Document of The International Development Association acting as Administrator of the Interim Trust Fund For Official Use Only Report No. P-7028 BIH MEMORANDUM AND RECOMMENDATION OF THE MANAGING DIRECTOR TO THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION ON A PROPOSED INTERIM FUND CREDIT IN AN AMOUNT OF SDR 7.7 MILLION TO BOSNIA AND HERZEGOVINA FOR A SECOND EMERGENCY EDUCATION RECONSTRUCTION PROJECT June 6, 1997 Human Resources Sector Operations Division Central and Southern Europe Departments Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of June 5, 1997) Currency Unit: Bosnia and.Herzegovina Dinars (BHD) US$1.00 = BHD170.00 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BH Bosnia and Herzegovia CY Calendar Year DC Direct Contracting Federation Federation of Bosnia and Herzegovina EBRD European Bank for Reconstruction and Development EC European Community ECHO European Community Humanitarian Organization EU European Union FY Fiscal Year of the World Bank GPN General Procurement Notice ICB International Competitive Bidding IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund IMG International Management Group IS International Shopping LIB Limited International Bidding MOE Ministry of Education, Science, Culture, and Sports NCB National Competitive Bidding NS National Shopping PIU Project Implementation Unit RS Republika Srpska (Serbian Republic) SNCB Simplified National Competitive Bidding SOE Statement of Expenditures TA Technical Assistance TFBH Trust Fund for Reconstruction of Bosnia and Herzegovina UNDP United Nations Development Program UNESCO United Nations Educational, Scientfic, and Cultural Organization UNHCR United Nations High Commission for Refugees UNICEF United Nations Children's Fund USAID United States Agency for International Development FISCAL YEAR January 1 - December 31 Vice President: Johannes Linn (ECAVP) Country Director: Christine Wallich (EC2DR) Division Chief: Ralph W. Harbison (ECI/2HR) Responsible Staff: James Stevens, Task Manager (ECI/2HR) Ilona Szemzo, Social Sectors Operations Officer (EC2BA) Zorica Lesit, Project Officer ( V-C2BA) Michael Mertaugh, Principcal Education Economist ( ECI/2HR) Edith Santos, Sr. Staff Assistant ( EC12HR) Peer Reviewers: Bo Matsen, Education Specialist (EU ECHO, Sarajevo) Sarah Forster, Economist (EC2BA) FOR OFFICIAL USE ONLY BOSNIA AND HERZEGOVINA SECOND EMERGENCY EDUCATION RECONSTRUCTION PROJECT Credit and Project Summary Borrower: Bosnia and Herzegovina Beneficiaries: Cantons and Ministries of Education of the Federation and Republika Srpska Credit Amount: SDR 7.7 million (US$11.0 million equivalent) Credit Terms: 35 years, including 10 years of grace, at standard IDA service charge Financing plan: IDA (ITF) Credit US$ 11.0 million Total US$ 11.0 million Economic Rate of Return: Not applicable Poverty Category: Although this project is not a poverty-focused operation, it will contribute to the alleviation of poverty by increasing the educational qualifications and future productive potential of the school-age population. Sth.f Appraisal Report: Not applicable. A Technical Annex is attached. Map: IBRD 28377 Project ID Number: BA-PE-45313 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE MANAGING DIRECTOR TO THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION (THE ASSOCIATION ACTING AS ADMINISTRATOR OF THE INTERIM TRUST FUND) ON A PROPOSED INTERIM FUND CREDIT TO BOSNIA AND HERZEGOVINA FOR A SECOND EMERGENCY EDUCATION RECONSTRUCTION PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed Interim Fund Credit for SDR 7.7 million to Bosnia and Herzegovina to help finance the Second Emergency Education Reconstruction Project. 2. Background. Prior to the start of hostilities, Bosnia-Herzegovina had a well developed education system, financed by public expenditures accounting for about 6 percent of GDP. Virtually all children completed the eight-year primary cycle; most also completed a four-year secondary cycle. As elsewhere in the region, the preponderance of secondary education was offered in the form of narrowly specialized vocational education programs, oriented to the needs of industry. Higher education was offered through four universities, comprising 46 institutes and faculties. Higher education enrollments emphasized science and engineering. 3. All aspects of education were severely disrupted by the war. Many teachers were drafted into military service, killed, displaced, or took refuge in other countries. Approximately 70 percent of schools have been damaged, destroyed, or requisitioned for military uses. Many schools have been rendered all but useless through loss of windows, furniture, and educational material. Budgetary resources to pay teachers and provide textbooks and other educational materials are very scarce in most parts of the country. 4. In spite of these difficulties, due to the extraordinary efforts of parents, local governments, and aid agencies, most children managed to continue their education throughout the war, though in a very disrupted form. Where there was heavy fighting, instruction was halted for almost a year. In some cases, classes were never resumed. Where classes managed to continue, the school year was shortened to less than half its normal duration. To accommodate students displaced from destroyed schools and the influx of displaced persons in some areas, most schools function in two or three shifts of 3 1/2 hours each. With the collapse of public transport, children in rural areas and even in city suburbs have difficulties reaching school. Many teachers currently in the classroom are wartime volunteers, and lack pedagogical training. 5. Sector Issues and Policies. The most immediate need in the education sector is to restore acceptable teaching and learning conditions in schools at all levels throughout the country, which involves rehabilitating damaged schools, rebuilding destroyed schools, and providing suitable textbooks, educational materials, and equipment to schools throughout the country. Meeting this need will require not only investment financing for school reconstruction, but also stable budgets to meet the recurrent financing needs of schools. There are also several longer-term, structural issues in the sector relating to economic transition and decentralization of education functions inherited from the former Socialist Federal Republic of Yugoslavia: a. Clarification of Roles. The single most important structural issue which needs to be resolved in the education sector involves roles of different levels of government in financing and delivering education at various levels. According to the 1994 Federation Constitution, the ten cantons of the Federation are responsible for delivering education, but cantons may delegate this responsibility upward to the Federation or downward to communities. In the short term, this policy is impractical -2- because most cantons lack the capacity to manage education delivery. More fundamentally, the small size of some cantons is inconsistent with efficient management of some education functions. In higher education, for example, cantonal universities would be too small to capture economies of scale and allow for a diversity of high-quality course offerings. Efficient administration may also call for particular functions -- such as curriculum development, educational materials development, and quality control -- being carried out at the Federation or the State level. In view of the sizeable differences in income among the cantons, there may also be a need for some inter-cantonal transfers to provide for education of at least minimally acceptable quality in the poorest cantons. The Republika Srpska (RS) has a unitary form of administration, and does not face the same issues of cantonal/central roles as the Federation. But there are, nonetheless, some issues of central versus local roles which need clarification in the RS -- in particular, concerning the financing of education. b. Change in Content of Education Programs. There are needs for content change at all levels of the education system to promote post-war reconciliation among the parties to the former conflict. In addition, at the secondary level -- especially in vocational/technical programs - a significant reform of structure and content is needed to reorient education to the requirements of a modem market economy and a democratic society. At the same time, secondary vocational education may be expected to play a major role in providing qualifications to those who dropped out of school or were otherwise deprived of access to secondary education during the war. Rather than rebuilding all secondary vocational/technical schools which were destroyed or damaged during the war, reconstruction should take the form of developing practical, "second chance" or remedial education programs for students and young adults. These programs should stress adequate preparation in general subjects, while at the same time starting the process of developing vocational/technical education programs which embody a more modem curriculum than was in use before the war. To start with, this should involve reinforcing general academic studies in secondary education and orienting more students to general education. The science and math content of vocational education should be strengthened. Vocational education should be developed for broad occupational families, rather than for narrow occupations. More generally, pedagogy should be modernized to give greater emphasis to the synthesis and application of facts rather than rote memorization and the simple mastery of facts. And there should be more emphasis upon self-directed learning and teamwork learning, rather than passive absorption of material provided by the teacher or the textbook. Application of these changes has far-reaching implications for new teacher-training programs and new educational materials, including school libraries. Over time, there is also a need for modification of the content of social studies and other courses to explain recent political developments in the region in a fashion which encourages reconciliation among the parties of the former conflict. c. Higher Education Administration and Finance. In order to offer higher education programs of high quality and diversity, a number of changes are needed in the administration and financing of higher education. Because it is not possible to maintain high quality programs in multiple, small, free-standing institutions, there is a -3- need to move towards an integrated higher education system with critical mass in particular fields and open access to specialized programs in different parts of the country. This will require harmonization of program and admission requirements, and reciprocity agreements across faculties. In order to contain the budgetary cost of higher education, there is a need for introduction of student fees and the development of needs-based and merit-based scholarships. Budgetary resources should be allocated to programs on the basis of student demand rather than program inputs in order to ensure the market relevance of program offerings in higher education, and upon evidence of efficient past use of budget resources. 6. Recovery Strategy for the Sector. There is agreement on the part of the Government, the Bank, and other donors that initial reconstruction efforts in the education sector should not wait until these questions are resolved. First, the needs are urgent, and it would be both unnecessary and unfair to deprive the current generation of children an education of acceptable quality while awaiting a solution to these problems. Second, there are a number of reconstruction actions which are clearly justified regardless of how outstanding issues are resolved. And, finally, starting the process of reconstructing the education sector is helping to resolve some of the outstanding issues -- for example, by helping build implementation capacity at various levels of government, and by supporting activities in which cooperation is mutually beneficial to the various parties to the former conflict. 7. To address the needs in the education sector, a priority reconstruction program was developed jointly by the Government and various donors, and presented to the donor community at meetings hosted by the European Commission and the World Bank in December, 1995, and April, 1996. Indicative estimates were included for the Republika Srpska, for which little concrete information was then available. Setting reconstruction priorities inevitably involves difficult choices among the many urgent and legitimate needs throughout the education system. Because the available resources are so limited, these choices involve tradeoffs between the highest priority needs, and needs which can appropriately be deferred to a later stage in the reconstruction process. 8. The priority program was designed to address only the most urgent requirements for restoring minimal operations in the sector in a coherent fashion, starting with those investments which could have an immediate impact and benefit the largest possible number of school children. The program focuses on: a) ensuring that all classrooms are at least minimally supplied with textbooks and educational materials for students and teachers, b) reconstructing lightly damaged primary and general secondary schools to make them functional quickly, c) upgrading teaching skills, d) providing remedial education for young people whose education suffered during the war, and e) strengthening capacities for education administration at all levels. The priority program does not include essential and well justified reconstruction activities which are more appropriately addressed at the next stage of the reconstruction effort -- either because they will take longer to implement, or because they will require policy decisions not yet taken. On that limited basis, total foreign financing needs for priority education investments in the first three to four years of the reconstruction program in the education sector were then estimated at about US$180 million. On the basis of updated information (particularly, for the Republika Srpska), they are now estimated at about US$275 million. 9. As the first concerted initiative within this priority reconstruction program, the Federation Government and the World Bank jointly prepared an Emergency Education Reconstruction -4- Project early in 1996.1 Discussions were initiated with RS authorities too late to permit inclusion of the same range of reconstruction activities as the Project provides for the Federation. The Project supports a limited set of emergency actions to help restore adequate teaching and learning conditions in schools throughout the country. The Project comprises: a) the refurbishment of 91 large primary schools throughout the Federation including the construction of three new primary schools in areas with no alternative school capacity, b) the provision of selected books and educational materials to schools throughout the Federation, c) strengthening of education implementation capacity at the Federation and canton level, and d) support for preparation of similar reconstruction activities for education programs in the Republika Srpska. 10. This first project was designed to meet urgent needs for education reconstruction. Two objectives which guided the design of the project were, first, to improve the educational situation of as many school children as possible with the very limited resources available, and, second, to do so quickly -- preferably, by the start of the 1996/97 school year. Those principles led to the project's focus on .rimary education. They also led to the compressed implementation period for the project -- eighteen months in duration, with most of it in the first six months. 11. The total cost of this first Emergency Education Reconstruction Project was estimated at US$ 32.8 million. Of this total, US$10 million is being provided by the World Bank under earlier commitments -- half in the form of a grant under the Trust Fund for Reconstruction of Bosnia and Herzegovina (approved by the Board in May, 1996), and half as an IDA Credit (approved by the Board in June, 1996). At the time of appraisal, it was expected that the remaining US$22.8 million cost of the Project would be provided by other donors. 12. Although there have been firm commitments from other donors totalling US$82 million for the education sector, relatively little of this amount -- about US$10.5 million -- has been provided for the specific activities included under the Emergency Education Reconstruction Project. Other donor commitments for the education sector include both humanitarian assistance and reconstruction activities - including a number of initiatives at the secondary and tertiary levels. Implementation has often taken place in a decentralized manner with individual schools or municipalities. That.is particularly true of'resources channeled through NGOs. In such cases, the authorities in Bosnia and Herzegovina at the Entity, regional/municipality (RS) or canton level (in the Federation) are often not informed of donor activities. Such separately concluded financing arrangements, while producing quick results on the ground, may have generated inconsistencies among reconstruction activities. They also cannot ensure that donor financing is directed to the most urgent needs, as set forth in the Government's priority reconstruction program. An Education Reconstruction Task Force, comprising representatives of the Ministries of Education for both Entities, the Bank, the EU, and other major education donors and NGOs, has been established to coordinate donor reconstruction efforts in the education sector. This group is beginning to make progress in ensuring that reconstruction efforts of the various donors are consistent with each other, and with the most urgent reconstruction priorities in the sector. 13. In view of the Emergency Education Reconstruction Project's dependence upon cofinancing, it was deliberately designed in prioritized modules, to permit timely implementation of as much of the Project as possible with the funding available. Implementation of the funded portions of I/ Memorandum and Recommendation of the President dated April 22, 1996; Report No. P-6856-BIH. -5- the Project is at an advanced stage, as is preparation of the other portions of the Project. The status of these activities is described below: a. School Reconstruction/Rehabilitation. Damage assessments have been completed for all schools which are to be refurbished under the Project. Of the US$10 million provided by the World Bank, over 95 percent has been committed; nearly US$8.0 million has been disbursed. An additional US$8.0 million has been disbursed by other donors. Contracts have been signed and rehabilitation is in progress for 28 primary schools -- 12 in Croat-majority cantons and 16 in Bosniac-majority cantons. Other donors are financing the rehabilitation of 24 schools located in Bosniac-majority cantons. Another 39 schools are ready for tendering for rehabilitation as soon as the necessary financing is secured. Additional financing for this work is being sought. Designs for the three new schools to be constructed under the Project -- all in Bosniac-majority cantons - are being prepared. Two of the new schools are being financed by NGOs. Financing for the remaining new schools is being sought; designs for these schools are under preparation, with financing provided by UNDP. b. Educational Materials. Contracts have also been signed for US$1.5 million of educational materials and 20 textbook titles to be provided under World Bank financing. Additional titles are being procured with financing provided by the Soros Foundation and the German Government. An additional 24 textbook and supplementary reader titles are ready for tendering, as soon as the necessary financing is secured. All of this is for schools in Bosniac-majority areas. (The Project is not providing textbooks and educational materials for the Croat-majority areas of the Federation or the Republika Srpska because educational officials of these areas prefer to continue to obtain these supplies from Croatia and the Federal Republic of Yugoslavia, respectively.) c. Institutional Development. On the institutional development front, a Project Implementation Unit (PIU) has been established in the Federation Ministry of Education and is overseeing implementation of all aspects of the Emergency Education Reconstruction Project. This coordination is working well for those portions of the Project which are financed by the World Bank. Coordination of elements of the Project which are financed by other sources was initially hampered by the PIU's lack of information and jurisdiction over these activities. This process is now working better, based upon shared information between the PIU and the implementing agencies. Two resident staff in the World Bank Bosnia Resident Mission in Sarajevo provide support to implementation staff for education and related reconstruction activities. Other Resident,Mission staff are also available to provide expert support on specialized implementation questions on procurement and civil works execution. 14. Because other donor financing for the first Emergency Education Reconstruction Project has not materialized to the degree expected, and in order to prevent further delays in implementation of the unfunded portions of the priority program, the Bank and the Government have agreed to pursue a two-part strategy for meeting these needs: First, the limited IDA funds available for the education sector in 1997 (US$11 million) would be used to: a) partially cover the financing gap for the priority primary school reconstruction program developed under the first project, b) initiate education reconstruction in the Republika Srpska, and c) begin to address the unresolved -6- medium-term questions of education finance and administration. The proposed Second Emergency Education Reconstruction Project, described below and in the Technical Annex (Report No. T-7029 BIH), would support these actions. Second, The Government, the Bank, and other major donors in the sector -- including the European Union, the United Nations High Commission for Refugees (UNHCR), UNESCO, UNICEF, USAID, IMG and the Soros Foundation -- would work together to elaborate a 1997 school reconstruction program for the Federation and the RS to which donors would be expected to commit financing. Preparation of the 1997 school construction program is well advanced, and will be presented to the Education Sector Task Force in June 1997. The 1997 Program is described in more detail in Part B of the Technical Annex for the proposed project. 15. World Bank Strategy and Programs in Bosnia and Herzegovina (BH). On April 1, 1996 Bosnia and Herzegovina fulfilled the conditions of succession to the Socialist Federal Republic of Yugoslavia's membership in the Bank, IDA and IFC. Membership is retroactive to February 25, 1993. Since early 1995, the Bank Group has been deeply involved in developing a donor-funded reconstruction program for BH. A joint mission of the Bank, IMF, EU and EBRD in late 1995 resulted in the proposed Priority Reconstruction Program which was first presented to a donors meeting, co-sponsored by the Bank and the EU in Brussels, a week after the signing of the Paris/Dayton Peace Agreement. This meeting led to donor commitments of about US$600 million for immediate reconstruction activities. A second donors conference, again co-chaired by the Bank and the EU, was held in mid-April, 1996 and resulted in additional donor pledges on the order of US$1.2 billion for financing priority reconstruction activities during 1996. 16. The Bank has been following a broad-based assistance strategy, which seeks to leverage its limited resources with significant resource transfers from donors. Before arrears resolution, the Bank supported a series of immediate assistance programs through a special Trust Fund for Reconstruction of Bosnia and Herzegovina (TFBH) which is providing US$125 million on concessional terms equivalent to those offered by IDA, as well as an additional US$25 million in grant funds. Seven emergency operations, committing the entire US$150 million, were approved under the TFBH. The resolution of arrears, made possible by the Consolidation Loan package, allowed regular IDA lending to begin in June 1996. The Bank is continuing to focus on supporting the reconstruction program in the infrastructure and social sectors, with special emphasis on employment creation. Its assistance program has also been broadened to include support for the initial phase of the government's macroeconomic and institutional reforms. The Transition Assistance Credit, approved by the Board in September 1996, was the first operation focusing on major institutional issues of the Federation and a series of structural reforms that are needed for advancing the transition to a market economy. It provides, inter alia, for reintegration of the health finance system in the Federation. Further policy-enhancing investment or adjustment operations are envisaged to support institution-building at the state and entity levels, in the financial sector as well as trade liberalization. In the area of reconstruction, future Bank operations will support the recovery of industry and employment generation, the rehabilitation of infrastructure (energy and transport), agriculture (forestry) and basic social services (health and education). Limited IDA resources will continue to make partnerships with other donors crucial. 17. Project Objectives. The primary objective of the Second Emergency Education Reconstruction Project is to continue the work begun under the first Emergency Education Reconstruction Project to restore adequate teaching and learning conditions in primary schools throughout the country. Secondary objectives are to help develop an appropriate process of education finance and administration, to build government implementation capacity to plan and deliver education -7- programs at the State, Entity, canton, and region/municipality levels, and to facilitate communication and cooperation on education issues within the Federation, and between the Federation and the RS. 18. Project Description. The proposed Second Emergency Education Reconstruction Project would support: (a) reconstruction of about 18 primary schools in the Federation and about seven primary schools in the RS (estimated cost, US$8.1 million); (b) provision of furniture and equipment for classrooms in these schools (estimated cost, US$1.0 million); (c) provision of textbooks and educational materials for Federation schools (estimated cost, US$0.8 million); (d) support for incremental recurrent costs for the two project PIUs -- one for the Federation, and one for the Republika Srpska (estimated cost, US$0.4 million); and (e) technical assistance to improve education finance and administration (estimated cost, US$0.5 million). A fuller description of these components is provided in the Technical Annex (Report No. T-7029 BIH). For the Federation portion of the proposed project, all of the schools to be reconstructed and all of the textbooks and educational materials to be provided have been selected from the original priority list approved for inclusion under the first Emergency Education Reconstruction Project. All are ready for tendering. The share of financing allocated to the Federation under the Project (approximately US$7.0 million) will only partially fill the financing gap of about US$13 million which remains under the first project. Other donor financing is being sought to cover this residual financing gap. Most of the financing provided under the Project for the Republika Srpska would support school reconstruction, since RS textbook needs are being supplied by the Federal Repulblic of Yugoslavia. 19. Construction, furniture and textbook procurement will be carried out by local contractors to be selected on a competitive basis. Architectural designs and specifications have been developed through International Management Group (IMG), using UNDP financing. War-damaged schools to be reconstructed under the proposed project in the Federation, as well as textbooks to be procured, were selected and agreed with the Bank during preparation of the first Emergency Education Reconstruction Project. The main criteria for selection of schools under the 1996 priority reconstruction program were: a) light-to-medium war-related damages which could be repaired quickly, and b) the absence of other facilities which could accommodate the school-age children in the catchment area. (Selection criteria under the 1997 school reconstruction program will be modified to include more severely damaged schools, as well as damaged schools in all UNHCR priority areas for the return of refugees and displaced people.) Funding for the RS under the proposed project (approximately US$4.0 million) will be used for school reconstruction, furniture, technical assistance, and incremental recurrent costs for project implementation. 20. Project Costs and Financing. The total cost of the proposed Second Emergency Education Reconstruction Project is estimated at US$11.0 million, for which financing is requested under the proposed ITF Credit. This includes an estimated US$0.5 million for technical assistance on education finance and administration, for which donor cofinancing is being sought. If donor financing is identified, the amount reserved in the proposed ITF Credit for this activity would be used to augment the civil works portion of the Project. No price or physical contingencies have been included in the Project, given the modular nature of the Project and its expected short disbursement period. The Project is expected to disburse over a 24-month implementation period; most disbursements are expected to occur in the first six months, as they did for the first project. Estimated costs for the proposed project reflect recent experience under the first Emergency Education Reconstruction Project, in which school reconstruction costs have averaged about US$400 per square meter. These unit costs are lower than the average costs of recent school reconstruction financed by other donors, in part reflecting the advantages of competitive contract award under the -8- Project. The cost of school furniture under the first project, financed by the EU, was about US$4,000 per classroom; the average unit cost for textbooks procured under the first project was less than US$3 -- slightly below appraisal estimates. 21. The proposed project would be financed through an IDA ITF Credit of US$11.0 million. The Project would finance 100 percent of locally-procured contracts, net of taxes. The Project does not include taxes or duties. There are no taxes on civil works, and the Government has waived import taxes and duties on goods through December 1997. An extension of this exemption through the implementation period for the Project will be sought. Both local and foreign expenditures under the Project will generally occur in hard currency, since, for an interim period, the deutschmark is expected to be the only currency accepted throughout BH. 22. Project Implementation. The Second Emergency Education Reconstruction Project would be implemented over a 24-month period, with the bulk of contracting and disbursements occurring during the first six months after effectiveness. (Fully 70% of the funds under the first project were disbursed within six months of effectiveness). Responsibility for implementation of the Federation portion of the Project would be delegated by the State and by the Federation Ministry of Finance to the Federation Ministry of Education. Responsibility for implementation of the RS portion of the Project would be delegated by the State and by the Republika Srpska Ministry of Finance to the RS Ministry of Education. As with the first project, implementation in the Federation would be managed by a Project Implementation Unit (PIU) established at the Federation MOE. Implementation in the RS would be managed by a Project Implementation Unit established at the RS Ministry of Education. The Project would provide for the incremental costs of running the two PIUs (estimated at US$0.4 million), under arrangements established for the first project. It would also provide for auditing by an independent auditor. Disbursements would be made principally through two Special Accounts established by the State at a commercial Bank, one for the Federation and the other for RS. PIU authorities on both sides will continue to strengthen regional implementation capacity by implementing the school rehabilitation program in partnership with regional authorities -- cantons in the case of the Federation, and regions/municipalities in the RS. 23. All design documents and specifications necessary for the Project are being prepared with assistance of the International Management Group (IMG), with financial support from UNDP. The Federation PIU has proven its capacity under the first project to carry out procurement and manage the supervision of works. It is expected that the RS PIU will be equally capable of managing its portion of the proposed project, with punctual support from technical assistance and from Bank staff based at the Resident Mission in Sarajevo, at the Budapest regional Human Resources Hub, and at Headquarters. Both PIUs will continue to receive support from the IMG for assessments and designs, from the PIU of the ongoing Economic Recovery Project in the areas of project supervision and procurement, and from an independent project management and procurement consultant financed by the Government of the Netherlands. 24. Project Sustainability. The key question of sustainability for the investments which the Project will support is whether the responsible authorities will have the resources necessary to operate the project schools and other schools effectively in the future. This means, in particular, whether they will be able to attract and retain qualified teachers, and whether they will have the budgets necessary to pay for utilities, replenishment of educational materials, and school maintenance. -9- 25. Contrary to expectations, information acquired at appraisal confirms that teachers are being paid throughout the country even at this early stage in the recovery process. This is encouraging evidence that local revenue bases are beginning to recover, and that local budget authorities consistently give a high priority to the most urgent recurrent financing needs of schools. For the medium term, however, there is a clear need to develop secure financing for utilities and other recurrent costs of schools which are not now being met. In the current rapidly evolving budget situation, an important question is whether local revenues will be adequate to finance these needs and continue to provide adequately for teachers' salaries. Several activities are planned in the coming year to help ensure that there are adequate resources for education and other key public services in the future. A Public Expenditure Review which the Bank has carried out with counterparts in both Entities in May 1997, examines revenues and expenditures of central and cantonal governments, and recommends measures for increasing tax yields and improving the efficiency of the budgetary process. Implementation of these measures would be supported under a planned investment operation and a planned policy-based operation later in 1997. In addition, the proposed Second Emergency Education Reconstruction Project would address the needs for financial sustainability of education by supporting several actions to strengthen education finance and administration: a) carrying out of a study of options for education finance and administration, which examines the experiences of other decentralized education systems in relation to the decentralization experience under the Socialist Federal Republic of Yugoslavia, b) dissemination of findings of the study through preparation of a report and presentation at a national seminar, and c) supporting consensus-building for the recommended measures through local seminars, study visits, etc. Conduct of the study under agreed terms of reference and an agreed time schedule, and implementation. of the recommendations of the study would be conditions of the proposed Second Emergency Education Reconstruction Project. Continued implementation of the recommendations of the Education Finance and Administration Study would also be supported through conditionality in a planned policy-based project in support of public expenditure reform. 26. Other education policy issues are being addressed by ongoing initiatives of the Education Reconstruction Task Force, with Bank participation. Bank-executed trust fund financing provided by the Government of the Netherlands is being used to support policy development in the areas of secondary technical and vocational education, teacher training, and textbooks, with the aim of improving educational quality and making the delivery of education more efficient and cost-effective. It is expected that investments to implement these policies will be supported under subsequent Bank- financed operations, as well as by other donors. 27. Lessons Learned from Previous Bank Operations. The implementation experience of the first Emergency Education Reconstruction Project has demonstrated the effectiveness of the proposed implementation arrangements. Nearly US$7 million has been disbursed for school reconstruction and educational materials within 11 months of the Bank's identification mission for the Project, and within 6 months of the Project's effectiveness. This successful implementation experience under the first project has confirmed the importance of intensive -- preferably field-based - - supervision, carried out in close collaboration with other donors. - 10 - 28. Agreements Reached. Agreement was reached at Negotiations on the following points: a. that the Federation of Bosnia and Herzegovina and the Republika Srpska would: i) carry out by September 30, 1997 an Education Finance and Administration Study under terms of reference satisfactory to the Association; ii) provide to the Association for comment by October 31, 1997 the findings and recommendations of the Education Finance and Administration Study; and iii) subsequently implement the recommendations of the Study, as discussed and agreed with the Association; b. that the State, the Federation and RS shall employ independent auditors by November 30, 1997; c. that the Federation and RS shall coordinate with the Procurement Monitoring and Audit Unit for purposes of procurement monitoring and audit for their respective parts of the Project; d. that the Federation and RS shall by February 28 of each year prepare a report on the progress achieved in carrying out their respective parts of the Project and review such report, together with the Association, by March 31, 1998; and e. that the execution of a Project Agreement between IDA and at least one of the Entities and the corresponding Subsidiary Credit Agreement between Bosnia and Herzegovina and such Entity would be a condition of effectiveness for the proposed ITF Credit. Execution of the Project Agreement between IDA and the other Entity and the corresponding Subsidiary Credit Agreement between Bosnia and Herzegovina and such Entity would be a condition of disbursement for that portion of the Credit allocated to that Entity. 29. Environmental Aspects. Because it is not expected to have any adverse environmental impact, the Project has been placed in environmental screening Category C. Hazardous materials such as asbestos will not be used in school construction or rehabilitation under the Project. 30. Program Objective Categories. The Project will contribute to the alleviation of poverty by increasing the educational qualifications and future productive potential of the school-age population. The Project will also contribute to employment growth through the support which it provides for school rehabilitation by local contractors. The Project falls into a single Program Objective Category: Poverty Reduction and Human Resources Development. 31. Participatory Techniques. Local governments were instrumental in defining school rehabilitation priorities for the first Emergency Education Reconstruction Project. In addition, a beneficiary assessment was carried out in May 1996, under Dutch Trust fund financing. This assessment confirmed the priority attached by parents, teachers, government officials and business leaders to the activities which the proposed project would support. - 11 - 32. Benefits. The proposed Second Emergency Education Reconstruction Project would help to restore the provision of education of acceptable quality throughout the Federation and RS, thereby improving the educational qualifications and future productive potential of their school-age population. The Project would also improve the Government's capacity to manage education programs, and would continue to provide a framework for cooperation between the two partners of the Federation, and encourage similar cooperation between the Federation and the Republika Srpska. 33. Risks. The risk remains that a renewal of hostilities among the various partners of the new State and Federation could undermine implementation of the Project, and prevent (or severely delay) achievement of the project's objectives. However, the reconstruction program itself is helping to reduce this risk by creating incentives for cooperation by all parties. 34. Recommendation. I am satisfied that the proposed Interim Trust Fund Credit would comply with Resolution No. 184, adopted by the Board of Governors of the Association on June 26, 1996, establishing the Interim Trust Fund, and I recommend that the Executive Directors approve it. James D. Wolfensohn President by Caio K. Koch-Weser Attachments: Schedules Technical Annex Map Washington, D.C. June 6, 1997 - 12 - Schedule A Bosnia and Herzegovina Second Emergency Education Reconstruction Project Estimated Cost and Financing Plan Project Cost Summary (US$ millions) School Textbooks Operating Education Expenditure Category Reconstuc- Costs Finance & tion Administr. Total Investment Costs Civil Works 8.1 8.1 Furniture and Equipment 1.0 0.1 1.1 Educational Materials 0.8 0.8 Technical Assistance 0.2 0.5 0.7 Recurrent Costs 0.3 0.3 Total Proiect Costs 9.3 0.8 0.4 0.5 11.0 Project Financing Plan (US$ million) School Reconstruc- Operating Education tion Textbooks Costs Finance & Total Administr. World Bank (ITF/IDA) 9.3 0.8 0.4 0.5 11.0 Total 9.3 0.8 0.4 0.5 11.0 - 13 - Schedule B Bosnia and Herzegovina Second Emergency Education Reconstruction Project Proposed Procurement Arrangements Procurement Arrangements Procurement methods (US$m) a/ Category of Expenditures NCB b/ SNCB b/ NS Other Total Civil works 3.9 4.2 8.1 (3.9) (4.2) (8.1) Furniture & Equipment 0.5 0.5 c/ 1.0 (0.5) (0.5) c/ (1.0) Textbooks 0.8 0.8 (0.8) (0.8) Technical Assistance 0.7 0.7 (0.7) (0.7) Recurrent Costs 0.4 0.4 (0.4) (0.4) Total Financing 5.2 4.2 0.5 1.1 11.0 (5.:2) (4.2) (0.5) (1.1) (11.0) NCB = National Competitive Bidding SNCB = Simplified National Competitive Bidding NS National Shopping a/ Figures in parentheses represent ITFIIDA financing. b/ All civil works will be procured using national competitive bidding and simplified national competitive bidding procedures. c/ All school furniture and equipment will be procured using NCB and NS. - 14 - Schedule BI Bosnia and Herzegovina Second Emergency Education Reconstruction Project Disbursement Categories and Schedule (US$ million) Implementation Federation RS Total % of Expenditures to be Financed Category 1. Civil works 4.6 3.3 7.9 100% (net-of taxes) 2. Goods 1.5 0.3 1.8 100% of foreign expenditures 100% of local expenditures (ex-factory cost) and 85% of local expenditures for other items procured locally 100% 3. Technical Assistance 0.5 0.2 0.7 100% 4. Recurrent Costs 0.3 0.1 0.4 5. Unallocated 0.1 0.1 0.2 TOTAL 7.0 4.0 11.0 Estimated Disbursements FY97 FY98 FY98 Credit Q3/4 Q1/2 Q3/4 Annual 4.0 6.0 1.0 Cumulative 4.0 10.0 11.0 Cumulative as % of total 36 91 100 - 15 - Schedule C Bosnia and Herzegovina Second Emergency Education Reconstruction Project Timetable of Key Project Processing Activities (a) Time Taken to Prepare: 2 months (b) Project prepared by: Government (MOE) with World Bank assistance (c) First World Bank mission: August 27 - 30, 1996 (d) Appraisal: September 30 - October 4, 1996 (e) Negotiations: January 21, 1997 (f) Planned date of effectiveness July 22, 1997 (g) List of relevant ICRs and PPARs: None - 16 - Schedule D STATUS OF BANK GROUP OPERATIONS IN BOSNIA-HERZEGOVINA A. STATEMENT OF BANK LOANS * (As of May 31. 1997) USS Million Loan Fiscal (Less Cancellations) No. .Year. Borrower Pro4ect .LD Undlisbursed Loans/Credits/Grants IBM W 4038-BOS 1996 Bosnia and Herzegovina Consolidation Loan A 28.6 0.0 4039-BOS 1996 Bosnia and Herzegovina Consolidation Loan B 284.9 0.0 4040-BOS 1996 Bosnia and Herzegovina Consolidation Loan C 307.1 0.0 Total K, Of Which: Repaid l Total Now Held by dhe Bank: 589.5 (Under Disbursement) TF-024030 1996 Bosnia and Herzegovina Emergency Recovery Credit 45.0 5.8 TF-024031 1996 Bosnia and Herzegovina Emergency Fann Reconstuction 20.0 1.1 TF-024032 1996 Bosnia and Herzegovina Emergency Water Supply 20.0 2.0 TF-024033 1996 Bosnia and Herzegovina Emergency Transport 35.0 12.0 TF-024034 1996 Bosnia and Herzegovina Emergency District Heating". 20.0 7.2 TF-024035 1996 Bosnia and Herzegovina Emergency War Victims Rehabilitation 5.0 1.5 TF-024040 1996 Bosnia and Herzegovina Emergency Educaon Reconstraction 5.0 0.0 Total 2897-BOS 1996 Bosnia and Herzegovina Emergency Education Reconstruction 5.0 0.4 2896-BOS 1996 Bosnia and Herzegovina Emergency War Victims Rehabititation 5.0 5.0 2902-BOS 1996 Bosnia and Herzegovina Emergency Housing Repair 15.0 3.9 2903-BOS 1997 Bosnia and Herzegovina Emergency Power Reconstruction 35.6 22.5 2904-BOS 1997 Bosnia and Herzegovina Emergency Public Works and Employment 10.0 4.6 2905-BOS 1997 Bosnia and Herzegovina Emergency Landmines Clearance 7.5 6.7 2906-BOS 1997 Bosnia and Herzegovina Emergency Demobiliation and Reintegration 7.5 5.6 2914-BOS 1997 Bosnia and Herzegovina Transition Assistance Credit 90.0 0.0 N001-BOS 1997 Bosnia and Herzegovina Emergency Industry Re-Start Guarantee 10.0 10.0 N002-BOS 1997 Bosnia and Herzegovina Emergency Microenterprise/Local Initiatives 7.0 5.1 N003-BOS 1997 Bosnia and Herzegovina Essential Hospital Services 15.0 15.0 Total M 7U The status of these projects is described in a separate report on all Bank/IDA financed projects in execution. which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. b' Consolidation Loans A. B, and C were approved on June 13. 1996 and became effective on June 14, 1996. c/ Trust Fund for Bosnia and Herzegovina. d/ Disbursements to date am from the Project Start-Up Advance (of which US$2 million is disbursed for Gas). - 17 - B. STATEMENT OF IFC INVESTMENTS (As of December 31. 1996) Gross Commitments ---------US$ Million------- Fiscal ear Oblisor Type of Business Loan Eguity Total 1977 Tvornica Kartona I Ambalaze Cazin Timber, Pulp and Paper 4.28 0.0 4.28 1985 Sour Energoinvest Industrial Equipment and Machinery 9.80 0.0 9.80 Total Gross Commitments 14.08 0.0 14.08 Less: Participations, Cancellations. Terminations. Exchange Adjustments. Repayments. Writeoffs and Sales 23.5 2.6 26.1 Total Commitments Now Held by IFC 14.08 -- 14.08 Total Undisbursed -- -- Total Outstanding 14.08 -- 14.08 June 6, 1997 - 18 - SCHEDULE E Bosnia and Herzegovina at a glance Bosnia Europe & POVERTY and SOCIAL and Central Low. Herzegovina Asia income Development diamond' Population mid-1995 (millions) 4.4 488 3,182 GNP per capita 1994 (USs) 1/ .. 2,270 390 GNP 1994 (billions US$) 11 .. 1,108 1,241 Average annual growth, 1990-94 Population (%) -1.1 0.4 1.8 Labor force (%) 0.6 1.9 Most recent estimate (latest year available since 1989) Poverty: headcount index (% of population) Urban population (% of total population) 49 65 28 Life expectancy at birth (years) 71 68 63 Infant mortality (per 1,000 live births) 19 23 68 Child malnutrition (% of children under 5) .. . 38 Access to safe water (% of population) .. . 67 - Bosnia and Herzegovina Illiteracy (% of population age 15+) .. . 35 Low-income group Gross primary enrollment (% of school-age population) .. 97 105 Male .. 97 112 Female .. 97 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1995 1996" Economic ratios* GDP (billions USS) 2 1 3 3 Gross domestic investment/GDP Exports of goods and non-factor services/GDP 17+0 20.2 Gross domestic savings/GDP Gross national savings/GDP 4 0 1.0 Current account balance/GDP -9.0 -26.0 Savings - Investment interest payments/GDP Total debt/GDP . 168.0 115.0 Total debt service/exports . 135.0 66.0 Present value of debt/GDP . .. 106.0 Indebtedness Present value of debt/exports . .. 529.0 1976-84 1985-95 1995 1996 1996-04 (average annual growth) - Bosnia and Herzegovina GDP 33.0 50.0 17.2 - Low4ncome group GNP per capita .. .. Exports of goods and nfs 72.0 36.7 STRUCTURE of the ECONOMY 1975 1991 1995 1996 (%6 of GDP) Agriculture 9.5 Industry 43.0 5. - Manufacturing Services 47.5 so 91 s2 03 94 5s Private consumption 100.0 102.0 General government consumption 20.0 20.0 - GD GDP Imports of goods and non-factor services 63.0 73.0 1975-84 1985-95 1996 1996 (average annual growth) Agriculture Industry Manufacturing 100 Services so - 90 91 92 93 94 9S Private consumption 9.0 28.0 General government consumption 3.7 36.0 Gross domestic investment Imports of goods and non-factor services 22.0 78.0Epo Int Gross national product Note: 1995 and 1996 data are preliminary estimates. Large proportion of data are missing due to scant and partial data in case of Bosnia and Herzegovina at this early stage of post-war period. 1/ 1994 GNP figures are not available. For 1995, EC2CO estimates GDP to be US$ 2.5 billion and GDP per capita to be US$ 595. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - 19 - Bosnia and Herzegovina PRICES and GOVERNMENT FINANCE Domestic prices 1975 1985 1995 1996 Inflation (%) (% change) Consumer prices .. 3 Implicit GDP deflator .. .. 3 Government finance o (% ofGDP) 90 91 92 93 94 9S Current revenue .. .. 33.0 42.0 Current budget balance (on a cash basis) .. .. -0.3 0.0 -GDP de. ---CP Overall surplus/deficit .. TRADE (millions US$) 1975 1985 1995 1996 Export and Import levels (mill. USS) Total exports (fob) .. .. 152 336 Food 3000 Manufactures 2.500 - Other .. .. 2.00 . Total imports (cif) .. .. 1,082 1,882 1,00 Food .. .. .. .. i.0o Fuel and energy .. .. .. .. soo Capital goods .. .. .. .. o - Export price index (1987=100) .. . . . 9 90 91 92 93 94 95 Import price index (1987=100) .. .. .. Exports in Imports Terms of trade (1987=100) .. BALANCE of PAYMENTS 1975 1985 1995 1996 (millons USS) Exports of goods and r, n-factor services .. .. 381 658 Imports of goods and non-factor services .. .. 1,334 2,380 o Resource balance .. .. -953 -1,622 89 90 91 92 93 94 95 Net factor income .. .. -242 -220 -lo Net current transfers .. .. 1,002 1,094 '6ifent account balance to GDP ratio 1%) Current account balance, -193 -848 -20 before official transfers .. .. -570 -1,406 - Financing items (net) .. .. .. .. . - Changes in net reserves .. .. -138 -398 Memo: Reserves including gold (mill USS) .. .. .. 69 Conversion rate (ilocalUS$) .. EXTERNAL DEBT and RESOURCE FLOWS 1975 1985 1995 1996 I (millions US$) Composition of total debt, 1995 (mill. US$) Total debt outstanding and disbursed .. .. 3,518 3,768 IBRD .. .. 625 625 IDA .. .. .. 190 A Total debt service .. .. 382 468 625 IBRD .. .. 73 .. C IDA .9 D Composition of net resource flows 37 Official grants .. .. .. .. F Official creditors .. .. .. .. 1847 Private creditors .. .. .. .. E Foreign direct investment .. .. .. .. 803 Portfolio equity .. World Bank program Commitments .. .. .. .. A - 8RD E - Bilateral Disbursements .. .. .. .. 8- IDA D - Other multilateral F - Private Principal repayments .. . C - IMF G - Short-term Net flows .. Interest payments .. Net transfers .. International Economics Department 4/1197 21 Debt and debt service are astimates 31 ntornation refers only to Federation of BiH, riation in the Republika Srpska was -9 parcent  MAP SECTION  IBRD 28377 I 6~ o ZogebTo Osijek To Zagreb To Zogreb C R 0 A T l A To Vinkovci To Osijek Bc.,ar.. ao bE d 'sn.a 4.'• Gr ad., ca5° ~F,ecr-- Der.EnPa0 4 c Ca2-. Dm.n Frn-r \ n a Bar. L ... - br > arolorn Mot* ( crD \~ 0 J:r c |Bonic.--i .. np on Im ad Glarre 0 1I Euso M - p- .. Fr,n - Go,rn1, *,kuI . ..- Sara evo PcrqtrccTo - -