Document of The World Bank ON A PROPOSED CREDIT IN THE AMOUNT OF SDR24.2 MILLION (US$30 MILLION EQIVALENT) BOSNIA & HERZEGOVINA FOR A

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1 Public Disclosure Authorized Document of The World Bank Report No: BIH Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT Public Disclosure Authorized IN THE AMOUNT OF SDR24.2 MILLION (US$30 MILLION EQIVALENT) TO BOSNIA & HERZEGOVINA FOR A ROAD MANAGEMENT AND SAFETY PROJECT February 28, 2002 Public Disclosure Authorized Infrastructure and Energy Services Departmnent South East Europe Country Unit Europe and Central Asia Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective 6/25/2001) Currency Unit = Konvertible Mark (KM) = US$1 US$0.438 = KM 1 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS AADT APL BH BRIC EA EBRD EC EIB EMP ERR ETRP Federation FBHRD HDM ICAO ICB IDA IFI LACI NCB NPV OHR PID PMR RS RSRD SETRP SIL SNCB Annual Average Daily Traffic Adaptable Program Loan Bosnia and Herzegovina Bosnia & Herzegovina Road Infrastructure Public Corporation Environmental Assessment European Bank for Reconstruction and Development European Commission European Investment Bank Environment Management Plan Economic Rate of Return Emergency Transport Reconstruction Project The Federation of Bosnia and Herzegovina Federation of Bosnia and Herzegovina Road Directorate Highway Development Model International Civil Aviation Organization Intemational Competitive Bidding International Development Association International Financial Institution Loan Administration Change Initiative National Competitive Bidding Net Present Value Office of the High Representative Project Implementation Directorate Project Management Report Republic of Srpska Republic of Srpska Road Directorate Second Emergency Transport Reconstruction Project Standard Investment Loan Simplified National Competitive Bidding Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: Johannes F. Linn, ECAVP Christiaan J. Poortman, ECCO4 Hossein Razavi Eva Molnar, ECSIE Cesar Queiroz, ECSIE

3 BOSNIA AND HERZEGOVINA ROAD MANAGEMENT AND SAFETY PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 7 C. Project Description Summary 1. Project components 8 2. Key policy and institutional reforms supported by the project 9 3. Benefits and target population Institutional and implementation arrangements 10 D. Project Rationale 1. Project alternatives considered and reasons for rejection Major related projects financed by the Bank and other development agencies Lessons learned and reflected in the project design Indications of borrower commitment and ownership Value added of Bank support in this project 13 E. Summary Project Analysis 1. Economic Financial Technical Institutional Environmental Social Safeguard Policies 18

4 F. Sustainability and Risks 1. Sustainability Critical risks Possible controversial aspects 20 G. Main Conditions 1. Effectiveness Condition Other 20 H. Readiness for Implementation 21 I. Compliance with Bank Policies 21 Annexes Annex 1: Project Design Summary 23 Annex 2: Detailed Project Description 26 Annex 3: Estimated Project Costs 27 Annex 4: Cost Benefit Analysis Summary 29 Annex 5: Financial Summary 33 Annex 6: Procurement and Disbursement Arrangements 34 Annex 7: Project Processing Schedule 52 Annex 8: Documents in the Project File 53 Annex 9: Statement of Loans and Credits 55 Annex 10: Country at a Glance 57 Annex 11: Road Management and Maintenance Policy Letter 59 Annex 12: Road Safety and Actions Related To Emergency Medical Services 64 Annex 13: Road Needs and Financing 71 MAP(S) IBRD No

5 Date: February 28, 2002 Country Director: Christiaan Poortman Project ID: P Lending Instrument: Specific Investment Loan (SIL) BOSNIA AND HERZEGOVINA Road Management and Safety Project Project Appraisal Document Europe and Central Asia Region ECSIE Team Leader: Cesar Queiroz Sector Manager: Eva Molnar Sector(s): TH - Highways Theme(s): Transport Poverty Targeted Intervention: N Program Financing Data 1 Loan [X] Credit [ ] Grant [ Guarantee [] Other: For Loans/Credits/Others: Amount (US$m): Proposed Terms (IDA): Standard Credit Grace period (years): 10 Years to maturity: 35 Commitment fee: 0.50 Financing Plan (US$mn): Source Local Foreign Total BORROWER IDA FOREIGN SOURCES (UNIDENTIFIED) Total: Borrower: BOSNIA AND HERZEGOVINA Responsible agency: ENTITY MINISTRIES OF TRANSPORT Federation of Bosnia and Herzegovina Road Directorate (FBHRD) Address: Ulica Put Zivota 2, Sarajevo Contact Person: Mr. Arif Dilberovic Tel: ++ (387) Fax: ++ (387) fd-ceste@bih.net.ba Other Agency(ies): Republika Srpska Road Directorate (RSRD) Address: Ulica Vase Pelagica 10, Banja Luka Contact Person: Dr. Dragan Mihajlovic Tel: ++ (387) Fax: ++ (387) dmihajlovic@rdprs.org Estimated disbursements (Bank FY/US$m): FY Annual Cumulative Project implementation period: 5 years Expected effectiveness date: 06/30/2002 Expected closing date: 06/30/2007 ocssopa FO.o S, Un,* 20X0

6 A. Project Development Objective 1. Project development objective: (see Annex 1) The project development objective is to improve traffic flow and reduce accident rates on the country's road network through rehabilitation of priority road sections associated with identified poor road condition and accident 'black spots'. 2. Key performance indicators: (see Annex 1) I Post-construction traffic surveys demonstrate the achievement of expected reductions in travel time and increase in traffic volumes within each identified road segment when compared to pre-construction traffic surveys. 2. Post-construction accident records indicate significant reduction in accidents at 'black spots' when compared to pre-construction records. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: BIH Date of latest CAS discussion: October 18, 2001 Bosnia and Herzegovina, with a population of 4.2 million and GDP per capita of US$920 in 1998, is one of the poorest regions of the former Yugoslavia. The overall objective of the Country Assistance Strategy is to increase economic opportunity and improve the quality of life of all citizens of Bosnia and Herzegovina, with poverty reduction as an overarching theme. The strategic objectives of the CAS are (i) to help strengthen weak and fragmented govemance structures, (ii) foster private sector-led growth and employment, and (iii) establish affordable and equitable social services. As road transport accounts for over 95 percent of all goods and passenger movements, efficient and low cost road transport is essential to the attainment of the second objective by reducing road transport costs and facilitating local, regional and even intemational commerce. This, in tum, would facilitate pursuit of the other country development objectives. In Bosnia and Herzegovina road development is also an important integration factor. More specifically, the project will be supportive of the CAS objectives in the following ways: (i) It will provide improvements in vital infrastructure needed for private sector-led growth; (ii) It will make a direct contribution to the creation of stronger public sector institutions through the institutional strengthening of the road administrations; (iii) It will promote privatization and development of the road construction industry by increasing contracting, improved quality control for civil works activities, and the use of competitive bidding for civil works contracts; and (iv) It will support poverty alleviation by providing employment for the low income population directly through the works programs included in the project and by improved access to vital social services, and indirectly through the support for private sector investment and its related employment generation

7 2. Main sector issues and Government strategy: Background Bosnia and Herzegovina (BiH) is a country that has a central govemment, called the Council of Ministers, but is essentially comprised of two parts (referred to as the "Entities"): the Federation of Bosnia and Herzegovina (the Federation), and the Republic of Srpska (RS). The central government has State institutions that encompass the entire country and each of the two Entities have Parliaments and Ministries. The road network of Bosnia and Herzegovina consists of approximately 22,600 km, with 3,788 km of main roads (of which about 96 percent is paved), 4,842 km of regional roads and 14,000 km of local roads. Of these, 2,024 km of main and 2,724 km of regional roads are in the Federation of Bosnia and Herzegovina, and 1,764 km of main and 2,384 km of regional roads are in Republic of Srpska. Emergency Program of Assistance. Following the end of hostilities in 1995, an emergency transport reconstruction program was prepared and presented to the intemational donor conmmunity in December This program was implemented through the Emergency Transport Reconstruction Project (ETRP) and its successor, the Second Emergency Transport Reconstruction Project (SETRP). The ETRP was launched in early 1996 for a total amount of US$149 million of which IDA financed US$35 million. The SETRP, launched in 1997, totaled US$184 million, and was conceived as a continuation of the activities initiated under the ETRP, of which IDA financed US$39 million. The primary objective of the ETRP and SETRP was to remove critical infrastructure bottlenecks in order to permit the resumption of operation of the country's major transport network. From 1996 to 2000 under the two projects, a total of US$158.4 million in assistance from the European Union, the United States, Japan, EBRD, and IDA was made available for improvements in roads and bridges. Most of the emergency needs defined in 1995 have been met, due in large part to the combined activities of the donor community with funding under the ETRP and the SETRP as described above: (i) a significant part of the main and regional road networks has been rehabilitated, based on the needs identified in 1995, with 60 bridges located on the main and regional road networks repaired and/or rehabilitated and road maintenance carried out on 1,600 km of the main network and 750 km of the regional network; (ii) the Sarajevo, Mostar and Banja Luka airports are now operating to civilian standards; (iii) trains can run on most of the network, although at minimum safety and technical standards; and (iv) public transportation has resumed country-wide, the tram system in Sarajevo is in operation, and 300 buses and mini-buses have been procured, meeting about 70 percent of the needs identified in Also, the local contracting and consulting industries have strengthened considerably, as evidenced by the degree of competition now existing, and by the ability of the contractors to submit correct bids on studies and works, as well as to execute works in a timely and technically competent way. However, a number of important issues could not be addressed adequately in the context of these two emergency operations. These were: (i) the need to establish a more sustainable road maintenance and management system/capacity throughout the country; (ii) efficiency in the use of public funds for road maintenance; and (iii) provide adequate resources to preserve and improve the serviceability of the existing road network. Without urgent action on all these three areas, there is a danger that the road network will deteriorate rapidly with an increased level of traffic, thus impeding development. Present Condition of the Road Network. Despite the emergency program, a significant part of the main - 3 -

8 road network is still in poor condition, mainly because of: (i) the maintenance backlog accumulated before and during the hostilities; and (ii) insufficient allocations to road maintenance and rehabilitation, especially in the Federation. The lack of funding has contributed to the continued deterioration of the Federation's main road network, while the condition of the main road network in Republic of Srpska can be considered stabilized; (iii) lack of respect of axle-load limits; and (iv) increase in traffic volume, whereby since 1987, traffic increased between 2 and 3 times on road sections located around the country's main cities, which corresponds to an average annual increase of about 7 percent. Traffic counts perforned in 2000, during the preparation of the JICA-fmanced Transport Master Plan, showed that traffic was about 10,500 annual average daily traffic (AADT) on the Sarajevo-Tuzla road near Tuzla, 17,000 AADT on the Sarajevo-Mostar road near Sarajevo, and 15,400 AADT on the Banja Luka-Gradiska road near Banja Luka. Damage includes deep rutting (on some sections, over 70 mm), wide-spread cracks, potholes and generally increasing roughness due to a high density of patchwork and in some cases to structural fatigue. While road maintenance can still be effective in prolonging the life of the pavements on some of these damaged sections, more costly solutions will be required to stop the deterioration, including in some cases partial reconstruction. In addition, the traffic increases mentioned above have occurred over a period during which basically no road widening has been carried out. This increasing traffic on narrow roads has a negative impact on road safety. It is thus foreseen that a number of traffic safety-related measures such as modifications of intersections and widening of shoulders (typically only 0.5 m wide) on some of the most critical parts of the main network will need to be carried out. Road Management Capacity Federation of Bosnia and Herzegovina Road Directorate. Roads are maintained by separate Road Directorates for the Federation and for the Republic of Srpska. For the Federation, road management is the responsibility of the Federation of Bosnia and Herzegovina Roads Directorate (FBHRD), which was formally established in 1999 as part of the Federation Ministry of Transport and Communications. The previous projects in the sector were implemented by a Project Implementation Directorate (PID). The PID's performance in implementing the SETRP was rated as satisfactory, and FBHRD has retained some of the key PID staff. However, road maintenance has remained severely under-funded since the end of the hostilities despite agreement reached with IDA during the preparation of the SETRP. A Law on Roads in the Federation was adopted in December Republic of Srpska Road Directorate. In Republic of Srpska, the situation is more satisfactory. A Law on Roads was passed in 1995 establishing the Republic of Srpska Road Directorate (RSRD). RSRD is gradually building up its capacity. The administration now has 49 staff members and is able to carry out the basic duties pertaining to a road administration. However, more support will be required to develop it into a full-fledged administration in areas such as road management, planning and prioritization for road maintenance, competitive procurement, environment and safety related activities, and axle load controls. Bosnia and Herzegovina Road Infrastructure Public Corporation. At the inter-entity level, a roads organization has been established, under the auspices of the Office of the High Representative (OHR), the international civilian authority in the country, called the Bosnia and Herzegovina Road Infrastructure Public Corporation (BRIC). BRIC was established through an Agreement of the two Entities, signed by Federation and RS Prime Ministers, and Principal Deputy High Representative (OHR), in February 2000, published in the Official Gazette Number 11, dated March 31, According to the Agreement, BRIC's main duties are to (i) act as a joint representative of the two Entities for contacts with institutions of BiH and the intemational community, (ii) participate in road and other transportation network development planning and the establishment ofjoint action plans for the entire territory of BiH, (iii) harmonize and agree - 4 -

9 on joint lists of priorities for maintenance, rehabilitation, upgrading, modernization and network expansion to potential international sponsors and other financiers, (iv) consider as immediate priority European road corridors traversing BiH, (v) prevent enactment of any measures that may result in restricting freedom of movement of operators/persons, (vi) work on modernizing and harmonizing road signage, road markings, traffic signals, weighing stations, lighting, road safety devices and other systems, as well as the rules and criteria used for managing road infrastructures in the two Entities, and (vii) work on modernizing and harmonizing and determining the amount of road infrastructure usage fees to be collected from foreign operators using the network in the Entities. BRIC can perform a useful role in introducing standard practices to both of the Entity Road Directorates in the above areas. In order to achieve results in the short term, the BRIC should not consider road network development as a primary area of focus for the time being, given: (a) the weak fiscal situation prevailing in the country, with adequate funding not likely to be available for road development in the foreseeable future; (b) the difficulties of attracting private investments on acceptable terms to Bosnia and Herzegovina; and (c) the fact that, especially in Bosnia and Herzegovina, road development is politically a very difficult question, as a country-wide road development scheme requires the agreement of the three constituencies which, so far, have shown diverging interests. Instead, it should concentrate on areas where coordination is needed, and should leave the implementation of road maintenance and development to the FBHRD and the RSRD for each of their respective road networks. BRIC has received financial support from EU-PHARE for a short term consultancy contract with the German Technical Cooperation Agency (GTZ) for expert advice on the institutional development and organization of BRIC to help establish it as a functioning organization with headquarters in Banja Luka, with the expectation that it would eventually become the country's highway agency. In addition, the Quick Reaction Fund of the Swiss Government has made 50,000 KM available to BRIC to finance the procurement of its own equipment and office furniture in order to enable it to become an institution capable of operating independently from the Government ministries. Efficiency of Public Expenditures Increasing the efficiency of public expenditures is of primary importance in a context of scarce budgetary resources and sharply declining support from the international community. Inefficiencies have been identified as follows: (i) weaknesses in the procurement process of maintenance activities funded out of budgetary resources; (ii) several road maintenance companies are still owned by the Entity Council of Ministers; (iii) road maintenance contracts, and to a lesser extent, road rehabilitation contracts, are awarded on an annual basis, to follow the budgetary year; and (iv) the absence of a road databank and the present design standards, which usually lead to over designed technical solutions that do not achieve an optimal use of available resources. In the Federation, 12 companies have been included in regular and winter maintenance programs contracted by the Federation Road Directorate. Contracts have been awarded to these companies directly. However, after the privatization process is completed, competitive selection will take place. So far out of 12 companies eight have been privatized, privatization process is ongoing in the remaining four. The process of privatization is expected to be completed by the end of As in RS, competitive selection for maintenance of the roads has been introduced to allow for the private companies to be selected by competitive procedures. In Republic of Srpska, regular and winter maintenance is now being done by ten companies, which have been contracted directly by the RS Road Directorate, as per the provisions of the current law. Four of the - 5 -

10 companies have been privatized, and the privatization process has started for another company. The other five companies are registered as joint stock companies, with approximately 40 % owned by state. Competitive selection for maintenance of the roads has been introduced to allow for the private companies to be selected by competitive procedures. Road Safety Conditions (see Annex 12) According to a report prepared for EU-Phare in November 1999, the 1997 fatality rate of around 18.6 deaths per 10,000 vehicles was around nine times higher than the fatality rate of 1.5 to 2.0 deaths per 10,000 vehicles in industrialized countries such as the United Kingdom. Because of the breakup of the road management systems that existed previously when Bosnia and Herzegovina was part of Yugoslavia, there is little data on accident causes (and hence a reason for the high fatality rate), condition of the vehicle fleet, and accident reporting. However, several locations of accident black spots have been identified and will be addressed by the project. There is also no coordination of road safety activities between the two Entities. The EU-Phare report recommended that one organization at the national level should be tasked with collating the data and analyzing trends, as well as coordinating all areas of road safety activity. The newly established BRIC has the potential to play this role but will need to be strengthened in order to do so. It is estimated that the economic impact of road crashes in the Europe and Central Asia Region is approximately percent of GNP. For Bosnia and Herzegovina this amounts to around DEM 116 million, or DEM 31 per capita (compared to DEM 114 per capita spent in total on health services in the country). In terms of health impact, the number of deaths is relatively small in comparison to the total number of deaths in Bosnia and Herzegovina (estimated 315 out of 19,000 deaths annually or 1.7 percent). However, the younger age at death and significant disability resulting from automobile accidents means that the resulting disability adjusted life years (DALYs) lost is much higher (accidents in total account for 9 percent of DALYs lost). Road Maintenance Financing (see Annex 13) (a) Federation Road Financing. Road User Charges are levied in the form of various taxes and fees including sales tax on fuel, road fee, excise duties, and vehicle taxes; 40 percent of the fuel and road fees are allocated to the Federation of Bosnia and Herzegovina Road Directorate. Consequently the relationship between the road user charges and the expenditures for road maintenance is weak. New construction is financed through various means, such as local budgets and contributions by enterprises. The only expenditures financed through the FBHRD budget have been routine and winter maintenance, reported by the FBHRD to be 10.5 million KM in 2000 and 13.7 million KM in Thus in the Federation, allocations to road maintenance have so far been insufficient to cover even minimum maintenance requirements, estimated at 25 million KM per year. However, increased allocations are expected with the adoption of the new law in December (b) Republic of Srpska Road Financing. In Republic of Srpska, the situation is more satisfactory. Road user charges include: fuel taxes (retail tax, excise duties, special republic tax), vehicle taxes, import tax, registration tax, annual vehicle tax, automobile association, tax and transit tax. Of the above charges, only a few categories are intended for road/transport purposes percent of the fuel excise duties and 85 percent of the annual vehicle tax are allocated to the RSRD. The other charges are allocated mainly to the general Government budget with some amounts also to the municipalities. The approved budget for 2001 is 60 million KM. The actual expenditures in 2000 were 67.4 million KM. The fuel excise tax is estimated conservatively at the beginning of the year and the budget may be adjusted upward as revenues are -6 -

11 collected. Environmental Management Present road construction environmental standards (including mitigation measures) are still those which were used during the time of the former Yugoslavia. These standards are in the process of being upgraded and aligned with international requirements (EU). In addition, since the end of the hostilities, the Entities' capacity of enforcing environmental standards and monitoring the impact of road works on the environment has been limited. This capacity needs to be reinforced, both within the road administrations and within the environmental agencies. 3. Sector issues to be addressed by the project and strategic choices: The following issues will be addressed by the project: (a) Strengthening Weak and Fragmented Governance Structures. The project will support the CAS objective of strengthening weak and fragmented governance structures. The project will do so by addressing the issues of (i) inadequate financing for road maintenance; (ii) inadequate management capacity for road maintenance; and (iii) the need to improve road safety conditions. The following strategic choices have been made in deciding how to address the issues: (i) Inadequate financing for road maintenance is a major impediment to the continued provision of transport services in Bosnia and Herzegovina, particularly in the Federation. The project will address this issue in the short term by the addition of financing from the Credit for road improvements through civil works contracts. For the longer term, the project contains a condition that the financing for road maintenance from the respective budgets in the Entities will be gradually increased during the life of the project. (ii) Increased road financing will only be effective in maintaining the road network if it is utilized by competent and efficient road administrations. A crucial aspect of the project will, therefore, be the institutional strengthening for FBHRD, RSRD and BRIC. The Emergency Projects were satisfactorily implemented through the use of efficient PID organizations, which either have been ( in the case of RS) or will be integrated into the directorates themselves. Now the challenge will be to integrate the new skills and knowledge into the directorates themselves. This will be done by providing consultants to assist in the installation of improved data banks, the use of HDM for carrying out economic analysis, improving the road and materials design standards, introducing modem road maintenance technology, improving management and financial systems, and providing training on road management and on environmental issues. While RSRD is somewhat ahead of the Federation in achieving a viable and efficient operation, the FBHRD seems determined to take advantage of the consultant services to be provided through the project to modernize its operations and improve its skills. (iii) There is an obvious need to have a degree of coordination and standardization of the road works carried out in the two Entities. While implementation of the civil works component can be handled by the two road directorates separately, the project will also support the development of BRIC in organizing common design standards, a coordinated road safety program, and coordination in future planning for the expansion of the road network with the objective of addressing the need for coordination in these fields of activity. (iv) There is a pressing need to reduce the high rate of accidents and fatalities in Bosnia and - 7 -

12 Herzegovina. The means of achieving this have been well established in the Westem European countries, and can be applied here. The process of improving road safety will be initiated by efforts to increase awareness of the magnitude of the problem through seminars, efforts to increase cooperation among the various governmental agencies with responsibilities in this area, and through the development of a road safety plan. The project will also correct black spots identified by the Road Directorates. (b) CAS Theme of Poverty Reduction. Although not a poverty targeted intervention, the project will help address the CAS theme of poverty reduction by providing employment for the low income population directly through the construction works included in the project and by improved access to vital social services such as health care and educational facilities. It will also support this theme indirectly through the support for private sector development and its related employment generation. (c) Regional Considerations. The project will be supportive of the regional interaction of Bosnia and Herzegovina with its neighbors and the European Union by improving linkages between commercial centers and the country's border, through the rehabilitation of about 150 km of Corridor Vc of the Trans-European Transport Network. The project will also strengthen the inter-entity organization (BRIC), which has responsibility for international road transport matters. Cross-border cooperation to facilitate trade is being supported by the Bank-financed Trade and Transport Facilitation Project. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Component Sector Indicative Costs % of Bankfinancing % of Bank- (US$M) Total (US$M) financing 1. Road maintenance, rehabilitation, Highways and safety improvements for the main and regional road network, including about 280 km of priority road sections in the Federation of Bosnia and Herzegovina, and about 290 km of priority road sections in Republic of Srpska. 2. Institutional strengthening of the Institutional FBHRD and RSRD, including setting Development up of road and bridge data banks, introducing the use of HDM for setting road maintenance priorities, supervision for civil works, the use of competitive bidding procedures, familiarization with modem road maintenance technologies, improved financial management systems, establishing environmental units in each of the Road Directorates and to support these units in implementing their Environmental -8 -

13 Management Plans (EMPs), training of staff and audits of the project accounts. Also, this component includes a program of technical support for BRIC, including establishing improved and uniform road and bridge design, maintenance and construction standards, creation of a road safety data base and conducting safety awareness campaigns, development of the capacity to evaluate private sector proposals for investmnents in road concessions, and the coordination of inter-entity and intemational road matters, as well as staff training. Also included is office equipment and supplies, and vehicles and equipment for road works surveys and supervision for FBHRD and RSRD, and office equipment, vehicles and supplies for BRIC Total Project Costs Total Financing Required The total cost of the project components made available to the Federation will be US$27.96 million equivalent of which US$20.00 million equivalent will be financed from the IDA Credit. For RS, the total project cost will be US$13.57 million equivalent, of which US$ million will be financed from the IDA Credit.. 2. Key policy and institutional reforms supported by the project: The project will support the following policy and institutional reforms: * increase private sector participation through the introduction of competitive bidding for both periodic and routine maintenance. * employment creation, both directly through the jobs needed to implement the civil works program, and from the investment that is expected to be stimulated by an improved road infrastructure. * rationalization and optimization of road expenditure. * increased organizational efficiency of the Federation's and RS's road directorates with clearer goals, objectives and performance targets, increased management autonomy and accountability for results, and more effective planning, management and control systems. * begin the process of increasing awareness of the need for improved road safety, and setting up the operational systems needed to establish and carry out a road safety program. * improvements in the enforcement of environmental standards for road works. -9-

14 3. Benefits and target population: The rehabilitation, maintenance, safety, and institution building components of the project will reduce vehicle operating costs, travel time and accidents, thus benefiting road users, and producers and consumers of goods transported by road. It will particularly benefit the low income populations served by the road network through improved access to markets for their agricultural products, as well as to social services such as health and education. Attention will be paid to the needs of disabled people by removing, where appropriate, architectural barriers, old reconstructing sidewalks and pedestrian crossings. The privatization of the remaining public road maintenance companies and the transferring of road maintenance activities to private contractors, will provide private sector jobs and help the Entities to reduce the public sector work force. Finally, the population of Bosnia and Herzegovina will benefit from increased awareness regarding environmental issues related to the transport sector, and by strengthening the Entities' environmental management capacity and increasing the means available to them to monitor and reduce threats to the environment. 4. Institutional and implementation arrangements: The State of Bosnia and Herzegovina will be the Borrower of the Credit. The Borrower will onlend, under subsidiary agreements, respective parts of the proceeds of the Credit to the Entities on the same terms and conditions as the Borrower shall pay to the Association. The two Entities' Council of Ministers will be responsible for implementing their common part of the project through the BRIC. In the Entities, implementation responsibility will be delegated to the Entity Ministries of Transport and Communications. The implementing agencies will be the Entity Road Directorates FBHRD and RSRD. Each of these organizations had Project Implementation Directorates (PIDs) under the Emergency projects, which have been substantially integrated into their organizations. Implementation at all levels will be conducted in accordance with the provisions of the Credit and Project Agreements, and performance will be monitored through the use of the project design and monitoring indicators (see Annex 1). The Borrower will open the Special Accounts and transfer authority for their use to the Entities. The Federation and Republic of Srpska will each have a separate Special Account. The Special Accounts will be held in commercial banks acceptable to IDA. There will be a separate Government Counterpart Fund account for the FBHRD and the RSRD set up in commercial banks. The FBHRD and the RSRD will make all payments for the project and maintain vouchers and supporting documentation for expenditures for project activities. The FBHRD and the RSRD will maintain local accounts in EURO for foreign currency payments and local accounts in KM for local currency payments. A maximum advance of two weeks estimated IDA share of expenditures is allowed from the IDA Special Accounts. The two Entities, through their Road Directorates, will be in charge of preparing quarterly progress reports. BRIC will prepare its own progress reports on the activities carried out by BRIC in each quarter of project implementation. These reports will be sent simultaneously to the Ministry of Civil Affairs and Communications, the Federation of Bosnia and Herzegovina, Republic of Srpska and the Bank. BRIC will be supported by FBHRD and RSRD in all matters regarding procurement and disbursement. Disbursements from the IDA Credit will follow the transaction-based method i.e. the traditional Bank procedures (reimbursements with full documentation, Statements of Expenditure (SOE), direct payments and special commitments). The FBHRD and RSRD will prepare and submit quarterly Financial Monitoring Reports (FMR) in format agreed with the Bank. The project expenditures will be audited on an annual basis by an independent auditor acceptable to the Bank. The project is included under the global audit contract for World Bank financed projects in Bosnia and Herzegovina which is currently contracted with PriceWaterhouseCoopers, Netherlands

15 D. Project Rationale 1. Project alternatives considered and reasons for rejection: The possibility of utilizing an APL instead of a SIL was explored and discussed at the Decision Review Meeting. However, while the meeting agreed that an APL might be appropriate in order to better stage the implementation of the institutional reforms and to increase IDA's leverage regarding budget financing for road maintenance, it is not well suited to the use of IDA financing, and would be difficult to accomplish within the limited time available for project preparation. Therefore under these conditions, a SIL was determiined to be more appropriate. The alternative of focusing the project on road rehabilitation only was considered, as rehabilitation is essential to keep some of the key road sections in acceptable condition and the prospects for institutional strengthening are uncertain. While such an alternative would have provided for a simple project design and straightforward implementation, it would have three major flaws: * it would not ensure the sustainability of the investments being undertaken, as it would not focus sufficiently on developing adequate road management capacity and financing; * it would unduly restrict the potential institution building impact of the project, which is seen as a vehicle for making a major contribution to improved road management capacity; and * it would not address the issue of traffic safety. The alternative of including a road building component in the project was also considered, as traffic has increased rapidly since 1987, while virtually no capacity increase of the main network has taken place. This alternative was rejected, as increasing capacity would have been possible only on a restricted number of road sections due to the high cost of this altemative, and as other aid donors have expressed interest in financing such activities. In particular, the EIB plans to finance one of the remaining sections of the Sarajevo bypass, and two proposals have been received from the private sector for road concessions during the last year. However, evaluation of these proposals showed that the rationale for "traditional" concession agreements was weak and that other solutions had to be found. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned) Latest Supervision Sector Issue Project (PSR) Ratings. (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Road network Emergency Transport S S reconstruction/maintenance Reconstruction Project Road network Second Emergency Transport S S reconstruction/maintenance and Reconstruction Project institution building Trade facilitation Trade and Transport S S Facilitation in Southeast Europe Other development agencies Road network Emergency Transport

16 reconstruction/maintenance funded mainly by the EBRD, EC, and the Council of M_inisters of Japan and the Reconstruction Project and Second Emergency Transport Reconstrucfion Project IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Project Implementation Directorates. In an emergency situation where speedy implementation is crucial and where established institutions do not exist or where their performance is uncertain, it makes sense to create special organizations for project implementation that can focus their attention on the task at hand without being diverted by other considerations. From this perspective the PIDs proved most useful and appropriate for the implementation of the two Emergency Projects. However, they should be seen as transitory arrangements only, and be integrated into more established administrative structures. In both Entities, the PID has already been integrated into the respective Road Directorates. Time Needed for Reform. Even in an extreme, post-conflict situation such as in Bosnia and Herzegovina, where the international community has more leverage than in most other countries, the prospects for reforms have proven slim in the absence of local consensus and interest. In this case there are compelling objective reasons to proceed rapidly with reforms, but unless these reasons have been weighed in the political process against the perceived disadvantages for the different ethnic groups, progress is not likely to be forthcoming. Institutional Components.Closely linked to the previous lesson is the fact that institutional components of projects have often fallen short of achieving their objectives. The frequent changes of sector administrations have been an important factor. But the scope and timetable of these components have often been overly optimistic. The institutional component of the project focuses on a few essential issues. It will be monitored against clear indicators and targets. Counterpart Funding and Budgets. Counterpart funding has been an issue under the SETRP. In order to reduce this risk, the Entities' road programs and budgets will need to be reviewed by IDA each year before the programs are sent to the Parliaments for the following year's budgets. The budgets should include the counterpart amounts estimated to be required during the following year as part of the Entities' Public Investment Programs

17 4. Indications of borrower commitment and ownership: Following approval by IDA of the ETRP and SETRP, the Council of Ministers of Bosnia and Herzegovina began requesting this project, and have reiterated their interest in it ever since that time. The two Entities' Council of Ministers see this project as an opportunity to resolve a number of outstanding issues remaining unresolved since the end of hostilities, including: (i) the need to increase the efficiency of financing mechanisms. to fund road maintenance and development; and (ii) the need to strengthen a road organization to handle inter-entity network development and international matters in the road sector, as well as to ensure coordinated maintenance and development activities within the Entities. Morover, the project is seen as the appropriate vehicle to increase the efficiency of the main road network management, expand expenditures in the road sector, and create financing mechanisms to fund future road network maintenance. Both Entity Council of Ministers and BRIC have prepared and presented specific proposals to IDA detailing the contents of the various proposed project components. The FBHRD and RSRD have demonstrated their willingness to cooperate and support each other. As an example, during the pre-appraisal mission a senior RSRD official joined project preparation discussions at FBHRD headquarters; at appraisal, representatives of both Entities, as well as of BRIC, participated at a joint seminar on roads and environmental issues. A Road Management and Maintenance Policy letter, addressed to the Bank, was signed on September 28, 2001, by the State Minister of Civil Affairs and Communications, and the Federation and Republic of Srpska Ministers of Transport and Communications. The letter outlines the proposed actions to improve the ability of Bosnia and Herzegovina to manage efficiently and maintain properly its road network (see Annex 11). 5. Value added of Bank support in this project: Since the end of hostilities in 1995, IDA has been the main aid donor in the road sector, especially in terms of institutional development and reestablishment of local construction capacity. There is an active policy dialogue with the Bosnia and Herzegovina authorities, and IDA has been providing advice on a number of issues ranging from evaluation of proposed motorway concessions to the drafting of laws and regulations pertaining to the road and railway sectors. IDA thus has a comparative advantage in undertaking a project aimed at increasing management effectiveness in the road sector. Specifically, the Bank will help: * enhance public expenditures efficiency and management through modifications of technical standards and the systematic introduction of economic evaluation; through increase of supervision capacity; and through joint reviews of the annual programs; * strengthen governance through the creation of an inter-entity body, development and strengthening of the Entity Road Directorates, as well as the establishment of an adequate environmental management and monitoring capacity in the road sector; and * promote private sector development through the development of capacity to prepare and evaluate concessions, privatization of road maintenance companies and introduction of performance-based contracts. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$12.5 million; ERR = 21.7 % (see Annex 4) O Cost effectiveness O Other (specify) The economic evaluation has been carried out on that part of the project which comprises road maintenance, rehabilitation and safety improvements for the main and regional road network. This

18 component accounts for about 90 percent of total project costs. The remaining, which is allocated mainly to the institutional strengthening of the Entity Road Directorates, including technical assistance, support and training, is considered to be a prerequisite for the development of the Road Directorates into modem and efficient organizations. No formalized economic analysis has been carried out for that part of the project. The economic analysis was carried out by evaluating and comparing costs and benefits of road improvements compared to the absence of road interventions until a complete resurfacing would be warranted. In order to verify the results, the Bank staff also ran an analysis using the HDM-4 computer model. The ERRs achieved on this basis were generally higher than those calculated in the evaluation described above. The Net Present Value was calculated based on a cost of capital of 12 percent. A sensitivity analysis based on a 20 percent increase in construction costs, and a 20 percent reduction in the traffic increase, demonstrated that the project is sufficiently robust to provide a positive return under these conditions. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Not applicable, as the Entities are not revenue-producing institutions and as such, do not require financial analysis. Fiscal Impact: The Government counterpart financing requirement, estimated at US$11.53 million equivalent, including 30 percent of the civil works component, will be spread over the five year life of the project implementation period. Of this amount, US$3.57 million will be provided by the Republic of Srpska and US$7.96 million by the Federation. Based on the delays encountered in meeting the counterpart requirements of the Emergency projects, where the Government contribution was only 10 percent for the civil works component, this amount will be difficult to achieve, especially for the Federation. For this reason, an initial deposit of EURO 200,000 equivalent for the Republic of Srpska and EURO 400,000 equivalent for the Federation will be a condition for the effectiveness of the respective components for each Entity. 3. Technical: Road sections have been selected for improvement based on road surveys carried out in As is the usual case in road work of this kind, the roads will deteriorate further prior to carrying out the work, especially in the later years of the project. Therefore, each year the roads will be resurveyed and economic rates of return recalculated, as needed, to assure that the selection of the road sections and the type of periodic repairs are still appropriate. Where indicated, the selections will be revised to reflect the new conditions. However, this is not expected to reduce the economic rates of return or Net Present Values for the works, based on similar situations in other countries. 4. Institutional: 4.1 Executing agencies: Although several systems and functions need strengthening (see below), the Road Directorates are capable executing agencies, as both have implemented highway projects financed by IDA and other IFIs. The knowledge of Bank procedures and requirements is good, both in Republic of Srpska and in the Federation. The FBHRD is in the process of hiring additional staff familiar with World Bank procurement rules, efficient at working on text, spreadsheet and s software, and fluent in English

19 4.2 Project management: The project management capacity of the Road Directorates require strengthening. Stand-alone computerized project management systems were established for monitoring implementation of the IDA-financed part of the SETRP. These systems have proven reliable. However, a number of operations still are performed manually, especially when preparing consolidated data. The project will support the upgrading of these systems to increase their efficiency. 4.3 Procurement issues: The Project will be carried out by the two roads directorates, FBHRD for the Federation and RSRD for the Republic of Srpska. Both FBHRD and RSRD will also handle the procurement for BRIC. Both FBHRD and RSRD will be staffed with a minimum of one procurement specialist (a condition of effectiveness) and one procurement assistant to ensure that procurement is undertaken efficiently, in a timely manner, and in accordance with the Bank procurement guidelines. Both FBHRD and RSRD have a good knowledge of the Bank's procurement rules, procedures and bidding documents from the previous Bank project. For FBHRD, this knowledge was improved in mid 2001 when a former key staff of the PID joined the FBHRD. 4.4 Financial management issues: The Road Management and Safety project is one of the first Bank projects in BiH to be managed within the structure of government departments. Most previous Bank projects have been "ring fenced" with separate PIUs. The objective of integrating the project management into the respective government departments is to begin the process of building longer-term sustainability of project management capacity. Given the higher inherent risks during this transition, the financial management arrangements for the project have been designed to compensate for the institutional weaknesses by having separate finance and accounting units within the respective government department Roads Directorates, staffed by qualified personnel and with independent accounting systems and controls. An assessment of the Financial Management arrangements for the project was undertaken during appraisal to determine whether the financial management arrangements within two Entities Road Directorates are acceptable to the Bank. These financial management arrangements include the entities' systems of accounting, financial reporting, auditing, and intemal controls. Taking into account mitigating measures, the financial management arrangements for the Entities' Road Directorates are considered capable of satisfactorily recording all transactions and balances, supporting the preparation of regular and reliable financial statements, safeguarding the entities' assets, and are subject to auditing arrangements acceptable to the Bank. The detailed financial management assessment is included in Annex 6b of this PAD. The Financial Risks Assessment for this project has identified the following financial risks: (a) Country financial management risk - the draft Country Financial Accountability Assessment (CFAA) report notes that there are very weak financial structures in government departments. To compensate, expenditures for the roads project in both Entities will be controlled and accounted for by a separate unit within the respective Roads Directorate. (b) Banking sector risk - The banking sector in BiH is considered to be very weak. To compensate for this the special accounts for the project will be held in acceptable commercial banks outside the - 15-

20 BiH. (c) Perceived corruption risk - the Bank's financial resources are used for a relatively small number of specific contracts which allows for close monitoring by the Bank. (d) Counterpart funds risk - the Credit Agreement specifies an initial deposit of the Government's contribution and assurances have been given that government counterpart funds will be budgeted and advance on a regular basis. Close monitoring will still be required. These risks are considered as manageable based on the various risk-rnitigation measures taken. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. In accordance with World Bank Safeguard Policies (OP/BP/GP 4.01 Environmental Assessment) the project is rated environmental category B and Environmental Management Plans (EMPs) were prepared by each of the Entity Road Directorates. The project is expected to have only minor negative impacts on the environment, as it will focus on road maintenance and rehabilitation activities, with no resettlement or land acquisition activities involved. Slight negative impacts are primarily during the construction phase and would be restricted to road works related to movements of men, and materials (asphalt, rocks, dust, noise etc.), excavation of borrow pits, altered drainage patterns, disposal of wastes and associated activities of road crews. After completion, the project will have positive indirect impacts on human health and safety through decreased number of accidents; reduced air pollution from more even travel speeds on rehabilitated road sections; reduced water pollution resulting from rehabilitated drainage systems; reduced noise levels from those collectivities located close to the rehabilitated road sections. Materials (e.g. asphalt, stone, etc.) would be supplied only from sources with approved licenses, permits, and/or approvals for environment and worker safety, and any equipment used during construction would meet internationally recognized standards for environment and worker health and safety. 5.2 What are the main features of the EMP and are they adequate? Draft EMPs had been prepared by the Borrower for road maintenance and rehabilitation activities under the project. The EMPs include: mitigation plan, monitoring plan, institutional strengthening needs, institutional arrangements for environmental management, implementation schedule, and a record of the public consultations. The documents were of outstanding quality. The World Bank reviewed them with the Borrower during Appraisal and requested some minor revisions and clarifications. During project implementation, provisions of the EMPs will be applied to all activities undertaken by the road administrations, including design of road works. As appropriate, mitigation measures specified in the EMPs will be incorporated as requirements in each bidding document for works. The contracts will contain adequate provisions to ensure that the contractors undertake the measures specified in the EMPs. The Road Directorates will be committed, under Project Agreements, to implement their part of the EMP through their environmental units established under the project and with the support of the Entities environmental agencies. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: September 5, 2001 Final draft EMPs delivered to World Bank Infoshop. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted?

21 Stakeholders were fully consulted after the EMPs were prepared. Descriptions of who were consulted, when, where, and the method of consultation are fully described in the EMP Section F. Pubic hearings were held near those communities located close to road sections to be rehabilitated under the project to ensure that those most directly concerned by the project can, by voicing their opinions and suggestions, increase the quality and efficiency of the works design. Maintenance and rehabilitation works to be funded under the project include activities ranging from cleaning ditches and pothole patching to new overlays on certain road sections. The project will also fund the modification of dangerous intersections and the creation of parking areas on mountainous road sections. However, these works will be performed on road sections that are not located within inhabited areas, and will be confined to the road right-of-way. Given the fact that the works to be carried out are standard and do not have the potential to substantially modify the environment within which the communities are located, hearings will take place during preparation of the individual subprojects, and will be in accordance with guidelines to be agreed by the Road Directorates. Furthermore a clause in Section E (Institutional Arrangements) of the EMP requires each Entity Road Directorate to submit any proposed work activity to appropriate environmental authorities for their approval or to submit any additional documentation to them that they may require for their approval. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The Entity Governments will be committed, under the Project Agreements, to monitor, on a regular basis the impact of the project on the environment. A detailed monitoring program designed to validate the effectiveness of the mitigating measures is included in the EMP. The monitoring program will be the responsibility of the Entity Road Directorates, in collaboration with the Entities' environmental authorities. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. As noted above, Bosnia and Herzegovina's economic and social life depends mainly on its road network. For much of the poor, rural and urban, their primary concern is basic accessibility to employment and social facilities in all weather conditions. This is particularly important in Bosnia and Herzegovina, where the distinction between urban and rural road is very often unclear and where winter conditions are severe. In order to improve the project impact, a survey will be carried out to understand the transport needs of urban and rural communities and of men and women. Although the project does not have land acquisition issues, should these occur during project implementation, adequate treatment and mitigation measures will be adopted. Safety will also be improved and monitored. Accident related data disagregated per gender, age, location, etc. will be collected to help define where architectural barriers will be removed and safe pedestrian crossings will be constructed. 6.2 Participatory Approach: How are key stakeholders participating in the project? The project will focus mostly on inter-city roads, so that it is not expected that many communities would be directly affected by the activities funded under the project. However, road users and communities living in the areas of influence of the road sections to be rehabilitated under the project will be consulted during the preparation of the subproject to determine social indicators to be built in the M & E System. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? At this stage, consultations and collaboration are anticipated to be handled directly between the Entity Road Directorates and road users as well as local communities associations. These associations will participate during the subprojects design phase to provide their inputs on how the designs should be modified to

22 accommodate as much as feasible their needs. Local communities will also be invited to provide feedback on the implementation of works. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Social monitoring indicators will be determined by the social assessment. Decreased vehicle operating costs and transportation costs, increased accessibility, transportation speed and road safety will depend on the design of the road rehabilitation and safety activities and their implementation. A review of design standards and technical solutions will be undertaken under the project to ensure that optimized technical solutions be used in designing the rehabilitation and safety activities. Supervision of these activities will be ensured by the Entity Road Directorates, which have demonstrated their supervision capabilities under previous IDA-funded projects. 6.5 How will the project monitor performance in terms of social development outcomes? Social indicators such as access to services, improved living standards, gender impacts, safety issues will be monitored. The monitoring and measuring of project performance will be carried out by the Entity Road Directorates. Monitoring and measuring modalities will be discussed with the Borrower during the upcoming mission, with the following agreements to be reached: (i) the nature of the required technical assistance for strengthening of the Entity's Road Directorates for the measurement of these outcomes; and (ii) establishment of a baseline for these outcomes at the beginning of project implementation. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Natural Habitats (OP 4.04, BP 4.04, GP 4.04) Forestry (OP 4.36, GP 4.36) Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* Applicability * Yes 0 No 0 Yes * No 0 Yes * No 0 Yes * No 0 Yes 0 No 0 Yes 0 No 0 Yes * No 0 Yes 0 No 0 Yes 0 No 0 Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Draft EMPs have been prepared by the Borrower. The Credit Agreement will contain a requirement that the Borrower agrees to implement the EMPs

23 F. Sustainability and Risks 1. Sustainability: The key to project benefits sustainability lies in the efficiency of the road management structures and the allocation of sufficient resources to road rehabilitation and maintenance. The project will address the issue of road management capacity, road maintenance efficiency, and prioritization of activities according to economic criteria. However, it will not, beyond the project implementation period, provide leverage to ensure that sufficient resources are being allocated to the conservation of road assets, and that only economically sound road construction projects are being undertaken. These two specific aspects should continue to be monitored through other Bank activities such as follow-on projects or adjustment lending. With respect to the creation of a concession capacity, sustainability will be attained only if this capacity is used to properly assess the feasibility of concession schemes. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Entity Council of Ministers may not S Joint review of the annual road budget proposals allocate sufficient resources to road maintenance and rehabilitation. for each Entity, which should include appropriate levels of counterpart funding, and follow up by supervision missions. From Components to Outputs Entities' counterpart funds may not be S Counterpart funds will be included in the timely available. Ministries of Transport budget proposals to their parliaments, and an initial payment will be required as a condition of disbursement.. Road Directorates' staff may not be M The project will include specific support to responsive to agreed changes. strengthen FBHRD, RSRD, and BRIC, both in human and technical aspects of their operations. Private contractors may not be responsive N Private contractors have already demonstrated to new forms of contract. their interest and capability under the two previous IDA financed operations in the transport sector. Also, FBHRD and RSRD are committed to give advance notice of contract availability and to meeting with contractors prior to bidding to clarify bidder's rights and obligations. Adequate staffing and resources may not M Bank staff have observed that some competent be made available to FBHRD, RSRD, and staff are already in place, and have emphasized BRIC. to the Council of Ministers the need for adding more staff to their ranks during implementation. Entity environmental agencies fully N The high quality of the EMPs prepared by involved in preparation of EIA and project FBHRD and RSRD augers well for good activities. cooperation within the country regarding environmental aspects of the project. FBHRD and RSRD staff may not be M FBHRD and RSRD have indicated their

24 competent to implement the new procedures and participate in their installation and the related training programs. commitment to implement new procedures and they clearly want training and upgraded equipment for increasing efficiency of their operations. Supervision missions will follow up. Overall Risk Rating Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) M 3. Possible Controversial Aspects: Obtaining annual increases in the budgets for the Entity road directorates may be difficult at a time when the Government's overall resources are strained. G. Main Credit Conditions 1. Effectiveness Conditions Passage of the Federation Law on Roads is a condition of negotiations. (i) The Government has selected independent auditors for the audit of the project accounts, with terms of reference and qualifications satisfactory to IDA. 2. Other [classify according to covenant types used in the Legal Agreements.] (i) Effectiveness of the Subsidiary Agreements: (a) For the Federation: (i) A Subsidiary Credit Agreement for US$20.0 million equivalent satisfactory to IDA has been signed by the State and the Federation; (ii) The Borrower has opened a Project Account in a commercial bank satisfactory to IDA and has deposited EURO 400,000 equivalent in that account. (b) For Republic of Srpska: (i) A Subsidiary Credit Agreement for US$10.0 million equivalent satisfactory to IDA has been signed by the State and RS; (ii) The Borrower has opened a Project Account in a commercial bank satisfactory to IDA, and has deposited EURO 200,000 equivalent in that account. (ii) The Entities will provide counterpart funds as required for financing their share of project costs on a timely basis, and will deposit these funds into the Project Accounts for withdrawal as required for project implementation. After the initial deposit of counterpart funds (condition of effectiveness), counterpart funding will be reviewed with IDA on a quarterly basis. (iii) In addition to the counterpart financing, the annual budgets of the FBHRD will be increased each year by 20 percent on the average, and not less than 15 percent each year; for RSRD the routine maintenance budget will increase not less than 5 percent each year both in real terms during the life of the project, starting from the budgets for the year (iv) The Govermment will complete the agreed financial action plan for strengthening the project financial management systems by December 31,

25 (v) Procurement will be in accordance with the Bank's Procurement Guidelines. (vi) The Borrower will assure that the Environmental Management Plan is carried out. (vii) Not later than August 31 of each year, the Government will furnish IDA the annual project implementation work programs for the Entities' road directorates for the next year, including procurement and financing plans, and will review these plans with IDA before implementing them. (viii) The Government will submit to IDA, commencing upon Credit effectiveness, a quarterly Project Progress Report not later that 45 days after the end of each quarter outlining progress made in the implementation of each project component, as well as the problems encountered and how they are being addressed. (ix) The Government will prepare a report, by August 31, 2003, outlining the progress made in carrying out the project, and will review the report by September 30, 2003, in order to determine if the progress toward meeting the project objectives is on schedule; the Government will then make any necessary adjustmnents suggested by the Review in order to assure that the project objectives are achieved by the project completion date. (x) The Government will prepare, not later than 6 months after the Closing Date, a plan for the future operation of the project activities, and the Government's input into the Implementation Completion Report, both of which will be reviewed with IDA. (xi) The Government will cause the Entity road directorates to have their records, accounts and financial statements audited each year, comrencing with the accounts for the year ending December 31, (xii) The Government will assure that no private land will be affected during the implementation of the project unless procedures for compensation and replacement have been reviewed and found satisfactory by IDA. H. Readiness for Implementation 1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. D 1. b) Not applicable. Z 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. D 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. D 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies

26 Cesar Queiroz olnar Christiaan Poortman Team Leader t Sector Manager Country Director

27 Annex 1: Project Design Summary BOSNIA AND HERZEGOVINA: Road Management and Safety Project Key Performance Data Collection Strategy Hierarchy of Objectives Indicators. Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Foster sustainable economic Gradually improving Bank CAS updates Strong Government growth in the following areas: economic and regional trade commitment to the CAS (i) increase economic statistics, compared to the reform agenda opportunities and trade baseline year. efficiency; (ii) promote private sector development; (iii) strengthen institutions, in particular enhancing of public expenditures efficiency and management. Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: To improve traffic flow and 1 Post-construction traffic * Traffic survey reports * This project and reduce accident rates on the surveys demonstrate the (annual) comparing additional transport country's road network achievement of expected before and after traffic projects successfully through rehabilitation of reductions in travel time and statistics on improved carried out. priority road sections increase in traffic volumes road sections. associated with identified poor within each identified road road condition and accident segment when compared to 'black spots'. pre-construction traffic surveys. 2. Post-construction accident * Traffic safety reports records indicate significant (annual) comparing reduction in accidents at before and after traffic 'black spots' when compared safety statistics on to pre-construction records, improved road segments

28 Key Performance [Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Road Rehabilitation and Post construction audits * Quarterly progress * Entity Council of Safety: high priority road indicate compliance with reports and Bank Ministers will allocate sections and bridges agreed road standards and supervision missions' sufficient resources to rehabilitated within the approved designs in Aide Memoires road maintenance and country's road network, rehabilitated segments. rehabilitation. including accident 'black spots'. 2. Institutional Strengthening: Road databank set up in * technical audit reports Sector agencies (including FBHRD and RSRD by (annual) FBHRD, RSRD & BRIC) gain December 2003; FBHRD and increased capacity and RSRD staffs trained in authority for road necessary skill areas by June management, planning, 2003; improved financial program administration, and systems installed within enforcement of regulations; FBHRD and RSRD by June necessary office technology 2002; design and material and laboratory and field standards updated by measuring equipment December 2003; road safety upgraded. data base in place and functioning by June

29 Key Performnance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Road Rehabilitation and US$36.63 million * Quarterly progress * Timely availability of Safety reports and missions' Entities counterpart Aide-Memoirs funds. 2. Institutional Strengthening US$4.90 million * Financial audit reports * Road Directorates' staff (annual) responsive to agreed * Disbursement reports changes. (quarterly) * Private contractors responsive to new forms of contract. * Adequate staffing and resources made available to FBHRD, RSRD, and BRIC. * Entity environmental agencies fully involved in preparation of EIA and project activities. * FBHRD and RSRD staff are competent to implement the new procedures and participate in their installation and the related training programs

30 By Component: Annex 2: Detailed Project Description BOSNIA AND HERZEGOVINA: Road Management and Safety Project Project Component 1 - US$36.63 million 1. Road rehabilitation and safety. This component covers estimated maintenance and rehabilitation needs on the main and secondary road network, including upgrading of drainage, identified accident black spots, road markings, crash barriers and signaling. It includes the improvement of 280 km of priority road sections in the Federation (US$25.37 million), and 290 km of priority road sections in Republic of Srpska (US$11.26 million). A detailed list of road rehabilitation and safety works proposed for the project is given in Annex 6. Project Component 2 - US$4.90 million 2. Institutional Strengthening. This component will provide consultant services for the institutional strengthening of the FBHRD (US$1.78 million), including (i) setting up of a road and bridge data bank, including pavement condition survey, and introducing the use of HDM for setting road maintenance and rehabilitation priorities and annual road works programs; (ii) improved quality control procedures for civil works; (iii) the use of competitive bidding procedures; (iv) familiarization with modem road maintenance technologies; (v) improved financial management systems; (vi) support for the creation of core environmental capacities, including establishing environmental unit in the Road Directorate and the review of environmental standards and monitoring pertaining to the road sector; (vii) the training of the FBHRD staff; (viii) creation of a road safety data base and conducting safety awareness campaigns; and (ix) half of the cost of the audit of the project accounts. For RSRD (US$1.89 million), it includes: (i) assistance in establishing procedures for works supervision; (ii) setting up road and bridge data banks; (iii) training in economic analysis and road management; (iv) pavement condition surveys; (v) support in setting up procurement procedures and units for traffic management and road safety and for environmental management; (vi) creation of a road safety data base and conducting safety awareness campaigns; and (vii) one-half of the cost of audits of the project accounts. It also includes a program of technical support for BRIC (US$0.45 million), including: (i) establishing improved and uniform road and bridge design, maintenance and construction standards; (ii) development of the capacity to evaluate private sector proposals for investments in road concessions; (iii) the coordination of inter-entity and intemational road matters; and (iv) the training of the BRIC staff. Equipment, materials and supplies. This component will also finance the equipment, materials and supplies needed to support the project activities, including improved road management. For FBHRD, it will finance office equipment and supplies needed to implement the road data bank, for the operation of an adequate financial and planning system and a road safety system, preparation of reports, and vehicles and survey equipment for road works surveys and supervision (US$0.48 million). For RSRD, it will include road measurement equipment and related office equipment needed to establish the road and bridge data banks (US$0.25 million). For BRIC, it will finance office equipment and supplies, and vehicles (US$0.05 million). A detailed list of services and goods included in the institutional strengthening component of the project is given in Annex

31 Annex 3: Estimated Project Costs BOSNIA AND HERZEGOVINA: Road Management and Safety Project Local Foreign Total Project Cost By Component US $million US $million US $million 1. Road rehabilitation and safety Institutional strengthening Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs' Total Financing Required Local Foreign Total Project Cost By Category US $million US $million US $million Goods Works Services and Training Other Total Project Costs Total Financing Required Cost estimates do not include VAT, as there is no VAT in Bosnia at this time

32 Project Cost by Implementing Agency FEDERATION REPUBLIC OF BRIC TOTAL SRPSKA US$ US$ US$ US$ Works (IDA financing 70%) (17.69) (7.95) (25.64) Goods (IDA financing 100%) (0.48) (0.25) (0.05) (0.78) Technical Services (IDA financing 70%) (0.10) (0.05) (0.15) Consultants and Training * (IDA financing 88%) (1.44) (1.60) (0.39) (3.43) Total Project Cost (19.71) (9.85) (0.44) (30.00) Credit Amount Without BRIC BRIC With BRIC *Includes 50% of audits Project Financing by Financier Federation Republic of Srpska IDA Total US$7.96 US$3.57 US$30.00 US$41.53 million Identifiable taxes and duties are 0 (USSm) and the total project cost, net of taxes, is (USSm). Therefore, the project cost sharing ratio is 72.24% of total project cost net of taxes

33 Annex 4: Cost Benefit Analysis Summary BOSNIA AND HERZEGOVINA: Road Management and Safety Project [For projects with benefits that are measured in monetary terms] Benefits:..Analysis Taxes Present Value of Flows Economic Financial Analysis' MKM Fiscal Impact Subsidies Costs: MKM Net Benefits: MKM IRR: 21.7% l If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value of financial benefits is less than that of economic benefits because of controls on electricity tariffs." Summary of Benefits and Costs: The economic evaluation has been carried out on that part of the project which comprises road maintenance, rehabilitation and safety improvements for the main and regional road network. This component accounts for about 90 percent of total project costs. The remaining, which is allocated mainly to the institutional strengthening of the Entity Road Directorates, including technical assistance, support and training, is considered to be a prerequisite for the development of the Road Directorates into modem and efficient organizations. No formalized economic analysis has been carried out for that part of the project. Main Assumptions: The calculations have been run on the road sections to be maintained/rehabilitated under the project. The project case has been compared to an assumed, likely situation that would exist without the project. This would basically be characterized by an absence of interventions until a complete resurfacing would be warranted. Given the conditions at hand, this would have to be done within four to five years. In the meantime the road conditions would deteriorate, leading to increasing vehicle operating costs and travel times. The economic analyses have been carried out using classical methods of evaluating and comparing costs and benefits of road improvements. The costs and benefits have been calculated as the differences in the without and with the project case. The investments made under the project lead to improved pavements, which contribute to decreased vehicle operating, passenger time and maintenance costs. The black spot corrections, which are included in some of the sections, concem punctual interventions, for example to rectify a curve or to improve a sight distance. The effect is to improve traffic safety by removing a hazard in that particular location, but the effect cannot be quantified with any reasonable degree of credibility in

34 the existing conditions. Consequently, no ERR was computed for this subcomponent. The situation with respect to input data has been improving in the past few years with valuable information about traffic volumes and patterns, vehicle fleet composition and use, coming from the Transport Master Plan for Bosnia and Herzegovina. The vehicle operating costs are now derived directly from the actual vehicle fleets and actual costs in the country whereas up till now use had been made of information from neighboring countries. Although limited in scope and duration, traffic counts have been carried out systematically in 2000, the first in about ten years. However much still remains conjectural. There is for example no measured data for the pavement condition generally and for the roughness of the pavements in particular. Use has been made of various inspections and assessments undertaken both in the Federation and in RS. These estimates by necessity imply a high degree of subjectivity and the observations are not always internally consistent. Thus there are limitations, inherent to the situation in Bosnia and Herzegovina at this time, but the work that has been done for the economic evaluation has considerably improved on the previous situation. In the Federation the economic evaluation of the sections included in the project has been carried out by the Institute of Traffic at the Faculty for Civil Engineering in Sarajevo (Study of Economic Viability for Rehabilitation of Highways in the Region of Federation of Bosnia and Herzegovina, Sarajevo, September 2001). The same methodology has also been applied to the RS project components. Among the more important assumptions, traffic volumes have been assumed to increase by 3.5% pa which is in accordance with the conclusions of the Transport Master Plan and which cannot be considered excessive, rather they seem to be on the conservative side considering what seems (but without the support of systematic counts) to have been much higher increases over the past few years. For other civil works components of the investment program, mainly the reconstruction or rehabilitation of bridges and tunnel lighting, the rates of return are expected to be high since damaged bridges are critical bottlenecks causing long detours and/or waiting times. Tunnel lighting has an important positive effect on traffic safety. The detailed assumption and calculations are shown in the studies mentioned above. The table below shows detailed results of the calculations

35 C. Sct o.~'&~.: 2 Cst -Cost ~2OO~.ji2000' 'ERR -@Z%--. NP 1 't.^, ^ -r. Ml IADT -. (M: M -ERR Sensitivity.. ' ~ ~ ~ ~ ~ j~~j - k--,cost*20% traffic-20% Federation Sicki Brod to Entity border Sicki Brod to Doboi Lasva to Entity border Lasva to Kula Gorica to Neum Posusje to Mostar Livno to Posusje Strmica to Livno Bihac to Srbljani Karuse to Lasva Stupska petlja to Jablanica Jablanica to Mostar Mostar to Doljani Sicki Brod to Loncari Sicki Brod to Krivajevici Krivajevici to Sarajevo Suica to Tunel Kupres DonjiVakuf to Tunel Kupres Livno to Tomislav Grad Vel Brusnica to Odzak Vel Kladusu to Srbljani Ustikolina to Gorazde Republika Srpska Novi Grad to Prijedor Koz Dubiza to Gradiska Karanovac to Ugar Prnjavor to Rudanka Doboj to Petrovo Priboj to Lopare Caparde to Karakaj Konjevic Polje to Srebrenica Kula to Vraca Dobro Polje to Kalinovik All of the analyzed road sections have ERR's above 12%. The ERR's range is from 13.1% to 73.6% with

36 the mean being 25.4%. Generally those sections with low present traffic levels, below 1000 AADT, have rates of return at the lower end of the spectrum. This is quite natural and reflects the fact that some of the road sections, although important, are of a secondary character with limited traffic. In order to verify these results, the mission has also run an analysis using HDM 4. The ERR's so calculated were generally higher than those calculated in the Study of Economic Viability described above. Without arguing the relative merits or the appropriateness of using the HDM 4 in the context of Bosnia and Herzegovina, where road condition data is relatively limited, the results show that the ERR's arrived at in the Study of Economic Viability do not overstate the viability but rather that conservative assumptions have been used with corresponding results. Overall, the project in its entirety has an ERR of 21.7% and a NPV, at 12% discount rate, of MKM. Conclusions All the components considered are economically justified, having ERR's above 12%. The project in its entirety has an ERR of 21.7% and an NPV, at 12%, of MKM. The summary of benefits and costs is given in the table below. Federation Republic of Srpska Overall Benefits (MKM) Costs (MKM) Net Benefits (MKM) IRR % Sensitivity analysis / Switching values of critical items: Two sensitivity analyses have been carried out. One assumes a 20% increase in construction costs, and the other a 20% decrease in traffic relative to the values assumed. The results are shown in the two right hand columns in the detailed results table above. Increasing construction costs by 20% still leaves most of the sections above 12% ERR. Roughly the same reductions of the ERR's occur with the decrease of traffic by 20%. Those sections which fall below do so by relatively small margins. The one section which shows the most significant reduction in viability is the Ustikolina to Gorazde road which also has the lowest base case ERR of 13%, which is reduced to 5-6% with the assumed traffic decreases/construction cost increases. This section should be carefully watched during the design and bidding phases

37 Annex 5: Financial Summary BOSNIA AND HERZEGOVINA: Road Management and Safety Project Years Ending December 31 IMPLEMENTATION- Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total Financing Required Project Costs Investment Costs Recurrent Costs Total Project Costs ,Total Financing Financing IBRD/IDA Government Central Provincial Co-financiers User Fees/Beneficiaries Others Total Project Financing Main assumptions: VAT is not included in the above projections. :'

38 Procurement Annex 6: Procurement and Disbursement Arrangements BOSNIA AND HERZEGOVINA: Road Management and Safety Project Civil works, goods and services to be financed by the Bank will be procured in accordance with the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in January 1995and revised in January and August 1996, September 1997 and January 1999 and "Guidelines for Selection and Employment of Consultants by World Bank Borrowers" published in January 1997 and revised in September 1997 and January The project elements, their estimated cost and procurement methods are summarized in Tables A and B1. The thresholds for each procurement method and Bank prior review are shown in Table B. A procurement plan detailing the packaging and estimated schedule of the major procurement actions is also enclosed in Table B 1. The disbursement schedule is shown as Table C. The Project will be carried out by the two Road Directorates (RD), one in the Federation and the other one in the Republic of Srpska. RS Road Directorate (RSRD) will also handle the procurement of Road Corporation (BRIC), a joint establishment of two entities. Federation Road Directorate (FBHRD) will participate in the evaluation committees regarding the procurement carried out on behalf of BRIC. Each RD will be staffed with a minimum of one procurement specialist (a condition of effectiveness) and one procurement assistant to ensure that procurement is undertaken efficiently, in a timely manner, and in accordance with the Bank guidelines. 1. Procurement of Civil Works Civil Works (US$ million) will be procured as follows: (a) International Competitive Bidding (ICB): All works contracts estimated to cost over US$500,000 equivalent per contract will be procured through ICB. (b) National Competitive Bidding (NCB): Works contracts estimated to cost less than US$500,000 equivalent per contract, up to an aggregate amount not to exceed US$1.0 millon equivalent, may be procured through NCB. 2. Procurement of Goods Goods(US$0.78 million), will be procured in package sizes that will encourage Competitive Bidding. Intemational (a) International Competitive Bidding (ICB): Goods contracts estimated to be above US$100,000 equivalent per contract will be procured through ICB. (b) International Shopping (IS): Goods estimated to cost less than US$100,000 equivalent per contract, up to an aggregate of US$ 0.21 million equivalent may be procured through IS. 3. Procurement of Technical Services Technical Services (US$ 0.21 million) such as TV / Radio braodcasting of public information for Road Safety related Emergency Medical Care component will be procured through NCB. (a) National Competitive Bidding (NCB): Technical services contracts estimated to cost less

39 than US$250,000 equivalent per contract, up to an aggregate amount not to exceed US$0.25 millon equivalent, may be procured through NCB. ECA sample bidding document for procurement of minor works will be used after customizing to fit into this procurement. 4. Selection Procedures for Consulting Services Contracts for Consulting Services will be awarded following the World Bank Guidelines "Selection and Employment of Consultants by World Bank Borrowers" dated January 1997, revised September 1997 and January The following methods of selection will be followed: (a) Quality and Cost Based Selection (QCBS) procedures will be used for consultant services. (b) Least Cost Selection (LCS) procedures will be used for consultant services such as financial audits, pavement condition survey, construction supervision, etc. to cost less than US$ 100,000 equivalent per contract. (c) Selection based on Consultants Qualifications (CQ) will be used for very small consultant assignments such as preparation of public information, training design, legal TA, etc. to cost less than US$ 100,000 equivalent per contract. (d) Individual Consultant selection (ICS) procedures will be used for assignments which meet the criteria specified in Section V of the Guidelines. 5. Notification of Business Opportunities A General Procurement Notice (GPN) was published in the August 16, 2001 issue of the Development Business and will be updated annually if there are any outstanding ICB tenders and all outstanding large consulting assignments above $200,000 thereafter. For consultant contracts above US$200,000, a Request for Expressions of Interest will be published in Development Business, as well as in a local newspaper of wide circulation. The Invitation to Bid for civil works and goods contracts will be advertised as per the requirements of the Bank Guidelines. Procurement methods (Table A)

40 Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other N.B.F. Total Cost 1. Works (24.94) (0.70) (0.00) (0.00) (25.64) 2. Goods (0.57) (0.00) (0.21) (0.00) (0.78) 3. Services (0.00) (0.00) (3.43) (0.00) (3.43) 4. Technical Services (0.00) (0.15) (0.00) (0.00) (0.15) Total (25.51) (0.85) (3.64) (0.00) (30.00) "Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies. 2 Includes civil works and goods to be procured through consulting services, training, technical assistance services

41 Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Selection Method Consultant Services Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total Cost. A. Firms (2.60) (0.00) (0.00) (0.75) (0.04) (0.00) (0.00) (3.39) B. Individuals (0.00) (0.00) (0.00) (0.00) (0.00) (0.04) (0.00) (0.04) Total (2.60) (0.00) (0.00) (0.75) (0.04) (0.04) (0.00) (3.43) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Credit

42 Prior review thresholds (Table B) Review by the Bank of Procurement Decisions Scheduling of Procurement: Any revision in the procurement plan for the project by the Road Directorates will be reviewed by the Association,before inviting bids, in accordance with the provisions of paragraph 1 of Annex I of the procurement guidelines. Procurement of civil works, goods and services for the project will be modified as appropriate and included in the progress reports subject to Bank review. Prior Review: (a) Goods: All ICB and the first IS contract of each Road Directorate will be subject to prior review; (b) Civil Works: All ICB contracts, and first 2 NCB contracts of each Road Directorate will be subject to prior review; (c) Technical Services: First contract in each Road Directorate will be subject to prior review, (d) Consulting Services: Terms of reference for all consulting assignments will be subject to prior review. Request for Proposals (RFP), shortlists, terms and condition of contracts as well as evaluation reports and recommendation for award will be prior reviewed for contracts for individual consultants above $50,000 equivalent and firms above $100,000 equivalent. Ex-post review: During Bank supervision missions, not less than 1 in 5 tenders not subject to Bank prior review will be examined ex-post. Table B: Thresholds for Procurement Methods and Prior Review' Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works $500,000 or > All for ICB <$500,000 First two NCB contracts in 0.20 each RD 2. Goods $100,000 or> All ICB 0.57 <$ 100,000 First IS contract in each RD Services >$100,000 for firms All QCBS or LCS 3.81 >$50,000 for individuals Individual selection 4. Technical Services <$250,000 First NCB contract in each 0.21 RD 5. Miscellaneous 6. Miscellaneous Total value of contracts subject to prior review: $ 40.53million Overall Procurement Risk Assessment Frequency of procurement supervision missions proposed: One every six months (includes special procurement supervision for post-review/audits) High Table BH: Procurement Arrangements and Time Schedule

43 Major Procurement Description No. of Type' Est. Proc. Doc. lnvit. to Bid Contract Contract Packages Cont. Cost Method 2 Prepar. Bid Opening Award Complet. USSm _ Civil Works (Fed) Rehabilitation of Sicki Brod-Simin Han- Gr. I W 1.52 ICB Apr-02 May-02 Jun-02 Jul-02 Dec-02 Ent road Civil Works (Fed) Rehab. of Lasva - Jajce - Gr. Ent. Road I W 1.51 ICB Apr-02 May-02 Jun-02 Jul-02 Dec-02 Civil Works (Fed) Rehab. of Gorica - Caplina - Gr. Ent.and 1 W 0.50 ICB May-02 June-02 Jul-02 Jul-02 Dec-02 Prolaz kroz Neum Road Civil Works (Fed) Rehab. of Bihac - Srbinja and B. Grupa - I W 0.69 ICB May-02 June-02 Jul-02 Jul-02 Dec-02 Gudavac roads Civil Works (Fed) Rehab. of Karuse- Lasva road 1 W 2.60 ICB Jun-02 Jul-02 Aug-02 Sep-02 Jun-03 Civil Works (Fed) Rehab. of Krivajevici - Sarajevo road I W 1.40 ICB Jun-02 Jul-02 Aug-02 Sep-02 Jun-03 Civil Works (Fed) Rehab. of Vel. Brusnica - Odzak and Gr. Ent. I W 0.64 ICB Jul-02 Aug-02 Oct-02 Dec-02 Aug-03 - Gradacac - Gr. Entity roads Civil Works (Fed) Rehab. of Ustikolina - Gorazde - Gr. Ent. road I W 0.59 ICB Jul-02 Aug-02 Oct-02 Dec-02 Aug-03 Civil Works (Fed) Rehab, of Lasva- Stupska petija - Kula road I W 0.75 ICB Dec-02 Jan-03 Mar-03 Apr--03 Dec-03 Civil Works (Fed) Rehab. of Livno - Kolo- Posusje road I W 1.14 ICB Dec-02 Jan-03 Mar-03 Apr--03 Dec-03 Civil Works (Fed) Rehab. of B. Grahova - Livno and B. Grahova I W 1.49 ICB Nov-02 Dec-02 Feb-03 Mar-03 Nov-03 - Strmica roadsii Civil Works (Fed) Rehab. of Stupska petlja - Jablanica road I W 1.58 ICB Nov-02 Dec-02 Feb-03 Mar-03 Nov-03 Civil Works (Fed) Rehab. of Sicki Brod - Krivajevici road I W 1.80 ICB Dec-02 Jan-03 Mar-03 Apr--03 Dec-03 Civil Works (Fed) Rehab. of V. Kladusa - Srbljani road 1 W 0.88 ICB Dec-02 Jan-03 Mar-03 Apr-03 Dec-03 Civil Works (Fed) Rehab. of Tunnel lightings 1 W 1.07 ICB Dec-02 Jan-03 Mar-03 Apr--03 Dec-03 Civil Works (Fed) Rehab. of Sicki Brod - Gracanica - Gr. Ent. I W 1.12 ICB Nov-03 Dec-03 Feb-04 Mar-04 Nov-04 Road Civil Works (Fed) Rehab. of Posusje - Mostar road I W 0.77 ICB Nov-03 Dec-03 Feb-04 Mar-04 Nov-04 Civil Works (Fed) Rehab. of Jablanica - Mostar road I W 0.64 ICB Dec-03 Jan-04 Mar-04 Apr-04 Dec-04 Civil Works (Fed) Rehab. of Mostar - Doljani road I W 0.73 ICB Dec-03 Jan-04 Mar-04 Apr-04 Dec-04 Civil Works (Fed) Rehab. of Arizona - S. Brod and Orasje - I W 0.91 ICB Dec-03 Jan-04 Mar-04 Apr-04 Dec-04 Loncari roads Civil Works (Fed) Rehab. of Suica - Tunel Kupres road 1 W 0.81 ICB Dec-03 Jan-04 Mar-04 Apr-04 Dec-04 Civil Works (Fed) Rehab. of D. Vakuf- T. Kupres road I W 0.64 ICB Dec-03 Jan-04 Mar-04 Apr-04 Dec-04 Civil Works (Fed) Rehab. of Livno - Suica - T. Grad road I W 0.59 ICB Dec-03 Jan-04 Mar-04 Apr-04 Dec-04 Civil Works (RS) Rehab. of N. Grad- Prijedor road I W 1.12 ICB Feb-02 May-02 Jun-02 Jul-02 Dec-02 Civil Works (RS) Rehab. of Doboj - Petrova road I W 1.12 ICB Feb-02 May-02 Jun-02 Jul-02 Dec-02 Civil Works (RS) Rehab. of Caparde - Karakaj road I W 0.50 ICB Feb-02 May-02 Jun-02 Jul-02 Dec-02 Civil Works (RS) Rehab. of Kula - Vraca road 1 W 0.50 ICB Feb-02 May-02 Jun-02 Jul-02 Dec-02 Civil Works (RS) Rehab. of Tunnel lights 3 W 1.61 ICB Feb-02 MayO2 Jun-02 ul-02 Dec-02 Nov-02 Jan-03 Mar-03 Apr.-03 Oct-03 Nov-03 Jan-04 Mar-04 Apr.-04 Oct-04 Civil Works (RS) Rehab. of Karanovac - Kenzevo-Ugar road I W 1.80 ICB rov-02 Jan-03 Mar-03 Apr-03 Dec-03 Civil Works (RS) Rehab. of Priboj - Lopare road I W 0.50 ICB Nov-02 Jan-03 Mar-03 Apr-03 Dec-03 Civil Works (RS) Rehab. of K. Polje - Bratunac - Kalinovik road I W 1.23 ICB Nov-02 Jan-03 Mar-03 Apr-03 Dec-03 Civil Works (RS) Rehab. of K. Dubica - Gradiska Road I W 1.12 ICB Oct-03 Jan-04 Mar-04 Mar-04 Oct-04 Civil Works (RS) Rehab. of Pmjavor - Dragalovici - Rudanska 1 W 0.76 ICB Oct-03 Jan-04 Mar-04 Mar-04 Oct-04 road I Civil Works (RS) Rehab. of D. Polije - Kalinovik road 1 W 0.50 ICB Nov-03 Jan-04 Mar-04 Oct-04 Civil Works (RS) Recons. of Ugar Bridge I W 0.50 ICB Nov-03 Jan-04 Mar-04 Apr-04 Oct-04 Civil Works (Fed) Recons. of damaged bridges 10 W 1.00 NCB TOTAL WORKS Goods (Fed) Office Equipment and furniture for Federation 2 G 0.05 IS Aug-02 Sep-02 Sep-02 Oct-02 Nov-02 RD Goods (Fed) Procurement of weighscales for Fed. RD I G 0.06 s Ju1-02 Aug-02 Sept-02 Oct-02 Jan-03 Goods (Fed) Proc. Of traffic counters for Fed. RD I G 0.32 ICB Mar-03 Apr-03 Jun-03 Aug-03 Dec-03 Goods (Fed) Proc. Of Rutting Measurement Device for Fed. I G 0.05 Is Feb-03 Apr-03 May-03 Jun-03 Aug-03 _ ~~~RD I Goods (BRIC) Office Eqpt. I G 0.05 is Jul-02 Aug-02 Sept-02 Oct-02 Dec

44 Goods (RS) Road Measuring Equipment I G 0.25 ICB Sept-02 Nov-02 Jan-02 Mar-02 Sept-02 TOTAL 0.78 GOODS Technical Services Media Time 1 S 0.14 NCB Sep-0 2 Oct-02 Dec-02 Feb-03 Feb-04 (Fed) Technical Services Media Time 1 S 0.07 NCB Sep-02 Oct-02 Dec-02 Feb-03 Feb-04 (RS) TOTAL 0.21 TECHNICAL SERVICES Consultants (Fed) Design of Roads and Bridges Data Base 1 S 0.43 QCBS Aug-02 Sept-02 Nov-02 Dec-02 Dec-03 Consultants (Fed) Contract Supervision 24 S 0.45 LCS Consultants (Fed) Survey of Pavement Condition I S 0.21 QCBS Nov-03 Dec-03 Feb-04 Apr-04 Jul-04 Consultants (Fed) Traffic Management and Safety, including I S 0.32 QCBS ul-03 Aug-03 Sep-03 Dec-03 Dec-04 Monitoring and Evaluation Consultants (Fed) Procurement Specialist 1 S 0.05 ICS Apr-02 Apr-02 May-02 May-02 Dec-04 Consultants (Fed) Environmental Monitoring and Supervision I S 0.10 QCBS Apr-02 May-02 Jul-02 Aug-02 Dec-04 Consultants (Fed) Public Information, clinical input 2 S 0.02 CQ Jun-02 Jul-02 Sep-02 Oct-02 Dec-02 Consultants (RS) Contract Supervision 10 S 0.20 LCS Consultants (RS) Preparation of Road Data Bank I S 0.50 QCBS Aug-03 Sept-03 Nov-03 Dec-03 Dec-04 Consultants (RS) Survey of Pavement Condition 1 S 0.10 LCS Nov-03 Dec-03 Feb-04 Apr-04 Jul-04 Consultants (RS) Environemental Monitoring and Supervision 1 S 0.10 QCBS Apr-02 May-02 Jul-02 Aug-02 Dec-04 Consultants (RS) Traffic Management and Safety, including 1 S 0.50 QCBS Jul-03 Aug-03 Oct-03 Dec-03 Dec-04 Monitoring and Evaluation Consultants (RS) Bridges Data Bank I S 0.35 QCBS Aug-03 Sept-03 Nov-03 Dec-03 Dec-04 Consultants (RS) Public Information, clinical input 2 S 0.02 CQ Jun-02 Jul-02 Sep-0 2 Oct-02 Dec-02 Consultants (RS) for Prep. of Road Design, construction and 3 S 0.45 QCBS Aug-02 Nov-02 Dec-02 BRIC maintenance standards and concession capacity Consultants Project Financial Audits 5 S 10 LCS (Federation and RS) TOTAL 3.91 CONSULTANTS _ 1) G for Goods, W for Works, S for Services 2) ICB for International Competitive Bidding, NCB for National Competitive Bidding, MW for Minor Works, QCBS for Quality and Cost Based Selection, LCS for Least Cost Selection, ICS for Individual Consultant Selection Brief Statement A capacity assessment of the Borrower was conducted during the project appraisal. The respective procurement units of the Borrower in Federation and RS have limited experience with Bank procurement. Therefore, an action plan was prepared to enable the Borrower to conduct procurement under the project in accordance with Bank procurement procedures. This plan includes: (i) hiring one procurement specialist in each Road Directorate to conduct procurement under the project (latest by the project effectiveness (June 2002), (ii) use of Bank standard bidding documents under the project; and (iii) organizing a project launch workshop around project effectiveness (May 2002). Country Procurement Assessment Report: under preparation. Training Information and Development on Procurement Estimated Date of Project Launch Workshop: May 2002 Date of publication of General Procurement Notice: August 16,

45 Indicate if there is procurement subject to mandatory SPN in Development Business: Yes, for hiring the technical assistance consultant for the preparation of design, supervision and maintenance standards and design of roads data base. Domestic Preference for Goods: Yes Domestic Preference for Works, if applicable: No Retroactive Financing: No. Explain: Explain briefly the Procurement Monitoring System: 11 project documentation which requires prior review will be cleared by a PAS and the relevant technical staff. RS Road Directorate has already hired a procurement specialist with previous experience on procurement under Bank projects and the Federation Road Directorate is identifying the candidates for the procurement specialist position with Bank procurement experience in other Bank projects in Bosnia. Procurement information will be collected and recorded by the Road Directorates and submitted to the Bank as part of the quarterly progress reports prepared by them. This information would include: (a) revised cost estimates for individual contracts; (b) revised timing of procurement actions including advertising, bidding, contract award and completion time for individual contracts; and (c) compliance with aggregate limits on specific methods of procurement. Cofinancing: Explain briefly the Procurement arrangements under co-financing: N/A Section 4: Procurement Staffing Indicate name of Procurement Staff or Bank's staff part of Task Team responsible for the procurement in the Proj ect: Name: Ahmet Gokce Extension : xplain briefly the expected role of the Field Office in Procurement: The Field Office will provide support to the project team during project implementation. Thresholds generally differ by country and project. Consult OD "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance

46 Disbursement Allocation of credit proceeds (Table C) Table C: Allocation of Credit Proceeds Expenditure Category Amount in US$million Financing Percentage A. Part A of the Project (the Federation of BiH); Subtotal US$20.00 million 1. Works % 2. Goods % of foreign expenditures and 80% Federation: US$0.48 million of local expenditures for Federation; BRIC: US$0.03 million 67% of foreign expenditures and 53.3% of local expenditures for BRIC 3. Consultant Services and Training % for Federation; 58.7% for BRIC Federation: US$1.39 million BRIC: US$0.26 million 4. Technical Services % 5. Operating Costs % B. Part B of the Project (Republic of Srpska); Subtotal US$10.00 million 1. Works % 2. Goods % of foreign expenditures and 80% RS: US$0.25 million BRIC: US$0.02 million of local expenditures for RS; 33% of foreign expenditures and 26.7% for BRIC 3. Consultant Services and Training % for RS; 29.3% for BRIC RS: US$1.55 million BRIC: US$0.13 million 4. Technical Services % 5. Operating Costs % Total Project Costs Total

47 Annex 6b: Financial Management Assessment Report BOSNIA AND HERZEGOVINA: Road Management and Safety Project 1. Executive Summary and Conclusion. Bosnia and Herzegovina (BiH) is an emerging post-conflict country with weak public financial management capacities and high perceived levels of institutional corruption. The Road Management and Safety project is one of the first Bank projects in BiH to be managed within the structure of government departments. Most previous Bank projects have been "ring fenced" with separate PIUs. The objective of integrating the project management into the respective government departments is to begin the process of building longer-term sustainability of project management capacity. Given the higher inherent risks during this transition, the financial management arrangements for the project have been designed to compensate for the institutional weaknesses by having separate finance and accounting units within the respective Roads Directorates, staffed by qualified personnel and with independent accounting systems and controls. An assessment of the Financial Management arrangements for the project was undertaken during appraisal to determine whether the financial management arrangements within two Entities Road Directorates are acceptable to the Bank. These financial management arrangements include the entities' systems of accounting, financial reporting, auditing, and internal controls. Detailed financial management assessment questionnaires are included in the project files. A surnmary of the conclusions are as follows: _ Rating Comments 1. Implementing Entity Satisfactory 2. Funds Flow Satisfactory 3. Staffing Satisfactory 4. Accounting Policies and Procedures Satisfactory 5. Internal Audit NA No reliance placed on internal audit 6. External Audit Satisfactory The project will be audited under a country-wide general audit agreement 7. Reporting and Monitoring Satisfactory 8. Information Systems Marginally Action plan item - some mino Satisfactory modifications for revised FMR Overal Financlal Management Rating Satisfactory Conclusion Taking into consideration the assessment of the financial management systems and processes and the assessment of risks and mitigating measures, the financial management arrangements for the Entities Road Directorates are considered capable of satisfactorily recording all transactions and balances, supporting the preparation of regular and reliable financial statements, safeguarding the entities' assets, and are subject to auditing arrangements acceptable to the Bank

48 2. Summary Project Description The project development objective is to improve traffic flow and reduce accident rates on the country's road network through rehabilitation of priority road sections associated with identified poor road condition and accident black spots'. The project, to be supported by a $30 million IDA credit and a Government contribution of $11.5 million, consists of two components: (a) Road rehabilitation and safety (US$36.6 million) and (b) Institutional Strengthening (US$4.90 million). Details of the components are included in Annex 2 of this PAD. 3. Country issues A Country Financial Accountability Assessment (CFAA) for Bosnia and Herzegovina was completed in August The draft CFAA report identified issues of extremely weak public sector Public Sector Budgeting, Accounting, Reporting and Auditing. The draft CFAA report also identified an environment of pervasive corruption at all levels of the economy. In view of the above, the draft CFAA report concluded that it remained appropriate to maintain the current "ring fencing" of financial resources in Bank projects in order to provide the appropriate fiduciary safeguards. The draft CFAA report did, however identify the medium to longer term goal of mainstreaming project management into Ministries and Department and to consolidate PIUs and refrain from the creation of new PIUs. The governing system in Bosnia and Herzegovina (BiH) is complex and comprises thirteen government levels with appropriate legislative and fiscal powers. These are: the State of BiH (State); Federation Bosnia and Herzegovina (Federation); Republic of Srpska (RS); and ten cantons (Canton) of the Federation. Below the canton level, there are traditional local Council of Ministers-cities and municipalities. In addition there is the Bracko District (under the State) and the OHR. 4. Risk Analysis A summary of the consolidated risk assessment for the project is as follows: Risk Comments Inherent Risk 1. Country Financial Management Risk High Based on draft 2001 CFAA report 2. Project Financial Management Issues Substantial 3. Banking sector High Weak banking sector in the RS 4. Perceived corruption High Draft CFAA report in 2001 notes pervasive corruption at all levels of the economy. 5. Counterpart funds High A higher level of govermnent contribution than in prior projects. Overall Inherent Risk High X -44 -

49 Control Risk 1. Implementing Entity Substantial 2. Funds Flow Moderate 3. Staffing Moderate 4. Accounting Policies and Procedures Moderate 5. Intemal Audit N/A 6. Extemal Audit Negligible 7. Reporting and Monitoring Negligible 8. Information Systems Negligible Overall Control Risk Moderate Risk mitigation strategy: Country financial management risk - the draft CFAA report notes that there are very weak financial structures in govemment departments. To compensate, expenditures for the roads project in both Entities will be controlled and accounted for by a separate unit within the respective Roads Directorate. Banking sector risk - the special accounts for the project will be held in acceptable commercial banks outside the BiH. Perceived corruption risk - the Bank's financial resources are used for a relatively small number of specific contracts which allows for close monitoring by the Bank. The implementation of the contracts will be monitored, including ensuring that the funds have been used for the intended purpose, at least twice each year during supervision missions and by regular monitoring by the country-based FMS. Counterpart funds risk - the Credit Agreement specifies an initial deposit of the Govemment's contribution and assurances have been given that govemment counterpart funds will be budgeted and advance on a regular basis. Close monitoring will still be required. The financial risks will also be mitigated by the institutional strengthening component of the project including; improving the supervision capacity within the Roads Directorates, requirements for technical audit reports, increasing the privatization of contractors and the involvement of local communities in providing feedback on the civil works. Financial risks are also mitigated by the procurement arrangements which result in some 87% of contract value to be subject to ICB and some 97% of contract value to be subject to prior review by the Bank. 5. Strengths and Weaknesses Strengths The Project design is simple and straightforward. Approximately 91% of anticipated project expenditures are covered by 38 civil works contracts and 99% of anticipated project expenditures are covered by some 60 specific contracts. The limited number of contracts allows for closer monitoring of contract execution. The Bank has accumulated experience through the implementation of two previous emergency road projects, ETRP and the SETRP

50 Weaknesses Moving the implementation unit into the Ministries, rather that operating a stand alone PIU, may make more difficult to attract and retain good financial staff as the government salary levels are lower than the levels paid to PIU staff. 6. Implementing Entities The IDA Credit will be lent to Bosnia and Herzegovina, who will on-lend the proceeds of the Credit to the Federation of Bosnia and Herzegovina, and to the RS. The proposed Credit is a single operation with three parts, one in each Entity (one in the RS and the other in the Federation) implemented through the respective Roads Directorates, the Republic of Srpska Road Directorate (RSRD) and the Federation of Bosnia and Herzegovina Roads Directorate (FBHRD) and a third, relatively small element (US$500,000), through the Bosnia and Herzegovina Road Infrastructure Public Corporation (BRIC) an inter-entity corporation dealing with common road transportation issues. The BRIC element will be administered through the two Entity Road Directorates. The previous Bank road projects, the ETRP and the SETRP were implemented through the stand alone PlUs. The current Road project will be implemented within the respective Entity Roads Directorates. Some of the staff who have experience with implementing the previous road projects have been transferred to the Roads Directorates. 7. Funds Flow There will be two IDA Special Accounts established, one for the FBHRD and the other for the RSRD. The IDA Special Accounts will be held in commercial banks acceptable to IDA. There will be a separate Government Counterpart Funds accounts for the FBHRD and the RSFD set up in commercial banks. The FBHRD and the RSRD will make all payments for the project and maintain vouchers and supporting documentation for expenditures for project activities. The FBHRD and the RSRD will maintain local accounts in EURO for foreign currency payments and local accounts in KM for local currency payments. An maximum advance of two weeks estimated IDA share of expenditures is allowed from the IDA Special Accounts. 8. Staffing Federation staffing Within the FBHRD a PMU has been established. The PMU is led by a Project Director who will have overall responsibilities for the day-to-day implementation. The PMU includes a financial manager who is responsible for financial matters including monitoring that the financial covenants of the Credit agreement.. The PMU will engage an Accountant to be responsible for maintaining the accounting system together with a financial assistant and a procurement officer. The staffing levels and qualifications are satisfactory for the implementation of the project. As with other projects in BiH there is a risk of not being able to attract and retain qualified staff given the remuneration levels in Federation government. RS staffing The RS will implement the project within the RS Road Directorate. The Director of the PIU which managed the previous Bank financed roads project has transferred to the RSRD as Deputy Director. The RSRD has engaged a financial manager on contract to be responsible for managing and carrying out the financial management responsibilities. This financial manager has extensive experience in other Bank projects where he has performed satisfactorily. There remains a risk of retaining qualified and competent staff, in view of proposals to limit the fees that extemal PIU staff can charge internationally funded

51 projects. 9. Accounting Policies and Procedures At present the accounting practices and standards within the two Entity Council of Ministers are not yet at acceptable levels. The draft CFAA report indicated that "the budget classification structures, the chart of accounts and the reporting formats are duly explained in a Rule Book issued in However, only few, simpler elements of the new structures are being implemented. A group of IAS-based accounting standards have been officially adopted and are presented in the Rule Book, but existing accounting practices do not actually follow them. In fact, pure cash bookkeeping is in place, supplemented by a fragmented, rudimentary commitment tracking system, not integrated with the overall accounting system." There is a separate project underway, financed by USAID, to strengthen financial management in the Entity Council of Ministers. In view of the above, project accounting will be maintained separately within the Roads Directorates and will comply with International Accounting Standards. The local accounting standards, which are based closely on International Accounting Standards, have been adopted by the Federation from January 1, Donor agencies are currently providing training to local accountants to familiarize them with the new standards. Accounting procedures are set out in detail in separate Financial Management Manuals for the Federation and for the RS. The financial manuals cover: (a) the financial management system proposed under the project, with special emphasis on accounting and auditing policies, standards and internal controls; (b) the role of the financial management systems in project management and implementation; (c) the accounting arrangements required for project management, the format for and content of project financial reporting; (d) the auditing arrangements that will be used during project implementation, and (e) budgeting and planning. The Financial Management Manuals have been reviewed by the Bank and are assessed as being satisfactory. 10. Internal Audit There is no intemal audit function in the unit. The project may be subject to audits by the newly established Supreme Audit Institutions (SAI) as they become operational. At this time, however, no reliance is being placed on any internal financial reviews. 11. External Audit Annual audits for the project accounts will be carried out in accordance with the Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank. The audit reports will be in a format in accordance with the Intemational Standards on Auditing promulgated by the International Federation of Accountants (IFAC). The audit reports will include a separate opinion on the operation of the Special Accounts and on disbursements made on the basis of SOEs. The audited financial statements, including the audit of the special accounts, and SOEs will be sent to the Bank within six (6) months of the end of the Government's fiscal year

52 There are government-wide audit arrangements covering all Bank financed projects in BiH (with the exception of revenue earning entities). The State Ministry of Treasury of Institutions of BiH has recently renewed a three-year contract ( ) with PriceWaterhouseCoopers, Netherlands for the audits of World Bank financed projects. The Roads Project will be included on the list of projects audited under the master audit agreement with PriceWaterhouseCoopers, Netherlands. 12. Reporting and Monitoring The Entities will maintain separate financial records for their parts of the Project and will ensure appropriate accounting for the funds provided. The Entities will prepare and submit Financial Monitoring Reports (FMR) in a form and frequency agreed with the Bank. The FMRs will be customized to reflect the country circumstances and the needs of the project, while meeting the Bank's minimum information requirements for the financial monitoring of the Project. Approximately 91% of Project expenditures are planned for a limited number (some 38) civil works contracts, with a additional 8% of Project expenditures relate to specific contracts for consulting services and goods (some 20 contracts). The prime focus of financial monitoring will be the tracking of disbursements relating to the above specific contract packages, which in the case of civil works also track the physical progress of the Project. The FMR will therefore include (a) statement of sources and uses of funds (b) a detailed schedule fro tracking disbursements against specific contracts for civil works, goods and consultants services. The projects will also prepare annual financial statements, in a form acceptable to the Bank, and these will be submitted for external audit. 13. Information Systems The Entities will use separate information systems. In the Federation the software that will be used was developed in LORA, another Bank financed project in the Federation. This accounting software system, which uses Visual Basic Database, was developed by an external consultant a few years ago and subsequently enhanced by LORA's MIS staff. It consists of the following modules: financial, procurement and reporting. The financial modules include 4 sub-modules: Payments, Reports, Other Categories, and Reports by Other Categories. The payments are entered into the system based on disbursement categories. The reporting sub-modules allows the FBHRD to print detail reports and the financial statements. The procurement module enables the FBHRD to enter all necessary information on procurement matters. The financial software has adequate security levels. Based on the initial assessment the system meets the Bank's minimum reporting requirement. In the RS an ACCESS data base software developed for other bank projects will be used. Both software packages have been used successfully on other bank projects, however they may need to have some minor modifications to adapt to the customized FMRs. 14. Impact of procurement arrangements The major part of the project is for a limited number of civil works projects (ie some 91% of project expenditures). The contract packages and the procurement thresholds are set at levels which result in ICB -48 -

53 processes for some 97% of civil works contracts and overall ICB some 87% of total project expenditures. The ICB process mitigates some of the lack of transparency in national processes that were noted in the draft CFAA report. 15. Disbursement arrangements It is expected that the proceeds of the Credit will be disbursed over a period of five years, which includes six months for the completion of accounts and the submission of withdrawal applications. As there is no standard disbursement profile for Bosnia and Herzegovina, the disbursement forecast is based on the Bank's experience with financing similar projects in other ECA countries, and other projects in Bosnia and Herzegovina. The Project's Closing Date is estimated to be June 30, Disbursement method Disbursements from the IDA Credit will follow the transaction-based method ie the traditional Bank procedures (reimbursements with full documentation, Statements of Expenditure (SOE), direct payments and special commitments). The CFAA for BiH, completed in August 2001 recommended that report-based disbursements (also known as PMR-based disbursements) should not be introduced in the BiH portfolio at this stage because of significant risks relating to (i) project financial management weaknesses and lack of capacity in PIUs; (ii) the shaky banking system; and (iii) the unstable political situation and general govemance problems presently affecting Bosnia and Herzegovina. The Credit amount of $30 million funded by IDA will be allocated to the Federation of BiH and Republika Srspka as indicated in Table C. Disbursements from the Credit proceeds would be administered by the respective Road Directorates, i.e. FBHRD in the Federation and RSRD in Republic of Srpska. The FBHRD and RSRD are responsible for retaining supporting documentation for SOEs and making them available to IDA supervision missions, as well as to the auditors. Disbursements against the categories described in Table C will be made upon receipt by IDA of fully documented applications, except for contracts valued at: (i) less than US$100,000 for consulting firms; (ii) less than US$50,000 for individual consultants; (iii) contracts for goods costing less than US$100,000 equivalent each, except for the first IS contract in each RD; (iv) contracts for works costing less than US$500,000 equivalent each, except for the first two NCB contracts in each RD; (v) contracts for technical services costing less than US$250,000 equivalent each, except for the first NCB contract in each RD. The minimum size of application for direct payment withdrawals and the issuance of special commitments from the IDA Credit account would be 20 percent of the Authorized Allocation to the Special Account. Table C sets forth the Categories of items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each Category and the Percentage of expenditures for items so to be financed in each Category. Use of statements of expenditures (SOEs): Replenishment applications should be submitted on a monthly basis and must be fully documented and supported by statements and reconciliation statements. Disbursements should be made based on SOE for: (i) less than US$100,000 for consulting firms; (ii) less than US$50,000 for individual consultants; (iii) contracts for goods costing less than US$100,000 equivalent each, except for the first IS contract in each -49-

54 RD; (iv) contracts for works costing less than US$500,000 equivalent each, except for the first two NCB contracts in each RD; (v) contracts for technical services costing less than US$250,000 equivalent each, except for the first NCB contract in each RD. This documentation will be made available for the required audit as well as to Bank Supervision Missions, and will be retained by the FBHRD and RSRD respectively for at least one year after receipt by the Bank of the audit report for the last fiscal year in which disbursement was made. Special account: To facilitate timely project implementation, the Council of Ministers of Bosnia and Herzegovina will establish, maintain and operate, under terms and conditions acceptable to the Bank, two separate Special Accounts, one for the Federation (A) and one for Republic of Srpska (B), denominated in Euros. Currently, local banks are not yet considered fully reliable and financially sound. The IDA special accounts will therefore be held in banks outside BiH, until the local banking system has improved significantly. FBHRD authorized allocation is EUR 1,500,000, limited to EUR 750,000 until withdrawals have reached SDR 1.5 million. RSRD authorized allocation is EUR 1,000,000, limited to EUR 500,000 until withdrawal has reached SDR 1 million. 16. Action Plan It is concluded that the FBHRD and the RSRD currently satisfy the Bank's minimum financial management requirements. There are however a number of actions that the Road Directorates have agreed to take to improve their financial management processes. Action Deadline 1. The Road Directorates in RS and Federation to appoint Done accountants, acceptable to the Bank 2. The Road Directorates in RS and Federation to implemen acceptable accounting software capable of producing FMRs Selection of accounting software Done Installation of accounting software December 31, 2001 Completion of initial training December 31, 2001 Finalization of the accounting software to produce FMRs December 31, Submit a written notification to the Bank by the Ministry o December 31, 2001 Treasury (MOT) that the Road Management and Safety Project has been included in the global contract to be audited by the Audito acceptable to the Bank. 4. The Road Directorates in RS and Federation to complete financia manuals, acceptable to the Bank Draft version Done Final version December 31, Design reporting requirements (draft PMR template) for review by December 31, 2001 the Financial Management Specialist. 6. Review of the financial management arrangements by the Done Financial Management Specialist in accordance with the Bank's Financial Management policies

55 17. Supervision Plan The reports of the progress of the contracting process will be monitored in detail during supervision missions. FMRs will be reviewed on a regular basis by the field-based FMS and the results or issues followed up during the supervision missions. Financial audit reports will be reviewed and issues identified and followed up. The action plan for strengthening financial management will be regularly monitored

56 Annex 7: Project Processing Schedule BOSNIA AND HERZEGOVINA: Road Management and Safety Project Project Schedule Planned Actual Time taken to prepare the project (months) 18 First Bank mission (identification) 09/28/ /28/2000 Appraisal mission departure 09/17/ /17/2001 Negotiations 11/26/2001 Planned Date of Effectiveness 06/28/2002 Prepared by: Cesar Queiroz, Program Team Leader Preparation assistance: Canadian Consultant Trust Fund, Central and Eastern Europe; Netherlands Consultant Trust Fund Bank staff who worked on the project included: Name Cesar Queiroz Aymeric-Albin Meyers Bernard Baratz Ahmet Gokce Enn Vasur Mirjana Karahasanovic Siew Chai Ting Robert Nooter Scott Hanna Patrizia Poggi Dominic Haazen David Webber William Denning Jacques Cellier, Peer Reviewer Speciality Program Team Leader Team Leader at Identification Lead Environmental Specialist Senior Procurement Specialist Transport Economist Operations Analyst Senior Financial Management Specialist Consultant/Economist Consultant/Environmentalist Social Development Operations Specialist Senior Health Specialist Lead Financing Management Specialist Consultant/Economist Lead Transport Economist

57 Annex 8: Documents in the Project File* BOSNIA AND HERZEGOVINA: Road Management and Safety Project A. Project Implementation Plan Republic of Srpska, Project Implementation Plan, Road Management and Safety Project, October 31, Federation of Bosnia and Herzegovina, Project Implementation Plan, Road Management and Safety Project, October B. Bank Staff Assessments Identification Mission Aide Memoire, September Pre-Appraisal Mission Aide Memoire, April Appraisal Mission Aide-Memoire, October C. Other Law on Roads (Republic of Srpska), Number: /95, June 14, 1995 (Official Gazette 11/95). Agreement on Establishment of Bosnia and Herzegovina Public Corporations - Office of the High Representative - Initialled in Dayton on November 21, 1995 and signed in Paris on December 14, The Phare Multi-Country Road Safety Project, Final Report Volume 2 (main body), November Agreement between the Federation of Bosnia and Herzegovina and the Republic of Srpska on the Establishment of a Joint Road Infrastructure Public corporation as Part of the Transportation Corporation, dated December 14, Amendment Number 01 to Agreement dated January 16, Press Release, Public Corporation for Road Infrastructure Established, Office of the High Representative, March 6, Road User Charges in Bosnia Herzegovina: Emergency Transport Reconstruction Project, Final. On behalf of: European Bank for Reconstruction and Development - NEI Transport, Rotterdam, May In association with: Danish Road Directorate; IPSA Institute, Sarajevo; Institute for Urbanism, Banja Luka. Draft Federation of BiH Law on Roads, Mostar, July 2000, and July Report - Launching the Bosnia and Herzegovina Road Infrastructure Public Corporation (BRIC), Dieter Wrede, Nuemberg, September Information on Traffic Accidents (TA) on Magistral Roads (MR), January Financial Asset into Magistral Roads in the Federation of Bosnia and Herzegovina for period

58 List of Working Organizations that are engaged on Maintenance Works in the Federation of Bosnia and Herzegovina. Report on Status of Roads, Federation Ministry of Traffic and Communications, Federation Directorate for Roads, Sarajevo, January 2, The Study on The Transport Master Plan in Bosnia and Herzegovian (BiHTMAP), (Final). Prepared by: Pacific Consultants International for Japan International Cooperation Agency (JICA), March Bosnia and Herzegovina, Ministry of Civil Affairs and Communications, Draft Law on International and Inter-Entity Road Transport, Sarajevo, March 19, Roads and Environment Seminar, Scott Hanna, Sarajevo, Bosnia and Herzegovina, September 27, Proposal for Road Rehabilitation (Republic of Srpska), April The Railway Sector in Bosnia and Herzegovina, Joint Strategy, Period , Sarajevo, April Organization of Railways in Bosnia and Herzegovina, Office of the High Representative, April 25, Agenda for International Conference on Railways in Banja Luka, Bosnia and Herzegovina, May 4, A Long-term Plan of Railways in Bosnia and Herzegovina, Presented by: Dr. Katsuhide Nagayama, Team Leader, the JICA Study Team. Country Report Bosnia and Herzegovina, Road Transport Charges, (Final). On behalf of: Multi-Country Transport Programme - NEI Transport, Rotterdam, August Phare Traffic Counting in Republic of Srpska, Road Directorate, Banja Luka, September 2001 (prepared by Mr. Igor Jokanovic). Study of Economic Viability for Rehabilitation of Highways at the Region of Federation of Bosnia and Herzegovina, Volume I, Investments for the First Phase, TJ Institute for Traffic Faculty for Civil Engineering, Sarajevo, September THE LAW on Amendments and Modifications of The Law on Ministries and other bodies of Federal Administration (translated October 2001), published in Official gazette number 48/99 on December 3,1999. [Establishment of the Federation Road Directorate] *Including electronic files

59 Annex 9: Statement of Loans and Credits BOSNIA AND HERZEGOVINA: Road Management and Safety Project 06-Feb-2002 Orginal Amount in US$ Millions Difference between expected and actual disbursements Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd P ELEC PWR 3 RECN P LOC INIT P TRADE & TRANS FACIL IN SE EUR P SOTAC P PRIVTA P COMM DEVT P MOSTAR WS & SAN P EDUC P EMG LABOR REDEPLOYMENT PILOT P ENTER & BANKING PRIV P BASIC HEALTH P PFSAC P ENT EXP FACIL (BEEF) P CULTL HERITAGE PILOT P LOCAL DEVT P FORESTRY P ESSNTL HOSP SERV Total:

60 BOSNIA AND HERZEGOVINA STATEMENT OF IFC's Held and Disbursed Portfolio OCT-2001 In Millions US Dollars IFC Committed IFC Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1997/99/01 Bosnia Micro Energoinvest Enterprise Fund SEF Akova /01 SEF Bosnalijek SEF Kopex SEF Lignosper SEF Lijanovici Sarajevska TKA Cazin Wood Agency-AL Wood Inga Wood Konjuh Wood Kozara Wood Podgradci Wood Vrbas Total Portfolio: Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 PBS Pre-Priv Total Pending Commitment:

61 Annex 10: Country at a Glance BOSNIA AND HERZEGOVINA: Road Management and Safety Project Bosnia Europe & Lower- POVERTY and SOCIAL and Central middle. Herzegovina Asia Income Development dlamond' 2000 Population, mid-year (millions) Life expectancy GNI Per capita (Atlas method. US$).. 2,010 1,140 GNI (Atlas method, USS billions) Average annual growth, Population (%) Labor force (X) GNI per Gross primary Most recent estimate (latest year available, ) capita. enrollment Poverty (X of Population below national poverty line) Urban population (% of total population) Life expectancy at birth (vears) Infant mortality (Per 1,000 live births) Child malnutrition (% of children under 5) Access to improved water source Access to an improved water source (% of population) Illiteracy (% of population age 15+) Gross primary enrollment (% of school-age population) Bosnia and Heregovina Male Lower-middle-income group Female KEY ECONOMIC RATIOS and LONG-TERM TRENDS Economlc ratlos' GDP (US$ billions) Gross domestic investment/gdp Trade Exports of goods and services/gdp Gross domestic savinqs/gdp Gross national savings/gdp Current account balance/gdp Domestic Investment Interest pavmentslgdp Total debt/gdp savings Total debt service/exports Present value of debt/gdp.. Present value of debt/exports.. Indebtedness (average annual growth) GDP Bosnia and Herzegovina GDP per capita Lower-middle-income group Exports of goods and services STRUCTURE of the ECONOMY Growth of Investment and GDP (%) (% of GDP) 400 Agriculture Industry Manufacturing Services lo Private consumption as a7 9s 9s s9 00 General government consumption..... GD0 GDP Imports of goods and services Growth of exports and Imports (%) (average annual.qrowth) Agriculture ISO. Industrv ioo.. Manufacturino Services o Private consumption s97 S General government consumption..- Gross domestic investment Expons C Impons Imports of poods and services Note: 2000 data are preliminary estimates. The diamonds show four kev indicators in the countrv (in bold) compared with its income-qroup average. If data are missing, the diamond will be incomolete

62 Bosnia and Herzegovina PRICES and GOVERNMENT FINANCE Inflation (%) DomestUc prices (% change) 20 Consumer prices o o---j-- Implicit GDP deflator Government finance 4 (% of GDP, includes current grants) Current revenue r0o Current budget balance GDP deflator O CPI Overall surplus/deficit TRADE (VSS millions) Export and Import levels (US$ mill.) Total exports (fob) n.a. n.a..0 Manufactures 2. Total imports (cif) 2,502 2,348 Food 00 Fuel and energv -. Capital goods o Export price index (1995=100) Import price index (1995=100) * Exports * Imports Terms of trade (1995=100).. BALANCE of PAYMENTS (USS millions) Current account balance to GDP (#) Exports of goods and servioes 1,201 1,192 o Imports of goods and services 2,728 2,543 ** Resource balance -1,527-1,351 so * l Net income Net current transfers Current account balance., Financing items (net), 1, Changes in net reserves _40 Memo: Reserves including gold (USS millions) Conversion rate (DEC, localus$) EXTERNAL DEBT and RESOURCE FLOWS (USS millions) Composition of 2000 debt (USS mill.) Total debt outstanding and disbursed.. 2,183 2,052 lbrd G:49 IDA F: 131 Total debt service A: 562 IBRD, IDA 2 3 E:526 Composition of net resource flows Official grants. Official creditors Private creditors :398 Foreign direct investment. D 2t B Portfolio equity., C 105 World Bank program Commitments A -IBRO E -Bilateral Disbursements IDA D -Other mulbilateral F -Private Principal repayments, 0 0 C - IMF G -Short-term Net flows Interest payments Net transfers 32 8 Development Economics

63 Additional Annex 11 Road Management and Maintenance Policy Letter BOSNIA AND HERZEGOVINA: Road Management and Safety Project Ministry of Civil Affairs and Communications Bosnia and Herzegovina Ministry of Transport and Communications Federation of Bosnia and Herzegovina Ministry of Transport and Communications The Republic of Srpska Mr. Christiaan Poortman Country Director The World.Bank Washington D.C. Dear Mr. Poortman, September 28, Despite the successful completion of the Emergency Transport Reconstruction Project (ETRP launched in 1996 for a total amount of US$149 million of which IDA financed US$35 million) and the Second Emergency Transport Reconstruction Project (SETRP launched in 1997, totaling US$184 million of which IDA financed US$39 million), a significant part of the main road network in Bosnia and HeTzegovina, both in the Federation of Bosnia and Herzegovina (FBH) and in the Republic of Srpska (RS), is still in poor condition. The traffic safety situation in the country is extremely unsatisfactory in the light of intemational comparison. That is the consequence of (i) the maintenance backlog accumulated in the last 10 years; (ii) insufficient allocations to road maintenance and rehabilitation, especially in the FBH; (iii) lack of respect and efficient control of axle-load limits and traffic safety regulations; (iv) steadily growing (on average 7% p.a.) traffic acompanying economic recovery; and (v) human behavioral factors, and failure to adust driving habits to the prevailing traffic safety conditions. The actual institutional framework, organization of road works, traffic control measures, and the level of the government financing available for general road expenditure (10,500,000 KM for main roads in FBH, and 67,447,351 KM in RS in 2000) is apparently inadequate to, manage and maintain properly the road network. 2. Bosnia and Herzegovina intends to borrow US$30 million from the International Development Association (IDA) to help finance a Road Management and Safety Project (RMSP) with the overall objective to increase efficiency and safety of road transport in the country. The Borrower's contribution to RMSP is expected to be US$11.25 million

64 the country. The Borrower's contribution to RMSP is expected to be US$11.25 million. 3. The objective of this Road Management and Maintenance Policy Letter is to demonstrate the Council of Ministers' commitment to an appropriate road management and maintenance policy, allowing seamless implementation of RMSP and to enhance sustainability of its expected impacts. Objective 4. There is a clear and urgent need to take action to improve the ability of Bosnia and Herzegovina to manage efficiently and maintain properly its road network. Large amounts have been spent to rehabilitate portions of the road network, but these, along with roads and bridges that were not included in the rehabilitation plans mentioned above, will soon deteriorate unless an effective and efficient policy of road management and maintenance can be elaborated, approved and implemented. 5. There are several studies related to road management, operation, maintenance and financing, completed within the framework of ETRP and SETRP, prepared by consultants of internationally acclaimed experience. Results and recommendations of these studies, together with data collected and observed by the personnel and experts of the Ministries, while not constituting a policy, provide sufficient information to form the basis for creating one. Our policy to achieve an effective road management and maintenance capability is given below. Road Management and Maintenance Policy 6. The policy that we envision is based on the principle of providing and maintaining an appropriate service level for each portion of the public road network. At present that means more timely and adequate maintenance for virtually all roads in Bosnia and Herzegovina, but over the longer run it also means to prevent overspending for maintaining roads beyond what is justified for their traffic level and usage. This principle results in the lowest possible cost for maintaining roads, as timely maintenance reduces the need for costly reconstruction, and avoiding excessive maintenance has obvious benefits in lowering the total costs for the road directorates. To carry out this principle correctly requires techniques that provide guidance on how to achieve just the right amount of maintenance for each road section at the right time. 7. The policy includes measures to address five important areas at once: (i) (ii) (iii) (iv) (v) creating an effective organizational structure for road management, establishing a system that assures an adequate level of road financing, enhancing privatization of road construction and maintenance companies and contracting out works to the private sector through competitive bidding, putting in place sound safety improvement measures, and adopting good personnel policies including the provision of relevant training. 8. Organizational Structure - There are three guiding principles to assist Bosnia and Herzegovina in its effort to achieve better organizational structures in road management

65 First, it has become obvious and it is intemationally acknowledged that private sector operations, especially under competitive conditions, are invariably more efficient than public sector operations. Therefore, as many functions as possible of the Federation Road Directorate (FBHRD) and the Republic of Srpska Road Directorate (RSRD) should be carried out on contracts, arranged on a competitive bidding basis with due regard for transparency, and suitably supervised by their respective Road Directorates. 9. The second principle, which has already been applied in both Entities, is that the "client" should be separated organizationally from the "producer", since this results in clear cut, single point responsibilities and obligations. If the road administration is carrying out road maintenance work with its own forces, there is no client to detemline that the work has been properly executed. Contracting out can achieve the desired separation of client and producer, in which the producer must produce satisfactory work if he wants to be paid. 10. Third, it is well known that decisions should be taken at a level and by staff having the best information about the problem. There is an obvious need to avoid redundancies and to have a stronger coordination and standardization of the road management and works carried out in the FBH and RS. The recently established Bosnia and Herzegovina Road Infrastructure Public Corporation (BRIC) shall play an important role in this respect. Organization and responsibility for managing and maintaining of roads should be structured in line with the Constitution and relevant legal framework. 11. Financing: The road users have both an obligation to pay for the use of the roads (through fuel and/or other taxes related to the use of the roads), and an opportunity to gain benefit which they receive in the form of reduced vehicle operating costs and travel time when the roads are well maintained. Other important principles are that (i) an adequate level of financing that permits timely maintenance will result in lower overall costs for the operation of the road network, and (ii) the amounts of financing for road maintenance should be relatively level each year so that the contractors will be able to develop their staffs and purchase equipment with the knowledge that they will be able to compete for work every year. 12. The obvious conclusion is that sufficient road expenditure budget within the Ministry of Transport and Communications in FBH and RS respectively (for maintenance and operation of their road networks) is to be allocated on an annual basis. The country's present road user tax structure is reasonable, and could be improved with fairly minor adjustments, as indicated in a Road User Charges study of May 2000, commissioned by the European Bank for Reconstruction and Development (EBRD) under the framework of the ETRP. What is seriously needed is vastly improved tax-collections, and a mechanism that assures that an appropriate portion of the collected funds are then turned over to the authorities bearing exclusive responsibility for road management and maintenance. 13. In case the steady and rapid traffic growth continues as expected, and traffic volumes on certain elements of the main road network in peak periods will approach capacity level, opportunities to increase capacity attracting private capital into the road business under a concession type public-private partnership scheme will be duly considered and assessed

66 14. Procurement Practices: The privatization of road construction and maintenance services and companies will be encouraged and supported by appropriate contracting measures. The road management and maintenance policy will include good procurement practices to assure competitive bidding, adequate quality control, and the application of new technologies through contact with what is going on in road maintenance practices in other countries. There is no practical way to become up to date on the best operational practices without the help of knowledgeable technical advisers that have these skills. This will be accomplished in several ways, including specific short term seminars for the staff of the Entities' Road Directorates. In a later stage, concession type, performance based maintenance contracts could also be envisaged. 15. Operations: The road management and maintenance policy will be implemented through the application of proper operational procedures and practices, including the use of economic evaluation to determine how best to use limited resources and how to avoid under- and over-spending for maintenance. Appropriate environmental and social assessments will be carried out simultaneously. As part of the operational activities a monitoring and data collection system feeding an appropriate data bank will be established, dealing with road, traffic and accident data as well. 16. Personnel Practices: Implementation of the policy also depends on having competent staff producing at high levels. The personnel issues are reduced to the extent that contracting is used, since most personnel are employed by the contractors. However, there will still be a critical core of persons on public payrolls managing the road system. Selection should be on the basis of qualifications, dismissal should be an option for nonperformers, and salaries should be at levels that can attract and hold qualified staff. Training is another important element in bringing the staff up to standard in areas that they have not been exposed to before, including transparency in contract management, budgeting, and planning based on economic analysis and concem for the environment and social impact. Training already received should be used as a basis for the future technical assistance and training programn. Actions to Implement the Road Management and Maintenance Policy 17. Critical steps in the implementation of this policy include: (a) Roads should be classified hierarchically and placed under the responsibility of the appropriate Council of Ministers' Bodies by approving appropriate legislation or regulation.. (b) In the future, all road and bridge maintenance work would be carried out by contract, both for routine and periodic maintenance. The relevant Bodies will be responsible for planning and budgeting, contracting for design, civil works and maintenance, and ensuring quality control of the contracted works related to the road network managed by them. The works will be carried out by private contractors under contracts secured from the road administrations on a competitive bid basis. Procurement of equipment would be the responsibility of the contractors. (c) Train relevant Road Agencies' personnel in economic analysis, modem budgeting and accounting practices, new road technologies, procurement and contract management (including public-private partnership), quality control, and road safety; salaries should be set at rates able to compete for qualified staff with

67 the private sector; donor support should be sought for training, office equipment, and contacts with road maintenance practices in other countries. (d) Provide financial support and training (on a voluntary basis) for the private road construction and maintenance industry in competitive bidding practices, cost accounting, modem road construction techniques, and good management practices. (e) Establish a comprehensive data bank, collecting, storing and processing road and bridge condition, traffic and accident data serving as a base for long term planning, project evaluation, management systems, and road safety improvement programs. The data bank will include socio-economic information on road users and all accident victims. 18. We are convinced that support for the above set of measures will allow us to tackle the country's road deterioration problem. The elaboration and implementation of the proposed Road Management and Maintenance Policy will contribute to the expected sustainable economic growth of our country. We appreciate your support. Sincerely yours, Ministry of Civil Affairs and Communications Bosnia and Herzegovina Minister: Mr Svetozar Mihajlovic Ministry of Transport and Communications Federation of Bosnia and Herzegovina Minister: Mr. Besim Mehmedic Ministry of Transport and Communications The Republic of Srpska Minister: Mr. Branko Dokic

68 Additional Annex 12 Background Road Safety and Actions Related to Emergency Medical Services BOSNIA AND HERZEGOVINA: Road Management and Safety Project As a result of reconstruction efforts following the conflict, including previous World Bank projects, the personnel who work in the emergency medical services (EMS) system in Bosnia and Herzegovina, and the equipment they use are generally of a high standard. However, in the case of road traffic accidents, a number of deficiencies have been observed that inhibit the ability of the formal EMS system to provide the maximum benefit to those injured in such accidents. These deficiencies include: Current legislation that requires civilian personnel to transport the sick and injured to the nearest medical facility - even in larger centers, where highly trained EMS personnel that can provide definitive medical treatment are only 5-7 minutes away, crews often come on the scene to learn that critically injured patients have been crammed into a taxi or private vehicle and taken to the nearest medical facility (although not necessarily one with personnel trained to deal with serious trauma); * Although first aid training is required by law for those obtaining a drivers' license, no standardized course exists, and those providing the training are themselves not required to have formal training or certification. Anecdotal evidence suggests that many would-be drivers are simply paying to obtain the training certificate, without necessarily having completed the course; * Police and fire fighters, who are frequently first on the scene of a road traffic accident, do not have formal first aid training, despite numerous attempts in the past to develop and implement such training courses; * The level of care provided by the general public and other emergency personnel, including inadequate attention to potential spinal injuries, bleeding and other serious conditions, suggests that people either do not have the appropriate level of training or have forgotten the basics in treating seriously injured patients. Since the medical outcome of those involved in road traffic accidents in often determined in the initial interventions that are made, it is critical that to the extent possible, those who happen upon an accident have a basic understanding of what to do, and almost more importantly, what not to do. In addition, there is a benefit in ensuring that other emergency personnel have a general proficiency in basic accident first aid, so that they can either ensure that no harm is done to the patient, as a minimum, or provide initial first aid interventions until the EMS crew arrives. In developing countries, road crashes represent the second biggest cause of ill-health and premature death for males years old. Because automobile accidents involve mostly economically active males, young people, pedestrians and professional drivers, the economic and health impact is considerable. It is estimated that the economic impact of road crashes in the Europe and Central Asia Region is approximately percent of GNP. For Bosnia and Herzegovina this amounts to around DEM 116 million, or DEM 31 per capita (compared to DEM 114 per capita spent in total on health services in the country). In terrns of health impact, the number of deaths is relatively small in comparison to the total number of deaths in Bosnia and Herzegovina (estimated 315 out of 19,000 deaths annually or 1.7 percent). However, the younger age at death and significant disability resulting from automobile accidents means that the resulting disability adjusted life years lost is much higher (accidents in total account for 9 percent

69 of DALYs lost). The availability of data is a major problem in Bosnia and Herzegovina, so intemational comparisons are difficult to make. It has been possible to obtain fairly accurate data from one of the cantons (Sarajevo), and this data has been extrapolated to the remainder of the country in the table below: Table 1: Estimated Road Traffic Accidents, Injuries and Fatalities 1 trapolated from Saraievo Statistics Sarajevo Republica Canton Federation I Srpska I Total BiH Population 356,5021 l 2,346,4971 1,400,0001 3,746,497 Automobile Accidents 6,066 39,926 23,821 63,748 Light Injuries 715 4,706 2,808 7,514 Heavy Injuries 352 2,317 1,382 3,699 Deaths Death % Total Injuries 2.8% Death % Heavy Injuries 8.5% Per 10,000 Population Automobile Accidents Light Injuries Heavy Injuries 9.87 Deaths 0.84 Intemational comparison data should be regarded with some caution, and the conclusion to be drawn depends upon the variables used. For example, in Figure 1, the number of traffic accident fatalities is expressed as a fraction of the total population, while in Figure 2, the fatalities are expressed in relation to the total number of motor vehicles. While Bosnia and Herzegovina have a fairly low value in relation to population, this appears to be due to a relatively low number of motor vehicles per capita

70 a M p 4 itd 4) - *a - a

71 Figure 2: Trafric Deaths per 10,000 Vehicles CzechRepublic Butgeuia Estonia Slovak Republic Slovenia Macedotie. FYR Yugoslavia, R (Serbia/Montenegro) Lhueuas _ Romania = Rus sienfedesation Bosnia aend Henegovima - 5.0t M

72 These international statistics do not provide information on permanent disability or other serious injury resulting from inappropriate treatment prior to hospitalization. A recent study by the Institute for Emergency Medical Services in Sarajevo (IEMS) indicated that of 217 patients treated by the emergency teams at IEMS, 97 (45 percent) were brought in by taxi or private vehicle. This is despite the fact that the average response time for ambulances to the scene in the Sarajevo Canton is 7.7 minutes, and less than 5 minutes to the central city of Sarajevo. Among those treated by ambulance crews, 54 patients (45 percent) had multiple trauma, and of these 47 required spinal immobilization, 30 required intravenous solutions and 28 required oxygen. Three quarters of the patients transported by taxi or private vehicle (63) had multiple trauma that should have received immediate treatment at the scene and en route to the emergency center. The data appear to indicate that the more heavily injured are more often transported by private vehicles. Even if it is assumed that those traveling by private vehicles were not sicker than those transported by ambulance, it could reasonably be expected that 64 of these patients required spinal immobilization but did not get it, 41 required intravenous solutions and 38 required oxygen. The potential impact of the damage done by the lack of these critical interventions is significant. It is also important to note that the age and condition of the vehicles in Bosnia and Herzegovina may contribute to the severity of motor vehicle accidents. For example, a check done in October, 1999 by BiHamk, the Bosnian automobile club, found that of 819 vehicles tested, 58 percent had at least one defect. The average age of the vehicles tested was 13 years, and the vehicles had, on average, almost 150,000 kilometers on the odometer. The most common defects included lights (77 percent), steering (21 percent), brakes (11 percent), and tires (11 percent). Activities for an Integrated Road Safety/EMS Program 1. Assist in the drafting of legislation to: Remove the requirement for transport of accident victims, except under the direction of a trained emergency professional; Establish minimum standards for driver first aid, and the licensing of first aid trainers; Establish a licensing board for emergency medical services personnel, including paramedics, first responders, and the trainers of first responders and new drivers. A number of different laws could be affected by these measures, both at the entity (Federation and Republica Srpska) and cantonal levels. Both international and local legal experts would be needed to review and advise on these issues. This activity would also explore the feasibility of moving the financial responsibility for the medical expenses associated with motor vehicle accidents from the health insurance funds to motor vehicle insurers. If this change could be accomplished, automobile insurers would have a vested interest in improving the overall level of first aid knowledge of drivers, thereby ensuring the ongoing sustainability of the driver education system, including re-certification at regular intervals. 2. Assist in the actual establishment of the licensing board, including the development (or installation) of a licensing database, and related equipment. This would require specific decisions on the location of the licensing board. Options would include the independent medical licensing organization in each entity (College of Physicians or College of Nurses), the Ministry of Health, or a separate organization. Once this decision is made,

73 appropriate legislative amendments would be required and staff hired. Given the relative population sizes, it is estimated that two licensing officials would be needed for the Federation, and one for RS. 3. Development of a standard curriculum for pre-licensing driver first aid training. Using both international expertise and existing resources, a standard first aid curriculum would be developed for new drivers. This basic first aid course would likely be 1-2 days in length, and would include basic skills in areas such as head and neck stabilization, airway management, breathing and circulation management and checking for major injuries. To ensure the wide acceptance of this curriculum, it is proposed that consensus conferences be held to draw as many stake-holders as possible together and obtain agreement on the appropriateness of the proposed approach. It is also important that feedback from the training process be considered and changes made as appropriate. 4. Supporting the training of trainers who will deliver the revised curriculum. Because of the volume of new drivers who will require first aid taining (and possibly the retraining of drivers in the future), it is not feasible for existing EMS services to provide this training directly. There are also currently private individuals and organizations that provide this type of training, but they are not licensed at present. Under this activity, the courses would be provided to those who would like to be certified trainers under the new legislation. Part of the costs of these courses would be covered from course fees. This activity would need to be coordinated with the passage of the relevant legislation and establishment of the licensing boards, so that after a given date only licensed trainers would be able to provide first aid training to prospective drivers. While this activity will only address the small proportion of the drivers who are just obtaining their license, it is hoped that the public information campaign will reach all drivers, including those who have had their license for some time. 5. Development of a curriculum for police andfire service first responders. Using both international expertise and existing resources, this standard first responder curriculum would be developed for police and fire departments and other interested groups (such as professional drivers or the staff of the automobile association. This would be a more in-depth first aid course which would likely be 4-5 days in length, and would include both the basic skills in areas such as head and neck stabilization, airway management, breathing and circulation management and checking for major injuries, as well as the appropriate movement of patients with suspected spinal injuries, bleeding control, secondary assessment and more advanced airway management. To ensure the wide acceptance of this curriculum, it is proposed that consensus conferences be held to draw all of the stake-holders together and obtain agreement on the appropriateness of the proposed approach. In addition, representatives of the police and fire services should be included in the team developing the curriculum. It is also important that feedback from the training process be considered and changes made as appropriate. 6. Supporting the training of trainers who will deliver the first responder curriculum, and initial training offirst responders. This activity will include the training of existing police and fire personnel using the standard curriculum, as well as the training of trainers for both of these services, as well as other groups, to

74 ensure that this training is continued beyond the life of the project. Both trainers and first responder personnel will be licensed by the licensing board upon the completion of their training. 7. Developing and funding a public information campaign to outline the legislative changes that have been made and the rationale for these changes, and to advise the public on the appropriate procedures for individuals coming upon a traffic accident. This activity would be coordinated with other public information components of the project related to road and traffic safety (e.g., wearing of seat-belts, defensive driving, drinking and driving). It would focus on the mass media, in order to get the maximum possible exposure for these important messages. A joint conference on traffic safety issues, including possibly the Ministers of Transport, Education and Health, and other senior politicians, as well as govemment officials, may be organized to kick off the information campaign. Proposed Activities Based on Appraisal Mission Agreement was reached that this project will assist in developing and funding a public information campaign to advise the public on the appropriate procedures for individuals coming upon a traffic accident. This activity would also include sensitizing the public to the impact of motor vehicle accidents, in personal, financial and health terms, as well as other public information components related to road and traffic safety (e.g., wearing of seat-belts, defensive driving, drinking and driving). This activity should have input from professional emergency service providers to ensure that the message is consistent with the longer-term strategy, and reinforces the notion that this alone will not address the issues noted above. This component would focus on the mass media, in order to get the maximum possible exposure for these important messages. A joint conference on traffic safety issues, including possibly the Ministers of Transport, Education and Health, and other senior politicians, as well as government officials, may be organized to kick off the information campaign. This conference will highlight that this is only the first phase of a major effort to reduce accidents and improve the outcomes in accidents that do occur

75 Additional Annex 13: Road Needs and Financing BOSNIA AND HERZEGOVINA: Road Management and Safety Project A. Road User Charges Road user charges are continuously evolving and the latest comprehensive overview is found in the study Road User Charges in Bosnia and Herzegovina, NEI Transport, Rotterdam, May It is based on mainly 1998 data, but these have since changed only marginally. Federation - Road User charges are levied in the form of various taxes and fees, as follows Charges Amount Allocation Fues Taxes: Sales Tax on Fuel 20% of price before taxes Cantons Road Fee 0.22 KM/I for gas 45% to Mininstry of Transport 55% to Cantons 0.12 KM/I for diesel ditto Excise Duties 0.30 KM/1 for gas Federation 0.30 KM/I for diesel ditto Vehicle Taxes: Sales Tax 20% of vehicle value Cantons for passenger cars Customs, Excise Duty and Road Varying according to type of Federation, Ministry of Transport Fee vehicle and Cantons The pump price for gasoline and diesel varies but is presently around 1.40 and 1.30 KM/I respectively. The fuel taxes constitute about 58% and 52% of the retail price for gasoline and diesel respectively. This is about the average level found in Central and Eastern Europe while considerably lower than the levels in EU which are around 70 to 80%. In absolute terms the price of both gasoline and diesel is relatively low (about two thirds) in the Federation as compared to EU. However in relation to average income the price is about twice as high as in EU countries and hence the scope of increasing the fuel taxation levels appears limited. The various road user charges are allocated to the Federation and the cantons. 45% of the road fee is allocated to the Federation Ministry of Transport, but there is no fixed percentage allocated directly to the FBHRD. Consequently there is no direct relationship between the road user charges and road expenditures. Making an assessment of the amount of road user charges collected annually involves a number of rather uncertain assumptions but yields an order of magnitude of the amounts involved. Total road fuel taxes can be estimated to almost 300 MKM (1998). Of this about 130 MKM should have been allocated to the cantons with the balance, 170 MKM, going to the Federation budget. From this budget about 40 MKM should have been allocated to the Ministry of Transport, not necessarily for roads. These assessments, done from the consumption side, seem to adhere quite well with actual revenue figures

76 Republic of Srpska Charges Amount Allocation Fues Taxes: Retail tax 18% of price before taxes RS Excise duties 0.30 KM/i of gas 50% RS, 46.25% 0.20 KM/I of diesel RSRD, 3.25% local Special Republic Tax 0.10 KM/I RS Vehicle Taxes: Import tax Various according to type RS Registration Tax 50 KM RS Annual Vehicle Tax Various according to type 85% RSRD Automobile Association 1.45 KM/year for passenger cars AA 2.21 KM/year for others Waterworks Tax 1.10 KM/year for passenger cars Waterworks X 2.78 KM /year for others Administration Tax 1.43 KM/year RS Transit Tax 200 KM for passenger cars RS 350 KM for buses 500 KM for trucks The pump prices in RS are still somewhat lower than the corresponding prices in the Federation. The share that taxes constitute is also lower but still on level with Central and Eastern Europe. The gap between the prices in RS and the Federation is narrowing however. The same comments as were given above for the Federation with respect to absolute and relative levels in comparison to EU applies also to RS. The link between the above charges and the allocation to roads is clearer and more direct in RS than in the Federation in that a part of the fuel taxes, % of the fuel excise duties, and the vehicle taxes, 85% of the annual vehicle tax, are allocated directly to the RS Road Directorate. Although this share is clearly defined, its application in reality has apparently not always been that clear, since the actual applications and amounts sometimes have been the result of political considerations and decisions. An assessment similar to the one in the Federation gives the total road user charges at around 100 MKM. Of this, it can be estimated that about 25 MKM are allocated directly to the Road Directorate with the rest going mainly to the general budget. B. Road Expenditures Federation The expenditures on roads in the Federation are inherently difficult to gauge. This stems from the fact that expenditures during the reconstruction phase during the last few years have been funded and managed from a variety of sources and surrounded with sometimes uncertainty as to what has actually been spent vs what has been promised/pledged. Another reason is that the Federation Road Directorate has had very limited possibilities to carry out its tasks, with a very limited staff until the end of year 2000, but which has been strengthened in The cantons have responsibilities for the cantonal roads and have spent resources on them but there exists no estimate of how much and where this has been done

77 The FBHRD budget has developed as follows: ,246,000 KM ,100,000 KM ,500,000 KM ,700,000 KM (budget) These amounts have been used for routine and winter maintenance. In addition there have been winter maintenance which has been financed by IFOR/SFOR to an unknown extent. The reconstruction of roads and bridges since 1996 has taken place almost entirely outside of FBHRD with financing from various multilateral and bilateral agencies. It is estimated that about 100 MUSD has been expended for reconstruction in the roads sector in the Federation in For the cantonal expenditures there are no numbers available. This is also the case for some other investments which have been funded by other govemment entities (or government related enterprises) and which have not been channeled through the FBHRD. The above FBHRD budget figures are clearly insufficient even to cover only minimum maintenance requirements. With an FBHRD network of 2,024 km, the minimum maintenance expenditures requirements were estimated at about 20 MKM. In addition to what is included in the above FBHRD budget, two other main new road projects are expected to be implemented during the next three to four years. EIB will finance two components in the Federation; the Caplina bridge reconstruction, estimated at 6 MKM, and the Sarajevo by-pass between Josanica and Blazuj, 13,9 km, estimated at 120 MKM. Government's contribution for the road component is 50%. Government has also, through the FBHRD, advertised and received bids for the part of the Sarajevo-Zenica motorway between Josanica and Podlugovi, 11.5 km, estimated at 59 MKM. Discussions about financing for both of these projects are presently underway. Thus, adding these figures, say about 40 to 50 MKM per year for the next four years shows that maintenance, ie the FBHRD budget, accounts for but a small part of the total road sector expenditures in the Federation. In addition, the Bank's proposed project will add about 8 MKM/year for the next four to five years. Thus total annual Federation road expenditure during the coming few years can be estimated as follows (MKM): FBHRD budget 20 (assuming 20% annual increases) New construction 45 (as described above) WB credit 8 TOTAL 70 (cantonal expenditures not included)

78 Republic of Srpska RSRD expenditures have developed as follows (in 1000KM): Category Routine maintenance 14,857 14,407 17,010 21,044 Winter maintenance 1,856 2,187 3,250 3,500 Rehabilitation 0 1,946 1,212 19,802 Reconstruction 4,854-7,658 22,396 19,949 Salaries ,554 Admin. Expend 1,869 3,316 1,276 1,348 Other (land ,235 acquistion, etc.) Total 23,551 29,78A 46,12 67,447 The same type of reconstruction expenditure as in the Federation from multilateral and bilateral agencies that has taken place in the Federation, can in RS be estimated to about 50 MUSD. In the other respects the RS budget shows the full picture better than in the Federation since there are no cantonal expenditures nor any extra budgetary investments. The EIB project has components also in RS, 40 MKM, but since they involve reconstruction only and no new construction, reconstruction projects previously carried out with domestic resources are counted as government counterpart funds and hence no additional government contribution is required. The total annual RS road sector expenditures over the next few years can thus be estimated as follows (MKM): RSRD 70 (assuming some 5% annual increase) EIB project 10 (assuming a four year implementation) C. Road Requirements Although there is no hard data to show how fast the development in the road sector has been since the war, the evidence that there is shows that the development has been very fast with respect to traffic volumes, at least on the main roads. No traffic counts were made until 2000 when a countrywide traffic counting and roadside origin-destination survey was carried out within the framework of the BiH Transport Master Plan Study. Although this was a very limited study, valuable information was gained. In 2001 RSRD has started systematic counts which will provide the basis for a continuous monitoring of traffic volumes and conditions. A similar exercise should get underway in the Federation. Another important development is that traffic on some parts of the network has been redistributed, changing the relative importance of several roads as a result of the war and the ensuing political changes. To take these changes into account, a reclassification of the roads, to reflect actual physical and administrative conditions, is recommended. This is particularly more important in the Federation where FBHRD is responsible for the main roads while the cantons are responsible for secondary roads. The absence of more precise data make projections relatively uncertain but such projections can also provide interesting background to the decisions to be taken. The Transport Master Plan Study has

79 attempted to forecast traffic, classify roads and determine necessary road expenditures. The traffic forecasts, using conventional techniques and based on an assumption of a GDP per capita in 2020 of KM 5,404, ie a 4.5% annual increase, give a total increase in road traffic by 3.5% annually (which seems low), i.e., a doubling of the present traffic in Based on this traffic increase a number of conclusions are drawn, followed by recommended road expenditure levels. Capacity increasing investments will be necessary. These concern mainly accesses to the main agglomerations as well as the north-south central axis, or corridor Vc, Ploce-Mostar-Sarajevo-Doboj-Brod, where various sections have to be rebuilt/widened and some new sections are planned. In addition, there are numerous existing main primary roads which need improvements. The question of capacity increases is tied to a continuing rehabilitation of the networks which has been started under the Emergency Transport Reconstruction Projects, under which more than 2000 km have been reconstructed. This is however an ongoing activity and a more fundamental reconstruction, dealing with more than the pavement, has to be planned. Finally, the improvement and increase in maintenance is a prerequisite for any long term road planning. Including a definition of main and regional road networks in both entities of about 4000 km in each, the study arrives at the following required expenditures (MKM): Category Federation Republic of Srpska Total Maintenance 1, Rehabilitation s 1,581 Proposed projects 1,763 1,136 2,933 Total 3,62k 2,8271 6,500 Thus for the period a total of 6.5 bkm would be needed or about 325 MKM per year or about 175 and 150 MKM in the Federation and RS respectively. It should be noted that this calculation does not assume anything about the distribution of responsibilities in the Federation between FBHRD and the cantons, but only that there are about 4000 km of roads under consideration (FBHRD is currently responsible for 2,024 km, i.e., the Federation's main road network). This forecast shows that the present expenditure levels have to be gradually increased over the coming years if the road networks are to be maintained and improved. More importantly, it also shows that the maintenance budgets should be considerably raised, to about 50 MKM/year

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81 MAP SECTION