Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 22202

IMPLEMENTATION COMPLETION REPORT(CPL-35630)

ON A

LOAN

IN THE AMOUNT OF US$93 MILLION

TO THE

NATIONAL ELECTRIC COMPANY OF BULGARIA

FOR THE

ENERGY I PROJECT

June 21, 2001

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of December 2000)

Currency Unit = lev (plural leva), abbreviation Lv1 Lv = US$ 0.45859

US$ 1 = 2.1806 Lv(US$ I = 2,181 old or pre-July 1999 Lv)

FISCAL YEARJanuary 1 to December 31

ABBREVIATIONS AND ACRONYMS

COE - Committee of EnergyCoM - Council of MinistersEBRD - European Bank for Reconstruction and DevelopmentEIB - European Investment BankERR - Economic Rate of ReturnEU - European UnionGOB - Government of BulgariaIAS - International Accounting StandardsICB - International Competitive BiddingIDC - Interest During ConstructionMIS - Management Information SystemNEK - Natsionalna Elektricheska KompaniaOED - Operations Evaluation DepartmentPIU - Project Implementation UnitSAR - Staff Appraisal ReportSAEER - State Agency for Energy and Energy ResourcesSEEA - State Energy Efficiency AgencySERC - State Energy Regulatory CommissionUCTE - Union for the Coordination of Transport of Electricity (West European Grid)USAID - United States Agency for International DevelopmentUSTDA - United States Trade and Development Agency

Vice President: Johannes Linn, ECAVPCountry Director: Andrew Vorkink, ECCO5Sector Manager: Henk Busz, ECSEG

Task Team Leader/Task Manager: Dejan Ostojic, ECSEG

FOR OFFICIAL USE ONLY

BULGARIAENERGY I PROJECT

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 14. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 66. Sustainability 87. Bank and Borrower Performance 98. Lessons Learned 109. Partner Comments 1110. Additional Information 11Annex 1. Key Performance Indicators/Log Frame Matrix 12Annex 2. Project Costs and Financing 13Annex 3. Economic Costs and Benefits 17Annex 4. Bank Inputs 18Annex 5. Ratings for Achievement of Objectives/Outputs of Components 20Annex 6. Ratings of Bank and Borrower Performance 21Annex 7. List of Supporting Documents 22

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

Project ID: P008316 Project Name: ENERGY ITeam Leader: Salman Zaheer TL Unit: ECSEG

ICR 7Tvpe: Core ICR Report Date: June 22, 2001

1. Project Data

Name: ENERGY I L/C/TFNumber: CPL-35630Countiy/Department: BULGARIA Region: Europe and Central

Asia RegionSector/subsector: PD - Distribution & Transmission; PY - Other

Power & Energy Conversion

KEY DATESOriginal Revised/Actual

PCD: 02/24/1992 Effective: 08/11/1993 08/11/1993Appraisal: 07/31/1992 MTR: 06/01/1995Approval: 03/09/1993 Closing: 12/30/1997 12/31/2000

Borrower/Implementing Agency: Natsionalna Elektricheska Kompania (NEK)

Other Partners:

STAFF Current At AppraisalVice President: Johannes F. Linn Wilfried ThalwitzCountrv AMIanager: Andrew N. Vorkink Michael WiehenSector Manager: Henk Busz Franco BatzellaTeam Leader at ICR: Salman Zaheer James Sayle MooseICR Primaty Author: Dejan R. Ostojic

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely; HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: H

Bank Perfbrmance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S S

Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:Background

In 1992, the power sector in Bulgaria was comprised of two principal organizations - the Committee ofEnergy (COE) and the Natsionalna Elektricheska Kompania (NEK). The COE was responsible for

developing and implementing power sector policy and held the delegated responsibility for the shareholderfunctions of NEK. COE also set tariffs with the approval of the Council of Ministers (CoM). NEK, astate-owned, vertically integrated power utility formed in 1992, was responsible for generation,transmission and distribution of electricity throughout Bulgaria.

Bulgaria's endowment of commercial energy is poor, its hydropower resources are limited and nearly athird of the total installed capacity of 12,000 MW included nuclear units which the EU and G-7 consideredunsafe. The operating capacity of the thermal power plants was significantly lower than rated levels due toaging and the poor quality of domestic lignite. The available capacity had been further reduced due tounreliable coal supplies from Ukraine affecting nearly 1500 MW of thermal capacity, and Bulgariacritically depended on other countries - especially Ukraine - for reserve power to meet peak demand,frequency control of the system and for spinning reserve requirements for nearly 1000 MW of old nuclearunits at Kozloduy in the event of unplanned outage. Further, the lack of adequate and modem controlsystems for transmission and dispatching considerably reduced Bulgaria's flexibility and ability to managethe complex system load, increased system losses and voltage fluctuations, and also caused frequentnegative ripple effects on other networks interconnected with the Bulgarian system. At the same time, thefinancial condition of the newly formed NEK was poor.

To address these issues, COE, with the help of consultants, developed a strategy which was adopted by theGovernment of Bulgaria (GoB) in 1992. The development of such a strategy was supported by the Bank(Energy Strategy Study, Report No. 10143-BUL) and several other donors (USAID, USTDA, CEA, EIB,EBRD, etc.,) which aimed at: (a) improving the operating efficiency, reliability and safety of the powersystem; (b) improving voltage control and frequency regulation; (c) efficient expansion of domesticproduction to reduce imports and environmental impacts; and (d) adoption of appropriate policy measuresto enhance resources for the sector and promote commercial operations. The strategy envisioned amulti-phase effort to modernize Bulgaria's power system, of which the Energy Project is the first element.

The Project was implemented during a period of political uncertainty resulting from six governments in fiveyears, a severe economic crisis and the collapse of the banking system at the peak of projectimplementation. Through sustained efforts of the Bank, the GoB and NEK, and through concerted effortsof the Donors, the power sector emerged in 1999/2000 as profitable and attractive to foreign investors,ready to meet the technical requirements of UCTE system interconnection, and well positioned to supportBulgaria's EU accession efforts through sector unbundling and the first steps to create a competitiveelectricity market.

Objectives

The project had the following objectives: (a) improve the operating efficiency and reliability of the powersystem, thus reducing supply disruptions; (b) improve voltage control and frequency regulation; (c) realignthe level and structure of electricity tariffs to rationalize consumption of electricity, reduce imports, reducethe pollution associated with electricity generation, and mobilize resources for NEK; (d) improve anddepoliticize the tariff setting system by establishing an independent regulatory mechanism to set electricitytariffs; (e) reduce the need for electricity imnports or other high cost sources to meet peak demand; (f)reorient the operations of NEK along more commercial lines; and (g) strengthen dam safety at theBelmeken and Chaira dams and associated saddle dam.

The objectives of the Project were clear, important for sector development, and specifically responded tothe critical priorities in the sector. While NEK had strong technical capabilities, their lack of experiencewith procurement methods required by the Bank posed implementation challenges. Also, the socio-political

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issues surrounding tariffs posed financial risks to the project and sustainability risks for the sector.

3.2 Revised Objective:The objectives of the Project were not revised.

3.3 Original Components:The objectives of the Project were implemented through the following three major components:

(a) Improvement of the supervisory control and transmission network systems of NEK in order to increaseits stability and efficiency: The main parts included installation of (i) modem communication systemslinking various parts of the power system for real-time control/operations; (ii) state-of-the-art hardware andsoftware for the National Dispatch Center; (iii) power plant unit control systems as part of the automaticgeneration control system; and (iv) shunt reactors and fault recorders on the 400kV transmission network.Necessary technical assistance in the design and implementation of these installations was also included.

(b) Completion of units 3 and 4 of the Chaira pumped storage hydropower plant to ensure availability ofpeaking capacity and improve efficiency of power supply: The main parts included (i) civil works andinstallation of turbo-generators; (ii) supply of various items including steel lining for penstocks,instrumentation for seismic monitoring, heat pump distribution center, auxiliary systems and equipment;and (iii) dam strengthening. Technical assistance for implementation supervision, water usage optimization,dam safety monitoring and a panel of experts for the dam was also included.

(c) Technical assistance to help NEK operate in a commercial manner: This included the design andimplementation of a financial management improvement program covering cost accounting, financialaccounting per IAS, billing & collection, cash and budget management, and a supporting computerizedManagement Information System (MIS).

The scope and focus of components were appropriate to achieve the objectives of the Project. The designwas kept simple, taking into account NEK's inexperience with project implementation with externalfinancing, and also the Bank's lack of experience in the country.

3.4 Revised Comnponents:The components of the Project were not revised but the scope of the physical elements was expanded,mainly in the transmission system part of the Project, following savings resulting from lower than estimatedprices on large contracts. Meters for measuring power/energy in the high voltage grid became necessary asNEK's unbundling was initiated and improving the performance of the 220 kV part of the network alsobecame important to enhance the stability of the system.

3.5 Quality at Entry:Quality at entry is judged as satisfactory. As noted above, the project design was kept simple, consistentwith experience in the region. Ownership of the Project by NEK was high, but by GoB it was less so. TheProject was highly relevant to NEK's development priorities and was consistent with Bulgaria's strategy forpower sector development. It also reinforced the overall goal supported by the Bank, namely, introducingcompetition in the sector. Most assumptions made in the development of the Project were reasonable, withthe notable exception of those concerning Bulgaria's macroeconomic performance for the period early tomid-1990s, which turned out to be overly-optimistic. This caused much difficulty in bringing about tariffreforms. However, the final outcomes were satisfactory overall.

4. Achievement of Objective and Outputs

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4.1 Outcome/achievemnent of objective:

Summary Assessment of Outcome

The overall outcome of the Project is rated as satisfactory. As noted in the following sections, allenvisioned objectives and development outcomes were achieved, albeit with delays, especially in the policyarea. The main project components brought the desired benefits at a cost of about 25% less than estimated.The institutional development achieved was significant, resulting in major sector restructuring/unbundlingin a progressive way. The improved power system stability brought Bulgaria closer to its membership inUCTE, while the reforms in sector policy and legal and regulatory frameworks significantly increasedprivate sector interest, with some deals in advanced stages of negotiations. The financial condition of thesector also improved significantly.

System Performance

The improvement in system performance was satisfactory. The voltage fluctuations in the transmissionsystem stabilized considerably and frequency regulation was brought under control. The number of forcedoutages reduced from 3556 in 1992 to 1108 by 1998 and further down to 381 by 2000 (for HV lines only).This also helped plan the outages for maintenance purposes in a normal and controlled manner. Improvedreliability of the system also significantly contributed to the initiation of the procedure for UCTEinterconnection in 1997 followed by system testing for interconnection in 2001.

Peak Load Management

The improvement in peak load management was satisfactory. Bulgaria's reliance on neighboring countriesfor meeting peak demand was virtually eliminated due to the addition of peaking capacity added by theChaira units. Plant availability, which was only 432MW in 1995, improved to 864MW by 1998/99,thereby the reserve capacity of the system was increased by about 400MW or about 5% of the maximumpeak load. In fact, Bulgaria was able to offer firm capacity for export and has, since 1996, begun to exportelectricity. Bulgaria's electricity exports, which increased to 4.5 TWh by 2000, are also bringing financialgain to NEK and fiscal benefits to the country.

Dam Safety

The improvement in dam safety was satisfactory. The strengthening of the Belmeken-Chaira damssignificantly reduced vulnerability due to high seismic risks, thus enhancing safety. Working with theintemational Panel of Experts and training in dam safety monitoring enhanced the capacity of Bulgarianofficials in these critical aspects, including exposure to western methods.

NEK's Management /Operations

The improvement in operations and management of NEK was satisfactory. As a new corporation in 1992,NEK had no experience in modem management methods or functioning as a commercial entity. The neworganizational structure which was evolving up to and through 1999 facilitated stream-lining of decisionmaking, delineating lines of responsibility through functional management and improving proper separationof govemance and management functions. The Project helped NEK adopt modem financial, accounting andcommercial policies, including establishing computerized systems. COE adopted a new tariff methodologyin late-1 996 with indexation for automatic adjustments for changes in exchange rates and the domesticprice index. This helped NEK's financial recovery; NEK's net profits increased from US$90.9 million

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equivalent in 1996 to US$101.7 million by 1998. In May 2000, the distribution entities were removedfrom the structure of NEK. In June 2000 the independent producers were also removed. Nevertheless,NEK's year 2000 profits were still at US$97.6 million. The auditing of NEK per IAS throughoutimplementation helped identify financial management inadequacies and gradually address them, asevidenced by the auditor's opinions in successive reports.

Policy and Regulatory Reforms

The reforms achieved in improving the policy and regulatory environment for the sector were satisfactory.While the Project aimed for the establishment of a separate regulatory agency to supervise the sector,including setting of tariffs - all of which were achieved with significant delays - the overall reforms were farmore comprehensive. A new Energy Law was adopted by GoB in mid-1999, the State Energy RegulatoryCommission (SERC) was established within months thereafter, and the COE was reorganized by end-1999into two separate agencies - the State Agency for Energy and Energy Resources (SAEER) in charge ofpolicy making for the sector, and the State Energy Efficiency Agency (SEEA) to promote energyconservation and environmentally clean technologies in the sector. Not only was a new tariff policy adoptedin May 2000, the consistent adjustments in end-user tariffs since 1998 have established a track record ofthe GoB's willingness to take politically difficult actions, as evidenced by the corresponding growinginterest of the private sector. In addition, the policy to encourage competition in the sector was adopted andNEK was unbundled along functional lines into a separate transmission and hydropower company andseveral generation and distribution companies.

4.2 Outputs by components:

The Project outputs exceeded the plan in the transmission part, were in line with the plan in the Chairapumped storage part, and were aligned with the evolving sector's and NEK's corporate needs under thetechnical assistance part.

The improvement of the supervisory control and transmission system was satisfactory. The NationalDispatch Center was modemized using modem hardware and software contributing to real time monitoringand management of the power system. The open architecture basis provided for both integration with otherparts of the system on different technologies and technological upgrades as might become necessary to thedispatch center. Automatic unit controls were installed in two units of the thermal power plant Bobov Doland in nine units of three hydropower plants. In addition, two units in Varna, two units in ME2, and twounits in Bobov Dol thermal power plants were equipped with modem turbine govemor systems. Theprotection relays with self-test features were installed at critical points in the 400 kV and in all points of the220 kV network, which reduced fault rate and response times from 55ms to 27ms. The competitive priceson several tenders resulted in savings which helped to provide for the inclusion of the 220 kV in the scope,thereby enhancing the system stability and benefits of the Project.

The gain in peak and spinning reserve capacity through the Chaira pumped storage plant was satisfactory.Unit 3 was commissioned in early 1999, and unit 4 in mid 1999, providing a combined peak capacity ofabout 440 MW. The critical rehabilitation on units I and 2 improved the availability of these units andhelped restore their rated performances. The main wall and the counter wall of the Belmeken dam werestrengthened to correspond to current seismic risks.

The technical assistance items were implemented well and are rated as satisfactory. The assistanceprovided for engineering, design, procurement and supervision of implementation of the physicalcomponents complemented NEK's technical strengths and helped build capacity in project management

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under external financing. The impact of the training in dam safety and collaboration with internationalpanel of experts was beneficial to both NEK and relevant GoB officials. The installation of a new MISwith financial and cost accounting modules in NEK contributed to the adoption of IAS, as was evidencedby the continual improvement in the observation of NEK's financial auditors. The change in the scope ofMIS was necessitated by NEK's unbundling towards the end of the Project.

4.3 Net Present Value/Economic rate of return:

Economic returns for the project were satisfactory. The SAR shows an estimated ERR for the Project at19%. The re-estimated ERR for the Project at completion is 22%. Separate ERRs were estimated atappraisal for the Chaira component (22%), the supervisory control component (19%), and the transmissioncomponent (11%). Cost savings in increasing active load management in the Chaira component led to anincrease in its ERR to 30%. Both costs and benefits in automatic generation control associated with thesupervisory control component remained roughly the same as estimated in the SAR. Benefits attributable tovoltage and reactive power control in the transmission component are estimated to have increased slightlydue to work done under the project on the 220 kV network reducing fault rates and response times. NetPresent Value was not estimated at appraisal or included in the SAR and, as such, was not calculated forthe purposes of this report.

4.4 Financial rate of return:

Financial rates of return were not estimated at appraisal or included in the SAR and, as such, were notcalculated for the purposes of this report.

4.5 Institutional development impact:

The Project's institutional development impact was high. The inculcation of commercial discipline withmodem tools and techniques brought about a market-oriented philosophy in NEK's operational strategies,which also contributed to turn around NEK's financial condition. The corresponding improvements in itsmanagement practices were noticeable through, for example, NEK's handling of its restructuring andnegotiations with foreign private investors (AES, Entergy, etc.). The restructuring/unbundling of NEK intoseven distribution companies, six generation companies and a national transmission company laid the basisfor the introduction of competition. The far-reaching changes achieved in the policy and regulatoryframework through a new energy law are significant, both because of the nature of changes (see section 4.1above) and in terms of the long term sustainability brought about by them. These developments wereoutward looking, along international trends and aimed at achieving harmonization with EU accessionrequirements. Bulgaria's imminent membership in the UCTE providing access to the large European marketfor electricity trade is also a significant impact of the Project. The project helped Bulgaria join neighboringcountries in synchronous operation of the power system.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

Three factors outside the control of the Government and NEK contributed to delays in Projectimplementation. The first factor was political/economic instability. At the time the loan was negotiated andapproved in 1993, Bulgaria had begun the difficult transition from a centrally-planned to a marketeconomy. There have been four elected governmnents since 1991, three caretaker governments and one"experts" government, which hindered decision-making. There was also replacement of the Presidents ofCOE and NEK. These frequent changes and political instability adversely affected COE and NEK abilityto implement policies and development activities on schedule in accordance with Project commitments.

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Changes in management resulted in changes in decisions regarding restructuring which disrupted corporatedevelopment plans and the corresponding technical assistance. Focus and attention was also diverted by thesevere economic crisis coupled with hyperinflation and the collapse of the banking system in late 1996 -early 1997.

The second factor was accidents and problems related to physical components. The critical 400 kV linelinking the Chaira underground power house to the switchyard burned accidentally and had to be replacedbefore commissioning unit 3 of the Chaira hydropower plant. While the Bank stepped-in in time to financethe 400 kV link, a nearly one year delay in the Chaira part of the Project was inevitable due to the need toconduct a new procurement process including developing the tender specifications. Also, a rotor had to betaken back by the contractor for remanufacturing as problems were encountered during testing, whichresulted in more than six months delays.

The third factor was contractual problems. A contract for the MIS component was delayed due to theconsultant assisting with this procurement going bankrupt during the middle of preparation of the tenderdocuments. Later, NEK had difficulties in maintaining timely implementation under the Chaira componentas the contractor seemed to deliberately delay implementation progress in its desire to remain employed foras long as possible due to the decline in the economy. NEK also experienced difficulties with Bulgariansubcontractor companies which lacked the necessary experience in executing works according tointemationally accepted contract conditions such as FIDIC. In spite of these exogenous factors affectingimplementation, in due course all actions were completed to the satisfaction of the Bank.

5.2 Factors generally subject to government control:

Initially, the Government took all measures, including initiating tariff increases, for loan effectiveness asplanned in August 1993. The successive governments resisted policy decisions entailing tariff increases,even though the financial condition of NEK had deteriorated to a dangerous condition by mid-1 995affecting the Project and prospects for other possible assistance from the Bank. The tariff increases werenecessary for the sustainability of the sector and the financial viability of NEK. However, delays in tariffadjustments did not severely hamper Project financing in the short- term because (i) the Bank contributedthe vast majority of the funds for project financing, and (ii) NEK was able to delay other investments tomeet its contributions to the Project. The uncertainties resulting from possible loan suspension (or evencancellation) due to non-compliance with the tariff covenant placed NEK in a difficult position to launchnew procurement or to finalize contracts. The establishment of mechanisms for tariff setting by anindependent regulatory body was also delayed, though a transitional arrangement established end-1996 forautomatic adjustment through indexation was found acceptable from NEK's viability and Project'scontinuation view points. Frequent changes made by the Government in NEK management also contributedto implementation delays.

5.3 Factors generally subject to implementing agency control:

The main factor within the control of NEK that contributed to implementation delays was NEK's poorimplementation capacity and frequent turnover of key staff, particularly in the area of procurement: Inspite of delays, ultimately NEK successfully managed project implementation to completion, including itsown restructuring and unbundling. NEK utilized certain opportunities in its favor, for example, improving220 kV network using savings. It also proactively sought to work with COE and CoM to find solutions tothe tariff difficulty. NEK appropriately redesigned the scope of the MIS component to conform to the neworganizational structure that resulted from unbundling and committed adequate resources to organizational,operational and financial improvements in order to maximize benefits. It is noteworthy that NEK respected

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environmental aspects in the implementation of the Project; it ensured the use of special tools andtechniques by contractors to avoid any negative impacts on the environment and stipulated environmentalconditions in contracts where feasible. NEK performed better than the Government.

J. 4 Costs andfinancing:

Total Project costs, including interest during construction (IDC), were about US$93.5 million equivalent,or 74% of the appraisal estimate of US$126 million equivalent. The reduction of US$32.5 millionequivalent in project costs was realized in civil works (by about US$7 million), most of the other supplyitems (by about US$7 million) and technical assistance (by about US$1 million). In the physicalcomponents, savings can be attributed to conservative, international benchmarks used in appraisalestimates, the deep devaluation of Leva exchange rate with the US$ (the exchange rate reached Leva 1800per US$ by mid-1997 compared to the projected exchange rate of Leva 40 per US$ at appraisal) and localsubcontractors' participation at lower than international rates. In the technical assistance component,savings were mainly from the nearly 66% reduction in the scope of the MIS due to NEK's unbundling. Theincrease in IDC was due to the three-year delay in the completion of the Project.

As for financing, the Bank loan was utilized at 84% of the original amount and US$14.7 million wascanceled. NEK's share of financing also was reduced from US$33 million estimated at appraisal toUS$15.1 million equivalent (about 46%), which helped NEK considerably.

6. Sustainability

6.1 Rationale for sustainability rating:

The improvement in the system's stability and safety, the turn around in Bulgaria's dependence on foreignsupplies and reserve capacity, the positive trends in the sector's finances and GoB's continuing commitmentto develop the sector indicate that the benefits of the Project are sustainable. NEK and GoB are satisfiedwith the results achieved under the Project which, as noted before, is only a first element in the developmentstrategy. The policy and regulatory environment have already begun to provide the needed stability andpredictability for attracting private sector interest and capital. Competition in generation and supply fromunbundling are expected to further depoliticize tariff setting. Bulgaria's ambition to join the EU should alsoprovide added assurance on sustainability of the Project's results.

6.2 Transition arrangenment to regular operations:

Even though thermal generation and distribution operations have been separated, NEK retains almost all ofthe assets acquired under the Project as it continues to be responsible for transmission & load dispatch aswell as hydropower plant operations. NEK has already internalized the new systems which are fullydeployed in day-to-day operations; as such, transition to regular operations has begun. In addition, similarinvestments with financing from other sources, including the EBRD and EIB, are underway to expandcoverage of the system improvements. Sustainable improvements, as measured from imports/exports ofelectricity, UCTE testing/monitoring reports, private capital flows to the sector, financial performance ofthe sector, etc., should be tracked. It is recommended that an evaluation take place in 2002 for measuringperformance along these criteria and expected competitive trading in electricity. Also, the interimarrangement of NEK serving as single-buyer up to mid-2002 should be followed-up to ensure a smoothtransition to market-based trading.

7. Bank and Borrower Performance

Bank

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7.1 Lending:

The Bank's performance in lending was satisfactory. The Bank, in cooperation with other donors (theUSAID, USTDA, CEA, EIB, EBRD, etc.), provided comprehensive assistance to NEK and COE todevelop an appropriate sector development strategy and also to identify priority areas for short- tomedium-term support. The Bank ensured complementarity through appropriate coordination with thedonors during the preparation. By focusing on the critical priorities of the sector in a comprehensive way,including sector reforms and corporate development, the Bank was able to define a long-term developmentstrategy for the sector.

The Bank's desire to keep the design simple could have been further supported by a realistic time table,especially in policy related actions (e.g. regulatory agency). Better monitoring indicators for evaluatingeach component of the Project would have helped both the Bank and NEK during implementation.

7.2 Supervision:

The Bank's performance in supervision is rated as satisfactory. The skill-mix and frequency of missionswas aligned with the needs of implementation and responsive to the issues as they emerged (e.g. tariffs,dam safety). The Bank's coordination and collaboration with other development partners and donors duringsupervision is noteworthy, as it also helped forge a consensus based approach to resolving difficult issuesaffecting the collective developmental goals. The Bank's perseverance in handling the tariff issues underdifficult circumstances, including willingness for invoking its remedies, as well as its readiness to respondto emerging opportunities (e.g. allocation of savings to other priority investments, redesign of MIS) ensureddesired results and expanded benefits of the Project. The Bank also provided recommendations onprotecting the poor, including life line rates and targeted subsidies, which helped GoB in the formulation oftariff policy options.

7.3 Overall Bank performance:

The overall performance was satisfactory throughout the Project cycle.

Borrower7.4 Preparation:

NEK was well supported by consultants in the preparation of the Project and also benefited from earlyBank involvement. Commercial aspe&t-and Bank's procurement methods were unfamiliar to NEK, but its

/commitment was high and senior managers were involved on a continual basis. Considering NEK'sinexperience with management of external project financing, its performance and support duringpreparation was impressive and is\rated satisfactory. On the part of COE, because of its policyresponsibilities, high officials were\involved in the preparation of the Project.

7.5 Government inmplementation pe(rfimance:

Despite the changes in Government over the period of project implementation and substantial delays, theGoB fulfilled the covenants of the Guarantee agreement to the satisfaction of the Bank, eventually. Inaddition, GoB proceeded with broader sector reforms, unbundled the sector and proactively sought privatesector interest and capital. Based on the final results, GoB's performance is rated as satisfactory.

7.6 Implementing Agency:

NEK's performance during implementation was satisfactory. Project implementation was carried out by

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NEK's investment division under the direct management of the Executive Director. With the exception offrequent staff turnover, the department was generally adequately staffed with the appropriate skill mix tohandle the day-to-day implementation aspects. The unit adhered to the procurement strategy and its gradualcapacity building was evident in its handling of over 50 procurement packages, including manylarge/complex ones with turnkey contracting. NEK's performance, which was very poor to start with,progressively improved during implementation. NEK was quick to utilize a part of the savings in the Bankloan and redesigned the scope of the MIS to better suit the new organizational structure. Despite its earnestefforts, it could not make up for the time lost during the initial years (slow procurement and tariff issues),but ensured full or substantial compliance with covenants under the Loan agreement throughout. NEK'sattention to financial aspects, including to timely auditing, could have been more focused.

NEK managed the environmental aspects in a prudent manner and in full cooperation with the panel ofexperts by ensuring that contractors met the standards stipulated in their contracts and by diligentlymonitoring dam safety aspects as expected under the Project. Its shortcomings in the initial period wereeventually addressed as evidenced by the outcomes and outputs of the Project.

7.7 Overall Borrower performance:

NEK's overall performance has been satisfactory in both the physical and technical assistance aspects ofthe Project. COE's (and GoB's) performance, which was rated as highly unsatisfactory during mid-coursein the Project, was upgraded to satisfactory during the later years for having established a suitable sectorpolicy, legal and regulatory frameworks and for maintaining tariff levels as required under the Project.

8. Lessons Learned

Adhere to long-term development goals: Keeping the focus on long term development objectives pays off.Policy reforms, such as the tariff policy, are important to the long term health and sustainability of thesector. Such reforms require that the macroeconomic situation in a country be under control. In the caseof Bulgaria, the economic crisis and hyperinflation fueled the Government with numerous reasons forwhich they did not want to meet the tariff covenant. The Bank's Project team held strong to the commitmentto encouraging the Government to meet the financial covenants of the loan and showed the Government,through research and global evidence of experience, that it could be met and that benefits could be derived.The Bank also partnered with other institutions such as the IMF in encouraging the Government to meet itstariff covenant. The establishment of the currency board and the joint support of the Bank and IMF to theGovernment demonstrated that this reform was necessary and doable.

Assess implementation capacity: Even though the project design was simple, NEK's lack of capacity todeal with extemal financiers such as the Bank could have been addressed through specific TA. Addressingimplementation capacity up front may have also mitigated the problem of high staff turnover. A detailedassessment of implementation capacity, including procurement, would have helped to avoid delays.

Remainflexible to adapt to emerging trends/opportunities: The Bank's flexible approach to allow changesin the scope of the Project (e.g. the financing of 220 kV network improvements, redesign of MIS) helpedexpand the benefits of the Project. Also, the Bank's encouragement of GoB's intention for advancing sectorrestructuring showed how emerging trends could be marshaled for larger gains for the country, e.g.Bulgaria's ambition to join the EU.

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9. Partner Comments

(a) Bornower/implementing agency:Comments from NEK:"NEK's assessment of the overall execution of the project is positive. The loan was utilized accordinglysuch that all objectives were completed and all activities set in SAR were accomplished. Concomitantly, adelay in the execution of the project due to a number of objective factors was registered which madenecessary the two-fold extension of the loan.

The Bank team working on the project - both in its organization and execution - rendered assistance toNEK's personnel in due time with recommendations and instructions. All ambiguities and inaccuraciesassociated with the execution of the project were duly clarified and eliminated with the active assistance ofthe specialists from the Bank.

All payments in respect of the contracts with the active assistance of the Bank disbursement experts duringthe utilization of funds were performed in due time, without registered delays and penalties.

At the same the specialists from NEK acquired experience and knowledge associated with theimplementation of Bank financed projects, such as procedures, execution reports etc."

Comments from SAEER:"The State Agency of Energy and Energy resources as a state authority, also makes a positive appraisal forthe utilization of the funds from the Loan in fulfillment of the project objectives. We consider that all themeasures and actions that had to be followed and fulfilled in respect with the energy sector restructuringand set in the Action plan of the Loan Agreement, were performed. NEK has annually submitted to theBank its balance sheets, as their audits were performed by Arthur Andersen in compliance with theInternational accounting standards.

The measures set in the Guarantee agreement are also being fulfilled. This refers to the financial aspects inrespect with the gradual orienting the Borrowers' activities towards market economy. A new stateregulatory organ was created and the energy tariffs were adjusted.

All the objectives set in SAR were fulfilled and all the projects that were envisaged for financing from theLoan, were completed. Due to different reasonable factors, the original project estimates were decreasedand in this way, cost savings were achieved. Notwithstanding some difficulties, related to the projectimplementation and to the Bank procedures, "Energy I " project has been successfully completed in relationwith the achieved objectives and costs."

(b) Cofinanciers:

Not applicable.

(c) Other partters (NGOs/private sector):

Not applicable.

10. Additional Information

Mineral Bank, which held the Special Account for the project at inception, went bankrupt. As a result,NEK returned about US$2 million of loan proceeds to the World Bank.

During the Project implementation period, the World Bank also contributed to sector improvements througha separate Energy and Environment Review and advisory services to develop and implement the legal andregulatory framework.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indlcator/Matrix Projected In last PSR ActuaULatest Estimate

1. Average Price of Eectdricity for end 3.5 c/kWh (1 994) 3.4 c (2000)Consumer2. Net Profit of NEK (US$ million eq.) 87.2 (1995) 90.8 (1996)

101.7 (1998)97.6 (2000)

3. Unplanned Outages 3556 (1992) 1108 (1998): 381 (2000)4. Imports of Electricity 1 TWh by 1995 0 in 2000

5. Exports of Electricity 1.5 TWh by 1995 3.6 TWh in 1998; 4.5 TWh in 2000

Output Indicators:

Indicator/Matrix ProJected in last PSR - :- ActuaULatbst EstUmate.

1. Peaking Capacity Addition 432 MW by 1997 432 MW by early-19992. New Dispatch Center by 1997 September 1999

3. New Regulatory Agency June 1994 September 1999

End of project

Remark for year 2000: On May 1, 2000, the structure of NEK included transmission,distribution and generation. By June 1, 2000, the distribution companies, the NPP and2 TPP were separated from the structure of NEK. By December 31, 2000 NEK hadretained only the transmission functions, a part of the generation and selling ofelectricity to industrial consumers. The new NEK profits for 2000 were US$41.7m ascompared to US$97.6m if it was not unbundled.

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)Appraisal Actual/Latest Percentage ofEstimate Estimate Appraisal

Project Cost By Component US$ million US$ million1. Supervisory Control & Transmission System 41.50 51.79 1242. Chaira Units 3 & 4 Pumped Storage Project 40.30 28.77 713. TA for NEK's Commercialization 6.50 2.34 36

Total Baseline Cost 88.30 82.90Physical Contingencies 8.90Price Contingencies 17.50

Total Project Costs 114.70 82.90Interest during construction 11.30 10.50 92.90

Total Financing Required 126.00 93.40

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other2 N.B.F. Total Cost

1. Works 32.10 2.40 0.00 0.00 34.50(23.30) (0.00) (0.00) (0.00) (23.30)

2. Goods 45.60 4.10 2.20 0.00 51.90(36.50) (0.00) (2.10) (0.00) (38.60)

3. Services 0.00 0.00 18.60 0.00 18.60(0.00) (0.00) (17.40) (0.00) (17.40)

4. Dam Strengthening 9.30 0.00 0.40 0.00 9.70(5.50) (0.00) (0.40) (0.00) (5.90)

5. Interest During 0.00 0.00 11.30 0.00 11.30Construction (0.00) (0.00) (7.80) (0.00) (7.80)6. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)Total 87.00 6.50 32.50 0.00 126.00

(65.30) (0.00) (27.70) (0.00) (93.00)NCB is referred to by the client as SH and is LCB (local competitive bidding) in the SAR."Other" refers to DC.

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Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equival nt)

Procurement Method.Expenditure Category ICB NCB Other2 N.B.F. Total Cost

1. Works 9.46 0.00 0.00 0.00 9.46(5.20) (0.00) (0.00) (0.00) (5.20)

2. Goods 59.00 0.70 4.90 0.00 64.60

(50.70) (0.60) (3.10) (0.00) (54.40)

3. Services 7.36 0.00 1.50 0.00 8.86(6.80) (0.00) (1.40) (0.00) (8.20)

4. Dam Strengthening 0.00 -0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Interest During 10.50 - 0.00 0.00 0.00 10.50Construction (10.50) (0.00) (0.00) (0.00) (10.50)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 86.32 0.70 6.40 0.00 93.42(73.20) (0.60) (4.50) (0.00) (78.30)

"Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2 Ilncludes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in USS million equivalent)Percentage of Appraisal

Cornponent Appraisal Estimate ActuaL/Latest Estimate . = .

.______________ .Bank Govt. CoF.- Bank Govt. CoF. Bank Govt. CoF.1. Supervisory Control & 42.88 10.68 43.30 8.49 101.0 79.5Transmission System2. Chaira Units 3 & 4 36.12 18.52 22.30 6.47 61.7 34.9Pumped Storage Project3. TA for NEK's 6.20 0.30 2.20 0.14 35.5 46.7Commercialization4. IDC 7.80 3.50 10.50 0.00 134.6 0.0

TOTAL 93.00 33.00 78.30 15.10 84.2 45.8

Note: Govt. refers toY,4 EK

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Procurement Packages Awarded

A. SUPERVISORY CONTROL AND TRANSMISSION NETWORK SYSTEM COMPONENTDt. Contr. Contr. Amount USD

Item Description Method Signed Supplier Country (disbursed) Com Date

A.1.1 Power transducers SH 11/28/94 Enerdis France 159,496 May-95

A.1.2 Radio-relay lines ICB 2/27/96 Ascom Austria 1,220,589 May-97

A.1.3 Telegyr extension DC 9/23/94 Landis & Gyr Switzerland 1,212,574 May-95

A.1.4 PLC channels ICB 6/8/95 Alcatel Italy 1,228,533Strengthen supervisory control NDC -

A.2.1 consultancy Cons. 11/10/94 KEMA-ECC Netherlands 575,267 May-96

Strengthen supervisory control NDC -A.2.2 procurement ICB Sep-96 Landis & Gyr Switzerland 5,000,000 Sep-99

A.3.1 Unit control system - consultancy Cons. 6/23/95 ELC Italy 720,867 Dec-00

Unit control system - procurement- HPP part 9/2/88 ABB Austria 26,912,837 DEM June-00

A.3.2 - TPP part ICB 8/12/99 Honeywell USA 1,658,685 Euro Oct-00

A.4.1 Shunt reactors ICB 2/9/94 ABB Sweden 2,396,778 Feb-95

A.4.2 Circuit breakers ICB 219/94 ABB Sweden 928,367 Feb-95

A.4.3 Disconnectors ICB 1/25/94 AEG Germany 554,076 Feb-95

A.4.4 Relay protections ICB 2/24/94 ABB Sweden 323,205 Sep-94

A.4.5 Fault recorders ICB 1/28/94 Siemens Germany 1,422,130 Oct-94

A.5.1 Optical fibre cable ICB 7/30/99 NK Networks Germany 3,116,405 DEM Oct-00A.5.2 Measuring transformers acc. 0.2 ICB Sep-98 Passoni & Villa Italy 920,350,000 ITL Dec-99

Precise measurement of electricA.5.3 energy ICB 8/28/98 ABB USA 1,604,276 Mar-99

Relay protections in the 220 kV system-Lot 1 12/11/98 ABB Sweden 15,636,400 SEK Dec-00

A.5.4 -Lot 2 ICB 12/15/98 Alstom France 1,161,625 FrF Dec-00Measuring equipment for diagnostics of

A.5.5 power transformers oils ICB 8/27/98 Hroma Bulgaria 478,112 Mar-99

A.6.1 Upgrading of the turbine govemors ICB 9/15/99 Siemens Germany 4,591,496 DEM Nov-00

Runners for hydro turbines-Lot 1 3/12/99 Alstom France 463,460 Euro Dec-00

A.6.2 -Lot 2 ICB 12/29/99 SULZER Switzerland 982,946 CHF Dec-00

A.6.3 Automatic Weather Station SH Orion USA 67,025 Mar-00

A.6.4 Nozzles for hydro turbines _ 7/12/00 VOITH Austria 1,167,000 Euro Dec-00

A.7 Spare parts for NDC DC 5/16/00 Telegyr Switzerland 528,512 Dec-00

A.8 Spare parts for fault recorders DC 8/18/00 Siemens Germany 233,000 Euro Dec-00

A.9 Spare parts for PLC channels DC 6/26/00 Alcatel Italy 20,595 Euro

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B. CHAIRA PUMPED STORAGE PROJECT (UNITS 3&4) COMPONENTDt. Contr. Contr. Amount corn

Item Description Method Signed Supplier Country USD (disbursed) Date

Supply of steel and tubestor penstockB.1 No2 ICB 4/7/95 Mitsui&Co Japan 265,795 Jun-95

B.2 Manufacture of lining tubes DC 10/6/95 KZU-ZLMK Bulgaria 83,515 Dec-96Supervision of installations hydro sets 3

B.3 and 4 - Consultants ICB 5/31/94 Harza USA 4,317,522 Sep-99Construction works for and installations

B.4 hydro sets 3 and 4 ICB 1/23/96 Montagi Bulgaria 13,052,270 Sep-99Interpretation for seismic monitoring

B.5 instrumentation SH 12/15/93 Kinemetrics USA 43,684 Jun-94Strengthening of Belmeken and Chaira

B.6 dams - Consultants DC 3/14/94 Energoproekt Bulgaria 139,764 Aug-96Strengthening of Belmeken and Chaira

B.7 dams - Civil works LIB 5/31/96 Hydrostroitel Bulgaria 253,293 Jun-99Stability of Belmeken and Chaira dams DC Four J. Lowe ill USA 66,968 Dec-96- Panel of Experts contracts J. Rescher Austria

with Abadjiev BulgariaB.8 indvduals IZIIS MacedoniaB.11 Water level recorder and current meter SH 3/23/94 OOT Germany 11,348 Jun-94

B.12 Geodetic instruments SH 5/24/94 Leika AG Switzerland 30,233 Jul-94

B.13 Automatic Meteorological station SH Aug-96 Qualime-trics USA 19,140 Jan-97

B.14 Replacement parts1. Bushings - 5 Ps SH 8/12/95 Micafil Switzerland 98,097 Mar-96

2. HV Cable 400 kV ICB 4/15/97 Alcatel France 1,335,934 Mar-99

3. Earth switch SH 6/5/96 Merlien Geren France 48,935 Jan-994. Missing parts for U3&U4 DC 11/11/96 Mitsui&Co Japan 584,870 Mar-99

5. Low voltage circuit breakers DC 10/14/96 Merlien Geren France 9,850 Feb-97Supply and Supervision of Heat Pump

B.15 Distribution Center ICB 9/5/97 Total Air Bulgaria 363,566 Dec-99Instrumentation for seismic monitoring

B.16 - Penstock No2 SH 12/2/96 Geokon USA 26 808 Feb-97Oil processing machines ICB 6/22/99 Hedrich Germany 427,600 DEM Oct 99

6/10/99 Hydac Austria 130,495 Euro Oct 99B.18 6/11/99 ROFA Bulgaria 132,544 DEM Oct 99

B.19 20 kV switch-gear ICB 17/03/00 ABB Avangard Bulgaria 390,996 BGL Dec-00

B.20 Toshiba's Supervision DC 11/11/96 Mitsui&Co Japan 1,186,126 Jul-99

B.22 Automatic control board DC 5/19/97 Mitsui&Co Japan 518,254 Mar-98

B.23 Supply of compressors SH Euromar-ket BG 100,103 Mar-00

C. NEK'S COMMERCIALIZATION IMPROVEMENT COMPONENT

Item Description Method | Contr Supplier Country USD (disbursed) Date

C.1 Design and implementation of Cons. 1,245,644organizational management informationsystem - consulting

C.1.1 Bid Evaluation Process - Second DC 12/20/99 Donna Edgerton USA 12,740_ Stage -Consulting

C.2 Design and implementation of ICB 7/6/00 VA TECH Austria 962,989 Dec-00organizational management information AIINFORMATICSsystem - procurement

C.3 Implementation and acceptance of MIS DC KPMG Bulgaria 63,042 Dec-00system

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Annex 3. Economic Costs and Benefits

In order to estimate benefits from the Project, during preparation/appraisal, a computer model (Wasp) wasused to simulate the Bulgarian power system, with and without the Project. Replication of this model wasnot possible for the purposes of estimating benefits at the time of the ICR. Therefore, the approach taken inthis report was to validate how the assumptions made at the time of the SAR compare with the currentsituation and to infer what, if any, impact changes in these assumptions have had on the overall retums oninvestments.

The major benefits of the Project predicted at appraisal consisted of increased capacity for (1) active loadmanagement contributable to the Chaira component (2) automatic generation control including primary andsecondary regulation, and (3) voltage and reactive power control. The price of electricity at the end of theProject was only slightly more than the level assumed at appraisal. As such, the benefits stream is notestimated to be substantially higher. However, significant cost savings were realized in the project withoutloss in scope, and hence higher rates of return were derived from the Project. The table below compares theERRs estimated at appraisal with revised ones for the two principal components of the Project (Excelmodel results are included in Project files).

ERR (%) SAR RevisedThe Project 19% 22%Chaira Pumped Storage Component 22% 30%The Transmission Component 11% 13%

Secondary system benefits as estimated in the SAR include reduced system minimum loading and improvedfrequency regulation, which have been realized. These benefits are inferred to be higher than expected dueto improvement in the 220 kV network also achieved at costs much lower than anticipated. Thus, theeconomic benefits from the Project were satisfactory.

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Annex 4. Bank Inputs

a) Missions:

Stage of Project Cycle No. of Persons and Specialty Performarnce Rating(e.g. 2 Economists, I FMS, etc.) implementation Development

Month/Year Count Specialty Progress Objective

Identification/PreparationMar 1991 2 Economist; Financial AnalystApr-May 1991 5 Power Engnr/Procuremt; Power

Spec; Mining Engineer;Economist; Financial Analyst

Mar 1992 4 Econ/Financial Analyst; PowerEngnr/Procuremt; Dam SafetyExp; Nuclear Safety Consultant

Appraisal/NegotiationJun-July 1992 5 Power Engnr/Procurmt,

Operatns Offcr; Legal, DamSafety Exp; Econ/Fin Anlyst

Jan 1993 3 Power Engnr/Procurmt; Legal;Econ/Fin Anlyst

SupervisionJul-Aug 1993 2 Economist; Engineer S SSep 1993 1 Dam Specialist S SDec 1993 2 Economist; Engineer S SFeb 1994 2 Economist; Engineer S SApr 1994 2 Economist; Engineer S SAug 1994 3 Economist; Engineer; Dam S S

SpecialistNov-Dec 1994 2 Economist; Engineer U UApr-May 1995 2 Economist; Engineer U USep 1995 2 Economist; Engineer U HUMar 1996 2 Economist; Engineer U UJun 1996 2 Economist; Engineer U UOct 1996 2 Economist; Engineer S SMar 1997 1 Economist S SJul 1997 2 Economist; Operations S SNov 1997 2 Economist; Operations S SMar 1998 2 Economist; Operations S SMay 1998 2 Economist; Operations S SSep-Oct 1998 5 Economist; Engineer; Financial U S

Analyst; Operations;Procurement

Feb 1999 4 Economist; Engineer; S SOperations; Procurement

Oct 1999 2 Engineer; Financial Analyst S SFeb-Mar 2000 3 Economist; Engineer; Financial S S

AnalystSep 2000 3 Economist; Financial Analyst; S S

Procurement

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ICRSep 2000 3 Economist; Financial S S

Analyst; Procurement

1. Key to Performance Ratings: HS - Highly Satisfactory; S - Satisfactory; U - Unsatisfactory; HU - HighlyUnsatisfactory

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate

No. Staff weeks US$ ('000)

Identification/Preparation 67.0 160.9

Appraisal/Negotiation 40.6+11.9 102.6+25.3Supervision 217.09 504.7ICR included in included in

Supervision Supervision figuresfigures

Total 336.59 793.5

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

3Macro policies O H OSUOM O N * NA3Sector Policies O H *SUOM O N O NA3 Physical O H *SUOM O N O NA3 Financial O H * SU OM O N O NA

Z Institutional Development 0 H O SU O M 0 N 0 NAZEnvironmental O H OSUOM O N * NA

Social3 Poverty Reduction O H OSUOM O N * NA

[3 Gender O H OSUOM O N * NACI Other (Please specify) O H OSUOM O N * NA

X Private sector development 0 H O SUO M 0 N 0 NAZ Public sector management 0 H O SU O M 0 N * NALII Other (Please specify) O H OSUOM O N * NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

• Lending OHS*S OLu OHU• Supervision OHS OS Ou O HU• Overall OHS OS OU 0u HU

6.2 Borrowerperformance Rating

• Preparation OHS OS OU 0 HUF Government implementation performance O HS Os O U 0 HU• Implementation agency performance OHS OS 0 U 0 HU• Overall OHS OS 0 u O HU

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Annex 7. List of Supporting Documents

Found in Project files:

1. Spreadsheets supporting ERR calculations2. Tariff Structure/levas (1994 to 2000)3. Relevant correspondence

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Annex 8: Status of Legal Covenants (as at completion)

eSeti Coven Present Original RevisedAgree ant Status Fulfillment Fulfillment Description of Covenantment n Type Date Date

Loan 3.03 6 C 6/30/1993 By June 30, 1993, NEK shall contract a panel of at least twoindependent experts with terms and conditions acceptable tothe Bank, for the purpose of providing assistance in annualdam safety inspection of the Belmeken and Chaira dams,including monitoring and analysis of data after the filling ofsuch dams.

Loan 4.04 5 C 7/1/1993 By July 1, 1993, NEK shall submit a plan for streamliningdecision-making and strengthening the corporate planning,accounting and financial functions of NEK and a timetable forits implementation acceptable to the Bank and, thereafter,take all necessary measures to implement such plan inaccordance with the timetable.

Loan 5.01 b 1 C June 30 NEK shall submit annual audited financial statements andeach year required audit reports

Loan 5.02 a 2 C 12/31/1992 Except as the Bank shall otherwise agree, NEK shall, for eachof its fiscal years commencing after December 31, 1992,generate funds from intemal sources equivalent to not lessthan 30% of the annual average of the Borrower's capitalexpenditures incurred, or expected to be incurred, for thatyear, and the next following fiscal year.

Loan 5.03 a 2 C Each NEK shall generate net revenues for each fiscal yearFiscal equivalent to at least 1.5 times the debt service requirementsYear of NEK in such year on all debt of NEK, including this Loan.

beginning1993

Loan 5.04 a 2 C Each NEK shall achieve and maintain a ratio of current assets toFiscal current liabilities of not less than 1:2.

Year from1993

Loan 5.06 2 C 6/30/1994 NEK shall: (a) increase its provision for the depreciation of itsfixed assets for 1993 to three times its depreciation for 1992(based on the 1992 depreciation level of 570 million leva) andcharge it against its taxable income or take other measureswhich, in the opinion of the Bank, would have the same effecton its generation of funds from internal sources as defined inSection 5.02 (d)(i) of the Loan Agreement; and (b) gradually,increase its provisions for the depreciation of its fixed assetsin real terms in accordance with a methodology acceptable tothe Bank so that it is consistent with its revalued fixed assetsby December 31, 1997, and charge such provisions against itstaxable income or take other measures which, in the opinionof the Bank, would have the same effect on its generation offunds from internal sources.

Loan 5.07 5 C October 31 During each year NEK shall prepare a five-year rollingeach year corporate plan, which shall include projected financial

statements and provide such corporate plan to the GOB andthe Bank no later than October 31 of each year for review.

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Guaran 3.03 2 CD 9/1/1993 Without limitations upon the generality of the obligations of thetee GOB set forth in Section 3.01 of the Guarantee Agreement,

the GOB shall: (a) increase the real level of electricity pricesso as to obtain an average level equivalent to at least 3.5 UScents/kWh by September 1, 1993, in accordance with amethodology acceptable to the Bank; and (b) thereaftermaintain an average electricity price level equivalent to atleast 3.5 US cents/kWh until the new average level specifiedin Guarantee Agreement Section 3.04 (b) is implemented.

Guaran 3.04 2 CD 9/30/1994 Without limitations upon the generality of the obligations of thetee GOB set forth in Section 3.01 of the Guarantee Agreement,

the GOB: (a) shall establish, by June 30, 1994, in consultationwith the Bank, a new independent regulatory mechanism forelectricity prices acceptable to the Bank; and (b) acting inconjunction with NEK, shall enable this new mechanism toset, by September 30, 1994, and maintain thereafter, anaverage level of electricity prices equal to the higher of thelong-run marginal cost of supplying electricity or the levelrequired for NEK to achieve financial covenants set out inSections 5.02, 5.03 and 5.04 of the Loan Agreement,calculated in a manner satisfactory to the Bank.

Covenant types: Present Status:

1. = Accounts/audits C = covenant complied with

2. = Financial perf/revenue generatn from benefic's CD = complied with after delay

3. = Flow and utilization of project funds CP. = complied with partially

4. = Counterpart funding NC = not complied with

5. = Management aspects of the project or executing agency

6. = Environmental covenants

7. = Involuntary resettlement

8. = Indigenous people

9. = Monitoring, review, and reporting

10. = Project implementation not covered by categories 1-9

11. = Sectoral or cross-sectoral budgetary or other resource allocation

12. = Sectoral or cross-sectoral policy/regulatory/institutional action

13. = Other

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