Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 29993

PROJECT APPRAISAL DOCUMENT

ON

A PROPOSED LOAN

IN THE AMOUNT OF EURO 66 MILLION (USD 84.3 MILLION EQUIVALENT)

TO

HIDROELECTRICA S.A.

WITH THE GUARANTEE OF ROMANIA

IN SUPPORT OF THE FIRST PHASE OF THE US$l ,OOO MILLION

ENERGY COMMUNITY OF SOUTH EAST EUROPE (APL) PROGRAM

DECEMBER 23,2004

Infrastructure and Energy Sector Unit Europe and Central Asia Region

This document has restricted distribution and may be used by recipients only in the performance o f their official duties. I ts contents may not otherwise be disclosed without W o r l d Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 15,2004)

ANRE APL EBRD EC ECSEE EIB EMP ETSO EU KfW M E C OP OPCOM SEE Transelectrica TSO UCTE USAID

Currency Unit = Romanian L e u (ROL) ROL29,OOO = US$1

FISCAL YEAR January 1 - December 3 1

ABBREVIATIONS AND ACRONYMS

National Energy Regulatory Authority (Romania) Adaptable Program Loan European Bank for Reconstruction and Development European Commission Energy Community o f South East Europe European Investment Bank Environmental Management Plan European Transmission System Operators’ Association European Union Bank for Reconstruction (Germany) Ministry o f Economy and Commerce (Government o f Romania) Operational Policy Romanian Electricity Market Operator South East Europe Romanian National Transmission Company Transmission System Operator Union €or the Coordination o f Transmission of Electricity in Europe United States Agency for International Development

Vice President: Shigeo Katsu Country Director for Romania: Anand Seth

Sector Manager: Henk Busz Task Team Leader: Kari Nyman

FOR OFFICZAL USE ONLY EUROPE AND CENTRAL ASIA

Energy Community of South East Europe (APL1)

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 Country and sector issues .................................................................................................... 1

Rationale for Bank involvement ......................................................................................... 2 1 . 2 . 3 . Higher level objectives to which the project contributes .................................................... 3

B . PROJECT DESCRIPTION ................................................................................................. 4 1 . 2 . 3 . 4 . 5 . 6 .

Lending instrument ............................................................................................................. 4

Program objective and Phases ............................................................................................. 4

Project development objective and key indicators .............................................................. 6

Project components ............................................................................................................. 6

Lessons leamed and reflected in the project design ............................................................ 7

Altematives considered and reasons for rejection .............................................................. 8

C . IMPLEMENTATION .......................................................................................................... 8 Partnership arrangements .................................................................................................... 8 1 .

2 . 3 . Monitoring and evaluation o f outcomes/results ................................................................ 11

4 . Sustainability ..................................................................................................................... 11

5 . Critical r isks and possible controversial aspects ............................................................... 12

6 . Loadcredit conditions and covenants ............................................................................... 13

Institutional and implementation arrangements .................................................................. 9

D . APPRAISAL SUMMARY ................................................................................................. 14 Economic and financial analyses ...................................................................................... 14 1 .

2 . Technical ........................................................................................................................... 15

3 . Fiduciary ........................................................................................................................... 16

4 . Social ............................................................................................................. ................... 16

5 . Environment ...................................................................................................................... 17

6 . Safeguard policies ............................................................................................................. 17

7 . Policy Exceptions and Readiness ...................................................................................... 18

This document has a restr icted distr ibut ion and may be used by recipients on ly in the performance of their of f ic ia l duties . I t s contents may n o t be otherwise disclosed

Annex 1: Country. Sector and Program Background ............................................................. 19

Annex 2: Ma jo r Related Projects Financed by the Bank and other Agencies ...................... 27

Annex 3: Results Framework and Monitoring ........................................................................ 28

Annex 4: Detailed Project Description ...................................................................................... 30

Annex 5: Project Costs ............................................................................................................... 31

Annex 6: Implementation Arrangements ................................................................................. 32

Annex 7: Financial Management and Disbursement Arrangements ..................................... 33

Annex 8: Procurement Arrangement ........................................................................................ 38

Annex 9: Economic and Financial Analysis ............................................................................. 41

Annex 10: Safeguard Policy Issues ............................................................................................ 46

Annex 11: Project Preparation and Supervision ..................................................................... 48

Annex 12: Documents in the Project F i le ................................................................................. 50

Annex 13: Statement o f Loans and Credits .............................................................................. 51

Annex 14: Country at a Glance ................................................................................................. 53

M a p IBRI) 33688

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

The improvement o f the performance of the energy sector i s crucial to improve and sustain economic development in South East Europe (SEE). Power supply situation i s projected to tighten significantly during the next few years and threatens to constrain economic activity and affect the quality o f l i fe if not addressed with determined regional action. Apart from Turkey, investment over the past 10-15 years has been limited, with the average age o f capacity now in excess o f thirty years. Significant capacity additions (of the order o f 12,000-15,000 MW) and plant rehabilitations (of the order o f 8,000-9,000 MW) will be required during the next ten years, along with matching transmission and distribution system investments if demand i s to be met and severe power shortages and supply interruptions are to be avoided *.

The SEE countries have acknowledged that solutions to these regional issues based on isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emerging demand and supply imbalances. Building upon their experience to cooperate in the power sector, in recognition of potential gains from increased trade, and as part o f a wider movement to strengthen regional cooperation, the governments o f SEE countries and the European Commission (EC) signed the “the Athens Memorandum” - the Memorandum o f Understanding o n the Regional Energy Market in South East Europe and its Integration into the European Union Internal Energy Market - on December 8,2003 in Athens, Greece, whereby they formally expressed their commitment to what i s currently called the Energy Community of South East Europe (ECSEE) ’. ECSEE’s current membership is as follows:

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ECSEE’s State Parties are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia and Montenegro, and Turkey; The United Nations Interim Administration in Kosovo, pursuant to the United Nations Security Council Resolution 1244, i s an Adhering Party; The State Parties and the Adhering Party together are ECSEE’s Regional Members (also referred to as the Contracting Parties); EU Member States Austria, Greece, Hungary, Italy, and Slovenia are participants. Any other EU Member States can also request to become participants; and Neighboring non-EU Member States can request to participate as observers. Currently, Moldova i s participating as an observer.

Negotiations are underway to convert the Athens Memorandum into a legally binding ECSEE Treaty (Section C.2) between the European Commission (on behalf o f the European Union) and the Contracting Parties. This project appraisal document reflects the December 3,2004 version o f the ECSEE Treaty.

Review of power demand and supply in South East Europe, Working Paper No. 17, World Bank,

Until June 2004 this initiative was known as the South East Europe Regional Energy Market.

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October 2003 and separate Bank staff estimates for Turkey. 2

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2. Rationale for Bank involvement

The Bank is participating in regional efforts to promote cooperation and integration in South East Europe and inter alia supports the Stability Pact. A strategy paper was prepared by the Bank in 2000, which looked at the first decade o f transition from a regional perspective and mapped a way forward for a more strategic regional approach. The Bank i s an active participant and promoter o f the Athens process, at the invitation o f the European Commission. The Bank has supported individual countries o f South East Europe in their efforts to rehabilitate and restructure their power sectors through pol icy dialogue, technical assistance and financing since the early 1990s (in some cases even earlier). This deep country knowledge and participation in the development o f ECSEE in the Athens process including regional trade strategy work puts the Bank in a strong position to provide regional lending, pol icy advice and technical assistance to further support the Athens process for ECSEE - the proposed APL program i s a key component of the Bank’s support for the Stability Pact and the working partnership with the European Commission.

In March 2004, the Bank published a strategy paper for energy trade in South East Europe ‘. The framework paper outlines the Bank’s vision for regional energy market development and defines its role in supporting the evolution o f regional energy trade. The framework elaborates the Bank’s role in supporting pol icy reform and institutional development, and lending for power generation, transmission, distribution:

0 Promote a phased approach to market opening, starting with trading based on bilateral contracts and third party network access, and moving to a more sophisticated model after the institutional framework i s sufficiently developed; Apply regional benchmarking in pol icy support work with individual countries and as a trigger for investment financing; Develop a special regional instrument - the proposed ECSEE APL - and finance priori ty investments to support development o f the regional market; Analytical work to assess the economics o f increasing the use o f gas in the SEE countries and costs o f compliance with EU environmental standards; and Complete a regional power Generation Investment Study, financed by the EC.

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Within this regional strategy, the Bank customizes the focus o f its pol icy support towards most critical aspects for the development o f an institutional framework for power market liberalization in each country:

0 Albania: tari f f reform, improvement o f payments discipline, and strengthening o f the social safety net;

3 World Bank, March 2000. 4 Discussion Paper No. 12, March 2004.

The Road to Stability and Prosperity in South Eastem Europe - A Regional Strategy Study,

World Bank Framework for Development of Regional Energy Trade in South East Europe, EMT

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Bosnia and Herzegovina: payments discipline, industry restructuring, regulatory strengthening, and strengthening o f the social safety net; Croatia: industry restructuring; Kosovo: sector strategy; Macedonia: payments discipline and energy strategy; Montenegro: improvement o f payments discipline, industry restructuring and regulatory development; Romania: power market development; Serbia: energy legislation, regulatory strengthening, power industry restructuring; and Turkey: power market development.

In addition, the Bank will work with selected countries on institutional reform in the gas sector, and development o f gas distribution concessions. A regional investment facility for gas, similar to the proposed ECSEE APL, will also be considered.

3. Higher level objectives to which the project contributes

ECSEE is an integral element o f the Regional Members’ and the European Commission’s efforts for a l l states in South East Europe to have access to stable and continuous energy supply which they regard as essential for economic development and social stability. The creation o f an area without internal frontiers for energy contributes to economic and social progress and a high level of employment as well as balanced and sustainable development. These higher level objectives are expressed in the ECSEE Treaty.

All SEE countries have the prospect o f EU membership. Bulgaria and Romania expect to j o i n in 2007, and also Croatia and Turkey are candidate countries. The countries o f Western Balkans - the other Regional Members o f ECSEE - are potential candidates to accession (European Council in Copenhagen in December 2002). “The Thessaloniki Agenda for the Western Balkans: moving towards European Integration”, which was endorsed by the European Council in Thessaloniki in June 2003, encourages the region to adopt a legally binding energy market agreement. Accordingly, the Member Countries and the Commission are resolved to establish integrated energy markets in electricity and gas based o n a common solidarity and consistent with the rules applicable within the European Union.

The Stability Pact has made regional energy cooperation one o f its core objectives in its efforts to strengthen regional cooperation and to foster the conditions for peace, stability and economic growth in the South East Europe. The Stability Pact has characterized ECSEE as a unique political chance for the SEE region, to consolidate reconciliation and provide a power driver towards a more comprehensive economic and political integration into the European Union.

The Bank supports regional efforts to promote cooperation and integration in South East Europe. ECSEE i s one of the most prominent o f current regional programs. The proposed APL facility i s a key component o f the Bank’s support for the Stability Pact and the working partnership with the European Commission.

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B. PROJECT DESCRIPTION

1. Lending instrument

ECSEE is a regional program and i t i s proposed that the Bank investment support be provided using the adaptable program lending (APL) instrument, horizontally o n a regional basis to support ECSEE’s Regional Members (up to eight countries and Kosovo) and vertically (each Regional Member can in principle receive support from more than one APL installment over the APL program period). The APL instrument, by visibly committing substantial resources and complementing activities supported by other donors, would help ensure the availability o f adequate resources to fund priori ty investments for a functioning electricity market. The APL instrument would enable the Bank to provide support in a flexible manner - when individual countries have met the pol icy triggers (country criteria under the Athens process) and when individual projects are ready to receive Bank support. All ECSEE Regional Members might not actually borrow under the APL program. However, countries would know up-front that they can rely on the Bank to support them in achieving the goals o f the ECSEE if they meet specific eligibility criteria and if they need Bank support. The proposed size o f the APL lending facility is U S $ l ,000 million, o f which EUR 66 mi l l ion (US$84.3 mi l l ion equivalent) would be approved to Romania under the proposed APLl. The ECSEE APL i s detailed in Annex 1 (Section 1).

2. Program objective and Phases

The key objectives of the Energy Community o f South East Europe (ECSEE) are:

0 Create a stable regulatory and market framework capable o f attracting investment to the region in gas networks and power system so that al l states in the region have access to the stable and continuous energy supply that i s essential for economic development and social stability;

0 Establish integrated regional markets in South East Europe, closely l inked to the internal energy market o f the European Union, and fully complying with the rules applicable within the European Union;

0 Enhance the energy security o f supply o f South East Europe and the European Union by providing incentives to connect the Balkans to Caspian and Nor th Afr ican gas reserves; and

0 Improve the environmental situation in relation to energy in the region.

The Member States are committing themselves under ECSEE inter alia to:

0 Implement the E C Directives 2003/54 (electricity) and 2003/55 (gas) o f the European Parliament and o f the Council, June 26,2003, in full but with a delayed schedule for market liberalization compared to the schedule applicable to EU Member States; and

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0 Progressively align their environmental standards to a high common level, including that a l l generating plants starting to operate after the entry into force o f the forthcoming ECSEE Treaty comply with E C standards.

0 All Regional Members are also expected to accede to the Kyoto Protocol within one year o f the Treaty’s effectiveness.

The Bank supports ECSEE in a number o f ways, through active participation in ECSEE’s implementation organization (described in Section C.2); analytical work including the March 2004 framework paper, the ongoing generation investment study and the gasification study; and country-level po l icy dialogue and project work. The proposed regional investment and technical assistance support under the ECSEE APL is an integral element o f this comprehensive program o f support. ECSEE APL phasing and triggers are discussed in Annex 1 (Section 1) and summarized below. They are directly linked to ECSEE and utilize both the horizontal and vertical features o f the APL instrument in a regional context:

A country becomes eligible once it has met ECSEE’s basic entry conditions as they were defined in the Athens Memorandum - the ECSEE APL requirements are that an electricity sector regulator and a transmission system operator have been established and are operational. I t is currently expected that al l Regional Members would meet this condition by mid-2006 at the latest. The beneficiary country o f APL1, Romania, already meets these init ial conditions and i s eligible for Bank support under the ECSEE APL program;

A country remains eligible for Bank support under the ECSEE APL program as long as the country signs and ratifies the ECSEE Treaty and meets i t s key obligations under the Treaty:

(a) signs the ECSEE Treaty; (b) ratifies the Treaty; (c) (d)

establishes distributions system operators; and opens its electricity market to non-household customers.

For a countryhorrower to be or remain eligible for Bank support under the APL program the Bank also needs to be satisfied that the countryhorrower has the ability to effectively participate in the regional market. With this trigger, the Bank would reserve the right to defer or withhold ECSEE APL support in cases where a country might have complied with the letter o f its ECSEE Treaty commitments but not have implemented or launched credible programs o f other critical measures that are needed for market participation such as, for example, reasonable tariffs, adequate bill collection, and systems for electricity market and power system operations.

The Commission expects the ECSEE Treaty to be signed in mid-2005. The signing o f the Treaty is proposed to be applied as a trigger under the ECSEE APL program from January 1, 2006, and its ratification f rom January 1,2007.

The current version o f the ECSEE Treaty calls for the establishment o f distribution system operators by January 1,2007, and for the opening o f the electricity market to al l non-household

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customers by January 1 , 200S5. I t i s possible that in the course o f the final negotiations o f the ECSEE Treaty, these ambitious deadlines are adjusted - the Athens Memorandum contained even more aggressive targets which have since been reviewed and adjusted. The target dates that will be applied as triggers under the ECSEE APL program wil l be those incorporated in the final version o f the Treaty including derogations and subsequent modifications agreed by the European Commission and ECSEE Regional Members.

A long with the triggers, projects wil l have to meet standard Bank requirements (including safeguards) and will have to fit into the country programs (net o f possible regional IDA).

3. Project development objective and key indicators

The objective o f ECSEE APL is the development o f a functioning regional electricity market in South East Europe and its integration into the intemal electricity market o f the European Union, through the implementation o f priority investments supporting electricity market and power system operations in electricity generation, transmission and distribution and technical assistance for institutional/systems development and project preparation and implementation.

The ECSEE APL program would be considered successful if the countries in the region achieve their commitments under the Athens process and are able to: (a) develop a functioning electricity market including the agreed market liberalization targets; and (b) integrate i t into the intemal electricity market of the European Union in accordance with the ECSEE Treaty. To accomplish this, the countries wil l have to continue ongoing restructuring and reform measures, build up their institutions and improve their power systems including interconnections so that regional trade can increase. The ECSEE APLl would establish the ECSEE APL facility and provide investment support and technical assistance to Hidroelectrica in Romania. Related technical assistance support to the electricity regulator ANRE, market operator OPCOM and transmission system operator Transelectrica is already being provided by the Bank under the ongoing Electricity Market Project. The key performance indicators that will be used to assess the fulfil lment o f the ECSEE APL program and ECSEE APLl projects in terms o f results and outcomes are presented in Annex 3.

4. Project components

Eligible E C S E E APL project components. The Bank’s March 2004 framework paper concluded that significant investments in power generation, transmission and distribution and technical assistance are required for a well-functioning power market. Priority investments and technical assistance would be financed under the ECSEE APL program so that the ECSEE Regional Members can effectively participate in the regional electricity market:

5 This level o f market opening i s a highly ambitious target - the EU Member Countries themselves were required to reach this target only by July 2004 - and may we l l s t i l l be adjusted before the Treaty i s finalized. In the EU Member States, a l l customers including households are to be eligible to choose their supplier by July 2007. In ECSEE, this deadline i s currently set for January 2015 -beyond the ECSEE APL program.

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Investments to ensure that ECSEE Regional Member meet the integration requirements o f U C T E - the Un ion for the Coordination o f Transmission o f Electricity in Europe; Investments to upgrade the capabilities of transmission system operators (TSOs) o f ECSEE Regional Members so that they can implement pol icy decisions to assure regional security o f supply. Examples o f such investments include: (a) upgrading load dispatch and real-time system stability and control capabilities; (b) upgrading infiastructure/systems for electricity market administration; and (c) removing critical bottlenecks in transmission networks and sub-stations; Investment to restore operational capacity/flexibility o f critical generation facilities that provide ancillary services to TSOs, e.g. the proposed A P L 1 investment to rehabilitate Hidroelectrica’s Lot ru Hydropower Station in Romania; Investment in retrofits o f critical generation and/or transmission facilities to assure environmental compliance; Metering and/or telecommunications programs designed to enhance revenue realization and/or coordination and communications capabilities o f distribution utilities so that they can more effectively participate in the regional power market; and A wide range o f technical assistance, for institutional/systems development and project preparation and implementation, to support ECSEE Regional Members in energy market design and implementation assistance, inter al ia to ensure full compliance with the ECSEE frameworWEU directives and compatibility o f market designs for the supply of balancing services and/or ancillary services across SEE country frontiers; and engineering/environmental services for the preparation and implementation o f investment projects (including but not l imited to projects financed by the Bank under the ECSEE APL) for a functioning electricity market.

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APLl investment project i s the rehabilitation o f Hidroelectrica’s Lot ru hydropower station in Romania. The 5 10 MW hydro power station wil l be rehabilitated into a reliable source o f ancillary services for several decades. Details are presented in Annexes 4-6.

5. Lessons learned and reflected in the project design

In terms o f actual examples, the best known regional power market i s the Nordic power market, known by the name o f its operator NordPool. I t operates in Finland, Norway and Sweden and part o f Denmark. Portugal and Spain have recently launched a jo int market, and regional power markets are also under development in Southern Africa, South-East Asia and Central America, and they are under discussion in Eastem and Western Africa. A key lesson learned from other markets elsewhere, including NordPool, and from the association o f European Transmission System Operators (ETSO) is that the progressive integration o f energy markets in SEE and the adoptiodimplementation of common security o f supply policies require close attention to be paid to the design and operation o f subsidiary electricity markets (e.g. balancing and ancillary services) which are best administered by Transmission System Operators (TSOs). ECSEE’s implementation organization includes the SEE Transmission System Operators Task Force, which interacts with ETSO and U C T E to ensure smooth integration and coordination. The role of the ECSEE Task Force o f TSOs is critical in al l phases o f ECSEE’s development and operation.

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Political commitment and adequate financial support are key ingredients o f successful reform programs. ECSEE’s development i s premised o n the political commitment o f the SEE countries as expressed in the Athens Memorandum and the forthcoming ECSEE Treaty, and it i s backed by an exceptionally strong donor involvement. The APL program has been directly l inked to ECSEE, with n o additional conditionality. Investment component included in APL1 is and components to be supported under subsequent APL installments wil l be o f proven design and streamlined approaches emphasizing turnkey contracting wil l be employed in their implementation.

6. Alternatives considered and reasons for rejection

The Bank supports the countries o f South East Europe in their efforts to rehabilitate and restructure their power sectors through regular single-country operations. This approach wil l continue and i t was also considered for ECSEE but was rejected, in favor o f a regional approach to support in a visible and coordinated manner this ambitious regional program. The APL instrument gives the Bank the flexibility to match i t s JBRD and IDA commitments to the pace of its clients. The use o f a regular investment loan instrument would have required the Bank to commit the full US$1 .O bi l l ion APL amount upfront and would similarly have required the borrowers to assume these debt obligations well ahead o f being able to actually utilize the funds. All SEE countries would know up-front that they can rely on the Bank to support them in achieving the goals of the ECSEE when they meet specific eligibility criteria and when they need Bank support. Regional approach, and the regular monitoring and regional benchmarking that wil l take place in the ECSEE process, wil l provide higher publicity and awareness, peer support, and also peer pressurehncentives for countries to improve performance so as to avoid falling behind other ECSEE members. The use o f the APL instrument also enable to launch the ECSEE APL facility to support ECSEE ahead of the ratification of the ECSEE Treaty and apply market liberalization targets as triggers in future APL installments as such targets are agreed, including derogations and subsequent modifications that may be agreed between the European Commission and ECSEE Regional Members.

C. IMPLEMENTATION

1. Partnership arrangements

First and foremost, ECSEE is a partnership among the SEE countries. They have acknowledged that solutions to pressing regional issues based o n isolated national markets are neither capable nor desirable as a means to attempt to close investment gaps and emerging demand and supply imbalances. Second, ECSEE i s a partnership between the SEE countries and the European Union. The European Commission signed the Athens Memorandum as a participant and wil l also be a signatory to the ECSEE Treaty. Neighboring Austria, I ta ly and Greece signed the Memorandum as “political participants to the Athens process” and Hungary and Slovenia (which signed as observer^^^) have since joined the EU and become political participants. Finally, ECSEE i s a partnership between the SEE countries and the donors including the Bank. Financial institutions and bilateral donors include the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (ED), the German Development Bank

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(KfW), the Uni ted States Agency for International Development (USAID), the Canadian Agency for International Development (CIDA), and France, Greece, Italy, and Switzerland.

The region and the European Commission are currently negotiating to formalize their partnership into a legally binding international Energy Community o f South East Europe Treaty (ECSEE Treaty). The Council o f the European Union authorized the Commission in June 2004 to open such negotiations, on behalf o f the European Union. The negotiations started in July 2004. ECSEE’s Ministerial Council concluded o n December 13,2004 that there i s broad agreement o n the substance o f the Treaty and directed their negotiators to conclude remaining details as soon as possible. The current time-table calls for the signing o f the Treaty in mid-2005 and ratification i s expected by mid-2006. The Treaty i s proposed to become effective when the European Union and a majority o f the Regional Members have ratified it. This schedule i s reflected in the proposed vertical triggers o f the ECSEE APL, with 6-month contingency provisions: signing by end-2005 and ratification by end-2006 (Section B.2). U p o n accession to the EU, Regional Members (signatories o f the Treaty) wil l automatically cease to be Regional Members and become participants. As members o f the European Union, participants are required to meet more demanding electricity market liberalization targets than those set for ECSEE and they will remain eligible to borrow under the ECSEE APL facility.

2. Institutional and implementation arrangements

A comprehensive coordination and implementation mechanism has been established for the development o f ECSEE. The mechanism covers and brings together political and administrative leadership, regulators, transmission system operators and other utilities, the European Commission, international financial institutions and bilateral donors:

0 ECSEE’s Ministerial Council takes place annually with the participation o f the Ministers o f Energy o f the countries and the Commissioner for Energy and Transport of the European Commission. The Council takes strategic decisions and gives guidance to ECSEE and, where necessary, formally reviews the conclusions o f other ECSEE bodiedmeetings including the Forum. Once the ECSEE Treaty i s in effect, the Council wil l report annually on ECSEE’s activities to the European Parliament and to the Parliaments o f ECSEE’s Regional Members;

0 ECSEE’s Permanent High Level Group i s composed o f representatives o f the Ministers of Energy o f the countries and the European Commission. The group meets, when necessary, on the initiative o f the Commission and the Presidency in Office, in order to prepare the Ministerial Council and to ensure the follow-up o f i t s decisions;

0 Two Task Forces have been established for ECSEE preparatory work and day-to-day coordination and cooperation: (1) the SEE Energy Regulators Task Force, which works closely with the Council o f European Energy Regulators (CEER); and (b) the SEE Transmission System Operators Task Force, which interacts with the European Transmission System Operators (ETSO) and the Union for the Coordination o f Transmission o f Electricity in Europe (UCTE);

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ECSEE Forum meets at least twice yearly. I t comprises o f representatives o f the governments, regulators and transmission system operators o f the countries, CEER, ETSO, UCTE, producing companies, consumers, the European Commission, the Stability Pact, and donors including the Bank;

0 Several donors support ECSEE (Section C.1). Donors are members o f the ECSEE Forum and usually the donor agencies also meet separately in connection with the Forum meetings. The Stability Pact assigned the role o f coordinating the donors to the European Commission in 2001. The Commission retains the overall co-ordination, setting politicalhechnical goals and organizing donors. The Commission i s funding an Athens Process secretariat, based in Athens, to support the process, inter alia, benchmarking and monitoring; and

0 The Ministerial Council, the Permanent High Level Group and the Forum are already operational and they would be recognized in the ECSEE Treaty. In addition, two new bodies, a Regulatory Board and a Regulatory Secretariat, would be set up under the Treaty:

(a) The Regulatory Board would monitor the implementation o f a l l statutory, technical and regulatory rules and would report directly to the Council. The Regulatory Board, would be composed of one representative o f the energy regulators o f the Regional Members. The European Commission would represent the European Union, assisted by one regulator o f each Participant; and

(b) The Regulatory Secretariat would monitor ECSEE’s development, in particular the functioning of the energy market and the promotion o f common security o f supply policies. The Secretariat would assist the Council, the High Level Group, the Forum and the Regulatory Board.

Romania/Hidroelectrica. The Lotru project wi l l be implemented by Hidroelectrica. It i s one o f the successor companies of Romania’s national power company Renel, which was restructured and unbundled in 1998-2000 into Hidroelectrica (hydro power generator), Termoelectrica (thermal generation), Nuclearelectrica (nuclear power), Transelectrica (transmission and system operations) and Electrica (electricity distribution and supply). Hidroelectrica owns and operates 345 hydro power plants and 5 pumping stations with a total capacity o f 6,288 MW, accounting for about % o f Romania’s power supply and most o f the ancillary services to Transelectrica, the system operator.

In accordance with the Romanian government’s energy strategy (the Road Map, July 2003), following the unbundling, the Government has launched an ambitious program for the substantial privatization o f the power sector. The first two o f the country eight electricity distribution companies have been privatized (transaction being finalized with Bank support using the partial risk guarantee instrument) and the other six are to be privatized by 2006. Three major thermal power companies have been created from within Termoelectrica and are to be privatized in 2005. These privatizations are supported by the Bank under the Programmatic Adjustment

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Loan (PAL) sector participation in hydro generation, including review o f options for private sector participation in the implementation o f some o f the projects o f Hidroelectrica and the privatization o f selected plants o f Hidroelectrica. Romania’s power sector i s discussed further in Annex 1 (Section 2).

program. The PAL program also includes the preparation o f a strategy for private

3. Monitoring and evaluation of outcomes/results

At the regional level, the ECSEE APL program wil l continue to be included (as its concept work has already been included) in the established mechanism for ECSEE coordination - Ministerial Council, Permanent High-level Group, Task Forces, and the Forum (Section C.2). The project wil l benefit f rom this elaborate, active and well-functioning mechanism for coordination, monitoring and evaluation. The new Regulatory Secretariat wil l provide an institutional mechanism for the regular monitoring of the countries’ performance against agreed benchmarks. At the country level, investment projects wil l be included in national programs which wil l be monitored by the ECSEE coordination mechanism. The Bank wil l continue to participate in the Athens process including the Forum and will also directly supervise the individual country projects.

4. Sustainability

The current situation and the key dimensions o f the short- and long-term vision for a sustainable electricity market can be brief ly outlined as follows:

0 ECSEE Participants: The main utilities in the region are already engaged in power trading, which provides the basis for further development. The next steps wil l be bilateral contracts involving unbundled utilities and large customers; followed by expanding trade as electricity markets in each country are further opened and additional customers become eligible and start exercising the freedom to choose their electricity supplier;

0 Market Sophistication: Some o f the countries including Romania are already developing day-ahead markets (operated by market operators) and real-time balancing mechanisms (operated by system operators). Over time such markets and mechanisms will become increasingly standard; and further sophistication will be developed, including intra-day and real-time balancing markets and financial instruments (possibly starting with a contract exchange);

0 Competition: Current utility-to-utility contracts and other exchanges are typically cooperative and competition i s not their key objective. As industry unbundling deepens and in line with market opening across the region, contracting and trading wil l become increasingly competitive. However, transmission system operators wil l continue to coordinate on a cooperative basis, as members of ETSO and in the framework o f the UCTE;

The f irst Programmatic Adjustment Loan (PALI) was approved on September 16,2004. PAL2 6

and PAL3 are expected to follow by end-2005 and end-2006, respectively.

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0 Integration of ECSEE into the European Union Internal Energy Market: Croatia and a part o f Bosnia and Herzegovina had already been interconnected and their power systems operated synchronously and as a part o f the main European power system administered by UCTE. The rest o f South East Europe (except Turkey) was synchronously interconnected o n October 10,2004, fol lowing the completion o f rehabilitation in Croatia and Bosnia of facilities required for the synchronous interconnection o f the whole region with the main European power system. Additional transmission l i n k s to the EU countries will be developed. They include a second connection between Romania and Hungary (with EBRD financing for implementation), and second connections between Serbia and Hungary and Croatia and Hungary, and a connection between Croatia and Italy/Slovenia (the last three interconnections are candidates for financing under the ECSEE APL). Through integration the region will secure access to a major trading partner and an important import source to meet possible electricity shortfalls and emergency support. This highlights the electricity/economy dimension in ECSEE’s integration into the European Un ion internal energy market.

5. Critical risks and possible controversial aspects

ECSEE has been developed and is being implemented through a comprehensive coordination and implementation mechanism (explained in Section C.2). It has gone through extensive discussion and debate. The Bank’s work in the ECSEE context, published in the recent framework paper (footnote 4), has highlighted risks and contributed to risk mit igation measures. Risks are being minimized by adopting a gradual approach to market opening and voluntary approach to trading. Though market i s being opened, meaning an increasing number o f electricity consumers will become eligible to choose their electricity supplier, trading i s not mandatory but voluntary between willing sellers and willing buyers - customers in individual countries need not and are not expected to move at the same pace. The pace o f liberalization may nevertheless trigger controversy. Adjustments can be accommodated in the finalization of the ECSEE Treaty, including derogations and subsequent modifications in accordance with the practice o f the European Commission.

Potential controversies can be occasionally expected in the development o f new generation capacity, where individual countries may propose projects that are not necessarily optimal choices in the regional context, in terms o f size, fuel choice, location or commissioning schedule. ECSEE implementation mechanism provides a number o f venues to discuss and resolve such issues, including the Ministerial Council as the final step. The Bank-administered currently ongoing generation investment study i s expected to help identify the highest pr ior i ty regional projects, in part facilitating the resolution o f potential disputes.

Another potential area for controversy, also mainly in the area o f power generation, is the progressive upgrading and implementation o f environmental legislation in countries that do not have short-term prospects o f EU accession. The Regional Members are to progressively align their environmental standards and specifically, new generation plants starting to operate after the ECSEE Treaty i s in effect have to comply with the relevant E C standards, and the countries are expected to accede to the Kyoto Protocol. The potential controversy i s not about the desirability

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of these objectives but their affordability - this i s an area where the region wi l l require assistance from the international community.

I t must be emphasized that the SEE region faces a fundamental risk o f not being able to meet the growing demand for electricity. ECSEE i s the regarded as the best possible mitigation measure for that risk, which if materialized, would threaten the economic growth prospects and affect the quality o f l i fe in the region. Through ECSEE - a regional market o f countries with harmonized and EU-compatible legislation and institutions underpinned by a legally binding international Treaty - the region wil l develop an EU-compatible regional market and thereby represent a much larger and more attractive investment destination to prospective investors. Integration o f ECSEE into the internal energy market o f the European Union wil l not only provide the region opportunities to export energy into the Community, but to also import energy to help meet shortfalls, including system emergency situations.

Plant-by-plant costs o f electricity generation vary within countries and across the region. In a regional market and as market liberalization advances, customers that exercise their freedom to choose their supplier will naturally seek competitive suppliers. This wi l l put pressure on higher cost and less competitive suppliers to improve their performance. But there is also potential for controversy: (a) some o f the most uncompetitive plants may be forced to close; and (b) some of the less attractiveheliable customers may end up paying more for their electricity as generatorshppliers wi l l prefer to sell to more creditworthy clients, possibly located in other countries. In principle these kinds o f potential controversies are part o f any functioning market. However, it i s expected that countries wi l l seek to mitigate some o f the impacts in the transition period by managing the init ial power contracting process. The projected tightening electricity demand and supply situation in the region wil l also provide more time for the higher cost generators to improve their performance before competition increases along with new investment. However, for the same reason, tightening demand/supply outlook, less creditworthy consumers wil l find it increasingly difficult to secure power supply. This should provide a powerful momentum to improve payment discipline.

All APL investment projects are expected to use proven designs and are not expected to contain any particular risks or controversial aspects. This i s the case in the APLl project. Under Romania’s Lotru project, an underground power station wil l be rehabilitated and restored to i ts original capacity.

6. Loan conditions and covenants

As discussed in Section B.2, the ECSEE APL is directly linked to the countries’ commitments under ECSEE. N o other triggers would be applied (including non-compliance with undertakings under ongoing national projects as long as they do not directly affect countries’ participation in ECSEE). Triggers would not be applied to loandcredits already approved. A s an example, a loan or credit approved as part o f APLl or APL2 would not have conditions (equivalent to dated covenants) about the country having to meet future triggers (that apply to APL3, or APL4-5) and a possible failure to meet such future triggers would not jeopardize the implementation of projects that are under implementation. APL projects would have financial targets for utilities (Annex 9 presents APL1 targets), financial management covenants (Annex 7 presents APL1

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F M S arrangements) and undertakings about safeguards, such as the implementation o f environmental management plans and dam safety inspections (Annex 10 presents APLl requirements).

Romania already meets the initial ECSEE conditions and the APL1 project complies with Bank safeguard policies. Going beyond the initial eligibility criteria, Romania has already started the liberalization o f i ts electricity market and i s expected to continue the opening ahead o f the ECSEE deadlines. Romania’s current level o f market opening i s 55%. The Romanian government’s energy strategy (the Road Map) sets July 2007 as the target date for full opening of the electricity market to al l consumers.

D. APPRAISAL S U M M A R Y

1. Economic and financial analyses

The benefits o f regional power trade in general and trade benefits in the SEE region specifically have been studied by Argonne National Laboratories sponsored by U S A I D and the sector work underpinning the APL program (footnote 4). A preliminary estimate is that if SEE were to operate as a regionally integrated system dispatching on a least cost basis, operating costs could be reduced by 11-15%. There would be additional cost savings relating to capital, for example, through exports f rom surplus to deficit countries, and sharing o f reserve. In the short term, savings would be reflected in lower prices where these are currently relatively high, and increased net revenues for utilities with the potential for increased exports. In the longer term, integrated operation would lead to lower prices than in a l imited trade scenario.

Some benefits from electricity trade are already being realized in the region. The main exporters in the region are Bosnia and Herzegovina, Bulgaria and Romania. Some o f the countries have substantial hydro power capacity, while others rely more o n thermal, and two have also nuclear power plants. The March 2004 framework paper discusses the country-by-county situation. This mix o f hydrokhermal m i x enhances the prospects for efficiency improvement and cost savings through regional cooperation. There is also scope for power trade between SEE and i ts neighbors, and indeed, one o f ECSEE’s key objectives is that the SEE energy market wil l be integrated into the EU internal energy market. From a technical point o f view, this would be feasible given that power systems in Europe and SEE operate according to common technical standards established by UCTE, and that SEE wil l shortly be reintegrated with the European grid. Significant potential benefits exist given non coincidental peak load periods between Russia and SEE, but synchronizing system operation between the eastern neighbors such as UkraineRussia and SEE would be a major challenge. A near-term option to increase trade would be to develop links through Moldova, to allow power transfer at least ini t ial ly with asynchronous system operation, and this is being discussed between Romania and Moldova.

Romania/Hidroelectrica finances. Details in Annex 9. Hidroelectrica i s the lowest cost generator in the Romanian power system. In accordance with Government policy, the electricity regulator ANRE kept hydro tariffs at a very l o w level until late 2003. The pol icy provided for tariff revenues to Hidroelectrica set to enable i t to cover i t s day-to-day operations, but no self- financing for investment. In the meantime, ANRE carried out rapid adjustments in the retail

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tariffs, but assigned the increasing revenues to Tennoelectrica by adjusting i ts rates for thermal generation, to bring Termoelectrica to cost recovery level and reduce the Government’s quasi- fiscal deficit. This strategy was supported by the Bank and the IMF.

In March 2004, at the request o f the Government, the Bank reviewed Romania’s electricity tariffs in close operation with ANRE and inter alia recommended that Hidroelectrica’s tariff for the regulated market be doubled by January 2005, to a s t i l l l o w level o f about U S cents 2/kWh. The Bank and ANRE agreed in principle that such tariff action i s necessary for Hidroelectrica to: (a) meet its financial obligations; (b) start generating internal funds for investments (including completion o f projects initiated years ago which had stalled due to lack o f funds); and (c) be properly integrated into the liberalizing electricity market - where the level o f market opening was raised 55% in November 2004 and is set to reach 100% in July 2007. ANRE implemented this tariff adjustment in two stages through its June and December 2004 tariff orders, and Hidroelectrica’s average tariff revenue wil l be about U S cents 2.2/kWh f rom January 2005. With these adjustments, Hidroelectrica reached a sound and generally satisfactory financial position, and the functioning o f the electricity market was greatly facilitated. This strategy i s also supported by the IMF.

Inadequate bil l collection had been a major financial issue in the power sector. With support from the Bank (under PSAL and PSAL2) and the IMF (under i ts Stand-By Arrangements), the Government and the distribution utility Electrica have progressively and ultimately successfully addressed this issue. For the whole o f 2003, Electrica achieved a bill collection rate o f 99%. Similar accomplishment has been achieved in the gas sector, where the two distribution utilities reached a bil l collection rate o f 100% for 2003. Highly satisfactory collection rates have been maintained in 2004, and with the distribution privatization now underway (Annex 1, Section 2), high collection rates are expected to be maintained also in the future.

2. Technical

The transmission system in the SEE region meets the minimum requirements for a regional market, now that the rehabilitation projects in Croatia and Bosnia and Herzegovina (the latter under the Bank’s Power I11 Project) have been completed facilitating the synchronous interconnection o f the whole region with the main European power system o n October 10,2004. Additional interconnections, within the region and with the European Union, will be required to accommodate the projected increasing power flows. The APL program wi l l support some of these additional projects, and other donors participating in the Athens process will support others - active donor coordination i s aimed at ensuring that highest priori ty projects wi l l get funded. The countries and their utilities, even with the help o f the donors, wil l not by themselves be able to fund al l necessary generation investments required to meet the growing demand for electricity in the region. Private investment wil l have to be mobilized and that is one o f ECSEE’s fundamental goals - the creation o f a hnct ioning regional market, with a stable regulatory and market framework capable o f attracting private investment.

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3. Fiduciary

The Bank’s standard fiduciary requirements apply also to the projects and utilities supported under the ECSEE APL program. Lending under the ECSEE APL program will be through IBRD loans and IDA credits to individual countries. The Bank will review the financial management systems of the executing agencies and audit reports wil l be required to be submitted. Procurement will be in accordance with the Bank Guidelines for Procurement and Bank Guidelines for he Use o f Consulting Services wil l apply. I t is possible that, within applicable guidelines, the Bank may agree that borrowers’ F M S and/or procurement systems be utilized, taking into account experience from other projects where such approaches are piloted. The proposed APLl loan to Romania does not feature such use o f country systems. Standard fiduciary and procurement arrangements wil l be applied (Annexes 7-8 present APLl arrangements).

4. Social

ECSEE’s overall social impact i s positive. The common objective o f the parties adhering to the Athens Memorandum o f Understanding is to stimulate economic growth and investment in South East Europe by improving the availability, efficiency and reliability o f network energy sources at reasonable cost. The draft ECSEE Treaty states that the Regional Members and the Commission are determined to achieve economic and social progress and a high level o f employment as wel l as balanced and sustainable development through the creation o f an area without internal frontiers for energy. All SEE countries have the prospect o f EU membership and the European Commission had made participation in ECSEE a de-facto accession condition. The Stability Pact has characterized ECSEE as a unique political chance for the SEE region, to consolidate reconciliation and provide a power driver towards a more comprehensive economic and political integration into the European Union. The overall social impact o f improving power supply; mitigating environmental impacts o f the power sector; supporting growth, investment and employment; and facilitating EU accession i s positive.

All countries in the SEE region are implementing reforms in their energy and power sectors, which inter alia involve tari f f adjustments towards full cost recovery and financial discipline including bill collection. This raises the issue o f social protection, to ensure that low-income households have access to electricity. ECSEE does not contain additional financial targets or conditions, but reinforces these ongoing national efforts. The Treaty calls for the provision o f electricity to al l citizens at a reasonable price level that nevertheless allows for adequate cost recovery and reinvestment.

Romania. The Lotru project does not involve social issues. No land acquisition or resettlement is required. Access to reliable electricity is a key driver o f economic growth and a direct means of reducing poverty by improving the productivity o f households and enhancing the delivery o f social services. Romania has virtually universal electricity service coverage and the tar i f f system includes a functioning mechanism to support low-income households. The challenge is to maintain and improve the quality o f this extensive service. The Government has concluded that along with its ongoing ambitious privatization program, active participation in ECSEE i s essential to maintain such service.

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5. Environment

ECSEE’s overall environmental impact is positive. ECSEE accelerates the introduction o f EU- compatible environmental legislation and standards in the SEE region. Two specific requirements are particularly noteworthy: (a) new generation plants starting to operate after the ECSEE Treaty is in effect have to comply with the relevant E C standards; and (b) a l l Regional Members are expected to accede to the Kyoto Protocol within one year o f the Treaty’s effectiveness.

This i s an area where the region wil l require assistance from the intemational community. The APL program is one potential source o f such assistance, for example for the rehabilitation and upgrading o f power generation facilities to improve their operational and environmental performance. N e w generation projects wil l not be financed under the APL program, but the World Bank Group wil l consider such projects separately, in parallel with the APL program. For Turkey, a project for environmental upgrading o f Afsin-Elbistan Power Plant is included in the FY05 lending program.

Romania/Lotru. Lotru i s an existing hydro power development on the Lotru river. I t was built in the 1960s/early 1970s and commissioned in 1972-75. The source o f water for the hydro plant i s the Vidra reservoir. The condition and continued safety o f the Vidra dam i s under continuous monitoring and regular maintenance and the dam is in good condition. At the same time, after three decades o f demanding heavy-duty operation as the key provider o f ancillary services, the hydro plant’s electro-mechanical equipment i s overdue for extensive rehabilitation. The rehabilitation of the Lot ru station wil l have only minor environmental impacts. The station i s located about 140 meters underground. The main impact is the disposal o f equipment replaced under the project. An Environmental Management Plan (EMP) has been prepared, public consultations have been held. It has been cleared by the Bank and submitted to the Infoshop.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.0 1) [XI [ I Natural Habitats (OP/BP 4.04) [ I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [XI Involuntary Resettlement (OP/BP 4.12) [XI [ I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI Forests (OP/BP 4.36) [ I [XI Safety o f Dams (OP/BP 4.37) [XI [ I Projects in Disputed Areas (OP/BP/GP 7.60) [ I [XI Projects on International Waterways (OP/BP/GP 7.50) [XI [I

[ I

[ I

The classification o f the APL program i s FI. APLl was rated FI when the project elements had not yet been identified. RomanidLotru is a B-category project. Most o f the country-level investment projects are expected to be B-category projects. However, individual country-level

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investment projects included in the later installments o f the APL program may contain components that would be rated into the A-category or C-category.

The proposed financing o f the rehabilitation o f the Lotru hydro project triggers OP 4.37 o n D a m Safety. Romania’s and Hidroelectrica’s dam safety laws, regulation and arrangements, in general and as applied to the Vidra dam, and Hidroelectrica’s undertakings regarding Vidra dam during the implementation o f the project, are satisfactory with respect to OP 4.37 (see also Annex 10, Section 1). The Lotru project also triggers OP 7.50 on Projects in International Waterways. Since the Lotru hydro plant is located on the Lotru river, which flows into the Olt River, which in turn flows into Danube, an international waterway in Europe, OP 7.50 applies, even if the Olt River and its tributary Lotru River f low within Romania. An exemption f rom the notification requirement under OP 7.50 has been granted: the Lotru project does not involve works and activities that would exceed the original scheme, change i t s nature, or alter and expand its scope and extent to make i t appear a new or different scheme, and will therefore not adversely affect the quality or quantity o f water flows to the other riparians (see also Annex 10, Section 1).

7. Policy Exceptions and Readiness

No policy exceptions are sought. The project is ready for financing.

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Annex 1 : Country, Sector and Program Background

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

1. ECSEEAPL

The proposed Approach for Adaptable Program Lending (APL) for ECSEE. The key pol icy and institutional elements for an APL program have been defined and established. The Energy Community of South East Europe (ECSEE) i s a regional program, with strong country commitment and with well- established coordination mechanisms at the highest political level, at the level o f regulators and transmission companies in the region, as well as among donors supporting the program, plus a the ECSEE Forum which brings them al l together with other stakeholders.

ECSEE i s a regional program and it i s proposed that the Bank investment support be provided using the APL instrument, horizontally o n a regional basis (to support up to eight countries and Kosovo) and vertically (each country can in principle receive support f rom more than one APL installment over the APL program period). An APL would enable the Bank to provide regional financial support to a regional program, yet f inancing could be tailored to the needs o f individual countries to help them meet their commitments to ECSEE.

APLl presents the ECSEE program and the f irst two individual country projects that the Bank would finance. APLl wou ld be presented to the Board - the Board approves a l l first-phase APLs under regular procedures. The approval o f subsequent APL phases i s delegated to the President and exercised by the Regional Vice Presidents under the oversight o f the Managing Director. Subsequent country projects (following the approval o f the APL program when APLl i s approved) would be processed each at i t s own pace and when ready, each PAD would be submitted for approval by ECA’s Vice President. Each PAD would be circulated to the Board for information after Management approves the follow-on operation in principle. Management approval becomes effective 10 working days thereafter, unless at least three Executive Directors request a regular Board discussion during the 10-day time period. Each country/project could proceed at i t s own pace and not be held back by the Bank needing to combine several projects for the purpose o f processing or approval.

APLs typically have 3-5 phases. In the case o f the proposed ECSEE APL, APL1 would cover the first two projects approved together with the APL program, APL2 phase would cover other country projects approved within FY05 (assuming APL1 i s approved by mid FY05 - if not, then APLl alone could cover FY05), APL3 phase would cover country projects approved in FY06, and APL4-5 phase projects approved in FY07-08 - this phasing provides for a four-year program (FY05-FY08). Each APL installment would have an implementation period up to five years. The implementation o f some o f the projects in APL5 could continue until FYO 13.

APL Triggers. T w o sets o f triggers would apply under the APL. Policy triggers would determine the eligibil i ty of an individual country to receive Bank assistance under the APL program. Project triggers would determine when an individual investment i s eligible to receive Bank funds.

Policy Triggers

A fundamental eligibil i ty criterion for a country to qualify for Bank support i s the signing o f the Athens Memorandum - al l prospective clients signed the Memorandum on December 8,2003 and thereby they a l l meet this requirement (the Athens Memorandum i s the base document o f the ECSEE).

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Horizontally under the regional APL, a country becomes eligible to borrow once it has met ECSEE’s basic entry conditions as they were defined in the Athens Memorandum - the ECSEE APL requirements are that an electricity sector regulator and a transmission system operator have been established and are operational. It i s currently expected that all Regional Members would meet this condition by mid-2006 at the latest. The beneficiary country o f APL1, Romania, already meets this condition and i s eligible for Bank support under the ECSEE APL program.

Vertically, a country remains eligible for Bank support under the ECSEE APL program as long as the country signs and ratifies the ECSEE Treaty and meets its key obligations under the Treaty:

0 signs the ECSEE Treaty; 0 ratifies the Treaty; 0

0

establishes distributions system operators; and opens i t s electricity market to non-household customers.

For a countryhorrower to be or remain eligible for Bank support under the APL program the Bank also needs to be satisfied that the countryhorrower has the ability to effectively participate in the regional market. With this trigger, the Bank would reserve the right to defer or withhold ECSEE APL support in cases where a country might have complied with the letter o f i t s ECSEE Treaty commitments but not have implemented or launched credible programs of other critical measures that are needed for market participation such as, for example, reasonable tariffs, adequate bill collection, and systems for electricity market and power system operations.

The Commission expects the ECSEE Treaty to be signed in mid-2005. The signing o f the Treaty i s proposed to be applied as a trigger under the ECSEE APL program from January 1,2006, and i ts ratification from January 1,2007.

The current version o f the ECSEE Treaty calls for the establishment o f distribution system operators by January 1, 2007, and for the opening o f the electricity market to al l non-household customers by January 1, 2008 7, It i s possible that in the course o f the final negotiations o f the ECSEE Treaty, these ambitious deadlines are adjusted - the Athens Memorandum contained even more aggressive targets which have since been reviewed and adjusted. The target dates that will be applied as triggers under the ECSEE APL program will be those incorporated in the final version o f the Treaty including derogations and subsequent modifications agreed by the European Commission and ECSEE Regional Members.

Triggers wil l not be applied to loansfcredits already approved. As an example, a loan or credit approved as part o f APL 1 or APL2 will not have conditions (equivalent to dated covenants) about the country having to meet future triggers (that apply to APL3, or APL4-5) and a possible failure to meet such future triggers will not jeopardize the implementation o f projects that are under implementation.

7 This level o f market opening i s a highly ambitious target - the EU Member Countries themselves were required to reach this target only by July 2004 - and may well s t i l l be adjusted before the Treaty i s finalized. In the EU Member States, all customers including households are to be eligible to choose their supplier by July 2007. In ECSEE, this deadline i s currently set for January 2015 -beyond the ECSEE APL program.

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CAS Framework

Bank assistance to the individual projects will be committed through loans and credits to individual countries within the Country Assistance Strategies:

(a) By signing the Athens Memorandum, countries have signaled their commitment to the regional market. This does not automatically mean that each country would be interested in borrowing f rom the BanWIDA - as o f September 2004, Bulgaria and Croatia have no t shown strong interest;

(b) There might be cases where the country program cannot accommodate additional projects. IDA countries are expected to be able to get additional IDA resources for their participation in a regional program’. Apart f rom such possible additional allocations due to the regional nature of the APL program, a l l IBRD loans and IDA credits will have to be considered in the C A S frameworks and limits o f the country programs.

Compliance by the recipient country/utility o f i t s commitments under ongoing Bank operations in the powedenergy sector will not be an additional trigger. The use o f the APL program as an additional leverage to address issues under ongoing operations wi l l be l imi ted to areas where non-compliance affects the uti l i ty’s abil ity to participate in the regional electricity market, for two reasons: (a) t o retain strong regional approach and focus o n ECSEE; and (b) to keep the implementation o f the APL program manageable. -- This approach i s in l ine with the IDA pi lot program for regional projects (footnote 8) , which calls for f lexibil i ty even when a country i s in arrears to the Bank, if i ts participation i s crucial t o the success o f a regional project.

Components for Bank Financing. The Bank has prepared a strategy for Bank support for regional energy trade under an ongoing E S W activity. The ESW highlights that significant investments are required in power generation, transmission and distribution for a well-functioning power market. At the outset, the Bank would be prepared to consider a broad range o f investments for support under the APL program.

(a) Power Generation. Major new generation projects are not proposed for Bank financing under this APL program: (a) Regional prioritization o f possible projects i s not yet available. I t will b e established under a recently launched study (one o f the Bank’s contributions to ECSEE i s the administration of this study, at the request o f the European Commission); and (b) Bank Group participation in such large projects i s better dealt with on a case-by-case basis due to their large financing needs. However, the Bank would be prepared to consider plant rehabilitations in cases where the pr ior i ty and cost- effectiveness o f the renovations can be readily established. Such projects offer one o f the best approaches to provide ancillary services to power system operators (ancillary services include a l l services other than the production o f energy provided by generators necessary for the operation o f the power system, such as frequency support, reactive power, and spinning reserve), by restoring capacity and improving plant availability and load-following capability (ability to fo l low dispatch instructions from system operators). This i s in line with the Athens Memorandum, which highlights the inclusion of plant rehabilitations among regional investment priorities.

~

8

annum during FY04-05. Individual country allocations will normally cover 1/3 o f the project cost attributable to an individual country wherever feasible. In recognition o f the significant positive extemalities o f regional projects, the remaining 2/3 o f the credit amount will be f rom the IDA pool and will maximize the flexibil i ty within IDA.

IDA has introduced an I D A 1 3 Pi lot Envelope for regional projects o f up to $450 m i l l i on per

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@) Power Transmission and System Operations. The region requires additional interconnections including l inks to UCTE. These main projects have been studied and prioritized by U S A I D as part of ECSEE preparations’. Albania-Montenegro, Serbia-Hungary, Croatia-Hungary, Macedonia-Albania, Hungary-Romania and Bulgaria-Greece are among the highest priority links. Interconnection o f Turkey (expected to be developed in 2005-06) and the Kosovo-Albania interconnection (being studied under Bank financing) were beyond the scope o f the USAID study, but both are clearly also high pr ior i ty items. Other high pr ior i ty transmission investments will also include transmission l ine and substation reinforcements within individual countries - a link between two countries or between the region and U C T E will be useful only i f power can be moved across countries with reliability.

Transmission system operators in the region are typically also responsible for system operations. This i s an area where several countries will need to upgrade their facilities and install new load dispatch and communication systems. A study carried out for U S A I D recommended the fol lowing projects for submission to international financing and commercial credit institutions: Croatia, Macedonia, and Serbia and Montenegro. The EBRD and EIB are currently considering financing the project in Serbia, but Croatia, Macedonia and Montenegro are yet to confirm financiers.

(c) Power Distribution. Power distribution projects are typically local undertakings and Bank Group support would continue to be provided mainly under individual country projects, for example, distribution reinforcement projects to modernize aging systems and reduce system losses. However, the Bank would support metering and/or telecommunications programs, which are designed to quickly enhance revenue realization and/or coordination and communications capabilities o f distribution utilities so that they can more effectively participate in the regional power market.

(d) Technical Assistance. Along with investments, APL projects can finance a wide range o f technical assistance:

(a) Institutional Development - establishing and/or strengthening the regulators, transmission companies/system operatordmarket operators, and distribution system operators to implement the required rules, codes and regulations, power exchanges and settlement systems, etc.; and

(b) Project Preparation and Implementation - engineering and environmental services to (1) prepare projects for financing by the Bank under alter APL installment and/or by other financiers and (2) help implement projects.

Environmental Considerations. The Bank’s standard environmental requirements would apply to projects supported under the APL program. An environmental management plan acceptable to the Bank would be finalized and disclosed in the country and submitted to the InfoShop pr ior to project appraisal of category B projects. More comprehensive environmental impacts assessments would be required for category A projects, if any. Mos t projects to be financed under the program are expected to be category B projects, but some generation renovation projects might receive category A ratings. The APL instrument i s wel l suited to dealing with the uncertainties and delays that environmental management

9 Under the USAID-funded South East Europe Cooperative Init iative (SECI), a Project Group o n “Development o f Interconnection o f Electric Power Systems o f SECI Countries for Better Integration to the European System” comprising transmission system operators in the region was established. The SECI Project Group undertook a “Regional Electricity Transmission Planning and Interconnection Study” which modeled the potential impact o f twelve new transmission links under various hypothetical inter (between SEE and Westem and Central Europe) regional (not intra - this study assumed that countries in SEE are individually balanced) power flows.

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plans, assessments and consultations often cause in Bank projects. Unl ike a regular multi-component investment project, which gets delayed i f any o f i t s components get delayed, under the APL program, other APL projects can proceed and only the one APL project that i s delayed i s affected. Therefore, i t does not appear necessary to “automatically” exclude al l generation projects f rom further consideration but it i s important to identify potential projects early and then launch preparatory work including environmental assessmentdmanagement plans to avoid delays o n that account later.

The Envisioned U S $ 1.0 Billion ECSEE APL Lending Program

Finance Perspective. The proposed US$1 b i l l ion size o f the ECSEE APL facil ity may appear to be very large, and it would be a significant commitment. However, the financial requirements o f power development in the region are very large, and the Bank’s US$ 1 .O bi l l ion has to be seen in this perspective. The SEE region faces a fundamental r i sk o f not being able to meet the growing demand for electricity. Significant capacity additions (of the order o f 12,000-1 5,000 MW) and plant rehabilitations (o f the order o f 8,000-9,000 MW) will be required during the next ten years, along with matching transmission and distribution system investments if demand i s to be met and severe power shortages and supply interruptions are to be avoided. Financing requirements are o f the order o f some US$30-40 b i l l i on and these are conservative estimates. The bulk o f such financing, particularly in power generation, can not be raised in the public sector alone, without significant private sector participation. Through ECSEE - a regional market o f countries with harmonized and EU-compatible legislation and institutions underpinned by a legally binding international Treaty - the region will develop a EU-compatible regional market and thereby represent a much larger and more attractive investment destination to prospective investors. Integration of ECSEE into the internal market o f the European Un ion will not only provide the region opportunities to export energy into the Community, but to also import energy to help meet shortfalls, including system emergency situations.

ECSEE APL Country Programs. The overall APL program requires an investment by the Bank of about US$l,OOO mill ion, based on current estimates and subject to further review and change. A tentative breakdown i s gwen below:

Bank Financing under the ECSEE APL Program (US$ million)

ALBANIA BOSNIA AND HERZEGOVINA BULGARIA CROATIA KOSOVO MACEDONIA ROMANIA SERBIA AND MONTENEGRO TURKEY Unallocated

TOTAL

APLl APL2 APL3 APL4

FY05 FY05 FY06 FY07

84

24 30 36

5 25

126 20 50 80 100

40 40

84 124 206 246

APLS

FY08

30

125

165 20

340

TOTAL

54 66

5 25

335 70

345 100

1,000

23

The above APL financing plan includes a proposed unallocated portion o f US$lOO mi l l i on (about lo%, in principle available any time when needed in the FY05-08 period), which could b e used to fund projects in Bulgaria and Croatia (which have not expressed strong interest in the APL facility) and/or provide higher volumes to others, or if not needed, would simply not be committed.

Approach to Co-financing. In view o f the large financing requirements and the l imi ted number o f projects that each donor can appraise and supervise, the approach in donor coordination for the financing o f ECSEE’s pr ior i ty investments i s that to the extent feasible, instead o f co-financing individual projects, donors discuss the financing o f priority investments and then take charge o f their respective projects: co- financing i s being done at the ECSEE program level, donors coordinate at the program level and each takes care o f specific projects.

2. Romania Country and Sector Background

Romania’s Energy and Infrastructure Challenge. Economic stagnation for most o f the 1990s meant less demand on Romania’s energy and infrastructure sectors, which also l ed to inadequate investments and insufficient maintenance and rehabilitation o f aging facilities and networks. Now that Romania’s economic growth has reached 4-5% per annum, pressure on energy and infrastructure services i s increasing. This i s far more than a sectoral issue. Adequate supply o f energy and availability o f infrastructure are essential prerequisites for achieving sustainable economic growth. Without economic growth momentum, it will be diff icult for Romania to both implement i t s social programs/poverty alleviation agenda and improve and maintain necessary fiscal discipline for sustainable development. Romania’s desire to j o i n the European Un ion adds to the country’s energy and infrastructure challenges the need to comply with various EU directives and other minimum standards. Improvements in Romania’s energy and infiastructure services are also needed to improve the quality o f l i f e o f individuals - including helping Romania improve maternal health, reduce chi ld mortality, contain diseases, and improve primary education.

In the power sector, as economic growth i s accelerating, demand for electricity has picked up and i s projected to increase. As a result, pressure o n electricity facilities and services i s increasing, at a time when available capacity f rom existing facilities i s declining. Raising the necessary investment resources to rehabilitate aging plants and transmission and distribution networks - the estimated US$10 b i l l ion needed in the 2005-2015 period - i s a tremendous challenge given the constraints in the public sector and current global environment for private energy investments. The Government o f Romania has concluded in its energy strategy 10 that private sector participation i s essential in meeting the investment requirements in the energy sector. In the power sector, the private sector i s projected to help raise almost h a l f - US$4.5 b i l l ion of the US10 bi l l ion investment needs. Reforms to address power sector issues were launched in the late 1990s, and substantial progress has been achieved, enabling the Govemment to realistically attempt to attract such large private investments.

Power Sector Reforms. An electricity l aw was enacted in 1998 and the electricity and heat regulatory authority ANRE (Autoritatea Nationala de Reglementare in domeniul Energiei) was established in 1999. Sector entities have gone through several reorganization and restructuring measures. At the start o f the reform process, power generation, transmission and distribution and system operations were carried out by the Romanian Electricity Authority RENEL (Regia Autonoma de Electricitate) which had been established in 1990. RENEL was corporatized (converted into a jo in t stock company) in 1998 into the National Power Company CONEL (Compania Nationala de Electricitate) and a separate j o in t stock

lo “The Road M a p for the Energy Field” was approved and published in July 2003.

24

company Nuclearelectrica which was created for " E L ' S nuclear assets. Power generation and distribution were carried out by CONEL's subsidiaries Hidroelectrica (hydro power), Termoelectrica (thermal power and heat) and Electrica (distribution and supply), a l l jo int stock companies. CONEL was directly in charge o f transmission and system operations as wel l as the commercial relationships among i t s subsidiaries (the start o f an electricity market). The restructuring process continued in 2000: (a) Hidroelectrica, Termoelectrica and Electrica became independent companies reporting to the Ministry of Industry and Resources (MIR); (b) the process to establish eight regional power distribution and supply companies (discoms) was launched by the national distributor (Electrica); (c) a national power grid company Transelectrica (Compania Nationala de Transport a1 Energiei Electrice) was established for CONEL's power transmission and system operations functions and a subsidiary company OPCOM (Operator Comercial) was established for CONEL's commercial functions and to become the electricity market operator.

Through a series o f tar i f f adjustments by ANRE, overall tar i f f revenue has been brought up to cover the cost o f supply and cross-subsidies have been largely eliminated. In parallel, Romania has started the liberalization o f i ts electricity market, along the lines o f EU directives, which require member countries to al low a gradually increasing share o f electricity to be contracted between suppliers (generators and traders) and eligible customers -- electricity users qualified to purchase power directly f rom the wholesale market. The concept o f an eligible customer i s well-known f rom the EU electricity directive, but Romania has added an additional criteria requiring the payment of bills, reflecting chronic issues in bill collection in the past. Some fundamental issues remain to be resolved before a well-functioning electricity market can emerge and before the sector can operate within the larger regional and European networks. This i s largely because o f the structure o f the generation sector -- not having a sufficient number o f commercially-oriented generators and generation unbundling based o n fuel used (hydro, nuclear and thermal) -- and the related regulatory and commercial framework. A sufficient number of buyers n o w exist as Electrica's eight discoms have become fully functional along with an increasing number o f eligible customers (currently about 2,000).

The Government's Road M a p spells out i t s strategy and implementation plans for further power sector reforms. The Government intends to increase the number o f commercially-oriented suppliers through further generation restructuring and by attracting private investors. Restructuring o f Termoelectrica into four new subsidiaries (Bucuresti, Craiova, Rovinari and Turceni) along the lines o f i t s existing subsidiary Deva (which was established under an ongoing Bank operation), with a few generation plants staying with Termoelectrica, was done in 2003. Craiova, Rovinari and Turceni were separated f rom Termoelectrica into independent companies f rom April 2004, and are to be privatized (under PAL2). Significant changes in the regulation o f hydro generation are being carried out, ahead o f the partial privatization o f Hidroelectrica envisioned in the Road Map. ANRE i s also starting preparations to put in place a fully functional supplier(s) o f last resort by the time o f full market liberalization. Four o f Electrica's eight discoms are expected to be privatized by mid-2005, and the other four are also to be privatized under PAL2.

A long with above industry structure, the Road M a p also spells out the proposed new wholesale electricity market. The Electricity Market Project (EMP) supports the development o f the kmd o f well-functioning wholesale electricity market envisioned in the Road Map, with assistance to the Government, ANRE, OPCOM and Transelectrica. ANRE has already launched the electricity market liberalization, and i s putting in place under the EMP a comprehensive set o f regulations for a new trading regime - a wholesale electricity market to be operated by OPCOM for the increasingly private generating companies and discoms, as wel l as other electricity suppliers and an increasing number o f eligible consumers. The success o f Romania's power reforms in key areas (including privatizations, investments, efficiency improvements and competitiveness) will be greatly influenced by ANRE's, OPCOM's and Transelectrica's ability to develop, regulate and operate a competitive electricity market. Such a liberalized electricity

25

market wil l also facilitate Romania's accession to the EU - the Road M a p i s focused o n the remaining steps Romania needs to take in order to meet the EU directives in the energy sector and the development o f a well-functioning electricity market i s one o f i t s key elements.

The Romanian system currently has a synchronous interconnection with some o f i t s neighbors including Albania, Bulgaria, Greece, and Serbia in the so-called UCTE second synchronous zone. On M a y 8,2003 Transelectrica became a member o f U C T E (the Union for the Co-ordination o f Transmission of Electricity), an association o f transmission system operators providing a reliable market base by efficient and secure electric "power highways'' in Europe. O n October 10,2004, the UCTE second synchronous zone was connected to the main UCTE. This opened the way for Romania (and the rest o f South East Europe) to j o i n one of the largest electric synchronously interconnected power systems worldwide. Full integration o f the Romanian power system into EU's intemal electncity market and into the continental Europe interconnected power system i s one o f the Govemment's priorities in i ts power reforms and Romania i s one o f the most active members in ECSEE's development.

26

Annex 2: Major Related Projects Financed by the Bank and other Agencies

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

The fol lowing i s a selective listing o f related projects and highlights o f those that are directly supporting ECSEE’s development.

The World Bank has ongoing projects in the electricity sector in most ECSEE countries, and technical assistance in Kosovo. These projects support various aspects o f power sector reform and restructuring, including financial aspects, and inter alia help build the foundation for the development o f a regional electricity market and participation by the respective countries/utilities. The Third Power Reconstruction Project in Bosnia and Herzegovina i s instrumental for the resynchronization of the so-called second UCTE zone (Eastern part o f Bosnia, plus Albania, Bulgaria, Macedonia, Romania, Serbia and Montenegro) with the Western part o f Bosnia and Croatia, and the main UCTE Western Europe power system.

The European Union supports power sector reform and restructuring under i ts technical assistance operations in the region. Through its Phare program, in a large project co-financed with EIB and EBRD; it i s also providing investment support to Transelectrica in Romania.

EBRD has ongoing power sector projects in Albania, Bosnia and Herzegovina, Bulgaria, Macedonia, Romania and Serbia and Montenegro, including private sector power generation in Bulgaria. EBRD has jus t approved a project that wil l implement the second interconnection between Hungary and Romania, This interconnector wi l l be one o f the means for the integration o f ECSEE in to the internal market o f the European Union.

EIB has ongoing power sector projects in Bosnia and Herzegovina, Bulgaria, Macedonia, Romania and Serbia and Montenegro, often in co-financing arrangements with EBRD andor the Bank.

KfW has ongoing power projects in Albania, Bosnia and Herzegovina, Kosovo, Serbia and Montenegro, and Turkey.

Technical Assistance. Several Bank projects also provide technical assistance. Mos t noteworthy in this context are the ongoing projects in Romania and Turkey, which support the development o f electricity markets. CIDA o f Canada i s providing regional technical assistance (the SEETEC project) for the development o f regional electricity market in South East Europe. USAID i s providing technical assistance o n legal and regulatory aspects o f power reforms and restructuring, including institution- building support to the regulator agencies, throughout South East Europe, as w e l l as regional studies on power trade and required communication facilities for the development o f ECSEE. Annex 5 o f the Bank’s March 2004 framework paper (footnote 4) contains a comprehensive l isting o f technical assistance in the ECSEE context. The Italian Government may provide technical assistance for ECSEE preparatory work to ECSEE Regional Members. The Spanish Government has provided support through a trust fund to help the Bank review ECSEE investment projects.

All o f these agencies/countries except Spain are members o f the ECSEE Forum.

27

Annex 3: Results Framework and Monitoring

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

Results Framework

PDO

The ECSEE APLl would (1) establish the ECSEE A P L facility for the implementation o f priority investments in electricity generation, transmission and distribution and technical assistance for institutionaUsysterm development and project preparation and implementation for the development o f a functioning regional electricity market in South East Europe and its integration into the intemal electricity market o f the European Union; and (2) provide priority investment support for Romania.

Intermediate Results One per Component

Component One:

Romania/Hidroelectrica - main rehabilitation contract for the Lotru Hydro project i s awarded. Sept 2005.

Outcome Indicators

(1) Electricity markets in South-East Europe are liberalized in accordance with the ECSEE Treaty (including derogations and subsequent modifications, if any) and a regional electricity market i s functioning;

(2) A P L l project i s completed in Romania and i t s electricity market and power system operates wi th the help o f ancillary services f rom Romania's Lotru project.

Results Indicators for Each Comnonent

Component One:

Lotru rehabilitation i s completed, ancillary services are available. lst unit March 2007, 2"d unit June 2008, 3rd unit Sept 2009.

Use o f Outcome Information

An increasing number o f electricity consumers are free to choose their electricity supplier.

Romania operates in the regional power market in accordance with the ECSEE Treaty.

Use of Results Monitoring

Component One:

Romania's TSO, Transelectrica, uses the ancillary services made available by Hidroelectrica f rom i t s Lotru station, increasingly unit b y unit and operates with an increasingly regional approach in power system operations. Romania's market operator OPCOM operates a functioning electricity market, wi th an increasingly regional approach.

28

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Annex 4: Detailed Project Description

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

RomaniaLotru project (EUR 66 million in APL financing):

Lot ru i s an existing hydro power development on the Lo t ru River. Lotru i s the most important provider of ancillary services 1970s and commissioned in 1972-75. The capacity o f the Lot ru power station i s 510 MW (from three Pelton turbines o f 170 MW each). The source o f water for the hydro plant i s the V id ra reservoir, which was created as part o f the Lo t ru development. I t i s a multi-year reservoir, an ideal faci l i ty for Lotru’s special operational ro le in the power system. The reservoir includes the Vidra dam, a large rockf i l l dam with a height o f 121 meters and crest length o f 350 meters. The elevation o f the reservoir i s about 1,300 meters, and the power station i s at about 500 meters, giving the project a maximum gross head o f 809 meters. In order to maximize the head - and thereby the power output - the power station i s located about 140 meters underground.

for the operation o f Romania’s power system. I t was built in the 1960dearly

The condition and continued safety o f the Vidra dam i s under continuous monitoring and regular maintenance and the dam i s in good condition (also see Annex 10, Section 1). At the same time, after three decades o f demanding heavy-duty operation as the key provider o f ancillary services, the hydro plant’s electro-mechanical equipment i s overdue for extensive rehabilitation. Due to financial constraints, Romania has only been able to replace the Pelton runners, under Swiss a id financing in the late 1990s, and defective switchyard electrical equipment. Under the proposed project, a l l other ma in equipment in the underground power station and the switchyard will be replaced. The project will restore the Lo t ru plant into a reliable source of ancillary services. Effective capacity wil l be restored to the current nominal capacity o f 510 MW. The total cost estimate i s about EUR 85 mi l l ion o f which about EUR 63 m i l l i on i s proposed to be funded under the Romania component o f APLl .

Hidroelectrica’s Institutional Development. Going beyond the needs o f the Lo t ru project, Hidroelectrica will establish under the ECSEE APLl project a twinning arrangement with a power utility with significant hydro generation and experience in operating in an electricity market under EU liberalization approach. The scope o f such twinning arrangement would include: (a) contracting - bilateral contracts, risk management using day-ahead markets and optiodcapacity contracts etc., (b) investment planning and prioritization; (c) financial planning and project finance; (d) project management; (e) human resource development, etc. The twinning arrangement will b e financed under a EUR 3 m i l l i on technical assistance component for Hidroelectrica’s institutional development.

Under the Programmatic Adjustment Loan (PAL) program (footnote 6), the Government will carry out an assessment o f privatization options for Hidroelectrica, including i t s sale as a whole or in parts. Partial (minority) listing o f Hidroelectrica’s shares might be an option, and/or some of Hidroelectrica’s existing plants and/or some unfinished projects might be offered for sale, as the next step in the Government’s efforts to attract private sector investment, management sk i l ls and competition into the power sector (Annex 1, section 2 presents Romania’s power sector strategy). This assessment could be financed under the technical assistance component of the project. However, Hidroelectrica i s not required to use the proceeds o f the Bank loan for this assessment.

”

for the safe and reliable operation o f power systems. Ancillary services (such as frequency support, reactive power, and spinning reserve) are required

30

Annex 5: Project Costs

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

Romaniahotru project:

Foreign Total Local

mill ion million mil l ion Project Cost By Component andor Activity EUR EUR EUR

Lotru Rehabilitation 14.8 58.7 73.5

Technical Assistance 0.6 3.0 3.6

Total Baseline Cost 15.4 61.7 77.1 Physical Contingencies 0.3 1.9 2.2 Price Contingencies 2.1 1.8 3.9

Interest during construction 4.4 4.4 Total Project Costs' 17.8 65.3 83.2

Front-end Fee 0.4 0.4 Total Financing Required 17.8 70.1 87.9

'Identifiable taxes and duties are EUR 16.4 million, and the total project cost, net o f taxes, i s EUR 72.5 million. Therefore, the share o f project cost net o f taxes i s 79.5%.

31

Annex 6: Implementation Arrangements

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

RomaniaLotru project:

The Lotru project will be implemented by Hidroelectrica. I t i s one o f the successor companies o f Romania’s national power company Renel, which was restructured and unbundled in 1998-2000 into Hidroelectrica (hydro power generator), Termoelectrica (thermal generation), Nuclearelectrica (nuclear power), Transelectrica (transmission and system operations) and Electrica (electricity distribution and supply). I t owns and operates 345 hydro power plants and 5 pumping stations with a total capacity o f 6,288 MW, accounting for about !4 o f Romania’s power supply and most of the ancillary services to Transelectrica, the system operator.

Hidroelectrica has experience in al l aspects o f hydropower development and operations. I t utilizes Romania’s Institute of Hydroelectric Studies and Design for specialized support o n a regular basis, including the preparation o f the Lotru project. The rehabilitation o f the Lot ru station will be implemented through one large turnkey supply and install contract. The work will be staggered so that for most o f the time during implementation, only one o f the three 170 MW units will be out o f operation. Prospective contractors will be prequalified. Two-stage bidding wil l be used, so that a l l potential technical issues can be addressed pr ior to inviting the price bids. As this wil l be Hidroelectrica’s f i rs t Bank-financed project, Hidroelectrica will engage consultants with experience in Bank-financed procurement to assist with the prequalification and tendering. The process to select the consultants i s currently underway.

Hidroelectrica has prepared and wil l implement an Environmental Management Plan for the project. Hidroelectrica will also continue to carry out annual inspections o f the Vidra dam. Supplementing these dam safety inspections, Hidroelectrica has an emergency preparedness plan (EPP) for the area downstream o f the Vidra dam. Hidroelectrica i s developing a sophisticated communication (warning) systems for Vidra, and once completed (target i s March ZOOS), the Vidra EPP will b e updated to incorporate the new warning system. These aspects o f the project are covered under the Bank‘s safeguard policies, as presented in Annex 10.

Hidroelectrica will monitor and evaluate on an ongoing basis the carrying out of the project and the achievement o f the objectives, and will submit to the Bank, at the end o f each calendar quarter, quarterly progress reports. Hidroelectnca will also prepare and furnish to the Bank, by December 3 1,2006, a mid- term review report integrating the results o f the monitoring and evaluation activities. Hidroelectrica will review the mid-term report with the Bank, by March 3 1,2007, and wil l take a l l measures required to ensure the efficient completion o f the Project, based o n the conclusions and recommendations o f the mid- term review.

32

Annex 7: Financial Management and Disbursement Arrangements

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

Romania/Lotru Project:

1. Summary

Country Issues

The first Country Financial Accountability Assessment (CFAA) for Romania was finalized in December 2003 and concluded that the overall fiduciary risk associated with the public financial management and financial accountability arrangements o f the Romanian government administration i s considered to be moderate, with the systems for accounting, financial reporting and internal control representing the areas with the higher risks and budgeting, cash management and external audit and Parliamentary oversight representing the lower risks.

The implications o f the CFAA for the project are addressed by the fol lowing actions:

0

0

0

0

0

A detailed review of the systems was performed for the implementing entity; The implementing entity has a distinct project-specific accounting ledger; Project accounting staff has been nominated for the implementing entity; The format of the FMRs and financial reports agreed with the implementing entity; and Hidroelectrica entity as wel l as the Project financial statements audited by an independent auditor annually.

Strengths and Weaknesses

The significant strengths that provide a basis o f reliance on the project financial management system include: (i) the experience o f Hidroelectrica and i t s financial staff in implementing Bank-financed projects and satisfying Bank financial management requirements, as some o f Hidroelectrica’s staff have worked on the previous Power Sector Project that was implemented by the previous National Electricity Company and o n the Electricity Market Project, implemented by Transelectrica; and (ii) the simple funds’ flow.

There are no significant wealaesses o f the project financial management system.

Implementing Entity - Hidroelectrica

Hidroelectrica was established in August 2000 as commercial legal entity, by Government decision, following the restructuring o f the National Electricity Company. The existing project implementation team established within Hidroelectrica would be responsible for the financial management aspects of the Project.

The Loan Agreement will be signed between the Wor ld Bank (IBRD) and Hidroelectrica with the Government o f Romania guarantee issued by the MPF under a Guarantee Agreement.

33

Funds Flow

Project funds will flow in respect o f each o f the sources o f project financing as follows:

(i) The B a n k loan, by direct payments or v ia the Special Account, which will be replenished o n transactional methods using Statements o f Expenditure; and

(ii) Govemment counterpart contribution, v ia dedicated Treasury project accounts.

A Special Account will be opened at a commercial bank and on terms and conditions acceptable to the Bank. Foreign currency amounts wil l be exchanged as needed in local currency (ROL), to cover eligible expenditures payments in local currency to suppliers, f rom the Special Account into a local currency transfer account that will be opened at a commercial bank and on terms and conditions acceptable to the Bank.

Government counterpart contribution payments wil l be made f rom a separate Treasury project account, being a sub-account o f Hidroelectrica’s main budgetary account, and which will be used specifically for the counterpart contributions to the project. These contributions will be received monthly in accordance with normal budget procedures.

Stafflnng

The project implementation team includes a project director, a finance team comprising the project finance Manager, project disbursement officer and project accounting officer and a number o f technical and procurement specialists. The project finance manager has good experience o f implementing Bank- financed projects and has demonstrated that it i s fully capable o f fulfilling the financial management needs of the project, as shown during the previous years worked o n the Bank-financed Power Sector Project that was implemented by the previous National Electricity Company, and the Electricity Market Project.

Accounting Policies and Procedures

The project’s accounting books and records at the various agencies will be maintained o n an accrual basis and denominated in Romanian L e i (ROL) with the exception o f the books and records in respect o f the Special Account which will be maintained in the currency o f the IBRD Loan.

Hidroelectrica has in place appropriate accounting regulations and internal controls including authorization and segregation o f duties documented in the internal control procedures and regulations.

2. Audit Arrangements

Internal Audit

Hidroelectrica has recently established i t s internal audit department. I t i s anticipated that the internal audit department will review the project’s financial management arrangements. The internal audit department will include in the annual work program the Project, as part o f Hidroelectrica’s overall activities. However, the internal audit department has, so far, relatively l imi ted experience, being recently established.

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External Audit

As o f the date o f th is report, the Borrower i s in compliance with i t s audit covenants o f the Bank-financed projects.

Hidroelectrica has been audited in accordance with I S A since i ts incorporation in 2000 by independent extemal auditors. The auditors issued a qualified-exception opinion o n Hidroelectrica’s financial statements for 2002 and 2003, due to issues relating to inventory and to the application o f I A S 36 and aspects pertaining to fixed assets. The auditors issued a disclaimer o f opinion on Hidroelectrica’s financial statements for 2000 and 2001 due to matters related to I A S 29, public patrimony, inventory, accounts payable, f ixed assets, going concem and financial position o f the company.

The Project will be audited annually both by an audit firm and on terms o f reference acceptable to the Bank. The terms o f reference for the audit have been agreed and were attached to the minutes o f negotiations. The audit scope will include the project’s books and records as maintained by the implementing entity, a l l withdrawal applications, and the Special Account. The audited project financial statements together with the auditor’s opinion thereon wil l be provided to the Bank within six months of the end o f the reporting period, being the fiscal year.

Hidroelectrica’s financial statements will be audited annually, both by an audit firm and on terms of reference acceptable to the Bank. The terms o f reference for the audit have been agreed and were attached to the minutes o f negotiations.

In addition, the Romanian Court o f Accounts (CoA), the country’s supreme audit institution, will continue to perform ad hoc extemal audits o f the implementing entities, including o f this project.

The most recent audit report prepared by the CoA, dated July 2004, covering FY 2001 - 2003 for Hidroelectrica has been reviewed. The points raised by the C o A have been satisfactorily addressed by Hidroelectrica and the CoA confirmed that Hidroelect ica has discharged i t s obligations in respect of the execution and reporting of the budget.

3. Disbursement Arrangements

The Loan proceeds would be disbursed over a five-year period (May 2005 to June 2010). The project completion date would be December 3 1,2009 and the loan closing date would be June 30,2010, when full disbursement o f the Loan is anticipated. Hidroelectrica would maintain a l l required supporting documentation for at least one year beyond the year in which the last withdrawal f rom the Loan Account has taken place and make it available for review by the Bank staff and independent auditors upon request.

35

Allocation o f loan proceeds i s shown in the Table below:

Allocation of Loan Proceeds

Expenditure Category

1. Goods (including installation)

Lotru Rehabilitation

2. TA: Consulting Services

3. Unallocated Amount

4. Premia for Interest Rate Caps and Interest Rate Collars

Total Project Costs with Bank Financing Interest during construction

Front-end fee

Total

Amount in EUR Financing Percentage million 59.30 100% of foreign expenditures, and

100% o f local expenditures (ex-factory cost), and 80% for other items procured

locally 85% incurred by foreign consultants

and 75% incurred by local consultants 3.00

3.70

0.00

66.00 0.00 0.00

66.00

Use o f Statements o f Expenditure (SOEs):

Bank funds will be disbursed under the Bank’s standard procedures including SOEs and direct payments. Supporting documentation for SOEs, including completion reports and certificates, will be retained by the Borrower and made available to the Bank during project supervision. Disbursements for expenditures above the SOE threshold o f EUR 100,000 (EUR 20,000 for individual consultants) wil l be made against presentation of full documentation relating to those expenditures. There i s n o plan to move to periodic disbursements.

Special Account:

Hidroelectrica will open and manage a Special Account specifically for this project, in a commercial bank acceptable to the Bank, including appropriate protection against set-off, seizure and attachment. Withdrawal applications for the replenishments o f the S A will be sent to the Bank monthly, or when about 33% o f the init ial deposit in the SA has been utilized, whichever comes f irst. The S A wil l be kept in the loan currency, for which the Borrower has already expressed i t s preference for Euro. Authorized allocation for S A would be EUR 6.6 mill ion, init ial allocation would be EUR 4 mill ion, increased to EUR 6.6 mil l ion after withdrawal applications and special commitments reach EUR 12 mi l l ion.

4. Reporting and Monitoring

Project management-oriented Financial Monitoring Reports (FMRs) will be used for project monitoring and supervision. The project implementing team in Hidroelectrica will produce the project’s FMRs every calendar quarter and the reports will be submitted to the Bank within 45 days after the calendar quarter- end. The formats o f the FMRs and financial reports have been agreed and were attached to the minutes of negotiations.

36

5. Information Systems

Hidroelectrica has a modern accounting software system in place implemented by a Romanian software firm which also provides system maintenance. A project-specific accounting ledger has been created within Hidroelectrica’s accounting software system to record distinctly the operations o f the project, using the existing chart o f accounts.

6. Action Plan (Agreed with Borrower)

None required.

7. Supervision Plan

During project implementation, the Bank will supervise the project’s financial management arrangements in two main ways: (i) review the project’s quarterly financial monitoring reports (FMRs) as wel l as the project’s annual audited financial statements and auditor’s management letter; and (ii) during the Bank’s supervision missions, review the project’s financial management and disbursement arrangements (including a review o f a sample of withdrawal applications and movements on the Special Account) to ensure compliance with the Bank‘s financial management requirements.

37

Annex 8: Procurement Arrangements

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

RomanialLotru project:

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers" dated M a y 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loadcredi t , the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, pr ior review requirements, and time frame are agreed between the Borrower and the B a n k in the Procurement Plan. The Procurement Plan wil l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement of Goods: Goods procured under this project would include a large (up to US$SO mill ion) Supply and Installation contract for rehabilitation o f Lot ru HPP. I t i s envisioned that procurement will be conducted in two stages with prequalification o f bidders.

Selection of Consultants:

The Borrower will select and hire consultants to provide technical, procurement and construction supervision assistance. Consultants have been engaged through advance procurement before the Loan i s approved and signed and costs will be reimbursed retroactively.

The Borrower will also select and hire consultants to provide institution building support under a twinning arrangement with a power utility with significant hydro generation and experience in operating in an electricity market under EU market liberalization approach. The scope o f such twinning arrangement would include: (a) contracting - bilateral contracts, risk management using day-ahead markets and optiodcapacity contracts etc., (b) investment planning and prioritization; (c) financial planning and project finance; (d) project management; (e) human resource development, etc.. Consultants will be engaged through the standard procedure for the selection o f f i rms .

B. Assessment of the agency's capacity to implement procurement

Procurement activities will be carried out by Hidroelectrica, the Borrower.

The key issues and risks concerning procurement for implementation o f the project have been identif ied and include lack o f experience with the Bank-financed projects and lack o f personnel experienced in international procurement. The corrective measures which have been agreed are training of the personnel of the Borrower (a training session was provided during preparation mission) and hiring o f experienced international and local consultants.

The overall project risk for procurement i s average, subject to satisfactory implementing the above corrective measures.

38

C. Procurement Plan

7

The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on November 8,2004 and i s summarized in Section E - i t consists o f one large supply and installation contract, plus consulting services for Hidroelectrica’s institutional development and project implementation (procurement support). The Procurement Plan wil l be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

8

D. Frequency o f Procurement Supervision

In addition to the prior review supervision to be carried out fi-om Bank offices, the capacity assessment of the Implementing Agency has recommended 6-month frequency for supervision missions to visit the field to carry out post review o f procurement actions.

E. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

(a) L i s t o f contract packages to be procured following ICB and direct contracting:

1 r 2

Contract (Description)

S&I Contract for rehabilitatio n o f Lotru HPP

Procurement Domestic Method Preference

(yedno)

6

Review by Bank

(Prior / Post)

Prior

Expected Comments Bid-

I I

(b) I C B contracts and a l l direct contracting will be subject to pr ior review by the Bank.

39

2. Consulting Services

1 2

(a) L i s t o f consulting assignments with short-list o f international f i rms.

3 4 5 6

Ref. No.

1

2

Description o f Selection Review Expected Comments Assignment Method b y Bank Proposals

(Prior / Post) Submission Date

Technical/ Individual pr ior Oct 04 procurement Cons. (actual) Twinning Firm pr ior June 05

Arrangement for Institution Building

(b) Consultancy services estimated to cost above US$50,000 per contract and single source selection of consultants will b e subject to pr ior review by the Bank.

(c) Short lists composed entirely o f national consultants: Short lists of consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

40

Annex 9: Economic and Financial Analysis

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

Romania/Hidroelectrica:

Regulatory Environment

Hidroelectrica i s the lowest-cost generator in the Romanian power system. The key to Hidroelectrica’s finances (including much-improved profitability from 2005) i s in the regulatory ( tar i f f and market) framework and the Romanian Government’s electricity pricing strategy for hydro, which i s implemented by the electricity regulator ANRE, as part o f the Government’s overall strategy for electricity tar i f f reform and electricity market liberalization.

Electricity Market. Through a series o f tar i f f adjustments by ANRE (discussed below), overall tariff revenue in the power sector has been brought up to cover the cost o f supply and cross-subsidies have been largely eliminated. In parallel, Romania has started the liberalization o f i ts electricity market, along the lines o f EU directives, which require member countries to allow a gradually increasing share of electricity to be contracted between suppliers (generators and traders) and eligible customers -- electricity users qualified to purchase power directly f rom the wholesale market. Liberalization was launched in 2000, and the share o f liberalized market has been raised rapidly. F rom November 2004, market opening reached 55% when a l l consumers (about 2,000) with an annual consumption o f 1 GWh or higher became eligible to choose their supplier. Full 100% opening i s set for July 1,2007, in accordance with the Government’s Road M a p and Directive 2003/54/EC.

Hidroelectrica accounts for about ‘/4 o f Romania’s power supply and most o f the ancillary services to Transelectrica, the system operator. Being the lowest-cost generator, Hidroelectrica i s one o f the main beneficiaries o f market liberalization. However, in accordance with Government Decision No. 1524/2002, ANRE was required to fully regulate Hidroelectrica’s operations beyond i t s bilateral contracts already in place f rom 2003 until the 100% liberalization o f the electricity market in July 2007. T h i s transitional strategy for hydro was reviewed in 2004, resulting in Government Decision No. 1336 in August 2004, under which hydro liberalization was restarted and i s n o w being implemented in l ine with the overall market liberalization.

Hidroelectrica’s market comprises o f four main segments: (a) “eligible customers” in domestic market supplied at market prices under bilateral contracts and through OPCOM’s Power Exchange (a day-ahead market); (b) distribution utilities that supply electricity t o regulated customers at prices regulated by ANRE; (c) Transelectrica as the purchaser o f ancillary services at prices regulated by ANRE; and (d) export customers at negotiated prices. Because o f progressive market deregulation Hidroelectrica’s sales mix has changed rapidly to i t s advantage: f?om FY2001 to FY2004, its sales at regulated tariffs have decreased from 75% o f i t s output t o about 40%, with a corresponding increase i s sales to eligible customers and exports. Further reduction in sales to the regulated market will take place f rom January 2005, when the market i s opened to 55% o f consumption.

Electricity Tariffs. Since 1999, ANRE has implemented a series of tar i f f adjustments, usually 2-3 per annum (and once, in September 2001-April 2002, monthly). In 2003, ANRE had three adjustments (January, April and September), but then decided to adopt a 6-month cycle for tar i f f reviews. Accordingly, it made two adjustments this year, in January and July 2004, and the latest adjustment i s to become effective on January 1,2005. In accordance with Government policy, ANRE kept hydro tariffs at a very l o w level, o f about U S cent OS/kWh equivalent, until late 2003. The pol icy provided for tariff

41

revenues to Hidroelectrica set t o enable to i t cover i t s day-to-day operations, but n o financing for investment. In the meantime, ANRE carried out rapid adjustments in the retail tariffs, and in the rates for thermal generation to bring the major thermal generator, Termoelectrica, to cost recovery level.

Due to the very high inflation in Romania and depreciation o f the Romanian L e u against the U S $ until 2001, ANRE’S t a r i f f adjustments in the 1999-2001 period, though significant in local currency terms, st i l l resulted in a reduction in the average retail price o f electricity in US$ terms. With the moderating inflation, since 2001 through 2004, retail tar i f f adjustments in U S $ have been o f the order o f 20-30%, and the resulting 2003 tar i f f would have been sufficient for the power sector to reach cost recovery level, had a drought not occurred. Largely to compensate Hidroelectrica for the significant losses incurred in 2003 due to the drought, ANRE doubled Hidroelectrica’s tar i f f to about U S cent l kWh equivalent in September 2003, with a corresponding adjustment in retail rates. With these adjustments, the power sector was projected to cover i t s costs in 2004.

In March 2004, at the request o f the Government, the Bank reviewed Romania’s electricity tariffs in close operation with ANRE. The March 2004 review made a number o f recommendations to the Government and ANRE regarding pol icy and tariffs, respectively. Among the recommendations was the doubling of Hidroelectrica’s tariffs by January 2005, to a s t i l l l o w level o f about U S cents 2/kWh. Such tar i f f action has been effected by ANRE. I t was necessary for Hidroelectrica to:

0

0

0

meet i ts financial obligations (including payment o f arrears incurred due to the drought in 2003, by the end o f the agreed three-year period); start generating funds for investments (rehabilitation o f i t s aging plants and completion o f projects initiated years ago which had stalled due to lack o f funds); and be properly integrated into the liberalizing electricity market - where the level o f market opening i s set to reach 55% in January 2005.

Hidroelectrica has reached a sound and generally satisfactory financial position.

Hidroelectrica’s Operations

Hidroelectrica’s Past Financial Performance. Hidroelectrica’s financial performance has been analyzed f rom FY200 1, the year in which i t commenced i t s operations as an independent company. A summary o f i t s financial performance for the period FY2001-03 and latest estimates for FY2004 are provided in Table 1 below. Highlights can be summarized as follows:

0 Profitability. In spite o f large proportion o f sales to regulated customers at tariffs w e l l below i ts average cost o f supply, Hidroelectrica eamed a prof i t in FY2001 and 2002. In FY2003 Hidroelectrica suffered a financial loss o f US$ 112 mi l l ion due to a severe drought and resulting shortfall in generation. In add incurred a loss, i t s collections f rom regulated customers also dropped. However, because of exceptionally l o w level o f debt for such a highly capitalized company (debt equity ratio o f O.Ol), i t did not default t o its lenders;

0 Billing and Collection. Hidroelectrica’s collection efficiency currently at an average o f 80% i s less than satisfactory and wel l below the overall performance in the power sector12. I t s bill

’* support f rom the Bank (under PSAL and PSAL2) and the IMF (under i ts Stand-By Arrangements), the Government and the distribution utility Electrica have progressively and ultimately successfully addressed this issue. For the whole of 2003, Electrica achieved a bill collection rate o f 99%. Similar accomplishment has been achieved in the gas sector, where the two distribution uti l i t ies reached a bill collection rate o f 100% for 2003. These highly

Inadequate bill collection had been a major financial issue in the power sector since 1990s. With strong

42

collection f rom export and eligible customers i s near hundred percent. However, i t gets pa id by the distribution companies (all s t i l l Electrica subsidiaries) serving regulated customers through a centrally-administered procedure o f distributing Electrica’s cash collections according to the suppliers’ operating needs. This system works against Hidroelectrica due to i ts low operating costs and appears to favor thermal generators particularly Termoelectrica. In response/as a result, Hidroelectrica has been unable to service some o f i t s obligations. With the expected gradual discontinuation o f this centrally-administered system in line with distribution privatization from FY 2005, Hidroelectrica’s collection efficiency i s expected to improve; and

0 Accounts Payables. Liabilities o f U S $ 1 18 million, incurred on account of power purchased in the spot market f rom Termoelectrica to meet i t s supply obligations, will be set o f f against f i t u re profits over three years FY2004-06 -- part o f the resources to be generated fi-om the ta r i f f increase in FY 2004 and the increase expected in FY 2005 will go towards paying off the short term debt and bills outstanding to Termoelectrica over the next three years. Reduction in intemal resources wil l create a financing gap in Hidroelectrica’s investment program in the medium term

Hidroelectrica’s Projected Financial Performance. Hidroelectrica’s financial performance has been analyzed through FY2012. A summary o f i t s projected financial performance for the per iod FY2005-12 i s provided in Table 1 below. Highlights can be summarized as follows:

0 Profitability. Hidroelectrica’s tariffs for regulated customers wi l l be adjusted significantly in January 2005 and further by 2007 so as to reach the level o f prices in the electricity market and avoid a tar i f f shock when the market i s fully deregulated in 2007. Even under conservative assumptions o f market prices remaining constant in real terms, Hidroelectrica’s revenue will be adequate to cover i t s costs and provide an average profit margin o f more than 20% in the FY05- 12 period. Given the projected tightening supply situation in the region, Hidroelectrica’s profitabil ity may tum out to be higher than projected. Hidroelectrica will also benefit as a competitive supplier o f ancillary services in Romania and in the region. A 50% dividend payout ratio has been assumed from FY2007 after Hidroelectrica has fully recovered i ts losses and paid i t s obligations incurred during the drought o f FY 2003. However, the past asset revaluations would result in a l o w return o n net worth, expected to be about 2% over the projection period;

0 Capital Structure. Due to the l o w level o f debt and asset revaluations, Hidroelectrica’s debt equity ratio i s only 0.02. At the end o f FY2003, revaluation reserves were US$ 3.4 b i l l i on out of i t s net worth o f US$5.5 bil l ion. Despite a projected investment program of over US$3 bi l l ion in the next eight years, i t s debt equity ratio i s expected to go up to only 0.16 in FY 2012; and

0 Internal Resource Generation and Investment Program. From 2005 to 2012, Hidroelectrica plans to invest about US$3.3 bil l ion: US$1,265 mi l l ion in rehabilitation o f i t s existing hydro projects including Lo t ru to be financed through the proposed loan, US$802 mi l l i on o n completion o f ongoing and other partially completed projects, and US$1,260 mi l l ion o n new capacity addition. Al lowed to recover depreciation on i t s revalued assets, Hidroelectrica’s intemal resource generation will be substantial and adequate to support this program. Because o f the l o w debt equity ratio and strong self-financing, Hidroelectrica’s debt service coverage wil l remain high and Hidroelectrica should be able to also access commercial sources to help finance a part of i t s investment program.

satisfactory rates have been maintained in 2004, and with the distribution privatization now underway (Annex 1, Section 2), high collection rates are expected to be maintained also in the future. This i s an important positive factor for the future financial performance o f Hidroelectrica.

43

Targets and Commitments under the Project. Basic financial targets, designed to safeguard Hidroelectrica’s financial position and operations, including i ts abil ity to provide ancillary services to Transelectrica for the reliable and efficient operations o f the Romania and regional power system, have been agreed: Hidroelectrica wil l maintain a debt equity ratio o f not less than 1.5 and a current ratio of not less than 1.2. I t was also agreed that Hidroelectrica and the Govemment would finalize during 2005 a concession agreement for Hidroelectrica’s public domain assets - as was done for Transelectrica’s public domain assets under the Electricity Market Project in 2004. The concession agreement will inter alia formalize Hidroelectrica’s continued use o f such assets in i t s operations and facilitate the treatment o f related fees to the Government and Hidroelectrica’s operations and maintenance costs by ANRE.

Mitigation of Hydrological Risk. Hidroelectrica’s financial risks (in addition to bill collection) arise due to possible hydro failure and exchange and interest rate variations. The last two are easier t o manage since Hidroelectrica has adequate foreign exchange earning f rom i ts exports, and due to i t s l o w level o f debt it will be able to cover interest rate variations even under adverse circumstances. However, mitigation o f hydro failure risk requires careful consideration:

e In the absence o f availability o f hedging products in the market, Hidroelectrica could mitigate this r i s k through contracting long term bilateral and export sales only for primary energy (firm energy capability o f available hydropower plants). As the electricity market develops and Hidroelectrica gains experience and ski l ls , Hidroelectrica could use more sophisticated techniques o f r isk assessment and mitigation;

0 The appraisal team recommended to Hidroelectrica and ANRE that in the formulation o f the Portfolio Contract for Hidroelectrica for sale to the distribution companies for their sales to the regulated customers, i t would be prudent to restrict the amount of energy that Hidroelectrica would sell through Portfolio Contracts and other bilaterally negotiated contracts to a level equivalent to primary energy o f available hydropower plants. This implies that Option Contracts between Hidroelectrica and thermal producers should be used to back-stop the Portfolio Contracts and also the bilaterally negotiated contracts. The balance (secondary energy) would be sold through OPCOM’s Power Exchange; and

e Hidroelectrica confirmed that i t intends to negotiate option contract(s) with thermal generator(s) to back-up i t s power sales contracts. Hidroelectrica will also establish a twinning arrangement with a power utility with significant hydro generation and experience in operating in an electricity market under EU liberalization approach. The scope o f such twinning arrangement would include: (a) contracting - bilateral contracts, risk management using day-ahead markets and optiodcapacity contracts etc., (b) investment planning and prioritization; (c) financial planning and project finance; (d) project management; (e) human resource development, etc. The twinning arrangement wil l be financed under the technical assistance component for Hidroelectrica’s institutional development.

44

45

Annex 10: Safeguard Policy Issues

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

The classification of the APL program and AE’L1 i s FI. Most o f the country-level investment projects are expected to be B-category projects. RomanidLotru i s a B-category project. However, individual country-level investment projects included in the later installments o f the APL program may contain components that would be rated as belonging to the A-category or C-category.

Romania/Lotru project:

The rehabilitation o f the Lotru station will have only minor environmental impacts and no social impacts. There are no issues. The station i s located about 140 meters underground. The main impact i s the disposal o f equipment replaced under the project. An Environmental Management Plan (EMP) has been prepared and public consultations have been held. I t has been cleared by the Bank and submitted to the Infoshop. Hidroelectrica wil l implement the EMP and provide in the quarterly progress reports the results o f the monitoring programs included in the EMP.

The Lot ru hydro project triggers OP 4.37 on D a m Safety:

Romania’s and Hidroelectrica’s dam safety laws, regulation and arrangements, in general and as applied to the Vidra dam, and Hidroelectrica’s undertalungs regarding Vidra dam during the implementation of the project, are satisfactory with respect to the Bank’s safeguard policy on the Safety o f Dams.

Romanian Law on the Safety o f Dams requires statutory safety assessments to be carried out once in every seven years, or more frequently if required by Romania’s National Commission for Dam Safety (CONSIB). CONSIB i s independent from Hidroelectrica; therefore the provisions comply with the requirements o f OP 4.37. A statutory assessment o f the Vidra dam was carried out in 2002. The safety of the dam was found satisfactory. A number o f recommendations were made for continued safety, to be implemented in 2002-2005. Hidroelectrica i s implementing the recommendations, as part o f i t s corporate commitment to ensure the continued safety o f all o f i t s dams. Hidroelectrica has i t s own Committee on Dam Safety, which reviews annually Hidroelectrica’s ongoing dam safety monitoring programs and reports and submits an annual report to CONSIB. Although there are no concerns and no problems are envisioned based on Hidroelectrica’s track record in general l3 and with Vidra dam specifically, at the Bank’s request Hidroelectrica agreed to: (a) submit annually to the Bank: (i) reports o f statutory and i t s own inspections o f the Vidra dam; and (ii) reports on the implementation o f their recommendations; and (b) discuss the reports with the Bank and undertake additional measures suggested by the Bank in consultation with CONSIB.

All Hidroelectrica dams including Vidra have emergency preparedness plans (EPPs), based on the 1995 law on disaster protection, 1996 law on civil protection, the 1999 Water Act, and 2001 law on dam safety, The current EPP for Vidra dam i s from 2003. I t was reviewed and found satisfactory. A copy has been placed in the project file. Hidroelectrica has an ongoing program to develop sophisticated communication (warning) systems, launched in 2002 in the potentially most critical dams and to be completed in 2006.

l3

(approved in May 2004), the Bank carried out a dam safety assessment. On that basis, a number o f unsafe dams were selected for rehabilitation under that project, al l from the priority l i s t o f Romania’s National Commission for Dam Safety (CONSIB). None o f the unsafe dams are administered by Hidroelectrica.

As part o f the preparation o f the Hazard Risk Mitigation and Emergency Preparedness Project

46

Vidra project i s underway for completion in March 2005. Once completed, the Vidra EPP will be updated to incorporate the new warning system. A t the Bank’s request, Hidroelectrica agreed to submit in 2005 the updated EPP, in draft for Bank review and in final form for Bank records, and inform the Bank about consultations with and by local authorities about the update. In addition, Hidroelectrica will keep the Bank informed o f future updates o f the EPP for Vidra.

The proposed financing of the rehabilitation o f the Lotru hydro project triggers OP 7.50 on Projects in International Waterways:

The project i s on the Lotru River, which flows into Olt River, which in turn flows into Danube on the border of Romania and Bulgaria before reaching the Black Sea. An exemption from the notification requirement under OP 7.50 has been granted: the Lotru project does not involve works and activities that would exceed the original scheme, change i ts nature, or alter and expand its scope and extent to make it appear a new or different scheme. Consequently, i t falls within the exception set forth in paragraph 7 (a) o f OP7.50 as: (a) it will not adversely affect the quality or quantity o f water flows to the other riparians; and (b) i t will not be adversely affected by other riparians’ water use.

Romania i s a signatory of the Convention on Co-operation for the Protection and Sustainable Use o f the River Danube (short title: Danube River Protection Convention - DRPC). The Convention i s aimed at achieving sustainable and equitable water management in the Danube basin. An Intemational Commission for the Protection o f the Danube River (ICPDR) was established under the Convention. The Romanian Government, Hidroelectrica and the Bank’s project team discussed the relevant provisions of this Convention and agreed that since the Lotru does not have any adverse transboundary impacts, no notification to the ICPDR i s required under the Convention. The team also reviewed Romania’s bilateral agreements on transboundary waterways with Ukraine and the former Yugoslavia and a proposed agreement with Moldova and confirmed that the provisions o f those agreements do not require notification about the Lotru project because there i s no transboundary impact. This review was facilitated by Bank’s work for the Hazard Risk Mitigation and Emergency Preparedness Project (footnote 13).

47

Annex 11: Project Preparation and Supervision

EUROPE AND CENTRAL ASIA: Energy Community o f South East Europe (APL1)

Planned Actual PCN review January 2004 January 23,2004 Initial PID to PIC February 204 March 9,2004 Initial ISDS to PIC February 2004 March 8, 2004 Appr ai s a1 September 2004 October 2004 Negotiations November 2004 November 11 , 2004 BoardRVP approval December 2004 Planned date o f effectiveness Planned date o f mid-term review Planned closing date June 30,2010

May 2005 March 2007

Key institutions responsible for preparation o f the project:

0 ECSEE - The governments of South East Europe and the European Commission

0 RomanidLotm project - Hidroelectrica and its consultants including the Institute o f Hydroelectric Studies and Design

0 RomanidElectricity market and regulatory framework - ANRE, OPCOM and Transelectrica, and their consultants

Bank funds expended to date on project preparation: 1. Bank resources: $425,000 2. Trust funds: $37,500 3. Total: $387,500

Estimated Approval and Supervision costs o f APLl : 1. Remaining costs to approval: $25,000 2. Estimated annual supervision cost: $80,000

48

Bank staff and consultants who worked on the ECSEE APL program and the APL1 RomanidLotru project included:

Name Title Unit ECSIE Kari Nyman *

Irina Kichigina Rozena Serrano Doina Visa Doncho Barbalov Nicholay Chistyakov Bogdan Constantinescu Istvan Dobozi * Stjepan Gabric Mohinder Gulati * David Kennedy * Iftikhar Khali l * Ranjit Lamech * George Moldoveanu Dejan Ostojic Gurhan Ozdora Alessandro Palmieri Jonathan Pavluk Stan Peabody Leonid Vanian Daniel Aizic Bernard Baratz Ramon Lopez-Rivera

Ludmilla Butenko Amarquaye Armar Patricio Marquez

Lead Specialist - ECSEE Team Leader, Romania, Croatia Sr. Counsel

Program Assistant Operations Officer - Romania Operations Officer - Bulgaria

Sr. Finance Officer Sr. Financial Management Specialist Lead Energy Economist - Bulgaria

Projects Officer - Croatia Sr. Financial Analyst - Serbia and Montenegro, Kosovo Sr. Energy Economist - Regional Strategy, Macedonia Lead Energy Spec. - Albania, Bosnia and Herzegovina

Sector Leader - Turkey Team Assistant - Romania

Sr. Energy Spec. - Regional Generation Investment Sr. Operations Officer - Turkey

Lead Dam Specialist Sr. Counsel

Lead Social Scientist Sr. Procurement Specialist

Consultant - Financial Analyst Consultant - Environmental Specialist Consultant - Engineering, Hydropower

Peer Reviewers: Sr. Resource Management Officer

Lead Energy Specialist Lead Health Specialist

LEGEC ECSIE ECSIE ECSIE

L O A G l ECSPS ECSIE ECSIE ECSIE ECSIE ECSIE

IEF ECCRO ECSIE ECSPF ESDQC LEGEC ECSSD ECSPS

EASEG ECSIE

SFRRM EWDEN ECSHD

--

* ECSEE AF'L program team members and task leaders for ECSEE APL country projects as listed above

49

Annex 12: Documents in the Project File

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

1. ECSEE:

ECSEE Treaty, draft, version IV.5, December 3,2004 Athens Memorandum, December 8,2003 Athens Memorandum, November 15,2002

ECSEE information at http://www.seerecon,ora/infrastructure/sectors/enerPy/index.html

2. Romania/Lotru project :

Hidroelectrica, annual reports, 2001,2002,2003 Lotru Project Feasibility Study, four volumes, Institute o f Hydroelectric Studies and Design, August 2004 L o i n Project, Environmental Synthesis, Institute o f Hydroelectric Studies and Design, August 2004 Environmental Impact Assessment, Institute o f Power Studies and Consultancy, June 2004 Vidra Dam, Institute o f Hydroelectric Studies and Design, September 2004 D a m Safety Report, Daniel Gunaratnam, prepared for the Romania Hazard Risk Mit igat ion and Emergency Preparedness Project, July 2003

Hidroelectrica information at: http://www.hidroelectrica.rokidrohomeengl.asp

ANRE information at: http : Nwww .anre .ro

50

Annex 13: Statement of Loans and Credits

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

Active Projects GEF Cancel. Undisb. Orig. Frm. ProjectID FY Purpose IBRD IDA SF

PO66065 2002 A G POLLUTION 5.15 2.38 0.68 Rev'd

PO43882 PO44 176

PO58284

PO81406 PO68062 PO67367

PO342 13 PO75 163 PO78971

PO43881 PO86949

PO56337 PO87807

PO08791 PO3925 1 PO69679 PO39250 PO57960 PO73967 PO56891 PO68808 PO08783 PO83620

2000 1999

1999

2003 2003 2003

1998 2004 2005

2004 2005

2000 2005

2005 1999 2003 1997 2002 2003 200 1 2002 2001 2005

CONTROL (GEF) AGR SUPPORT SERVS 11 .OO BIODIV CONSV MGMT (GEF) CULTURAL 5.00 HERITAGE ELEC MARKET 82.00 ENERGY EFF (GEF) FOREST DEVT 25.00

GEN'L CADASTRE HAZ MITIG HEALTH SEC REF 2 (APL #2) (CRL) IRRIG REHAB MAKIS AGRIC SUF'PT SERVS (CRL) MINE CLOSURE MINE CLOSURE, ENV & SOCIO-ECO REG (CRL) PAL PIBL PPIBL ROADS 2 RURAL DEV (APL #1) RURAL EDUC RURAL FIN (APL #1) SDF 2 (AF'L #2) SOC SECT DEV (SSD) TRANSPORT RESTRUCTURING

25.50 150.00 80.00

80.00 50.00

44.50 120.00

150.00 25.00 18.60 150.00 40.00 60.00 80.00 20.00 50.00 225.00

3.64 3.64 5.50 1.75 1.75

0.89 0.89

87.95 -7.87 10.00 8.28 6.23

24.22

13.90 13.90 149.90 0.90 86.72

79.80 3.10 53.47

19.57 19.57 120.00

152.06

17.77 14.76 34.57 56.39 64.67 9.38 42.52 225.00

1.10 3.43 4.53 -0.83 14.76 10.07 4.80 44.47 -10.62 37.64

20.65 1.10 1273.03 150.49

0.04 11.00 1.04

0.89 5.00

82.00

4.63 25.50 150.00 80.00

80.00 50.00

5.57 44.50 120.00

150.00 25.00 18.60 150.00 40.00

0.89 60.00

0.38 20.00 50.00 225.00

-6.33 80.00

7.11 1491.60

*PO89568 Banat & Dobrogea Electricy Distribution Companies Partial Risk Guarantee

76.7

51

ROMANIA STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f U S Dollars

Held D isbursed

F Y A p p r o v a l C o m p a n y L o a n Equity Q u a s i Part ic Loan Equ i ty Q u a s i Part io

1 9 9 9 A m b r o 3 0 7 0 0 0 3 . 0 7 2 0 0 3 Arct ic 12.79 0 0 0 12.79

0 2 0 0 2 a a n c p o s t 0 1 0 0 0 0 111

2 0 0 1 B a n c a Romaneasoa 3 29 2 0 0 1 I C M E 1 0 . 5 5 0 0 0 10 5 5

0 1998 Krupp C o m p a 1.51 0 0.65 1.51 3 /4 /2002 M F I M F B Romania 10 0 0 0 5

2 0 0 4 R Z B R o m a n i a 40 0 0 0 4 0 1997 R a m b o x 0 23 0 0 0 0 . 2 3 2 0 0 3 Ro-F in 2 0 0 4 R o m a n i a n - A m e r ..

0 0 0 0 0 0 0 1 0 0

0 0 111 0 0 0 3 . 2 9 0 0 0

0 0 0 0 0 0.65 0 0 0 0 0 0 0 0 0

0 0 5.02 0 1 . 0 1 0 0 0 3 0 0 0 3 0 0 0

0 0 0 2.22 0 0 0 0 0 0

0

0 0 2003104 B a n c a Comerc ia la

19-34/01 R o m l e a s e 2 22 2 0 0 4 Trans i l van iabank 25 5 7 0 0 0 3.84

Tota l Portfol io. 1 1 7 2 5 111 10 0 6 5 86 5 1 1 1 1 1 0 0.65

A p p r o v a l s Pend ing C o m m i t m e n t

L o a n Equity Q u a s i Part ic 2 0 0 5 B a n v i l R o m a n i a 15 0 0 0 2 0 0 4 M i n d b a n k 7 0 0 0 2 0 0 3 R o - F i n Mor tgage 0 0 1 0

Tota l Pend ing Commi tment : 22 0 1 0

I

52

Annex 14: Country at a Glance

EUROPE AND CENTRAL ASIA: Energy Community of South East Europe (APL1)

POVERTY and SOCIAL Romania

2003 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1997-03

Population (“A) Labor force (“A)

Most recent estimate (latest year available, 1997-03)

Poverty (% of population below national poverty line) Urban population (“A of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% of population) Illiteracy (“A ofpopulation age 15+) Gross primary enrollment (“A of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983

GDP (US$ billions) Gross domestic investmenffGDP Exports of goods and servicesiGDP Gross domestic savingsiGDP Gross national savingsiGDP

Current account balanceiGDP Interest paymentsiGDP Total debffGDP Total debt serviceiexports 15.2 Present value of debffGDP Present value of debffexports

1983-93 1993-03 (average annual growfhj GDP -3.1 0.7 GDP oer caDita -3.3 1.2

21.7 2,260 49.2

-0.6 0.1

25 56 70 20

58 2

99 100 98

1993

26.4 28.9 23.0 24.0 24.2

-4.5 0.5

16.2 6.3

2002

4.3 7.2

Europe & Central

Asia

473 2,570 1,217

0.0 0.2

63 69 31

91 3

103 104 102

2002

45.7 23.1 35.4 17.3 19.7

-3.3 1.2

34.3 19.0 33.2 91.3

2003

4.9

Lower- middle- income

2,655 1,480 3,934

0.9 1.2

50 69 32 11 81 10

112 113 111

2003

57.0 24.6 36.3 16.8 18.2

-5.8 1.4

39.8 17.5

2003-07

5.0 5.2 5.0

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growih) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and sewices

Manufacturing

1983 1993

.. 22.6

.. 42.1

.. 28.7

.. 35.3

.. 63.7

.. 12.3

.. 28.0

1983-93 1993-03

1.4 -1.5 -4.3 0.9

1.5

3.2 -0.3 0.3

.. 11.9

2002 2003

13.1 13.0 38.1 37.9

31.5 48.8 49.1

76.0 70.8 6.6 12.4

41.2 44.1

2002 2003

-3.9 3.0 7.2 4.6

5.6 5.2

3.0 7.3 2.1 4.6 7.3 9.2

12.1 34.4

Development diamond*

Life expectancy

GNI Gross per - __ primary capita enrollment

Access to improved water source

Romania Lower-middle-income group

. -~

I Economic ratios’

Trade

-Romania ~~ Lower-middle-income group

Growth of investment and GDP (%) ___

30 -

15

0

. I5

.30 1

00 01 02 03

-GDI +GDP I ~~~ ~ -~ __

~~~~

I Growth of expo& and imports (%) 45 -

30 - 15

0

-15

PRICES and GOVERNMENT FINANCE

Domestic prices ('33 change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, indudes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Textiles Metals Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, /oca//US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1983

-0.4

1983

1983

12,239 10,369 1,870

-710 0

1,160

-1,538 378

1983

9,129 1,742

0

1,875 220

0

0 31 7

-123 0 0

0 362 102 259 118 141

1993

256.1 227.4

33.2 4.3

-0.4

1993

4,892 959 574

2,856 6,522

964 1,872 1,432

1993

5,691 6,934 -1,243

-1 45 214

-1,174

1,120 54

956 760.0

1993

4,282 403

0

363 19 0

99 743 167 94 0

120 189

0 189 19

169

2002

22.5 24.2

29.6 0.6

-2.6

2002

13,876 1,782 1,181 9,851

17,862 1,174 2,272 5,111

79 70

114

2002

16,223 18,825 -2,602

-459 1,536

-1,525

3,327 -1,802

7.306

2003

15.3 19.2

29.9 1.3

-2.2

2003

17,618 2,282 1,482

12,534 23,983

1,737 2,615 7,017

79 71

111

2003

20,646 25,113 -4,467

-705 1,861

-3,311

4,445 -1,134

9.364 33,055.5 33,200.1

2002 2003

15,680 22,686 2,173 2,296

0 0

3,163 3,673 196 214

0 0

259 0 143 16

2,060 1,967 1,144 0

21 0

340 222 335 131 120 145

76 69 139 -82

21 4 -1 4

Inflation (%) 200 i

98 99 00 01 02 03

1 -GDPdeflator - 0 - C P I I

1 Export and import levels (US$ mill.) j 1 30'000 T 1 20 000

10 000

I O

O3 I 97 98 99 00 01 02

Exports w Imports

Romania

Development twnomics

Current account balance to GDP (%)

Composition of 2003 debt (US$ mill.)

G 2,771 A 2,296

F. 13,667

4 - IBRD 3 - IDA D - Other multilateral F . Private

E - Bilateral

G - Short-term ; - IMF

54