanitation sector in many ways. There are physicaldamages along the former confrontation lines affecting facilities located primarily above the groundlevel, including water pumping stations, water and sewage treatment plants, reservoirs, and river dikes.There are also war impacts related to the loss of service vehicles, loss of mechanical and electricalequipment, and due to unfinished construction works which were started before the war. However, themost severe impact is felt from system malfunctions due to lack of maintenance and of replacementinvestments during and after the war period. Other war related problems are area contamination causedby land mines along former front-lines; the overloading of water supply and sanitation services due toheavy population shifts; and the disruption of water services in areas where the water source and thewater supply area have been separated by the Inter-Entity Boundary Line.

9. As a result of the above factors, water supply and sanitation services have seriously deterioratedthroughout RS. The 24 hour water supply services are no longer the norm. Due to lack of proper watertreatment, water quality may not comply with drinking water standards. There are problems withblocked sewers, and most sewage treatment plants are reported to be either out of order or not functioningproperly. Solid waste collection suffers from the lack of trucks and containers. None of the presentlandfill sites in use meet sanitary standards, and they largely fail to protect water courses andgroundwater from pollution. Of particular concern is the dumping of wastes into former gravel pits andon river banks. Regarding river pollution, the impact of the war offers a mixed picture: While manyfactories have shut down and no longer discharge waste water into rivers, thus improving water qualityconsiderably, the breakdown of domestic sewage treatment plants and of services for septic tanks has ledto increased bacteriological pollution in rivers.


10. Lack of maintenance and delayed replacement investments constitute the primary reason for theissues faced in the water and sanitation sector today. Both result from constraints of access to labor andcapital during the war. Poor cost recovery is a key factor since water services were offered at very lowcost, including prior to the war. The municipal water service departnents are not financially independentand rely on payments from the central govenmnent to help cover the cost of system operation andmaintenance. Many municipal service organizations are still understaffed.


11. No major reconstruction as taken place in the water and sanitation sector in RS since the end ofthe hostilities. Some limited emergency assistance was provided by ECHO, ODA, the Red Cross,Norway, IFOR and some NGOs for the supply of the most urgently needed materials, works, equipmentand spare parts, so as to start with repairs to selected facilities. The total value of this combinedassistance is estimated to be in the order of US$ 5 million for all of RS during 1996.

12. Under the supervision of the International Management Group, consultants have been employedin late 1996 to prepare a comprehensive Emergency Reconstruction and Development Plan for the watersupply, waste water and solid waste sectors of RS. This plan and study were completed by December of1996 and comprise some 50 urban centers in RS with more than 2,5i0 inhabitants tach. Data -ollectionwas carried out via survey questionnaires and focused on information regarding water supply, wateravailability, water quality, water losses, sewerage services, damage to sewers, treatment plant conditions,and solid waste services. A comprehensive listing of damages and required priority investments has beendeveloped under this study and forms the basis for the preparation of the proposed Water and SanitationComponent under the Reconstruction Assistance Project.

Sector Issues

13. High unaccounted-for water losses in the water systems throughout BH are a matter of majorconcern. It is estimated that, before the war, these losses ranged between 30 and 50 percent while today,they vary between 40 and 60 percent. War activities have contributed indirectly to this issue sincefighting and the economic break-down prevented current maintenance. However, the primary cause ofhigh losses are decades of neglected maintenance prior to the war. One contributing factor is that systemmaintenance and repairs were under the responsibility of the municipalities which did not achieveadequate levels of cost recovery, while water sector investment programs were under the responsibility ofVBH at the state level. The emphasis was placed on developing new sources, rather than on reducingtechnical losses in existing systems or on educating consumers on water conservation. Developing newresources and systems may indeed be more economic in areas where water resources are abundant. Incontrast, water loss reduction should be given priority where water production costs are high due toexpensive water treatment or the high cost of water pumping.

14. As a result of the war, health risks have increased. Due to the present intermittent water supplyin most municipalities, sewage from leaking sewers may infiltrate into water pipelines, potentiallyaffecting a large number of people at the same time. Furthermore, health risks arise from water treatmentplants which fail to produce water of drinking water quality. The discharge of raw sewage from seweragesystems without working treatment plants or any treatment facilities, also from sewage pumping stationsand septic tanks that are of order, is posing health risks to down-stream users of the polluted river waters.In Karst areas, underground channels and downstrearn Karst springs may become polluted as well. A

further danger are blocked sewers, resulting in overflow of sewage and pollution of water courses andground water. Uncollected or illegally dumped refuse will attract rats and flies. To date, however, theauthorities are unable to provide detailed information on water-borne diseases.


15. There are also institutional and legal issues relating to the transition of the water construction andconsulting industry from public to private status and ownership. In the Federation of Bosnia andHerzegovina, a number of newly registered private companies in the water sector have emerged, usuallywith some share of ownership remaining in the public sector. The same process is expected to take placein RS. These private companies are generally founded by and composed of individuals who used to workfor public water companies and institutes, and many of these individuals carried out most of theconstruction and engineering work in the water sector prior to the war. Questions of asset transfer andownership arise during this transition phase. More importantly for the implementation of donor-financedprojects, however, is the question whether these newly created enterprises dispose of the requiredphysical and financial resources so as to carry out works on time and to cover any losses or legalobligations which may arise during the execution of works entrusted to them.

16. The key financial issue in the water sector relates to cost recovery for water and sanitationservices. Most municipalities have been unable to collect for their services during the war, even ifsufficient efforts were made for billing of households and industrial users. In the immediate post-warperiod, collection of water charges is hindered by a number of factors, including high unemployment andlow household income, the large number of refugees and displaced persons who also often have nomeans to pay, and the still heavily reduced levels of services that consumers receive, especially in RS,which leads to an unwillingness to pay charges. Also, municipalities and households need to adjust to anew economic situation vvhere the Entity governments are no longer wilinig nor ablc to it, -

financially the cost of water system operation and maintenance. To ensure the sustainability of futurerepair investments to be made, benefiting municipalities must commit themselves to achieve adequaterecovery of at least their operating costs over the short term through improved billings and collections.

17. One of the sector priorities facing the RS Government is to establish an efficient organization ofwater and sanitation institutions, taking into consideration the new market-based economic regime wherecentral planning will increasingly be replaced by largely decentralized investment decisions at themunicipal level. This implies cost recovery through user charges rather than funding of costs throughfiscal transfers. It also implies delegation of more authority to the municipalities which will themselvesset development and investment priorities and carry them out in accordance with applicable laws andregulations. However, in the short term, municipalities are not equipped to take over investment-relatedresponsibilities. The RS Institute for Water Management (ZVRS) will need to be strengthened to theextent necessary so as to manage and monitor water repair investments financed by donors during theinitial years after the end of the war. At the same time, private sector involvement in repair works shouldbe encouraged as much as possible by involving local private firms to prepare detailed designs, to carryout repair and installation works, and to handle independent construction and site supervision.

18. Regarding existing sewage systems in RS, most systems are designed for combined collection ofsewage and storm water and discharge raw sewage into the rivers. In order to introduce environmentallyacceptable solutions, some of these installations will have to be converted into separate systems, allowingfor distinct pipeline systems for sewage and storm water. Also, sewage treatment plants will have to beconstructed in larger villages and for all urban settlements. While necessary and desired by theauthorities, however, many of these measures will be very costly to implement. Prospects for donorfinancing for them during the initial post-war emergency period are limited, given that many householdsremain without any water, sewage or solid waste removal services. As a first priority, therefore, low-costsolutions that allow for replacement of key equipment on otherwise functional sewerage systems areaimed for. This includes removing blockages and structural damages to sewers, the rehabilitation ofsewage pumping stations, and repairs of sewage treatment plants.



Bank Strategy

19. To assist the Bosnian authorities to restore essential water and sanitation services, the Bank iscommitted to assist both Entities within BH to address the most basic and urgent reconstruction needsthrough emergency-type projects. In the Federation of Bosnia and Herzegovina, in March 1996, theBank approved a US$ 20 million Credit for a Water, Sanitation and Solid Waste Urgent Works Project(FY96). Together with donor partners such as the European Union and the governments of Austria, theNetherlands and others, through that project the Bank is assisting the Federation to install urgentreplacement equipment, carry out priority rehabilitation works, draft an emergency development plan forthe water sector, and strengthen key institutions. The proposed Reconstruction Assistance Project is theequivalent emergency project designed to assist the RS authorities in a similar manner.

20. The Bank's support to Bosnia's water sector is part of the agreed intemational reconstruction andrehabilitation program for water and waste management of BH of about US$ 363 million, to beimplemented over three to four years, which the Bank has helped to develop in a joint effort with thecountry and the donor community.' This program aims to restore water, sewage, solid waste disposal,flood control, and irrigation systems to pre-war levels, and to establish the proper institutionalarrangements to make the improvements sustainable (see Table 1).

Table 1: Three-Year Assistance Program in Water and Waste Management

(in US$ nillion) 3-4 Year 1996 1997 1998-1999Program 96-99 Commitments Requirements Requirements

Federation of Bosnia and Herzegovina 258 82 51 125Works and Goods 238 74 44 120Institutional Strengthening 16 7 5 4Recurrent Costs 4 1 2 1Republika Srpska 105 1 49 55Works and Goods 95 0 44 51Institutional Strengthening 8 1 4 3Recurrent Costs 2 0 1 1Total 363 83 100 180


21. Through its support for the Water, Sanitation and Solid Waste Urgent Works Project in theFederation of Bosnia and Herzegovina, the Bank was able to assist the Federation to secure substantialadditional donor cofinancing. It is expected that the Bank's support for an emergency-type water sectorrehabilitation program in RS would result in a similar success to raise donor funding. The Bank has alsorelevant pre-war experience in Bosnia's water sector through two Loans to former Yugoslavia whichbenefited the Sarajevo water and waste water system and helped improved water supply in the Tuzlaregion.2 Through its recent involvement in a variety of water and sanitation projects in emerging marketeconomies in Central and Eastern Europe, the Bank has gained experience on a number of key

See: "Bosnia and Herzegovina: The Priority Reconstruction Program", Vol. 3, Reconstruction SectorReports, made available for the Donor Information Meeting in Brussels, January 1997.Ln 1263 Sarajevo Water and Wastewater Project; Ln 2233 Tuzla Region Water and EnviromnentalProject.


institutional issues in the sector, such as cost recovery and decentralization of investment management,and is therefore in a good position to offer financial assistance and policy advice to the RS authorities.


22. There are several key lessons learned from the Water, Sanitation and Solid Waste Urgent WorksProject in the Federation since April 1996. These have been incorporated into the proposed project andare as follows:

* Construction of new infrastructure should be financed only when existing facilities are properlymanaged. In the presence of high unaccounted-for water losses, donor assistance should beconditional on the development of a demand management program.

* Waster water treatment should initially concentrate on primary treatment. Secondary and tertiarytreatment should be considered on a case-by-case basis only.

* Strengthening of the local water authorities is critical for sustainable sector development.* Financial assistance to municipalities should be given on equal terms. All municipalities should

receive long-term loans, even if some donor contributions are provided to the government as grants.* Close donor coordination is critical to avoid duplication of efforts and allow for the establishment of

common sector policy principles. Coordination needs to take place through the water sector taskforce and the local water authorities.


23. The Water and Sanitation Component of the Reconstruction Assistance Project will complement,in part, the other components of this project (agriculture, housing, and electric energy) by generatingimproved living conditions for returning refugees and displaced persons. Since there will be one jointProject Coordination Unit established for all four components, it will be possible to target selectedmunicipalities where two or more project components provide benefits to the same population, thusfollowing an integrated area approach to economic reconstruction.



24. The primary objective of the Water and Sanitation Component is to restore water, sanitation andsolid waste services, in selected RS target municipalities, to a level that will satisfy basic human needs,mitigate public health risks and support the return of economic activity.

25. The secondary objectives of the Component are (i) to strengthen institutions necessary for therecovery of the sector; (ii) to introduce improved cost recovery so as to allow for maintenance ofinvestments over time; (iii) to promote private enterprise development in the water sector; and (iv) toassist the RS authorities in developing a medium-term sector strategy that would address all essentialservice needs of the population while implementing adherence to adequate environmental standards.Through financing of repair works, the Component would also create local employment and income.

Selection of Municipalities and Investments

26. Target municipalities in RS included under the Component have been selected according to thefollowing three criteria:


* municipalities along the former confrontation lines that have suffered significant damage to watersupply, sewage and solid waste collection systems

* municipalities facing a shortage of water and sanitation services due to an inflow of displacedpersons and refugees

* municipalities which are of economic importance, are confronted with urgent investment needs in thewater sector, and allow for cost-effective high-return repair investments

27. While the various needs of the population related to water and sanitation services are very large,first priority would be given to the restoration of water supply services in adequate quantity and quality,in view that domestic water supply is a basic human need. Least-cost solutions have been selected whenfacing the choice between developing additional water resources or alternatively reducing water losses inexisting water supply systems. The second priority are sewage investments aiming to repair existingsystems in order to avoid health hazards, mostly through rehabilitation of blocked and broken sewers.Third priority is given to investments in solid waste disposal, primarily through investments into garbagecollection trucks and containers. The full rehabilitation of existing municipal garbage disposal sites isnot feasible within the scope of this first emergency-type assistance program. Furthermore, a medium andlong term strategy for the sector would likely call for development of larger regional sanitary landfillsites rather than an extension of the present landfills.

Component Elements

28. To support the above objectives, the Water and Sanitation Component has four elements: (i)urgent works; (ii) refuse collection equipment; (iii) technical support; and (iv) institutional strengthening.

Element 1: Urgent Works

29. The project would finance urgent rehabilitation works, including required material andequipment, to restore water supply and sewage services in 18 RS municipalities. Works will includerehabilitation and repair of water sources, supply pipelines, water treatment plants, distribution networks,the cleaning and repair of sewers, and rehabilitation of sewage pumping stations. See Table 2 fordetailed cost estimates which include physical contingencies. Cost estimates have been compared withand verified against unit costs incurred under the parallel water sector project in the Federation of Bosniaand Herzegovina, in implementation since mid-I 996. The attachment provides a more detaileddescription of the urgent works to be carried out in each target municipality.

Element 2: Refuse Collection Equipment

30. The project would finance the purchase of refuse trucks and collection containers, together withcritical spare parts. The equipment and materials would benefit a total of 20 RS municipalities. SeeTable 3 for cost estimates. The detailed distribution list for this equipment is attached.

Element 3: Technical Support

31. The project would finance technical assistance and consultant services. For preparation ofdetailed designs and tender documents under Element 1, mostly local consultant services would be used.Local consultants would also be employed to carry out on-site supervision of rehabilitation works. Theywould be complemented by a foreign monitoring expert who would verify quality of designs, review theperformance of site supervisors, and assess the quality of construction. Furthermore, in order to preparefor essential future investments in the water and sanitation sector, the project would finance a number of


urgent studies which are listed in more detail in the attachment. Table 4 provides cost estimates for thiselement.

Table 2: Urgent Works - Detailed Cost Table

Municipality Population Selection Water Sanitation Total LikelyEstimate Criteria Supply Works (US$) Cost Donor

Works (US$) (USS)Northern-Western RSBanja Luka 180,000 R, E 9,640,000 9,640,000 ECBrcko 32,000 W, R, E 600,000 600,000 IDARibnik 8,000 W, R 1,440,000 1,440,000 ECModrica 9,000 R, E 20,000 20,000 IDAMrkonjic Grad 15,000 W, R 500,000 500,000 AustriaNovi Grad 13,000 W, R, E 200,000 200,000 IDASipovo 3,000 W, R 930,000 930,000 ECSrp. Gradiska 18,000 R, E 300,000 300,000 IDASrp. Brod 10,000 W, R, E 560,000 200,000 760,000 openSouthern-Eastern RSBijeijina 50,000 R,E 140,000 140,000 IDABratunac 17,500 R, E 90,000 90,000 IDAKalinovic 2,500 W 300,000 300,000 openNevesinje 9,000 R, E 500,000 500,000 openRogatica 12,000 W, R 70,000 70,000 IDASokolac 19,400 W, R 750,000 750,000 IDASrbinje 17,500 W, E 510,000 510,000 IDATmovo 2,000 W 200,000 200,000 IDAVisegrad 12,000 W, R 310,000 310,000 IDATOTAL Cost (including contingencies) 16,760,000 500,000 17,260,000

Note: Selection criteria include ' (war damage), '" (refugee population), and 'E" (economic inportance).

Table 3: Refuse Collection Equipment - Detailed Cost Table

Item Unit Quantity Unit Cost Total Cost(USS) (US$)

Compacting truck (15 cbm) piece 9 120,000 1,080,000Container truck (5 cbm) piece 12 75,000 900,000Containers (5 cbm) piece 52 2,000 104,000Containers (1.1 cbm) piece 263 800 210,400Spare parts and tools for 20 municipalities lump sum 220,000TOTAL Cost (including contingencies) 2,514,400

Table 4: Technical Support - Detailed Cost Table

Item Unit Quantity Unit Cost Total Cost(US$)

Engineering, designs and tender percentage of value 4.0 based on USS 690,400documents for urgent works of works 17.26 million

Construction supervision services (as above) 2.0 (as above) 345,200Expatriate monitoring expert man-months 12 USS 15,000 180,000Urgent studies for future works lump sum 740,000TOTAL Cost 1,955,600

Appendix 3Eag 9 of 23

Element 4: Institutional Strengthening

32. The project would support the Institute for Water Management of RS, Zavod za Vodoprivreda,RS (ZVRS) so as to strengthen its administrative and engineering capacity to manage and monitor projectimplementation. At present, ZVRS receives hardly any funding from the RS govemment and hasinsufficient office space. The project would finance office equipment and supplies, vehicles and also ashare of the incremental operating costs and consultants of ZVRS. See Table 5 for cost estimates.

Table 5: Institutional Strengthening - Detailed Cost Table


Computers, software, printers, supplies set 10 3,000 30,000Specialized drawing equipment lump sum 20,000Office funiture lump sum 20,000Vehicles (4 wheel drive) piece 2 25,000 50,000Vehicles (sedans) piece 3 15,000 45,000Office and vehicle running costs lump swn 50,000

(communication, office rent, etc.)Local ZVRS staff and consultants man-month 240 800 192,000TOTAL Cost (including contingencies) 407,000


33. The total estimated cost of the component is shown in Table 6. Physical contingencies of 3percent on goods and 7 percent on works are included. No price contingencies have been included giventhe expected short disbursement period of this emergency project. Donor-financed items under theinternational reconstruction program are tax-exempt in RS.

Table 6: Water and Sanitation Component - Cost Summary

(in US$ '000) Urgent Refuse Technical Institutional Total CostWorks Collection Support Streng-

Equipment theningWater supply repairs 16,560 0 0 0 16,560Sanitation repairs 700 0 0 0 700Trucks and containers 0 2,514 0 0 2,514Engineering, designs, tender 0 0 1,036 0 1,036

documents, supeivisionOther consultant services 0 0 920 192 1,112Office equipment, furniture 0 0 0 70 70Vehicles 0 0 0 95 95Incremental operating costs 0 0 0 50 50Total Component Cost 17,260 2,514 1,956 407 22,137

34. Of the total component cost, the World Bank would finance US$ 5.0 million equivalent. Thisfinancing would cover the following cost items: urgent water and sanitation repair works (US$ 3.19

Appendix 3Pane 10 of 23

million) 3; refuse collection trucks and containers (US$ 0.80 million); engineering, preparation of designsand tender documents, and works supervision (US$ 0.20 million, equivalent to about 6 percent of thevalue of Bank-financed repair works); the expatriate monitoring expert (US$0.18 million); ui�ent studiesfor future works (US$ 0.30 million); office equipment, furniture, vehicles and incremental operatingcosts for ZVRS (US$ 0.22 million); and local ZVRS staff and consultants (US$ 0.11 million). Donorcofinancing for most of the balance of costs has been committed by the European Union (US$ 12.7million, to be implemented outside of the PCU structure, using EU implementation mechanism) and byAustria (US$ 0.5 million, also not using the PCU structure for implementation). Norway has alsotentatively committed about US$ 5 million in support of this Component. See the financing plan shownin Table 7.


(in US$ '000) Urgent Refuse Technical Institutiona Total CostWorks Collection Support 1 Streng-

Equipment tlieningWorld Bank 3,190 800 680 330 5,000European Union (parallel f.) 12,010 0 721 0 12,731Austria (parallel financing) 500 0 0 0 500Otherdonorstobeidentifled 1,560 1,714 555 77 3,906Total Component Cost 17,260 2,514 1,956 407 22,137

Note: Norway has tentatively committed about US$ S million for this component.


35. The Water and Sanitation Component would help restore essential urban water, sanitation andsolid waste disposal services to levels that would make urban centers livable, reduce health risks andsupport the return of economic activity. Since the primaiy focus is on rehabilitation works, economicrates of returns are expected to be in excess of 30 percent. These returns result from a reduction in thelarge amount of unaccounted-for water and the related decline in the usage of electric energy andchemicals. Rehabilitation works carried out now will also help save future replacement investmentswhich, in the absence of the Component, would have to be carried out eventually so as to replace entiresystems for both water and waste water.

36. The two main Component risks are delays in the start-up and implementation of repair works,and the potential inability of municipalities to operate and adequately maintain the repaired systems inthe future. Implementation may be delayed due to a slow start of preparation of detailed designs andbidding documents. To reduce this risk, local consultants in RS have been engaged since early 1997,using available project preparation grant funds, to prepare the first detailed designs and draft requiredbidding documents prior to Board approval. Most of the procurement and sample contractingdocumentation used for the parallel project carried out during 1996 in the Federation has been madeavailable to the local consultants in RS. An experienced expatriate expert that helped start up theFederation project is assisting the RS authorities. The second risk relates to low billings and collectionsfor services, and hence insufficient cost recovexy by the municipalities. Charging of fully cost-coveringservice fees will take time. To facilitate this process and reduce the associated project risk, eachbenefiting municipality will be required to submit to the Bank a specific plan to recover recurrent andinvestment costs over time, as set out further below.

The following municipalities are envisaged for Bank financing of repair works: Bijeijina, Brcko,Modiica,

Novi Grad, Srp. Gradiska, Bratunac, Rogatica, Sokolac, Srbinje, Tmovo, and Visegrad.



37. The Reconstruction Assistance Project has been placed in environmental category B. The Waterand Sanitation Component would have a positive environmental impact as a result of reduced waterlosses, a safer water supply, improved sewage collection, and proper disposal of solid waste. There is noresettlement involved. All works would be monitored during supervision to ensure that there is nodegradation to the environment.



38. The Banja Luka office of the Institute for Water Management of RS, Zavod za Vodoprivreda, RS(ZVRS) would have the primary responsibility for the execution of the Water and Sanitation Component.The organizational chart of ZVRS is attached. ZVRS is part of the RS Ministry of Agriculture, Forestryand Water Management. At present, the Banja Luka office of ZVRS employs three engineers and twosupport staff. Under financing from the Component, the Banja Luka office would establish a ProjectImplementation Unit (PIU), consisting of several experienced staff from ZVRS and of outsideconsultants. This PIU would be responsible for day to day project management, engineering,coordination and supervision. In particular, the PIU would:

* draft terms of reference for local consultant-engineers who will prepare detailed designs and biddingdocuments for works and goods

* under the supervision of the central Project Coordination Unit in the Ministry of Finance (see below),procure the above consultant-engineers and enter into contracts with them

e review final designs and bidding documents prepared by consultants, and forward them to the ProjectCoordination Unit for subsequent bidding

- evaluate bids received from contractors and suppliers for execution of works and supply of goods,and prepare evaluation reports for the Project Coordination Unit

* draft terms of reference for local on-site construction supervision by consultant firms or individuals* under the supervision of the Project Coordination Unit, procure the above construction supervision

consultants and enter into contracts with them* monitor construction quality and progress, review the performance of site supervisors* verify bills prepared by contractors and checked by site supervisors and forward them to the Project

Coordination Unit for payment* be present at the commissioning of the works, together with representatives of the municipality, the

contractor and the site supervisor, and prepare the hand-over protocol* organize distribution of imported refuse collection equipment to the municipalities* obtain required documentation from municipalities on cost recovery and system operation and

maintenance (see further below)* report to the Project Coordination Unit on Component implementation progress

39. The cross-sectoral Project Coordination Unit (PCU) in the RS Ministry of Finance will open aWater and Sanitation Department. This Department will be composed of two water engineers and willoperate for a duration of 18 months. The Department will be in charge of tendering as well asdisbursement activities, through the PCU Financial Controller, for works, goods and services under theWater and Sanitation Component. Preparation of procurement documents, evaluation of bids, andcontracting of small-value local consulting services will be the responsibility of the PIU in ZVRS, asoutlined above. However, procurement processing, including seeking the Bank's no-objection on

Appendix 3Paye 12 of 23

contract awards, as well as contract signing, contract disbursements, and Component accounting andreporting would be the responsibility of the Water and Sanitation Department, supported by the PIU inZVRS. The Water and Sanitation Department will also procure and enter into the contract with theexpatriate monitoring expert who would independently review the quality of designs and tenderdocuments, the performance of on-site supervisors, and the quality of construction.

40. The Water and Sanitation Component is designed to be implemented within a 24 month timeframe. Preparatory activities by ZVRS are under way to select local consultants for the preparation ofdetailed designs and bidding documents. Since early 1997, ZVRS is being supported by an expatriateadvisor financed under available trust fund resources.


41. Most water and sewage works in RS have been unable to collect for their services during the war.It would be difficult to reinstate charges in the short term, and it is unlikely that any municipality wouldbe able to contribute to the cost of the Component from any other source than in kind. Nevertheless,there should be a commitment by the municipalities to obtain cost recovery in the future. Therefore,within six months after effectiveness of the World Bank Credit, every municipality benefiting from repairworks under this Component will be required to submit to ZVRS a time-bound program for raising watercharges and increasing collections of billed charges. Each program submitted would permit recovery ofrecurrent costs of the operation and maintenance of water and sanitation systems within three years, andrecovery of all costs including capital investments within seven years. The submission of such programswould be a condition of effectiveness of the credit agreements between RS and each municipalitydescribed below.

42. The RS Govemment, through ZVRS as its agent, would make available Bank and other donorfunding to the benefiting municipalities on the basis of credit agreements, covering the cost of urgentworks and of refuse collection equipment (Component Elements I and 2). The onlending terms would be30 years maturity at zero interest including seven years grace. The credit agreements between RS andeach municipality would provide for a percentage of the amounts received to be forgiven. Thepercentage would be determined as soon as the repayment conditions of all donor financing for theComponent are known with certainty. It would be calculated by dividing the amount of grant financingin the Component financing plan by the total cost of the Component. It is estimated that about 65percent of each municipal credit could be forgiven. The costs of Component Elements 3 and 4 would beborne by RS.

Procurement

43. The proposed procurement arrangements are summarized in Table 8, the procurement plan forthe Water and Sanitation Component is attached. In case of parallel financing by other donors, theapplicable procurement procedures of the respective financiers would be used.

44. The Bank will finance civil works contracts for repair and rehabilitation of water and sewagesystems, valued at US$ 3.0 million, to be procured under Simplified National Competitive Bidding(SNCB) procedures. Individual contracts under SNCB would be valued at less then US$ I millionequivalent per contract. The average contract size is expected to be around US$ 400,000. SNCBcontracts would be lump sum, fixed price contracts awarded on the basis of quotations obtained fromthree pre-qualified contractors in response to a written invitation. The invitation would include a detaileddescription of the works, the basic specifications, the required completion period, a basic form ofagreement and drawings when relevant. Prior approval by the Bank will be required for the first five


contracts for urgent works and any contracts exceeding a value of US$ 400,000 equivalent. Prior to theinitiation of any procurement action, the Water and Sanitation Departnent will provide the Bank with aprocurement plan detailing the number of contracts to be procured, bid invitation dates, as well asexpected start and end dates for each contract.


Items Procurement Method (USS m) a/SNCB FA IS OTHER NBF TOTAL

1. Works1.1 Contracted b/ 3.00 - - - 14.07 17.07

(3.00) (0.00) (3.00)1.2 Force Account c/ 0.19 - 0.19

(0.19) (0.19)Subtotal 3.00 0.19 -- 14.07 17.26

(3.00) (0.19) (0.00) (3.19)

2. Goods2.1 Refuse collection equipment d/ - - 0.80 - 1.71 2.51

(0O.) (0.00) (0.80)2.2 Office equipment, vehicles e/ - - 0.17 - - 0.17

(0.17) (0.17)

Subtotal - - 0.97 - 1.71 2.68(0.97) (0.00) (097)

3. Services3.1 Engineering, supervision f/ - - - 0.20 0.84 1.04

(0.20) (0.00) (0.20)3.2 Other consultant services f/ - - - 0.59 0.52 1.11

(0.59) (0.00) (0.59)

Subtotal - - - 0.79 1.36 2.15(0.79) (0.00) (0.79)

0.05 - 0.054. Recurrent Costs (ZVRS) - - - (0.05) - (0.05)

TOTAL COMPONENT COST 3.00 0.19 0.97 0.84 17.14 22.14(including contingencies) (3.00) (0.19) (0.97) (0.84) (0.00) (5.00)

NBF = Not Bank Financed; SNCB = Simplified National Compet. Bidding; FA = Force Account; IS = InternationalShoppinga Figures in parenthesis represent Bank financing.b SNCB contracts are valued at less then US$ I million equivalent per contract, with an expected average of US$ 400,000.c FA is limited to US$ 50,000 per contract.d Three IS contracts for refuse collection equipment are expected, valued at less than US$ 400,000 each.e Four IS contracts for office equipment, drawing equipment, office furniture and vehicles are expected.f Consultant services consist of a number of individual consultants. Their services would be procured in accordance with

Bank guidelines which shall include both competition and sole sourcing. The sole sourcing would be justified in eachcase.

45. A pre-qualification of contractors will be carried out. For this purpose, a notice will be publishedin the local press and announcements will be made inviting local and national, private and state-ownedcontracting firms to express their interest in different levels of contract values. Pre-qualification criteriawill be subject to prior approval by the Bank. Bidders shall provide information using standard formsissued by the Water and Sanitation Departnent and shall meet the following minimum criteria:


* demonstrated capacity as a contractor to successfiully complete works in an amount up to theaggregate contract value specified

* demonstrated experience as a contractor in the construction of similar works of nature andcomplexity to the proposed works

* demonstrated ability to provide all essential workers for completion of the works specified in the bid

46. Pre-qualification will result in a listing of contractors with individual established contract limits.Contractors will be invited to submit bids for works contracts up to their established upper contractinglimit. State-owned construction enterprises must meet the Bank's eligibility criteria of autonomous legalstatus and absence of govemment subsidies of their operations.

47. In addition to SNCB, works under Force Account would be financed by the Bank up to anaggregate limit of US$ 190,000. Force Account would be used for the installation of equipment andminor repair work within the capability of the staff of municipal water, sanitation and solid wasteorganizations and valued at less than US$ 50,000 per contract. To qualify, organizations would need todemonstrate that they have the equipment, capacity and experience to undertake the work. Anappropriate accounting and supervision mechanism will be put in place to ensure cost-effectiveness.

48. Using Intemational Shopping, the Bank would finance the purchase of solid waste collectiontrucks and containers, up to an aggregate value of US$ 800,000. Three IS contracts are expected for suchequipment, valued at less than US$ 400,000 each. Also, the Bank would finance office equipment, officefumiture and vehicles using Intemational Shopping, at a combined value of US$ 170,000, broken downinto four contracts.

49. Furthermore, the Bank will finance US$ 0.79 million of local and expatriate consultant services.The services will be procured in accordance with Bank guidelines which shall include both competitionand sole sourcing. Sole sourcing of services will need to be justified in each case. Such justificationmay be the timing constraint, continuity, unique expertise, and lack of candidates given the post-conflictsituation in RS. No assignments have been pre-identified for sole sourcing. Any sole sourcing duringimplementation will be subject to the Bank's approval. Follow-up assigmments will be permissible to theextent that this will be indicated in the initial Terms of Reference. The Bank will also financeincremental operating costs of ZVRS up to an aggregate value of US$ 50,000. Operating costs would bereimbursed based on an approved program and budget.

50. From the experience gained of the parallel project in the Federation of Bosnia and Herzegovina,it is not expected that procurement agents would need to be engaged. The Water and SanitationDepartment of the Project Coordination Unit, together with ZVRS, and assisted by a qualified andexperienced expatriate advisor, is expected to be able to carry out procurement of works contracts quicklyand efficiently. Sample documentation available from the Federation project should facilitate theprocurement task in RS. Post review of procurement actions will be carried out on a quarterly basis byBank supervision missions. The Bank's Procurement Specialist in the Resident Mission in Sarajevo willassist with prior review of the first five works contracts. Furthermore, monitoring of procurement will befacilitated through quarterly reporting, which will be part of the regular quarterly progress reports underthe overall project.

Disbursements

51. The disbursement plan is given in Tables 9 and 10. Disbursements are expected to be completedwithin a period of less than three years from the date of effectiveness. The Bank Credit would financethe categories of expenditures outlined in Table 11. Further details on disbursement procedures,


including use of the Special Account and of Statements of Expenditures, are provided in the main text ofthe overall project.


Component Elements CY 1997 CY 1998 CY 1998 CY 1999 CY CY TotalQ3/4 Q1/2 Q314 Q112 1999 2000

Q314 Q112




Component Elements CY 1997 CY 1998 CY 1998 CY 1999 CY CY TotalQ3/4 Ql/2 Q314 Q1/2 1999 2000

Q3/4 Q1/2




Categories Amount (US$ % of Expenditures to be fianced under theequiv.) World Bank Credit

1. Civil Works 3,100,000 100% (net of taxes)100% of foreign, 100% of local (ex-factory

2. Goods 900,000 cost), and 85% of local expenditures forother items procured locally

3. Consultant Services (technicalassistance, training, studies) 700,000 100%

4. Recurrent costs50,000 100 %

5. Unallocated 250,000TOTAL (incl. contingencies) 5,000,000


52. Separate and auditable accounts would be established by the PCU for expenditures within theWater and Sanitation Component of the project. Details on these accounts, as well as on auditing andsupervision procedures to be followed, are applicable to all project components and are therefore set outin the main text of the overall project documentation.


53. The Water and Sanitation Department will provide to the PCU management quarterly inputs forprogress reports showing the status of implementation of the Water and Sanitation Component, includingsummary information on procurement contracts, in a format acceptable to the Bank. Specific reportingelements for the Water Sanitation Component include the following project information and performancemonitoring indicators:

* An updated Component Procurement Plan, detailing the names of municipalities, type of repairworks to be carried out, description of current system status and damage, type and cost of worksenvisaged, value of design and supervision contracts

* Procurement information for civil works contracts: number of contracts let, all applicable contractprocurement dates (invitation to quote, evaluation, award, signature, start of works, current worksprogress, expected works completion), progress payments made to date, name of contractors

* Procurement information for goods and consultant services* Copies of the credit agreements entered into by the RS Govemnment with each municipality, detailing

repayment modalities* Copies of the time-bound programs developed by each benefiting municipality, showing the planned

future water charges and the expected increase of revenues- Assessment of the size of population benefiting from the works, including the degree of service

improvement• Assessment of the labor impact caused by civil works financed and carried out to date

Agreements Reached

54. During Credit negotiations, the following agreements were reached regarding the Water andSanitation Component:

- Agreement on the specific municipalities to be included for financing by the Bank.* Agreement that, within six months after effectiveness of the Credit, every municipality under this

Component will be required to submit to ZVRS a time-bound program for raising water charges andincreasing collections of billed charges to a level that would permit recovery of operating costswithin three years and recovery of all costs, including capital investments, within seven years.

• Agreement that the RS Government, through ZVRS as its agent, would make available Bank andother donor funding to municipalities on the basis of credit agreements, covering the cost of urgentworks and of refuse collection equipment. The onlending terms would be 30 years maturity at zerointerest including seven years grace.

* Agreement that the submission of time-bound programs for raising water-related revenues would be acondition of effectiveness of the credit agreements between RS and each municipality.

* Agreement on the staffing and maintenance of the PIU at the Banja Luka office of ZVRS.• Agreement on the staffing of the Water and Sanitation Department within the Project Coordination

Unit for the project.* Agreement on reporting requirements specific to the Water and Sanitation Component, as set out

above.

Attachments:Implementation Schedule -Water and Sanitation ComponentProcurement Plan - Water and Sanitation ComponentDescription of Urgent Works by MunicipalityDistribution Plan for Refuse Collection EquipmentUrgent Studies in Water and SanitationOrganizational Chart of ZVRS


Attachment 1: Implementation Schedule - Water and Sanitation Component

TASKS RESP. month month 2 month 3 month 4 month 5 month 6Appoint staff of PIU in ZVRS Banja Luka ZVRS= = = = = = = = = =Appoint staff of Water d Sanit. Depart. PCUlt

WDoc

Purchase and install of fice equipment in WDSelect and mobilize expatriate advisor to MID WD=Y= = = = Establish auditable project accounts & PCUZVrecords a rDevelop detailed component nig pl. schedule ZVRSURGEUT WORKS SE I __ __ _

Prepare Terms of Ref. for consuptant- ZVRSengineers_ _Invite bids from at least three consultants ZVRSEvaluate bids, award consultant contracts ZVRSConsultants to complete designs, bidding consult,docs.Pre-qualification of contractors WD* * * -_ = _ =Invite bids for first urgent works contracts ZVRSEvaluate bids and recom end awards ZVRSAward and sign contracts, make advance WDsupaym Construction of works contract. c equipment splieMunicp and RS Govt. sign credit agreemnts. Imun.lRS = = CONSTRUCTION SUPERVISIONPrepare termis of reference for supernsors ZVRSInvite bids from st lIste dr consultants ZVRSEvaluate bids, award con silant contracts ZVRSSupervise construction activities superv.GwOODSPROCUREMENT =

progras ______ | 1 Quearterl reportingat theiBiatink, Widig VRdotes.

Invite bids WD = = =_7Evaluate bids, award andsign contracts Ws o t e g r t p TDelivery of office equipment, vehicles supplier l d o th d IDelivery of refuse collection equipment supplier STVDES__I I I I I F r XPrepare termsofrTeference for studies ZVRS l Prepare shortlist of consultants ZVRS - _l l l l IInvite bids from shortlisted consultants ZVRS Bk wu b c o aEvaluateids, awardandsigncontracts ZVRSl_lCarry out studies consult.l l l

REPORTING I = Municipalities deliver cost recovery municp.I I l l l l I

prograins I I Quarterly reporting to the Bank W __Notes:T'he above accelerated implementation schedule is based on the experiences gained during the parallel 1996 project carrdedout in the Federation of Bosnia and Herzegovina. Actual imnplemnentation dates will depend on the date of IDA Crediteffectiveness and availability of donor cofumacing,Component supervision through the World Bank would be carried on a continuous basis through staff of the Resident Missionin Sarajevo.


Attachment 2: Procurement Plan - Water and Sanitation Component

Package Description Units Total Procu- Invita- Submis- Sign- Comple-Cost in rement tion to sion of ing of tion of

US$000 Method Bid/ Bid/ Con- PackageQuote Quotes tracts

URGENT WORKS

(works for the 18 municipalities 3,000 SNCBbe procured in 4 batches) 190 FA

14.070 NBFTotal of al packages17.260

REFUSE COLLECTIONEQUIPMENT

I Compacting truck (15 cbm) 2 240 Is2 Compacting truck (15 cbm) 4 300 IS3 Container truck (5 cbm) 8 600 NBP

5 Containers 140 140 IS6 Containers 175 174 NBP7 Spare parts lump sum 220 NBP

Total of all packages 2.514

OFFICE EQUIPMENT, VEHICLES

8 Computers and supplies 10 30 IS

9 Drawing equipment lump sum 20 IS10 Office furniture lump sum 20 ISi i Vehicles ; 95 IS

Total of al 165packages

SERVICES

12 Engineering, supervision 200 CS13 Engineering, supervision 835 NBP14 Other consultant services 590 CS15 Other consultant services 523 NBP

2.148Total all contracts

RECURRENT COSTS againstlump sum 50 invoices

GRAND TOTAL

WORKS .17,260GOODS .2,679SERVICES .2,148RECURRENT COSTS .S0

TOTAL PROCUREMENT .22,137

Notes:SNCB Simplified National Competitive BiddingFA Force AccountIS International ShoppingCS Consultant selection according to standard Bank guidelines which shall include both competition and

sole sourcing. Sole sourcing would be justified in each case.NBF Not Bank-financed


Attachment 3: Description of Urgent Works by MunicipalityMunicipality Description of Works Estimated Costs (USS)

Year I Year2 Total

Banja Luka Water supply is insufficient due to lack of maintenance andreplacements. Repairs include:* Rehabilitation of ground water pumping, spare parts 450,000 450,000 900,000* Replacement of booster pumps for upper zone 420,000 420,000* Low cost water treatment 600,000 600,000* Leakage survey and repair of pipelines 1,870,000 1,870,000 3,740,000* Replacement of distribution pipelines 675,000 675,000 1,350,000* Rehabilitation of water treatment plant 1,315,000 1,315,000 2,630,000

9,640,000Brcko Water supply is insufficient due to lack of maintenance; there

are water quality issues. Repairs include:* Rehabilitation of wells, including replacement of pumps,

cleaning of filters, supply of bulk meters and spare parts 300,000 300,000* Leakage survey, repair/replacement of pipelines 200,000 100,000 300,000

600,000

Ribnik In this refugee return area, water supply is scarce, requiringconstruction of new water systems. Based on a mandatorydetailed study to be carried out, works are likely to include:* Reinforcement of distribution network 710,000 710,000 1,420,000* Supply of pumping equipment 20,000 20,000

1,440,000Modrica Sewage services require replacement of a pump:

* Supply and installation of sewage pump 20,000 20,000

Mrkonjic Grad Water supply is constrained by war damage. Repairs include:* Rehabilitation of water source facilities 100,000 100,000* Leakage survey, repair/ replacement of pipelines 200,000 200,000 400,000

500,000Novi Grad Water supply requires replacement of pumps:

* Rehabilitation of the wellfield pumping system 200,000 200,000

Sipovo Water supply and sanitation facilities are constrained by wardamage. Repairs include:

t Leakage survey and repair/replacement of pipelines 295,000 295,000 590,000* Expansion of distribution system to cover un-served areas 140,000 200,000 340,000

930,000Srp. Gradiska Weilfield requires urgent protection. Works include:

* Completion of sewer to protect Zeravica wellfield 200,000 100,000 300,000

Srp. Brod Water supply is insufficient due to lack of maintenance andreplacements. Repairs include:* Cleaning of wells at the source Brod to increase capacity 60,000 60,000* Leakage survey and repair/ replacement of pipelines 200,000 300,000 500,000* Rehabilitation of the sewerage pumping station 200,000 200,000

760,000Bijeljina Water supply is insufficient due to lack of wells and pumping

equipment, following influx of refugees. Works include:* Provision of water well pumping equipment, including

related electrical installations 140,000 140,000

Bratunac Water supply is insufficient due to lack of maintenance andreplacements. Repairs include:* Rehabilitation/ replacement of pumping & chlorinating

equipment 90,000 90,000


Municipality Description of Works Estimated Costs (USS)Year I Year 2 Total

Kalinovic Water supply is constrained by war damage. Repairs include:* Repair of damaged water supply facilities 300,000 300,000

Nevesinje Water supply is insufficient due to lack of maintenance andreplacements. Repairs include:* Rehabilitation of the raw water pumping station and

treatment plant 200,000 100,000 300,000* Leakage survey, repair/ replacement of pipelines 100,000 100,000 200,000

500,000Rogatica Water supply is insufficient due to lack of maintenance and

replacements. Repairs include:* Rehabilitation of water pumping station and chlorination 70,000 70,000

equipment

Sokolac Water supply is insufficient due to lack of maintenance andreplacements. Repairs include:* Reconstruction of water intake* Replacement of water pumps and pipes to raise capacity* Installation of chlorination equipment (Laze)

400,000 350,000 750,000

Srbinje Water supply is constrained by war damage. Repairs include:* Repair of war damaged to water supply facilities 111,000 110,000* Leakage survey, repair/ replacement of pipelines 200,000 200,000 400,000

510,000Tmovo Water supply is constrained by war damage. Repair works

include:- Repair of war damages to water supply facilities 200,000 200,000

Visegrad Water supply is insufficient due to lack of maintenance andreplacements. Repairs include:* Rehabilitation of water source (Dobrun)* Rehabilitation of pipeline (Dobrun - Straziste)* Rehabilitation of cholrination equipmente Leakage survey, repair/ replacement of pipelines

200,000 110,000 310,000

TOTAL COST 17,260,000


Attachment 4: Distribution Plan for Refuse Collection Equipment

Municipality Compacting Truck Container Truck (5 Containers (5 cbm) Containers (1.1(15 cbm) cbm) cbm)

Banja Luka 3 100Bijeljina 1 1 10 80Bratunac 1 10Brcko 1 1Cajnice 1 5Derventa 1 30Kalinovik 1 5Ribnik (Kljuc) 1 3Knezevo 1 2 8Kotor Varos 2Ljubinje 1 5Lopare 1 2Milici 1 10Mrkonjic Grad 1 3Novi Grad 6Pale IRogatica 1 20Sipovo 1 2Trnovo/ Lukavica 1 5Vukosavlje 2 5


Attachment 5: Urgent Studies in Water and Sanitation

Municipality Purpose and Scope of the Study Cost (US$)

Banja Luka Water supply network analysis. A study which has been carried out prior to 100,000the war requires updating, the need for replacement of pipelines needs to bedetermined. An assessment is required regarding a first phase leakage surveyand repair program.

Bijeljina Sewerage feasibility study. A study is to be carried out for a sewage 150,000collection, treatment and disposal system, including a phased investmentprogram. The first phase program would contain measures required to reducehealth hazards in this town of 50,000 inhabitants.

Brcko Feasibility study for investments to improve water quality. Brcko abstracts 60,000ground water from near the river Sava which does not comply with drinkingwater standards regarding contents of Fe, Mn, and N. There is no watertreatment plant. A study is required to develop solutions which would reducehealth risks from unpurified water. Possible solutions are the development ofother water sources or investment into a water treatment facility.

Brcko Study for new sanitary landfill development. Existing dumping sites in the 40,000Brcko are and adjacent Bijeljina are filled, a new common landfill site is tobe identified.

Ribnik Study for a new water system. The increase in population on the RS side of 150,000the Kljuc municipality requires the development of a new water supplysystem. A feasibility study is to be carried out for the water source,transmission, treatment requirements and distribution.

Petrovac Study for extension of the water supply system. This small settlement is 60,000expected to experience an influx of refugees. A feasibility study for theextension of the water supply system and a final design for a first phasedevelopment is to be carried out.

Srp. Brod Feasibility study on water source and water treatment. There are issues of 100,000water quality (Fe, Mn and N). Even after treatment, drinking water qualitycannot be achieved. A study is to determine the least-cost solution of eitherrehabilitation/ reconstruction of the existing facility, or development of newwater sources such as possibly from deep wells reported to be located in thevicinity with good water quality.

Gorazde Study for extension of water supply system. The Gorazde settlement within 80,000RS is expected to experience an inflow of refugees. A feasibility study forthe extension of the water supply system, with final designs for first phasedevelopment, is to be carried out.

Total Cost 740,000


Attachment 6: Organizational Chart of ZVRS

Ministry of Agriculture, Forestryand Water Management

Monitoring Boardof ZVRS ODP Zavod za Vodoprivreda (ZVRS) RS Directorate for

Management Board Water Supply and Sanitation, DIRECTOR Irrigation and Flood Controlof ZVRS

External Assistants ZVRS Head Office, Pale

Legal service Expert engineers (2)Electrical engineer Secretary (1)Mechanical engineer Interpreter (I)Hydrological engineerHyrdogeological expertTechnology expertConstruction expert

ZVRS Branch Office, Banja Luka Project Implementation Unit

Expert engineers (3) PIU DirectorAccountant (1) PIU EngineersInterpreter (1)

ZVRS Branch Office, Bijeljina

Expert engineers (2)

ZVRS Branch Office, Trebinje

Expert engineers (2)



ELECTRIC POWER COMPONENT

A. BACKGROUND

Electric Power Sector in RS'

1. The electric power sector in Republika Srpska (RS) is operated by Elektroprivreda RepublikaSrpska (EPRS). EPRS was established on June 2, 1992 as a public utility charged with generating,transmitting and distributing electricity, and required coal, in RS. EPRS is comprised of 11 autonomouspublic owned corporations, consisting of: (i) 5 generation companies, as follows: Trebinje Hydro PowerStations, Visegrad Hydro Power Station, Bocac Hydro Power Station, Gacko Thermal Power Plant andCoal Mine, and Uglievik Thermal Power Plant and Coal Mine; (ii) one transmission company:Elektroprenos at Banja Luka; (iii) and 5 distribution companies, as follows: Elektrokrajina Banja Luka,Elektrodistribucija Pale, Elektrodistribucija Doboj, Electrodistribucija Bijeljina, and ElektrodistribucijaTrebinje. See the attachment for an organizational chart.

Power Generation

2. The total installed electricity capacity in EPRS service areas is about 1,293 MW, of which 735MW are hydroelectric power and 558 MW are thermal power. Hydroelectric power plants includeTrebinje I (138 MW), Trebinje II ( 8 MW), and Dubrovnik (164 MW) on the Trebinje River, Visegrad(315 MW) on the Drina River, and Bocac (110 MW) on the Vrbas River. Thermal power plants includeUgljevik (300 MW) and Gacko (300 MW). In 1995, electricity generation in the territory of RS was2,355 GWh (or 56 percent of the total generation in Bosnia and Herzegovina), and electricityconsumption was 2,264 GWh. 2 Electricity exchange with the Federal Republic of Yugoslavia in 1995anmounted to imports of about 400 GWh and exports of some 327 GWh. Most of the plants have sufferedthroughout the war from the lack of maintenance on installed equipment. Rehabilitation of the Ugljevikthermal plant and associated coal mine has been started in 1996, financed by the United Kingdom underthe Bank-supported Emergency Electric Power Reconstruction Project (FY96).

Transmission System

3. The electric transmission system in RS includes two parts: western RS (the northem and westemparts of RS located around Banja Luka), and eastem RS (areas located east and south of the Posavinacorridor). These two parts are currently interconnected by 110 kV lines through the Posavina corridor.The transmission network and control system were largely damaged, particularly in those areas locatedclose to the former confrontation lines. The network includes 474 km of 400 kV lines, 315 km of 220kV lines, and 1,553 kh of 110 kV lines. Total capacity of the transmission substations is about 4,220MVA. Reconstruction of a 400 kV transmission line between Ugljevik and Banja Luka has been startedin 1996. A section of the 220 kV transmission line running through Central Bosnia from Trebinje to

For a detailed description of Bosnia's pre-war electric power sector, and for more infonnation on thepresent situation of the sector within the Federation of Bosnia and Herzegovina, refer to the projectdocuments of the Bosnia and Herzegovina Emergency Electric Power Reconstruction Project (FY96).This compares with a pre-war generation, in 1990, for all of Bosnia and Herzegovina of 13,090 GWh andan electricity consumption of 11,181 GWh.


Bihac has been completed. Completion of these lines, particularly the 220 kV line, will restore thelinkage between the RS and the Federation power grids. Repair of a 110 kV line between the cities ofVisegrad, Gorazde and Foca was completed in 1996. Restoration of this 110 kV transmission line willimprove the power ability in Gorazde.

Distribution Network

4. The RS distribution network includes Banja Luka, Pale, Doboj, Bijeljina, and Trebinje. Thenetworks include 67,884 km of overhead lines, 9,114 km of cables, and 3,129 MVA transformer stationscapacity. Many of the distribution networks have been significantly destroyed as a result of localizedfighting and lack of maintenance. Many transformer stations, civil works structures, telecommunicationsand maintenance equipments are also seriously damaged or destroyed. Rehabilitation of a part of thedistribution networks in Doboj, Bijeljina, Srebrenica, Gorazde, Foca and Mrkonjic Grad has been startedin 1996.

Power Sector Issues

5. There are two main technical issues relating to the electric power sector in RS. First, powergeneration sources are mainly concentrated in the eastem part of RS; however, the major load center islocated in the western part of RS. Existing transmission linkage between the eastern and westem parts ofRS is weak and cannot ensure reliable power supply from east to west. To ensure system reliability,improving cooperation between RS and the Federation of Bosnia and Herzegovina and developing powerexchanges between the Elektroprivredas of the Federation and of RS through a newly reconnected 220kV trans-country transmission system is critical.

6. Second, the distribution networks in RS seriously deteriorated due to insufficient spare parts andmaintenance over an extended period, particularly during the war. In addition, there are sharp increasesin illegal consumption of electricity. Illegal usage of electricity for space heating is common in urbanareas due to shortage of fuel and failure of the district heating facilities. In the Banja Luka service areaalone, 30,000 refugee-households currently are using electricity without meters. These cause overloadingof the distribution and subtransmission system and have led to an increase of non-technical losses to acurrent level of 13 percent.

7. Prior to the onset of the hostilities in 1991, a single enterprise, Elektroprivreda Bosnia iHerzegovina, was responsible for electricity generation, transmission and distribution over the wholeterritory of the country, covering the areas now constituting the Federation and RS. In 1992, this singleenterprise was broken up into public utilities serving the areas under majority Bosniak, Croat, Serbcontrol, respectively. The resulting legal issues are as follows: (i) the entities are currently operatingunder a mix of old and new legislation; new laws on electricity sector organization and operations areunder discussion but not yet adopted; and (ii) assets have nominally been transferred on the basis of therespective areas of service; however, the distribution of liabilities of the pre-war electric utility companybetween the successor enterprises has yet to take place.

8. As a consequence of the war, several economic and financial issues arise that are critical forsector rehabilitation. Electricity tariff levels in RS declined sharply during the war period. In 1991, theaverage tariff level was 0.24 dinars per KWh (7 i per KWh). By end-1994, the average tariff level haddeclined to 0.05 dinars per KWh (1.6 i per KWh). Since January 1995, the authorities made a number ofincreases, each quarter, which led to an increase in the average tariff level to 0.178 dinars per KWh (3.5 Eper KWh) by July 1996. This was followed by a further significant increase in October 1996 whichbrought the average levels to 0.268 dinars per KWh (5.4 d per KWh).


9. The financial situation of the RS power utilities seriously deteriorated during the war period.Billing and collection ratios were affected by the economic difficulties of the population, including inparticular the large numbers of refugees and displaced persons. Accounts receivable mounted during thewar and prospects of recovery are limited, especially since the authorities decided to allow for debtforgiveness in respect of billed amounts owed by households for years prior to 1995. While the averagetariff level has been raised substantially, actual collection ratios continue to be low, affecting internalcash generation of the utilities. Current levels of cash generation are inadequate to fully cover currentoperating and maintenance costs. The power entities will need the firm support by the RS Governmentto enforce collections and raise revenues to required minimum sustainable levels. The financial situationof the utilities would be further strained when settlements were to be made in respect of the inter-entitydistribution of liabilities.

10. Regarding institutional aspects, the existing situation of three largely separate power systems inBosnia and Herzegovina constitutes an obstacle to safe, efficient and economic operations. Measures areneeded to introduce a sector structure that would facilitate inter-entity coordination and cooperation and,over the longer term, attract potential (foreign) investors.

Reconstruction Objectives

11. Based on preliminary assessments, estimates by EPRS of total war-related damage in the powersector in RS equal about US$ 330 million. About 54 percent of this damage is in the distributionnetwork, 27 percent is in the transmission system, 14 percent in power plants, and 5 percent in coalmines. EPRS has prepared an investment program for reconstruction and plans to carry this out over thenext several years.

12. A preliminary review of the EPRS investment program shows that estimated investment needsappear to be on the high side. The core of priority investments should be more clearly defined for thenext several years. Besides ongoing urgent repairs, systematic rehabilitation of the existing power plants- the most capital intensive investments in the sector - requires considerable preparatory works andfeasibility studies. In order to review and evaluate the possibility of full scale rehabilitation of theexisting power plants and associated coal mines, the operational status of major civil works and of plantequipments needs to be reviewed, fuel requirements and sources of supply have to be specified, andenvironmental impacts and mitigation measures should be evaluated.

13. In the EPRS investment program, the economic and technical justification for efficiency andavailability improvements and! or life extension; the role of the rehabilitated units in meeting systemdemand; and the recommended technology for rehabilitation of the main civil works and generation unitsshould be defined in detail. Rehabilitation of the associated coal mines should ensure the critical coalsupply from the most efficient mines, in line with the fuel needs of the power plants. Under financingfrom the European Union, it is expected that a detailed study will be carried out through consultantswhich will review the investment proposals submitted by EPRS for the 1997-99 period.

14. Currently, some parts of Bosnia and Herzegovina lack power generation capacity, while othershave relative surpluses. Ensuring in the short term a sufficient and uninterrupted power supply to allareas will therefore only be possible by developing power exchanges between the two Entities. Thesituation in the Banja Luka area which is supplied from the eastern part of RS through unreliable 110 kVtransmission linkages could be significantly improved if power was also provided by the Federationpower companies through the newly commissioned 220 kV transmission linkage from the Federation intoRS.


15. The priority for the 1997 electric power rehabilitation program for RS should focus on 110 kVtransmission facilities, including transmission lines and substations, and on distribution networks toensure resumption of a reasonable level of power supply to the population, especially to cut-off areas andareas with serious power shortages. Rehabilitation of the 220 kV core system is well underway, whichwould facilitate the above-mentioned power exchange between the Entities. The 400 kV transmissionsystem is mainly for interstate transmission, rehabilitation of which should wait until a thorough studyhas been completed. The study should be carried out jointly by the Elektroprivredas of the Federationand RS, taking into account the new environment and the network reconfiguration.


Bank Strategy

16. The Bank is committed to assist the Federation of Bosnia and Herzegovina and RS to addressurgent reconstruction needs in the electric power sector through emergency-type projects. In theFederation, in July 1996, the Bank has a approved a US$ 35.6 million Credit for an Emergency ElectricPower Rehabilitation Project (FY96). Together with a large number of other donor partners supportngthis project, the Bank is assisting the Federation authorities to rehabilitate power generation plants,reconstruct transmission lines and substations, rehabilitate communication and control systems, rebuilddistribution networks, and supply spare parts and maintenance vehicles to the power utilities in theFederation.

17. The proposed Reconstruction Assistance Project is the first equivalent emergency projectdesigned to assist the RS authorities to address the most urgent and critical needs for repairs in the powersector. The second, larger project benefiting RS in the electric power sector would a Second ElectricPower Project, financing repairs to generation, transmission and distribution in both the Federation andRS. However, preparation of this second power project is not expected to be finalized prior to the end of1997. Therefore, the Electric Power Component under the proposed Reconstruction Assistance Projectwould enable the RS authorities to meet the most pressing needs for systems repairs early on.

Table 1: Three-Year Assistance Program in Electric Power and Coal Mining

(in US$ million) 3-4 Year 1996 1997 1998-1999Program Commitments Requirements Requirements1996-99

Electric Power 540 200 175 165Generation: hydro 60 20 30 10Generation: thermal 60 32 15 13Transmission: lines 65 34 20 11Transmission: substations/ dispatch 80 21 19 40Distribution 191 62 65 64Communications 6 0 3 3Transportation 23 0 10 13Spare Parts 30 21 5 4Engineering, Technical Assistance 25 10 8 7Coal Mining 74 21 25 28Equipment and Spare Parts 70 20 22 28Technical Assistance 4 1 3 0Total 614 221 200 193


18. The Bank's support to Bosnia's electric power sector is part of the agreed internationalreconstruction and rehabilitation program for electric power and coal mining of BH of about US$ 614million, to be implemented over three to four years, which the Bank has helped to develop in a jointeffort with the country and the donor community.' This program aims to (i) restore services to acceptablelevels; (ii) restore output of the lowest-cost coal mines to minimum required levels; (ii) improve thesector finances through increased billing and collections; and (iv) restructure the electric power and coalsectors. Donor financing is being sought for a variety of investments, as set out in Table 1.


19. In close cooperation with other main donors such as the European Union, the United States andthe United Kingdom, the Bank was able to attract substantial cofinancing from other smaller donors toassist the Federation of Bosnia and Herzegovina to start implementing the Emergency Electric PowerReconstruction Project during 1996. It is expected that the Bank's support for electric powerrehabilitation in RS would also result in securing donor cofinancing. Prior to the war, the Bank has beenheavily involved in the energy sector in Bosnia and Herzegovina (BH), notably in electric power,petroleum and natural gas. Through six different power sector projects alone the Bank helped finance thedevelopment of Former Yugoslavia's interconnected power system, the construction of hydro powerplants and dams, the establishment of an energy management system, and the installation of an airpollution control system for Sarajevo. Through this prior experience, the Bank is familiar with thetechnical, institutional and financial issues facing the two Entities within BH today and is in a goodposition make available technical advice and targeted financial assistance.


20. There are several lessons leamed from implementation of the Emergency Electric PowerReconstruction Project since mid-1996. These have been incorporated into the proposed project and areas follows:

* The electric power utility company of the Entity is in the best position to prepare technicalspecifications and bidding documents for equipment and carry out installation-related works;procurement of items itself may be centralized in a project unit of the Entity government.

* Close communication between the power utility and the Bank during the initial project phase ofspecification development and procurement is critical. The permanent presence of a ProcurementSpecialist in the Bank's Resident Mission in Sarajevo is a key factor for early project start-up.

* Donors supporting the project are to be invited to work through the electric power utility company ofthe Entity when designing and implementing repair works. At the least, donors must keep the utilitycompany informed on the status of their project activities to ensure full coordination.

* Local labor and contractors should be used as much as possible, when consistent with economy andefficiency in procurement, since they can be mobilized faster than foreign contractors for a given job,especially when work is to be done in widely dispersed areas.

* Different contracting methods should be used, such as tum key arrangements, to facilitate smoothand timely project implementation.




21. The Electric Power Component of the Reconstruction Assistance Project will complement, inpart, the other components of this project (agriculture, housing and water and sanitation) by securingreliable supply of electric power in the target area of the project around Banja Luka. Complementarityalso exists with respect to other Bank-supported projects that will benefit this area within RS.Furthermore, the project will help prepare and start up the subsequent envisaged Second Electric PowerProject which is scheduled for Board consideration by early 1998.



22. The objective of the Electric Power Component is to improve reliability, availability and qualityof electricity supply in the target area within RS.

Target Area

23. Given the emergency nature and therefore limited size of the Electric Power Component, theComponent needs to focus on a well-defined target area in order to deliver the impacts expected. Incoordination with the RS authorities, the area around Banja Luka has been selected as a priority area toimprove supply of electricity to industrial and residential users. Of Banja Luka's current residents ofsome 220,000 (1996), about 72,000, or one third, are displaced persons. In the entire region aroundBanja Luka, about one quarter of the 670,000 inhabitants are displaced persons.

24. The power transmission and distribution network in and around Banja Luka has sufferedextensive war-related damage and degradation, resulting in frequent network overload and outages. Inparticular, the 100 kV and 35 kV substations and lines, and the MV/LV distribution networks are in verypoor condition. Therefore, their urgent rehabilitation will greatly improve the living conditions of thedisplaced and other resident population in this area. Given the importance of this region for the RSeconomy, enterprises and industrial users would also benefit from such rehabilitation.

25. The power supply network in the Banja Luka area relies on four voltage levels, as follows below.The proposed rehabilitation effort would focus on 110 kV transmission facilities and distribution

networks.

26. 400/ 220/ 110 kV level. This represents supply to the Banja Luka 6 (400/ 110 kV) substationwhich practically feeds the entire service area. The 110 kV network comprises 470 km of overhead lineslinking the five 110 kV substations in Banja Luka, three 110 kV substations in Prijedor, and 110 kVsubstations in Novigrad, Dubica, Gradiska, Srbac, N. Topola, Laktasi, and Kotor Varos. At present, theelectric power transmitted throughout the area is almost entirely generated by the Ugljevik thermal powerplant in the eastern part of RS, and complemented by hydro power plants at the Vrbas River. By late1997, the 110 kV system in the Banja Luka service area will have been reconnected with the newlyreconstructed 220 kV Trebinje-Mostar-Jablanica-Jaice-Prijedor-Bihac trans-country transmission line,through the 220/110 Prijedor 2 substation. Power supply to Banja Luka from generating sources locatedin south-eastem and central parts of the Federation of Bosnia and Herzegovina could then be resumed.


27. 35 kV level. The 35 kV network comprising about 35 km of lines and four 35/20/10 substationsis designed to supply the industrial consumers in suburban and rural areas.

28. 10/ 20 kV level. This MV network comprising 967 km of lines and 405 secondary substations isfor supply of suburban and rural areas, for feeders linking switching substations of the urban center, aswell as for secondary MV/LV transformer substations.

29. Low voltage (0.4 kV) level. This network provides for electricity distribution to localconsumers.

Component Elements

30. To support the above objectives in the Banja Luka area, the Electric Power Component has thefollowing elements: (i) 110 kV transmission rehabilitation; (ii) 35 kV distribution rehabilitation; (iii)Banja Luka distribution repairs; (iv) telecommunication repairs; (v) testing equipment and maintenancetools; and (vi) engineering and management.

Element 1: 110 kV Transmission Rehabilitation

31. This element consists of (a) four substations with a total capacity of 200 MVA: Banja Luka 1(110/35/10 kV, 2x40 MVA), Banja Luka 2 (110/10 kV, 2x20 MVA), Banja Luka 3 (110/20/10 kV, 2x20MVA), and Banja Luka 4 (110/20/10 kV, 2x20 MVA); and (b) six transmission lines with a total lengthof about 113 km: Banja Luka 1--Banja Luka 2 (9.8 km), Banja Luka 1--Banja Luka 6 (double circuitswith a total length of 25.5 km), Banja Luka 6-- Prijedor 2 (45 km), Banja Luka 6--Banja Luka 3 (14.9km), Banja Luka 6--Banja Luka 4 (2.8 km), and Banja Luka 1--Laktasi (15.4 km). See Table 2 fordetailed costs.

Table 2: 110 kV Transmission Rehabilitation - Detailed Cost Table

Item Local Cost Foreign Cost Total Cost Foreign Cost as(US$) (US$) (US$) % of Total

Substation Banja Luka 1 520,000 1,970,000 2,490,000 79 %Substation Banja Luka 2 200,000 470,000 670,000 70 %Substation Banja Luka 3 100,000 370,000 470,000 79 %Substation Banja Luka 4 70,000 350,000 420,000 83 %Subtotal Substations 890,000 3,160,000 4,050,000 78 %Transmission Line Banja Luka 1--2 70,000 100,000 170,000 59 %Transmission Line Banja Luka 1--6 300,000 810,000 1,110,000 73 %Transm.Line Banja Luka 6-Prijedor 2 550,000 1,300,000 1,850,000 70 %Transmission Line Banja Luka 6--3 190,000 550,000 740,000 74 %Transmission Line Banja Luka 6-4 70,000 100,000 170,000 59 %Trasm. Line Banja Luka l--Laktasi 200,000 320,000 520,000 62 %Subtotal Transmission Lines 1,380,000 3,180,000 4,560,000 70 %TOTAL Cost (including contingencies) 2,270,000 6,340,000 8,610,000 74 %

Element 2: 35 kVDistribution Rehabilitation

32. The project would finance the rehabilitation of three substations with a total capacity of 20MVA: Sitari (35/10 kV, 1x4 MVA), Banja Luka 5 (35/20 kV, 2x4 MVA), and Dobrinja (35/20 kV, lx4


MVA); and a 35 kV line of 26 km interconnecting Banja Luka 1 and Dobrinja. See Table 3 for costestimates.

Table 3: 35 kV Distribution Rehabilitation - Detailed Cost Table


Substation Sitari 30,000 90,000 120,000 75 %Substation Banja Luka 5 250,000 570,000 820,000 70 %Substation Dobrinja 20,000 60,000 80,000 75 %Subtotal Substations 300,000 720,000 1,020,000 71 %oTransm.Line Banja Luka l--Dobrinja 300,000 670,000 970,000 69 %TOTAL Cost (including contingencies) 600,000 1,390,000 1,990,000 70 %

Element 3: Banja Luka Distribution Repairs

33. The MV and LV distribution networks are extremely deteriorated due to war-related damage,aging and high overloads. This element will cover the rehabilitation of the distribution network in themunicipal area of Banja Luka from the 20/10 kV secondary substations and step-down transformersubstations to LV distribution networks. This will include supply and installation of 4,000 householdmeters for consumers without meters in the Banja Luka urban area. See Table 4 for costs estimates.

Table 4: Banja Luka Distribution Repairs - Detailed Cost Table


MV network repairs 300,000 1,180,000 1,480,000 80 %LV network repairs 350,000 1,500,000 1,850,000 81 %Household meters (with installation) 10,000 220,000 230,000 96 %TOTAL Cost (including contingencies) 660,000 2,900,000 3,560,000 82 %

Element 4: Telecommunication Repairs

34. Prior to the war, the telecommunication system for the Banja Luka - Prijedor - Mrkonjic Graddistribution network provided voice communication, data acquisition, and tele-control functions for thenetwork. During the war, this telecommunication system was heavily damaged in the Banja Luka area.To retain control of the distribution network and to operate it efficiently, repair of this telecommunicationsystem is an urgent necessity. This Component element will include a turn-key package for repairing thedamaged telecommunication towers and replacing required equipment, valued at US$ 650,000. Inaddition, HF devices and a telephone exchanger would be financed valued at US$ 90,000.

Element 5: Testing Equipment and Maintenance Tools

35. Testing equipment and maintenance tools for transmission and distribution facilities are wom outand in very short supply. The component will cover a minimum amount of testing equipment andmaintenance tools for the Banja Luka service area. The total package is valued at US$ 580,000, detailedspecifications have been prepared.

Appendix 4Paze 9 of 21

Element 6: Engineering and Management

36. The project will finance required engineering services to prepare detailed designs and tenderdocuments and to manage and supervise all Component-related tasks. These services, valued at US$400,000, will be delivered and financed by Elektroprivreda RS through Elektroprenos and Elektrokrajina(see further below). To support engineering and Ct. aponent management within Elektroprenos andElektrokrajina, the project will finance the supply of basic office equipment, including computerhardware and software, as well as fax and copy machines, within a budget limit of US$ 50,000.Component Cost and Financing Plan

37. The total estimated cost of the Component is shown in Table 5. Physical contingencies of 3percent on goods and 7 percent on works are included. No price contingencies have been included giventhe expected short disbursement period of this emergency project. Donor-financed items under theintemational reconstruction program are tax-exempt in RS. More detailed cost estimates and furtherdescriptions of the items to be financed are provided in the attachment.

Table 5: Electric Power Component - Cost Summary

Component Element Local Cost Foreign Cost Total Cost Foreign Cost as(US$) (US$) (US$) % of Total

110 kV Transmission Rehabilitation 2,270,000 6,340,000 8,610,000 74 %35 kV Distribution Rehabilitation 600,000 1,390,000 1,990,000 70 %Banja Luka Distribution Repairs 660,000 2,900,000 3,560,000 82 %Telecommunication Repairs 0 740,000 740,000 100 %Testing Equipment, Maintenance Tools 0 580,000 580,000 100 %Engineering and Management 400,000 50,000 450,000 11 %TOTAL Cost (including contingencies) 3,930,000 12,000,000 15,930,000 75 %

38. Of the total Component cost, the World Bank would finance US$ 4.0 million equivalent. TheWorld Bank contribution would finance the import of transmission and distribution equipment and parts,testing and maintenance equipment, as well as office equipment. Table 6 shows the financing plan.While the Bank and other donors would finance the foreign cost element (US$ 12 million) of theComponent, the beneficiary electric power enterprises, Elektroprenos and Elektrokrajina of Banja Luka,would provide the funds required to finance the local costs (about US$ 4 million equivalent). Norwayhas also tentatively committed about US$ 5 million in support of this Component.


(in US$ '000) 110 kV 35 kV Banja Tele- Testing/ Engin. TotalTrans- Distri- Luka comm. Maint. and Finan-mssion bution Distr. Equip. Equip. Managt. cing

World Bank 1,660 310 1,400 0 580 50 4,000Elektroprenos 1,560 0 0 0 0 210 1,770Elektrokrajina 0 1,000 970 0 0 190 2,160Donors to be identified 5,390 680 1,190 740 0 0 8,000Total Component Cost 8,610 1,990 3,560 740 580 450 15,930

Note: Italy has committed US$ 2.34 million in support of this Component; this amount is yet to be allocted forspecific Component elements. Also, Norway has committed about US$ 5 million for this Component.


39. During the war, the cash flow of Elektroprenos and Elektrokrajina was severely affected by lowcollection ratios relative to billings. If the RS Govermment provides relief to electric power consumers inrespect of outstanding dues from the years 1994 and 1995, this would result in a write-off of receivablesin an amount of about US$ 2 million for Elektrokrajina, Banja Luka and about US$ 11 to 12 million forthe Elektroprivreda system as a whole. The activities and financial situation of both enterprises isdescribed further below.

40. Given the above situation, Elektroprenos and Elektrokrajina are expecting to raise the requiredfinancing for the local cost element through an increase in collection ratios, which would in turn dependupon Government support for enforcement actions in cases of non-payment. There is also an expectationof 1997 exports of surplus power of about 1,500 GWh to neighboring countries such as Yugoslavia,Croatia and Greece. Furthermore, due to the necessity of using force account to implement the local costelement, the actual level of net incremental local financing required would be substantially less than thevalue of the gross amount of about US$ 4 million. The major part of the civil works would be performedby already employed, but largely idle technical staff and work force whose salaries would have to be paidin any case. Nevertheless, in the event that Elektroprenos and Elektrokrajina are unable to raise thenecessary local funds, it has been agreed that the RS Government would be prepared to cover anyresulting financial gaps through grants or subordinated debt to these two enterprises.

Benefits and Risks

41. The proposed investments would repair damaged transmission and distribution networks whichwould restore a reliable supply of electricity to the Banja Luka area, a pre-condition for normal economiclife to return to this part of RS. A least-cost approach is being followed to ensure economy ofinvestments. By rehabilitating a transmission and distribution area that is connected to and would benefitfrom electricity exchange with the Federation of Bosnia and Herzegovina, the Electric Power Componentwould also provide an incentive for increased cooperation and commercial relations between the electricpower enterprises in both Entities.

42. The main Component risks are delays in its execution which could arise due to a shortage oflocal financing or a lack of external donor funding. To minimize this risk, provisions have been made forthe RS Government to cover any financial gap regarding local cost financing for required civil works toinstall the imported materials and equipment. Regarding mobilization of external donor financing, giventhe largely modular nature of the investments to be carried out, if donor financing could not be securedon time and in full, a reduced number of transmission and distribution lines and systems would berepaired initially. Further investments could follow if and when donor financing becomes available. Theproject presents no physical risks since reconstruction and rehabilitation of standard secondarytransmission and distribution facilities are involved.


43. The Reconstruction Assistance Project has been placed in environmental category B. All itemsprocured under the Electric Power Component which present an opportunity for environmentalenhancement will be specified accordingly, and item usage will be monitored during supervision toensure that there is no degradation to the environment.



Elektroprenos and Elektrokrajina

44. The main implementing agencies and beneficiaries under the Electric Power Component wouldbe Elektroprenos Banja Luka which is the transmission company for RS, and Elektrokrajina Banja Lukawhich is the distribution company for the Banja Luka area and the largest of its kind in RS.

45. ElektroUrenos Bania Luka (EPBL). EPBL was formed from the former Elektroprenos Bosnia iHerzegovina which was responsible for power transmission for the entire territory of pre-war Bosnia andHerzegovina. EPBL covers the territory of the RS, with sub-operations in Banja Luka, Visegrad andTrebinje, and maintains its head office in Banja Luka. EPBL is also responsible for imports and exportsof electricity, at present mainly with the Federal Republic of Yugoslavia.

46. Revenues from electricity sales are shared between the generating, transmission and distributionenterprises on the basis of a formula that, at present, results in an effective distribution in the proportions63:5:32. EPBL therefore receives ar6und 5 percent of the total revenue collections on the territory of theRS. As for the RS Elektroprivreda system as a whole, EPBL's financial situation has been seriouslyaffected by low billing and collection ratios, leading to substantial losses of about 39 million dinars (US$8.5 million equivalent) in 1995 and a further 29 million dinars (US$ 6.3 million) in the first six monthsof 1996. As a result, while EPBL's current collection levels appear adequate to cover cash operatingcosts, they do not enable generation of amounts necessary for adequate system maintenance andexpansion. A summary of EPBL's financial situation in 1995 and the first six months of 1996 isprovided in Table 7.

Table 7: Elektroprenos Banja Luka: Summary of Financial Indicators

(Dinars Million) 1995 1996 (Jan-June)Revenues 11.21 7.80Cash Operating Expenses 1.81 2.13Other Expenses (Maintenance, 28.31 34.42Investments)Total Expenses 50.12 36.96Net Income! (Loss) (38.91) (29.17)

Current Assets 6.81 15.93Current Liabilities 27.47 47.46Fixed Assets 1,138.80 1,120.50Debt/Equity Ratio a/Current Ratio 0.25 0.34

a! Distribution of medium to long term liabilities among Federation and RS power entitiesnot settled as yet.

47. Elektrokraiina Bania Luka (EKBL). EKBL is responsible for power distribution in the BanjaLuka area, covering Banja Luka as well as the municipalities of Prijedor, Gradiska, Kozarska Dubica,Novi Grad, Mrkonjic Grad and Pmjavor. It is the largest power distribution company in RS,accountingfor 27 percent of total sales in RS. The company has about 1,200 employees. In 1995, it wassupplying electricity to about 153,000 domestic consumers; 8,000 commercial establishments; 540 publicsector consumers; and 150 industrial customers.


Table 8: Elektrokrajina Banja Luka: Summary of Financial Indicators

(Dinars Million) Esfimates Projections1995 1996 1997 1998

Revenues 16.81 49.32 72.52 109.62Cash Operating Expenses 14.24 27.62 50.68 109.62Other Expenses 19.50 36.00 40.00 0Total Expenses 33.74 63.62 90.68 109.62Net Income/(Loss) (16.93) (14.29) (18.16) 0

Current Assets 787.10 820.12Current Liabilities 619.11 645.60Fixed Assets 408.27 391.59Current Ratio 1.27 1.27DebtlEquity Ratio a/

a/ Distribution of long-term liabilities among Federation and RS power entities not settled as yet.

48. EKBL's financial situation has suffered during the war period. Billings declined from a level ofaround 2,470 million dinars (US$ 70 million equivalent) in 1991 to around 40 million dinars (US$ 12million) in 1995, of which only about 17 million dinars were collected. Subsequently, billings haveimproved in 1996 to about 111 million dinars (US$ 24 million), reflecting the five-fold increase in theaverage tariff level, with an expected collection of about 50 million dinars (US$ 10 million) or acollection ratio of about 42 percent. Although this represents a considerable improvement in collectionrates, at these levels cash collections are inadequate to cover EKBL's total operating expenses. Asummary of EKBL's financial situation is provided in Table 8.

49. EKBL is projecting electricity sales to increase from about 610 GWh in 1995 to about 900 GWhin 1997 and 990 GWh in 1998. Average tariffs are expected to remain at around 0.268 dinars/KWh(5.4c/KWh) in 1997 and to increase to 0.31 dinarslKWh (6.2c/KWh) in 1998. On this basis, EKBL isexpecting to reach operating cost break-even in 1998.


50. Elektroprivreda of Republika Srpska (EPRS) would have primary responsibility for the executionof the Electric Power Component. A Project Management Group (PMG), consisting of experienced stafffrom EPRS, Elektroprenos and Elektrokrajina, will be set up in Banja Luka under EPRS's supervisionand be responsible to organize and supervise the rehabilitation of the transmission system anddistribution networks in the Banja Luka area. The PMG would be directed by the General Director ofEPRS, and assisted by a Technical Director of Elektroprenos on transmission, and Technical Director ofElektrokrajina on distribution. The office of the PMG, responsible for day to day project management,engineering, coordination and supervision, will be established in the Elektroprenos office building inBanja Luka. The PMG would receive cross-support from Elektroprenos' and Elektrokrajina's relateddepartments in selected areas, such as engineering and technical support, legal matters, budgeting,accounting, disbursement, man-power allocation, and operational support.

51. The implementation of the 110 kV transmission subprojects (Banja Luka I substation, andtransmission lines Banja Luka 1--Banja Luka 6, Banja Luka 6--Prijedor 2, and Banja Luka 6--Banja Luka3) would be the responsibility of Elektroprenos. The implementation of the 110 kV transmissionsubprojects (Banja Luka substations No. 2, 3 and 4, and transmission lines Banja Luka 1--2, Banja Luka6-4, Banja Luka l--Laktasi), the 35 kV subproject, and the Banja Luka distribution networks would be


the responsibility of Elektrokrajina. The telecommunication component would be jointly implementedby Elektroprenos and Elektrokrajina.

52. The cross-sectoral Project Coordination Unit in the RS Ministry of Finance will open an ElectricPower Department. This Department will be composed of two electric power engineers and will operatefor a duration of 18 months. The Department will be in charge of tendering and disbursement activities,through the PCU Financial Controller, as far as they relate to donor-financed goods and services.Preparation of procurement documents will be the responsibility of the PMG, while procurement

l processing, contract signing, contract disbursements as well as Component accounting and reportingwould be the responsibility of the Electric Power Department, supported by the PMG.

53. Equipment deliveries would be made direcdy to the warehouses of the power companies or toconstruction sites. Since the replacement of transmission and distribution equipment needs to be carriedout under operational conditions, installation and related civil works would be implemented throughforce account using technical staff and the workforce of Elektroprenos and Elektrokrajina. Theinstallation of major equipment will be carried out under the supervision of the respective supplier.

54. The Electric Power Component is designed to be implemented within a 24 month time frame.Preparatory activities by Elektroprenos and Elektrokrajina are well under way to finalize technicalspecifications and prepare bidding documents.


55. At current tariff levels of about 5.4c/KWh, EKBL and EPBL should be able to cover their cashoperating expenses provided that the collection ratios can be significantly improved over existing levels.Thus, for EKBL, a cash break-even in 1997 would require an improvement in the collection ratio toaround 56 percent, up from the current level of 42 percent in 1996. Covering of total operating costs,including depreciation, by 1998 would require a further increase in average tariffs from the 0.268 dinarsper KWh at present to around 0.31 dinars KWh (or 6.26 per KWh). At these levels, the electricity pricescharged to consumers -would still remain substantially below those charged in most OECD countries.

56. The RS Government would make available Bank and other donor funding for the Electric PowerComponent to the two beneficiaries, EPBL and EKBL. These funds would be on-lent at the IDA servicecharge over a 20-year maturity, including five years of grace. The amounts of Bank funding on-lent toEPBL and EKBL by the RS Government would be equal to the value of equipment imported for repairsto transmission (EPBL) and to distribution (EKBL) facilities, respectively.

Procurement

57. The proposed procurement arrangements are summarized in Table 9, the procurement plan forthe Electric Power Component is attached. In case of parallel financing by other donors, the applicableprocurement procedures of the respective financiers would be used.

58. Procurement of equipment and materials financed by the Bank will be in accordance with theBank's procurement guidelines applicable for emergency-type projects in Bosnia and Herzegovina. Forgoods and equipment, Limited International Bidding (LIB) and International Shopping (IS) procedureswill be used. IS will be used for procuring equipment and materials or standard specificationcommodities, estimated to cost between US$ 200,000 and US$ 1.0 million per contract. IS is based oncomparison of price quotations obtained from at least three suppliers in two countries. DirectContracting (DC) will be used for proprietary items, for reasons of compatibility and standardization.


National Shopping (NS) will be used for supply of a small amount of basic office equipment to supportproject engineering and management. Installation activities and related civil works, financed byElektroprivreda, would be done by force account.


Items Procurement Method (USS m) a/OTHER

LIB DC IS/ NS NBF TOTAL

1. Works1.1 Transmission works - - 1.56 1.561.2 Distribution works - - 1.97 1.97

Subtotal 3.53 3.53(0.00) (0.00)

2. Goods2.1 Transmission facilities b/ 1.66 - 5.02 6.68

(1.66) (0.00) (1.66)2.2 Distribution facilities b/ c/ 1.40 0.31 - 2.24 3.95

(1.40) (0.31) 0. 74 (1.71)2.3 Telecommunication equip. 0.7 0.74

0.8 (0.00) (0.00)2.4 Testing, maintenance equip. d/ (0.58) 0.58

(0.58) ~~~~(0.58)2.5 Office equipment d/ 0.05 0.05

(0.05) (0.05)12.00

Subtotal (4.00)

3. Services3.1 Engineering and project management - - - 0.40 0.40

(0.00)

TOTAL COMPONENT COST 3.06 0.31 0.63 11.93 15.93(including contingencies) (3.06) (0.31) (0.63) (0.00) (4.00)

NBF = Not Bank FimancedLIB = Limited International Biddinga Figures in parenthesis represent Bank fnancing.b LEB for steel structures (US$ 1.2 million), paint (US$ 0.46 million), and for MV/ LV equipment (US$ 1.4 million).c DC for proprietary items (US$ 0.31 million for overhaul of transformers).d IS for testing and maintenance equipment (US$ 0.58 million); NS for a office equipment (US$ 50,000).

59. The Bank will finance two contracts for goods related to transmission facilities, procured underLIB: one contract package valued at US$ 1.2 million for steel structures, and one contract for anti-corrosion paint (US$ 0.46 million). The Bank will also finance one contract package for the replacementof damaged MV and LV switchgears, to be procured under LIB, at a value of US$ 1.4 million. The Bankwill furthermore finance one package under Direct Contracting for the overhaul of transformers, valued atUS$ 0.31 million. -Two packages for transmission testing equipment and for distribution testingequipment, at a combined value of US$ 0.58 million, will be procured under IS. Any Direct Contactingbeyond the above-mentioned package will require prior Bank approval. Bank funds will also be used toprocure, under National Shopping, office computers and software, fax and copy machines, andmiscellaneous office supplies, valued at US$ 50,000.


60. The required capacity to carry out the above procurement activities will be concentrated in theProject Coordination Unit where an experienced expatriate procurement advisor, familiar with Bankprocurement guidelines, will be based. From the experience gained under the first emergency-typeelectric power project in the Federation of Bosnia and Herzegovina, carried out during 1996, the electricpower utility should be in a good position to prepare detailed technical specifications and biddingdocuments so as to assist the Project Coordination Unit. Post review of procurement actions will becarried out by Bank supervision missions, assisted by the Procurement Specialist in the Bank's ResidentMission in Sarajevo who will also carry out the prior review of packages going to Direct Contracting.Post review monitoring of procurement will furthermore be facilitated through quarterly reporting to theBank.

Disbursements

61. The disbursement plan is given in Tables 10 and 11. Disbursements are expected to becompleted within a period of two years from the date of effectiveness. The Bank Credit would financethe categories of expenditures outlined in Table 12. Further details on disbursement procedures areprovided in the main text of the overall project.


Component Elements CY 1997 CY 1998 CY 1998 CY 1999 TotalQ3/4 Q1/2 Q3/4 Q1/2




CY 1997 CY 1998 CY 1998 CY 1999 TotalQ3/4 Q1/2 Q314 Q1/2





1. Goods 3,800,000 100% of foreign, 100% of local (ex-factorycost), and 85% of local expenditures for

other items procured locally2. Unallocated 200,000TOTAL (incl. contingencies) 4,000,000



62. Separate and auditable accounts would be established by the PCU for expenditures within theElectric Power Component of the project. Details on these accounts, as well as on auditing andsupervision procedures to be followed, are applicable to all project components and are therefore set outin the main text of the overall project documentation. In addition to standard auditing requirements forproject records, the financial statements of Elektroprenos Banja Luka and Elektrokrajina Banja Lukawould be audited annually by independent auditors under terms of reference acceptable to the Bank.

63. The Electric Power Department will provide to the PCU management quarterly inputs forprogress reports showing the status of implementation of the Electric Power Component, includingsummary information on procurement contracts, in a format acceptable to the Bank. Specific reportingelements for the Electric Power Component include the following project information and performancemonitoring indicators:

* Procurement information for electricity equipment: number and value of contract packages; detailson key procurement steps and dates, expected completion dates for installation

* Number and qualification of staff employed within the Project Management Group in Elektroprenos* Number and cost of work force carrying out the civil works for installation of equipment

3 Detailed progress maps showing areas and extent of repairs of transmission and distribution networks. Assessment of the Component impact: number of consumers benefiting, degree of service

improvement* Data on electricity charges, collection rates, total revenues, and coverage of operating and

maintenance costs, both for Elektroprenos and Elektrokrajina Banja Luka

Agreements Reached

64. During Credit negotiations, the following agreements were reached regarding the Electric PowerComponent:

* Agreement that, in the event that Elektroprenos and Elektrokrajina are unable to carry out and financethe local cost element of this Component in a timely manner, the RS Government will cover anyresulting financial gaps through grants or subordinated debt to these two enterprises

* Agreement that the RS Government would make available Bank funds to Elektroprenos andElektrokrajina through on-lending at the IDA service charge over a 20-year maturity, including fiveyears of grace.

* Agreement on the staffing and maintenance of the Electric Power Department within the ProjectCoordination Unit for the project

* Agreement on the staffing and maintenance of the Project Management Group within ElektroprenosBanja Luka

* Agreement on reporting requirements specific to the Electric Power Component, as set out above,including submission of annual audits of the financial statements of Elektroprenos Banja Luka andElektrokrajina Banja Luka, carried out by independent auditors under terms of reference acceptable tothe Bank.

Attachments:Procurement and Implementation Plan - Electric Power ComponentOrganizational Chart of Elektroprivreda RS


Attachment 1: Procurement and Implementation Plan - Electric Power Component

| Major Activities ScheduleProcurement Nature of Total Method Submission Award! Completio

Package Package Cost of Of Signing ofand Estimated Procurement Bids/Prop of Package

Quantities (mS s . Contractmillion).

A. TransmissionA-01 Works a)Substation Equipment 1.56 Force

Installation Accountb)Reconstruction (by

of transmission Elektroprenos)lines and towers

c)Related civil worksA-02 HV circuit a)SF6 Circuit breaker 0.65 Donor's

breakers 110 kV, 2000 A, 31.5kA Method9 pcs (or IS)

b)Oil circuit breaker110kV, 1250A, 31.5kA4pcs

A-03 Disconnectors a)Disconnector 110 kV, 0.41 Donor's1250 A, 31.5 kA, 24 Method

pcs (or IS)b)Disconnector 20 kV,

200-630 A, 104 pcsA-04 Current/ a)Current transf. 110 kV 0.37 Donor's

voltage 2x150/1/1/1 and Methodtransformers 2x300/1/1/1, 36 pcs (or IS)

b)Voltage transf. 110 kV110/43/0.1/43/0.1/4321 pcs

A-05 Metal oxide a)Metal oxide surge 0.08 Donor'ssurge afresters arresters 110 kV, 10 kA Method

20 pcs (or IS)b)Metal oxide surge

arresters 35kV, 10 kA,8 pcs

c)Metal oxide surgearresters 10 kV, 10 kA6pcs

A-06 AC/DC Battery 220 V DC 0.21 Donor'sauxiliary AC supply 3x380/220 V Methodpower DC supply 220 V (or IS)supply 4 sets


A-07 Protection, 110kV and 35 kV 0.55 Donor'scontrol, Methodmeasurement (or IS)andremote

control

A-08 Steel Steel structure 1.20 LIBstructure (deep hot Zinc steel),

773t

A-09 Paint for Paint preparation 0.46 LIBanticorrosio Basic paint, 26 t

n protection of Final paint, 13 tsteelstructure

A-10 Conductors, a)Conductor ACSR 1.01 Donor'sground wire 240/40, 150/25, 95/15 Method

50/8, 150/25, 35/6 and (or IS)25/4 nmu2 , 359 t

b)Ground wire50 mm2

, 46 tA-lI Overhead ground a)Overhead ground wire 0.77 Donor's

wire with with optical fibres Methodoptical (OPGW), 92.7 km (or IS)

fibres(OPGW) b)Accessories for OPGW321 pcs

c)Multiplex system forOPGW, 8 pcs

A-12 Insulators a)Insulators 110 kV 0.37 Donor's(U 120 BS) Method19,325 pcs (or IS)

b)Insulators 20 kV3,290 pcs

A-13 Hardware Strings and connections 0.60 Donor'sfor transmission lines and Methodsubstations lot. (or IS)

B. Distribution

B-01 Works a)Equipment installation 1.97 Forcefor substations and Accounttransformer stations (byb)Works on distribution Elektrokrajina

lines and poles )c)Related civil works

B-02 20(10) /0.4 kV a)Distribution 0.41 Donor'sdistribution transformer Methodtransformers 20/10/0.4 kV 630 kVA (or IS)

and 100 kVA, 68 pcs


B-03 Transformers Power transformers 0.31 DC(overhaul) 110/20/10 kV and

35/20/10 kV,6pcs:"ELTA" Poland (2 pcs);"Rade Koncar" Croatia (1pcs); "Energoinvest" ofRS (3 pcs) I

B-04 MV and LV a) 35 and 20 kV 1.4 LIBequipment switchgears, 38 pcs

b) switchgear-3WZ+lTr,20 kV, 23 pcsc)LV Switchgears-8outlets, 400 A, 23 pcs

B-05 LV Circuit breakers 0.06 Donor'sautomatic DU 1,000 A, 380 V Method

circuit 40 pcs (or IS)breakers

B-06 MV/LV a)Cables 20 kV, 20 km 0.71 Donor'soverhead cables b)Cables 1 kV, 84 km Method

c)Signalling cable, 20 km (or IS)d)Earthing lot

B-07 Transformer oil 55 t 0.11 Donor'sMethod(or IS)

B-08 Concrete and a)Concrete poles (9-12 0.73 Donor'swooden poles m), 2,000 pcs Method

b)Wooden poles (9-12 (or IS/NS)m)1,770 pcs

B-09 Household Single phase ( 40-60 A) 0.22 Donor'smeters 4,000 pcs Method

(or IS)

C TelecommunicationC-01 Telecom- Turn key contract: 0.65 Donor's

munication a)Telecommunication Methodfor towers, 2 pcs (or IS)distribution b)Telecommunicationnetwork equipment 146-174

Mhz, (Motorola), 3 setsC-02 Telecom- HF devices (4 pcs) and 0.09 Donor's

munication telephone exchanger (I Methodfor pcs) (or IS)transmissionsystem _ J


D. Testing and Maintenance EquipmentD-01 Testing and a)Transmission testing 0.58 IS

maintenance equipment andequipment: maintenanceSpare parts equipment

Suppliers:-Tetex - Switzerland-WeidmOller - Germany-Pfisterer - Germany-Chauvin Arnoux -France-Motorola - USA

b)Distribution testingequipment &

maintenanceequipment

Suppliers:-Caty - France-Pfisterer - Germany-Bolzer - Germany-Findor - Germany-Bauer - Austria-Packard - USA-Norma - Austria-Wittmann GMBH I

E. Engineering and Project ManagementE-01 Engineering a)Detailed design 0.4 Elektroprenos

and Project b)Preparation of tender &Management documentation Elektrokrajina

c)Project managementand

supervisionE-02 Office Computer hardware and 0.05 NS

Equipment software, copy, fax andcopy machines

Notes:Actual procurement dates wil depend on the date of effectiveness of the proposed IDA credit and availability of donorcofnancing.

,IS International ShoppingNS National ShoppingDC Direct Contracting


Attachment 2: Organizational Chart of Elektroprivreda RS

Elektroprivreda Republika Srpska

Managing Board Controlling Board

I General Manager I Internal Audit

Hydro Power Plant Transmission Ent. Distribution Ent.on Trebisnjica Banja Luka Banja Luka

Hydro Power Plant Distribution Ent.on Dnna Doboj

Hydro Power Plant Distribution Ent.on Vrbas Bijeljina

Thenno Power PI. Distribution Ent.Ugljevik Pale

Thenno Power P1. Distribution Ent.Gacko I Trebinje



IMPLEMENTATION SUPPORT COMPONENT

A. PROJECT COORDINATION UNIT

Functions

1. The Project Coordination Unit (PCU) will have responsibility for the implementation of theReconstruction Assistance Project. In particular, it will have the following functions:

* Overall project coordination, monitoring and progress reporting* Direct implementation responsibility for the Agriculture Component and the Housing Component* Supervision of Zavod za Vodoprivreda, RS (ZVRS) on implementation of the Water and Sanitation

Component, and of Elektroprivreda RS (Elektroprenos and Elektrokrajina, Banja Luka) onimplementation of the Electric Power Component

* Procurement of all goods, works and services* Management of funds, verification of payment requests, proper maintenance of bank accounts and

project records* Audit of project accounts and preparation of the project completion report

Organization and Staffing

2. The PCU will be established under the RS Ministry of Finance in Banja Luka, under the overallsupervision of a Coordination Committee of the RS Government including the RS Prime Minister andthe relevant sector Ministries. The PCU would establish a liaison office in Pale to facilitate coordinationwith the RS Govemment as well as with foreign donors interested in cofinancing of the project.

3 . The PCU will be headed by a PCU Director who will report to the RS Government CoordinationCommittee. The PCU Director will be appointed by the RS Government. The PCU Director willappoint other local PCU staff.

4. The PCU will be composed of a Central Support Section as well as four sectoral departments, asfollows: Agriculture Department; Housing Departnent; Water and Sanitation Department; and ElectricPower Departnent. The structure and staffing of the PCU is set out in Chart 1.

5. The PCU's Central Support Section will have the following responsibilities:

* Procurement of office equipment, office vehicles and fumiture, and contracting of local PCU staff* Oversight over and intensive support to the procurement and contracting activities carried out by the

four sectoral Departments of the project* Management of all financial transactions relating to the project, including operating the Special

Account, preparing withdrawal applications for the World Bank, open letters of credit, managementof the local bank account, authorizing and making of project-related payments, maintenance ofcomprehensive financial project records, compliance with financial reporting requirements by theBank and other cofinancing donors, arranging for annual audits of project accounts


* Progress reporting to the Bank, donors and the RS govemnnent, including preparation of the progresscompletion report

* Liaison with the RS Ministry of Finance on issues of on-lending, cost recovery, taxes, etc.* Logistical support to the four sectoral Departments (office space, vehicles, drivers, communications)

6. The responsibilities of the four sectoral Departments of the PCU have been set out in detail in theAppendices on the respective project Components.

Chart 1: Project Coordination Unit

Coordination Committee of theRS Government Central Support Section

I Finance Manager (1)PCU Liaison Project Coordination Unit, Banja Luka - Expatr. Finance Adv. (1)Office, Pale DIRECTOR, Secretary Procurement Manager (1)

- Expatriate Proc. Adv. (1)Secretary (1)

Agriculture Department Housing Departnent. Head of Department (1) a Head of Department (1)

- Interpreter (1), Secretary (I) - Interpreter (1), Secretary (I). Livestock Manager (1) * Technical Manager (1)

- Expatriate Livestock Advisor (1) - Project Managers (2). Mechanization Manager (1) - Expatriate Housing Advisor (1)

- Expatriate Mechaniz. Advisor (1) a Accounts Manager (1). Agr. Econ,omistV Monitoring Expert - Database Technician (1)

(1) __________________________

Agriculturl Experts Housing Consultantsin Target Municipalities in Target Municipalities |

Water and Sanitation Departnent Electric Power Departnent. Head of Department (1) [ Head of Department (1)* Water Engineer (I) * Electric Power Engineer (1)

- Expatriate Monitoring Expert (1)l

Zavodza Yodoprivreda, RS Elektroprenos, ElektrokrajinaPIU, Banja Luka PMG, Banja Luka

7. The staffing of the PCU would be as set out in Table 1. Detailed costs for staff and equipmentare presented in Table 2 further below. The equipment required for the PCU to operate would be asfollows:

• Desktop PCs (Pentium), with laser printers, software (word processing, spreadsheet, projectmanagement): 12 sets

* Fax machines: 3 units* Photocopy mazhines: 3 units• Telephone system with 12 units


* 4 Wheel-drive vehicles: 3 units* Sedan vehicles: 5 units* Office fiumiture, as required* Incremental operating costs (office supplies, communications, car maintenance, gasoline, etc.)

Table 1: Staffing of the Project Coordination Unit

PCU Staff Local Duration Expatnate Duration(man-months) (man-months)

PCU Director 1 24Secretary 1 24Central Support SectionFinance Manager 1 24Finance Advisor 1 12Procurement Manager 1 24Procurement Advisor 1 12Secretary 1 24Agriculture DepartmentDepartment Head 1 12Interpreter 1 12Secretary 1 12Livestock Manager 1 12Mechanization Manager 1 12Agricultural Economist 1 12Housing DepartnentDepartment Head 1 18Interpreter 1 18Secretary 1 18Technical Manager 1 18Project Managers 2 18 x 2 =36Accounts Manager 1 18Database Technician 1 18Water and Sanitation DepartnentHead of Department 1 18Water Engineer 1 18Electric Power DepartmentHead of Department 1 18Electric Power Engineer 1 18

TOTAL Staff Input 408 24Notes: The staff input of expatriate advisors for the sectoral Departnents has been included into the cost of the respectivesectoral project Component. The PCU may have several drivers to be financed by the RS Government. The accountsmanager and the database technician in the Housing Department would also support the Central Support Section on fmancialrecord keeping and software support for implementation of the overall project. Staff changes (such as the addition of adedicated PCU office manager, if needed) would be agreed with the Bank during project implementation.

B. PROCUREMENT MONITORING AND AUDIT UNIT

Experience with the PMAU in the Federation

8. A Procurement Monitoring and Auditing Unit (PMAU) was established in November 1996 inSarajevo, with initial mandate and financing to cover activities within the area of the Federation ofBosnia and Herzegovina over a two-year period. The purpose of the PMAU is to monitor and audit the

Appendix 5Pare 4 of 7

procurement carried out by govemnmental implementing agencies, relating to reconstruction projects thatare funded by the Bank or financed by funds that are administered by the BanK for other donors. ThePMAU is fully operational, has been staffed with local auditors from the Institute of Accounting andAuditing in Sarajevo, and is receiving long-term technical assistance by three expatriate experts. PMAUstaff are visiting Project Implementation Units of the Federation to monitor their ongoing procurement aswell as audit the procurement decisions already made. The PMAU is being funded out of donor grants.

9. Under the procurement monitoring function, the PMAU monitors at least one full cycle ofprocurement and disbursement transactions carried out by each executing government agency. For thispurpose, an assessment of methods and practices used by the executing agency concerned in procuringgoods and services is being made. The purpose is to ensure that these practices are in line with theprocurement policies and procedures agreed in the applicable Credit or Grant agreements, and that theyare reflected in the tender documents issued.

10. In addition to procurement monitoring, the PMAU is carrying out ex-post annual procurementaudits for all projects financed or administered by the World Bank in FY96 and FY97. Also, specificaudits will be prepared on a case-by-case basis as requested by the Government and by the Bank.

Need for Procurement Monitoring and Auditing in RS

11. Since mid-1996, the Bank has approved ten emergency reconstruction projects in Bosnia andHerzegovina that benefit both the Federation of Bosnia and Herzegovina and Republika Srpska. Furtherprojects are planned to be presented to the Bank's Board of Directors for consideration which includeRepublika Srpska as a benefiting Entity. As was the case in the Federation earlier on, Republika Srpskahas not yet established public procurement monitoring regulations, institutions or procedures that wouldensure a fully adequate review of procurement decisions taken by governmental staff who areimplementing donor-financed reconstruction projects.

12. Therefore, under the proposed Reconstruction Assistance Project, the existing PMAU mechanismwould be extended into Republika Srpska. For this purpose the RS Government will enter into anagreement with a qualified foreign consultant finn to assist the RS authorities to set up and maintain theRS Office of the PMAU over a two-year period, under terms of reference acceptable to the Bank.

Outputs and Reporting

13. The following auditing reports will be produced and submitted by the RS Office of the PMAU tothe Bank and the RS Government:

* Inception Report, to be submitted not later than 4 weeks after the start of activities of the office* Monthly Progress Reports, to be submitted not later than one week after the end of each month• Mid-Term Report twelve months after the effectiveness of the Bank Credit for the project, providing

details on progress in monitoring and auditing activities, training of staff, as well as design ofsystems, policies, and procedures

* Final Report, including recommendations concerning the organization of procurement monitoringand auditing in RS, required staffing, operational policies and procedures to be followed

* Individual project audit reports upon request by the RS Government and the Bank


Staffing Required

14. The RS Office of the PMAU would be established at a location to be determined, probably in theBanja Luka area given the proximity of a number project implementation units to be covered by thePMAU. Under the project, World Bank resources would finance the following expenditures of thisOffice: five local auditors for a period of two years; one full-time expatriate advisor for a period of 21months; as well as office equipment and incremental operating costs. The project would also cover thecost of the first year-end financial audit of the overall project by expatriate auditors. See Table 2 fordetailed cost estimates.

C. COMPONENT COSTS AND FINANCING

Costs

15. The estimated cost of the Implementation Support Component is shown in Table 2. Physicalcontingencies of 3 percent on goods are included in the cost estimates. No price contingencies have beenincluded given the expected short disbursement period of this emergency project. Donor-financed itemsunder the international reconstruction program are tax-exempt in RS. The financing plan is shown inTable 3. Efforts would be made to secure additional donor grant financing for this Component.

Table 2: Implementation Support Component - Detailed Cost Table


Project Coordination Unit (PCU)Local PCU staff 1/ man-month 408 327,000Expatriate Finance Advisor man-month 12 15,000 180,000Expatriate Procurement Advisor man-month 12 15,000 180,000Computers set 12 4,000 48,000Fax machines 3 1,000 3,000Photocopiers 3 4,000 12,000Telephone system system 1 2,000 2,000Vehicles (4 wheel drive) car 3 25,000 75,000Vehicles (sedans) car 5 15,000 75,000Office furniture lump sum 30,000Incremental operating costs (2 years) cost! month 24 2,000 48,000Subtotal PCU 980,000Procurement Monitoring and Audit Unit (PMAU)Local auditors of PMAU "/ man-month 120 96,000Expatriate advisor to PMAU man-month 21 15,000 315,000Equipment for RS Office of the PMAU lump sum 20,000Incremental operating costs of PMAU cost/month 24 1,000 24,000First year-end financial project audit lump sum 45,000Subtotal PMA U 500, ooTOTAL Cost (including contingencies) 1,480,000

11 calculated at an average salary of USS 800 per montih.


Table 3: Financing Plan

(in US$ '000) PCU PMAU Total CostWorld Bank 800 500 1,300UK (Know How Fund): Expatriate Procurement Advisor 180 0 180Donors to be identified 0 0 0Total Component Cost 980 500 1,480

Procurement

16. The proposed procurement anrangements are summarized in Table 4. Most of the staff andequipment would be procured during the first 3 rmonths after effectiveness of the Bank Credit. In case ofparallel financing by other donors, the applicable procurement procedures of the respective financierswould be used.


Procurement Method (US$ m) a/IS NS OTHER NBF TOTAL

1. Goods1.1 Office equipment, vehicles b/ 0.20 0.06 - - 0.26

(0.20) (0.06) (0.26)2. Services2.1 Local staff and consultants c/ - 0.42 - 0.42

(0.42) (0.42)

2.2 Expatriate consultants c/ 0.54 0.18 0.72(0.54) (0.00) (0.54)

0.08 0.083. Recurrent Costs - - (0.08) - (0.08)

TOTAL COMPONENT COST 0.20 0.06 1.04 0.18 1.48(induding contingencies) (0.20) (0.06) (1.04) (0.00) (1.30)

NBF = Not Bank Financed; IS -Intemational Shopping; NS = National Shoppinga Figures in parenthesis represent Bank financing.b IS (S 0.2 million) for imported office equipment and vehicles, expected are four contracts. NS (US$ 60,000) for minor

office equipment purchased locally, expected are three contracts.c Consultant services consist of a number of individual consultants. Their services would be procured in accordance with

Bank guidelines which shall include h)oth competition and sole sourcing. The sole sourcing would be justified in eachcase.

Disbursements

17. The disbursement plan is given in Table 5. Disbursements are expected to be completed within aperiod of two years from the date of effectiveness. The Bank Credit would finance the categories ofexpenditures outlined in Table 6. Further details on disbursement procedures, including use of theSpecial Account and of Statements of Expenditures, are provided in the main text of the overall project.



CY 1997 CY 1998 CY 1998 CY 1999 TotalQ314 Q1/2 Q314 Q112





100% of foreign, 100% of local (ex-factory1. Goods 200,000 cost), and 85% of local expenditures for

other items procured locally2. Consultant services (technical

assistance, training, studies) 950,000 100%3. Recurrent costs 50,000 100 %4. Unallocated 100,000TOTAL (incl. contingencies) 1,300,000



LIST OF SUPPORTING DOCUMENTS IN THE PROJECT FILE

* Establishing Economic Foundations for a Viable State of Bosnia and Herzegovina: Issues andPolicies. World Bank, Washington (IECIT), December 1996

* Bosnia and Herzegovina: Small Farm Reconstruction and Development Report - FomnulationReport (Draft). Intemational Fund for Agricultural Development (IFAD), Rome, February 1997

* Emergency Reconstruction and Development Plan for Water and Sanitation in Republika Szpska.Lahmeyer & Co., Frankfurt/ Germany, December 1996

X Supervision Report, Bosnia and Herzegovina - Emergency Farm Reconstruction Project (ID No.44394). World Bank, Sarajevo, November 1996

* Supervision Report, Bosnia and Herzegovina - Emergency Housing Repair Project (ID No. 44459).World Bank, Sarajevo, December 1996

* Supervision Report, Bosnia and Herzegovina - Water, Sanitation and Solid Waste Urgent WorksProject (ID No. 44458). World Bank, Washington DC, August 1996

* Supervision Report, Bosnia and Herzegovina - Emergency Electric Power Rehabilitation Project(ID No. 44395). World Bank, Washington DC, November 1996

* From Emergency to Rehabilitation: Basic Data of the Cantons and Regions in Bosnia andHerzegovina. Italian Co-operation MAE, Sarajevo, October 1996

* Various sector assessment on housing, water and sanitation, and electric power by the InternationalManagement Group (IMG), Sarajevo

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