Document of The World Bank FOROFFICIAL USEONLY Report No: 29993 PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHEAMOUNT OFEURO66MILLION(USD84.3MILLIONEQUIVALENT) TO HIDROELECTRICA S.A. WITH THE GUARANTEE OF ROMANIA INSUPPORTOFTHEFIRSTPHASEOFTHEUS$l,OOO MILLION ENERGY COMMUNITY OF SOUTH EAST EUROPE(APL) PROGRAM DECEMBER23,2004 InfrastructureandEnergySector Unit EuropeandCentralAsia Region This document has restricted distribution andmaybe usedbyrecipients only inthe performance o ftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 15,2004) Currency Unit = Romanian Leu (ROL) ROL29,OOO = US$1 FISCALYEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ANRE National Energy Regulatory Authority (Romania) APL Adaptable Program Loan EBRD European Bank for Reconstructionand Development EC European Commission ECSEE EnergyCommunity of South EastEurope EIB European InvestmentBank EMP Environmental Management Plan ETSO EuropeanTransmission System Operators' Association EU European Union KfW Bank for Reconstruction(Germany) MEC MinistryofEconomyandCommerce (Government ofRomania) OP Operational Policy OPCOM RomanianElectricity Market Operator SEE South East Europe Transelectrica RomanianNationalTransmission Company TSO Transmission System Operator UCTE Union or the Coordination of Transmission of Electricity inEurope USAID UnitedStates Agency for InternationalDevelopment Vice President: Shigeo Katsu Country Director for Romania: Anand Seth Sector Manager: HenkBusz Task Team Leader: Kari Nyman FOROFFICZAL USEONLY EUROPEAND CENTRAL ASIA EnergyCommunityof South EastEurope(APL1) CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 2 3. Higherlevelobjectives to which the project contributes.................................................... 3 B. PROJECT DESCRIPTION ................................................................................................. 4 1. Lending instrument ............................................................................................................. 4 2. Program objective and Phases ............................................................................................. 4 3. Project development objective andkey indicators.............................................................. 6 4. Project components............................................................................................................. 6 5. Lessons leamed and reflected inthe project design............................................................ 7 6. Altematives considered and reasons for rejection .............................................................. 8 C . IMPLEMENTATION .......................................................................................................... 8 1. Partnership arrangements.................................................................................................... 8 2. Institutional and implementation arrangements .................................................................. 9 3. Monitoring and evaluation o f outcomes/results ................................................................ 11 4. Sustainability..................................................................................................................... 11 5. Critical risks and possible controversial aspects............................................................... 12 6. Loadcredit conditions and covenants............................................................................... 13 D APPRAISAL SUMMARY . ................................................................................................. 14 1. Economic and financial analyses ...................................................................................... 14 2. Technical........................................................................................................................... 15 3. Fiduciary ........................................................................................................................... 16 4. Social............................................................................................................. ...................16 5. Environment...................................................................................................................... 17 6. Safeguard policies............................................................................................................. 17 7. Policy Exceptions and Readiness...................................................................................... 18 This document has a restricteddistribution and may be used by recipients only in the performance of their official duties I t s contents may not be otherwise disclosed . Annex 1: Country. Sector and ProgramBackground ............................................................. 19 Annex 2: Major RelatedProjects Financed by the Bank and other Agencies ...................... 27 Annex 3: Results Framework and Monitoring ........................................................................ 28 Annex 4: Detailed Project Description ...................................................................................... 30 Annex 5: Project Costs............................................................................................................... 31 Annex 6: Implementation Arrangements ................................................................................. 32 Annex 7: Financial Management and DisbursementArrangements ..................................... 33 Annex 8: Procurement Arrangement ........................................................................................ 38 Annex 9: Economic and FinancialAnalysis ............................................................................. 41 Annex 10: Safeguard Policy Issues ............................................................................................ 46 Annex 11:Project Preparationand Supervision ..................................................................... 48 Annex 12: Documents in the Project File ................................................................................. 50 Annex 13: Statement of Loans and Credits .............................................................................. 51 Annex 14: Country at a Glance ................................................................................................. 53 Map IBRI) 33688 A. STRATEGIC CONTEXT AND RATIONALE 1. Countryandsectorissues The improvement o fthe performance of the energy sector is crucial to improve and sustain economic development inSouth East Europe (SEE). Power supply situation i s projectedto tighten significantly duringthe next few years and threatens to constrain economic activity and affect the quality o f life ifnot addressedwith determinedregional action. Apart from Turkey, investment over the past 10-15 years has been limited, with the average age o f capacity now in excess of thirty years. Significant capacity additions (of the order of 12,000-15,000 MW) and plant rehabilitations (of the order o f 8,000-9,000 MW) will be required during the next ten years, along with matching transmission and distribution system investments ifdemand i s to be met and severe power shortages and supply interruptions are to be avoided *. The SEE countries have acknowledgedthat solutions to these regional issues based on isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emerging demand and supply imbalances. Buildingupon their experience to cooperate in the power sector, inrecognition of potential gains from increased trade, and as part o f a wider movement to strengthen regional cooperation, the governments o f SEE countries and the European Commission (EC) signed the "the Athens Memorandum" -the Memorandum o f Understanding on the Regional Energy Market inSouth East Europe and its Integration into the EuropeanUnion Internal Energy Market - on December 8,2003 inAthens, Greece, whereby they formally expressed their commitment to what i s currently calledthe Energy Community of South East Europe (ECSEE) '. ECSEE's current membershipis as follows: 0 ECSEE's State Parties are Albania, Bosnia andHerzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia and Montenegro, and Turkey; 0 The United Nations InterimAdministration inKosovo, pursuant to the United Nations Security Council Resolution 1244, is anAdheringParty; 0 The State Parties and the Adhering Party together are ECSEE's RegionalMembers (also referred to as the ContractingParties); 0 EUMemberStatesAustria, Greece, Hungary, Italy, and Sloveniaareparticipants. Any other EUMember States can also request to becomeparticipants; and 0 Neighboringnon-EUMember Statescan request to participate as observers. Currently, Moldova i s participating as an observer. Negotiations are underway to convert the Athens Memorandum into a legally bindingECSEE Treaty (Section C.2) betweenthe European Commission (on behalf o fthe European Union) and the Contracting Parties. This project appraisal document reflects the December 3,2004 version o f the ECSEE Treaty. 1 Reviewofpower demandand supply inSouthEastEurope,WorkingPaperNo. 17, WorldBank, October2003 andseparateBankstaffestimatesfor Turkey. 2 UntilJune 2004 this initiativewas knownas the SouthEastEuropeRegionalEnergyMarket. 1 2. Rationalefor Bank involvement The Bankis participating inregional efforts to promote cooperation and integration inSouth East Europe and inter alia supports the Stability Pact. A strategy paper was preparedby the Bank in 2000, which lookedat the first decade o ftransition from a regional perspective andmapped a way forward for a more strategic regional approach. The Banki s an active participant and promoter o f the Athens process, at the invitation o f the EuropeanCommission. The Bankhas supported individual countries o f South East Europe intheir efforts to rehabilitate and restructure their power sectors through policy dialogue, technical assistance and financing since the early 1990s (insome cases even earlier). This deep country knowledge andparticipation inthe development o f ECSEE inthe Athens process including regional trade strategy work puts the Bankina strongpositionto provide regional lending,policy advice andtechnical assistanceto further support the Athens process for ECSEE - the proposed APL program is a key component of the Bank's support for the Stability Pact and the working partnershipwith the European Commission. InMarch2004, the Bankpublisheda strategy paper for energy trade inSouthEast Europe`. The framework paper outlines the Bank's vision for regional energy market development and defines its role insupporting the evolution o f regional energy trade. The framework elaborates the Bank's role insupportingpolicy reform andinstitutional development, and lending for power generation, transmission, distribution: 0 Promote a phased approach to market opening, starting with trading based on bilateral contracts and third partynetwork access, and moving to a more sophisticated model after the institutional framework i s sufficiently developed; 0 Apply regionalbenchmarkinginpolicy support work with individual countries and as a trigger for investment financing; 0 Develop a special regional instrument -the proposed ECSEE APL - and finance priority investments to support development o fthe regional market; e Analytical work to assess the economics o f increasingthe use o f gas inthe SEE countries and costs o f compliance with EUenvironmental standards; and 0 Complete a regional power Generation Investment Study, financed by the EC. Withinthis regional strategy, the Bank customizes the focus o f its policy support towards most critical aspects for the development o f an institutional framework for power market liberalization ineachcountry: 0 Albania: tariff reform, improvement o fpayments discipline, and strengthening of the social safety net; 3 TheRoadto Stability and Prosperity inSouth EastemEurope-A Regional Strategy Study, World Bank, March2000. 4 World Bank Framework for Development of RegionalEnergy Trade inSouth East Europe, EMT Discussion Paper No. 12, March 2004. 2 Bosnia and Herzegovina: payments discipline, industry restructuring, regulatory strengthening, and strengthening o f the social safety net; Croatia: industry restructuring; Kosovo: sector strategy; Macedonia: payments discipline and energy strategy; Montenegro: improvement o fpayments discipline, industryrestructuring and regulatory development; Romania: power market development; Serbia: energy legislation, regulatory strengthening, power industry restructuring; and Turkey: power market development. Inaddition, theBankwillworkwithselectedcountries oninstitutionalreforminthegassector, anddevelopment o fgas distribution concessions. A regionalinvestmentfacility for gas, similar to the proposed ECSEE APL, will also be considered. 3. Higher level objectives to which the project contributes ECSEE is an integral element o f the Regional Members' andthe European Commission's efforts for all states inSouth East Europe to have access to stable and continuous energy supply which they regard as essential for economic development and social stability. The creation o f an area without internal frontiers for energy contributes to economic and social progress and a highlevel of employment as well as balanced and sustainable development. These higher level objectives are expressed inthe ECSEE Treaty. All SEE countrieshavethe prospect o fEUmembership. Bulgaria andRomania expect tojoin in2007, andalso Croatia andTurkey are candidate countries. The countriesofWestern Balkans - the other Regional Members o f ECSEE - are potential candidates to accession (European Council inCopenhagen inDecember 2002). "The Thessaloniki Agenda for the Western Balkans: movingtowards European Integration", which was endorsed bythe EuropeanCouncil inThessaloniki inJune 2003, encourages the regionto adopt alegallybindingenergymarket agreement. Accordingly, the Member Countries and the Commission are resolved to establish integratedenergy markets inelectricity and gas based on a common solidarity and consistent with the rules applicablewithin the EuropeanUnion. The Stability Pact has made regional energy cooperation one o f its core objectives inits efforts to strengthen regional cooperationand to foster the conditions for peace, stability and economic growth inthe South East Europe. The Stability Pact has characterized ECSEE as a unique political chance for the SEE region, to consolidate reconciliation andprovide a power driver towards a more comprehensive economic andpolitical integration into the EuropeanUnion. The Bank supports regional efforts to promote cooperation and integration inSouth East Europe. ECSEE i s one of the most prominent o f current regional programs. The proposedAPL facility i s a key component of the Bank's support for the Stability Pact and the working partnership with the EuropeanCommission. 3 B. PROJECTDESCRIPTION 1. Lendinginstrument ECSEE is a regional program and it i s proposedthat the Bank investment support be provided usingthe adaptable program lending (APL)instrument, horizontally on a regionalbasis to support ECSEE's Regional Members(up to eight countries andKosovo) and vertically (each Regional Member can inprinciple receive support from more than one APL installment over the APL programperiod). TheAPL instrument, byvisibly committing substantial resources and complementing activities supported by other donors, would help ensure the availability o f adequate resources to fundpriority investments for a functioning electricity market. The APL instrument would enable the Bank to provide support ina flexible manner-when individual countries have met the policy triggers (country criteria under the Athens process) and when individual projects are ready to receive Bank support. All ECSEE Regional Members might not actuallyborrow under the APL program. However, countries would know up-front that they can rely on the Bank to support them inachieving the goals o fthe ECSEE ifthey meet specific eligibility criteria and ifthey need Bank support. The proposed size o f the APL lending facility is US$l,000 million, o fwhich EUR 66 million (US$84.3 million equivalent) would be approved to Romania under the proposedAPLl. The ECSEE APL i s detailed inAnnex 1(Section 1). 2. ProgramobjectiveandPhases The key objectives of the Energy Community o f South East Europe (ECSEE) are: 0 Create a stable regulatory and market framework capable o f attracting investment to the region ingas networks and power system so that all states inthe regionhave access to the stable and continuous energy supply that i s essential for economic development and social stability; 0 Establish integrated regional markets inSouth East Europe, closely linkedto the internal energy market o f the EuropeanUnion, and fully complying with the rules applicable withinthe European Union; 0 Enhance the energy security o f supply o f South East Europe and the EuropeanUnionby providing incentives to connect the Balkans to Caspian and NorthAfrican gas reserves; and 0 Improve the environmental situation inrelation to energy inthe region. The Member States are committing themselves under ECSEE inter alia to: 0 Implement the EC Directives 2003/54 (electricity) and 2003/55 (gas) o f the European Parliament and o fthe Council, June 26,2003, infull but with a delayed schedule for marketliberalizationcomparedto the schedule applicable to EUMember States; and 4 0 Progressively align their environmental standards to a highcommon level, including that all generating plants starting to operate after the entry into force o fthe forthcoming ECSEE Treaty comply with EC standards. 0 All Regional Members are also expected to accede to the Kyoto Protocol withinone year o f the Treaty's effectiveness. The Bank supports ECSEE ina number o fways, through active participation inECSEE's implementation organization (described inSection C.2); analytical work including the March 2004 framework paper, the ongoing generation investment study and the gasification study; and country-level policy dialogue and project work. The proposedregional investment and technical assistance support under the ECSEE APL is an integral element o f this comprehensive program o f support. ECSEE APL phasing and triggers are discussed inAnnex 1(Section 1) and summarizedbelow. They are directly linked to ECSEE and utilize both the horizontal and vertical features o f the APL instrumentina regional context: A country becomes eligible once ithas met ECSEE's basic entry conditions as they were defined inthe Athens Memorandum -the ECSEE APL requirements are that an electricity sector regulator and a transmission system operator have been established and are operational. It is currently expected that all Regional Members would meet this condition by mid-2006 at the latest. The beneficiary country o f APL1, Romania, already meets these initial conditions and i s eligible for Bank support under the ECSEE APL program; A country remains eligible for Bank support under the ECSEEAPL program as long as the country signs and ratifies the ECSEE Treaty and meets its key obligations underthe Treaty: (a) signs the ECSEE Treaty; (b) ratifies the Treaty; (c) establishes distributions system operators; and (d) opens its electricity marketto non-household customers. For a countryhorrower to be or remain eligible for Bank support under the APL program the Bank also needs to be satisfiedthat the countryhorrower has the ability to effectively participate inthe regional market. With this trigger, the Bank would reserve the right to defer or withhold ECSEE APL support incases where a country might have complied with the letter o f its ECSEE Treaty commitments but not have implemented or launched credible programs o f other critical measures that are needed for market participation such as, for example, reasonable tariffs, adequate bill collection, and systems for electricity market and power system operations. The Commission expects the ECSEE Treaty to be signed inmid-2005. The signingo f the Treaty is proposed to be applied as a trigger under the ECSEE APL program from January 1, 2006, andits ratification from January 1,2007. The current version o fthe ECSEE Treaty calls for the establishment o fdistribution system operators by January 1,2007, and for the opening o f the electricity market to all non-household 5 customers by January 1,200S5. It i s possible that inthe course o fthe final negotiations o f the ECSEE Treaty, these ambitious deadlines are adjusted - the Athens Memorandum contained evenmore aggressive targets which have since beenreviewed and adjusted. The target dates that will be applied as triggers under the ECSEE APL program will be those incorporated inthe final version o f the Treaty including derogations and subsequent modifications agreed by the EuropeanCommission andECSEE Regional Members. Along with the triggers, projects will have to meet standard Bankrequirements (including safeguards) andwill have to fit into the country programs (net o fpossible regional IDA). 3. Project development objective and key indicators The objective o f ECSEE APL is the development o f a functioning regional electricity market in South East Europe and its integration into the intemal electricity market o f the European Union, through the implementation o fpriority investments supporting electricity market and power system operations inelectricity generation, transmission and distribution andtechnical assistance for institutional/systems development and project preparation and implementation. The ECSEE APL program would be considered successful ifthe countries inthe region achieve their commitments under the Athens process and are able to: (a) develop a functioning electricity market including the agreed market liberalization targets; and (b) integrate it into the intemal electricity market of the EuropeanUnioninaccordance with the ECSEE Treaty. To accomplish this, the countries will have to continue ongoing restructuring and reformmeasures, buildup their institutions andimprove their power systems including interconnections so that regional trade can increase. The ECSEE APLl would establish the ECSEE APL facility and provide investment support and technical assistance to Hidroelectrica inRomania. Related technical assistance support to the electricity regulator ANRE, market operator OPCOM and transmission system operator Transelectrica is already being provided bythe Bank under the ongoing Electricity Market Project. The key performance indicators that will be used to assess the fulfillment o f the ECSEE APL program and ECSEE APLl projects interms o fresults and outcomes are presented inAnnex 3. 4. Project components Eligible ECSEE APL project components. The Bank's March 2004 framework paper concluded that significant investments inpower generation, transmission and distribution and technical assistance are required for a well-functioning power market. Priority investments and technical assistance would be financed under the ECSEE APL program so that the ECSEE Regional Members can effectively participate inthe regional electricity market: 5 This level ofmarket opening is a highly ambitious target- the EUMember Countries themselves were requiredto reach this target only by July 2004- and may well still be adjusted before the Treaty i s finalized. Inthe EUMember States, allcustomers includinghouseholds areto beeligible to choose their supplier by July 2007. InECSEE, this deadline i s currently set for January 2015 -beyond the ECSEE APLprogram. 6 0 Investments to ensure that ECSEE Regional Member meet the integration requirements o f UCTE - the Unionfor the Coordination o f Transmissiono f Electricity inEurope; 0 Investments to upgrade the capabilities of transmission system operators (TSOs) o f ECSEE Regional Members so that they can implement policy decisions to assureregional security o f supply. Examples o f such investmentsinclude: (a) upgrading load dispatch and real-time system stability andcontrol capabilities; (b) upgrading infiastructure/systems for electricity market administration; and (c) removing critical bottlenecks intransmissionnetworks and sub-stations; 0 Investment to restore operational capacity/flexibility o f critical generation facilities that provide ancillary services to TSOs, e.g. the proposedAPL 1investment to rehabilitate Hidroelectrica's Lotru Hydropower Station inRomania; 0 Investment inretrofits o f critical generation and/or transmission facilities to assure environmental compliance; 0 Metering and/or telecommunications programs designed to enhance revenue realization and/or coordination and communications capabilities o f distribution utilities so that they can more effectively participate inthe regional power market; and 0 A wide rangeoftechnical assistance, for institutional/systemsdevelopment andproject preparation and implementation, to support ECSEE Regional Members inenergy market design and implementation assistance, inter alia to ensure full compliance with the ECSEE frameworWEU directives and compatibility o fmarket designs for the supply of balancing services and/or ancillary services across SEE country frontiers; and engineering/environmental services for the preparation and implementation o f investment projects (including but not limitedto projects financedby the Bank under the ECSEE APL) for a functioning electricity market. APLl investmentprojectis the rehabilitation ofHidroelectrica's Lotruhydropower stationin Romania. The 510MW hydro power station will be rehabilitated into a reliable source o f ancillary services for several decades. Details are presented inAnnexes 4-6. 5. Lessonslearnedandreflectedinthe projectdesign Interms ofactual examples, the bestknownregionalpower market isthe Nordicpower market, knownby the name o f its operator NordPool. It operates inFinland, Norway and Sweden and part o fDenmark. Portugal and Spain have recently launched ajoint market, and regional power markets are also under development inSouthern Africa, South-East Asia and Central America, and they are under discussion inEastem and Western Africa. A key lesson learned from other markets elsewhere, including NordPool, and from the association o f EuropeanTransmission System Operators (ETSO) is that the progressive integration o f energy markets inSEE and the adoptiodimplementation of common security o f supply policies require close attention to be paid to the design and operation o f subsidiary electricity markets (e.g. balancing and ancillary services) which are best administered by Transmission System Operators (TSOs). ECSEE's implementation organization includes the SEE Transmission System Operators Task Force, which interacts with ETSO andUCTE to ensure smooth integration and coordination. The role of the ECSEE Task Force o f TSOs is critical inall phases o f ECSEE's development and operation. 7 Political commitment and adequate financial support are key ingredientso f successful reform programs. ECSEE's development is premisedon the political commitment o f the SEE countries as expressed inthe Athens Memorandum andthe forthcoming ECSEE Treaty, and it is backed byan exceptionally strongdonor involvement. The APL programhasbeendirectly linkedto ECSEE, with no additional conditionality. Investment component included inAPL1 is and components to be supported under subsequent APL installments will be o fproven design and streamlined approaches emphasizingturnkey contracting will be employed intheir implementation. 6. Alternatives considered and reasons for rejection The Bank supports the countries o f SouthEast Europe intheir efforts to rehabilitate and restructure their power sectors through regular single-country operations. This approach will continue and it was also considered for ECSEE but was rejected, infavor o f a regional approach to support ina visible and coordinated manner this ambitious regional program. The APL instrument gives the Bank the flexibility to match its JBRD and IDA commitments to the pace of its clients. The use o f a regular investment loan instrument would have requiredthe Bank to commit the full US$1.O billion APL amount upfront andwould similarly have required the borrowers to assume these debt obligations well ahead o f beingable to actually utilize the funds. All SEE countries would know up-front that they canrely on the Bankto support them in achieving the goals of the ECSEE when they meet specific eligibility criteria and when they need Bank support. Regional approach, andthe regular monitoring andregionalbenchmarkingthat will take place inthe ECSEE process, will provide higher publicity and awareness, peer support, and also peer pressurehncentives for countries to improve performance so as to avoid falling behind other ECSEE members. The use o f the APL instrumentalso enable to launch the ECSEE APL facility to support ECSEE aheadof theratification of the ECSEE Treaty and apply market liberalization targets as triggers infuture APL installments as such targets are agreed, including derogations and subsequent modifications that may be agreed betweenthe European Commission andECSEE Regional Members. C. IMPLEMENTATION 1. Partnership arrangements Firstand foremost, ECSEE is a partnership among the SEE countries. They have acknowledged that solutions to pressingregional issues based on isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emerging demand and supply imbalances. Second, ECSEE is a partnership betweenthe SEE countries and the European Union. The European Commission signed the Athens Memorandum as a participant and will also be a signatory to the ECSEE Treaty. Neighboring Austria, Italy and Greece signed the Memorandum as "political participants to the Athens process" and Hungary and Slovenia (which signed as observer^^^) have sincejoined the EUand become political participants. Finally, ECSEE i s a partnership between the SEE countries and the donors including the Bank. Financial institutions and bilateral donors include the EuropeanBank for Reconstruction and Development (EBRD), the EuropeanInvestment Bank (ED), the GermanDevelopment Bank 8 (KfW),the UnitedStates Agency for InternationalDevelopment (USAID), the CanadianAgency for International Development (CIDA), and France, Greece, Italy, and Switzerland. The region and the European Commission are currently negotiating to formalize their partnership into a legally bindinginternationalEnergy Community o f South East Europe Treaty (ECSEE Treaty). The Council o f the European Union authorized the Commission inJune 2004 to open suchnegotiations, on behalf o fthe EuropeanUnion. The negotiations started inJuly 2004. ECSEE's Ministerial Council concludedon December 13,2004 that there i s broad agreement on the substance o f the Treaty and directed their negotiators to conclude remaining details as soon as possible. The current time-table calls for the signing o fthe Treaty inmid-2005 and ratification i s expected by mid-2006. The Treaty i s proposed to become effective when the EuropeanUnion and a majority o f the Regional Members have ratified it. This schedule is reflected inthe proposed vertical triggers o fthe ECSEE APL, with 6-month contingency provisions: signing by end-2005 andratification by end-2006 (Section B.2). Upon accession to the EU, Regional Members (signatories o f the Treaty) will automatically cease to be Regional Members andbecome participants. As members o f the European Union, participants are requiredto meet more demanding electricity market liberalization targets than those set for ECSEE and they will remain eligible to borrow under the ECSEE APL facility. 2. Institutionaland implementationarrangements A comprehensive coordination and implementationmechanismhas beenestablished for the development o f ECSEE. The mechanism covers andbrings together political and administrative leadership, regulators, transmission system operators andother utilities, the European Commission, international financial institutions andbilateral donors: 0 ECSEE's MinisterialCounciltakes place annually with the participation o f the Ministers o f Energy o f the countries andthe Commissioner for Energy and Transport of the European Commission. The Council takes strategic decisions and gives guidance to ECSEE and, where necessary, formally reviews the conclusions o f other ECSEE bodiedmeetings including the Forum. Once the ECSEE Treaty i s ineffect, the Council will report annually on ECSEE's activities to the EuropeanParliament and to the Parliaments ofECSEE's Regional Members; 0 ECSEE's PermanentHigh Level Group i s composed o f representatives o f the Ministers of Energyo fthe countries and the European Commission. The group meets, when necessary, on the initiative o f the Commission and the Presidency in Office, inorder to prepare the Ministerial Council and to ensure the follow-up o f its decisions; 0 Two Task Forces have been established for ECSEE preparatory work and day-to-day coordination and cooperation: (1) the SEE Energy Regulators Task Force, which works closely with the Council o f EuropeanEnergy Regulators (CEER); and (b) the SEE Transmission System Operators Task Force, which interacts with the European Transmission System Operators (ETSO) andthe Union for the Coordination o f Transmission o f Electricity inEurope (UCTE); 9 ECSEEForummeets at least twice yearly. Itcomprises o frepresentatives o fthe governments, regulators andtransmission system operators o fthe countries, CEER, ETSO, UCTE, producing companies, consumers, the European Commission, the Stability Pact, and donors including the Bank; 0 Several donors support ECSEE (Section C.1). Donors are members o f the ECSEE Forum andusually the donor agencies also meet separately inconnection with the Forum meetings. The Stability Pact assigned the role o f coordinating the donors to the EuropeanCommission in2001. The Commissionretains the overall co-ordination, setting politicalhechnical goals and organizing donors. The Commission i s fundingan Athens Process secretariat, based inAthens, to support the process, inter alia, benchmarking and monitoring; and 0 The Ministerial Council, the Permanent HighLevel Group and the Forum are already operational and they would be recognized inthe ECSEE Treaty. Inaddition, two new bodies, a Regulatory Board and a Regulatory Secretariat, would be set up under the Treaty: (a) The Regulatory Board would monitor the implementation o f all statutory, technical andregulatory rules andwouldreport directly to the Council. The Regulatory Board, would be composed of one representative o f the energy regulators o fthe Regional Members. The European Commissionwould represent the European Union, assisted by one regulator o f each Participant; and (b) The Regulatory Secretariat wouldmonitor ECSEE's development, inparticular the functioning of the energy market and the promotion o f common security o f supply policies. The Secretariat would assist the Council, the HighLevel Group, the Forum and the Regulatory Board. Romania/Hidroelectrica. The Lotruproject will be implemented by Hidroelectrica. It i s one o f the successor companies of Romania's nationalpower company Renel, which was restructuredand unbundledin 1998-2000 into Hidroelectrica (hydro power generator), Termoelectrica (thermal generation), Nuclearelectrica (nuclear power), Transelectrica (transmission and system operations) and Electrica (electricity distribution and supply). Hidroelectricaowns and operates 345 hydro power plants and 5 pumpingstations with a total capacity o f 6,288 MW, accounting for about % o f Romania's power supply andmost o f the ancillary services to Transelectrica, the system operator. Inaccordance withthe Romaniangovernment's energy strategy (the RoadMap, July2003), following the unbundling,the Government has launchedan ambitious program for the substantial privatization o f the power sector. The first two o f the country eight electricity distribution companies have beenprivatized (transaction being finalized with Bank support using the partial risk guarantee instrument) and the other six are to be privatized by 2006. Three major thermal power companies have been created from within Termoelectrica and are to beprivatized in2005. Theseprivatizations are supported bythe Bankunder the ProgrammaticAdjustment 10 Loan (PAL) program. The PALprogram also includesthepreparationo f a strategy for private sector participation inhydro generation, including review o f options for private sector participation inthe implementationo f some o fthe projects o fHidroelectrica andthe privatization o f selected plants o fHidroelectrica. Romania's power sector is discussed further in Annex 1(Section 2). 3. Monitoringandevaluationof outcomes/results At the regional level, the ECSEEAPLprogramwill continue to be included (as its concept work has already been included) inthe established mechanism for ECSEE coordination - Ministerial Council, Permanent High-level Group, Task Forces, and the Forum (Section C.2). The project will benefit from this elaborate, active and well-functioning mechanism for coordination, monitoring and evaluation. The new Regulatory Secretariat will provide an institutional mechanism for the regular monitoring of the countries' performance against agreed benchmarks. At the country level, investmentprojects will beincluded innationalprograms which will be monitoredby the ECSEE coordination mechanism. The Bank will continue to participate inthe Athens process including the Forum and will also directly supervise the individual country projects. 4. Sustainability The current situation and the key dimensions o fthe short- and long-term vision for a sustainable electricity market canbe briefly outlined as follows: 0 ECSEEParticipants: The mainutilities inthe region are already engaged inpower trading, which provides the basis for further development. The next steps will be bilateral contracts involvingunbundled utilities and large customers; followed by expanding trade as electricity markets ineach country are further opened and additional customers become eligible and start exercising the freedom to choose their electricity supplier; 0 Market Sophistication: Some o fthe countries including Romania are already developing day-ahead markets (operated by market operators) andreal-time balancing mechanisms (operated by system operators). Over time such markets andmechanisms will become increasingly standard; and further sophisticationwill be developed, including intra-day and real-time balancingmarkets and financial instruments (possibly starting with a contract exchange); 0 Competition: Current utility-to-utility contracts and other exchanges are typically cooperative and competition i s not their key objective. As industry unbundlingdeepens and inline withmarket openingacross the region, contracting andtrading will become increasingly competitive. However, transmission system operators will continue to coordinate on a cooperative basis, as members of ETSO and inthe framework o f the UCTE; 6 The first Programmatic Adjustment Loan(PALI) was approved on September 16,2004. PAL2 and PAL3 are expected to follow by end-2005 and end-2006, respectively. 11 0 Integrationof ECSEEinto the European Union Internal Energy Market: Croatia and a part o f Bosnia and Herzegovinahad already been interconnected andtheir power systems operated synchronously and as a part o f the main European power system administered by UCTE. The rest o f South East Europe (except Turkey) was synchronously interconnected on October 10,2004, following the completion o f rehabilitationinCroatia andBosnia of facilities required for the synchronous interconnection o fthe whole region with the main Europeanpower system. Additional transmission links to the EUcountries will be developed. They include a second connection betweenRomania and Hungary (withEBRD financing for implementation), and second connections betweenSerbia and Hungary and Croatia and Hungary, and a connection between Croatia and Italy/Slovenia (the last three interconnections are candidates for financing under the ECSEE APL). Through integration the region will secure access to a major trading partner and an important import source to meet possible electricity shortfalls and emergency support. This highlights the electricity/economy dimension inECSEE's integration into the European Union internal energy market. 5. Critical risks and possible controversialaspects ECSEE has been developed and is being implemented through a comprehensive coordination and implementation mechanism (explained in Section C.2). It has gone through extensive discussion and debate. The Bank's work inthe ECSEE context, published inthe recent framework paper (footnote 4), has highlighted risks and contributed to risk mitigationmeasures. Risksarebeingminimized by adoptinga gradual approachto market opening andvoluntary approach to trading. Though market is being opened, meaning an increasingnumber o f electricity consumers will become eligible to choose their electricity supplier, trading i s not mandatory but voluntary between willing sellers andwilling buyers - customers inindividual countries need not and are not expected to move at the same pace. The pace of liberalization may nevertheless trigger controversy. Adjustments can be accommodated inthe finalization of the ECSEE Treaty, including derogations and subsequent modifications inaccordance with the practice o f the EuropeanCommission. Potential controversies can be occasionally expected inthe development o f new generation capacity, where individual countries may propose projects that are not necessarily optimal choices inthe regional context, interms o f size, fuel choice, location or commissioning schedule. ECSEE implementationmechanismprovides a number o f venues to discuss and resolve such issues, including the Ministerial Council as the final step. The Bank-administeredcurrently ongoing generation investment study is expected to help identify the highest priority regional projects, inpart facilitating the resolution o fpotential disputes. Another potential area for controversy, also mainly inthe area o fpower generation, is the progressive upgrading and implementation o f environmental legislation incountries that do not have short-term prospects o f EUaccession. The Regional Members are to progressively align their environmental standards and specifically, new generation plants starting to operate after the ECSEE Treaty i s ineffect have to comply with the relevant EC standards, and the countries are expected to accede to the Kyoto Protocol. The potential controversy i s not about the desirability 12 of these objectives but their affordability - this is an area where the region will require assistance from the international community. It must be emphasizedthat the SEEregion faces a fundamental risk o fnot being able to meet the growing demand for electricity. ECSEE i s the regarded as the best possible mitigation measure for that risk, which ifmaterialized, would threaten the economic growth prospects and affect the quality o f life inthe region. Through ECSEE - a regional market o f countries with harmonized and EU-compatible legislation and institutions underpinnedby a legally bindinginternational Treaty - the regionwill develop an EU-compatible regional market and thereby represent a much larger and more attractive investment destination to prospective investors. Integrationo fECSEE into the internal energy market o fthe European Unionwill not only provide the region opportunities to export energy into the Community, but to also import energy to help meet shortfalls, including system emergency situations. Plant-by-plant costs o f electricity generation vary within countries and across the region. Ina regional market and as market liberalization advances, customers that exercise their freedom to choose their supplier will naturally seek competitive suppliers. This will put pressure on higher cost and less competitive suppliers to improve their performance. But there is also potential for controversy: (a) some o f the most uncompetitiveplants may be forced to close; and (b) some of the less attractiveheliable customers may endup payingmore for their electricity as generatorshppliers will prefer to sell to more creditworthy clients, possibly located inother countries. Inprinciple these kinds o fpotential controversies are part o f any functioning market. However, it i s expected that countries will seek to mitigate some o f the impacts inthe transition period by managing the initialpower contracting process. The projectedtightening electricity demand and supply situation inthe region will also provide more time for the higher cost generators to improve their performancebefore competition increases along with new investment. However, for the same reason, tightening demand/supply outlook, less creditworthy consumers will find it increasingly difficult to secure power supply. This should provide a powerful momentum to improve payment discipline. All APL investmentprojects are expected to useproven designs and are not expected to contain any particular risks or controversial aspects. This isthe case inthe APLl project. Under Romania's Lotruproject, an undergroundpower station will be rehabilitated andrestored to its original capacity. 6. Loan conditionsand covenants As discussed inSectionB.2, the ECSEE APL is directly linkedto the countries' commitments under ECSEE. No other triggers would be applied (including non-compliancewith undertakings under ongoingnationalprojects as longas they do not directly affect countries' participation in ECSEE). Triggers would not be applied to loandcredits already approved. As an example, a loan or credit approved as part o f APLl or APL2 would not have conditions (equivalent to dated covenants) about the country having to meet future triggers (that apply to APL3, or APL4-5) and a possible failure to meet such future triggers would notjeopardize the implementation of projects that are under implementation. APL projects would have financial targets for utilities (Annex 9 presents APL1 targets), financial management covenants (Annex 7 presents APL1 13 FMS arrangements) and undertakings about safeguards, such as the implementation o f environmental managementplans and dam safety inspections (Annex 10presents APLl requirements). Romania already meets the initial ECSEE conditions and the APL1project complies with Bank safeguard policies. Going beyondthe initial eligibility criteria, Romania has already started the liberalization o f its electricity market and i s expected to continue the opening ahead o f the ECSEE deadlines. Romania's current level o fmarket opening is 55%. The Romanian government's energy strategy (the RoadMap) sets July 2007 as the target date for full opening of the electricity market to all consumers. D. APPRAISAL SUMMARY 1. Economic and financial analyses The benefits o f regional power trade ingeneral and trade benefits inthe SEE region specifically have been studiedby Argonne National Laboratories sponsored byUSAID and the sector work underpinningthe APL program (footnote 4). A preliminary estimate is that ifSEEwere to operate as a regionally integrated system dispatching on a least cost basis, operating costs could be reducedby 11-15%. There would be additional cost savings relating to capital, for example, through exports from surplus to deficit countries, and sharing o freserve. Inthe short term, savings would be reflected inlower prices where these are currently relatively high, and increased net revenues for utilities with the potential for increased exports. Inthe longer term, integratedoperation would lead to lower prices than ina limited trade scenario. Some benefits from electricity trade are already being realized inthe region. The main exporters inthe regionareBosnia andHerzegovina, Bulgaria andRomania. Some ofthe countries have substantial hydro power capacity, while others rely more on thermal, and two have also nuclear power plants. The March2004 framework paper discusses the country-by-county situation. This mix o f hydrokhermal mix enhances the prospects for efficiency improvement and cost savings through regional cooperation. There is also scope for power trade between SEE and its neighbors, and indeed, one o f ECSEE's key objectives is that the SEE energy market will be integratedinto the EUinternal energy market. From a technical point o f view, this would be feasible given that power systems inEurope and SEE operate according to common technical standards established by UCTE, andthat SEE will shortly be reintegratedwith the European grid. Significant potential benefits exist given noncoincidentalpeak load periodsbetween Russia and SEE, but synchronizing systemoperation between the eastern neighbors such as UkraineRussia and SEE would be a major challenge. A near-term option to increase trade would be to develop links through Moldova, to allow power transfer at least initially with asynchronous system operation, and this is beingdiscussed betweenRomania and Moldova. Romania/Hidroelectrica finances. Details inAnnex 9. Hidroelectrica i s the lowest cost generator inthe Romanianpower system. Inaccordance with Government policy, the electricity regulator ANRE kept hydro tariffs at a very low level until late 2003. The policy provided for tariff revenues to Hidroelectrica set to enable it to cover its day-to-day operations, but no self- financing for investment. Inthe meantime, ANRE carried out rapid adjustments inthe retail 14 tariffs, but assigned the increasingrevenues to Tennoelectricaby adjusting its rates for thermal generation, to bringTermoelectrica to cost recovery level andreduce the Government's quasi- fiscal deficit. This strategy was supported by the Bank andthe IMF. InMarch2004, at therequest ofthe Government, theBankreviewedRomania's electricity tariffs inclose operationwith ANRE and inter alia recommended that Hidroelectrica's tariff for the regulated market be doubled by January 2005, to a still low level o f about U S cents 2/kWh. The Bank and ANRE agreed inprinciple that such tariff action i s necessary for Hidroelectrica to: (a) meet its financial obligations; (b) start generating internal funds for investments (including completion o fprojects initiated years ago which had stalled due to lack o f funds); and (c) be properly integrated into the liberalizing electricity market -where the level o fmarket opening was raised 55% inNovember 2004 and is set to reach 100%inJuly 2007. ANRE implemented this tariff adjustment intwo stages through its June and December 2004 tariff orders, and Hidroelectrica's average tariff revenue will be about US cents 2.2/kWhfrom January 2005. Withthese adjustments, Hidroelectrica reached a sound andgenerally satisfactory financial position, and the functioning o f the electricity market was greatly facilitated. This strategy is also supported by the IMF. Inadequate bill collection had been a major financial issue inthe power sector. With support from the Bank (under PSAL and PSAL2) and the IMF(under its Stand-By Arrangements), the Government and the distribution utility Electrica have progressively and ultimately successfully addressed this issue. For the whole o f 2003, Electrica achieved a bill collection rate o f 99%. Similar accomplishment has been achieved inthe gas sector, where the two distribution utilities reached a bill collection rate o f 100% for 2003. Highlysatisfactory collection rates have been maintained in2004, andwith the distribution privatization now underway (Annex 1, Section 2), highcollection rates are expectedto bemaintainedalso inthe future. 2. Technical The transmission system inthe SEE region meets the minimumrequirements for a regional market,now that the rehabilitation projects inCroatia andBosnia andHerzegovina (the latter underthe Bank's Power I11Project) havebeencompleted facilitating the synchronous interconnection o f the whole region with the main European power system on October 10,2004. Additional interconnections, within the region andwith the EuropeanUnion, will be required to accommodate the projected increasing power flows. The APL program will support some of these additional projects, and other donors participating inthe Athens process will support others -activedonorcoordinationisaimedatensuringthathighestpriorityprojectswillgetfunded. The countries andtheir utilities, even with the help o f the donors, will not by themselves be able to fund all necessary generation investments required to meet the growing demand for electricity inthe region. Privateinvestment will have to bemobilizedandthat isone o fECSEE's fundamental goals -the creation o f a hnctioningregional market, with a stable regulatory and market framework capable o f attracting private investment. 15 3. Fiduciary The Bank's standard fiduciary requirements apply also to the projects andutilities supported under the ECSEE APL program. Lendingunder the ECSEE APL program will be through IBRD loans and IDA credits to individual countries. The Bank will review the financial management systems of the executing agencies and audit reports will be requiredto be submitted. Procurementwill be inaccordance with the Bank Guidelines for Procurement and Bank Guidelines for he Use o f Consulting Services will apply. It is possible that, within applicable guidelines, the Bank may agree that borrowers' FMS and/or procurement systems be utilized, takinginto account experience from other projectswhere such approaches are piloted. The proposed APLl loanto Romania does not feature such use o f country systems. Standard fiduciary and procurement arrangements will be applied (Annexes 7-8 present APLl arrangements). 4. Social ECSEE's overall social impact is positive. The common objective o fthe parties adhering to the Athens Memorandum o fUnderstanding is to stimulate economic growth and investment inSouth East Europe by improvingthe availability, efficiency andreliability o fnetwork energy sources at reasonable cost. The draft ECSEE Treaty states that the Regional Members and the Commission are determined to achieve economic and social progress and a high level o f employment as well as balanced and sustainable development through the creation o f an area without internal frontiers for energy. All SEE countries have the prospect o f EUmembership and the European Commission had made participation inECSEE a de-facto accession condition. The Stability Pact has characterized ECSEE as a unique political chance for the SEE region, to consolidate reconciliation and provide a power driver towards a more comprehensive economic andpolitical integration into the EuropeanUnion. The overall social impact o f improvingpower supply; mitigating environmental impacts o fthe power sector; supporting growth, investment and employment; and facilitating EUaccession i s positive. All countries inthe SEE region are implementing reforms intheir energy andpower sectors, which inter alia involve tariff adjustments towards full cost recovery and financial discipline including bill collection. This raises the issue o f social protection, to ensure that low-income households have access to electricity. ECSEE does not contain additional financial targets or conditions, but reinforces these ongoing national efforts. The Treaty calls for the provision o f electricity to all citizens at a reasonable price level that nevertheless allows for adequate cost recovery and reinvestment. Romania. The Lotruproject does not involve social issues. No land acquisition or resettlement is required. Access to reliable electricity is a key driver o f economic growth and a direct means of reducing poverty by improving the productivity o fhouseholds and enhancing the delivery o f social services. Romania has virtually universal electricity service coverage and the tariff system includes a functioning mechanism to support low-income households. The challenge is to maintain andimprove the quality o f this extensive service. The Government has concluded that along with its ongoing ambitious privatization program, active participation inECSEE is essential to maintain such service. 16 5. Environment ECSEE's overall environmental impact is positive. ECSEE accelerates the introduction of EU- compatible environmental legislationand standards inthe SEE region. Two specific requirements are particularly noteworthy: (a) new generation plants starting to operate after the ECSEE Treaty is ineffect have to comply with the relevant E C standards; and (b) all Regional Members are expectedto accede to the Kyoto Protocolwithin one year o f the Treaty's effectiveness. This is an area where the region will require assistance from the intemational community. The APLprogramisonepotentialsource ofsuchassistance,for example for the rehabilitationand upgrading o f power generation facilities to improve their operational and environmental performance. N e w generation projects will not be financed under the APL program, but the World Bank Group will consider such projects separately, inparallel with the APL program. For Turkey, a project for environmental upgrading o f Afsin-Elbistan Power Plant is included inthe FY05 lendingprogram. Romania/Lotru. Lotru is an existing hydro power development on the Lotru river. Itwas built inthe 1960s/early 1970sandcommissionedin1972-75. The source ofwater for the hydroplant i s the Vidra reservoir. The condition and continued safety o f the Vidra dam is under continuous monitoring and regular maintenance andthe dam is ingood condition. At the same time, after three decades o f demanding heavy-duty operation as the key provider o f ancillary services, the hydro plant's electro-mechanical equipment is overdue for extensive rehabilitation. The rehabilitation of the Lotru station will have only minor environmental impacts. The station is located about 140meters underground. The main impact is the disposal o f equipment replaced under the project. An Environmental Management Plan(EMP) has beenprepared, public consultations have been held. It has been cleared by the Bank and submitted to the Infoshop. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [ I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [ I [XI Involuntary Resettlement (OP/BP 4.12) [XI [ I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ I [XI Forests (OP/BP4.36) [ I [XI Safety o f Dams (OP/BP 4.37) [XI [ I Projects inDisputedAreas (OP/BP/GP7.60) [ I [XI Projects on International Waterways (OP/BP/GP 7.50) [XI [I The classification o fthe APLprogram is FI. APLl was ratedFIwhen the project elements had not yet been identified. RomanidLotruis a B-category project. Most o fthe country-level investment projects are expected to be B-category projects. However, individual country-level 17 investment projects included inthe later installments o fthe APL program may contain components that would be rated into the A-category or C-category. The proposed financing o fthe rehabilitation o f the Lotruhydro project triggers OP 4.37 on Dam Safety. Romania's and Hidroelectrica's dam safety laws, regulation and arrangements, in general and as applied to the Vidra dam, and Hidroelectrica's undertakings regarding Vidra dam duringthe implementation o fthe project, are satisfactory withrespect to OP 4.37 (see also Annex 10, Section 1). The Lotruproject also triggers OP 7.50 on Projects inInternational Waterways. Since the Lotruhydro plant is located on the Lotru river,which flows into the Olt River, which inturnflows into Danube, an international waterway inEurope, OP 7.50 applies, even ifthe Olt River and its tributaryLotruRiver flow within Romania. An exemption from the notification requirement under OP 7.50 has been granted: the Lotruproject does not involve works and activities that would exceed the original scheme, change its nature, or alter and expand its scope and extent to make it appear a new or different scheme, and will therefore not adversely affect the quality or quantity o fwater flows to the other riparians (see also Annex 10, Section 1). 7. Policy Exceptions and Readiness Nopolicy exceptions are sought. The project is ready for financing. 18 Annex 1:Country,Sector andProgramBackground EUROPEAND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) 1. ECSEEAPL The proposedApproach for AdaptableProgramLending(APL)for ECSEE. The key policy and institutional elements for an APL program have been definedand established. The Energy Community of South East Europe (ECSEE) is a regional program, with strong country commitment and with well- established coordination mechanisms at the highest political level, at the level o fregulators and transmission companies inthe region, as well as among donors supportingthe program, plus a the ECSEE Forumwhich brings them all together with other stakeholders. ECSEE is a regional program and it i s proposedthat the Bank investment support be provided usingthe APL instrument, horizontally on aregionalbasis (to support upto eight countries andKosovo) and vertically (each country can inprinciple receive support from more than one APL installment over the APL programperiod). An APL would enable the Bankto provideregionalfinancial support to aregional program, yet financing could be tailored to the needs o f individual countries to help them meet their commitments to ECSEE. APLl presents the ECSEEprogramandthe first two individual countryprojectsthatthe Bankwould finance. APLl would be presented to the Board - the Board approves all first-phase APLs under regular procedures. The approval o f subsequent APL phases i s delegated to the President and exercised by the Regional Vice Presidents under the oversight o f the Managing Director. Subsequent country projects (following the approval o fthe APL program when APLl i s approved) would be processed each at its own pace andwhen ready, each PAD would be submitted for approval by ECA's Vice President. Each PAD would be circulated to the Board for information after Managementapproves the follow-on operation in principle. Management approval becomes effective 10 working days thereafter, unless at least three Executive Directors request a regular Board discussion duringthe 10-day time period. Each country/project could proceed at its own pace and not be held back by the Bank needing to combine several projects for the purpose o f processing or approval. APLs typically have 3-5 phases. Inthe case o fthe proposed ECSEE APL, APL1 would cover the first two projectsapproved together with the APL program, APL2 phase would cover other country projects approved within FY05 (assuming APL1 i s approved by midFY05 - ifnot, then APLl alone could cover FY05), APL3 phase would cover country projects approved inFY06, and APL4-5 phaseprojects approved inFY07-08 -this phasingprovides for a four-year program (FY05-FY08). Each APL installmentwould have an implementation period upto five years. The implementation o f some o f the projects inAPL5 could continue untilFYO13. APL Triggers. Two sets o f triggers would apply under the APL. Policytriggerswould determine the eligibility of an individual country to receive Bank assistance under the APL program. Project triggers would determine when an individual investment i s eligible to receive Bank funds. PolicyTriggers A fundamental eligibility criterion for a country to qualify for Bank support is the signingo fthe Athens Memorandum- all prospective clients signed the Memorandum on December 8,2003 and thereby they all meet this requirement (the Athens Memorandum i s the base document o f the ECSEE). 19 Horizontally under the regional APL, a country becomes eligible to borrow once ithas met ECSEE's basic entry conditions as they were definedinthe Athens Memorandum-the ECSEE APL requirements are that an electricity sector regulator and atransmission system operator have been established and are operational. Iti s currently expected that all RegionalMemberswould meet this conditionby mid-2006 at the latest. The beneficiary country of APL1, Romania, already meets this condition and i s eligible for Bank support under the ECSEEAPL program. Vertically, a country remains eligible for Bank support under the ECSEEAPL program as long as the country signs andratifies the ECSEE Treaty and meets its key obligations under the Treaty: 0 signs the ECSEETreaty; 0 ratifies the Treaty; 0 establishes distributions system operators; and 0 opens its electricity market to non-household customers. For a countryhorrower to be or remain eligible for Bank support under the APL programthe Bank also needs to be satisfiedthat the countryhorrower has the ability to effectively participate inthe regional market. With this trigger, the Bank would reserve the right to defer or withhold ECSEE APL support in cases where a country might have complied with the letter of its ECSEETreaty commitments butnot have implemented or launched credible programs of other critical measuresthat are needed for market participation such as, for example, reasonabletariffs, adequatebillcollection, and systems for electricity market and power system operations. The Commissionexpects the ECSEE Treaty to be signed inmid-2005. The signingo f the Treaty is proposed to be applied as a trigger under the ECSEE APL program from January 1,2006, and its ratification from January 1,2007. The current version ofthe ECSEETreaty calls for the establishment ofdistribution systemoperators by January 1, 2007, and for the opening o f the electricity market to all non-household customers by January 1, 2008 7,Itis possible that inthe courseofthe finalnegotiations ofthe ECSEETreaty, these ambitious deadlines are adjusted - the Athens Memorandumcontained even more aggressive targets which have since been reviewedand adjusted. The target datesthat will be applied as triggers under the ECSEE APL programwill be those incorporated inthe final version o fthe Treaty includingderogations and subsequent modifications agreedbythe European Commissionand ECSEE Regional Members. Triggerswill not be applied to loansfcredits already approved. As an example, a loanor credit approved as part o f APL1or APL2 will not have conditions (equivalent to dated covenants) about the country havingto meet future triggers (that apply to APL3, or APL4-5) and apossible failure to meet such future triggers will notjeopardize the implementation ofprojects that are underimplementation. 7 This level ofmarket opening is ahighlyambitious target -the EUMember Countries themselves were requiredto reach this target only by July 2004 and may well still be adjusted before the Treaty i s - finalized. Inthe EUMember States, allcustomers includinghouseholds areto beeligible to choose their supplier by July 2007. InECSEE, this deadline is currently set for January 2015 -beyond the ECSEE APLprogram. 20 CAS Framework Bank assistance to the individual projects will be committed through loans and credits to individual countries within the Country Assistance Strategies: (a) By signingthe Athens Memorandum, countries have signaled their commitment to the regional market. This does not automatically mean that each country would be interestedin borrowing from the BanWIDA - as o f September 2004, Bulgaria and Croatia have not shown strong interest; (b) There mightbe cases where the country program cannot accommodate additional projects. IDA countriesare expectedto be able to get additionalIDAresources for their participationina regional program'. Apart from such possible additional allocations due to the regional nature of the APL program, all IBRDloans and IDA credits will have to be considered inthe CAS frameworks and limits o f the country programs. Compliance by the recipient country/utility o f its commitments under ongoing Bank operations inthe powedenergy sector will not be an additional trigger. The use o f the APL program as an additional leverage to address issues under ongoing operations will be limitedto areas where non-compliance affects the utility's ability to participate inthe regional electricity market, for two reasons: (a) to retain strong regional approach and focus on ECSEE; and (b) to keep the implementation o f the APL program manageable. -- This approach is inline with the IDA pilot program for regional projects (footnote 8) , which calls for flexibility even when a country is inarrears to the Bank, ifits participation is crucial to the success o f a regional project. Components for BankFinancing. The Bank has prepared a strategy for Bank support for regional energy trade under an ongoing ESW activity. The ESW highlightsthat significant investments are required inpower generation, transmission and distribution for a well-functioning power market. At the outset, the Bank would be prepared to consider a broad range o f investments for support under the APL program. (a) Power Generation. Major new generation projects are not proposed for Bank financing under this APL program: (a) Regionalprioritization ofpossibleprojectsisnotyet available. Itwillbeestablished under a recently launched study (one o f the Bank's contributionsto ECSEE is the administration of this study, at the request o f the European Commission); and (b) Bank Group participation insuch large projects i s better dealt with on a case-by-case basis due to their large financing needs. However, the Bank would be prepared to consider plant rehabilitationsin cases where the priority and cost- effectiveness o f the renovations can be readily established. Such projects offer one o f the best approaches to provide ancillary services to power system operators (ancillary services include all services other than the production o f energy provided by generators necessary for the operation o f the power system, such as frequency support, reactive power, and spinningreserve), by restoring capacity and improving plant availability and load-following capability (ability to follow dispatch instructions from system operators). This i s in line with the Athens Memorandum, which highlights the inclusion of plant rehabilitations among regional investment priorities. ~ 8 IDAhas introducedan IDA13 Pilot Envelope for regionalprojects o fupto $450millionper annum duringFY04-05. Individual country allocations will normally cover 1/3 o f the project cost attributable to an individual country wherever feasible. Inrecognition o f the significant positive extemalities o fregional projects, the remaining 2/3 o f the credit amount will be from the IDA pool and will maximize the flexibility within IDA. 21 @) Power Transmissionand SystemOperations. The regionrequires additional interconnections including links to UCTE. These main projects have been studied andprioritized by USAID as part of ECSEE preparations'. Albania-Montenegro, Serbia-Hungary, Croatia-Hungary, Macedonia-Albania, Hungary-Romania and Bulgaria-Greece are among the highest priority links. Interconnectiono f Turkey (expected to be developed in2005-06) and the Kosovo-Albania interconnection (being studied under Bank financing) were beyond the scope o f the USAID study, but both are clearly also highpriority items. Other highpriority transmission investments will also include transmission line and substation reinforcements within individual countries - a linkbetweentwo countries or betweenthe region and UCTE will be useful only ifpower can be moved across countries with reliability. Transmission system operators inthe region are typically also responsible for system operations. This is an area where several countries will need to upgrade their facilities and installnew load dispatch and communication systems. A study carried out for USAID recommended the following projects for submission to international financing and commercial credit institutions: Croatia, Macedonia, and Serbia and Montenegro. The EBRD and EIB are currently considering financing the project inSerbia, but Croatia, Macedonia and Montenegro are yet to confirm financiers. (c) Power Distribution. Power distribution projects are typically local undertakings and Bank Group support would continue to be provided mainly under individual country projects, for example, distribution reinforcementprojects to modernize aging systems and reduce system losses. However, the Bank would support metering and/or telecommunications programs, which are designed to quickly enhance revenue realization and/or coordination and communications capabilities o f distributionutilities so that they can more effectively participate inthe regional power market. (d) Technical Assistance. Along with investments, APL projects can finance a wide range o ftechnical assistance: (a) Institutional Development - establishing and/or strengthening the regulators, transmission companies/system operatordmarket operators, and distribution system operators to implement the requiredrules, codes and regulations, power exchanges and settlement systems, etc.; and (b) Project Preparation and Implementation-engineering and environmental services to (1)prepare projects for financing by the Bank under alter APL installment and/or by other financiers and (2) help implement projects. EnvironmentalConsiderations. The Bank's standard environmentalrequirements would apply to projects supported under the APL program. An environmental management plan acceptable to the Bank would be finalized and disclosed inthe country and submitted to the InfoShop prior to project appraisal of category B projects. More comprehensive environmental impacts assessments would be required for category A projects, if any. Most projects to be financed under the program are expected to be category Bprojects, but some generationrenovationprojectsmightreceivecategory A ratings. The APL instrument i s well suited to dealing with the uncertainties and delays that environmental management 9 Under the USAID-funded SouthEast EuropeCooperative Initiative (SECI), a ProjectGroup on "Development of Interconnection o f Electric Power Systems o f SECI Countries for Better Integrationto the European System" comprising transmission system operators inthe region was established. The SECI Project Group undertook a "Regional Electricity TransmissionPlanning and Interconnection Study" which modeledthe potential impact o f twelve new transmission links under various hypothetical inter (between SEE and Westem and Central Europe) regional (not intra - this study assumed that countries in SEE are individually balanced) power flows. 22 plans, assessments andconsultations often cause inBankprojects. Unlike a regular multi-component investment project, which gets delayed if any o f its components get delayed, under the APL program, other APL projects can proceed and only the one APL project that i s delayed i s affected. Therefore, it does not appear necessary to "automatically" exclude all generationprojects from further consideration butitis important to identify potentialprojects early and then launchpreparatory work including environmental assessmentdmanagement plans to avoid delays on that account later. The EnvisionedUS$ 1.0 BillionECSEEAPL LendingProgram FinancePerspective. The proposed US$1billion size o fthe ECSEEAPL facility may appear to be very large, and it would be a significant commitment. However, the financial requirements of power development inthe region are very large, and the Bank's US$ 1.O billion has to be seen in this perspective. The SEE region faces a fundamental risk o f not being able to meet the growing demand for electricity. Significant capacity additions (of the order o f 12,000-15,000 MW) and plant rehabilitations (of the order o f 8,000-9,000 MW) will be required duringthe next ten years, along with matching transmission and distribution system investments ifdemand i s to be met and severe power shortages and supply interruptions are to be avoided. Financingrequirements are o fthe order of some US$30-40 billion and these are conservative estimates. The bulk o f such financing, particularly inpower generation, can notberaised inthe public sector alone, without significantprivate sector participation. Through ECSEE -aregionalmarketofcountrieswithharmonizedandEU-compatiblelegislationandinstitutions underpinnedby a legally bindinginternational Treaty - the region will develop a EU-compatible regional market and thereby represent a much larger and more attractive investmentdestination to prospective investors. Integrationof ECSEE into the internal market o f the European Union will not only provide the region opportunities to export energy into the Community, but to also import energy to help meet shortfalls, including system emergency situations. ECSEEAPL CountryPrograms. The overall APL programrequires an investment by the Bank of about US$l,OOO million, based on current estimates and subject to further review and change. A tentative breakdown i s gwen below: BankFinancingunderthe ECSEEAPL Program(US$ million) APLl APL2 APL3 APL4 APLS FY05 FY05 FY06 FY07 FY08 TOTAL ALBANIA 24 30 54 BOSNIA AND HERZEGOVINA 36 30 66 BULGARIA CROATIA KOSOVO 5 5 MACEDONIA 25 25 ROMANIA 84 126 125 335 SERBIA AND MONTENEGRO 20 50 70 TURKEY 80 100 165 345 Unallocated 40 40 20 100 TOTAL 84 124 206 246 340 1,000 23 The above APL financing plan includes a proposed unallocatedportion o fUS$lOO million (about lo%, inprinciple available any time when neededinthe FY05-08 period), whichcouldbeusedto fundprojects inBulgariaandCroatia(which havenot expressed strong interestinthe APL facility) and/or provide higher volumes to others, or ifnot needed, would simply not be committed. Approachto Co-financing. Inview o fthe large financingrequirements andthe limitednumber o f projects that each donor can appraise and supervise, the approach indonor coordination for the financing o f ECSEE's priority investments i s that to the extent feasible, instead o f co-financing individual projects, donors discuss the financing o fpriority investments and then take charge o f their respective projects: co- financing i s being done at the ECSEE program level, donors coordinate at the program level and each takes care o f specific projects. 2. RomaniaCountryand Sector Background Romania'sEnergy andInfrastructureChallenge. Economic stagnation for mosto f the 1990smeant less demand on Romania's energy and infrastructure sectors, which also ledto inadequate investments and insufficient maintenance and rehabilitation o f aging facilities and networks. Now that Romania's economic growth has reached 4-5% per annum, pressure on energy and infrastructure services is increasing. This i s far more than a sectoral issue. Adequate supply o f energy and availability of infrastructure are essentialprerequisites for achieving sustainable economic growth. Without economic growthmomentum, it will be difficult for Romania to both implement its social programs/poverty alleviation agenda and improve and maintain necessary fiscal discipline for sustainable development. Romania's desire tojoin the European Union adds to the country's energy and infrastructure challenges the needto comply with various EUdirectives and other minimumstandards. Improvements in Romania's energy and infiastructure services are also needed to improve the quality o f life o f individuals - including helping Romania improve maternal health, reduce child mortality, contain diseases, and improve primary education. Inthepower sector, aseconomic growthisaccelerating, demandforelectricityhaspickedupandis projectedto increase. As a result, pressure on electricity facilities and services is increasing, at a time when available capacity from existing facilities is declining. Raising the necessary investment resources to rehabilitate aging plants and transmission and distribution networks - the estimated US$10 billion needed inthe 2005-2015 period - isa tremendous challenge given the constraints inthe public sector and current global environment for private energy investments. The Government of Romania has concluded inits energy strategy 10 that private sector participationis essentialinmeetingthe investment requirements inthe energy sector. Inthe power sector, the private sector is projected to help raise almost half - US$4.5 billion of the US10billion investment needs. Reforms to address power sector issues were launched inthe late 1990s, and substantial progress has been achieved, enabling the Govemment to realistically attempt to attract such large private investments. Power Sector Reforms. An electricity law was enacted in 1998 andthe electricity andheatregulatory authority ANRE (Autoritatea Nationala de Reglementare in domeniul Energiei) was established in 1999. Sector entities have gone through several reorganizationand restructuringmeasures. At the start o f the reform process, power generation, transmission and distribution and system operations were carried out by the RomanianElectricityAuthority RENEL(Regia Autonoma de Electricitate) which hadbeen established in 1990. RENELwas corporatized (converted into ajoint stock company) in 1998 into the National Power Company CONEL (Compania Nationala de Electricitate) and a separatejoint stock lo "The Road Map for the Energy Field" was approved and published inJuly 2003. 24 company Nuclearelectrica which was created for "EL'S nuclear assets. Power generation and distribution were carried out by CONEL's subsidiaries Hidroelectrica (hydro power), Termoelectrica (thermal power and heat) and Electrica (distribution and supply), alljoint stock companies. CONEL was directly incharge of transmission and system operations as well as the commercial relationships among its subsidiaries (the start o f an electricity market). The restructuringprocess continued in2000: (a) Hidroelectrica, Termoelectrica and Electricabecame independent companies reporting to the Ministry of Industryand Resources (MIR); (b) the process to establish eight regionalpower distribution and supply companies (discoms) was launched by the national distributor (Electrica); (c) a national power grid company Transelectrica (Compania Nationala de Transport a1Energiei Electrice) was established for CONEL'spower transmission and system operations functions and a subsidiary company OPCOM (Operator Comercial) was established for CONEL's commercial functions and to become the electricity market operator. Through a series of tariff adjustments by ANRE, overall tariff revenue has been brought up to cover the cost o f supply and cross-subsidies have been largely eliminated. Inparallel, Romania has started the liberalization o f its electricity market, along the lines o f EUdirectives, which require member countries to allow a gradually increasing share o f electricity to be contracted between suppliers (generators and traders) and eligible customers -- electricity users qualified to purchase power directly from the wholesale market. The concept o f an eligible customer is well-known from the EUelectricity directive, but Romania has added an additional criteria requiring the payment of bills, reflecting chronic issues inbill collection inthe past. Some fundamental issues remain to be resolvedbefore a well-functioning electricity market can emerge and before the sector can operate within the larger regional and European networks. This i s largely because o f the structure o f the generation sector -- not having a sufficient number o f commercially-oriented generators and generation unbundlingbased on fuel used (hydro, nuclear and thermal) -- and the relatedregulatory and commercial framework. A sufficient number of buyersnow exist as Electrica's eight discoms have become fully functional along with an increasing number o f eligible customers (currently about 2,000). The Government's Road Map spells out its strategy and implementation plans for further power sector reforms. The Government intends to increase the number o f commercially-oriented suppliers through further generation restructuringand by attracting private investors. Restructuringo f Termoelectrica into four new subsidiaries (Bucuresti, Craiova, Rovinari and Turceni) alongthe lines o f its existing subsidiary Deva (which was established under an ongoing Bank operation), with a few generation plants staying with Termoelectrica, was done in2003. Craiova, Rovinari and Turceni were separated from Termoelectrica into independent companies from April 2004, and are to be privatized (under PAL2). Significant changes inthe regulation o fhydro generation are being carried out, ahead o f the partial privatizationo fHidroelectrica envisioned inthe RoadMap. ANRE i s also starting preparations to put in place a fully functional supplier(s) o f last resort by the time o f full market liberalization. Four o f Electrica's eight discoms are expected to be privatizedby mid-2005, and the other four are also to be privatized under PAL2. Along with above industrystructure, the RoadMap also spells out the proposed new wholesale electricity market. The Electricity Market Project (EMP) supports the development o f the kmdo f well-functioning wholesale electricity market envisioned inthe RoadMap, with assistance to the Government, ANRE, OPCOMandTranselectrica. ANRE has already launched the electricity market liberalization, and is puttinginplace under the EMPa comprehensive set ofregulationsfor a new trading regime - a wholesale electricity market to be operated by OPCOM for the increasinglyprivate generating companies and discoms, as well as other electricity suppliers and an increasing number o f eligible consumers. The success o f Romania's power reforms inkey areas (including privatizations, investments, efficiency improvements and competitiveness) will be greatly influencedby ANRE's, OPCOM's and Transelectrica's ability to develop, regulate and operate a competitive electricity market. Such a liberalizedelectricity 25 market will also facilitate Romania's accession to the EU- the Road Map i s focused on the remaining steps Romania needs to take inorder to meet the EUdirectives inthe energy sector and the development o f a well-functioning electricity market is one o f its key elements. The Romanian system currently has a synchronous interconnection with some o f its neighbors including Albania, Bulgaria, Greece, and Serbia inthe so-called UCTE second synchronous zone. On M a y 8,2003 Transelectrica became a member o f UCTE (the Union for the Co-ordination o f Transmission of Electricity), an association o f transmission system operators providing a reliablemarket base by efficient and secure electric "power highways'' inEurope. On October 10,2004, the UCTE second synchronous zone was connected to the mainUCTE. This opened the way for Romania (and the rest o f South East Europe) to join one of the largest electric synchronously interconnectedpower systems worldwide. Full integration o f the Romanian power system into EU's intemal electncity market and into the continental Europe interconnected power system i s one o f the Govemment's priorities inits power reforms and Romania is one o f the most active members inECSEE's development. 26 Annex 2: Major RelatedProjectsFinancedby the Bank and other Agencies EUROPEAND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) The following i s a selective listing o f related projects and highlightso fthose that are directly supporting ECSEE's development. The World Bankhas ongoingprojects inthe electricity sector inmost ECSEE countries, andtechnical assistance inKosovo. These projects support various aspects o f power sector reformand restructuring, including financial aspects, and inter alia help buildthe foundation for the development o f a regional electricity market and participation by the respective countries/utilities. The ThirdPower Reconstruction Project inBosnia and Herzegovina i s instrumental for the resynchronizationof the so-called second UCTEzone (Eastern part o f Bosnia, plus Albania, Bulgaria, Macedonia, Romania, Serbia and Montenegro) with the Western part o f Bosnia and Croatia, and the main UCTEWestern Europe power system. The EuropeanUnionsupports power sector reformandrestructuringunder its technical assistance operations inthe region. Through its Phare program, ina large project co-financed with EIB and EBRD; itis alsoproviding investment support to Transelectrica inRomania. EBRDhas ongoingpower sector projects inAlbania, Bosnia andHerzegovina, Bulgaria, Macedonia, Romania and Serbia and Montenegro, including private sector power generation inBulgaria. EBRDhas just approved a project that will implement the second interconnectionbetween Hungary and Romania, This interconnector will be one o f the means for the integration o f ECSEE into the internal market o f the European Union. EIBhas ongoing power sector projects inBosnia andHerzegovina, Bulgaria, Macedonia, Romania and Serbia and Montenegro, often inco-financing arrangements with EBRDandor the Bank. KfW has ongoing power projects inAlbania, Bosnia and Herzegovina, Kosovo, Serbia and Montenegro, and Turkey. Technical Assistance. Several Bankprojects also provide technical assistance. Mostnoteworthy inthis context are the ongoing projects inRomania and Turkey, which support the development of electricity markets. CIDA o f Canada i s providing regionaltechnical assistance (the SEETEC project) for the development o fregional electricity market inSouth East Europe. USAIDi s providing technical assistance on legal and regulatory aspects o fpower reforms and restructuring, including institution- buildingsupport to the regulator agencies, throughout South East Europe, as well as regional studies on power trade and requiredcommunication facilities for the development of ECSEE. Annex 5 o f the Bank's March 2004 framework paper (footnote 4) contains a comprehensive listing o f technical assistance inthe ECSEE context. The Italian Government may provide technical assistance for ECSEE preparatory work to ECSEE Regional Members. The Spanish Government has provided support through a trust fund to help the Bank review ECSEE investment projects. All o fthese agencies/countries except Spain are members o fthe ECSEEForum. 27 Annex 3: ResultsFrameworkandMonitoring EUROPE AND CENTRAL ASIA: Energy Communityof SouthEastEurope(APL1) ResultsFramework PDO OutcomeIndicators Use of OutcomeInformation The ECSEE APLl would (1) (1) Electricity markets inSouth-East An increasingnumber o f electricity establish the ECSEE APL facility Europe are liberalized inaccordance consumers are free to choose their for the implementation o f priority with the ECSEE Treaty (including electricity supplier. investments inelectricity generation, derogations and subsequent transmission and distributionand modifications, ifany) and a regional technical assistance for electricity market i s functioning; institutionaUsysterm development andproject preparation and (2) APLl project is completed in Romania operates inthe regional implementation for the development Romania and its electricity market power market inaccordance with the o f a functioning regional electricity andpower system operateswith the ECSEETreaty. market inSouth East Europe and its helpo fancillary services from integration into the intemal Romania's Lotruproject. electricity market o f the European Union; and (2) provide priority investment support for Romania. IntermediateResults ResultsIndicatorsfor Each Use of ResultsMonitoring Oneper Component Comnonent ComponentOne: ComponentOne: ComponentOne: Romania/Hidroelectrica - main Lotrurehabilitation i s completed, Romania's TSO, Transelectrica, uses rehabilitation contract for the Lotru ancillary services are available. lst the ancillary services made available Hydro project is awarded. Sept unit March2007, 2"d unit June 2008, byHidroelectrica from its Lotru 2005. 3rdunit Sept 2009. station, increasingly unitby unit and operates with an increasingly regional approach inpower system operations. Romania's market operator OPCOM operates a functioning electricity market, with an increasingly regional approach. 28 E E .C +LC .C e ; c 4r icjEsi ; a, VI x L b5 c0 a s at E o ? S;E ab L ! Annex 4: DetailedProjectDescription EUROPEAND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) RomaniaLotru project(EUR66 millioninAPL financing): Lotru i s an existing hydro power development on the LotruRiver. Lotru i s the most important provider of ancillary services for the operation o f Romania's power system. It was builtinthe 1960dearly 1970s and commissioned in 1972-75. The capacity o f the Lotru power station i s 510 MW (fromthree Pelton turbines o f 170 MW each). The source o f water for the hydro plant i s the Vidra reservoir, which was created as part o f the Lotrudevelopment. It i s a multi-year reservoir, an ideal facility for Lotru's special operational role inthe power system. The reservoir includes the Vidra dam, a large rockfill dam with a height o f 121meters and crest length o f 350meters. The elevation o fthe reservoir is about 1,300 meters, and the power station is at about 500 meters, giving the project a maximum gross head o f 809 meters. Inorder to maximize the head - and thereby the power output - the power station i s located about 140 meters underground. The condition and continued safety o f the Vidra dam i s under continuous monitoring and regular maintenance and the dam is in good condition (also see Annex 10, Section 1). At the same time, after three decades o f demanding heavy-duty operation as the key provider o f ancillary services, the hydro plant's electro-mechanical equipment is overdue for extensive rehabilitation. Due to financial constraints, Romania has only been able to replace the Peltonrunners, under Swiss aid financing inthe late 1990s, and defective switchyard electrical equipment. Under the proposed project, all other main equipment in the underground power station and the switchyard will be replaced. The project will restore the Lotru plant into a reliable source of ancillary services. Effective capacity will be restored to the current nominal capacity o f 510 MW. The total cost estimate is about EUR 85 million o f which about EUR 63 million i s proposed to be funded under the Romania component o f APLl. Hidroelectrica's InstitutionalDevelopment. Going beyond the needs o f the Lotruproject, Hidroelectrica will establish under the ECSEE APLl project a twinningarrangement with a power utility with significant hydro generation and experience inoperating inan electricity market under EU liberalization approach. The scope o f such twinningarrangement would include: (a) contracting - bilateral contracts, risk management usingday-ahead markets and optiodcapacity contracts etc., (b) investment planning and prioritization; (c) financial planning and project finance; (d) project management; (e) human resource development, etc. The twinningarrangement will be financed under a EUR 3 milliontechnical assistance component for Hidroelectrica's institutionaldevelopment. Under the Programmatic Adjustment Loan (PAL) program (footnote 6), the Government will carry out an assessment o fprivatization options for Hidroelectrica, including its sale as a whole or inparts. Partial (minority) listing o f Hidroelectrica's shares might be an option, and/or some of Hidroelectrica's existing plants and/or some unfinished projects mightbe offered for sale, as the next step inthe Government's efforts to attract private sector investment, management skills and competition into the power sector (Annex 1, section 2 presents Romania's power sector strategy). This assessment could be financed under the technical assistance component of the project. However, Hidroelectrica is notrequiredto use the proceeds o f the Bank loan for this assessment. " Ancillary services (such as frequency support, reactivepower, and spinningreserve) are required for the safe and reliable operation o fpower systems. 30 Annex 5: ProjectCosts EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) Romaniahotru project: Local Foreign Total Project Cost By Component andor Activity EUR EUR EUR million million million Lotru Rehabilitation 14.8 58.7 73.5 Technical Assistance 0.6 3.0 3.6 Total Baseline Cost 15.4 61.7 77.1 Physical Contingencies 0.3 1.9 2.2 Price Contingencies 2.1 1.8 3.9 TotalProjectCosts' 17.8 65.3 83.2 Interest during construction 4.4 4.4 Front-end Fee 0.4 0.4 TotalFinancingRequired 17.8 70.1 87.9 'Identifiable taxes and duties are EUR 16.4million, and the total project cost, net o ftaxes, is EUR72.5 million. Therefore, the share ofproject cost net oftaxes is 79.5%. 31 Annex 6: ImplementationArrangements EUROPEAND CENTRALASIA: EnergyCommunityof SouthEastEurope(APL1) RomaniaLotruproject: The Lotruproject will be implementedby Hidroelectrica. It i s one o f the successor companies o f Romania's national power company Renel, which was restructured and unbundled in 1998-2000 into Hidroelectrica (hydro power generator), Termoelectrica (thermal generation), Nuclearelectrica (nuclear power), Transelectrica (transmission and system operations) and Electrica (electricity distribution and supply). It owns andoperates 345 hydro powerplants and 5 pumpingstations with a total capacity o f 6,288 MW, accounting for about !4 o f Romania's power supply and most of the ancillary services to Transelectrica, the system operator. Hidroelectrica has experience in all aspects o f hydropower development and operations. It utilizes Romania's Instituteof Hydroelectric Studies and Design for specialized support on a regular basis, including the preparation o f the Lotruproject. The rehabilitation o f the Lotru station will be implemented through one large turnkey supply and install contract. The work will be staggered so that for most o f the time duringimplementation, only one o f the three 170 MW unitswill be out o f operation. Prospective contractors will be prequalified. Two-stage biddingwill be used, so that all potential technical issues can be addressed prior to inviting the price bids. As this will be Hidroelectrica's first Bank-financedproject, Hidroelectrica will engage consultants with experience inBank-financedprocurement to assist with the prequalification and tendering. The process to select the consultants i s currently underway. Hidroelectrica has prepared and will implement an Environmental ManagementPlan for the project. Hidroelectricawill also continue to carry out annual inspections o f the Vidra dam. Supplementingthese dam safety inspections, Hidroelectrica has an emergency preparedness plan (EPP) for the area downstreamo f the Vidra dam. Hidroelectrica i s developinga sophisticated communication (warning) systems for Vidra, and once completed (target i s March ZOOS), the Vidra EPP will be updatedto incorporate the new warning system. These aspects of the project are covered under the Bank`s safeguard policies, as presentedinAnnex 10. Hidroelectrica will monitor and evaluate on an ongoing basis the carrying out of the project and the achievement o f the objectives, and will submit to the Bank, at the end o f each calendar quarter, quarterly progress reports. Hidroelectnca will also prepare and furnish to the Bank, by December 31,2006, a mid- term review report integratingthe results o f the monitoring and evaluation activities. Hidroelectrica will review the mid-term report with the Bank, by March31,2007, and will take all measures required to ensure the efficient completion o f the Project, basedon the conclusions and recommendationso f the mid- term review. 32 Annex 7: FinancialManagementand DisbursementArrangements EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) Romania/LotruProject: 1. Summary Country Issues The first Country Financial Accountability Assessment (CFAA) for Romania was finalized inDecember 2003 and concluded that the overall fiduciary risk associated with the public financial management and financial accountability arrangements o f the Romanian government administration is considered to be moderate, with the systems for accounting, financial reporting and internal control representing the areas withthe higher risks andbudgeting, cashmanagement and external audit and Parliamentaryoversight representing the lower risks. The implications o f the CFAA for the project are addressed by the following actions: 0 A detailedreview ofthe systems was performedfor the implementing entity; 0 The implementing entity has a distinct project-specific accounting ledger; 0 Project accounting staff has been nominatedfor the implementing entity; 0 The format of the FMRs and financial reports agreed with the implementing entity; and 0 Hidroelectrica entity as well as the Project financial statements auditedby an independent auditor annually. Strengths and Weaknesses The significant strengths that provide a basis o f reliance on the project financial management system include: (i)the experience o f Hidroelectrica and its financial staff inimplementing Bank-financed projects and satisfyingBank financial management requirements, as some o f Hidroelectrica's staff have worked on the previous Power Sector Project that was implementedby the previous National Electricity Company and on the Electricity Market Project, implementedby Transelectrica; and (ii) the simple funds' flow. There are no significant wealaesses o f the project financial management system. Implementing Entity Hidroelectrica - Hidroelectrica was established inAugust 2000 as commercial legal entity, by Government decision, following the restructuringo f the National Electricity Company. The existing project implementation team established within Hidroelectrica would be responsible for the financial management aspects of the Project. The LoanAgreement will be signed between the World Bank (IBRD)and Hidroelectrica with the Government o f Romania guarantee issuedby the MPFunder a Guarantee Agreement. 33 Funds Flow Project funds will flow inrespect o f each of the sources o f project financing as follows: (i) The Bank loan, by direct payments or via the Special Account, which will be replenishedon transactional methods usingStatements o f Expenditure; and (ii)Govemmentcounterpartcontribution,viadedicatedTreasuryprojectaccounts. A Special Account will be openedat a commercialbank and on terms and conditions acceptable to the Bank. Foreign currency amounts will be exchanged as needed inlocal currency (ROL), to cover eligible expenditures payments inlocal currency to suppliers, from the Special Account into a local currency transfer account that will be opened at a commercial bank and on terms and conditions acceptable to the Bank. Government counterpart contributionpayments will be made from a separate Treasury project account, being a sub-account o f Hidroelectrica's main budgetary account, and which will be used specifically for the counterpart contributions to the project. These contributions will be received monthly inaccordance with normal budget procedures. Stafflnng The project implementationteam includes a project director, a finance team comprising the project finance Manager, project disbursement officer and project accounting officer and a number o f technical and procurement specialists. The project finance manager has good experience of implementing Bank- financed projects and has demonstrated that it i s fully capable o f fulfilling the financial management needs of the project, as shown duringthe previous years worked on the Bank-financed Power Sector Project that was implemented by the previousNational Electricity Company, and the Electricity Market Project. Accounting Policies and Procedures The project's accounting books and records at the various agencies will be maintained on an accrual basis and denominated inRomanian Lei (ROL) with the exception o f the books and records inrespect o f the Special Account which will be maintainedinthe currency o f the IBRDLoan. Hidroelectricahas inplace appropriate accounting regulations and internal controls including authorization and segregation o f duties documented inthe internal control procedures and regulations. 2. Audit Arrangements Internal Audit Hidroelectrica has recently established its internal audit department. It i s anticipated that the internal audit department will review the project's financial management arrangements. The internal audit department will include inthe annual work program the Project, as part o f Hidroelectrica's overall activities. However, the internal audit department has, so far, relatively limitedexperience, beingrecently established. 34 External Audit As o fthe date o fthis report, the Borrower is incompliance with its audit covenants o fthe Bank-financed projects. Hidroelectrica has been audited inaccordance with ISA since its incorporationin2000 by independent extemal auditors. The auditors issued a qualified-exception opinion on Hidroelectrica's financial statements for 2002 and 2003, due to issues relating to inventory and to the application o f I A S 36 and aspects pertainingto fixed assets. The auditors issueda disclaimer o f opinion on Hidroelectrica's financial statements for 2000 and 2001 due to matters related to I A S 29, public patrimony, inventory, accounts payable, fixed assets, going concem and financial position o f the company. The Project will be audited annually bothby an audit firm and on terms o f reference acceptable to the Bank. The terms of reference for the audit have been agreed and were attached to the minutes o f negotiations. The audit scope will include the project's books and records as maintained by the implementing entity, all withdrawal applications, and the Special Account. The audited project financial statements together with the auditor's opinion thereon will be provided to the Bank within six months of the end o fthe reportingperiod, being the fiscal year. Hidroelectrica's financial statements will be audited annually, bothby an audit firm and on terms of reference acceptable to the Bank. The terms o freference for the audit have been agreed and were attached to the minutes o f negotiations. Inaddition, the RomanianCourt ofAccounts (CoA), the country's supreme audit institution, will continue to perform ad hoc extemal audits o f the implementing entities, including of this project. The most recent audit report prepared by the CoA, dated July 2004, covering FY 2001 - 2003 for Hidroelectrica has been reviewed. The points raisedby the CoA have been satisfactorily addressed by Hidroelectrica and the CoA confirmed that Hidroelecticahas discharged its obligations inrespect of the execution and reporting of the budget. 3. DisbursementArrangements The Loan proceeds would be disbursed over a five-year period (May 2005 to June 2010). The project completion date would be December 31,2009 and the loan closing date would be June 30,2010, when full disbursement o fthe Loanis anticipated. Hidroelectrica would maintainallrequired supporting documentation for at least one year beyond the year inwhich the last withdrawal from the Loan Account has taken place and make it available for review by the Bank staff and independent auditors upon request. 35 Allocation o f loan proceeds i s shown inthe Table below: Allocation of Loan Proceeds Expenditure Category Amount in EUR Financing Percentage million 1.Goods (including installation) 59.30 100% of foreign expenditures, and 100% o f local expenditures (ex-factory LotruRehabilitation cost), and 80% for other items procured locally 2. TA: Consulting Services 3.00 85% incurred by foreign consultants and 75% incurred by local consultants 3. Unallocated Amount 3.70 4. Premia for Interest Rate Caps and Interest 0.00 Rate Collars Total Project Costs with Bank Financing 66.00 Interest during construction 0.00 Front-endfee 0.00 Total 66.00 Use of Statements of Expenditure (SOEs): Bank funds will be disbursed under the Bank's standard procedures including SOEs and direct payments. Supportingdocumentation for SOEs, including completion reports and certificates, will be retained by the Borrower and made available to the Bank duringproject supervision. Disbursements for expenditures above the SOE threshold o f EUR 100,000 (EUR 20,000 for individual consultants) will be made against presentation of full documentation relating to those expenditures. There is no plan to move to periodic disbursements. Special Account: Hidroelectrica will open and manage a Special Account specifically for this project, ina commercial bank acceptable to the Bank, including appropriate protectionagainst set-off, seizure and attachment. Withdrawal applications for the replenishments o f the SA will be sent to the Bank monthly, or when about 33% o fthe initial deposit inthe SA has been utilized, whichever comes first. The S A will be kept inthe loan currency, for which the Borrower has already expressed its preference for Euro. Authorized allocation for S A would be EUR 6.6 million, initial allocation would be EUR 4 million, increasedto EUR6.6 million after withdrawal applications and special commitments reachEUR 12 million. 4. Reporting and Monitoring Project management-oriented FinancialMonitoring Reports (FMRs) will be used for project monitoring and supervision. The project implementingteam inHidroelectrica will produce the project's FMRs every calendar quarter and the reports will be submittedto the Bank within45 days after the calendar quarter- end. The formats o f the FMRs and financial reports have been agreed and were attached to the minutes of negotiations. 36 5. InformationSystems Hidroelectrica has a modern accounting software system inplace implementedby a Romanian software firm which also provides systemmaintenance. A project-specific accounting ledger has beencreated within Hidroelectrica's accounting software systemto recorddistinctly the operations o fthe project, using the existing chart of accounts. 6. ActionPlan(AgreedwithBorrower) None required. 7. SupervisionPlan Duringproject implementation, the Bankwill supervise the project's financial management arrangements intwo mainways: (i) the project's quarterly financial monitoringreports (FMRs)aswell as the review project's annual audited financial statements and auditor's management letter; and (ii) duringthe Bank's supervision missions, review the project's financial management and disbursement arrangements (including a review of a sample of withdrawal applications and movements on the Special Account) to ensure compliance with the Bank`s financial management requirements. 37 Annex 8: ProcurementArrangements EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) RomanialLotruproject: A. General Procurement for the proposed project would be carried out inaccordance with the World Bank's "Guidelines: Procurement Under IBRDLoans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulatedinthe Legal Agreement. The various items under different expenditure categories are described ingeneral below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank inthe Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. Procurementof Goods: Goods procuredunder this project would include a large (upto US$SO million) Supply and Installation contract for rehabilitation o f Lotru HPP. It i s envisioned that procurement will be conducted intwo stages with prequalification o fbidders. Selectionof Consultants: The Borrower will select and hire consultants to provide technical, procurement and construction supervision assistance. Consultants have been engaged through advance procurementbefore the Loanis approved and signed and costs will be reimbursedretroactively. The Borrower will also select and hire consultants to provide institutionbuildingsupport under a twinning arrangement with a power utility with significant hydro generation and experience inoperating inanelectricitymarket under EUmarket liberalization approach. The scope of suchtwinning arrangement would include: (a) contracting - bilateral contracts, riskmanagement using day-ahead markets and optiodcapacity contracts etc., (b) investmentplanning and prioritization; (c) financial planning and project finance; (d) project management; (e) humanresource development, etc.. Consultants will be engaged through the standardprocedure for the selection of firms. B. Assessment ofthe agency's capacityto implementprocurement Procurement activities will be carried out by Hidroelectrica, the Borrower. The key issues and risks concerning procurement for implementation o f the project have been identified and include lack o f experience with the Bank-financedprojects and lack o f personnel experienced in international procurement. The corrective measures which have been agreed are training of the personnel of the Borrower (a training session was provided duringpreparation mission) and hiringof experienced international and local consultants. The overall projectrisk for procurement i s average, subject to satisfactory implementing the above corrective measures. 38 C. Procurement Plan The Borrower, at appraisal, developed a procurement plan for project implementationwhich provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on November 8,2004 and i s summarized in Section E-it consists o f one large supply and installation contract, plus consulting services for Hidroelectrica's institutional development and project implementation (procurement support). The Procurement Plan will be updated inagreement with the Project Team annually or as required to reflect the actual project implementationneeds and improvements ininstitutional capacity. D. Frequency of Procurement Supervision Inaddition to the prior review supervision to be carriedout fi-om Bankoffices, the capacity assessment of the Implementing Agency has recommended 6-month frequency for supervision missionsto visit the field to carry out post review o fprocurement actions. r E. Details of the ProcurementArrangements Involving InternationalCompetition 1. Goods, Works, and Non ConsultingServices (a) List o f contract packages to be procured following ICB and direct contracting: 12 6 7 8 Contract Procurement Domestic Review Expected Comments (Description) Method Preference by Bank Bid- (yedno) (Prior/ Post) S&I Prior Contract for rehabilitatio no fLotru HPP I I (b) ICB contracts and all direct contracting will be subject to priorreview bythe Bank. 39 2. ConsultingServices (a) List o f consulting assignments with short-list o f international firms. 1 2 3 4 5 6 Ref. No. Description of Selection Review Expected Comments Assignment Method by Bank Proposals (Prior / Post) Submission Date 1 Technical/ Individual prior Oct 04 procurement Cons. (actual) 2 Twinning Firm prior June 05 Arrangement for Institution Building (b) Consultancy services estimated to cost above US$50,000 per contract and single source selection of consultants will be subject to priorreview by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions ofparagraph 2.7 o f the Consultant Guidelines. 40 Annex 9: EconomicandFinancialAnalysis EUROPEAND CENTRALASIA: EnergyCommunityof SouthEastEurope(APL1) Romania/Hidroelectrica: Regulatory Environment Hidroelectrica is the lowest-cost generator inthe Romanianpower system. The key to Hidroelectrica's finances (including much-improvedprofitability from 2005) i s inthe regulatory (tariff and market) framework and the Romanian Government's electricity pricing strategy for hydro, which i s implemented bythe electricity regulatorANRE, as part o fthe Government's overall strategy for electricity tariffreform and electricity market liberalization. Electricity Market. Through a series o f tariff adjustments by ANRE (discussed below), overall tariff revenue inthe power sector has been brought up to cover the cost o f supply and cross-subsidies have been largely eliminated. Inparallel, Romania has started the liberalization o f its electricity market, along the lines of EUdirectives, which require member countries to allow a gradually increasingshare of electricity to be contractedbetweensuppliers (generators andtraders) and eligible customers -- electricity users qualified to purchase power directly from the wholesale market. Liberalization was launched in2000, and the share o f liberalized market has been raised rapidly. FromNovember 2004, market opening reached 55% when all consumers (about 2,000) with an annual consumption o f 1GWhor higher became eligible to choose their supplier. Full 100% opening i s set for July 1,2007, inaccordance with the Government's RoadMap and Directive 2003/54/EC. Hidroelectrica accounts for about `/4 o f Romania's power supply and most o f the ancillary services to Transelectrica, the system operator. Beingthe lowest-cost generator, Hidroelectrica is one o f the main beneficiaries o f market liberalization. However, in accordance with Government Decision No. 1524/2002, ANRE was required to fully regulate Hidroelectrica's operations beyond its bilateral contracts already inplace from 2003 untilthe 100% liberalization o f the electricity market inJuly 2007. This transitional strategy for hydrowas reviewed in 2004, resulting inGovernment DecisionNo. 1336 in August 2004, under which hydroliberalization was restarted andis now being implementedinline with the overall market liberalization. Hidroelectrica's market comprises o f four main segments: (a) "eligible customers" indomestic market supplied at marketprices under bilateral contracts andthrough OPCOM's Power Exchange (a day-ahead market); (b) distribution utilities that supply electricity to regulatedcustomers at prices regulatedby ANRE; (c) Transelectrica as the purchaser o fancillary services at prices regulatedby ANRE; and (d) export customers at negotiated prices. Because o fprogressive market deregulationHidroelectrica's sales mix has changedrapidly to its advantage: f?om FY2001to FY2004, its sales at regulatedtariffs have decreased from 75% o f its output to about 40%, with a corresponding increase i s sales to eligible customers and exports. Further reduction in sales to the regulated market will take place from January 2005, when the market i s opened to 55% o f consumption. Electricity Tariffs. Since 1999, ANRE has implementeda series of tariff adjustments, usually 2-3 per annum (and once, inSeptember 2001-April 2002, monthly). In2003, ANRE had three adjustments (January, April and September), but then decided to adopt a 6-month cycle for tariff reviews. Accordingly, it made two adjustments this year, inJanuary and July 2004, and the latest adjustment i s to become effective on January 1,2005. Inaccordance with Governmentpolicy, ANRE kept hydro tariffs at a very low level, o f about U S cent OS/kWhequivalent, untillate 2003. The policy provided for tariff 41 revenues to Hidroelectrica set to enable to it cover its day-to-day operations, but no financing for investment. Inthe meantime, ANRE carried out rapid adjustments inthe retail tariffs, and inthe rates for thermal generation to bringthe major thermal generator, Termoelectrica, to cost recovery level. Due to the very highinflation in Romania and depreciation o f the RomanianLeu against the US$ until 2001, ANRE'Stariff adjustments inthe 1999-2001 period, though significant inlocal currency terms, still resultedina reduction inthe average retail price o f electricity inUS$ terms. With the moderating inflation, since 2001 through 2004, retail tariff adjustments inUS$ have been o f the order o f 20-30%, and the resulting 2003 tariff would have been sufficient for the power sector to reach cost recovery level, had a drought not occurred. Largely to compensate Hidroelectrica for the significant losses incurred in2003 due to the drought, ANRE doubled Hidroelectrica's tariffto about U S cent lkWh equivalent in September 2003, with a corresponding adjustment inretail rates. With these adjustments, the power sector was projected to cover its costs in 2004. InMarch 2004, at the requestofthe Government, the BankreviewedRomania's electricity tariffs inclose operation with ANRE. The March 2004 review made a number o f recommendations to the Government and ANRE regarding policy and tariffs, respectively. Among the recommendations was the doubling of Hidroelectrica's tariffs by January 2005, to a still low level o f about U S cents 2/kWh. Such tariff action has been effected by ANRE. It was necessary for Hidroelectrica to: 0 meet its financial obligations (including payment o f arrears incurred due to the drought in2003, by the end o f the agreed three-year period); 0 start generating funds for investments (rehabilitation o f its aging plants andcompletion of projects initiated years ago which had stalled due to lack o f funds); and 0 be properly integrated into the liberalizing electricity market -where the level o f market opening is set to reach 55% inJanuary 2005. Hidroelectrica has reached a sound and generally satisfactory financial position. Hidroelectrica's Operations Hidroelectrica's Past Financial Performance. Hidroelectrica's financial performancehas been analyzed from FY2001, the year inwhich it commenced its operations as an independent company. A summary o f its financial performance for the period FY2001-03 and latest estimates for FY2004 are provided inTable 1below. Highlights can be summarized as follows: 0 Profitability. Inspite oflargeproportionofsalestoregulatedcustomersattariffswellbelowits average cost o f supply, Hidroelectrica eamed a profit inFY2001 and 2002. InFY2003 Hidroelectrica suffered a financial loss o f US$ 112 million due to a severe drought and resulting shortfall ingeneration. Inadd incurred a loss, its collections from regulated customers also dropped. However, because of exceptionally low level o f debt for such a highlycapitalized company (debt equity ratio o f O.Ol), it didnot default to its lenders; 0 Billing and Collection. Hidroelectrica's collection efficiency currently at an average o f 80% i s less than satisfactory and well below the overall performance inthe power sector12. Its bill '* Inadequate bill collection hadbeen a major financial issue inthe power sector since 1990s. With strong support from the Bank (under PSAL and PSAL2) and the IMF(under its Stand-By Arrangements), the Government and the distribution utilityElectrica have progressively and ultimately successfully addressed this issue. For the whole of 2003, Electrica achieved a bill collectionrate of 99%. Similar accomplishment has been achieved inthe gas sector, where the two distribution utilities reached a bill collection rate o f 100%for 2003. These highly 42 collection from export and eligible customers i s near hundredpercent. However, it gets paidby the distribution companies (all still Electrica subsidiaries) serving regulatedcustomers through a centrally-administeredprocedure o f distributingElectrica's cash collections according to the suppliers' operatingneeds. This system works against Hidroelectrica due to its low operating costs and appears to favor thermal generators particularly Termoelectrica. Inresponse/as a result, Hidroelectrica has been unable to service some o f its obligations. With the expected gradual discontinuation o fthis centrally-administered system inline with distributionprivatization from FY 2005, Hidroelectrica's collection efficiency is expected to improve; and 0 Accounts Payables. Liabilities o fU S $ 118 million, incurred on account of power purchased in the spot market from Termoelectrica to meet its supply obligations, will be set o f f against fiture profits over three years FY2004-06 -- part o f the resources to be generated fi-om the tariff increase inFY2004 andthe increase expected inFY2005 will go towards paying offthe shortterm debt and bills outstanding to Termoelectrica over the next three years. Reduction inintemal resources will create a financing gap inHidroelectrica's investment programinthe mediumterm Hidroelectrica's ProjectedFinancialPerformance. Hidroelectrica's financial performance has been analyzed through FY2012. A summary o f its projected financial performance for the periodFY2005-12 i s provided inTable 1below. Highlightscan be summarized as follows: 0 Profitability. Hidroelectrica's tariffs for regulated customers will be adjusted significantly in January 2005 and further by 2007 so as to reach the level o fprices inthe electricity market and avoid a tariff shock when the market i s fully deregulated in2007. Even under conservative assumptions o f market prices remaining constant inreal terms, Hidroelectrica's revenue will be adequate to cover its costs and provide an average profit margin o f more than 20% inthe FY05- 12period. Given the projectedtightening supply situation inthe region, Hidroelectrica's profitability may tumout to be higher than projected. Hidroelectrica will also benefit as a competitive supplier o f ancillary services inRomania and inthe region. A 50% dividend payout ratio has been assumed from FY2007 after Hidroelectrica has fully recoveredits losses and paid its obligations incurred duringthe drought o f FY 2003. However, the past asset revaluations would result ina low return on net worth, expected to be about 2% over the projection period; 0 Capital Structure. Due to the low level o f debt and asset revaluations, Hidroelectrica's debt equity ratio i s only 0.02. At the end o f FY2003, revaluation reserves were US$ 3.4 billion out of its net worth o f US$5.5 billion. Despite a projectedinvestment program of over US$3 billion in the next eight years, its debt equity ratio is expected to go up to only 0.16 inFY 2012; and 0 InternalResource Generation and Investment Program. From2005 to 2012, Hidroelectrica plans to invest about US$3.3 billion: US$1,265 million inrehabilitation o f its existing hydro projects including Lotruto be financed through the proposed loan, US$802 million on completion of ongoing and other partially completedprojects, and US$1,260 million on new capacity addition. Allowed to recover depreciation on its revalued assets, Hidroelectrica's intemal resource generation will be substantial and adequate to support this program. Because o f the l o w debt equity ratio and strong self-financing, Hidroelectrica's debt service coverage will remain highandHidroelectricashould be able to also access commercial sources to help finance a part of its investment program. satisfactory rates have beenmaintained in2004, and with the distribution privatization now underway (Annex 1, Section 2), high collection rates are expected to be maintained also inthe future. This is an importantpositive factor for the future financial performance of Hidroelectrica. 43 Targets and Commitments under the Project. Basic financial targets, designed to safeguard Hidroelectrica's financial position and operations, including its ability to provide ancillary services to Transelectrica for the reliable and efficient operations o f the Romania and regional power system, have been agreed: Hidroelectrica will maintain a debt equity ratio o fnot less than 1.5 and a current ratio of not less than 1.2. It was also agreed that Hidroelectrica and the Govemment would finalize during2005 a concession agreement for Hidroelectrica's public domain assets -as was done for Transelectrica's public domain assets under the Electricity Market Project in2004. The concession agreement will inter alia formalize Hidroelectrica's continued use o f such assets inits operations and facilitate the treatment o f related fees to the Government and Hidroelectrica's operations and maintenance costs by ANRE. Mitigation of HydrologicalRisk. Hidroelectrica's financial risks (inaddition to bill collection) arise due to possible hydro failure and exchange and interestrate variations. The last two are easier to manage since Hidroelectrica has adequate foreign exchange earning from its exports, and due to its low level o f debt it will be able to cover interest rate variations even under adverse circumstances. However, mitigation o f hydro failure riskrequires careful consideration: e Inthe absence ofavailability ofhedgingproducts inthe market, Hidroelectrica couldmitigate this risk through contracting long term bilateral and export sales only for primary energy (firmenergy capability o f available hydropower plants). As the electricity market develops and Hidroelectrica gains experience and skills, Hidroelectrica could use more sophisticated techniques o frisk assessment and mitigation; 0 The appraisal team recommendedto Hidroelectrica and ANRE that inthe formulation o f the Portfolio Contract for Hidroelectrica for sale to the distribution companies for their sales to the regulated customers, it would be prudent to restrict the amount of energy that Hidroelectrica would sell through Portfolio Contracts and other bilaterally negotiated contracts to a level equivalent to primary energy o f available hydropower plants. This implies that OptionContracts between Hidroelectrica and thermal producers should be used to back-stop the Portfolio Contracts and also the bilaterally negotiated contracts. The balance (secondary energy) would be sold through OPCOM's Power Exchange; and e Hidroelectricaconfirmed that it intends to negotiate option contract(s) with thermal generator(s) to back-up its power sales contracts. Hidroelectrica will also establish a twinningarrangement with a power utilitywith significant hydro generation and experience inoperating inan electricity market under EUliberalization approach. The scope o f such twinning arrangement would include: (a) contracting - bilateralcontracts, riskmanagement usingday-ahead markets and optiodcapacity contracts etc., (b) investment planning and prioritization; (c) financial planning and project finance; (d) project management; (e) human resource development, etc. The twinningarrangement will be financed under the technical assistance component for Hidroelectrica's institutional development. 44 45 Annex 10: SafeguardPolicyIssues EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) The classification of the APL program and AE'L1 i s FI. Most of the country-level investment projects are expected to be B-category projects. RomanidLotrui s a B-categoryproject. However, individual country-level investmentprojects includedinthe later installments ofthe APL programmay contain components that would beratedas belongingto the A-category or C-category. Romania/Lotruproject: Therehabilitation ofthe Lotrustationwill have only minor environmental impacts andno social impacts. There are no issues. The station i s located about 140meters underground. The main impact i s the disposal o f equipment replaced underthe project. An Environmental Management Plan (EMP) has been prepared and public consultations have been held. Ithas been cleared bythe Bank and submitted to the Infoshop. Hidroelectricawill implementthe EMP andprovide inthe quarterly progress reports the results o f the monitoring programs included inthe EMP. The Lotru hydro project triggers OP 4.37 on D a m Safety: Romania's and Hidroelectrica's dam safety laws, regulation andarrangements, ingeneral and as applied to the Vidra dam, and Hidroelectrica's undertalungs regardingVidra dam duringthe implementation of the project, are satisfactory with respect to the Bank's safeguardpolicy on the Safety o f Dams. RomanianLaw on the Safety o fDams requires statutory safety assessmentsto be carried out once in every seven years, or more frequently ifrequiredby Romania's National Commission for Dam Safety (CONSIB). CONSIB i s independentfrom Hidroelectrica; therefore the provisions comply with the requirements of OP 4.37. A statutory assessment of the Vidra damwas carried out in2002. The safety of the dam was found satisfactory. A number o f recommendations were made for continued safety, to be implemented in2002-2005. Hidroelectrica is implementing the recommendations, as part o f its corporate commitment to ensure the continuedsafety o f all of its dams. Hidroelectrica has its own Committee on Dam Safety, which reviews annually Hidroelectrica's ongoing dam safety monitoring programs and reports and submits an annual report to CONSIB. Although there are no concerns and no problems are envisionedbased on Hidroelectrica's track record in general l3andwith Vidra dam specifically, at the Bank's request Hidroelectrica agreedto: (a) submit annually to the Bank: (i) reports o f statutory and its own inspections o f the Vidra dam; and (ii) on the implementation of their recommendations; and reports (b) discuss the reports withthe Bank andundertake additionalmeasuressuggestedbythe Bankin consultationwith CONSIB. All Hidroelectrica dams includingVidra have emergency preparednessplans (EPPs), basedonthe 1995 law on disaster protection, 1996 law on civil protection, the 1999Water Act, and 2001 law on dam safety, The current EPP for Vidra dami s from 2003. It was reviewedand found satisfactory. A copy has been placed in the project file. Hidroelectrica has an ongoing program to develop sophisticated communication (warning) systems, launched in2002 inthe potentially most critical dams and to be completed in2006. l3 As part ofthe preparation of the HazardRiskMitigationand EmergencyPreparednessProject (approved inMay 2004), the Bank carried out a dam safety assessment. On that basis, a number of unsafe dams were selectedfor rehabilitation underthat project, all from the priority list o f Romania's National Commission for Dam Safety (CONSIB). None of the unsafe dams are administeredby Hidroelectrica. 46 Vidra project is underway for completion inMarch 2005. Once completed, the Vidra EPP will be updated to incorporate the newwarning system. At the Bank's request, Hidroelectricaagreed to submit in 2005 the updated EPP, indraft for Bank review and infinal form for Bank records, and informthe Bank about consultations with and by local authorities about the update. Inaddition, Hidroelectricawill keep the Bank informed offuture updatesofthe EPP for Vidra. The proposedfinancingof the rehabilitation ofthe Lotru hydroprojecttriggers OP 7.50 on ProjectsinInternationalWaterways: The project is onthe LotruRiver, which flows into Olt River, which inturn flows into Danubeonthe border of Romania and Bulgaria before reachingthe Black Sea. An exemption from the notification requirement under OP 7.50 has been granted: the Lotruproject does not involve works and activities that would exceedthe original scheme, change its nature, or alter and expand its scope and extent to make it appear a new or different scheme. Consequently, it falls within the exception set forth inparagraph 7 (a) of OP7.50 as: (a) it will not adversely affect the quality or quantity of water flows to the other riparians; and (b) it will not be adversely affected by other riparians' water use. Romaniai s a signatory of the Convention on Co-operation for the Protectionand Sustainable Use of the River Danube (short title: Danube RiverProtectionConvention-DRPC). The Conventionis aimed at achieving sustainable and equitable water managementinthe Danube basin. An Intemational Commission for the Protectionof the Danube River (ICPDR) was established under the Convention. The RomanianGovernment, Hidroelectrica and the Bank's project team discussed the relevant provisions of this Conventionand agreedthat sincethe Lotrudoes not have any adversetransboundary impacts, no notification to the ICPDR i s requiredunder the Convention. The team also reviewed Romania's bilateral agreements on transboundary waterways with Ukraine and the former Yugoslavia and a proposed agreement with Moldova and confirmed that the provisions of those agreementsdo not require notification about the Lotruproject becausethere is no transboundary impact. This review was facilitated byBank's work for the HazardRiskMitigationand Emergency PreparednessProject (footnote 13). 47 Annex 11: ProjectPreparationand Supervision EUROPEAND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) Planned Actual PCNreview January 2004 January 23,2004 InitialPID to PIC February204 March 9,2004 InitialISDS to PIC February 2004 March 8, 2004 Appraisa1 September2004 October 2004 Negotiations November 2004 November 11,2004 BoardRVP approval December2004 Planned date o f effectiveness May 2005 Planned date ofmid-termreview March 2007 Plannedclosing date June 30,2010 Key institutions responsible for preparation ofthe project: 0 ECSEE The governments of South East Europe andthe EuropeanCommission - 0 RomanidLotm project -Hidroelectrica and its consultants includingthe Institute o f Hydroelectric Studies and Design 0 RomanidElectricity market andregulatory framework -ANRE, OPCOM and Transelectrica, and their consultants Bankfunds expendedto date onproject preparation: 1. Bank resources: $425,000 2. Trust funds: $37,500 3. Total: $387,500 EstimatedApproval and Supervision costs ofAPLl: 1. Remaining costs to approval: $25,000 2. Estimated annual supervision cost: $80,000 48 Bankstaff andconsultantswho worked ontheECSEEAPLprogramandthe APL1 RomanidLotruproject included: Name Title Unit Kari Nyman * Lead Specialist -ECSEE Team Leader, Romania, Croatia ECSIE IrinaKichigina Sr. Counsel LEGEC Rozena Serrano Program Assistant ECSIE Doina Visa Operations Officer -Romania ECSIE Doncho Barbalov Operations Officer -Bulgaria ECSIE Nicholay Chistyakov Sr. Finance Officer LOAGl Bogdan Constantinescu Sr. Financial Management Specialist IstvanDobozi * ECSPS Lead Energy Economist -Bulgaria ECSIE Projects Officer - Croatia Mohinder Gulati * Stjepan Gabric ECSIE Sr. Financial Analyst - Serbia andMontenegro, Kosovo DavidKennedy * ECSIE Sr. Energy Economist - Regional Strategy, Macedonia IftikharKhalil * LeadEnergySpec. - Albania, Bosnia andHerzegovina ECSIE ECSIE Ranjit Lamech * Sector Leader-Turkey IEF George Moldoveanu Team Assistant Romania - ECCRO DejanOstojic Sr. Energy Spec. - Regional Generation Investment ECSIE GurhanOzdora Sr. Operations Officer Turkey - ECSPF Alessandro Palmieri LeadDam Specialist ESDQC JonathanPavluk Sr. Counsel LEGEC Stan Peabody Lead Social Scientist ECSSD LeonidVanian Sr. Procurement Specialist ECSPS Daniel Aizic Consultant -Financial Analyst -- BernardBaratz Consultant Environmental Specialist - EASEG Ramon Lopez-Rivera Consultant -Engineering, Hydropower ECSIE PeerReviewers: Ludmilla Butenko Sr. ResourceManagement Officer SFRRM Amarquaye Armar Lead Energy Specialist EWDEN Patricio Marquez LeadHealth Specialist ECSHD * ECSEE AF'L program team membersandtask leaders for ECSEE APL country projects as listed above 49 Annex 12: Documentsin the ProjectFile EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) 1. ECSEE: ECSEE Treaty, draft, version IV.5, December 3,2004 Athens Memorandum, December 8,2003 Athens Memorandum, November 15,2002 ECSEE information at http://www.seerecon,ora/infrastructure/sectors/enerPy/index.html 2. Romania/Lotruproject: Hidroelectrica, annual reports, 2001,2002,2003 LotruProject Feasibility Study, four volumes, Institute o f Hydroelectric Studies andDesign, August 2004 L o i nProject, Environmental Synthesis, Institute o fHydroelectric Studies andDesign, August 2004 Environmental Impact Assessment, Institute o f Power Studies and Consultancy, June 2004 Vidra Dam, Institute o f Hydroelectric Studies and Design, September 2004 Dam Safety Report, Daniel Gunaratnam, prepared for the Romania Hazard Risk Mitigationand Emergency Preparedness Project, July 2003 Hidroelectrica information at: http://www.hidroelectrica.rokidrohomeengl.asp ANRE information at: http:Nwww.anre.ro 50 Annex 13: Statementof Loansand Credits EUROPE AND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) Active Projects ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO66065 2002 AG POLLUTION 5.15 2.38 0.68 CONTROL (GEF) PO43882 2000 AGR SUPPORT SERVS 11.OO 3.64 3.64 0.04 11.00 PO44176 1999 BIODIV CONSV 5.50 1.75 1.75 1.04 MGMT (GEF) PO58284 1999 CULTURAL 5.00 0.89 0.89 0.89 5.00 HERITAGE PO81406 2003 ELECMARKET 82.00 87.95 -7.87 82.00 PO68062 2003 ENERGY EFF (GEF) 10.00 8.28 6.23 PO67367 2003 FORESTDEVT 25.00 24.22 PO34213 1998 GEN'L CADASTRE 25.50 13.90 13.90 4.63 25.50 PO75163 2004 HAZ MITIG 150.00 149.90 0.90 150.00 PO78971 2005 HEALTH SEC REF 2 80.00 86.72 80.00 (APL #2) (CRL) PO43881 2004 IRRIGREHAB 80.00 79.80 3.10 80.00 PO86949 2005 MAKIS AGRIC SUF'PT 50.00 53.47 50.00 SERVS (CRL) PO56337 2000 MINE CLOSURE 44.50 19.57 19.57 5.57 44.50 PO87807 2005 MINE CLOSURE, ENV 120.00 120.00 120.00 & SOCIO-ECOREG (CRL) PO08791 2005 PAL 150.00 152.06 150.00 PO39251 1999 PIBL 25.00 1.10 3.43 4.53 25.00 PO69679 2003 PPIBL 18.60 17.77 -0.83 18.60 PO39250 1997 ROADS 2 150.00 14.76 14.76 150.00 PO57960 2002 RURAL DEV (APL#1) 40.00 34.57 10.07 40.00 PO73967 2003 RURAL EDUC 60.00 56.39 4.80 0.89 60.00 PO56891 2001 RURAL FIN (APL #1) 80.00 64.67 44.47 -6.33 80.00 PO68808 2002 SDF 2 (AF'L #2) 20.00 9.38 -10.62 0.38 20.00 PO08783 2001 SOC SECT DEV (SSD) 50.00 42.52 37.64 50.00 PO83620 2005 TRANSPORT 225.00 225.00 225.00 RESTRUCTURING 20.65 1.10 1273.03 150.49 7.11 1491.60 *PO89568 Banat & DobrogeaElectricy 76.7 DistributionCompanies Partial Risk Guarantee 51 ROMANIA STATEMENTOF IFC's HeldandDisbursedPortfolio InMillionsofUS Dollars Held Disbursed F Y Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partio 1999 Ambro 3 07 0 0 0 3.07 0 0 0 2003 Arctic 12.79 0 0 0 12.79 0 0 0 2002 aanc post 0 0 10 0 0 0 10 0 2003104 Banca Comerciala 0 111 0 0 0 111 0 0 2001 Banca Romaneasoa 3 29 0 0 0 3.29 0 0 0 2001 ICME 10.55 0 0 0 10 55 0 0 0 1998 Krupp Compa 1.51 0 0 0.65 1.51 0 0 0.65 3/4/2002 M F I MFB Romania 10 0 0 0 5 0 0 0 2004 RZB Romania 40 0 0 0 40 0 0 0 1997 Rambox 0 23 0 0 0 0.23 0 0 0 2003 Ro-Fin 5.02 0 0 0 1.01 0 0 0 2004 Romanian-Amer .. 3 0 0 0 3 0 0 0 19-34/01 Romlease 2 22 0 0 0 2.22 0 0 0 2004 Transilvaniabank 25 57 0 0 0 3.84 0 0 0 Total Portfolio. 1 1 7 2 5 111 10 0 6 5 86 51 111 10 0.65 A p p r o v a l s Pending Commitment Loan Equity Quasi Partic 2005Banvil Romania 15 0 0 0 2004Mindbank 7 0 0 0 2003Ro-Fin Mortgage 0 0 1 0 Total Pending Commitment: 22 0 1 0 I 52 Annex 14: Country at a Glance EUROPEAND CENTRAL ASIA: EnergyCommunityof SouthEastEurope(APL1) Europe & Lower- POVERTYand SOCIAL Central middle- Romania Asia income Developmentdiamond* 2003 Population,mid-year (millions) 21.7 473 2,655 Life expectancy GNI per capita (Atlas method, US$) 2,260 2,570 1,480 GNI (Atlas method, US$billions) 49.2 1,217 3,934 Average annual growth, 1997-03 Population("A) -0.6 0.0 0.9 Laborforce ("A) 0.1 0.2 1.2 GNI Gross per - __ primary Most recent estimate (latest year available, 1997-03) capita enrollment Poverty(% of population belownationalpoverty line) 25 Urban population("A of totalpopulation) 56 63 50 Lifeexpectancy at birth (years) 70 69 69 Infantmortality(per 1,000live births) 20 31 32 Child malnutrition(% of childrenunder 5) 11 Access to improvedwater source Access to an improvedwater source (% of population) 58 91 81 Illiteracy("A ofpopulation age 15+) 2 3 10 Gross primary enrollment ("A of school-agepopulation) 99 103 112 Romania Male 100 104 113 Lower-middle-income group Female 98 102 111 KEY ECONOMICRATIOS and LONG-TERM TRENDS I 1983 1993 2002 2003 . -~ Economicratios' GDP (US$ billions) 26.4 45.7 57.0 Gross domestic investmenffGDP 28.9 23.1 24.6 Trade Exports of goods and servicesiGDP 23.0 35.4 36.3 Gross domestic savingsiGDP 24.0 17.3 16.8 Gross nationalsavingsiGDP 24.2 19.7 18.2 Currentaccount balanceiGDP -4.5 -3.3 -5.8 InterestpaymentsiGDP 0.5 1.2 1.4 Total debffGDP 16.2 34.3 39.8 Total debt serviceiexports 15.2 6.3 19.0 17.5 Presentvalue of debffGDP 33.2 Presentvalue of debffexports 91.3 1983-93 1993-03 2002 2003 2003-07 (average annualgrowfhj -Romania GDP -3.1 0.7 4.3 4.9 5.0 GDP oer caDita -3.3 1.2 7.2 5.2 5.0 Lower-middle-income group ~~ STRUCTURE of the ECONOMY 1983 1993 2002 2003 Growth of investment and GDP (%) ___ (% of GDP) Agriculture .. 22.6 13.1 13.0 30 - Industry .. 42.1 38.1 37.9 15 Manufacturing .. 28.7 31.5 0 Services .. 35.3 48.8 49.1 .I5 00 01 02 03 Privateconsumption .. 63.7 76.0 70.8 .30 1 General government consumption .. 12.3 6.6 12.4 Imports of goods and services .. 28.0 41.2 44.1 -GDI +GDP I I 1983-93 1993-03 2002 2003 Growthof expo& and imports (%) ~~~~ ~~~ ~ -~__ (average annualgrowih) Agriculture 1.4 -1.5 -3.9 3.0 45 - Industry -4.3 0.9 7.2 4.6 30 - Manufacturing Services 1.5 5.6 5.2 15 Privateconsumption 3.2 3.0 7.3 0 General governmentconsumption -0.3 2.1 4.6 -15 Gross domestic investment 0.3 7.3 9.2 Imports of goods and sewices .. 11.9 12.1 34.4 Romania PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Domestic prices Inflation (%) ('33 change) 200 i Consumer prices 256.1 22.5 15.3 ImplicitGDP deflator -0.4 227.4 24.2 19.2 Government finance (% of GDP, indudescurrent grants) Current revenue 33.2 29.6 29.9 98 99 00 01 02 03 Current budget balance 4.3 0.6 1.3 1 Overall surplus/deficit -0.4 -2.6 -2.2 -GDPdeflator -0-CPI I TRADE 1983 1993 2002 2003 (US$ millions) 1Export and import levels (US$ mill.) 1 Total exports (fob) 4,892 13,876 17,618 j Textiles 959 1,782 2,282 30'000 T 1 Metals 574 1,181 1,482 Manufactures 2,856 9,851 12,534 20 000 Total imports (cif) 6,522 17,862 23,983 Food 964 1,174 1,737 10000 Fuel and energy 1,872 2,272 2,615 I Capitalgoods 1,432 5,111 7,017 I O Exportprice index (1995=100) 79 79 97 98 99 00 01 02 Importprice index (1995=100) 70 71 Exports w Imports Terms of trade (1995=100) 114 111 O3 BALANCE of PAYMENTS 1983 1993 2002 2003 (US$ millions) Current account balanceto GDP (%) Exports of goods and services 12,239 5,691 16,223 20,646 Importsof goods and services 10,369 6,934 18,825 25,113 Resourcebalance 1,870 -1,243 -2,602 -4,467 Net income -710 -145 -459 -705 Net currenttransfers 0 214 1,536 1,861 Current account balance 1,160 -1,174 -1,525 -3,311 Financingitems (net) -1,538 1,120 3,327 4,445 Changesin net reserves 378 54 -1,802 -1,134 Memo: Reservesincludinggold (US$ millions) 956 7.306 9.364 Conversion rate (DEC,/oca//US$) 760.0 33,055.5 33,200.1 EXTERNAL DEBT and RESOURCEFLOWS 1983 1993 2002 2003 (US$ millions) Composition of 2003 debt (US$ mill.) Total debt outstandingand disbursed 9,129 4,282 15,680 22,686 IBRD 1,742 403 2,173 2,296 IDA 0 0 0 0 G 2,771 A 2,296 Total debt service 1,875 363 3,163 3,673 IBRD 220 19 196 214 IDA 0 0 0 0 Composition of net resourceflows Officialgrants 0 99 259 0 Officialcreditors 317 743 143 16 Privatecreditors -123 167 2,060 1,967 Foreign direct investment 0 94 1,144 0 Portfolioequity 0 0 21 0 F. 13,667 World Bank program Commitments 0 120 340 222 4 IBRD E - Bilateral Disbursements 362 189 335 131 3 -- D Other multilateral - F Private Principalrepayments 102 0 120 145 ;IMF - IDA G Short-term .- Netflows 259 189 214 -14 Interestpayments 118 19 76 69 Nettransfers 141 169 139 -82 Development twnomics 54