Document o f The World Bank

FOR OFFICIAL USE ONLY

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$156.5 MILLION

TO

REPUBLIC OF CROATIA

FOR THE

RIJEKA GATEWAY PROJECT

May 9,2003

Infrastructure Sector Unit South Central Europe Country Unit Europe and Central Asia Region

Report No: 25371-HR

document has a restricted distribution and may be used by recipients only in the performance o f heir official duties. I t s contents mav not otherwise be disclosed without World Bank authorization. I

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CURRENCY EQUIVALENTS

(Exchange Rate Effective M a y 9,2003)

CurrencyUnit = HRK HRKl = US$0.12

US$ = HRK6.65

CAS CES CFAA EA EBRD ED1 EMP ERR FRR GDP GPN H A C H C HZ I C R LR MMATC MOI MPWRC NEAR N P V PHRD PMS/BMS PPF PPP P R 4 RMG SOE TTFSE V T M S

FISCAL YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS

Country Assistance Strategy Croatian Employment Service Country Financial Accountability Assessment Environmental Assessment European Bank for Reconstruction and Development Electronic Data Interchange Environmental Management Plan Economic Rate o f Return Financial Rate o f Return Gross Domestic Product General Procurement Notice Hrvatske Autoceste (Croatian Motorways Company) Hrvatske Ceste (Croatian Roads Company) Hrvatske Zeljeznice (Croatian Railways Company) Implementation Completion Report Luka Rijeka d.d. (port operating company) Ministry o f Maritime Affairs, Transport and Communications Ministry o f Interior Ministry o f Public Works, Reconstruction and Construction Nor th East Adriatic Range Net Present Value Japan Policy and Human Resources Development Fund Pavement and Bridge Management System Project Preparation Facility Private-Public Partnership Port o f Rijeka Authority Rotterdam Maritime Group (Consultant) State Owned Enterprise Trade and Transport Facilitation in Southeast Europe Vessel Traffic Management System

Vice President: Country Managermirector:

Sector Managerhlirector:

Johannes F. Linn, ECAVP Andrew N. Vorkink, ECCUOS Eva MolnarIHossein Razavi, ECSIE

Task Team Leader/Task Manager: Michel Audige, ECSIE

FOR OFFICIAL USE ONLY CROATIA

RIJEKA GATEWAY PROJECT

CONTENTS

A. Project Development Objective

1. Project development objective 2. K e y performance indicators

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. M a i n sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices

C. Project Description Summary

1. Project components 2. K e y policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower commitment and ownership 5. Value added o f Bank support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

F. Sustainability and R isks

1. Sustainability 2. Critical r isks

Page

3 3

3 4 9

9 12 12 12

14 14 15 16 16

16 17 22 22 23 25 27

27 27

This document has a restr icted d is t r ibut ion and may be used by recipients on ly in the performance o f the i r off icial duties. I t s contents may no t b e otherwise disclosed without W o r l d Bank authorization.

3. Possible controversial aspects 28

G. M a i n Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1 : Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, o r Financial Summary Annex 6: (A) Procurement Arrangements

(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project Fi le Annex 9: Statement of Loans and Credits Annex 10: Country at a Glance Annex 11: SWOT analysis for the port o f Ri jeka Annex 12: Environmental Assessment Executive Summary Annex 13: Land Acquisition and Resettlement Plan Annex 14: Government Project Pol icy Letter (Draft)

28 28

30

30

31 34 39 40 43 62 69 73 74 76 78 80 87 96

102

MAP( S) No. IBRD 32355

ECSIE

Date: May 9,2003 Sector Manager: Eva Molnar Country Director: Andrew N. Vorkink

Lending Instrument: Specific Investment Loan (SIL)

Team Leader: Michel Audige Sector(s): Roads and highways (45%), Ports, waterways and shipping (45%), Central government administration ( 10%) Theme(s): Export development and competitiveness (p), Infrastructure services for private sector development (P), Social risk reduction (S), Other public sector govemance

Project ID: PO43 195

(SI Project Financing Data [XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others:

Borrower Rationale for Choice of Loan Terms Available on File: I Yes Proposed Terms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Commitment fee: 0.75% Financing Plan (US$m): Source Local Foreign Total BORROWERS 45.20 I 64.40 I 109.60

Amount (US$m): $156.5 -

Years to maturity: 15 Front end fee (FEF) on Bank loan: 1.00%

IBRD Total:

I

Borrower: PRA, HC, H A C Loan amounts including front-end fees (USSm): PRA (55. l), H C (84.1), and H A C (17.3) Responsible agency: PRA, HC, H A C Port o f Rijeka Authority (PRA) Address: Riva 1 Street, Rijeka 51 000 Contact Person: Mr. Bojan Hlaca, Director General Tel: 385-51-212 974 Fax: 385-51-213 112 Email: Lucka-uprava-ri@ritel.hr Other Agency(ies): Croatian Roads (HC) Address: Voncinina 3, Zagreb 10001 Contact Person: Mr. Vladimir Bizjak, President o f the Management Board Tel: 385-1- 472-2580 Fax: 3 85- 1-472-258 1 Email: zvonimir.nagy@hc.tel.hr

56.50 100.00 156.50 101.70 164.40 266.10

Croatian Motorways (HAC) Address: Voncinina 2, Zagreb 10001 Contact Person: Mr. Stanko Kovac, President o f the Management Board Tel: 385-1-469-4400 Fax: 385-1-469-4500 Email: stanko.kovac@hac.hr

Expected closing date: 09/30/2009

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A. Project Development Objective

1. Project development objective: (see Annex 1)

The overall objective o f the project i s to increase Croatia's trade competitiveness by improving the international transport chain through the Rijeka Gateway for both freight and passengers traffic through modernizing the port and road network connections, and privatizing port operations. Specific objectives include: (i) increasing efficiency and improving financial, social and environmental conditions at Rijeka Port, rehabilitating infrastructure and replacing equipment; (ii) preparing to redevelop part o f Rijeka Port for urban purposes; and (iii) improving international road connections linked to the Rijeka gateway, and the administration o f the road sector.

2. K e y performance indicators: (see Annex 1)

Performance indicators have been designed and agreed with the Government during project preparation. Indicators will center on the speed o f transformation and modernization o f Rijeka Port, and o f the road sector.

Key outcome/impact indicators for the project's objectives:

financing and operating transport sector infrastructure and services.

veloper i s selected to redevelop Delta and port0

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported b y the project: (see Annex 1) Document number: 22633-HR Date of latest CAS discussion: 06/1999

The last Croatia country Assistance strategy was discussed by the Board on June 3, 1999 (R99-89[IFC/R99-75]). A CAS Progress Report was issued on August 22,2001 (Report No.

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2263-HR).

The Project Development Objectives listed above derive from and support the following CAS objectives:

e Strengthening market institutions and competitiveness. Increasing private sector involvement in financing and operating transport sector infrastructure and services.

2. M a i n sector issues and Government strategy:

Croatia has achieved a great deal in the transport sector since independence: war damage has been repaired, a body o f law generally suitable to govern the transport sector o f a sovereign State has been created, and a number o f transport enterprises have been privatized. Sector issues were assessed by the Bank in Republic of Croatia - Policy Directions for Transport (Report No. 19447-hr, June 15, 1999), and as part o f a comprehensive diagnosis o f strategic development and sector policy issues and recommendations prepared for the new Government (A Policy Agenda for Reform and Growth, February 14,2000). The main sector issues and Government strategy are summarized below:

Economic Role of Riieka Port: Transport plays an important role in the international trade which has become more significant since independence and in reestablishing potentially profitable transit traffic. The Government has recognized the key role o f Rijeka Port by declaring that Rijeka and Ploce are the two strategic ports (the latter primarily serves Bosnia and Herzegovina, BiH). Rijeka Port's physically protected position and natural depth o f 25 meters makes it the only port in the North Eastem Adriatic Range (NEAR) capable o f handling the largest vessels. However, between 1980 and 1997, the Port o f Rijeka lost almost 70 percent o f i t s total throughput in general and bulk cargo. While the total Northern Adriatic market (Rijeka, Koper, Trieste excluding liquid bulk traffic) increased from about 16 mi l l ion tons in 1990 to 23 mi l l ion tons in 2001, Rijeka's share o f the market declined from 35% to 12%. Annex 11 provides a detailed SWOT analysis o f the three competing ports, as well as the low and medium case scenario o f Rotterdam Management Group's traffic forecast. The main reasons for the decline in traffic at Rijeka are the wars in Croatia and BiH which resulted in high insurance rates for using the port, the loss o f traffic to/from the former Republic o f Yugoslavia (FRY), restructuring o f the economies o f the region resulting in a decline o f bulk traffic, inefficient operations at Rijeka, and poor land connections.

Several considerations support the reestablishment o f the port o f Rijeka as the natural gateway for Croatia and Central Europe: (i) peace and political stability within the Balkans, reenforced by the signing o f a memorandum o f understanding on Trade Liberalization and Facilitation by eight heads o f State under the Stability Pact in 2001; (ii) Rijeka's competitive advantage as the only deep water port in the northern Adriatic which gives i t a significant cost advantage for bulk and other volume traffics; (iii) Rijeka's historical role as the primary gateway for Hungary, reenforced by Hungarian policy statements and investments in Rijeka; (iv) the resumption o f traffic to/from FRY; (v) increasing involvement o f the private sector in port operations, e.g., the container terminal recently concessioned to LR, which has a technical assistance agreement with an international private operator (Contship Italia); (vi) the improvement o f in land connections, i.e. the construction o f motorways financed by the EBRD, improvements in railway efficiency supported under the ongoing Railway Modernization and Restructuring Project (RMRP) and customs improvements supported by the Bank under the Trade and Transport Facilitation in Southeast Europe (TTSFE) Project, and (vii) rationalization o f the Croatian port system by concentrating international traffic at Rijeka and Ploce. Finally, it i s worth underlining that the Rijeka Gateway project wi l l improve one o f the main Trans-European corridor (Corridor Vb), which i s critical for both Serbia-Montenegro and Bosnia-Herzegovina for which Rijeka constitutes the main

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natural access to the Adriatic.

Privatization of Port Operations: The Government has taken a number o f steps to reform port operations, including adopting a new port law, creating a landlord port authority at Rijeka, and initiating port concessions with consultant assistance financed under a PHRD grant. As a f i rs t step, the Government granted Luka Rijeka (LR, port operating company) a global 12 year priority concession to operate the port in 2000. LR, directly through the priority concession or indirectly through joint ventures in the concession for the Container Terminal and in other potential projects, controls most Rijeka port operations. However, i t s financial capacities are quite limited, due to low levels o f activity and overstaffing. In such a situation, this public monopoly cannot meet the demand for performance, quality and competitiveness according to standard international benchmarks, and has limited capacity or incentive to become more efficient. The Bank has agreed to the proposal made by the Ministry o f Maritime Affairs, Transport and Communications (MMATC) to privatize LR during the priority concession. This would be achieved by putting up for sale a majority o f the shares o f the various Successor Companies ('daughter' companies) to be created in accordance with the priority concession Private investors would be selected -- through public competitive bidding -- according to their experience in port operations, technical and financial capacity and commitment to develop port activity in Rijeka. In order to implement this, the following questions have been examined further under studies financed under a PHRD (Japanese) grant and the Project Preparation Facility (PPF): (i) organization o f operations, (ii) creation o f profit and cost centers for each terminal operation and other activities, (iii) further transformation into daughter companies, (iv) privatization o f the mother company and/or independent (sets of) subsidiaries, (v) human resource strategy, (vi) analysis o f the status o f the accumulated debt, and (vii) transfer o f the various terminals and corresponding Successor Companies to private operators. The conditions under which the various terminals will be transferred to private concessionaires have also been examined. This includes the following: (i) review o f general objectives and o f contractual targets (traffic levels, performances, quality etc.), (ii) respective responsibilities and commitments o f the Port o f Rijeka Authority (PRA) and o f the concessionaires regarding maintenance and development o f infra- and superstructure, (iii) equipment, (iv) extension o f the concessions to allow new investment plans, (v) revision o f port tariffs, light dues, and (vi) periodic review o f performance. Real ownership rights during the concession remain an obstacle to private financing, and following the Port Privatization Workshop held in March, 2002, M M A T C i s preparing appropriate amendments to the Maritime Domain and Seaports Act. The agreed time frame for the privatization o f the port operations -- expressed in tons operated by the private sectorhotal port tonnage per year -- i s as follows: f rom 0% in 2004 to 30% in 2005,50% in 2006, and 80% in 2008.

Redundant Port Staff;: The labor restructuring strategy w i l l be to work out al l the details o f involuntary departure with the unions prior to announcing a well publicized voluntary program under a limited time offer (two months) with an incentive o f 1,000 Kuna per year o f service to a maximum o f 25 years for eligible workers. Voluntary departure will be targeted to two groups, the large group o f workers who are often absent due to illness, who are on the protected l is t and who therefore cannot be made redundant under labor legislation and to surplus white-collar workers. Workers considered vital to the continuing operation o f LR, workers who are eligible to retire, and workers who are eligible for pre-retirement departure w i l l not be eligible for departure with enhanced severance. The IBM business plan calculations for staffing levels in Successor Companies, together with the RMG estimates o f approximately 70 remaining staff in a residual Luka Rijeka (mother company) suggest a surplus o f staff in the range between 687 and 776 workers. LR Management has accepted a staff surplus in the range between 550 and 650. The LR Social Program wil l mitigate the negative impact o f the severance program which w i l l be implemented in two phases: (i) departure o f 380 staff on a voluntary basis by the end o f 2004; and (ii) departure o f about 400 staff during the period 2005-2006. Based on this level o f severance the cost o f

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labor restructuring measures w i l l be in a range between US$ 5.9 and US$7.0 mill ion in a low to medium cost scenario and between USD 6.8 and USD 8.0 mi l l ion in a medium to high cost scenario. A severance payment package o f U S 7 . 5 mill ion i s proposed under the project. The Croatian Employment Service (CES) has discussed with Luka Rijeka management arrangements to offer the services o f the Mobil ity Center (MC) in Rijeka, which has to date been assisting HZ workers on a pilot basis. The Ministry o f Labor in Croatia i s the beneficiary o f a EU program to assist the CES build on the pilot Mobil ity Center initiative, including funding o f Euro 1.5 mill ion for a labor redeployment fund. The LR restructuring project will build on the lessons learned from the HZ experience in terms o f labor redeployment. The project will: i) include management training in negotiating skil ls, conflict resolution, and problem solving; ii) target workers protected from redundancy with special measures (severance and redeployment); iii) ensure that the Human Resource and Legal Department plays a key role in the restructuring process; iv) promote the Social Plan and related measures wi th a well publicized information program within LR and in the community to build local support; and v) include terms o f reference for a tracer study in the Social Plan as an integral part o f the project.

Urban RedeveloDment at Riieka Port: The Port o f Rijeka i s an old industrial facility which stretches for several kilometers along the waterfront in the middle o f the city, creating a bamer to the Adriatic. Rijeka i s also constrained on the inland side by mountains. Port traffic passes through city streets, contributing to traffic congestion and increasing the cost o f urban transport. Urban planning i s also more difficult because port property i s maritime domain, i.e. administered by the central Government. Much o f this prime potential waterfront area i s currently occupied by dilapidated multi-storied warehouses which are not suitable anymore for modern port operations and have little historical interest, and PRA desires to locate some bulk operations to other locations, e.g. Bakar Bay. The Municipality and the Port are aware that other cities (e.g. Baltimore, New Orleans, Savannah, Bilbao) have redeveloped old port areas as attractive and profitable retail, office and public space on a public-private partnership (PPP) basis, and requested assistance under the project to help with a similar transformation.

The proposed project component consists o f redeveloping about 17 hectares o f land presently occupied by warehouses and parking lots, including constructing a ferry terminal building, and constructing a road connecting the port to the Rijeka Bypass. The waterfront area to be privately redeveloped i s immediately adjacent to the central business district (CBD) and has a high commercial and residential potential. After redevelopment, the site w i l l provide the only access to the sea from the downtown area and w i l l constitute a unique recreation facility for city inhabitants and tourists. As a f i rs t step, the City o f Rijeka, PRA and LR signed a cooperation agreement on March 15, 2002. A study financed under the PPF i s determining (i) the type o f agency that w i l l need to be created to design, manage and implement the scheme, (ii) the best use o f the area under current market conditions to achieve a se l f financing scheme, (iii) the preliminary costs and revenues o f the scheme and (iv) the type o f contracts and leases which would be the most practical and financially favorable to PRA and the Municipality to develop the site using private funds. The project will finance the clearing o f the site, the construction o f the ferry terminal, and the extension o f the primary infrastructure on site and if necessary o f f site. The project will also finance a section o f the Rijeka Bypass and port connector road (D404) to improve the flow o f traffic within the city and to/from the port, with a large reduction o f the air pollution and noise from large diesel trucks.

Motorwav Prowam: The Government in power until 2000 initiated a program to construct an additional 1,530 km o f motorways by the year 2013 at an estimated cost o f US$6.5 billion. The Government desired to unify the country, improve international land connections, generate business for domestic contractors and catch up with Western Europe. However, construction o f some o f these motorways appeared premature since few roads carried more than 15,000 vehicles per day at that time. The chosen financing model usually

Croatia has about 593 km o f high level tolled roads and motorways.

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consisted o f agreeing with a foreign consortium to arrange financing in return for the construction contract (and sometimes an operating contract). Decisions were taken in a non-transparent way and there was little competition. Construction prices were typically around 40% higher than in Western Europe. In addition, the Government took out expensive short term loans to cover i t s equity contributions since funding was not provided in the budget. The Government also provided traffic or revenue guarantees to the concessionaires, increasing their contingent liabilities.

Based in part on the Bank's sector dialogue, the new Government elected in 2000 recognized that the motonvay program was not sustainable. The Bank financed an advisor who helped define a reduced program, taking into account that some contracts were already signed. Parliament then approved a 'Program for Construction and Maintenance o f Public Roads for the Years 2001-2004: under which the Government plans to expand the network o f high level tolled roads from 593 km to 1,330 km over a 10-15 year period. The initial 2001-2004 program was funded from a combination o f tolls, extra-budgetary revenues from the fuel tax (HRK O.4Aiter in 2001, increased to HRK 0.6Aiter in 2002) and the budget. At the same time, Parliament approved a reorganization o f the road sector whereby Croatian Motonvays (HAC) was created and placed under the responsibility o f the Ministry o f Public Works (MPW) and other main roads were made the responsibility o f Croatian Roads (HC) under the Ministry o f Maritime Affairs, Transport and Communication (MMATC). HC's 2001-2004 program was similarly defined and funded. Both organizations were permitted to borrow and required to service their own debts.

The new motonvay program i s a significant improvement over the former one, although some issues remain. The construction o f some committed motonvays s t i l l appears premature, the aggregate level o f motonvay expenditure appears too high, motonvay construction i s partly financed o f f budget, and the administrative separation o f roads and motonvays under two Ministries makes road planning more difficult. The pace o f actual motonvay construction w i l l in all likelihood be limited by available financing, although H A C plans to complete the motonvay network by 2005. In order to continue the Bank's dialogue on motonvay construction, the project finances technical assistance to H A C to improve i t s organizational efficiency and obtain an I S 0 9001 certification, i.e., a model for quality assurance in design, development, production, installation and servicing. The project finances the rehabilitation o f the Krk Bridge (under the responsibility o f HAC), and the construction o f the western section o f the Rijeka bypass and port connector road (both under the responsibility o f HC).

Road Maintenance Finance: Road maintenance was under funded from the war until 2001 :

* includes motorways; also includes upgrade/modemization o f the expressways to motonvay standard.

Funds were initially diverted to the war itself and then to the repair o f war damage. The Highway Sector Project (Loan 3 869-HR) contributed to a more than two-fold increase in maintenance expenditures from 1995 to 1998, but expenditures f e l l again in 1999 and 2000 due to the diversion o f funds to the motonvay program. The more disciplined Program approved by the new government, discussed above, provides on average US$140 mill ion per annum for road maintenance financed from extra-budgetary revenues from fuel tax (HRK0.6/liter), extra-budgetary vehicle registration fees and the budget. The maintenance budget

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i s almost in line with the Bank's previously recommended US$170 mill ion p.a. needed to catch up with the backlog over six years. Therefore, Hrvatske Ceste will adhere to and implement the road management program, which envisages a gradual increase o f the road maintenance standards, for both routine and periodic maintenance, from 62% in the year 2003 to 100% in the year 201 1. Government support to this strategy has been agreed in the Project Policy Letter, with a minimum level o f road maintenance funding as shown in the table below:

Road maintenance budget in US$ 2003 2004 2005 2006 2007 2008 2009

Routine and periodic maintenance 158 140 155 170 170 170 170 of main and local roads and motorways including bridges.

million

PMS/BMS Implementation o f the pavement and bridge management systems (PMS/BMS) was initially supported under the Bank's Highway Sector Project. An inventory o f the condition o f the H C road network was completed in December 2002. Traffic levels, pavement roughness, rutting, pavement surface deterioration, skid resistance and status o f the pavement structure were surveyed. The survey results are being used for prioritizing the road maintenance works on the national roads network. Croatian Telecom has been contracted to install an integrated PMS/BMS system for all H C Districts, which would then be expanded to the counties. To complement the system, small equipment (trafpc counters, weigh-in-motion scales, weather monitoring system), PMS/BMS software upgrade, and technical assistancehaining will be financed under the project. Software to improve HC's ability to administer the road network w i l l also be included.

Road Safe@ Improvements: Road accident rates are high in Croatia (about 7 fatalities11 0,000 vehicles compared to 2 fatalities/l0,000 vehicles in Western Europe). This has an adverse impact on the Croatian economy and society, including international road transport. The Road Safety Study prepared under the Highway Sector Project recommended a number o f actions that are currently being implemented under the Government's National Road Traffic Safety Program. The Ministry o f Interior (Moo leads a working group consisting o f representatives o f the MoI, MMATC, Ministry o f Health, Ministry o f Education, HC, HAC, Automotive Club, Institute o f Traffic Medicine and Psychology, and Croatian Insurance Bureau. The traffic police together wi th M M A T C identified 147 so called 'black spots', or locations with high incidence o f traffic accidents. These black spots can be eliminated through (i) traffic management improvements; (ii) design improvement, or through (iii) combined civ i l engineering-traffic measures. The government has already eliminated 28 o f the black spots and another 20 will be included in the betterment program under the ongoing EIB project. The proposed loan would finance improvement o f 30 out o f the remaining 107 black spots. Also, through increased competitiveness o f the port, a signifficant growth in transit traffic i s expected. This increases safety hazards on the roads. The project will address this issue through improved link between the port and Rijeka bypass.

Railwav Restructuring: The Government i s currently restructuring HZ with Bank assistance under the Railway Modernization and Restructuring Project (RMRP, Project P039361, 1999). The objective o f the project i s to modernize and restructure H Z in order to reduce i t s deficit and financial burden on the economy, and create a company adapted to a competitive transport market. The U S 1 8 3 mill ion project, cofinanced by the EBRD and Government, finances severance payments for redundant staff, track renewal and maintenance, rehabilitation o f traction and roll ing stock, environmental protection, technical assistance and training. Agreed financial and staffing targets are spelled out in the Government's Letter o f Development Policy (LDP) dated december 4, 1998. After a slow start in initiating actions to meet the LDP targets, project implementation improved following the change o f Government in 2000 and the

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appointment o f a reform-oriented Supervisory Board and key personnel at HZ. A Social Program approved b y Parliament provided the legal basis for the retrenchment o f surplus staff. Both Government policies and implementation o f the project are now satisfactory. The ongoing railway reforms cover structural changes that are much deeper than what were originally foreseen under the project. These include enactment o f a new railway law to provide for open access, intra-rail competition and privatization o f core railway hnctions and new relationships between the Government and the railways; separation o f infrastructure from operations through setting up o f new companies; separation o f freight and passenger businesses; handing over the responsibility for loss-making regional and local passenger trains to the local or regional authorities; privatization o f subsidiary companies, and setting up o f a regulatory framework.

3. Sector issues to be addressed by the project and strategic choices:

The project seeks to address the main port and road issues discussed above. On the institutional side, the project will (a) help prepare necessary changes in port laws and the priority concession, reduce LR staff with minimum social disruption, and prepare tenders for terminal concessions with a view to privatizing operations, increasing traffic, improving financial performance and thereby reducing Government contributions in the longer term, (b) prepare to redevelop part o f the Rijeka waterfront on a public-private partnership (PPP) basis, (c) help strengthen HAC'S management capacity with a view to improving the implementation o f the motonvay program, and (d) help H C to improve i t s management capacity and axle-load policy and implement the PMS/BMS system. On the investment side, the project will (a) rehabilitate Rijeka port infrastructure and replace heavy cargo handling equipment, (b) provide for redevelopment o f port/city interface; (c) improve port traffic management and safety, and protect environment; (d) complete the westem part o f the Rijeka bypass, construct the port connector road D404, rehabilitate the Krk bridge, and eliminate 30 road safety 'black spots'.

The on-going feasibility study for the redevelopment o f the podc i t y interface redevelopment will: (i) define the appropriate institutional arrangement to manage the project; (ii) test the financial feasibility o f the project to provide an adequate financial return for the PRA and at the same time w i l l meet the environmental requirements o f the City o f Rijeka; and (iii) prepare the most appropriate process for leasing and contracting between PRA and the private developers who will invest in land parcels within the scheme area. This may involve auction, competitive bidding or another competitive process.

During the preparation o f the project, progress has been made in amending the Maritime Domain and Seaports Act and draft Law on Concessions. All the comments made by the Bank in November 2002 have been taken into account by the Government, including the possibility to grant the private sector a majority share in Luka Rijeka's successor companies. In order to address specific sector policy issues related to the project, the Government has prepared a draft project Policy Letter which has been agreed during negotiations and signed before Board presentation (See Annex 14).

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

The project includes three components: (a) port restructuring and modernization; (b) podci ty interface redevelopment; and (c) international road improvements.

A - Port Restructuring and Modernization lUS$75.1 million includinp contingencies; implemented by PRA)

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To allow smooth transfer o f the operations related to the handling o f woods and timber this component w i l l include (i) infrastructure rehabilitation works at the western port area: demolition o f outdated multi-storied warehouses that restrict open storage space and port performance, with the exception o f two which will be rehabilitated for their historical value; (ii) superstructure works would be designed to facilitate terminal leaseskoncessions; (iii) rehabilitation o f Becko (Vienna) berth and repaving and rehabilitation o f utility networks; and (iv) restoration and protection along the Zagrebacko berth (includes construction o f a berthing capacity o f a minimum 250 m length to allow vessels o f 15 m draft and more to service the port o f Rijeka), and backlog rehabilitation works needed in various part o f the port to complement the above works.

As a contribution to the knowledge economy and to help develop traffic and improve safety, a Vessel Traffic Management System (VTMS), i.e., a radar-based system coupled with a database to identify and monitor ship movements has been identified as an immediate need under the project. Environment protection eauiument has also been included under the project. LR operates old and outdated yard eauiument purchased by the former State Owned Enterprise (SOE) that need to be replaced. Also, most quay cranes that LR rents from PRA are old, slow and a low capacity (5 tons or less). New heavy mobile cranes will be procured by PRA under the project.

A privatization advisor will help implementing the LR business plan, covering: (i) organization o f operations, (ii) creation o f profit and cost centers for each terminal operations and other activities, (iii) further transformation into daughter companies, (iv) privatization o f the mother company and / or independent (sets of) subsidiaries, (v) a human resource strategy, (vi) analysis o f the status o f the accumulated debt, and (vii) concession o f terminals to private operators. The advisor would also consult issues connected with the priority concession: (i) review o f general objectives and o f contractual targets (traffic levels, performances, quality etc. as detailed in Annex 1 I), (ii) respective responsibilities and commitments o f the port authority and o f the concessionaires regarding maintenance and development o f infra- and superstructure, (iii) equipment, (iv) extension o f the concessions to allow new investment plans, (v) port tariffs, light dues, and (vi) periodic review o f performance. The project w i l l also finance management modernization consultants and consultants to prepare designs for c iv i l works contracts, to assist in preparing a BOT contract for further expansion o f Zagrebacko berth and for construction o f D 403 connector road; and to supervise c iv i l works under the project. Since PRA P IU i s not very experienced in implementation o f Bank-financed projects, additional training in accounting, financial management and procurement will be provided.

An Electronic Data Interchange (EDI) svstem connecting the port administration and port users w i l l facilitate trade through improved efficiency and safety o f the port operations. Based on LR 's Social Plan proposal, a severance urogram w i l l be also financed under the project.

The project w i l l also finance provision o f a suitable financial management system, and training for i t s use. In addition, the borrower w i l l hire an auditing firm to audit the project as well as the entities' financial statements.

B - Port/Citv Interface Redevelopment (US$43.2 million: implemented bv PRA and HC, respectively)

The modernization o f the passenger terminal represents a promising activity for both the port and the city o f Rijeka. This component aims at the development o f a waterfront area open to business and commercial activities. The project will finance preparation works at the Delta and Port0 Baros areas, as well as the construction o f a passenger terminal along the breakwater (this component will be implemented by PRA).

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The 4 km long Draga-Braidica (D404) connector road wi l l link the Bypass to the port o f Rijeka reducing heavy truck traffic through the congested center o f the city (this component w i l l be implemented by HC).

Component

A - Port Restructuring and Modernization

C - International Road Improvements (US$144.8 million: implemented bv HC and HAC)

Indicative Bank- costs % of financing

(US$M) Total (US$M) 75.10 28.2 50.20

The project w i l l finance H C management caoacitv improvements, such as TA and training and suoervision services for civil works and equipment installation for both H C and H A C roadhridge works components. Implementation o f the pavement and bridge management systems (PMSBMS) was initially supported under the Bank's Highway Sector Project. Small equipment. PMS/BMS software upgrade, and technical assistance/training will be financed under the project, including software to improve HC's ability to administer the road network. Preparation o f an axle load study to develop a strategy for enforcement and eventual adoption o f the EU standard; and prevention o f excessive damage to the national roads network through pilot fixed scale installation will be also included under the project. The project will also provide technical assistance in obtaininn an I S 0 9001 certificate for H A C (HAC w i l l implement this sub-component).

D - Project Preparation Facility Total Project Costs

Front-end fee

The proposed eastern section o f the Riieka BTJpass (Orehovica - Sv. Kuzam; 6.5 km; 4 lanes) i s expected to relieve traffic in a highly congested city which i s squeezed between the mountains and sea. Since the EIB-financed Zagreb-Rijeka motorway i s expected to be completed by 2005, it would also provide a through link for tourist traffic traveling from Central Europe (and SloveniaAtaly) to the Dalmatian coast. Road accident rates are high in Croatia (about 7 fatalities/10,000 vehicles compared to 2 fatalities/10,000 vehicles in Western Europe). As a follow-up on the recommendations o f the Road Safety Study prepared under the Highway Sector Project, the proposed loan w i l l finance the improvement o f 30 'black spots' in the road network where there i s a high incidence o f traffic accidents. Krk bridge provides the only road, electricity, water and o i l (pipeline) connection from the mainland to the island o f Krk where the Rijeka Airport and Omisalj Oil Terminal are located. The project w i l l finance rehabilitation o f the two sections o f this bridge (wi l l be implemented by HAC).

1.50 0.6 1.50 264.60 99.4 155.00

1.50 0.6 1.50

Proiect preparation facilitv reimbursement (US$1.5 million: implemented bv PRA)

Five preparatory studies for the port component have been financed under the PPF: (i) preparation o f detailed engineering and project design; (ii) study on porthrban redevelopment; (iii) environmental assessment (for the entire project); (iv) business plan for LR and (v) preparation o f social plan for LR. Training o f the PRA P IU staff has been also financed under the PPF.

An indicative project cost estimate (incl. physical and price contingencies) based on a tentative US$156.5 mill ion Bank loan i s shown below.

B - Portlcity Interface Redevelopment C - International Road Improvements

43.20 16.2 24.60 54.4 I 78.70 1 144.80 I

Yo of Bank-

financing 32.1 15.7 50.3

1 .o 99.0

1 .o

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Total Financing Required I 266.10 1 100.0 I 156.50 I 100.0 1 2. Key policy and institutional reforms supported by the project:

Key policy and institutional issues and reforms sought are described in section B.2. The principle o f further privatizing port operations was agreed with MTCWM, PRA and LR staff in September 2001. Some first proposals were made by consultants RMG and have been developed further under PPF-financed studies expected to be carried out by June 2003. The Privatization Workshop held on March 2 1,2002 recognized that amendments to the Maritime Domain and Seaports Act and the Law on Concessions were required in order to permit long-term leases and urban redevelopment at Rijeka Port as recorded in the Agreed Minutes signed by PRA, LR and the Municipality o f Rijeka. Satisfactory arrangements are a key to the success o f the project, as defined during appraisal and confirmed at negotiations. There are no other known policy or institutional issues which would affect the viability o f the project.

3. Benefits and target population:

The project i s expected to produce direct economic benefits and indirect economic, social and environmental benefits, all o f which w i l l be widely spread among the population.

Direct benefits include: 0

0

0

Increased traffic and revenues, and reduced operating costs at Rijeka Port Reduced road vehicle operating costs and delays Increased trade in transport services and other economic activity generated by increases

Reduced Govemment financial contributions to Rijeka Port in the longer te rm Maintenance o f bridge link to Krk Island

in transit traffic 0

0

Indirect benefits include: 0

0

Improved administration o f Rijeka Port Increased labor productivity with separation o f redundant port workers in a socially

Improved functioning and environmental conditions (Le., traffic congestion and air and noise

Achievement o f the connection o f the port o f Rijeka with the Trans-European Motorways

Improved management o f the road sector, including sustainable road maintenance policy, and

Reduction o f number o f accidents and fatalities through elimination o f black spots

acceptable way and increased opportunity for reemployment

pollution) for the City o f Rijeka

Network through corridor Vb

better implementation o f the motorway program

0

0

0

0

4. Institutional and implementation arrangements:

Legal Structure of the Loan Agreements

The Bank will enter into three loan agreements totalling USS156.5 million, with PRA (US$55.1 million), H C (US$84.1 million), and H A C (17.3 million) responsible for the implementation o f their respective parts o f the project. A subsidiary loan agreement o f US$8.1 mill ion has been concluded between PRA and LR for the financing o f the redundancy component and technical assistance during the privatization process. The subsidiary loan agreement between PRA and LR i s complemented with a Project Agreement between the Bank and LR. As agreed during the preparation o f the project, the three loans are

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guaranteed by the Government. It was also agreed that H C will be responsible for the overall reporting o f the project implementation with contributions from PRA and HAC.

Project Management. Each executing agency - PRA, HC, and H A C w i l l implement i t s respective component. HC, and to a lesser extent HAC, are staffed by trained professionals with adequate capacity to implement the project. PRA staff responsible for implementation o f the port component has performed very well while implementing the PPF studies. The Port/urban interface redevelopment component will be implemented on the basis o f a memorandum o f understanding between PRA, LR and the Municipality o f Rijeka. The project management capacity o f PRA, H C and H A C i s satisfactory. The three organizations will receive some training (in the use o f the financial management system and in procurement) and consultant assistance (for preparation o f designs, supervision o f works, and drafting o f technical specifications) under the PPF and during project implementation. Both H C and H A C have financial management systems acceptable to the Bank. Funding has been provided under the project to upgrade the financial management and management information systems o f PRA, which w i l l then be in a position to use the new system to produce reports acceptable to the Bank. Until1 the main system i s up-graded, an interim XL-based system has been established (similar interim systems have been used in other Bank financed projects) at the PRA PIU, to keep account for the on-going PHRD grant and the PPF. All three entities w i l l open Special Accounts in commercial banks acceptable to the Bank, to maintain Bank funds. Local suppliers eligible for Bank financing w i l l be paid from the SA, upon converting the finds into kunas. Counterpart funds will be paid from the entities own bank accounts. For the severance payment component for LR, the number o f people to be retrenched and the reporting formats to be included as part o f the FMR were finalized and agreed during Negotiations and detailed in the PIP.

Financial Reporting. The three entities w i l l ensure the preparation and distribution o f consolidated periodic progress reports to the Bank, for their relevant project components to reflect: (i) sources and uses o f funds, by component and activity; (ii) project progress; and (iii) procurement activities. In this context, the three entities w i l l prepare quarterly Financial Monitoring Reports (FMRs), which w i l l be submitted to the Bank within 45 days after the end o f each quarter. The FMR formats have been discussed and agreed with the entities during appraisal. The f i rs t FMRs will be submitted at the end o f the f i rs t quarter following project effectiveness.

Audit Arrangements. The three entities will be responsible for ensuring that the Project financial statements, Special Accounts, and Statement o f Expenditures (SOEs) are audited by independent auditors, acceptable to the Bank, in accordance with International Standards on Auditing (ISA). The audits w i l l cover all funds related to the project, including counterpart funds, for a l l project components. The audited financial statements, the special accounts, and SOEs o f the preceding fiscal year will be sent to the Bank within six months o f the end o f the calendar year. In addition to the audit o f the project accounts, the financial statements o f the three entities w i l l be audited by an independent auditor acceptable to the Bank. These audit reports will be submitted to the Bank within six months o f the end o f the calendar year. The TOR for the audits have been be discussed and agreed with the entities during appraisal.

Disbursements. Disbursements arrangements for the three entities w i l l be made based on traditional disbursement methods (i.e., direct payments and/or from the Special Account) with reimbursements made based on Statements o f Expenditures (SOEs) and full documentation. To facilitate timely project implementation, the three entities w i l l establish, maintain and operate special accounts under terms and conditions acceptable to the Bank. The option to move to a FMR based disbursements will be considered at a later date, when the individual entities and the Bank have agreed that such a move i s justifiable.

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D. Project Rationale 1. Project alternatives considered and reasons for rejection:

Without the project, it i s very likely that the competitiveness o f the port o f Rijeka would continue to decline vis-a-vis i t s main competitors, Koper and Trieste, with limited involvement o f the private sector in financing andfor operating port related services. A status quo situation would also lead to increasing unresolved social issues with a direct impact on the Government budget to finance LR labor reduction scheme negotiated under pressure. The Croatia’s economy would suffer from lost export and transit opportunities, whilst import costs and delays would increase. The city o f Rijeka would not make any significant progress in attracting more tourists and the level o f air and noise pollution, as well as passenger traffic would remain unchanged. For the road sector, the badly needed completion o f the Rijeka by-pass to alleviate current city traffic congestion would be significantly delayed, highly valuable assets would continue to deteriorate, e.g., Krk bridge, and the needed modernization o f the administration further delayed.

Sector issue

Three alternative project designs were considered and rejected.

Project

First, it would be possible to prepare separate road and port projects. A combined podroad project i s proposed because o f (a) synergy gained by reforming Rijeka Port and constructing the Rijeka Bypass at the same time, (b) the direct involvement o f the City o f Rijeka as a key project stakeholder, and (c) moderate but decreasing institutional risks on the port side could be overcome by continuing with the preparation o f an independently justified road project if the port component failed.

Bank-financed Road betterment, management, safety, Rijeka Port

Post-war emergency assistance to highways, railways, ports, and demining sectors

Restructuring o f the Croatian Railways

Second, i t would also be possible to prepare the port component in the absence of a clear commitment from the Government to privatize port operations. This was rejected because project benefits would be significantly reduced.

Highway Sector Project (P008329; recently completed)

Emergency Transport and Mine Clearing Project (P044457; recently completed)

Railway Modernization and Restructuring Project (P039161; ongoing)

Third, any involvement in motonvays could have been avoided for the reasons given in section B2 above. However, our continuing dialogue on motorway issues has resulted in gradual improvement in the program, which w i l l be continued under the project (reference ‘Lessons Learned’ below).

2. M a j o r related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Latest Supervision (PSR) Ratings

1Bank-financed projects only) Implementation

Progress (IP)

S

S

S

Development Objective (DO)

S

S

S

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Customs and border crossing improvements to facilitate trade and transport

Iongoing) Xher development agencies

Trade and Transport Facilitation in Southeast Europe Project (PO70088

EBRD: I Completion o f Rijeka-Zagreb motonvay (section o f Pan-European Corridor V)

S

Autecesta Rij eka-Zagreb Project (ongoing)

Road betterment and construction Highway Reconstruction Project (completed)

Completion o f Rijeka bypass - section Sv. Kuzam-Krizisce

Sv. Kuzam-Krizisce Project (under preparation)

EIB: I Road Betterment Motonvay Corridor X

Completion o f Rijeka-Zagreb motonvay (section o f Pan-European Corridor V)

Rijeka-Zagreb Motonvay (ongoing)

Road Betterment IMotonvay Corridor X

Improvement o f air traffic control

I

Air Traffic Control (ongoing)

S

Maintenance and rehabilitation o f the existing road network

The above-mentioned EBRD and EIB-financed completion o f the Rijeka-Zagreb motonvay (expected by 2005), the completion o f the remaining section (Sv. Kuzam-Krizisce) o f the Rijeka bypass, and the maintenance, rehabilitation and betterment o f the existing road network are particularly complementary to the objectives o f this project.

3. Lessons learned and reflected in the project design: There are several lessons learned from the Bank's past experience in implementing this type o f projects:

National Road Rehabilitation (ongoing)

(i) There are lessons which have been learned from reforming HZ under the RMRP (Section 2) which in many ways parallels the effort to reform Rijeka Port. First, the RMRP emphasized the importance o f obtaining an early reform commitment from the Government. This was, in fact, not fully realized until two years after the project was approved when a new Government took office. A second related point i s that reform-oriented managers, in particular middle managers, are necessary for success. Third, the new Government required that an adequate social program be put in place before involuntary staff separations began (the initial phase o f voluntary staff separations was implemented without difficulty). Fourth, early involvement o f labor unions and development o f healthy partnership with labor unions in the process o f

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labor restructuring. Fifth, HZ's financial results are to a significant degree determined by Government decisions which are not under the control o f the implementing agency (levels o f investment, public service obligation payments, tariff policy).

(ii) The previous Government initiated a premature motorway construction program and reduced the road maintenance budget below the required level. Decisions were made at a high level in a non-transparent way, and implemented by the Ministry o f Public Works (MPW) which was not directly involved in the ongoing Highway Sector Project. It i s unlikely that the Bank could have influenced these decisions directly. The Bank instead intensified i t s dialogue by preparing a sector report and discussing a possible Bank guarantee for the construction o f the Zagreb-Gorican Motonvay. This more patient approach bore fruit when the newly elected Parliament approved a more disciplined "Program for Construction and Maintenance o f Public Roads for the years 2001-2004". Major sector issues o f this type require continuous dialogue with the authorities over a long period o f time, and in this case a change o f Government. This dialogue will be continued under the present project.

(iii) Additional lessons from the recently completed Highway Sector Project and Emergency Transport and Mine Clearing Project include (i) the importance o f simple project design, (ii) commercializatiodprivatization reduces costs, and (iii) significant institutional improvements can occur when working in a new field (mine clearing).

(iv) Another lesson from working in other countries in the region that EU accession i s a powerful motivator for institutional reforms deemed necessary to compete in the EU, and for international transport improvements.

These lessons have been taken into account in the design o f the project.

4. Indications o f borrower commitment and ownership:

The borrowers, -- as well as the Government -- have demonstrated their commitment and ownership o f the project by (i) adoption o f the new Maritime Domain and Seaports Act, and the creation o f PRA and LR, (ii) agreeing in principal to privatize port operations; (iii) holding a Workshop on Port Privatization (iii) implementing (and financing) satisfactory preparation studies, (iv) signing a letter o f intent to redevelop part o f Rijeka Port for urban purposes, and (v) obtaining location and construction permits (including environmental assessments) for port and road investments.

5. Value added of Bank support in this project:

The lessons that the Bank has learned working with Croatian Railways will be applied to similar reforms required in the port sector. The project offers an opportunity to continue the important sector dialogue on the motorway program. The Bank will also take advantage o f i t s long established relationship workmg in the transport sector.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. I Economic (see Annex 4): - Costbenefit NPV=US$91.1 million; ERR = 27.6 YO (see Annex 4) - Cost effectiveness 0 Other (specify) A cost benefit analysis was carried out for the c iv i l works and redundancy components o f the project which comprise 91% o f project costs. The estimates are based on studies by consultants RMG for the

-

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passenger terminal, general cargo berth, dry bulk terminal, additional storage facilities and the multi-purpose terminal, and by the Civi l Engineering Institute for the Rijeka Bypass, port connector road, and Krk bridge. The studies employed standard cost benefit methodologies. The estimate for the redundancy component was made using a spreadsheet analysis taking into account social costs and benefits. Remaining project components comprise port equipment which replaces essential items which are w o m out and considered to be justified a priori, and consultant services, training and related minor equipment which are a prerequisite for achieving the institutional objectives o f the project. N o formal economic evaluation was carried out for these components. The estimates are summarized as follows:

Component NPV (US$ millions) ERR ( Y o ) ~

Western Port Area 10.4 13.6 Multimmose Terminal 3.0 13.8

Summary Economic Evaluation

Redundancy Program 5.8 20.1 Urban Redevelopment/Passenger 1.1 12.4 Terminal Rijeka Bypass Port Connector Road

25 .O 15.3 10.8 13.2

Krk Bridge 35.0 47.0 Total Project 91.1 27.6

The sensitivity o f the calculations was tested against (a) a shortfall in traffic resulting from, e.g. a failure to fully implement the institutional reforms in the port sector, and (b) a 20% cost overrun. Under these alternative scenarios, the estimated ERR for al l project components remains greater than 10%. The project i s therefore estimated to be economically justified.

2. Financial (see Annex 4 and Annex 5): NPV=US$42 million; FRR = 30 % (see Annex 4)

A. Past and Present Financial Performance

Port o f Riieka Authoritv (PRA)

Prior to reorganization in 1996, the financial situation o f the Port o f Rijeka deteriorated significantly. Losses incurred because o f declining traffic and low profitability resulting f rom overstaffing, old equipment, and growing competition. Due to lack o f working capital, Rijeka Port was compelled to take out short-term loans at high interest rates. The Croatian banking system did not permit the port to ro l l over i t s debt into long term loans, with the result that losses were covered by accumulating arrears to suppliers and the State.

As part o f the port reform process, PRA was established in May 1996 with responsibility for the day-to-day management and development o f the port. PRA was given the primary task o f leasing out the port facilities and the terminals to private operators. Other operating activities for cargo handling were taken over by LR. Although LR was initially granted the monopoly through the priority concession, the Government foresaw a subsequent splitting o f the operational activities among various private companies. Between 1998 and 2000, PRA also contracted out all other port services such as towage, cleaning, and bunkering.

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While PRA i s no longer burdened with deficits resulting from the accumulated debt taken over by LR, the financial situation o f PRA has remained weak. Acting as a government entity, PRA has to balance i t s books mainly by reducing infrastructure maintenance expenditures much below requirements. As a consequence, PRA i s steadily being decapitalized and the ports capacity and technical efficiency are continuously eroding. The development o f containerized transport imposed new needs for equipment. In January 2001, the Government guaranteed US$35 mill ion in a loan from Korea EXIM (KEXIM) Bank for container and bulk equipment. While the terms o f the loan are favorable, it would have been operationally preferable to let the concessionaires select and pay for part o f this equipment. The debt service payments are being made in Korean won at a fixed exchange rate o f 1,2 15 won per US dollar. Given that a subsidy i s earmarked for servicing the KEXIM Bank loan, foreign exchange exposure arising from this debt i s not impacting PRA directly at this time.

Port dues and concession fees are PRA’s primary source of revenue. A partial recovery of traffic since 2001 has not shown any positive impact yet on the operating revenue. The operating expenses also remained constant, except the level o f maintenance fluctuating depending on the amount o f subsidy. PRA does not depreciate the assets it manages, because they belong to the maritime domain. Instead, annual depreciation amount determines the level o f capital subsidy to be provided by the Government for new investments. As long as the port authority remains a public entity, assets belonging to the maritime domain should be depreciated. During appraisal, the Bank has agreed with the Government and PRA on infrastructure cost recovery to cover depreciation to reduce the fiscal burden in the longer term.

Luka Riieka d.d. (LR)

LR was transformed into a joint stock company in January 1999, and the accumulated debt to the State and other creditors was converted into LR shares. The major shareholder i s the Croatian Privatization Fund (CPF) with 52 percent o f the shares with the objective o f placing these shares in the public market in due course. The LR staff owns about 17 percent o f the shares. The remaining 31 percent o f shares i s owned by the State pension and health fund and a number o f private companies. As part o f the reform measures, LR removed about 600 jobs through induced retirement in 1998, reducing i t s workforce from 2,200 to 1,600 workers. The funding for retrenchment cost was made available by the public subsidy as well as debt financing.

In September 2000, the Government granted LR, a global 12-year priority concession to operate the port, excluding the container and passenger terminals and the handling o f general cargo at Rasa. Despite a sharp reduction in payroll and financial charges, the financial position o f LR i s s t i l l weak, because o f overstaffing, outdated equipment, inefficient work rules, lack of quality control, and lack o f incentives for improving efficiency. LR’s fixed cost i s high, accounting for over 70 percent o f total operating cost. As a result, LR’s capacity to cut i t s operating cost i s limited, leading to a net deficit o f HRK 27 mill ion in 2002. The liquidity situation o f LR i s also deteriorating due to high receivables. LR’s operating revenue i s mostly from stevedoring activities. Other activities including transport, forwarding, maintenance and catering are executed by i t s daughter companies.

Croatian Roads (HC)

HC’s revenue comes mainly from a dedicated fuel tax. The fuel tax was introduced by the Government in January 2002 and i s levied by the refineries at a rate o f HRK 0.6 per l iter. I t i s paid directly to HC, and as a result, HC’s financial situation has improved. H C i s responsible for the administration o f state roads totaling 6,932 km, excluding motorways. The maintenance and operation, reconstruction, and construction o f state roads for 2001-2005 requires a funding o f about HRK 7.5 billion. Within this amount, about HRK 6.1 bil l ion will be financed by it’s own revenue. H C w i l l borrow from foreign and

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local banks to cover the remaining HRK 1.4 billion, or 23 percent o f the estimated revenue. HC could obtain up to 25 percent o f i t s resources by borrowing with state guarantee, but will be responsible for debt service. A part o f HC’s revenue from fuel tax (HRK 0.1 per liter) i s transferred to the County Road Authorities (CRAs) for administration o f county and local roads (21,000 km). Vehicle registration fees, that are set by the Government and vary by vehicle size, are the main revenue o f CRAs. CRAs can also borrow up to 25% o f their revenues with an H C guarantee. The risk o f default on debt service payment i s negligible because: (i) the CRAs’ funding sources are fixed; (ii) all lenders require debt service payment not to exceed 20% o f CRAs’ revenue, and furthermore, some lenders will freeze the transfer o f funds from H C in case o f default; and (iii) like other budget entities, CRAs will have to balance their books.

Croatian Motorwavs (HAC)

The financial position o f H A C improved in 2002 as a result o f the following key changes: (i) the fuel levy was increased at the beginning o f the year from HRK 0.4 per l i ter to HRK 0.6 per liter; (ii) revenue from the fue l tax i s now paid directly to HAC; and (iii) H A C now receives all revenues from tolls. All motorways in Croatia are tolled with tolls varying by vehicle type and size.

The construction program for 2001-2005 requires completion o f 450 km o f new motorways and 81 km o f semi-motorways. H A C will complete 400 km o f motorways and other concessionaires w i l l complete the remaining network. H A C i s also responsible for maintenance o f the existing 455 km o f motorways and 43 km o f semi-motorways. The five-year road program requires a funding o f about Euro 2.3 bi l l ion (HRK 18 billion). H A C will spend Euro 2 bil l ion for new motorway construction, and Euro 150 mi l l ion for existing motorways for rehabilitation and maintenance. Routine maintenance and operation wi l l cost Euro 200 million. The revenue o f H A C will cover only 50 percent o f the funding needs in 2001-2005. H A C has therefore a large extemal financing requirement and will need to raise finance from a number o f sources to implement i t s capital program.

B. Financial objectives and strategy

Under the project, the main financial objectives for the port are to: (i) improve the financial performance by increasing efficiency o f PRA, LR and the Successor Companies to recover the lost traffic; and thereby (ii) create a self-financing port system to reduce subsidies from the Government in the longer term. To achieve these objectives, the strategy will include: (i) privatization o f LR and i t s daughter companies; (ii) reduction o f excess labor in LR; (iii) rehabilitation o f infrastructure and replacement o f equipment; (iv) design o f adequate cost recovery to finance infrastructure expansion and depreciation; (v) measures to reduce costs and improve operating efficiency to keep prices low; (vi) implementation o f the regulatory framework relating to economic regulation o f private port operators and safety, environmental issues and quality o f services; and (vii) amendment o f the current Maritime Domain and Seaports Acts to support the ongoing port reforms. The financial objective for H C and H A C i s to improve their operational efficiency and reduce operating costs. The project will provide management consultants to H C to assist with better road management and performance based maintenance contracts, as well as technical design and supervision o f c iv i l works financed under the project. The project w i l l also include technical assistance to H A C in obtaining an I S 0 9001 certificate, which will assist H A C in improving i t s organizational efficiency and implementing an economic motorway program.

Given the significant level o f borrowings and requirements for counterpart funds, in particular during project implementation, it i s crucial that debt service coverage remains sufficient. Under the project, PRA and L R shall maintain a debt service coverage ratio o f at least 1.0 in 2003-2005, gradually increasing to 1.3 in 2006 and thereafter. H C and H A C shall maintain a debt service coverage ratio o f at least 1.1. With regard to PRA, it i s crucial that the Government provide financial support at the level

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agreed at appraisal. This was discussed during negotiations and confirmed in the Project Policy Letter. Wi th regard to H C and HAC, the Government should adjust the fue l tax, tolls, and vehicle registration fees periodically to at least cover inflation.

C. Projected future financial situation

The Bank‘s financial projections have been prepared for PRA and LR combined with the Successor Companies. The projections are no more than best estimates; the actual performance w i l l depend on the traffic increase, speed o f the establishment o f the Successor Companies for each o f the cargo handling operations and relevant parts o f the concession area and subsequent privatization o f the Successor Companies. These projections have been made by the World Bank for internal purposes and reflect the opinions o f Bank staff, not PRA and LR. These projections are based on the results o f the LR Business Plan prepared with the assistance o f PPF-financed consultants (IBM Business Consulting Services).

Traffic and revenues for both P R 4 and LWSuccessor Companies are expected to continue growing. Given the estimated traffic growth, and commitment o f PRA, LR and the Government to port reform and for gradual withdrawal o f Luka Rijeka from the priority concession through new concession agreements to more commercially-based Successor Companies to be privatized in the medium term, and redevelopment o f waterfront area as a commercial and recreational center, the financial situation o f PRA and the port operators i s expected to improve gradually. However, the proposed modernization o f the port likely w i l l lead to a short-term increase o f State subsidies during project implementation, but they w i l l steadily decrease thereafter. PRA needs the commitment o f the Government to provide in the next six years (2004-2009) subsidies totaling at least about HRK 320 million. During this period, PRA has an additional funding requirement o f about HRK 500 mill ion to cover counterpart funds (HRK 200 million), debt service payments (HRK 200 mill ion for the Bank and KEXIM loans), and infrastructure maintenance (HRK 60 - H R K l O O million).

To assess the overall financial impact o f the project, cash flow analysis was performed for “with” and “without” project scenarios for the port operation including LR and i t s Successor Companies with an evaluation o f the net present value and financial rate o f retum. While the “with” project scenario assumes significant rehabilitation o f infrastructure and replacement o f equipment under the project and subsequent privatization o f LR and the Successor Companies, “without” project scenario assumes that the terminals w i l l remain technically unchanged and the privatization process w i l l not take place.

The key assumptions are: (i) the planned modernization o f k j e k a port would facilitate labor restructuring and the increased private sector involvement; (ii) cargo demand increases by about 7 percent per annum (with project), versus 5 percent (without project) per annum, in 2003-2012; (iii) port fees remain at the current levels in real terms; (iv) current surplus labor amounts to about 800 people. Each terminal deploys skilled and experienced workers and a professional management in a state-of-the-art business environment; (v) fixed concession fee w i l l increase from US$0.06 to U S $ l per m2, but the variable fee remains at the current rate, i.e. 1 percent o f total revenue o f the terminal. The consultant (IBM BCS) with the full support o f the World bank team has recommended to change the pricing structure o f i t s variable concession fees so that a flat charge o f 1 percent o f the total revenue o f each terminal would be replaced with a declining block charge per ton handled. This w i l l stimulate private operators to improve their cargo handling performance, and create an incentive for attracting new cargo.

The analysis indicates that the proposed investments and labor restructuring would reduce the operating cost o f port operators from US$10 per ton to US$3 per ton and increase the annual revenue gradually by US$l mill ion to US$7 mill ion during 2003-2012, based on an assumption that the annual cargo traffic

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wi l l increase from 3 mill ion tons in 2003 to 5 mill ion tons in 2012. As a result, the port component would generate positive cash flows o f US$9 mill ion in 2003 gradually increasing to US$20 mill ion in 2012, instead o f negative cash flows o f US$9 mill ion to US$2 mi l l ion estimated under the “without” project scenario. This will result in an acceptable financial rate o f return (30%) and NPV ( U S 4 2 million) at a discount rate o f 10 percent.

No financial rates o f return were calculated for H C and H A C as neither o f them are revenue-earning entities. Details o f the above financial analysis for PRA and cashflow analysis for “with” and “without” project for port operation are shown in Annex 5.

Fiscal Impact:

Port Component

The amount o f State budget funds transferred to PRA and LR in recent years i s as follows:

State Budget Support (in Millions of Kuna)

1999 2000 2001 2002 2003 actual actual actual actual budget

Port of Rijeka Authority (PRA) Infrastructure rehabilitation 3.6 10.0 16.8 16.9 18.0 Debt service I/ 0.7 4.0 10.0 Current maintenance 0.6 7.7 0.5 Counterpart funds (including VAT) 2/ 0.0 0.0 3.3

Subtotal 3.6 10.0 18.1 28.6 31.8

Luka Rijeka (LR) Restructuring 21 .o 0.0 9.3 1.5 0.0

TOTAL 24.6 10.0 27.4 30.1 31.8 I/ Including works required for installation of 2 Samsung cranes and other bulk equipment. 2/ Rijeka Gateway Project

Because o f the port’s limited financial capacity, it i s likely that the proposed modernization o f the port w i l l require a short-term increase o f State subsidies followed by a gradual decrease thereafter. PRA needs the Government support o f about HRK 320 mill ion in the next six years (2004-2009) to cover counterpart funds, part o f i t s debt service obligations, and infrastructure maintenance and rehabilitation. Over the longer run, the project i s expected to have a positive fiscal impact from the increase in revenues resulting from increased traffic and higher concession fees from the Successor Companies o f Luka hjeka. By the year 2010, the planned reform measures under the project will also enable PRA to cover depreciation fully, thus significantly reducing the port’s fiscal burden. By year 2020, PRA i s expected to no longer rely on public subsidies.

Road Component

The counterpart funding would be provided by H C and H A C from their own resources earmarked directly from fuel tax and tolls. The road component i s expected to have a favorable fiscal impact from

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expanded economic activity arising from the project (refer to Section E. 1).

3. Technical: No major technical issues are expected. PRA has a good capacity in port engineering and operations, and the design o f the various investments proposed under the project -- all located inside the protected port area -- are fully compliant wi th international standards. Geotechnical and soil investigations are available and the construction permit for Zagrebacko berth includes the use o f a physical model to assess the impact o f the waves regime on the new infrastructure. H C has long experience with the Bank, as it has successfully implemented two IBRD financed project during the past decade. Although H A C has been recently created, i t s technical staff are experienced, as most o f them have been recruited from HC. There should therefore be no major technical issues other than to ensure that quality control i s adequately administered.

4. Institutional: The organizational structure o f the institutions in charge i s fully operational (see section B2 above).

4.1 Executing agencies:

Each executing agency - PRA, HC, and H A C will implement i t s respective component. H C and H A C are staffed by trained professionals with adequate capacity to implement the project. PRA staff responsible for implementation o f the port component have performed very well while implementing the PPF studies, and will be trained further under the PPF. Since H C i s an experienced borrower, it w i l l coordinate progress reporting to the Bank. The podurban interface redevelopment component will be implemented on the basis o f a memorandum o f understanding between PRA, LR and the Municipality o f Rijeka.

4.2 Project management:

Preparation and appraisal missions assessed that the project management capacity o f PRA, H C and H A C i s generally satisfactory. If necessary, the three organizations w i l l receive some additional training (in the use o f the financial management system and in procurement) and consultant assistance (for preparation o f designs, supervision o f works, and drafting o f technical specifications) under the PPF and during early stages o f the project implementation.

4.3 Procurement issues:

H C and H A C are experienced with Bank procurement ru les and procedures. PRA staff i s being trained under the ongoing PPF implementation.

4.4 Financial management issues:

CFAA for Croatia was carried out in 1999. The reforms carried out to date in the area o f financial management put Croatia ahead o f many other CEE countries. Croatia has, in fact, set up a modern legal and regulatory framework, compatible with the needs o f a market-driven economy, completely discarded the old accounting system and opted to introduce a comprehensive new framework based on international guidelines. In order to enhance public sector financial management and to achieve a higher level o f accountability, the issues related to the integrity and universal coverage o f the budget process need to be addressed in greater depth, together with the start o f the Treasury, the modernization o f accounting and reporting systems and the further development o f the institutions in charge o f budget compliance through internal and external audits. Bank rehabilitation i s under way but additional efforts are needed to strengthen banking supervision and improve credit institutions risk-management. Financial markets and their regulatory institutions need further development; this would also make the privatization process more effective. Market competition and corporate governance are main areas to be reformed to achieve greater transparency and financial accountability for the private sector. The organization o f the accounting and auditing profession should be defined by a self-regulating and standard-setting national

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body, ensuring the application o f high standards o f ethics and progressively taking on the fimctions currently performed by the government.

From a financial management perspective, the project however, i s considered having moderate risk due to the following reasons. The three Borrowers are independent entities with their own financial management and information systems, with adequate controls and procedures in place. Where there i s a weakness, it has been mitigated by providing technical assistance through the project. Two o f the entities (HC and PRA) have experience in implementing Bank financed projects or grants. Some staff with prior experience in Bank financed projects have moved from H C to HAC, and are able to help HAC.

A review o f the Financial Management arrangements for the project was undertaken in March 2003 to determine whether the financial management arrangements within the three entities -- Hrvatske Ceste (HC), Hrvatske Auto Ceste (HAC) and Port o f Rijeka Authority (PRA) -- are acceptable to the Bank. Both H C and H A C have financial management systems, capable o f providing accurate and timely information regarding project resources and expenditures, including planning, procurement accounting and financial reporting. PRA’s financial management system needs to be upgraded in order to maintain proper accounts for the project. Funding has been provided under the project to review the existing system at PRA and upgrade the system for the PRA as a whole, which then w i l l be capable o f recording and reporting project related data as well as the normal operations o f the PRA. In the interim, a XL-based software program (which has been used in projects in Serbia as an interim system and found acceptable to the Bank) has been established at the P IU in the PRA. The P IU i s already preparing reports acceptable to the Bank on this system to keep accounts for the PPF. All three entities have prepared Project Implementation Plans that were reviewed and approved by the Bank.

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The modernization o f the Rijeka Port including preparation for urban redevelopment would not lead to any dredging or major works in the water. The only activities which raise environmental concern are: (a) the demolition o f old warehouses, which have used asbestos in the roofing and side wall material, and possibly also asbestos as an insulation material around pipes and inside ventilation ducts; (b) the use o f PCB in a transformer within the Zagrebacko berth area; and (c) reclamation o f land along the Zagrebacko berth for creation o f a -larger area for handling o f cargo and bulky goods. PCB as well as PCB contaminated soil around the transformer will be separated and handled as hazardous waste and transported to a certain facility collecting and storing the PCB contaminated material for further management in accordance with the Croatian legislation. The debris from the demolition activity, after removing the asbestos material, asphalt, and o i l contaminated soil, w i l l be dumped in the harbor, within the area along the Zagrebacko berth to be reclaimed under the Project, if the analysis o f the debris (see below) shows an acceptable level o f potential contaminants. Analysis o f soil was carried out around all the warehouses to be demolished, and the results show that only a limited amount o f soil would be regarded as contaminated with o i l and heavy metals, particularly chrome (Cr) and lead (Pb). The concentration o f hydro carbons (oil) and heavy metals in the material to be used for land reclamation i s the same level as that o f material and soil used for agricultural purposes or below or on the same level as background values for soil and rocks. This amount regarded as contaminated will be separated from the soil and debris to be disposed o f in the sea, and i t will be handled as hazardous waste and be disposed o f in accordance with Croatian regulations. The asbestos material will likewise be disposed o f at a safe place in accordance with Croatian regulations. In order to make sure that no contaminated material would be included by accident in the material used for land reclamation, additional analysis w i l l be carried out by the contractor; this activity i s regulated in the Environmental Management Plan (EMP).

Environmental Category: A (Full Assessment)

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Some o f the warehouses within the area o f Zagrebacko berth were originally given a temporary protection by the local branch o f Ministry o f Culture (MOC) on May 5, 2002. On November 25, 2002, MOC decided to lift the protection for four out o f six old warehouses due to their poor condition. The remaining two warehouses will be protected for the future, and will be rehabilitated under the Project.

Environmental Assessments (EAs) for the Rijeka Bypass road (part o f road D-8) and the port connector road (road D-404) were prepared in 1996 and are in conformity with Croatian legislation. These EIAs were reviewed once more, as part o f the overall EA for the Project, and the consultants confirm that proposed mitigation measures are adequate to secure that the planned road constructions would not lead to any adverse impacts on water resources, and people’s standard o f living, and that no additional mitigation measures are required. Along the roads separate and closed systems for collection o f run-off water and eventual spillages due to accidents w i l l be constructed. Collected water will be diverted to a treatment plant before i t s discharge to the sea. Reduction o f increased noise levels, where found necessary, w i l l be mitigated by construction o f barriers and planting o f green screens.

It should be mentioned that both the Rijeka Bypass and the port connector road w i l l result in considerable environmental benefits for Rijeka inhabitants. A large part o f the current traffic through Rijeka will be diverted to the bypass/connector road, while heavy trucks to/from the container terminal to the Bypass road will to a large extent go underground in a tunnel, instead o f through already congested streets in the Rijeka City center, which i s currently the only route for heavy traffic to/from the port. These changes will result in a large reduction o f the air pollution from exhaust gases from al l diesel h v e n vehicles, and a reduced noise level. In addition it i s also expected that the number o f accidents and injures will be reduced. Land needed for the construction o f the roads was acquired for the western part o f the road D-8 (between Orehovica and Draga), while the land acquisition for the western part o f road D-8 (between Draga and Sv. Kuzam) i s ongoing in accordance with the stringent procedures described in the Croatian legislation, and expected to be finished before the end o f June 2003. The Executive Summary o f the project Environmental Assessment i s attached as Annex 12 to the PAD.

In addition, the implementation o f the Project requires the resettlement o f 10 families within the port area, where the road D-404 starts, and o f two families at the Sv. Kuzam junction. The negotiations with the 10 families living in two buildings within the port area i s ongoing, and the families will be provided similar or better apartments in Rijeka, and agreements to resettle the two families at the Sv. Kuzam junction have already been reached. Annex 13 to the P A D (Land Acquisition and Resettlement Plan) outlines in more detail all issues related to land acquisition and resettlement.

The project w i l l also include the elimination o f 30 “black spots”, in order to improve road safety. This result will be achieved through managerial measures, such as improving visibility, imposing speed reductions, and setting up traffic lights for regulation o f traffic in some intersections. These activities would not lead to any environmental issues or need for land acquisition.

Finally, the project will include the rehabilitation o f the Krk bridge. In this case there are no disturbances for the waterway, as all bridge foundations are located on land, and there are no bridge support in the water.

I t should be mentioned that the current handling o f grains and cereals in the port leads to emission o f particulate matters when the products are transported to and unloaded from the existing silos. The Rijeka Port Authority has already procured air control equipment in order to eliminate the emission o f particulate matters from the silos, and the Project will finance covered conveyer belts for transport o f the grains between the ships and the silos. In addition, the Project will finance equipment for facilitating separation o f different waste generated in the port and from ships arriving to Rijeka, as well as equipment for abating eventual accidental o i l spillage in the harbor.

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5.2 What are the main features o f the EMP and are they adequate?

Separate EMPs for each construction or rehabilitation activity under the project have been prepared and are part o f the EA, except for the sub-components related to elimination o f "black spots" all over Croatia in order to reduce traffic accidents, and the rehabilitation o f concrete surfaces on pillars supporting the Krk bridge, as these activities would have no impact on the environment.

5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: December 15,2002

The final EA was approved by the Government on February 7,2003. 5.4 How have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

As mentioned above, the EIAs for the Road Components were prepared in the mid 90s, and at that time public consultations were not required by law. However, the public was actually invited to comment on the plans for the proposed road constructions related to the Road Components D-8 and D-404. In addition an extensive exhibition o f the plan including the road components D-8 and D-404 took place during November 11, 1998 - January 3 1, 1999, when the public was able to review the plans, and al l related documents, and also meet with team and authorities responsible for the plan.

Concerning the Port Component, a public consultation was held in December 2002.

The result o f the overall environmental assessment was made public in i t s draft form in accordance with Croatian and Bank requirements, and a public hearing and workshop for the whole Project took place on January 15, 2003, to which all active NGOs in Rijeka as well as different authorities and agencies with an interest in the project were invited, and the EA, EA Summary, and the EMP were made available to the public for comments. The documents were then made available for further comments during an additional seven days. However, no comments were received from the NGOs either during the hearing or during the additional seven days. Minutes from the meeting as well as the l ists o f invitees and participants in the hearing are attached to the final EMP. 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

Ex-post evaluation surveys w i l l be conducted during each supervision mission to confirm the appropriateness o f the EMPs' recommendations, and propose, if necessary, modifications o f the EMPs.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The main social issues related to the project concern the staff redundancy program for Luka Rijeka. When the systematization process i s completed, l is ts o f redundant workers will be prepared. Workers w i l l be advised that they are on the surplus l i s t and will be provided with a number o f options. Options w i l l include: i) normal retirement for workers reaching age 65, ii) pre-retirement benefits with purchase o f years to retirement based on a combination o f age and years o f service for workers who meet the criteria iii) voluntary departure wi th enhanced severance; iv) and involuntary departure wi th severance per the collective agreement. In addition, workers will be offered Redeployment Assistance through the Mobil ity Center in Rijeka operated by the CES with EU support. The second social issue relevant to the project i s the acquisition o f land and resettlement o f ten families which i s addressed in detail in the Land acquisition and resettlement plan attached in Annex 13.

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6.2 Participatory Approach: How are key stakeholders participating in the project?

The labor restructuring strategy will be to work out all the details o f involuntary departure with the unions prior to announcing a well publicized voluntary program under a limited time offer (two months) with an incentive o f 1,000 Kuna per year o f service to a maximum o f 25 years for eligible workers. Voluntary departure w i l l be targeted to two groups, the large group o f workers who are often absent due to illness, who are on the protected l i s t and who therefore cannot be made redundant under labor legislation and to surplus white-collar workers. Workers considered vital to the continuing operation o f LR, workers who are eligible to retire, and workers who are eligible for pre-retirement departure w i l l not be eligible for departure wi th enhanced severance.

Concerning environmental issues including land acquisition and resettlement, see above under sections 5.1 and 5.4

6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations?

LR management and port workers unions w i l l consult on a permanent basis during the implementation o f the redundancy program. The IBM business plan calculations for staffing levels in Successor Companies, and the RMG estimates o f approximately 70 remaining staff in a residual Luka Rijeka suggest a surplus o f staff in the range between 687 and 776 workers. LR Management has accepted a staff surplus in the range between 550 and 650. Based on this level o f severance the cost o f labor restructuring measures w i l l be in a range between USD 5.9 and USD 7.0 mill ion in a l ow to medium cost scenario and between USD 6.8 and USD 8.0 mill ion in a medium to high cost scenario. A condition o f Bank funding o f severance will be monitoring and evaluation, including the set up o f a register o f beneficiaries with a cross-reference system established in the personnel and payroll departments to prevent rehiring, and a tracer study with an annual survey o f workers who were beneficiaries o f departure with severance. Necessary detailed arrangements are detailed in the approved Project Implementation Plan for PRA.

6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

The Croatian Employment Service (CES) has discussed with Luka Rijeka (LR) management arrangements to offer the services o f the Mobil ity Center (MC) in Rijeka, which has to date been assisting HZ workers on a pilot basis. The Ministry of Labor in Croatia i s the beneficiary o f an EU program to assist the CES build on the pilot Mobil ity Center initiative, including funding o f Euro 1.5 mill ion for a labor redeployment fund. The LR restructuring project will build on a number o f lessons learned from the HZ experience in terms o f labor redeployment. The project will: i) include management training in negotiating ski l ls , conflict resolution, and problem solving; ii) target workers protected from redundancy with special measures (severance and redeployment); iii) ensure that the Human Resource and Legal Department plays a key role in the restructuring process; iv) promote the Social Plan and related measures with a well publicized information program within LR and in the community to build local support; and v) include terms o f reference for a tracer study in the Social Plan as an integral part o f the project.

6.5 How w i l l the project monitor performance in terms o f social development outcomes?

In regard to redundant staff, see section 6.3 above, and concerning issues related to land acquisition and resettlement it will be monitored by the Rijeka City administration and followed up during each Bank supervision mission.

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Policy Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Natural Habitats (OP 4.04, BP 4.04, GP 4.04) Forestry (OP 4.36, GP 4.36)

Triggered 0 Y e s - NO

- Y e s 0 NO

li- Y e s 0 NO

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The above mentioned EA clearly documents that the Government has appropriate legislation and staff to address the applicable safeguard issues. Loan Agreement with HC includes specific provisions requiring the Borrower to carry out land acquisition and resettlement in accordance with the Bank's policies, and the Loan Agreements with all three borrowers have provisions to ensure environmental compliance.

Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)*

F. Sustainability and Risks 1. Sustainability

The project w i l l seek sustainability through:

- Y e s 0 NO

0 Y e s - NO

- Y e s 0 NO

0 Y e s - NO

- Y e s 0 NO

- Y e s 0 NO

0 Y e s I NO

0

0

0

0

increased efficiency in port operation by greater involvement o f the private sector; improved port financial performance leading to reduced Government contribution in the longer term improved management o f motorways and national roads; and secured funding mechanisms for road maintenance

Risk From Outputs to Objective The Government may not implement agreed reforms in the port sector

Risk Rating Risk Mitigation Measure

S A reform 'action plan' has been defined as part o f Luka Rijeka Business plan, discussed during preparation, and confirmed at negotiations through a Project Policy Letter.

Private sector does not respond to competitive tenders for concessioning o f port operations and services

M The project will provide T A to both the Port Authority and Luka Rijeka to carehlly design the various transactions, to make them attractive to the private sector.

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Government may undertake new uneconomic motonvay projects

The City o f Rijeka, the Port Authority and Luka Rijeka do not respect their commitment to cooperate for a successful development o f the Ci typort interface.

H

M

Sector dialogue will continue through provision o f TA and financing Motonvay rehabilitation. Government unlikely to afford new projects

The Government w i l l provide assurances that the MOU signed in March 15,200 1 will be respected by all parties. The project w i l l assist in the design o f the transaction which should benefit all parties.

From Components to Outputs Counterpart funds may not be available. S

M Adequate procurement and financial management staff for implementing the project may not be available at the PRA land HAC.

Counterpart funds will be included in PRA, HAC, and H C annual budgets, and an initial payment by each w i l l be required as a condition o f disbursement. The PPF and the project will help strengthen PRA, LR, and HAC.

Overall Risk Rating S

3. Possible Controversial Aspects:

None.

G. Main Loan Conditions 1. Effectiveness Condition

1. least US$50,000 equivalent. 2. technical assistance for i t s Business Plan. 3. Loan Agreements.

PRA, HC, and H A C w i l l open a project Account with an initial deposit in local currency o f at

PRA and LR have signed a Subsidiary Loan Agreement for LR's severance program and

Each Loan Agreement contains a cross-effectiveness condition with respect to the other two

2. Other [classify according to covenant types used in the Legal Agreements.]

Loan conditions:

The following condition has been reflected in the Guarantee Agreements:

The Government w i l l ensure that an increasing percentage o f port traffic -- expressed in tons operated by the private sector/total port tonnage per year -- will be handled by the private sector, from 0% in 2004 to 30% in 2005,50% in 2006, and 80% in 2008.

The following conditions have been reflected in each o f the loan agreements:

- PRA: (a) the disbursement related to the construction o f the Zagrebacko berth, estimated at US$27.3 mill ion including contingencies, i s subordinated to the submission to Parliament o f the required

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legislative changes so as to permit (i) PRA to offer 25 year leases or concessions to private terminal operators on i ts own authority; and (ii) PRA and the City o f Rijeka to redevelop maritime domain at the Rijeka port for non-maritime purposes; (b) all necessary measures w i l l be taken to improve productivity o f port operations and to increase port throughput. (c) maintenance o f an operating ratio without subsidies satisfactory to the IBRD (2003: 230%, 2004: 220%, 2005: 200%, 2006: 190%, 2007: l8O%, 2008: 160%, 2009: 150%); (d) maintenance o f a debt service coverage ratio satisfactory to the IBRD (2003-2005: 1.0, 2006 and thereafter: 1.3); and (e) in cooperation with the Municipality o f Rijeka, and through a public competitive bidding process, award and initiate negotiations o f a contract to redevelop part o f the maritime domain o f k j e k a Port for urban purposes by December 3 1,2006.

(a) adhere to and implement the road management program, with gradual increase o f the road maintenance standards, for both routine and periodic maintenance, from 62% in the year 2003 to 100% in the year 201 1. Government support to this strategy has been confirmed at negotiations and reflected in the Project Policy Letter (PPL), with a minimum level o f road maintenance funding as follows: US$158 mill ion in 2003; US$140 mill ion in 2004; US$155 mill ion in 2005; US$170 mill ion in 2006; US$170 mill ion in 2007; US$170 mill ion in 2008; US$170 mill ion in 2009; and (b) maintenance o f a debt service coverage ratio o f 1.1, (c) shall take all measures necessary to ensure that acquisition o f land required for road construction under Parts B.3 and C.3, and all persons displaced as a result o f the project shall be dealt with in accordance with the Land Acquisition and Resettlement Action Plan (Annex 13).

- HAC: (a) obtain an I S 0 9001 certification by December 31,2006; and (b) maintenance o f a debt service coverage ratio o f 1.1,

In addition, all three entities will take appropriate measures to ensure: (i) project continuous monitoring and reporting, as well as mid-term reviews; (ii) the maintenance o f their respective Project Implementation Unit (PIU) during project implementation; and (iii) full compliance with the Environmental Management Plan.

The followinrr conditions have been reflected in the subsidiarv loan and Proiect agreement:

- LR: (a) annual preparation and implementation o f a multi-year business plan satisfactory to the IBRD; (b) implementation o f the Social Program completed by December 31, 2006; including the severance program in two phases, i.e., departure o f 380 staff on a voluntary basis by the end o f 2004, and about 400 staff during the period 2005-2006; (c) progress with productivity improvement plan as detailed in Annex 11, satisfactory to the IBRD; and (d) maintenance o f a debt service coverage ratio satisfactory to the IBRD (2003-2005: 1.0, 2006 and thereafter: 1.3).

Financial Covenants:

1. year, commencing with the accounts for the year ended December 3 1,2003.

HC, H A C and PRA wil l ensure that the project accounts, SOEs and SAs wil l be audited each

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H. Readiness for Implementation 1. a) The engineering design documents for the f i rs t year's activities are complete and ready for the

1. b) Not applicable. start o f project implementation.

2. The procurement documents for the first year's activities are complete and ready for the start o f

17 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory

4. The following items are lacking and are discussed under loan conditions (Section G):

project implementation.

quality.

I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 2. The following exceptions to Bank policies are recommended for approval. The project complies

with al l other applicable Bank policies.

Q

M he1 Audige Andrew N. Vorkink Team Leader Country Director

q. b y

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Hierarchy of Objectives iector-related CAS Goal: krengthening market insti- utions.

ncrease trade contribution to ?DP through improved trade ompetitiveness

ncreasing private sector nvolvement in financing and lperating transport sector nfrastructure and services.

'roject Development Ibjective: mprove the effectiveness o f he transport chain through the Lijeka Gateway for both reight and passenger traffic 'y modernizing the port and oad network connections, and r i a t i z i n g port operations.

Annex 1: Project Design Summary CROATIA RIJEKA GATEWAY PROJECT

Key Performance Indicators

Sector Indicators: Reduce Government financinghbsidies for Rijeka Port in the longer term.

Exports increase by an average 5% per year between 2003 to 2008.

Percentage o f private sector participation in Rijeka port operations increases from 0% in 2004 to 30% in 2005,50% in 2006, and 80% in 2008 (expressed in tons operated by the private sectoritotal port tonnage).

Outcome I Impact Indicators: Port operation performances are improving along the benchmark detailed in annex 1 1. Total Rijeka port traffic increases by an average 7% a year from 2004 to 2009, and passenger traffic increases by an average 5% per annum (90,000 pax in 2002).

Truck transit time through the city o f Rijeka i s reduced from an average 1 hour in 2004 to less than 20 minutes in 2006.

Data Collection Strategy

Sector/ country reports: 4nnual Government budgets; World Bank CAS' updates.

3overnment statistics and world economic indicators.

Project progress reports and Mission Aide-memoires.

Project reports:

Quarterly progress reports and supervision mission aide-memoires. Port statistics data.

Data from truckers associations and transport facilitation surveys.

Critical Assumptions (from Goal to Bank Mission) Economic stability and financial adjustment sustained.

Improved inland transport system and on going efforts to improve trade and transport facilitation sustained. Government committed to introducing private sector participation in the transport sector.

(from Objective to Goal)

Croatian authorities committec to continue the on going reforms in the transport sector.

;he Government promotes further border crossing improvements; investments in TEM comdors 5b and 10 continue.

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Hierarchy of Objectives Output from each Component: The Port o f Rijeka Authority acts as a landlord and the majority o f port services are provided by private operators on a competitive basis in modernized port infrastructure.

Port. City environment i s enhanced, through privately financed urban development. Security for goods and people i s in compliance with European standards.

International connections between the port and the road network are improved. The quality o f the sen ices o f the road sector Administration (HAC) i s I S 0 certified.

Key Performance Indicators

Output Indicators:

Law on Concessions, Maritime Domain and Seaports Act modified as required. Luka Rijeka (LR) is restructured in socially acceptable way.

Financial performance o f PRA and LR lead to a progressive reduction o f Government subsidies.

A developer is selected as a result o f an international competitve process. Port's security indicators comply with IMO and European Union standards.

I S 0 9001 certification granted for motonvays services. Implementation o f PMSBMS system extended

Data Collection Strategy

Project reports:

2uarterly progress reports and supervision mission aide-memoires.

Audited annual financial reports.

Quarterly progress reports and supervision missions aide-memoires. Special sociaknvironmental surveys.

Quarterly progress reports and supervision reports. Interviews with truckers associations.

Critical Assumptions (from Outputs to Objective)

Croatian authorities committed to continue ongoing reforms in the port sector. Private sector responds to competitive tenders.

Private sector responds favorably to bidding processes for port services related concessions.

Port Authority committed to improving the overall quality o f the port and port/city interface environment.

Project counterpart funds available on time, and procurement i s carried out in accordance with World Bank guidelines. Croatian authorities committed to rationalize implementation o f motonvay program.

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Hierarchy of Objectives roject Components I u b-components: - Port Restructuring and

lodemization

- Port/city Interface Ledevelopment

- Intemational Road mprovements

- Project Preparation Facility

?ont-end fee

Key Performance Indicators

Inputs: (budget for each component) LiS$75.1 million, including US50 .2 mil l ion from the [BRD

US$43.2 million, including USS24.6 mill ion from the [BRD US$144.8 million, including US$78.7 mil l ion from the IBRD USS1.5 mill ion

US$1.5 mil l ion

Data Collection Strategy

'roject reports:

)uarterly project progress and upervision reports

ame

ame

:onsultant reports

Critical Assumptions rom Components to

Ibjectives are reasonable, and an be reached within the me- and budget-frame o f the roject

kitputs)

%me

ame

The above costs include physical (6%) and price (8%) contingencies o f US$14.8 mil l ion and US$19.3 mil l ion respectively.

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Annex 2: Detailed Project Description CROATIA RIJEKA GATEWAY PROJECT

Tentative cost estimate for each sub-component i s shown below. The Borrower acronym i s shown in brackets.

By Component:

Project Component 1 - US$75.10 million A - Port Restructuring and Modernization WS$50.2 million to be financed by the Bank)

Rehabilitation of port infrastructure and suverstructure (US$lO.8 million: US$6.8 million Bank financed): Rehabilitation works are needed in the western part o f the port to allow a smooth transfer o f the operations related to the handling o f woods and timber. These include the demolition o f outdated and unused warehouses -- with the exception o f warehouses # I 2 and #I7 which w i l l be rehabilitated for their cultural value --, repaving along the western part o f the port for the storage o f general cargo, rehabilitation o f utility networks (water, electricity and telephone), rehabilitation o f the fencing o f the area, and the improvement o f the port connection with the road and railways networks. [PRA]

Demolition of existing and reconstruction of new warehouses in Zagrebacko and Prasko berth areas fUS$13.1 million: US$6.5 million Bank financed): Eight old warehouses and some small non-functioning facilities will be demolished, and new light modular multi-functional warehouses will be constructed under the project. [PRA]

Rehabilitation of Becko berth (US$1.5 million: US$0,8 million Bank financedl: Rehabilitation o f Becko berth has been identified as a f i rs t priority investment, and since all required permits and detailed designs are available, the works are expected to start as early as 2004. Tender documents will be prepared by the consultants recently selected under the PPF-financed study. [PRA]

Construction of multi-vurDose terminal at Zagrebacko berth (US$27.3 million: US$13.7 million Bank financed): The project will assist in the restoration and protection along the Zagrebacko shore by reclaiming the land with suitable material resulting from the demolition o f old warehouses, including the construction o f a berthing facility o f 250 m length which w i l l allow vessels o f 15 meter draft to service the port o f Rijeka. Detailed design and tender documents w i l l be prepared by the consultants recently selected under the PPF-financed study. [PRA]

Provision of traffic safetv eauivment (US$2.3 million: US$2.3 million Bank financed): Consultant RMG has identified investments contributing to traffic development and safety. The f irst to be implemented i s the Vessel Trafic Management System (VTMS), i.e., a radar-based system coupled with a database and identifying and monitoring ship movements. [PRA]

Provision of antiuollution eauivment (US$1.6 million: US$l.6 million Bank-financed): A specific equipment to contain dust from the grain silos will be provided under the project. [PRA]

Provision of Heavv Carp0 Handling eauiument OYS6.1 million: US$6.1 million Bank financed): LR s t i l l operates old and outdated yard equipment that clearly needs to be replaced to improve port operations, at least during the interim period before privatization. Most rail mounted quay cranes rented from PRA are very old, slow and have a very low capacity. Ports worldwide are replacing this outdated equipment with modem mobile cranes that can shift quickly from one berth to another, allowing fast handling o f unit loads up to 40 tons. [PRA]

Management Modernization (US$2.1 million: US$2.1 million Bank financed): Since PRA does not

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possess necessary technical knowledge o f VTMS, hiring consultants under the loan to provide assistance in drafting of the technical specifications and tender documents w i l l be needed. A privatization advisor would help implement a business plan for LR covering: (i) organization o f operations, (ii) creation o f profit and cost centers for each terminal operation and other activities, (iii) establishment o f daughter companies, (iv) privatization o f subsidiaries, (v) human resource strategy, and (vi) analysis o f the status o f the accumulated debt. The advisor would also address issues connected with the priority concession: (i) review o f general objectives an&of contractual targets (traffic levels, performances, quality etc.), (ii) respective responsibilities and commitments o f the port authority and o f the concessionaires regarding maintenance and development o f infra- and superstructure, (iii) equipment, (iv) extension o f the concessions to allow new investment plans, (v) port tariffs, lighthouse dues, and (vi) periodic review o f performance. The project would also finance consultants to (i) prepare designs for civil works contracts, (i i) assist in preparing a BOT contract for further expansion of Zagrebacko berth and for construction of 0403 connector road; and (iii) works supervision consultants. PRA i s not very experienced in implementation o f Bank-financed projects, training in accounting, financial management and procurement wi l l be required. Potential need for assistance o f individual consultants i s also foreseen. [ P W

Information technoloat modernization - Electronic Data Interchanze (EDI) svstem (US$l.9 million: US$1.9 million Bank financed): An ED1 system will provide for safer, quicker connections between the port community and the port administration. [PRA]

Severance payment (US$7.5 million: US$7.5 million Bank financed): Based on LR’s Social Plan proposal, a severance program would be financed under the project. [PRA/LR]

Audit and financial manazement system (lJS$0.8 million: US$0.8 million Bank financed): , The loan w i l l finance a multi-year (up to 3 years, subject to satisfactory performance) contract for auditing services. In addition, a financial management hardware and sof lare and training for i t s utilization will also be financed by the loan and provided to PRA and LR at the early stages o f project implementation. PRAI

Project Component 2 - US$43.20 million B - PortKitv Interface RedeveloDment (US$24.6 million Bank-financed)

Preparation works at the Delta and Porto Baros areas (US$1.8 million: US$0.9 million Bank financed): The transfer o f port operations from the Delta and Porto Baros area to the westem part o f the port for the modernization of the passenger terminal represent a promising activity for the city o f Rijeka. The total cost o f the preparation works for the area to be redeveloped includes transfer o f a l l cargo to the western part o f the port and removal o f wood storage warehouses, fencing, and al l quay cranes (including those on the breakwater). [PRA]

Construction of a new passenger terminal (US$4.0 million: US$2.0 million Bank financed): This component aims at the development o f the waterfront area open to business and commercial activities. If the PPF study confirms the viability o f a public/private partnership (PPP) approach, additional technical assistance will be provided under the project to help select a private investor under a competitive process, including the possible creation o f a podc i t y special purpose agency entrusted wi th the management o f this innovative project. The project will finance the construction o f a passenger terminal along the breakwater. [PRA]

Construction of Draga-Braidica connecting road 0-404 (US$3 7.4 million: US$21.7 million Bank financed): The 4 km long road would link the Bypass to the port o f Rijeka reducing heavy truck traffic

- 3 5 -

through the congested center o f the city. Designs, environmental studies, location permits and some land acquisition are already completed. HC, which would implement this component, prepared a feasibility study on new traffic and origin-destination data, considering separately the construction o f the three sections to 2- or 4- lane standard. The results are satisfactory. The cost also includes the acquisition and installation o f traffic equipment. [HC]

Project Component 3 - US$144.80 million International Road Improvements (US%78.7 million to be financed bv the Bank)

HC management cauacitv improvement (software, TA, suuervision consultants and training: US$5.4 million: US$5.4 million Bank financed): H C intends to improve i t s administration o f the Road Districts, and establish road design standards for local roads. The project would provide management consultants, TA, software (GIS extension; Oracle supplement license; weather and traffic systems software) and training to H C to carry out these tasks and improve i t s operational efficiency. In addition, consulting services for specific technical design and supervision o f civil works and equipment installation w i l l be financed.[HC]

Pavement and bridge management svstems (PMS/BMS: US$2.4 million: US$2.4 million Bank jinanced): I t s implementation was initially supported under the Bank's Highway Sector Project. An inventory o f the condition o f the H C road network was completed in December 2002. Traffic levels, pavement roughness, rutting, pavement surface deterioration, skid resistance and status o f the pavement structure were surveyed. Croatian Telecom has been contracted to install an integrated PMS/BMS system for all H C districts, which would then be expanded to the counties. To complement the system, small

. equipment (traffic counters, weigh-in-motion - WIM scales, weather monitoring system), PMS/BMS software upgrade, and technical assistance/training would be also financed under the project. Software to improve HC's ability to administer the road network would also be included. [HC]

Vehicle overloading monitoring svstem W S 2 . 7 million: U S 2 . 7 million Bank financed): Overloading o f heavy trucks causes excessive damage to the national roads network. H C identified two main transit corridors where the problems occur, and proposes to implement pilot fixed scale stations to be financed under the proposed project. In addition, H C needs to develop a strategy for transition from the existing axle load policy (lOt/axle) to the European Union standard (1 1.5t/axle). The project would finance an axle load study and installation o f equipment (fixed scales) to develop a strategy for enforcement and eventual adoption o f the EU standard. [HC]

H A C cauacitv imurovement and training of the HAC PIU staff (US$O.6 million: US$O.6 million Bank financed): Technical assistance for obtaining an I S 0 9001 certificate, which w i l l assist H A C in the next stage o f improving i t s organizational efficiency and implementing an economic motonvay program w i l l be provided under the project. Supervision consultants will be hired for Krk bridge rehabilitation works. In addition, H A C P IU staff w i l l receive training, as needed, in financial management, accounting and procurement. [HAC]

Construction of Riieka bypass section Orehovica - Draga - Sv. Kuzam (6.5 km: 4 lanes; US$95 million: US47.5 million Bank financed): The proposed section would complete the westem part o f the Kjeka bypass, relieving traffic in a highly congested city which i s squeezed between the mountains and sea and providing a through link for tourist traffic traveling from Italy/Slovenia/Central Europe to the Dalmatian coast. I t would also improve the linkage between the port terminals and the existing Skrljevo and Kukuljanovo industrial and free zones, where the current traffic passes through the narrow streets o f a small town o f Draga. Designs, environmental studies, location permits and some land acquisition are

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already completed. HC, which would implement this component, prepared a feasibility study based on new traffic and origin-destination data, and considering separately the construction o f the three sections to 2- or 4- lane standard, which i s satisfactory. The cost also includes acquisition and installation o f traffic equipment. [HC]

Repayment of PPF - Preparatory studies for port component Rehabilitation o f port infrastructure and superstructure Demolition and construction o f warehouses in Zagrebacko and

Elimination of 30 black svots (US$7.1 million: US$3.6 million Bank financedL: HC, in coordination wi th the traffic police have identified 147 so called 'black spots', or locations with high incidence o f traffic accidents. These black spots can be eliminated through (i) traffic management improvements; (ii) design improvement, or through (iii) combined civ i l engineering-traffic measures. The government has already eliminated 28 o f the black spots and another 20 will be eliminated through the betterment program included in the ongoing EIB project. The proposed loan would finance improvement o f 30 out o f the remaining 107 black spots. [HC]

1.50 1.50 1.50

3.50 3.50 7.00 7.90 5.80 5.80 11.60 13.10

Krk Bridee rehabilitation (US$31.5 million: US$16.5 million Bank financed): This bridge, once the longest arch bridge in the world, provides the only road, electricity, water and o i l (pipeline) connection from the mainland to the island o f Krk where the Rijeka Airport and Omigalj O i l Terminal are located. Strong winds, salt, and lack o f maintenance have caused severe deterioration o f the structure. HAC, which administers this toll facility, prepared a feasibility study for the rehabilitation o f the f i rs t section o f this bridge which i s satisfactory; additional studies are under preparation. [HAC]

Prague berth area

Project Component 4 - US$1.50 million Reimbursement o f the Project preparation facility (PPF). Five preparatory studies for the port component have been financed under the PPF: (i) detailed engineering and project design i s being prepared by Nippon Koei, Japan; (ii) study on porthrban redevelopment i s being prepared by a consortium o f international f i r m s FVRiInroslHPCl KPMG/Rijekaprojekt/RGS; (iii) Urbing, Croatia has prepared an environmental assessment summary for the entire project; (iv) business plan for LR i s being prepared by IBWCSS and RMG; and (v) social plan for LR i s being prepared by an individual consultant, Ms. Jolanta Hess. [PRA]

Reconstruction o f Zagrebacko-West berth 12.25 Heavy mobile equipment for Luka d.d. 5.60

2.00 Antipollution equipment 1.50

0.10

Vessel Traffic Management Information System (VTMS)

Cons. services for VTMS technical specifications & tender

CROATIA - Proposed Rijeka Gateway Project Tentative cost estimate (US$ million, net o f taxes and front-end fees)

12.25 24.50 27.30 5.60 6.10 2.00 2.20 1.50 1.60 0.10 0.10

Electronic Data Interchange (EDI) System I 1.901 1.901 1.90

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B. Port/City Interface Redevelopment I

G R A N D T O T A L I 155.00l 27.801 66.84 lS.Oa 264.601 264.60

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Annex 3: Estimated Project Costs CROATIA: RIJEKA GATEWAY PROJECT

Project Cost By Category Civil works Goods and equipments Services Redundancy payment PPF Reimbursment

A - Port Restructuring and Modernization B - Port/City Interface Redevelopment C - International Road Improvements D - Project Preparation Facility (PPF) Total Baseline Cost

Physical Contingencies

Local Foreign Total US $million US $million US $million

89.00 130.20 2 19.20 2.60 20.20 22.80 2.10 11.50 13.60 7.50 0.00 7.50 0.00 1.50 1.50

Total Project Costs’ Front-end fee

Total Financing Reauired

101.20 163.40 264.60 0.00 0.00

101.20 163.40 264.60

I Identifiable taxes and duties are 0 (US%m) and the total project cost, net o f taxes, i s 266.1 (USSm). Therefore, the project cost sharing ratio i s 58.81%

o f total project cost net o f taxes.

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Annex 4: Cost Benefit Analysis Summary CROATIA RIJEKA GATEWAY PROJECT

Present Value of Flows k"- t I ic Financial Analysis' An a I ys i s

Benefits:

[For projects with benefits that are measured in monetary terms]

Fiscal Impact

Taxes Subsidies

costs:

Net Benefits:

IRR:

US39 1.1 mill ion

27.6%

' If the difference between the present value o f financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation o f the difference i s warranted, e.g. "The value o f financial benefits i s less than that o f economic benefits because o f controls on electricity tariffs."

Summary of Benefits and Costs: The economic evaluation has been carried out for the civil works and redundancy components o f the project comprising 9 1% o f project costs. Remaining project comonents comprise port equipment which replaces essential items which are worn out and considered to be justified a priori, and consultant services, training and related minor equipment which are a prerequisite for achieving the institutional objectives o f the project. No formal economic evaluation was carried out for these components. The analyses are summarized below, while supporting consultant studies are retained in the project files.

Main Assumptions:

Rehabilitation of Infrastructure in the Western Port Area: The main assumptions are: - Investments take place in 2004-2007. - Value added per ton o f timber i s US$6. - Efficiency gain o f 2%. - General cargo traffic grows an average 8.6% p.a. from 2000 to 2010. - Throughput capacity o f general cargo terminal increases from 1,230,000 to 2,240,000 tons p.a.

in 2008.

On this basis, the investments are estimated to have a net present value (NPV) o f US10 .4 mill ion (10% discount rate) and an economic rate o f return (ERR) o f 13.6%.

Multipurpose Terminal at Zagreb Berth, Demolition and Rehabilitation Works: The benefits o f this component derive primarily from (a) upgrading the system o f handling timber products which are presently processed and stored extensively in the port, and (b) transfering timber operations from the Sisak terminal (Delta area) to Zagrebacko Quay which w i l l free up 17.5 hectares for urban purposes. The

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main assumptions are: - The capacity o f the present timber terminal i s 150,000 tons p.a. - Investments take place in 2004-2006. - Value added per ton o f timber i s US$lO. - New system o f storing and handling wood produces an efficiency improvement o f 30%. - Timber traffic grows an average 8.6% p.a. from 2000 to 2010. - Throughput capacity of Zagreb Berth area increases from 400,000 to 560,000 tons p.a. in 2008. - Rental value o f Delta area w i l l increase by US$9l/hectare/annum when used for urban

purposes.

On this basis, the investment i s estimated to have an NPV of US$3.0 mill ion and an ERR o f 13.8%.

Redundancy Program: The main assumptions are: - 780 LR staff are retrenched at a cost o f US$7.5 mill ion for redundancy payments and training. - Separated staff are not being employed productively prior to retrenchment. - 30% o f retrenched staff are reemployed after waiting one year on average. - Reemployed staff earn an average 75% o f their former salary.

On this basis the investment i s estimated to have an NPV o f USS 5.8 mill ion and an ERR o f 20.1%

Urban Redevelopment/Passenger Terminal: The passenger terminal i s an integral part o f the urban redevelopment scheme, but was conservatively evaluated in terms o f i t s expected financial return. The main assumptions are:

- Investments take place in two phases during 2004-2006 and the terminal i s fully operational in 2007.

- Annual operating costs are 2% o f investment costs. - Tariffs are US$0.34 per domestic passenger, US$1.82 per international passenger, and

- An additional 50,000 passengers w i l l use the facility in 2005 and 2007, and this traffic

- 50% o f passenger traffic i s international. - An additional 15,000 passenger car units will use the terminal in 2005, and this

traffic w i l l increase 10% p.a. thereafter.

US$5.45 per passenger car unit.

will grow 10% p.a. thereafter.

On this basis, the investment i s estimated to have an N P V o f US$1.1 mill ion and an ERR o f 12.4%.

Rijeka Bypass and Connector Roads: This road component was evaluated in accordance with the 'Guidelines for the Preparation o f Feasibility Studies' which was prepared by H C with assistance from the World Bank. HC used the OPCOST model which i s a variation o f HDM3 adopted to local conditions. The main inputs and assumptions are:

- Construction take place during 2003-2006 - Origin-destination surveys at eight locations during peak and off-peak seasons in 2001, plus manual/automatic and historical traffic counts. - Traffic model based on 34 traffic zones and 277 links. - Passenger car traffic grows 2-4% p.a., buses 1.3-2.0% p.a., and trucks 2.0-3.0% p.a, during

- Passenger time valued at the average wage rate for worlung time (US3.7l/hour); and one-third o f this amount (US$1.24/hour) for non-working time. - Fatal traffic accidents valued conservatively at US$l,720/accident. - Indirect traffic benefits on the D-404 port connector road estimated as 15% o f direct benefits

2001-2031.

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comprising (a) traffic benefits on the city street network which was not modeled, and (b) reductions in urban noise and air pollution following removal o f heavy truck traffic.

Component Best Estimate Low Traffic Forecast costs +20% Western Port Area 13.6 9.6 10.2 Multipurpose Terminal 13.8 11.6 12.3 Redundancy Program 20.1 20.1 17.9 Urban Redevelopment 12.4 11.0 9.8 Rijeka Bypass 15.3 13.3 12.8 Port Connector Road 13.2 10.0 10.8

On this basis, the Orehovica - Sv. Kuzam (4 lanes) and Sv. Kuzam - Bakar roads are estimated to have an NPV o f US$25.0 mill ion and an ERR o f 15.3%. If the Orehovica - Sv. Kuzam section were constructed to 2 lane standard, i t would have an N P V o f USS32.0 mill ion and an ERR o f 18.3 %. The D-404 connector road (Draga - Luka) i s estimated to have an N P V o f US$10.8 mill ion and an ERR o f 13.2%.

Krk Bridge: The rehabilitation o f the Krk Bridge was also evaluated by the OPCOST model following the 'Guidelines for the Preparation o f Feasibility Studies'. The main inputs and assumptions are:

- The 22 year old bridge has corroded due to salt intrusion resulting from failure to adequately protect the concrete reenforcements during construction, high winds, and inadequate maintenance during the war.

- Salt intrusion cannot be prevented by routine maintenance. - The bridge will become permanently unusable or collapse around 20 10-2020 and

- Krk Island including the Omisalj O i l Terminal, would be served by ferry beginning in 2006. - The bridge carried 7,239 vehicles per day in 2001 compared to 3,400 vehicles per day in 1986. - Rehabilitation w i l l be carried out in stages during 2003-2006.

will be closed to traffic in 2005 if the bridge i s not rehabilitated. .

On this basis, the investment i s estimated to have an NPV o f US$35.0 mi l l ion and an ERR o f 47.0%.

Sensitivity analysis / Switching values of critical items: The greatest project risk i s that the GovernmentPFWLR would fail to carry out the institutional reform o f the port sector resulting in a lower than expected growth o f traffic. A low traffic forcast was developed for the port components o f the project, detailed in the project file, whereas for the road components o f the project i t was assumed that project benefits would be 20% less than forecast. The second project risk i s that costs would be higher than estimated The effect o f these outcomes on the estimated ERRs for each project component i s as follows:

Sensitivity Analysis of Project ERRs (YO)

lKrk Bridge I 47.0 I 41.6 I 42.5 1

Under these altrernative scenarios, the estimated ERR for all project components i s 9.8% or greater, and the project ERR i s estimated to be sufficiently insensitive to these project risks.

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Annex 5: Financial Summary CROATIA RIJEKA GATEWAY PROJECT

I. Financial Performance of Rijeka Port

Port o f Riieka Authority (PRA)

Prior to reorganization in 1996, the financial situation o f the Port o f Rijeka deteriorated significantly. Losses incurred because o f declining traffic and low profitability resulting from overstaffing, o ld equipment, and growing competition with the neighboring north Adriatic ports o f Koper and Trieste. Due to lack o f working capital, Rijeka Port was compelled to take out short-term loans at high interest rates o f about 30 percent to cover i t s cash needs. The Croatian banking system did not permit the port to ro l l over i t s debt into long term loans, with the result that losses were covered by accumulating arrears to suppliers and the State in terms o f taxes and social contributions.

As part o f the 10-year plan for the development o f Croatian ports, PRA was established in May 1996 with responsibility for the day-to-day management and development o f the port. PRA was given the primary task o f leasing out the port facilities and the terminals to private operators, who w i l l be responsible for receiving and moving the goods in the port area. Other operating activities for cargo handling were taken over by LR at the same time. Although LR was initially granted the monopoly, the Government foresaw subsequent split up o f the operational activities among the various private companies specializing in a given geographic area or in a given cargo. Between 1998 and 2000, to improve port efficiency and performance, PRA contracted out nine port services including towage, cleaning, fueling, quantity and quality control, and garbage removal previously executed by itself.

PRA i s a non-profit legal entity incorporated under the Seaports Law o f 1995 and reports to the Ministry o f Maritime Affairs, Transport and Communications (MMATC). It i s governed by an Adrmnistrative Board and an Executive Director who reports to the Board. The Board consists o f eight members, five o f which are directly appointed by the Government and the other three are elected, both for a period o f four years. The members include: four representatives o f the Croatian Government; one representative each from Rijeka County and City o f Rijeka; one representative o f the harbormaster's office; and one representative o f all companies running business in accordance with the Seaports Law. PRA i s currently staffed with 40 people and has five departments (market research and development, finances and control, engineering and maintenance, commercial operations, and legal and general administrative services).

In September 2000, PRA entered into a global 12-year priority concession with LR to operate the port. The concession agreement includes the following financial terms: (i) a fixed annual fee o f US$60,381 based on an annual fee o f $0.06 per m2 for the total concession area o f 1,006,342 m2; (ii) a fixed annual fee o f US$607,729 for the use o f common areas o f 54,825 m2 based on a unit charge o f $1 1.09 per m2. In the first two years, LR will carry out the upkeep o f the common facilities and shall therefore be obliged to pay only a part o f the fees for the use o f the common facilities, amounting to about US$lOO,OOO each in 2001 and 2002; (iii) a variable fee amounting to one percent o f L R s revenues from port activity, beginning in September 2002; and (iv) maintenance o f infrastructure and superstructure in the concession area, plus maintenance of L R s own equipment. Subsequently in September 2002, PRA approved the request o f LR for a one-year delay for paying the full amount o f fixed and variable fees beyond the originally agreed two-year grace period.

Between November 2001 and February 2002, PRA also signed a 10-year concession agreement with foreign private operators for four terminals (container, timber, cars, and soybean). In addition to a fixed

- 4 3 -

fee o f US$0.6 per m2 and a variable fee o f 1 percent o f the total revenue, the concessionaire for container terminal will also pay an additional $200,000 for the use o f two new Samsung cranes. However, this i s far below the annual payment to service the Samsung loan, amounting to US$1 mill ion each in 2003-2007 and US$3-US$2 mill ion each in 2008-2025. Contship (Italy), a regional leader in the operation o f containerized cargo, i s now providing technical assistance to LR to ensure proper standard performance at the container terminal before committing itself to enter into a joint venture with LR. W h i l e there are some delays in starting the operation o f the timber and soybean terminals by the private operators, the concession agreement for car terminal has been cancelled due to difficulty in obtaining permits needed to operate the terminal.

The financial situation o f PRA since i t s creation has been marginal. With the accumulated debt taken over by LR, PRA i s no longer burdened with the substantial current account deficit facing the Port o f Ihjeka prior to the reorganization. However, cargo traffic s t i l l remains low, despite a partial recovery o f traffic in 2001. PRA, acting as a Government entity, has to balance i t s books mainly by reducing investments and maintenance expenses much below requirements. As a consequence, PRA i s steadily being decapitalized and the ports capacity and technical efficiency are continuously eroding. Over 70 percent o f PRA's assets have now been depreciated.

Serious decapitalization o f PRA as well as the development o f containerized transport imposed new needs for equipment. In January 2001, as part o f an ambitious 1 O-year development plan for Rijeka, the Government guaranteed US$35 mill ion in a loan from Korea EXIM (KEXIM) Bank for container and bulk equipment. The terms o f the loan are favorable, with a repayment period o f 25 years including 7 years o f grace and a 3.5 percent interest rate. Given that the Government i s providing a subsidy for servicing the KEXIM Bank loan, foreign exchange exposure arising from this debt i s not impacting PRA directly at this time. While asset renewals are much needed, it would have been operationally preferable to le t the concessionaire(s) select and pay for part o f this equipment. Given the limited resources o f PRA and tight public funds, this investment has limited PRA's ability to make other investments in the future, including borrowing from the Bank. Therefore, the project has been prepared with affordability as one o f the key criteria, and based on key actions to improve the port's financial position.

The operating revenues o f PRA, mainly from port dues and concession fees, are just enough to cover the operating expenses, but not depreciation expense which i s almost equal in amount to the sum o f all other operating expenses. The operating expenses have remained more or less constant, except the level o f infrastructure maintenance fluctuating based on the allocation o f the Government budget subsidy. In 2002, PRA generated operating revenues o f HRK 17 mill ion and with the help o f public subsidy, covered the operating expenses o f HRK 19 million.

The annual depreciation amount in 2002 was HRK 17 million, or 3 percent o f net fixed assets. Nearly al l o f the infrastructure and superstructure assets the PRA manages remained in the books o f LR until 2000, when the Administrative Board o f PRA decided to transfer them to the port authority's books. Nevertheless, PRA does not depreciate these assets because they belong to the maritime domain. Instead, annual depreciation cost determines the level o f capital subsidy to be provided by the Government for new investments. As long as the port authority remains a public entity, assets belonging to the maritime domain should be depreciated. The appraisal mission has agreed with the Government and PRA on infrastructure cost recovery to cover depreciation expenses in order to reduce the fiscal burden in the longer term. Subsidizing the port user charges i s viewed as part o f the Government strategy to recover the lost traffic and reestablish the Rijeka Port as the natural gateway for Croatia and Central Europe. The Government has been also subsidizing the Croatian ship operators to cover their operating losses. This has provided an incentive for the ship operators to run the feeder services regularly regardless o f the actual volume o f cargo to be carried. A number o f ship operators went bankrupt in the

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recent past due to a 70 percent decline o f cargo volume between 1980 and 1997.

At the end o f 2002, PRA's equity amounted to HRK 621 million, consisting o f the value o f fixed assets. Nearly all o f PRA's liabilities totaling HRK 261 mill ion were related to the long-term borrowing for the purchase o f container and bulk equipment from Samsung. Likewise, nearly all o f i t s assets are fixed, totaling HRK 877 million, with current assets amounting to only HRK 5 million.

Luka Riieka (LR)

As part o f the port reform process which the Government initiated in the mid-l990s, LR was transformed into a joint stock company in January 1999, and the accumulated debt to the State and other creditors was converted into LR shares. The major shareholder i s the Croatian Privatization Fund (CPF) with 52 percent o f the shares. The LR staff owns about 17 percent o f the shares. L R s initial share capital was HRK 294 million, divided into 2,938,230 shares o f the nominal value o f HRK 100 each. Such share capital was the aggregate of: (i) the value o f Luka's obligations towards i t s creditors, whose claims were converted into shares (HRK 162 mill ion in total); and (ii) the assessed value o f the company (HRK 132 million). O f the former group (i), the majority o f shares totaling 56 percent was transferred to CPF and the remaining 46 percent, to the State pension and health fund (30%) as well as a number o f private companies (16%). Of the latter group (ii), 49 percent o f the shares was sold to Luka's then present and former employees on a privileged condition o f purchase with some discounts. The remaining 51 percent o f shares was transferred to CPF with the objective o f placing these shares in the public market in due course. Total share capital now amounts to HRK 301 mill ion with no major changes in ownership. As a result o f debt restructuring, annual finance charges were reduced by nearly 80 percent from HRK 17 mill ion in 1998 to HRK 4 mill ion in 2002.

The Board o f LR consists o f 5 members including a representative from M M A T C (chairman), a representative from the Maritime College o f Rijeka (deputy chairman), a representative from the Chamber o f Commerce o f Rijeka, a former employee o f LR, and a member. LR has four departments: commercial; operations; financial and general affairs; and human resources. The operations department i s responsible for the operation o f five terminals, i.e. (i) cargo terminal for general cargo, timber, bulk and liquid cargo; (ii) bulk terminal Bakar, (iii) livestock terminal Rasa; (iv) frigo (fruit) terminal; and (v) grain terminal. The container terminal, passenger terminal and the area o f Stalije are excluded from the priority concession. I t i s also responsible for a pool o f dock workers, operational and technical workers, and mooring and unmooring workers. LR has three daughter operating companies (active and profit making) and five non-core daughter companies (provisional and loss-making) which have been created with the intention to privatize in the future.

LR employed 6,000 people in 1985, and has reduced i t s staff in stages to about 1,420 people at present including 330 in the five loss-making daughter companies. In 1998, LR removed about 580 jobs through induced retirement. LR laid o f f certain long-term employees who were almost eligible for full pensions. LR then paid to the State the difference between the actual amount o f contributions made by these employees and the contributions required for being eligible for full pensions. Severance payments were financed partially by a long-term loan, which will be repaid fully by end 2003. The Government also subsidized LR for part o f the labor restructuring costs with a total subsidy o f HRK 32 million. This resulted in a reduction o f annual payroll cost by HRK 20 mill ion (US$3 million). The annual labor cost s t i l l exceeds over HRK 100 mill ion (US$14 million), accounting for nearly 60 percent o f the operating revenue and 50 percent o f the operating expenses. The project would include financing redundancy payments and social program for surplus labor for US$7.5 mill ion discussed above.

LR's revenue i s mostly from stevedoring activities. Other activities including transport, forwarding,

- 4 5 -

maintenance and catering are executed by i t s daughter companies. Like PRA, LR's financial capacities have been limited. Despite a sharp reduction in payroll and financial charges, LR's fixed cost i s s t i l l high accounting for over 70 percent o f i t s operating cost because o f overstaffing and various charges associated with the priority concession agreement. As a result, LR's capacity to cut i t s operating cost i s limited, which led to a net deficit o f HRK 27 mill ion in 2002. The liquidity situation o f LR i s also deteriorating due to high receivables. The trade receivables due outstanding at end 2002 were HRK 35 million, most o f which were due from domestic clients. The average number o f days' sales that remain uncollected i s over 90 days. As a consequence, short-term liabilities to trade suppliers remain high, totaling HRK 38 mill ion at end 2002. LR has relied mostly on short-term loans to meet i t s working capital needs.

At the end o f 2002, LR's equity capital and reserves amounted to HRK 140 mill ion (USS18 million), with liabilities mostly related to short-term borrowing o f about HRK 90 mill ion (USSl2 million). I t s long-term liabilities o f HRK 30 mill ion (USS3 million) consists mostly o f a loan for the purchase o f a mobile crane in 2001 and the outstanding balance o f the 1998 loan for severance payments. About 75 percent o f i t s assets were the fixed, totaling HRK 200 mill ion (USS25 million), with current assets o f HRK 60 mill ion (USS8 million) due to high receivables.

Proiected future financial situation o f port operation

The financial forecasts have been prepared for PRA and port operators based on the following key assumptions:

Cargo traffic w i l l increase from 2.7 mill ion tons in 2002 to 8.4 mi l l ion tons in 2022. The annual average growth amounts to: 6.5% each in 2003-2012; and 4.5% each in 2013-2022. These projections are based on the improved competitiveness o f PRA, LR and the Successor Companies with substantial investments and productivity improvements.

Port tariffs w i l l remain at the current level: general cargo, containers, and timber (USSl.00 per ton); bulk cargo (USSO.40 per ton), livestock (USS1.20 per ton); vehicles (USS1.20 per ton). Total revenue from port dues are expected to increase from HRK 12 mill ion (USS2 million) in 2002 to HRK 40 mill ion (USS6 million) in 2022.

The concession fees now consist o f (i) a fixed fee o f USS0.06 per m2 for the concession area; (ii) a fixed fee o f US$1.43 per m2 for the use o f new investments; (iii) a variable fee o f 1% o f the total revenues o f the concessionaire; and (iv) a fixed fee o f US$11.09 per m2 for the use o f common infrastructure. Under the new concession agreements, the concession fees are estimated to increase to: (i) US$l.OO per m2 for fixed fee for the concession area; (ii) USS4.00 per m2 for a fixed fee for the use o f new investments; (iii) a variable fee o f 2% o f the total revenues o f the concessionaire. The fixed fee for the use o f common infrastructure wi l l remain the same.

The withdrawal o f Luka Rijeka from the priority concession to the Successor Companies i s based on the following schedule. This will provide PRA with an additional revenue in the range o f USS0.9 million-USS2 mill ion each year in 2006-2022. Under the existing concession agreements, the annual concession fees will range between USSl -1 mi l l ion in 2006 and USS1.5 mill ion in 2022. Under the new concession agreements, annual concession fees will range between US$2 mill ion and US$3.5 mill ion in the same period.

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Terminal Rijeka Terminal Bakar Terminal Rasa Terminal Susak

2005 2006 2007 2008 2009

0% 50% 50% 50% 60% 100% 100% 100% 100% 100%

0% 50% 50% 100% 100% 0% 50% 100% 100% 100%

PRA needs the commitment o f the Govemment to provide in the next five years (2004-2009) subsidies totaling about HRK 320 mill ion (US$46 million) to cover counterpart funds, debt payments, and infrastructure maintenance. The need for subsidies will decline by 12% to HRK 280 mi l l ion during the following six years (2010-2015), and by 70% for the next six years (2016-2021). PRA w i l l no longer depend on the public subsidy by 2020.

Total operating expenses (without depreciation) will increase from HRK 22 mi l l ion (US$3 million) in 2004 to HRK 33 mi l l ion (US$5 million) in 2022, by 3% in real terms each year between this period. Number o f PRA employees will remain at the current level o f 40 and an annual salary w i l l increase by 2% in real terms. Labor cost accounts for about 35% o f the operating expenses (without depreciation). The ratio o f maintenance as a percentage o f net fixed assets was low with 0.7% in 2000 and 0.3% in 2001. The plan ratio w i l l increase to 1% from 2003.

Total depreciation expenses will increase from HRK 24 mill ion in 2004 to HRK 42 mill ion in 2022. Most o f the existing assets are fully depreciated. Annual depreciation amount as a percentage o f net fixed assets averaged about 2.6% in 2000-2002. The rates for new investments w i l l be 2% for infrastructure and 6.7% for equipment. PRA i s expected to cover i t s depreciation expenses fully by 2020. The ratio o f total operating expenses (including depreciation) to total operating revenues (excluding subsidies) should decline from 240% in 2002 to 90% in 2022. The ratio o f total working expenses (excluding depreciation) to total operating revenues (excluding subsidies) should also decline from 140% in 2002 to 40% in 2022.

The capital expenditures w i l l consist only o f the Bank-financed investments between 2004-2009. Due mainly to high debt service, PRA i s not able to generate cash f low sufficient to cover any significant new investments until 2018. As part o f the project components, new mobile cranes and equipment would be procured by PRA, then rented to LR under commercial terms agreed during negotiations.

The ratio o f cash from operations (plus government subsidy earmarked for debt service and repayments from LR for severance payments) to total debt service should reach 1.0 in 2003-2005, and 1.3 in 2006 and thereafter.

With these assumptions, gradual, though modest, improvements can be expected. PRA wil l gradually be transformed into a self-financing port system which depends less on government subsidies. Total budget support for PRA w i l l rise from HRK 29 mill ion (0.02% o f GDP) in 2002 to HRK 70 mi l l ion (0.03% o f GDP) in 2005-2006, but gradually decrease to HRK 18 mill ion (0.005% o f GDP) in 2019. Beginning in 2020, PRA will no longer depend on the public subsidy.

- 4 7 -

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- 4 8 -

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- 49 -

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- 50 -

Port Oueration bv Luka and the Successor Comuanies

Cash flow analysis was performed for the two development options for Luka Rijeka and i t s Successor Companies, namely: (i) "With" project scenario assuming significant rehabilitation o f infrastructure and replacement o f equipment under the project and privatization process wil l take place; and (ii) "Without" project scenario assuming the terminals will remain technically unchanged and the privatization process w i l l not take place.

The key assumptions are: (i) the planned modernization o f Rijeka port would facilitate labor restructuring and the increased private sector involvement; (ii) cargo demand increases by about 7 percent per annum (with project), versus 5 percent (without project) per annum, in 2003-2012; (iii) port fees remain at the current levels in real terms; (iv) current surplus labor amounts to about 800 people. Each terminal deploys skilled and experienced workers and a professional management in a state-of-the-art business environment; (v) fixed concession fee w i l l increase from US$0.06 to US$ l per m2, but the variable fee remains at the current rate, i.e. 1 percent o f total revenue o f the terminal. The consultant (IBM BCS) has recommended to change the pricing structure o f i t s variable concession fees so that a flat charge o f 1 percent o f the total revenue of each terminal would be replaced with a declining block charge per ton handled. This will stimulate private operators to improve their cargo handling

-51 -

performance, and the Bank i s in full support o f such fee structure for new agreements with the Successor Companies.

The analysis indicates that the proposed investments and labor restructuring would reduce the operating cost from US$10 per ton to US$3 per ton and increase the annual revenue gradually by US$1 mill ion to US$7 mi l l ion during 2003-2012, based on an assumption that the annual cargo traffic will increase from 3 mill ion tons in 2003 to 5 mill ion tons in 2012. As a result, the port component would generate positive cash flows o f US$9 mill ion in 2003 gradually increasing to US$20 mill ion in 2012, instead o f negative cash flows o f US$9 mill ion to US$2 mill ion estimated under the "without" project scenario. This w i l l result in an acceptable financial rate o f retum (FRR) o f US$42 mill ion and NPV o f 30 percent at a discount rate o f 10 percent.

Port Operation Comparison of With and Without Project

(amount in US$ thousand)

With Project I / I Revenue 21 Expense 31 Interest CAPEX 41 Cash surplus

Throughput ('000 ton) % change

Revenue 21 Expense 31 Interest CAPEX 41 Cash surplus

Throughput ('000 ton) % change

2003

18.978 10,313

111 75

8,479

2,946 9%

2003

18,251 27,472

42 0

(9,262)

2.842 5%

2004

19,652 10,402

92 208

8,950

3,083 5%

2004

18,742 27,324

34 64

(8,680)

2,944 4%

2005

20,326 10,505

80 406

9,335

3,220 4%

2005

19,233 27,340

32 223

(8,363)

3,047 3%

2006 2007

22,213 24,101 10,786 11,294

76 57 689 463

10,662 12,286

3,521 3,823 9% 9%

Without Project I/

2006 2007

20,130 21,027 27,349 27,360

20 8 0 25

(7,239) (6,365)

3,203 3,359 5% 5%

2008

25,988 11,574

58 391

13,965

4,124 8%

2008

21,924 27,367

5 0

(5,448)

3,514 5%

2009

27,876 11.833

50 243

15,750

4,426 7%

2009

22.821 27.383

9 144

(4,715)

3,670 4%

2010

29,763 12,155

45 331

17,231

4,727 7%

2010

23,719 27,398

10 108

(3,797)

3,826 4%

201 1

31,058 12,317

40 283

18,418

4,951 5%

201 1

24,755 27,413

12 99

(2,769)

4,010 5%

201 2

32,353 12,466

25 I

19,862

5.17! 57

201 2

25,791 27,42*

I

(1,640

4,19, 50,

NPV and FRR

2003 2004 2005 2006 2007 2008 2009 201 0 201 1 2012 :osts

Project investment 51 12,700 36,200 38,000 20,400 9,300 1,100 Other investment 75 144 183 689 438 391 99 223 184 C

3enefits Incremental revenue 727 910 1,093 2,083 3,074 4,064 5,054 6,045 6,303 6,561 Saving in operating cost 17,089 16,864 16,788 16,507 16,016 15,740 15,509 15,207 15,068 14,941

Net benefits 17,741 4,930 (18.502) (20,099) (1.748) 10,113 19,364 21,029 21,186 21,502

NPV (US$ '000) $41,937 Financial IRR 30% 11 "With Project" scenario assuming significant rehabilitation of port infrastructure and replacement of equipment, and portlcity interface redevelopment, thereby privatization process will take place. "Without Project" assuming the terminals remaining technically unchanged and the privatization process not taking place. 21 Includes revenues from main operating activities and excludes miscellaneous revenues such as the government contributions. 31 Excludes depreciation. 41 Small capital investments not related to the project. 51 Includes capital investments in port restructuring and modernization, and portkity interface redevelopment to be financed by the Project.

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11. Croatian Roads and Croatian Motorways

Road type

The total length o f the public road network in Croatia i s 28,349 km, o f which 7.430 km are state roads, 10,544 km are county roads, and 10,375 km are local roads. State roads are further broken down into motorways and other main roads as follows:

Length (km)

Table 1: Composition o f State Roads in Croatia

I Motorwavs I 455 I I Semi-motorwavs I/ I 43 I I I / sinaie lane motorwavs. I I

By Government decree, the Croatian Road Agency was reorganized in April 2001 into Croatian Motorways (HAC), responsible for construction, operation and maintenance o f motorways and other tolled facilities, and Croatian Roads (HC), responsible for the administration o f the remainder o f the main road network. Both H A C and H C are state-owned limited liability companies. County Road Authorities (CRAs), o f which there are twenty, are responsible for developing and maintaining county and local roads. Although CRAs report to their respective county authority, H C i s responsible for authorizing plans for developing and maintaining county and local roads.

According to the Government’s four-year program for the Construction and Maintenance o f Public Roads (2001-2004), about HRK 8 bil l ion w i l l be spent on maintenance, reconstruction and construction o f state, county and local roads, and HRK 16 bil l ion on the motorway program. This program should help overcome the diversion o f maintenance funds primarily to the motorway program, which occurred during 1998-2000. The Government budget was the primary source o f financing o f the road sector until 2001. From 2002, the road sector w i l l be funded by the revenues from the fuel tax, vehicle registration fees, and motorway tolls. However, both H A C and H C have a large external financing requirement to implement their capital investment program.

Croatian Roads (HC)

H C i s a Govemment-owned limited liability company which reports to the Ministry o f Maritime Affairs, Transportation and Communications (MMATC). H C i s governed by the Government’s General Assembly, a Supervisory Board and a Management Board. The State, as HC’s sole shareholder, i s represented at the General Assembly by the Minister of MMATC. The Supervisory Board consists o f five members appointed by the General Assembly for a period o f four years. The Assistant Minister o f M M A T C i s the chairman o f the Supervisory Board, whose other members include a representative from Ministry o f Public Works, Ministry o f Finance, Ministry o f Environment, and a member o f H C trade union.

The Management Board currently has three members appointed for a four-year period by the General

- 53 -

Assembly. It i s responsible for the day-to-day management o f H C and oversees a number o f internal committees, councils and control functions. The company has six departments: Strategic Planning, Development and Studies, Engineering Studies and Design, Construction, Maintenance, Financial and Economic Affairs, and Legal and General Administrative Services.

H C i s now responsible for the administration o f state roads totaling 6,932 km, excluding motorways. H C employs about 300 persons. HC’s headquarters in Zagreb i s staffed with about 190 persons, mainly engineers and technicians and has a management role focusing on policy, budget and technical issues. A total o f 9 district offices are staffed with about 110 persons. Most o f the routine maintenance activities are carried out by 14 companies specialized for road maintenance.

Beginning in 2002, HC’s revenue comes mainly from a dedicated fue l tax. The fuel tax was introduced by the Government in January 2002 and i s levied by the refineries at a rate o f HRK 0.6 per l iter. I t i s paid directly to HC. The maintenance, reconstruction and construction o f state roads for 2001-2005 requires a funding o f about HRK 7.5 billion. Within this amount, about HRK 6.1 billion, or 81 percent w i l l be financed by fuel tax. H C will borrow from foreign and local banks to cover the remaining HRK 800 million. H C could obtain up to 25 percent o f i t s resources by borrowing with state guarantee, but w i l l be responsible for debt service.

H C was established in April 2001 and thus has audited accounts for only nine months o f 200 1. In 2001, the primary source o f HC’s revenue was the Government transfer. In 2002, total revenue was HRK 1.2 billion, most o f which came from fuel tax. Another source o f revenue, although very small in amount, i s the registration fees o f imported vehicles. HC’s main expenditure items were maintenance and depreciation costs. Maintenance costs were HRK 736 mi l l ion accounting for 60 percent o f the operating costs. Although H C i s not the owner o f public roads, depreciation o f public roads i s stated as a cost in HC’s profit and loss account using depreciation rates prescribed by the Government, and covered by fue l taxes. Depreciation o f the public roads amounted to HRK 457 million, accounting for 37 percent o f the total operating cost. HC’s losses o f HRK 25 mill ion in 2002 were made o f a l l non-cash losses. H C had sufficient cash to cover HRK 436 mill ion spent on new construction and rehabilitation works.

At the end o f 2002, nearly al l o f HC’s assets were fixed assets, totaling HRK 66.6 billion. The current assets were very small amounting to HRK 0.3 billion. HC’s equity capital and reserves amounted to HRK 66.7 billion, most o f which represent the Government share capital. The share capital represents the value o f public roads and construction contract work in progress. I t s liabilities totaling HRK0.2 bi l l ion were mostly related to short-term borrowings. H C i s expected to increase i t s maintenance and construction works by HRK 600 mill ion in 2003. For this, an EIB loan o f Euro 60 mill ion and a loan from local bank were obtained to cover the financing gap and only HRK 7 mi l l ion were utilized in 2002.

A part o f HC’s revenue from fuel tax (about HRK 0.1 per liter) i s transferred to the County Road Authorities (CRAs) for administration o f county and local roads (20,919 km) beginning in 2002. Vehicle registration fees, that are set by the Government and vary by vehicle size, are the main revenue o f CRAs. The annual budget thus consists o f about HRK 250 mill ion transferred from H C and HRK 450 mill ion from vehicle registration fees. CRAs may receive additional transfers from county budget at the discretion o f the relevant county authorities. CRA could also obtain up to 25 percent o f i t s resources by borrowing with H C guarantee. The risk o f default on debt service payment i s almost negligible because: (i) the CRAs’ funding sources are fixed; (ii) al l lenders require debt service payment not to exceed 20% o f CRAs’ revenue, and furthermore, some lenders will freeze the transfer o f funds from H C in case o f default; and (iii) like all budget entities, CRAs have to balance their books.

- 54 -

HC IncomeStatement

Yean Ending December 31,2001 through 2014 (In Millions of Kunas)

2001-2003 w m t prices; 2004-2014 constant mid 2003 prices

OPERATING REVENUES 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

foreign W i d e transit fee 20 14 15 15 16 16 17 18 18 19 20 21 22 revenue from fuel tax 1,149 1,308 1,360 1,415 1,471 1,530 1,591 1,655 1,721 1,790 1,862 1,936 2,014

other operating inwme 16 17 13 14 14 15 16 16 17 18 18 19 20 20 TOTAL OPERATING REVENUES 768 1,211 1,344 1,389 1,444 1,502 1,562 1,625 1,690 1,751 1,827 1,901 1,977 2,056

OPERATING EXPENSES material and energy 4 4 4 4 4 4 4 5 5 5 5 5 5 6 maintemnce and services 299 736 909 965 992 1,057 1,004 1,016 1,051 1,093 1,146 1,213 1,290 1,368 personnel 23 39 44 46 47 49 51 52 54 56 58 60 6 2 6 4

govanment grants 752 26 8

depredation 609 457 460 464 468 474 479 484 489 493 496 499 5M 504 other expmses 3 5 7 7 7 8 8 8 9 9 9 10 10 11 TOTAL OPERAllNG EXPENSES 938 1,240 1,424 1,485 1,519 1,582 1,547 1,566 1,607 1,656 1,714 1,788 1,869 1,953

OPERATING INCOME (170) (30) (SO) (96) (75) (90) 16 58 82 102 113 113 107 103

OTHER REVENUES interest 2 3 3 3 3 3 3 3 3 3 3 4 4 4 foreign exchange gains 0 0 0 i n m e from shares, dividends, disposals 5 6 6 6 6 6 0 extrawdinary revenue 2 4 4 4 4 4 5 5 5 5 5 6 6 6 TOTAL OTHER REVENUES 9 14 12 13 13 13 8 8 8 8 9 9 I O 10

OTHER EXPENSES

interest and dwges 20 2 3 12 36 70 94 109 123 122 119 115 109 102 foreing ewchange lasses 0 0 other finanaal msts 13 0 0 0 0 0 0 0 0 0 0 0 0 0 extraordinary expmses 4 7 5 5 6 6 6 6 6 7 7 7 7 8 TOTALOMERMPENSES 37 9 9 18 42 76 100 115 129 129 126 122 116 109

NET INCOME (198) (25) (76) (101) (103) (152) (77) (48) (39) (19) (4) 0 I 3 working ratio 43% 65% 72% 74% 73% 74% 68% 67% 66% 66% 67% 68% 69% 70% Operating ratio 122% 102% 106% 107% 105% 106% 99% 96% 95% 94% 94% 94% 95% 95%

-55 -

3 m4

“w liabilities lcng term loas &d imme tdd “nt liabilities

anwd liatilitie

am& tax liabilities tdd ament liabilities

t r a d e a n d d h e r ~ e s

186 144 0 0 2 4 4 5 6 6 7 7 a i a 2 9 7 2 5 6 5 6 5 6 % 5 6 5 6 5 6 5 6 5 6 % 5 6 56 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0

2 1 7 2 6 7 56 56 XI EI m 61 6 2 a 6 2 6 3 6 4 73

4044 6 8 5 3 66,768 67,140 67,708 4220 4437 68,389 4328 4236 4117 67,919 61,824

@,a09 66,585 66,563 66,471 66,364 66,254 =,la2 6 6 , a 65,976 65,937 65,919 65,914 65,915 65,915 129 129 129 129 129 129 129 129 129 129 129 129 129 129

( 1 9 (25) (76) (101) (152) (n) (49) (39) (19) (4) 0 1 3 67,940 66,688 66,m 66,499 66,388 66,m 66,154 66,105 66,066 66,047 66,043 66,043 66,044 66,047

laZ 157 14 14 14 14 14 14 14 14 14 14 14 14

104 157 14 14 14 14 14 14 14 14 14 14 14 14 2

- 56 -

CashflowsMement Years M i n g December 31, #K)l thragh 2014

(In Millions of Kmas)

net lncanefran qY3atlm (1%) (25) (76) (101) (103) (152) (77) (48) (39) ($9) (4) 0 1 3 4 5 (6) (6) (6) (6)

609 4 5 7 4 6 0 4 6 4 4 6 8 4 7 4 479 484 489 493 496 493 502 504 0 0 0 0

net cash fran operating activities 415 438 377 356 358 315 4w 436 450 474 492 493 502 508

increasldecrease in recsivables 25 (43) 17 0 0 0 0 0 0 0 0 0 0 0 im&W- in inv&mes 0 0 0 0 0 0 0 0 0 0 0 0 0 0 tncrdWeaseinpqatdes (99) 119 (144) 0 0 0 0 0 0 0 0 0 0 0

(73) 76 (127) 0 0 0 0 0 0 0 0 0 0 0 508

investing activities

irc./dec.inbngbleandintan.&s (219) (384) (589) (B) (1,034) (710) (596) (591) (308) (268) (195) (146) (115) (a0 finandal assets 1 0 0 0 0 0 0 0 0 0 0 0 0 0 Payables 6 6 6 6 6 0 0 0 0 0 0 0 0 p r m for targible assets 5 netcash~~~~Iininvestingadivities (213) (377) (583) (823) (998) (704) (5%) (591) (308) (268) (195) (146) (115) (Sa

financing activities short term finandal assets (1) 0 0 0 0 0 0 0 0 0 0 0 0 C inv. in shares and longterm loans 0 0

liatilitiesfor short tm loans 67 (67) d e b t s ” (87) (W (3) (13) (36) (70) (94) (109) (132) (164) (208) (234) (248) (X ne! cash used in finarcing aciivities (21) (128) 138 467 641 390 194 156 (132) (164) (208) (234) (248) (26c

increase in cash and cash equiv. 108 8 (195) 1 2 1 1 0 10 42 89 119 140 16e castatstartofyear 79 186 194 0 0 2 4 4 5 6 6 7 7 E cash at end of year 186 194 0 0 2 4 4 5 6 6 7 7 8 1E

longterm loars 7 141 480 677 460 283 266

debtservicecoverage ratio 3.9 7.4 73.7 28.3 9.9 4.5 4.3 4.0 3.4 2.9 2.4 2.1 2.0 2.

Croatian Motorways (HAC)

H A C i s a Government-owned limited liability company which reports to the Ministry o f Public Works, Reconstruction and Construction (MPWRC). The Ministry o f Maritime Affairs, Transportation and Communications (MMATC) i s responsible for the planning o f the motonvay network up to location permit stage.

H A C i s governed by the Government’s General Assembly, a Supervisory Board and a Management Board. The State, as HAC’S sole shareholder, i s represented at the General Assembly by the Minister o f Public Works, Reconstruction and Construction. The Supervisory Board consists o f five members appointed by the General Assembly for a period o f four years. The Minister o f Public Works, Reconstruction and Construction i s the chairman o f the Supervisory Board, whose other members include a representative from MMATC, Ministry o f Finance, Ministry o f Environment, and H A C employees.

The Management Board currently has two members appointed for a four-year period by the General

- 57 -

Assembly. I t i s responsible for the day-to-day management o f H A C and oversees a number o f internal committees, councils and control functions. The company has six departments: Development and Planning, Construction, Maintenance, Finance and Economy, Legal and General Affairs, and Tol l Collection.

H A C employed 966 workers at end-2001, and has now grown to a staff o f 1,370. About 650 o f HAC’S staff are involved in routine and emergency maintenance, which are carried out in-house. This amounts to about 10 percent o f the maintenance budget. Periodic and winter maintenance, accounting for the remaining 90 percent o f the maintenance budget, are contracted out. H A C i s developing a database o f construction and maintenance records to improve efficiency o f i t s maintenance activities. Another 450 people are involved in toll collection.

The construction program for 2001-2005 requires completion o f 450 km o f new motorways and 81 km o f semi-motorways. H A C w i l l complete 400 km o f motorways and other concessionaires will complete the remaining 50 km o f motorways and 81 km o f semi-motorways. Concessions have been awarded for the development o f two motorways, and these are supervised by HAC: (i) Rijeka-Zagreb motorway: Rijeka-Zagreb Highway Company, which i s 100% state-owned; and (ii) Istrian motorway: Bina Istra Company which i s 5 1% owned by Bouygues and 49% by the state. A third concession agreement i s now under negotiation with a German company. H A C i s also responsible for maintenance o f the existing 455 km o f motorways and 43 km of semi-motorways.

For HAC, the five-year program requires a funding o f about Euro 2.3 bil l ion (HRK 18 billion). H A C will spend Euro 2 bil l ion for new motorway construction (mainly the completion o f the Zagreb-Split motorway), and Euro 150 mill ion for existing motorways for rehabilitation and maintenance. Routine maintenance and operation will cost Euro 200 million. The revenue o f H A C will cover only 50 percent o f the funding needs in 2001-2005. H A C has therefore a large external financing requirement and w i l l need to raise finance from a number o f sources to implement i t s capital program.

Commercial banks are expected to provide loans for new motorway construction, whereas I F I s w i l l provide finance for motorway rehabilitation. The Government w i l l provide sovereign guarantees to finance the completion o f the capital program. H A C has appointed a financial adviser to assist with obtaining a credit rating so that it can consider borrowing from the market without recourse to sovereign guarantees. In the meantime, the Government raised Euro 500 mill ion in February 2003 with an issue o f Eurobonds. Out of the above proceeds, Euro 150 mill ion will be transferred to H A C between March and May 2003. The Government i s currently seeking for another domestic bond issue o f Euro 100 mill ion to provide these proceeds to HAC. H A C will be responsible for debt service o f the loans including i t s share o f these bonds.

HAC’s total debt service obligations in 2001-2005 are estimated at about Euro 370 million, and w i l l increase sharply to about Euro 1.1 bil l ion for the following five years in 2006-2010. Given this significant level o f borrowings and increasing debt service, it i s crucial that the Govemment adjust the fuel tax and tolls periodically to cover inflation. H A C will have to improve efficiency and reduce operating costs through better road management and performance based maintenance targets.

HAC’s revenue comes from a separate fuel tax, motorway tolls and a small amount o f rental income. The Government introduced HAC’s fuel tax in April 2001, which i s levied by the refineries at a rate o f HRK 0.4 per liter, and has increased to HRK 0.6 per l i ter since early 2002. All motorways in Croatia are tolled with tolls varying by vehicle type and size. An open tolling system i s operated on the Corridor 10 motorway under which vehicles pay a fixed amount regardless o f distance traveled. A closed system operates on all other motorway sections under which vehicles pay on exit according to distance traveled.

- 58 -

H A C intends to introduce a closed system on the Corridor 10 motorway in the future.

H A C was established in April 200 1 and thus has audited accounts for only nine months o f 200 1. The primary source o f HAC’s revenue in 2001 was the Government transfer o f HRK 633 million, o f which HRK 623 mi l l ion was the revenue from the fuel tax. It did not receive any revenue from tolls, which were transferred to the state budget. H A C also received a Govemment grant o f HRKlO mil l ion for land acquisition and current expenses, and a small concession fee o f HRK 2 million. In 2002, HAC’s financial position improved as a result o f the following key changes: (i) The fue l levy was increased at the beginning o f the year from HRK 0.4 per liter to HRK 0.6 per liter; (ii) Revenue from the fuel tax i s now paid directly to HAC; and (iii) H A C receives all revenues from tolls.

In 2002, total revenue was HRK 1.7 billion, consisting o f HRK 1.3 bil l ion from fuel tax and HRK 0.4 bil l ion from tolls. HAC’s main expenditure items were maintenance and depreciation costs. Maintenance costs were HRK 11 1 mill ion accounting for 13 percent o f the operating costs. Depreciation o f the motorways and public roads amounted to HRK 568 million, accounting for almost 70 percent o f the total operating expenses. Annual depreciation rate o f motorways and public roads i s 3%. H A C had a net income o f HRK 929 mill ion in 2002.

At the end o f 2002, total assets o f H A C were HRK 24 billion, o f which over 95 percent were in fixed assets. HAC’s equity capital and reserves amounted to HRK 21 billion, most o f which represent the Government share capital. The share capital represents the value o f motorways, public roads and construction contract work in progress. Over 80 percent o f HAC’S liabilities totaling HRK3 bi l l ion was related to long-term borrowings, a main source o f financing for construction o f tolled roads and maintenance. HAC’s long-term liabilities increased by almost HRK 2 bil l ion in 2002. In 2001, H A C raised HRK 900 mill ion in loans from commercial banks, in addition to a long-term debt o f IJS$213 mill ion transferred from the Croatian Road Agency when established in April 2001.

-59-

liMx#L?sMement Years Wing December 31,2001 tkm& 2014

(In Mllions of Kunas)

2oooMo3 current prices; 2004-2014 axlstmt mid 2003 prim audited unaudited forex5t 2001 Mo2 2003 Mo4 2035 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue from tolls Revenue from fuel tax Government grants other operating 1 " s

Total operating revenues

operating - Matenal and energy bhmtm~e and m c e FWSomd Dep-eaatl0-l Rovlslon for bad debts other

Total operating eqmses

c)perating l-e

other Revenue Interest Foragn exchange gars lncwnefrm shes and diqxsals Wraordinary r e "

Total other r e " -- Interest Foragn excfrange losses Wraordlnary expawe

Tdal other expews

&412-Dec.31 operatingkvenues

623 10 2

636

18 60 64

554 22 8

727

(91)

1 100 25

1 127

15 8 1

24

430 1,236

0 12

1,679

27 111 112 568

0 16

833

845

4 233

0 63

306

128 82 12

m

406 1,308

0 15

1,729

29 278 143 618

0 17

1,084

645

0 0 0 6 6

259 0 7

266

665 1,367

0 16

2,048

31 101 145 730

0 17

1,024

1,024

0 0 0 6 6

452 0 6

458

820 1,435

0 16

2,272

34 124 148 818

0 18

1,141

1,131

0 0 0 5 5

51 5 0 7

522

853 887 1,493 1,552

0 0 17 18

2,362 2457

3 6 3 6 111 113 153 157

1,066 1,066 0 0

19 19 1,384 1,391

978 1,066

0 0 0 0 0 0 4 4 4 4

512 493 0 0 3 3

515 496

923 1,614

0 18

2,555

36 114 162

1,066 0

20 1,398

1,157

0 0 0 4 4

460 0 3

463

958 998 1,038 1,679 1,746 1,816

0 0 0 19 20 21

2,657 2764 2$74

3 6 3 6 3 6 108 123 124 167 172 I77

1,066 1,066 1,066 0 0 0

21 22 23 1,398 1,418 1,426

1,260 1,345 1,449

0 0 0 0 0 0 0 0 0 4 4 4 4 4 4

426 389 301 0 0 0

3 3 3 429 392 304

1,079 1,889

0 21

2989

36 139 182

1,066 0

24 1,446

1,543

0 0 0 4 4

171 0 3

174

1,122 1,964

0 22

3,109

36 140 188

1,066 0

25 1,451

1,655

0 0 0 4 4

114 0 3

117

1,167 2043

0 23

3,233

36 153 193

1,066 0

26 1,474

1,760

0 0 0 4 4

85 0 3

88

Net lnarne 11 929 385 571 614 467 574 698 835 957 1,148 1,373 1,542 1,676 Working Ratio 27% 16% 27% 14% 14% 13% 13% 13% 12% 13% 13% 13% 12% 13% IQEratiig Ratio 114% Wh 63% Wh 50% 59% 57% 55% 53% 51% Wh 48% 47% 46%

- 60 -

WitflOAs Tdl - 53 67 6 111 F d t a 84 186 173 18) 167 afer 19 38 23 Logtemlcgscfviidr 121 475 563 330 19

Ru83%hedstirglars 121 1 6 83 Ru83%franwkas 2 8 5 4 8 3 3 3 0 1 9

T& % Tdal % "lo c fTd an1 2M2 2M3 aM4 2031-14 dTdal

707 4% 173 1% an 213 1,m 28% 1,051 236 2% 256 266 2% 45%

- Wk w 1% - Wh 1.614 i8%

m 1,250

321 za% 3%

5B%

m w

1,614 m

1,250

1% ap 210 218 227

T d C a h d h S 225 m 823 E€?3 447

(bxs$lrueassinCiEh ( 3 3 3 1 6 QhdsWdyzf 5 3 6 9 1 0 Cajhddcfyzf 3 6 9 10 16 I M W O e ~ t Z 4 0 53 aa 89 88 1.0

I

2 a lox 3n 258 285 2B3 276 1,433 IWk 442 247 239 235 5425 lWh

11 2 3 # 1 6 6 8 1 1 1 4 3 2 0 (33) 186 218 244 915 5 16 35 76 141 222 16 3 3 3 3 3 4 8 8 x 6 5

16 3 5 7 6 1 4 1 2 2 2 3 3 333 3 3 4 8 8 x 6 9 6 0 9 5 0 1.1 1.2 1.3 1.4 1.6 09 21 25 28

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Annex 6(A): Procurement Arrangements CROATIA: RIJEKA GATEWAY PROJECT

Procurement General. The Bank-financed procurement w i l l be carried out in accordance with the provisions stipulated in the Loan Agreement and: a) the World Bank's Guidelines for Procurement (published in January 1995, revised in January and August 1996, September 1997 and January 1999) for goods and works and; b) the World Bank's Guidelines for Selection and Employment o f Consultants (published in January 1997, revised in September 1997, January 1999 and May 2002) for technical assistance and other consultants assignments. The Bank's Standard Prequalification and Bidding Documents and the Bank's Standard Request for Proposal will be used for the Bank-financed I C B works/goods and consultant services, respectively. For N C B procurement o f works the Bank's Standard Bidding Documents w i l l also be used. The project's procurement arrangements for each component are summarized in Table A. The Borrower will be committed, under the Project loan agreement, to ensure that, for National Competitive Bidding procedures, the general sections of bidding documents and contracts will be identical to the general sections o f the Bank standard documents.

Advertisement. A General Procurement Notice (GPN) was published in the Development Business, issue No. dated December 30, 2002. I t announced works, goods and consultants services to be procured and invited interested eligible suppliers, contractors and consultants to express interest and to request any complementary information from the three respective PIUs. The Specific Procurement Notice for prequalification for the first road works contract was published on February 21, 2003, and the SPN for supervision o f bridge rehabilitation works was published on March 14,2003.

Procurement Records. Procurement records o f the project, including records o f time taken to complete key steps in the process and procurement activities will be maintained by the PIUs. These records w i l l be maintained for at least one year after the end o f the fiscal year in which the last disbursement was made. The records for goods and works w i l l include public notices, bidding documents and addenda, bid opening information, bid evaluation reports, formal appeals by bidders and outcomes, signed contracts with related addenda, records on claims and other useful information. The records for consultants will include public notices for expression o f interest, request for proposals and addenda, technical and financial reports, formal appeals by consultants and outcomes, signed contracts and related addenda, records on claims and other useful information.

A procurement assessment of the three implementing agencies -- PRA, HC, and H A C -- was discussed during the pre-appraisal and appraisal missions in November 2002 and March 2003. The final daft report was completed during the March 2003 appraisal mission, and was sent to the Regional Procurement Advisor's office for comments/clearance. I t w i l l be finalized prior to the invitation to negotiate. Each P IU will coordinate and monitor implementation o f i t s components, including procurement planning, scheduling, monitoring and reporting, disbursements and internal controls, maintenance o f project accounts and preparation o f project management reports. Each o f the three PIUs i s headed by i t s director, and staffed with an engineer, procurement specialist, accountant, and an administrative assistant. If necessary, PRA, HC, and H A C agreed to provide more staff or to hire extemal consultants in accordance with Bank Guidelines, to assist the respective PIUs in carrying out i t s activities, including preparing bidding documents and monitoring project implementation. Procurement staff o f the H C and HAC'S PIUs are familiar with Bank procurement policies and procedures since they have been involved in the procurement activities o f the recently completed Highway Sector and Emergency Transport and Mine Clearing projects, and Bank projects in another sectors. The implementation o f these projects has been rated satisfactory by the Bank and by the Government o f Croatia. PRA's procurement staff has shown due

- 62 -

diligence while implementing the US$1.5 mi l l ion technical assistance component o f the project preparation facility. However, procurement training wil l be provided to all relevant staff before at the early stages o f project implementation.

Procurement administration under the Project. In order to effectively carry out the procurement activities under the project, it was agreed that the three implementing agencies will make available additional lawyers and additional staff members with computer skills. The three executing agencies will draft TORS, technical specifications and prepare the bidding documents or Requests for Proposal. After reviewing the documents, they will forward those which require prior review to the Bank for review and no-objection. The three PIUs w i l l be responsible for advertising and receiving expressions o f interest, proposals and bids. PIUs w i l l organize the bid evaluation and will draft the bid or proposals evaluation reports, with the participation o f the technicians from the executing agencies. P IU directors will forward the evaluation report for the Bank review and no objection as necessary.

Procurement Plan. Each o f the three implementing agencies has prepared a detailed procurement plan for the six years o f project implementation, which identifies clearly most part o f the works, services and goods to be procured under the project. The procurement plans are an integral part o f the Project Implementation Plan (PIP), w i l l be updated annually, and will be agreed with the Bank. The annual updated procurement plans will include: i) l i s t o f contracts completed, under execution, under procurement, to be procured; ii) cost o f completed and under execution contracts and estimated costs for upcoming contracts; ii) schedule o f bidding; and iv) particular methods o f procurement o f goods or selection o f consultants.

Procurement methods (Table A)

Goods

International Competitive Bidding (ICB). Goods estimated to cost US$400,000 equivalent or more may be procured under contracts awarded on the basis o f ICB procedures. Twenty three contracts have been identified to be procured under this method. They relate to the purchase o f software, heavy mobile, safety and antipollution equipment for the Rijeka Port, as well as equipment for Croatian Roads and Motonvays.

National Competitive Building (NCB). Goods estimated to cost less than US$400,000 equivalent, but not less than US$lOO,OOO equivalent per contract, may be procured under contracts awarded on the basis o f N C B procedures. Two contracts have been identified to be procured under this method. They relate to the purchase o f vehicles and management software for the various government entities involved in project implementation.

International Shopping (IS). Procedures for IS will be used for contracts for goods and equipment estimated to cost less than US$lOO,OOO per contract, where the cost o f ICB w i l l clearly outweigh possible price advantages. International shopping procedures w i l l be based on comparing price quotations obtained from at least three suppliers from two different countries in accordance with the Bank’s “Guidelines for Procurement Under IBRD Loans and IDA Credits” (January 1995, amended in September 1997 and January 1999). Three contracts have been identified to be procured under this method.

National Shopping (NS). Minor sundry items not exceeding US$50,000 per contract, may be purchased on the basis o f prudent national shopping by comparing price quotations obtained from at least three local suppliers, in accordance with Bank Guidelines. This includes small pavementbridge management

- 6 3 -

software, office equipment, etc.

Civ i l Works

International Competitive Bidding (ICB). All works contracts estimated to cost USE5,000,000 equivalent or more w i l l be procured through International Competitive Bidding (ICB) procedure. All complex contracts, and those costing more than US$lO,OOO,OOO are subject to preqalification. About ten contracts will be procured under this method.

National Competitive Building (NCB). Works estimated to cost less than US$5,000,000 equivalent, but not less than US$lOO,OOO equivalent per contract, may be procured under contracts awarded on the basis o f N C B procedures. ECA standard N C B bidding documents dated August 1999 shall be followed. Bids w i l l be advertised in the national press andor official gazette, opened publicly, and awarded to the lowest evaluated bidder. Foreign f i r m s w i l l be allowed to participate. About forty contracts will be procured under N C B method under the port rehabilitation and black spot improvement components o f the project.

Procurement o f Minor Works (MW). Works estimated to cost less than USElO0,OOO equivalent per contract may be procured under lump-sum, fixed-price contracts awarded on the basis o f quotations obtained from at least three qualified domestic contractors in response to a written invitation. About ten contracts will be procured under SW method under the black spot elimination component of the project.

Consulting Services

Consultant services would be procured to prepare studies, designs, technical specifications, and to provide technical support and supervision o f the c iv i l works. The PIU w i l l use Bank standard contracts for a l l consultant services contracts. The following procurement procedures will be used:

Quality and Cost Based Selection (QCBS) procedures would be used for contracting f i rms for supervision o f civil works, preparation o f designs and axle load study, and assistance to implement Luka Rijeka Business Plan. All consulting assignments above the value o f US$200,000 wil l be advertised in Development Business. The estimated total value i s US5i10.5 million.

Least-Cost Selection (LCS) procedure will be used for consultant services and technical assistance and training contracts, costing less than US$200,000, but not less than US$lOO,OOO.

Selection based on Consultants' Qualifications (CQ) procedure will be used for consultants services contracts costing less than US$ 100,000.

Individual Consultant based on Qualification procedure w i l l be used for assignments which meet the criteria specified in Section V o f the Guidelines.

Single-Source Selection (SS) procedure i s expected to be used for about 3 contracts, totalling US$200,000, to provide specialized training. In submitting a request for any single-source selection, the Borrower will justify that the proposed assignment meets the criteria specified in Sections 3.8 to 3.11 of the Guidelines.

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Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

Expenditure Category 1. Works

2. Goods

3. Services

Redundancy Payments

5. Front-end fee

Other

Total

Procurement Method' N.B.F. Total Cost ICB NCB Other?

174.50 35.80 0.00 0.00 210.30 (84.10) (16.60) (0.00) (0.00) (100.70) 30.80 0.60 0.30 0.00 3 1.70

(30.80) (0.60) (0.30) (0.00) (3 1.70) 0.00 0.00 15.10 0.00 15.10

(0.00) (0.00) (15.10) (0.00) (15.10) 0.00 0.00 7.50 0.00 7.50

(0.00) (0.00) (7.50) (0.00) (7.50) 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

205.30 36.40 22.90 0.00 264.60 (1 14.90) (17.20) (22.90) (0.00) (1 55.00)

(0.00) (0.00) (0.00) (0.00) (0.00)

(0.00) (0.00) 0 0 (0.00)

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Consultant Services Expenditure Category

A. Firms

Selection Method

QCBS QBS SFB LCS CQ Other N.B.F. Total cost' 12.70 I 0.00 I 0.00 I 0.15 I 1.00 I 0.00 I 0.00 13.85

B. Individuals

" Including contingencies

(12.70) (0.00) (0.00) (0.15) (1.00) (0.00) (0.00) (13.85) 0.00 0.00 0.00 0.00 0.20 1.05 0.00 1.25

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc., and training of HC, HAC and PRA staff N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Loan.

Total

- 6 6 -

(0.00) (0.00) (0.00) (0.00) (0.20) (1.05) (0.00) (1.25) 12.70 0.00 0.00 0.15 1.20 1.05 0.00 15.10

(12.70) (0.00) (0.00) (0.15) (1.20) (1.05) (0.00) (15.10)

Prior review thresholds (Table B) The Bank’s procurement review w i l l be made in accordance with Appendix 1 o f the Guidelines for Procurement and Appendix 1 o f the Guidelines for Selection and Employment o f Consultants and the provisions stipulated in the Loan Agreement.

Prior review. The following procurement processes w i l l be subject to the Bank’s prior review (refer to table B): (i) al l works contracts costing US$5 mill ion or more; (ii) the f irst three works contracts below US$5 million; (iii) al l goods contracts costing more than US$0.4 million; (iv) the f irst three goods contracts costing less than U S 0 . 4 million; (v) the f i rs t three goods contracts costing less than US$O. 1 million; (vi) al l consultant contracts with f i r m s estimated to cost the equivalent o f US$lOO,OOO or more. In this

case, the following documents wi l l be reviewed: terms o f reference, request for proposals, short lists, terms and condition o f contracts as well as evaluation reports and recommendation for award;

(vii) individual consultant contracts estimated to cost the equivalent o f US$50,000 or more, in which case the qualification, terms o f reference and draft o f the contract will be forwarded to the Bank and w i l l be awarded only after the Bank’s concurrence.

Ex-post preview. All contracts, regardless o f value, are subject to ex-post review. All documentation, including but not limited to: terms o f reference, bidding documents or request for proposals, bids or proposals received, correspondence on al l bids either prior to or following award o f contract, including Bank’s no objections, contracts and any subsequent amendments should be maintained until at least two years following the close o f the Project. During Bank’s supervision missions, not less than 1 in 10 tenders not subject to Bank‘s prior review, will be examined ex-post.

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Table B: Thresholds for Procurement Methods and Prior Review'

Expenditure Category 1. Works

2. Goods

3. Services

Contract Value Contracts Subject to Threshold Procurement Prior Review

(US$ millions) Method (US$ millions) >=5.0 ICB 250.0 -4.0 NCB 9.0 <o. 1 minor works 6.0

>=0.4 ICB 10.0 ~ 0 . 4 NCB 5.0 <o. 1 I S 0.6 <0.05 N S 0.2 >0.2 QCBS 3.5

0.1-0.2 LCS 0.45 <=o. 1 CQ 0.2

individualdtraining 0.45 0.1 f i rms ss 0.1 f i rms

0.0 5 individuals 0.05 individuals

Total value of contracts subject to prior review: ICB: USS150 million; NCB: US$4 million; goods: US$27.3 million; US$0.8 million; cons.: USS13.2 mill ion = US$195.3

One every 6 months (includes special procurement supervision for post-reviewlaudits)

Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed:

I\ Thresholds generally differ by country and project. Consult "Assessment o f Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.

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Annex 6(B): Financial Management and Disbursement Arrangements CROATIA: RIJEKA GATEWAY PROJECT

Financial Manapement

1. Summary of the Financial Management Assessment

Country Zssues CFAA for Croatia was carried out in 1999. The reforms carried out to date in the area o f financial management put Croatia ahead o f many other CEE countries. Croatia has, in fact, set up a modem legal and regulatory framework, compatible with the needs o f a market-driven economy, completely discarded the o ld accounting system and opted to introduce a comprehensive new framework based on international guidelines. In order to enhance public sector financial management and to achieve a higher level o f accountability, the issues related to the integrity and universal coverage o f the budget process need to be addressed in greater depth, together with the start o f the Treasury, the modernization o f accounting and reporting systems and the further development o f the institutions in charge o f budget compliance through internal and external audits. Bank rehabilitation i s under way but additional efforts are needed to strengthen banking supervision and improve credit institutions risk-management. Financial markets and their regulatory institutions need further development; this would also make the privatization process more effective. Market competition and corporate governance are main areas to be reformed to achieve greater transparency and financial accountability for the private sector. The organization o f the accounting and auditing profession should be defined by a self-regulating and standard-setting national body, ensuring the application o f high standards o f ethics and progressively taking on the functions currently performed by the government.

From a financial management perspective, the project however, i s considered having moderate risk due to the following reasons. The three Borrowers are independent entities with their own financial management and information systems, with adequate controls and procedures in place. Where there i s a weakness, it has been mitigated by providing technical assistance through the project. Two o f the entities (HC and PRA) have experience in implementing Bank financed projects or grants. Some staff wi th prior experience in Bank financed projects have moved from H C to HAC, and are able to help HAC.

Strengths and Weaknesses The significant strengths that provide the basis o f reliance on the project financial management system include: (i) the experience gained by the core team o f Rijeka Port and HC, including the accountant in implementing a Bank financed project and satisfying Bank’s financial management requirements; and the clean audit opinions on the on-going projects. The H C has only a few staff who have had experience (they moved from H C to HAC) in Bank financed projects. N o major weaknesses are noted.

Implementing Entities Each executing agency - PRA, HC, and H A C w i l l implement i t s respective component. HC, and to a lesser extent HAC, are staffed by trained professionals with adequate capacity to implement the project. PRA staff responsible for implementation o f the port component has performed very well while implementing the PPF studies. The Porthrban interface redevelopment component will be implemented on the basis o f a memorandum o f understanding between PRA, LR and the Municipality o f Rijeka. The project management capacity o f PRA, HC, and H A C i s satisfactory. The three organizations will receive some training (in the use o f the financial management system and in procurement) and consultant assistance (for preparation o f designs, supervision o f works, and drafting o f technical specifications) under the PPF and during project implementation. Both H C and H A C have financial management systems acceptable to the Bank. Funding has been provided under the project to upgrade the financial management and management information systems o f PRA, which will then be in a position to use the

- 69 -

new system to produce reports acceptable to the Bank. Ti l l the main system i s upgraded, an interim XL-based system has been established (similar interim systems have been used in other Bank financed projects) at the PRA PIU, to keep account for the on-going PHRD grant and the PPF.

Audit Report Entity (HC,HAC,PRA, LR) Project (HC,HAC,PRA) SOE (HC,HAC,PRA) Special Account (HC,HAC,PRA)

Funds Flow All three entities w i l l open Special Accounts in commercial banks acceptable to the Bank, to maintain Bank funds. Local suppliers eligible for Bank financing will be paid from the SA, upon converting the funds into h a s . Counterpart funds w i l l be paid from the entities own bank accounts. For the severance payment component for LR, the number o f people to be retrenched and the reporting formats to be included as part o f the FMR were finalized and agreed during Negotiations and detailed in the PIP.

Due Date June 30,2004 June 30,2004 June 30,2004 June 30,2004

Staffing All three entities have a core group o f staff malung up the PIUS, at a minimum, including a Director, procurement officer and a financial manager. Staff at H C and PRA have had experienc in working on Bank financed loans and grants, while some o f the staff in H A C (who moved from HC) have prior experience.

Accounting Policies and Procedures The respective PIUs w i l l take all necessary steps to ensure that the project complies with the relevant Bank policies (OP/BP 10.02). This includes the establishment o f proper accounting procedures and internal controls, as documented in their respective Project Implementation Plans.

2. Audit Arrangements

Internal Audit Not applicable.

External Audit The three entities w i l l appoint independent auditors under terms o f reference acceptable to the Bank (attached). The auditors selected for the Project are required to be both members o f the International Federation o f Accountants (IFAC) and also acceptable to the Bank. Audited Project Financial Statements, and the audited financial statements o f RPA, Luka Rijeka, H C and H A C wil l be submitted to the Bank with the audit report six months after end o f each year audited. Costs o f the audit will be financed by the Loan for PRA, while H C and H A C w i l l finance the audits from their own funds.

Reporting and Monitoring The HC, H A C and PRA w i l l maintain accounts o f the Project and will ensure appropriate accounting o f the funds provided. They will be responsible for preparing FMRs on a quarterly basis, and the formats are attached. The FMRs will include: 0

0

0

Project Sources and Uses o f Funds Uses o f Funds by Project Activity Special Account Statement Plus Local Bank Account Statement

0 Project Progress Reporting

- 70 -

0 Procurement Reporting 0 Statements o f Expenditure for severance payments for LR

Information Systems Both H C and H A C have financial management systems, capable o f providing accurate and timely information regarding project resources and expenditures, including planning, procurement accounting and financial reporting. PRA's financial management system needs to be upgraded in order to maintain proper accounts for the project. Funding will be provided under the project to review the existing system at PRA and upgrade the system for the PRA as a whole, which then w i l l be capable o f recording and reporting project related data as well as the normal operations o f the PRA. In the interim, a XL-based software program (which has been used in projects in Serbia as an interim system and found acceptable to the Bank) has been established at the PIU in the PRA. The PIU i s already preparing reports acceptable to the Bank on this system to keep accounts for the PPF.

Impact of Procurement Arrangements Each PIU w i l l coordinate and monitor implementation o f i t s components, including procurement planning, scheduling, monitoring and reporting, disbursements and internal controls, maintenance o f project accounts and preparation o f project management reports. Each o f the three PIUs i s headed by i t s director, and staffed with an engineer, procurement specialist, accountant, and an administrative assistant. If necessary, PRA, HC, and H A C agreed to provide more staff or to hire external consultants in accordance with Bank Guidelines, to assist the respective PIUs in carrying out i t s activities, including preparing bidding documents and monitoring project implementation. Procurement staff o f the H C and HAC'S PIUs are familiar with Bank procurement policies and procedures since they have been involved in the procurement activities o f the recently completed Highway Sector and Emergency Transport and Mine Clearing projects. The implementation o f the two projects has been rated satisfactory by the Bank and by the Government o f Croatia. PRA's procurement staff has already done well while implementing the US$1.5 mi l l ion technical assistance component o f the project preparation facility. However, although many o f the staff o f these entities have adequate knowledge o f the procurement under national rules and adequate capacity for supervision o f procurement with Bank financing, procurement training will be provided to al l relevant staff before the beginning o f project implementation.

3. Disbursement Arrangements Disbursements arrangements for the entities w i l l be made based on traditional disbursement methods (i.e., from the Special Account with reimbursements made based on Statements o f Expenditures (SOEs) and full documentation, The Bank may require withdrawals from the Loan Account to be made on the basis o f statements o f expenditure for expenditures for: (i) goods under contracts not exceeding $400,000 equivalent; (ii) works under contracts not exceeding $5,000,000 equivalent; (iii) services provided by consulting f i r m s and individuals under contracts not exceeding $ 100,000 and $50,000 equivalent, respectively; and (iv) severance payments (only for LR), all under such terms and conditions as the Bank shall specify by notice to the Borrower. The option to move to a FMR based disbursements will be considered at a later date, when the entities and the Bank has agreed that such a move i s justifiable.

Supervision Plan Progress o f project implementation, with respect to financial management aspects will be monitored in detail during supervision missions. FMRs will be reviewed on a quarterly basis by the field based FMS and the results or issues followed up during the supervision missions. Audit reports o f the project w i l l be reviewed and issues identified and followed up.

-71 -

Allocation of loan proceeds (Table C)

Allocation of Loan Proceeds Allocation of Loan Proceeds

109.6 22.8 13.6 7.5 1.5

155.0 1.6

156.6

Civil works Goods and equipment Consultant services Redundancy payment Refundng of PPF advance Total project costs front-end fee

Civil works Goods and equipment Consultant services* Redundancy payment Refunding of PPF advance Total project costs

Total front-end fee

HC Allocation of Loan Proceeds

Expenditure Category Amount in US$ M

Civil works 66.8 Goods and equipment 1 1.1 Consultant services 5.4 Redundancy payment 0.0

Total project costs 83.3 front-end fee 0.8

Total 84.1

27.8 11.7 6.1 7.5 1.5

54.6 0.5

55.1 - HAC

Allocation of Loan Proceeds

Expenditure Category Amount in US$ M

Civil works 15.0 Goods and equipment 0.0 Consultant services 2.1 Redundancy payment 0.0

Total project costs 17.1 front-end fee 0.2

Total 17.3

Special account: Separate Special Accounts will be opened in commercial banks for PRA, HAC and HC. The amount of the Special Account for PRA will be USD 5,000,000 (limited to USD 2,500,000 until disbursement exceed USD 5,000,000). The amount of the Special Account for HAC will be EUR 1,500,000. The amount of the Special Account for HC will be EUR 7,000,000 (limited to EUR 3,500,000 until disbursement exceed EUR 5,000,000)

Retroactive financing

Retroactive financing shall be allowed for expenditures for Works subsequent to March 31, 2003 as follows: HC - up to EUR 7,600,000 and HAC - up to EUR 1,500,000.

- 72 -

Annex 7: Project Processing Schedule CROATIA: RIJEKA GATEWAY PROJECT

1 Project Schedule Planned Actual /Time taken to prepare the project (months) I 30 I 24 I

Appraisal mission departure

Negotiations

Planned Date of Effectiveness

I First Bank mission (identification) I 0910 1 I200 1 I 09/01/2001 1 ~ ~~

03/03/2003 04/07/2003 0511 512003 05/05/2003 09/30/2003

Prepared by: Project Team

Preparation assistance: Japanese PHRD Grant and PPF

Bank staff who worked on the project Name

Miche l AudigC Peter Parker Ir ina Kichigina Vladimir Skendrovic Elena Kastlerova Sunja Kim Anders Hal ld in Stan Peabody Hiran Herat Vladislav Krasikov Patrick Fourgeaud Nirmala Saraswat Marc Juhel Guillermo Ruan Charles Chandler Lorraine Mccan Kosinslu Lisa Fonick Haworth

ncluded: Soecialitv

Program Team Leader - Lead Port Specialist Co-Team Leader - Sr. Economist Sr. Councel Consultant - Transport Specialist Transport specialist Sr. Financial Analyst Sr. Environmental Specialist Lead Social Scientist Sr. Financial Analyst - F M S Sr. Procurement Specialist Sr. Port Operation Specialist Environmental Engineer Peer reviewer - Lead Transport Specialist Peer reviewer - Sr. Highway Engineer Quality reviewer - Project LogFrame Program Assistant Editor

- 73 -

Annex 8: Documents in the Project File* CROATIA RIJEKA GATEWAY PROJECT

A. Project Implementation Plan

RijekaGateway-PIP01 .doc

B. Bank Staff Assessments

Aide-memoires:

Identification Mission - September 2001, Preparation Mission - March 2002,

CroatiaORijekaOAMOSeplO2001 IdentificationMissior CroatiaORijekaOAMOMarchI 102002PreparationMissio

Pre-appraisal miss i Appraisal mission - March 2003

Iwl CroatiaORijekaOAMOSept2002PreAppraisaIMissio CroRijekaAMMarch03f.doc

C. Other

Transport Sector Strategy 1999 la CroatiaTransportStrategy Nov1999.d

Workshop on Port privatization - Rijeka, March 2002 March 15,2002

Cooperation Agreement between Port and City -

RijekaCoopAgreement.do

World Bank comments on the draft Maritime Domain and Seaports Act, and Concessions Law - November 2002

2CroRijekaAM11 O2a.doc

Decision o f Minister o f Culture on port warehouses - December 2002

~~

DecisionMinisterPortWarehousesHR.1 rjesenje minkulture.doc

- 74 -

EA Workshop - January 15,2003

Iwl MinutesEnvWorkshopJan2003.dc RijekaGateway-EIA-RoundTa ble-Participants

Rotterdam Maritime Group Study - Rehabilitation o f the port functions & ..svelopement study (March 2002)

Iwl Iwl ~

RMGFinalReportExecSummaryApr2002 CroRMGFinaIReportMar2002.d( CroRMGFinalReportMar2002Annex.c

Land Acquisition and resettelement Plan Negotiations

HCFinalLARPlanMay22-2003.p

GovernmentApproval. pc

Project Policy Letter Approval o f

PRO POLICY LET RIJEKA.p(

*Including electronic files

- 75 -

Annex 9: Statement of Loans and Credits CROATIA: RIJEKA GATEWAY PROJECT

11-Mar-2003 Difference between expected

and actual disbursements' Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA GEF Cancel, Undisb, Orig Frm Rev'd PO63546 2003 PENSION SYS INVST 27.30 0.00 0.00 0.00 27.30 0.00 0.00

PO67149 PO67223 PO42014

PO70088 PO65466 PO51273 PO391 6 1 PO57767 Po43444 PO48983 PO08334

2003 REAL PROP REG 8 CADASTRE

2002 SAL 2002 KARST ECOSYS CONSV (GEF) 2001 TRADE 8 TRANS FAClL IN SE EUR 2001 COURT 8 BANKRUPTCY ADM (LIL) 2000 HEALTH SYSTEM 1999 RAILWAY MOD. 8 REST. 1999 TA INST REG REF PSD 1998 MUN ENV INFRA 1998 EAST SLAVONIA REC 1997 COASTAL FOREST RECON

25.70 202.00

0.00 13.93 5.00

29.00 101.00

7.30 36.30 40.60 42.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00

5.07 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.80 0.00

0.00 0.00

27.79 100.00

5.39 14.82 4.61

21.18 54.93

4.49 23.39 19.66 5.56

-0.28 0.00 66.67 0.00 0.16 0.00

12.67 0.00 -0.39 0.00 -7.79 0.00 67.18 0.00 4.49 0.00

17.83 0.00 20.42 0.00 5.56 1.14

~~~ ~ ~ ~

Total 530 13 0 00 5 87 000 30912 18654 114

- 76 -

CROATIA STATEMENT OF IFC's

Held and Disbursed Portfolio

In Mill ions US Dollars J u ~ 30 - 2002

Committed Disbursed IFC IFC

FY Approval 1999 2001

1996199 2000 1973181198 2002 1999

Company E&S Bank Pliva T.S. Banka D.D. Viktor Lenac Belisce Croatia Banka Croatia Capital

Loan 12.99 22.92 0.00 6.00 9.97 8.93 0.00

Equity 0.00 0.00 0.13 1.90 6.01 0.00 5.00

Quasi 0.00

10.00 0.00 4.20 0.00 0.00 0.00

- Partic 0.00

11.25 0.00 9.00 5.92 0.00 0.00

Loan 12.99 22.92 0.00 6.00 9.97 0.00 0.00

Equity 0.00 0.00 0.13 1.90 6.01 0.00 2.96

Quasi 0.00

10.00 0.00 3.70 0.00 0.00 0.00

Partic 0.00

11.25 0.00 9.00 5.92 0.00 0.00

-

Total Portfolio: 60.81 13.04 14.20 26.17 51.88 11.00 13.70 26.17

Auurovals Pendine Commitment

FY Approval Company Loan Equity Quasi Partic 2002 Belisce Exp. 9.93 0.00 0.00 12.80 2000 RZB Pension 0.00 0.00 3.00 0.00 2001 Locat Leasing CR 5.00 0.00 I .20 0.00 2002 Croatia Banka 8.07 0.00 3.59 0.00 2002 ESBank Zagreb I1 26.91 0.00 0.00 0.00

Total Pending Commitment: 49.90 0.00 7.79 12.80

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Annex 10: Country at a Glance CROATIA RIJEKA GATEWAY PROJECT

POVERTY and SOCIAL Croatia

2001 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1995-01

Population (77) Labor force (%)

Most recent estimate (latest year available, 1995-01) Poverty (% of population below national poverty line) Urban population (% 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 (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981

GDP (US$ billions) Gross domestic investmenffGDP Exports of g o d s and services/GDP Gross domestic savings/GDP Gross national savings/GDP

Current account balanceiGDP interest payments/GDP Total debffGDP Total debt service/exports Present value of debffGDP Present value of debffexports

1981-91 1991-01 (average annual growth) GDP .. 2.7

Exoorts of ooods and services .. 5.9 GDP per capita .. 3.9

4.4 4,550

19.9

-0.9 0.4

8 58 73 8 1

95 2

97 97 96

I991 18.2 10.5 77.7 2.0 1.3

-3.5

2000

3.7 3.6 8.7

Europe 8 Central

Asia

475 1,960

930

0.1 0.8

63 69 20

90 3

102 103 101

2000

19.0 22.0 45.0 16.4 19 0

-2.3 2.5

55.5 20.9 63.7

121.4

2001

4.1 4.1 9.0

Upper- middle- income

504 4,460 2,248

1.3 1.8

77 71 24 9

87 10

127 128 126

2001

20.3 23.8 46.7 17.6 19.9

-2.9

52.1

2001-05

1 Development diamond'

Life expectancy

T I

I

1 GNI Gross p e r - primary capita nrollment

-

Access to improved water source

I Croatia Upper-middle-income grow

-

Economic ratios'

Trade

I Indebtedness

' -Croatia - Upper-middle-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment lmwrts of o o d s and services

Manufacturing

1981

1981-91

1991

10.4 33.0 28.0 56.8

74.5 23.5 86.1

1991-01

-0.6 0.7 0.1 3.8

2.7 0.4 7.6 4.8

2000

9.5 32.8 23.2 57.7

57.2 26.5 50.6

2000

1.3 1.5 4.1 5.0

4.1 -0.7 -0.1 4.2

2001

9.3 32.7 23.3 58.0

58.2 24.1 52.8

2001

0.7 4.3 6.0 4.8

4.8 -3.9 13.7 9.3

Growth of Investment and GDP (%) 140 - I

-GDI - O - G D P I -~

I Growth of exports and imports (%) 30 -

---~xports -imports I

Note: 2001 data are preliminary estimates. 'The diamonds show four key indicators in the country (in bold) compared with its incomegroup average. If data are missing, the diamond will be incomplete.

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Croatia

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (“A of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Raw materials, excluding fuels Mineral fuels and lubricants 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, /ocal/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

1981

1981

1981

1981

1991

122.6 99.3

35.1 -3.5 -4.3

1991

3,533 171 223

1,869 3,828

243 657 481

1991

4,568 5,067 -499

-101 -31

-631

631 0

2.43E-2

1991

2000

6.2 6.5

45.2 -1.9 -5.4

2000

4,567 251 486

2,223 7,771

556 1,145 2,568

149 148 101

2000

8,663 9,599 -936

-380 883

-433

1,015 -582

3,525 8.3

2000

10,569 413

0

2,085 45 0

190 969

1,086 722

14 54 22 32 22 10

2001

4.9 3.1

44.3 -1.6 -3.7

2001

4,752 24 1 474

2,393 8,764

691 1,174 3,005

150 149 101

2001

9,625 10,659 -1,034

-529 966

-597

1,910 -1,313

4,704 8.3

2001

10,555 469

0

37 0

1,325 716

207 75 18 57 19 38

i Inflation (%) 10 -

0 96 97 98 99 w

-GDP deflator ‘ D ’ C P I

1 Export and import levels (US$ mill.)

I 1 95 96 97 98 99 00 01

Exports Imports

Current account balance to GDP (Oh)

0 -

11 -5 !

-10 - l~ -15 1

I Composition of 2001 debt (US$ mill.)

A: 469 G:223 c: 122

F 8,166

1

I E ~ Bilateral 1 D F - t: -Other multilateral Pnvate C-IMF G - Short-term

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Additional Annex 11 : SWOT Analysis, traffic forecast and performance indicators for the port of Rijeka

CROATIA: RIJEKA GATEWAY PROJECT

A - SWOT Analvsis

Consultant IBM BCS carried out a SWOT analysis o f the port o f Rijeka to assess i t s major Strengths, Weaknesses, Opportunities and Threats . The strengths and weaknesses focus on the Port o f Rijeka operational performance, whereas the Opportunities and Threats position the Port o f Rijeka in the North East Adriatic Range. The table below summarizes the finding o f the analysis which was validated by both the Port Authority and Luka Rijeka d.d.

Strenpths: . Good quality o f infrastructure at Bakar -, Frigo -, and Livestock terminal; . Good quality o f superstructure at Bakar . Sufficient quay length and berthing capacity; Planned short term infrastructure investments for the general cargo; . Planned Short term suFerstructure investments to be financed by PRA; . Competitive labour c o s t h i t (compared to Koper & Trieste); . Concession Fee PoK < CF PoR < CF POT; . Free Zone & warehouse complex in Skrljevo and Kukuljanovo;

Opportunities . Positive long-term 2.8% annual growth rate o f the NEAR market for general cargo and bulk commodities; Limited free handling capacity (with the competitors Koper & Trieste) for general cargo and bulk; Bring Rijeka productivity up to competitors standards through privatisation o f port operations; Position the Skrljevo Free Zone and Kukuljevo Industrial Zone as a Distribution Centre for Croatia and neighboring countries;

.

.

.

Weaknesses: Declining market share in al l commodity segments (1990-2001); Concession Fee structure: variable part o f concession fee provides no incentive for better performance; . High ship call costs due to light dues; . L o w productivitylemployee due to overstaffing LR; . Limited expansion possibilities Rijeka Basin due to city centre; . Poor quality port infrastructure (except Bakar, Frigo, and Livestock terminals); . Poor quality port superstructure (except Bakar recently rehabilitated); . Poor operational performance; Poor rai l and road hinterland connections generating additional delays;

Threats Large market share o f Koper in Bulk segment (49% in 2001); . Large market share Trieste in General cargo segment (75%); Very competitive market as all players have same captive hinterland; . Infrastructure and superstructure investments financed by the state (K, T); . Planned infrastructure development projects (Koper and Trieste); . Large free capacity FrigoIFruit and Livestock terminals in the market; . Trieste strategy to promote North East Adriatic Port System, without Rijeka; Koper soon becoming an EU port;

1

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Competitive positioning Port of Riieka

The competitive position o f the Port o f Rijeka i s determined based on the comparative analysis methodology. The analysis concentrates on two aspects:

Port analysis: analysis o f each o f the ports individually; Inter port analysis: comparison o f the ports in their business environment;

The comparative analysis processes a large number o f subjects covered in the supply and demand analysis. The numerous relevant aspect can be classified into three main categories: strategic, structural and operational.

The results o f the analysis i s summarized in the graphic below which i s a snapshot o f the current situation o f the ports o f Koper, Trieste and Rijeka.

0% no/, 20% 30% 40% 3% 60% XPh 80% 90% xx)%

Based on the Competitive Position o f the Port o f Rijeka and the SWOT Analysis, IBM BCS developed a limited number o f recommendations that are key to improving the competitive position o f the Port.

Economical Aspects

Increase port growth, throughput and market share The average annual growth rate o f sea-bome traffic in the NEAR market (1990-2001) amounted to 2,8%. However, the Port o f Rijeka has been loosing cargo volume during the same period. IBM BCS recommends to catch up with market growth in short term and gain market share in the long run. Realising such a traffic growth w i l l only be feasible through implementation o f the other included recommendations.

Adapt the Concession Fee Structure

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The variable part o f the current concession fee does not provide an incentive for the operator to improve i t s performance. However, the concession fee structure should stimulate the (future) private operators to improve their cargo handling performance, for example through a decreasing fee for increasing terminal throughput. Such a new structure could be implemented during the privatisation process (see further).

Revise the light dues Call costs have a significant impact on the competitive position o f a port. The Port o f Rijeka faces the highest call costs in the NEAR market due to high light dues. A decrease in light dues at Koper level i s recommended.

Organisational Asuects

Facilitate privatisation According to the Priority Concession, Luka Rijeka intends to hold majority stakes in the shareholders structure o f the future Successor Companies. In order to facilitate privatisation and increase interest from private investors, it w i l l be necessary to include adequate incentive during the concessioning process o f the Successor Companies which will be implemented through public international bidding process.

Intensify cooperation with competitors in the market The strategy o f the ports o f Trieste and Koper i s to develop a consolidated North East Adriatic port system capable o f competing with the North Atlantic ports. Luka Koper and Compagnia Portuale di Monfalcone have already implemented this strategy through investments in certain Port o f Trieste operators. The Port o f b j e k a should further develop cooperation with the North East Adriatic ports.

Operational Aspects

Improve operational performance and reliability of handling in the port LR s t i l l operates old and outdated superstructure leading to poor operational performance and low productivity figures compared to competitors in the NEAR market. New investments in superstructure are required to improve port operations and enhance the operator’s service level. Except for the heavy mobile cranes financed by the PRA, equipment should be financed by the private partners in each o f the Successor Companies.

Increase the labour productivity through development of a redundancy schedule Compared to competitors in the market, the current labour productivity in the Port o f Rijeka proves poor performance. Increasing labour productivity through reduction o f overstaffing will be completed by a continuous monitoring o f operation performance on vessel by vessel basis with periodic reporting and analysis.

Develop the port information management system and increase automation level IBM BCS recommends to increase the automation level in the port through implementation o f supporting modem IT systems using WEB based interfaces with port users and clients, providing improved visibility and quicker administrative procedures.

Infrastructural and geographical Aspects

Improve hinterland accessibility Gradual improvements to the hinterland transport infrastructure o f Rijeka are required. IBM BCS supports the World Bank investment program focussed on improving the international road connections linked to the Rijeka Gateway. Moreover, a higher service level from the national railway company i s

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required to ensure reliable door-to-door services.

Accelerate port modernisation through infrastructure and superstructure investments IBM BCS supports the current Port Modernisation program. Significant infrastructure and superstructure investments are required in order to match market requirements and improve port operations.

B - Traffic forecasts (RMG Studv April 2002)

Forecasting results cargo throughput. This paragraph presents the results o f the L o w and Medium case scenarios. I t should be noted that domestic transport i s not analysed separately, but i s incorporated in the import and export (incoming and outgoing) flows. Furthermore, it should be noted that the total amount o f cargo handled in the port o f Rijeka in 2000 amounted to 2,569,309 tons, o f which 2,440,000 tons i s maritime related. In the forecasts only the maritime related freight flows are considered.

I t should be noted that all forecasting results should be treated with care. The standard and statistical economic uncertainties in Western developed countries are much larger in countries in an economic, social and political transformation process (Croatia and several countries in i t s hinterland). Moreover, the political situation in Croatia and the Balkan countries (Macedonia, Bosnia-Herzegovina and Albania) are far from stable and at this moment there are no clear prospects for a long term solution. For these reasons all results should be considered as indicative, giving possible directions.

Low scenario

In table 3.20 the results o f the l ow scenario are shown. These results are used as reference for market shifts in the other two scenarios. I t represents purely the growth o f the throughput in Rijeka if it would grow in equal rate with the growth o f total transport in the catchment area.

Table 3.20 Forecast results low scenario (in 1,000 tons)

An increase o f total throughput in the port o f Rijeka can be observed from 2.44 mill ion tons to 3.15 mill ion in 2005 (annual average 5.2%), almost 4 mill ion in 2010 (annual average 5.0%) and almost 5.9

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mil l ion in 2020 (annual average 4.5%). The forecast shows a rapid growth in the f i r s t years, after which the growth slows down. The share o f bulk cargo in the total throughput will increase from 77 percent in 2000 to 80 percent in 2020.

2000

The general cargo i s forecasted to increase from 670,000 tons to 904,000 in 2005 (annual average 6.2%), 1.1 mill ion in 2010 (annual average 5.3%) and 1.65 mill ion in 2020 (annual average 4.6%). Within this general cargo, the container throughput will increase from 9,700 TEU in 2000 to 23,000 TEU in 2020.

2005 2010 2020

The bulk transport increases from 1.6 mill ion tons to 2 mi l l ion in 2005 (annual average 5.1%), 2.6 mill ion in 2010 (annual average 5.0%) and 3.9 mill ion in 2020 (annual average 4.6%).

Exvort

The timber transport increases from 166,000 tons to 189,000 in 2005 (annual average 2.6%), 220,000 in 2010 (annual average 2.9%) and 282,000 in 2020 (annual average 2.7%). So in this case a larger increase i s foreseen after 2005 up to 2010 than in the other periods.

76 138 I 219 293

Medium scenario

97 228 376 603

General cargo 670 1,144 1,793 2,636 Export 172 20 1 300 392 Import 173 213 335 482 Transit 1,260 1,786 2,550 3,901 Bulk cargo Export ImDort

1,604 2,199 3,185 4,774 35 38 52 72

0 0 0 0

Total throughput 2440 3,5 18 Containers in 1,000 TEU 9.7 31

In this scenario the total throughput grows from 2.4 mill ion tons in 2000 to 3.5 mill ion tons in 2005, 5.2 mill ion tons in 2010 and 7.7 mi l l ion tons in 2020.

5,228 7,730 56 85

Comparing the medium scenario o f the throughput in the port o f Rijeka with the low scenario, market shares w i l l be won back especially in the f i rs t period up to 2010, after which i t stabilises.

In the f irst period up to 2005 the reconstruction will be ongoing and the major effects will take place in the period between 2005 and 2010. In the period up to 2005 change i s mainly expected from regaining transit markets (amongst which Yugoslavia). The growth o f general cargo in the period up to 2005 can be exclusively contributed to the growth o f container flows.

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In general, it should be noted that the growth o f general cargo in the f i rst period up to 2005 and the second period up to 2010 (mainly the first part o f this period) cannot be seen as a regular trend. Several trend breaks take place in these periods due to assumed recovery o f markets that will not take place gradually but within short periods o f time. These trend breaks are combined with the market growth o f the catchment area. For this reason the growth o f general cargo in especially the f irst period seems rather large in terms o f annual growth. The recovery o f market share i s based on the historical data o f the port combined with new developments like the enlargement o f the European Union, stabilising developments in former Yugoslavia and competitive aspects.

C - Operational Performances Improvement (IBM BCS March 2003)

In order to facilitate comparison, IBM BCS included the current productivity/gang/shift. The current performance figures included in the table differ from the ones mentioned in the RMG report as IBM BCS took into account remarks and comments indicated in the World Bank Aide Memoire o f November 2002 based on detailed performance analysis for typical vessels servicing the port o f Rijeka. A sample o f seven different vessels time sheets has been prepared and discussed in detail with the LR staff. These time-sheets, which may need to be crossed-checked with the corresponding shipping agents, show that the main contributors for gangs idle time are: (i) waiting for cargo; (ii) breakfast and lunch; (iii) equipment breakdowns; (iii) change o f shifts and preparation o f work; and (iv) rain. The table below summarizes the operation performance results for the vessels sampling.

More accurate estimates of productivity have been performed by Luka Rijeka, based on realistic information collected by the Operations Department. The table below summarizes the operational performance improvements to be achieved under the project.

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- a6 -

Additional Annex 12: Environmental Assessment Executive Summary CROATIA: RIJEKA GATEWAY PROJECT

BACKGROUND

The ultimate purpose o f the Rijeka Gateway Project i s to increase the trade competitiveness o f Croatia by improving the international transportation chain through Rijeka, which requires the transformation and modernization o f the Port o f Rijeka. This will be achieved by (i) increasing efficiency and improving financial, social and environmental conditions at Rijeka Port by preparing to privatize port operations, rehabilitating infrastructure and replacing equipment; (ii) preparing to redevelop part o f Rijeka Port for urban purposes; and (iii) improving international road connections linked to the Rijeka Port, and the administration o f the road sector.

The future development o f the Port o f Rijeka requires that current insufficient and inadequate traffic linkage between the Port o f Rijeka and the Croatian State road system be upgraded to international traffic system standards, and that the Port o f Rijeka should be modernized in order to efficiently handle cargo and container traffic.

The improvement o f the port’s operating efficiency implies the construction o f new and rehabilitation o f existing infrastructure that w i l l provide adequate connections between the Port o f Rijeka and the national and international traffic network. This requires the construction o f the eastern part o f Rijeka Bypass road (section Orehovica - Draga - Sv. Kuzam o f road D-S), a connection road between Brajdica - Draga (Road D-404 from the container terminal to the Rijeka eastern bypass), and the rehabilitation o f the bridge to the island o f Krk (Krkki most). In order to improve and reconstruct the port’s infrastructure, some major construction works have been planned. This refers to the reconstruction, as well as the construction o f a new terminal on the current Zagrebaeko berth and various other construction works for handling general cargo in the western part o f the port.

The long-term vision o f the development o f the Port o f Rijeka i s related to the long-term strategy o f the development o f the Croatian traffic system and the role o f to be played by Croatia in connecting Central Europe and the Danube Region with the Mediterranean and the World. The role o f the Port o f Rijeka should in the long term be considered in light o f i t s future role within European traffic corridors (corridor Vb) as one o f the major port in the North East Adriatic Range. In the long term, when Croatia becomes an EU member, the Croatian economy and i t s transport system will formally become an integral part o f the EU transport network. The development o f the Port o f Rijeka w i l l then depend to a large extent on the role and significance o f transit traffic, which Croatia as a member country w i l l be able to attract. A long-term vision o f the development o f the Port o f Rijeka should also be considered in the context o f the construction o f modern railroad communications from b j e k a to Zagreb and from Rijeka to Istria, as well as in the context o f the construction o f the Adriatic railroad.

In the light o f the problem o f the integration o f the Port o f Rijeka into the transport system o f the Republic o f Croatia, it i s easy to see that the past traffic position and the development o f Croatian regions have not resulted in satisfactory internal connections between all parts o f Croatia, especially between the Adriatic and the Pannonian regions. The Port o f Rijeka i s neither adequately integrated into the Croatian State road network, nor into the road network o f the neighboring Slovenia and Italy. The Port o f Rijeka i s practically, in i t s most important central part, an integral part o f the city center. Due to this, the Port has to use already congested city center streets for a major part o f i t s traffic. The basic road connection between the City o f Rijeka and the network o f city streets, but also the most important State roads, i s the Rijeka Bypass road (part o f road D-8). The only section that has already been constructed i s from the

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Skurinje Junction (with the highway to Zagreb) toward the west to the crossroad with the road leading to the Ueka Tunnel. A minor part o f this road has been constructed as a dual carriageway highway and a major part as a three-lane two-way road, or a road with one carriageway and two traffic lanes for two-way traffic.

Due to the fact that the Bypass road section from the &ur in je Junction to Bakar and Crikvenica (D-8) has not been constructed yet, the center o f Rljeka i s loaded with city and inter-city traffic (connections between Opatija and the eastern parts o f the City and Kostrena, Bakar, Krk and Crikvenica).

A key external factor o f the development o f the Port o f Rijeka i s the construction o f the Rijeka Bypass road from the Skurinje Junction to the east. It would, together with the construction o f the main city connecting road D-404 (GMC 105) from Delta area to the Rijeka bypass road, provide a good connection between the warehousefindustrial zones o f Skrljevo and Kukuljanovo on one side and the city center and the Port o f Rijeka on the other.

PROJECT DESCRIPTION

Three main components have been considered as parts o f the Project (port, communications and bridge) on which certain interventions w i l l be made in order to ensure higher efficiency o f the Port o f Rijeka. Interventions refer to recovery worksfmaintenance, reconstruction, some demolition and, as major interventions into space, construction:

0 Port of Rijeka: - western terminal-Zagrebaeko berth (includes reclamation works, the construction o f one berth, demolition o f unused warehouses, construction o f new shelters for wood storage, new yard pavement, and rehabilitation o f operational road and rail networks),

- Bebko (Vienna) berth - rehabilitation o f the existing infrastructure, - Redevelopment in the Delta and Port0 Baros Areas

0 Communications: - D-8, eastern Rijeka by-pass roads, construction o f the section Orehovica - Sv. Kuzam - D-404, connection road Draga - Brajdica (construction from the container terminal to the eastern Rijeka by-pass)

- Elimination o f the most critical “black spots” in Croatian national road network 0 Bridge - Krk bridge - rehabilitation works.

1. The Port Component

1.1.Zagreba5ko Berth The planned intervention, i.e., the construction o f a new Zagrebaeko berth constitutes the f i rs t step for the extension o f the western part o f the port, in compliance with the recently approved Port Master Plan. The construction o f the Zagrebaeko berth i s closely connected to the overall technological, spatial and traffic restructuring o f the Port o f Rijeka which creates the conditions for moving a number o f port activities from the immediate city center and providing space for new, commercial facilities in the very city center. These facilities are not included in the Project. This component o f the project w i l l provide:

250 meters additional berth capacity, which w i l l operate the largest ships in the North East Adriatic Range up to 60,000 Dwt and 15 meter draft, Le., with no draft limitations.

New storage and manipulation (handling) area o f about 22 ha, which will be used as outdoor warehouses for general cargo o f up to 2 mill ion Tfyear capacity and for the container terminal o f about 1 mill ion Tfyear capacity. Direct connection o f the cargo port with the Rijeka Bypass through D-404 towards Zagreb,

-

-

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Trieste (Italy), Ljubljana (Slovenia) and Split, which will be achieved by the construction o f a tunnel in the center o f Rijeka.

1.2. Bekko (Vienna) pier Planned repair work o f infrastructure will be performed on the existing areas without change in their use.

1.3. Redevelopment o f the Delta and Port0 Bar08 area As a result o f the transfer o f a l l cargoes o f timber and lumber to the western part o f the port (Zagrebakko multipurpose terminal) and removal o f existing wood storage warehouses, fencing, and all unused quay cranes, including those on the breakwater, the space w i l l be made available for the development o f the city toward the sea. Future development activities are not included in the Proiect.

2. The Road Component

2.1. D-8 State road, Orehovica - Sv. Kuzam Road Section The State road D-8 i s a part o f the road network, which i s o f wider European importance and therefore included in the European Road Network. They are:

D-3: D-8:

Letenje - Zagreb - Karlovac - Rijeka - Triest (E - 65, E - 71, E-63 ) Koper - Pula - Rijeka - Split - Dubrovnik (E - 75 1, E - 65 - E - 80 )

The existing route o f the Adriatic Tourist Road through Rijeka will be replaced with a highway whose route bypasses the City following i t s longitudinal form o f Kr i i iSae - Orehovica - Matulji. On the Orehovica - Matulj i - Rupa highway there are junctions planned for integration o f City road network o f which the following ones are relevant for th i s Report:

“Orehovica” Junction - to connect the City center and the Port to the beltway. Indirectly, a few City suburbs are connected to the same junction as well.

“Draga” Junction - by which SuSak and Kostrena are connected to the junction through the “Eastern Exit” (tunnel connection o f Brajdica - Plumbum and a new Plumbum - Draga road).

“Sv. Kuzam“ Junction - to which the Port industrial area and the new industrial zone o f Kukuljanovo - Cernik are connected. The villages o f Krasica, Praputnjak, Skrljevo, and Kukuljanovo are connected to the eastern junction.

2.2. D-404 (GMC 105) State road, Draga - Brajdica Connection Road The State road D-404 (GMC-105) i s planned to pass the area o f the Rijeka City and the area o f SuSak respectively (SE part o f the Rijeka City). The route D-404 (GMC-105) runs from the Mrtvi canal bridge that crosses Delta, then a new bridge on the Rjebina River across Brajdica (north o f the railway station and parallel to the railway). Almost the entire length o f the road route in the area o f Peaine and Donja Veiica i s laid in the tunnel. Two tunnels are planned: Peaine tunnel (1 300 m long) and Bobova tunnel (200 m long). When it leaves the tunnel the route runs through an undeveloped area below the settlements at Veiica, that i s on the southwest slope above the MartinSaica Cove (parallel to the DraSh Potok stream) to the Draga area, where it connects to the Draga Junction o f the future Adriatic Highway (road D-8).

2.3. Black Spot Elimination

Overall about 147 critical black spots have been identified in the Croatian national road network, leading to large economic and human losses. The project will eliminate about 30 o f these black spots through (i) traffic management improvements; (ii) design improvement, or through (iii) combined civ i l engineering-traffic measures. These activities wi l l not lead to any environmental impact.

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3. The Bridge Component

Krk bridge (the bridge to the island o f Krk) i s a part o f the State road system and also a part o f the traffic connection system among the parts o f the Port o f Rijeka. In addition to the road traffic running across the bridge, there i s an o i l pipeline laid in the bridge. The bridge i s currently subject to maintenance works, that i s the refurbishment and protection o f the reinforced concrete structure o f Sv. Marko bridge section (a small arch o f the Krk bridge toward the island o f Krk). This activitv will not lead to anv environmental impact.

ENVIRONMENTAL ASSESSMENT

ENVIRONMENTAL STUDIES. Evaluation o f environmental, cultural, and social issues have been an integral part o f planning and design studies undertaken by the Government to support identification, preparation, implementation, and operation o f the different Project components in order to not only arrive to the least cost solution, but also to ensure that the least impact on environment, cultural heritage, and peoples l i fe i s caused by Project implementation.

The Environmental Impact Studies (EIS) for the Road Components were performed in 1986 and 1994, and for the overall development o f the Port o f Rijeka, which goes far beyond the Port Component included in the Project, an EIS was carried out during the period 2001-2002.

In order to confirm that these studies also complied with the requirements under World Bank guideline OP 4.01, an Environmental Assessment covering all activities under the Project was performed by the Croatian firm URBING, including also an Environmental Management Plan (EMP).

POLICY AND LEGISLATIVE FRAMEWORK. The system o f physical planning in Croatia i s regulated by the Law on Physical Planning as a principal law. This law imposes the obligation to prepare physical plans o f various levels and scope. Physical plans on higher level determine strategy and concept o f development, while physical plans on lower level determine further conditions for physical planning. The standard method o f making and elaborating physical plans (physical planning documents) i s determined by the Law on Physical Planning and the Rule Book on the contents, criteria for map projections, required spatial indicators and the standards o f physical planning studies.

All Project components are prepared in accordance with the relevant physical planning documentation: (a) Physical Planning Program o f the Republic o f Croatia; and (b) the Physical Plans o f the County o f Primorje-Gorski kotar.

Every intervention in space i s carried out in accordance with physical planning documents, special regulations and the location permit. The location permit i s an administrative document issued on the basis o f the physical planning documents and special acts and regulations based on relevant legislation. The Ministry o f Environmental Protection and Physical Planning issues a location permit for the structures o f special national interest and for interventions in space based on the presented documents including the EIS.

The Project components: Port - Zagrebaeko berth, roads - state road D-8 (Orehovica-Draga-Sv. Kuzam section) and state road D-404 (Draga-Brajdica) are spatial interventions that al l have already undergone legally prescribed procedures for the defining and approval o f locations.

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The building permit i s a legal document (administrative decision) on the basis o f which the construction o f a structure can be initiated. I t certifies that the general designs, as well as basic, conceptual design are drawn up in conformity with regulations and requirementsfconditions a structure in a certain approved location has to meet. Shortly, i t confirms that al l the construction prerequisites are met. The Construction Law regulates the building permit issuance.

COMPONENT OF THE PROJECT

PORT

Project components: Port, state roads D-8 (Orehovica - Sv. Kuzam section) and D-404 represent significant spatial interventions and are subject to location and building permits.

PLANNED ACTIVITIES ENVIRONMENTAL IMPACT ' LO€ATION PERMIT BUILDING

ZAGREBAEKO BERTH CONSTRUCTION YES * ** YES *** YES

BECK0 (VIENNA) BERTH REHABILITATION NO * YES *** YES

PORTKITY INTERFACE DEMOLtTION OF WAREHOUSES NO * ** YES YES

S N D Y PERMIT

In view o f their significance and possible environmental influences, the environmental impact assessment (EIA) procedure must be carried out before the location permit i s issued. This procedure has been carried out through elaboration o f various documents (titles and contents o f these documents are in conformity with the requirements o f laws and regulations in force at the moment the documents were elaborated). On the basis o f an EIA and definition o f necessary measures aimed at preventing adverse environmental impacts and environmental monitoring programs, the competent government bodies have accepted the proposed spatial interventions and issued the relevant permits.

COMMUNICATIONS

CONFORMITY OF THE PROJECT WITH PHYSICAL PLANNING DOCUMENTS

As already mentioned, for each spatial intervention a location andor a building permit, respectively, i s necessary. The Project components considered are spatial interventions that have undergone all legally prescribed procedures for the definition of locations.

_ _ _ _~. - . ~ _ _ AND PORT0 BARROS A R M

STATE ROAD 0-8, SECTION CONSTRUCTION YES * ** YES OREHOVICA - '3. KUZAM *** YES ***

Scheme outline of the Project's components, planned activities and legally required documents and permits

KRK BRIDGE

STATE ROAD 0-404, CONSTRUCTION YES * ** YES CONNECTION ROAD *** YES DRAGA - BRAIDIC4 ELIMINATION OF BLACK MAINTENANCE NO * NOT SPOTS ALONG NATIONAL REQUIREDNOT ROADS REQUIRED

RECONSTRUCTION/ NO * NOT REQUIRED NOT REQUIRED MAlNTFNANrF

IREDEVELOPMENT OF DELTA I I I I

* ** *** Permit already obtained. Permit will be issued when the main design i s approved. Detailed design

EA prepared and approved by the Government. Activities included in the EMP.

will be started as soon as the Building permit has been obtained, which design does not need any further approval.

PARTICIPATORY APPROACH. As mentioned in previous chapter, the EIAs for the Road Components were prepared in 1986 and 1994 respectively, and at that time public consultations were not required by law. However, the public was actually invited to comment on the plans for the proposed road constructions related to the Road Components D-8 and D-404. In addition an extensive exhibition o f the

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plan including the road components D-8 and D-404 took place during November 11, 1998 - January 3 1, 1999, when the public could review the plan including all documents, and also meet with team and authorities responsible for the plan.

Concerning the Port Component, a public consultation was held in February 2002.

An overall public consultation for the whole project took place on January 15, 2003, and the EA, EA-Summary, and the EMP were made available to the public for comments. The documents were than made available for further comments during an additional seven days. However, no comments were received during this time.

POTENTIAL ENVIRONMENTAL IMPACTS AND PLANNED MITIGATION MEASURES RELATED TO PORT COMPONENT. In order to modernize the Port o f Rijeka, the Project w i l l finance activities to enable a more rational and efficient handling o f cargo. These activities comprise the demolition o f a l l warehouses on the Delta and Porto Barros areas in the eastem part o f the port, and use the Zagrebaiko berth for the future storage o f untreated lumber and timber, currently stored in the Delta and Porto Barros areas. The warehouses on the western part o f the port are not used anymore as most o f them are in advanced state o f degradation, and will all - except two which will be rehabilitated under the project for their architectural value - be demolished. In addition, the Project wi l l finance the repair o f infrastructure on the Bec berth, in particular the municipal storm water system, which i s passing through the Bec berth before discharge into the sea. The major part o f the demolition material and soil from excavations will be disposed directly into the sea, in order to reclaim land for the future expansion o f the Zagrebabko berth in accordance with the physical plan for port development.

Environmental issues have been identified in regard to the use o f asbestos material for roofing and side walls on some o f the buildings, and part o f the soil in some locations have been identified to have unacceptable levels o f heavy metals and oil. All asbestos containing material will be separated and disposed at a special landfill in accordance with the Croatian legislation, and soil and demolition material having unacceptable levels o f heavy metals and o i l will be handled as hazardous waste and directed to a special hazardous waste management facility in accordance with Croatian legislation.

The remaining material i s regarded as inert, and w i l l be disposed in the sea directly adjacent to the Zagrebaeko berth. The only expected effect o f the disposal will be an increased turbidity from loose material, which could increase the level o f suspended material. In order to mitigate that effect, a geo-membrane will be placed from the surface to the bottom, and fully cover the vertical area. The geo-membrane will serve as a filter for the suspended solids, and reduceieliminate an increased turbidity in the sea. It should be mentioned that the concentration o f heavy metals in the soil to be disposed in the sea i s on the same level as soil acceptable for agricultural purposes, and the concentration o f metals in the building material i s in par with background values for construction material, gravel and rocks. The disposal o f this material i s therefore not expected to cause any negative effect on the sea water.

I t should be mentioned that the current handling o f grains and cereals in the Port, leads to emission o f particulate matters when the products are transported to and unloaded from the existing silos. The Rijeka Port Authority has already procured air control equipment in order to eliminate the emission o f particulate matters from the silos, and the Project will finance covered conveyer belts for transport the grains between the ships and the silos. In addition, the Project will finance equipment for facilitating separation o f different waste generated in the Port and from ships arriving to Rijeka, as well as equipment for abating eventual o i l spillage in the harbor.

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POTENTIAL ENVIRONMENTAL IMPACTS AND PLANNED MITIGATION MEASURES RELATED TO ROAD COMPONENT D-8. The section Orehovica-Sv. Kuzam, o f the state road D-8, also called Rijeka Bypass Road, w i l l pass through a mainly agricultural area used for summer gardens, which area also serves as a catchment area for drinking water supplies. The construction o f the road will lead to increased noise levels and the risk for pollution o f the groundwater i s imminent.

In order to mitigate these effects noise barriers as well as green screens o f trees w i l l be established along those stretches o f the road where needed, and a water tight system for collection o f run-off water (storm water) and eventual spillage o f oil, hazardous material, etc. will be built along the whole road section. The collected water w i l l be diverted to a treatment plant, and treated before i t s discharge into the sea. The plant i s equipped with a buffer tank, in order to make it possible to collect spillage from a vehicle carrying liquids needing additional chemical treatment before i t s discharge. The buffer tank also provides the possibility to collect the liquids for recycling.

POTENTIAL ENVIRONMENTAL IMPACTS AND PLANNED MITIGATION MEASURES RELATED TO ROAD COMPONENT D-404. Road D-404 (GMC-105)) i s a road that represents a consistent solution for one o f the transversal - longitudinal routes derived from the global traffic system o f Rijeka. This i s a road running from the National Theatre in Rijeka across Brajdica container terminal, through the tunnel o f Peseine, to the point below Gornja Vei ica where i t connects to the highway system at the Draga Junction. I t s traffic function i s to collect and direct the traffic running through the City from the industrial zone and the Port towards the Draga Junction and towards Kostrena and eastern coastal zones. At the higher level o f traffic functions this road connects SuSak and Kostrena. The current traffic runs by the Franjo Rakki Street, a street with high slopes and sharp curves going through the very heart o f the City and causing jams and environmental pollution, and yearly several severe accidents.

The D-404 (GMC-105) road eliminates all these problems. Going through the Peseine tunnel, this road will free SuSak from the transit traffic. The D-404 road i s functionally an optimal solution o f a transversal direction that connects the coastal belt o f the Ci ty and the City bypass road. It i s also a good solution o f a primary coastal traffic corridor that runs westward from the National Theatre building by Ivana Zajca and Riva Streets, and as such i s justified for realization.

The construction o f the D-404 road i s a long-term solution for the traffic in SuSak. In addition to a good and the shortest connection between the Veiica residential area (21,000 inhabitants) and the City center, and the connection o f Rijeka WTC building to the City express and inter-regional roads, the existing and future City zones will benefit from this solution in many ways.

Measures to mitigate the environmental impact will be similar to those mentioned for road D-8. In view o f that D-404 i s passing through an area o f large importance for supply o f drinking water, the construction work w i l l be limited during periods o f high precipitation to avoid creating turbidity in the well water and during the whole construction period the presence o f geo-hydrological expertise will be mandatory, and a continued monitoring o f the groundwater will be carried out.

Substantial environmental and other benefits w i l l result form the construction o f D-404: The streets w i l l be relieved o f the transit traffic burden. The streets will be relieved o f heavy truck traffic, which i s rerouted to D-404 road. Current negative impact from the traffic i s reduced: noise, air pollution, landscape impair. Higher safety o f the participants in traffic. Improvement o f the city traffic efficiency (pedestrian and buses) because the streets are relieved

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o f heavy traffic. Shorter travelling and higher economic efficiency o f the entire traffic system.

POTENTIAL ENVIRONMENTAL IMPACTS AND PLANNED MITIGATION MEASURES RELATED TO ELIMINATION OF BLACK SPOTS. The work w i l l be mainly managerial, and will not include any changes in the road sections. Any environmental impacts are not foreseen, so this part o f project i s not included in the Environmental Management Plan (EMP) as described below.

TRANSPORTATION OF HAZARDOUS MATERIAL. Transport o f hazardous material i s in detail regulated by Law, and By-Laws providing regulations concerning type o f vehicles allowed for this transport, special requirements related to equipment, type o f packaging, education o f drivers, manuals in case of accident, and speed restrictions. As mentioned above, the roads financed under the Project will have special collection ditches for al l run-off water and spillage in case o f accidents in order to prevent groundwater resources.

IMPACTS ON CULTURAL HERITAGE. The EIAs and the overall EA have not identified any objects which would cause conflict with cultural heritage related to the Road Components, but identified six old warehouses within the Port area to be reconstructed including the demolishing o f buildings. These six warehouses were ordered to be temporary protected by a decision made by the County branch of Ministry o f Culture on March 5,2002.

On November 25, 2002, the Ministry o f Culture revisited the previous decision o f preventive protection and decided to lift the protection for four o f the warehouses. The remaining two ware houses (#12 and #17) w i l l s t i l l be protected, and it has been agreed that the funds allocated for the Port Component will also be used for rehabilitation o f these buildings, which also i s a covenant in the legal documents.

Furthermore, al l construction works includes the risk o f finding items and remains o f archaeological value. Therefore the construction contracts w i l l include special provisions regulating necessary proceedings in case o f chance finds. This requirement i s also included as a covenant in the legal documents.

LAND ACQUISITION. Croatian Roads has been forced to acquire additional land in order to construct the Road Components D-8 and D-404. All land required i s paid in accordance with prevailing market price, and the land acquisition for section Orehovica-Draga o f road D-8 i s completed. Concerning section Draga-Sv. Kuzam o f road d-8 and road D-404 the land acquisition i s s t i l l ongoing, and compensation will be provided in accordance with the Croatian Law, which stipulates reimbursement at prevailing market price.

N o land acquisition i s needed for implementation o f the Port Component as all land belongs to the Port o f Rijeka.

RESETTLEMENT. Close to the junction o f roads D-8 and D-404, two families will be resettled, and an agreement has already been reached. Within the Port area two inhabited buildings will be demolished. The buildings are currently occupied by 10 families, some living in the building for 30 years. All families have been informed for more than three years ago about the move, and will be provided apartments o f at least the same size in other parts o f Rijeka. I t should be mentioned that according to the Croatian legislation the families will be given the opportunity to express there interest to be resettled to a certain area. All families interviewed expressed a very positive attitude to the resettlement, and a clear satisfaction with the procedures established by the authorities.

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Annex 13 to the Project Appraisal Document (PAD) describes in more detail the Land Acquisition and Resettlement issues.

ENVIRONMENTAL MANAGEMENT PLAN

An Environmental Management Plan (EMP) has been prepared for each component, which can result in a negative impact during either construction or operation, and requires a continued monitoring. The following activities are regarded to have no environmental impact, and therefore an EMP concerning these activities has not been prepared:

Rehabilitation o f Beeko (Vienna) berth Elimination o f black spots Rehabilitation o f Krk bridge

The EMP for the remaining Project components defines all activities which require recording and monitoring, identifies responsibility for supervision and implementation o f the EMPs, training needs, and reporting requirements. Compliance o f the EMP will be guaranteed by the coordinator for environmental issues within each o f the involved agencies (Croatian Roads, Croatian Highways, and Rijeka Port Authority). In addition, the Rijeka County Branch o f Ministry o f Environment will on a regular basis control that the requirements in the EMPs will be followed, and the WB will during each supervision mission control that all requirements are fulfilled.

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Additional Annex 13: Land Acquisition and Resettlement Plan CROATIA: RIJEKA GATEWAY PROJECT

LAND ACQUISITION AND RESETTLEMENT PLAN RIJEKA GATEWAY PROJECT

BACKGROUND

The Rijeka Gateway Project (the Project) will finance the construction o f two road components which will help to divert a lot o f traffic from the center o f Rijeka and housing areas on the mountain slopes down to the city center. The effect o f the road components to be constructed i s entirely positive for the population along the current narrow and curvy roads leading to a substantial reduction in noise levels, air pollution and number o f serious accidents.

However, the road construction requires the acquisition o f land, and also the demolition o f a number of houses currently occupied as residences. provides details about land acquisition process and resettlement policy framework in Croatia, the number o f lots already acquired and houses to be demolished, as well as the compensation received, and the number o f residences which s t i l l need to be resettled.

The following plan

EXPROPRIATION PROCEDURES AND RESETTELEMENT POLICY FRAMEWORK IN CROATIA

In the Republic o f Croatia expropriation i s the only exception to the principle o f inviolability and confinement o f private property that i s determined in the Constitution o f the Republic o f Croatia (Article 48). The process o f expropriation i s determined in detail in the Law on Expropriation (published in Croatian Official Gazette Narodne Novine 9/94, 35/94, 112/00, 114/01), that enable the government institutions to acquire private property for projects that are deemed to be o f state interest, while protecting the interests of those whose assets are expropriated. Three principal provisions guide the process, which must be completed before c iv i l works can be carried out on the site:

0 Minimize expropriation Provide cash compensation according to market price Substitute land and residences, if possible, and mutually acceptable.

The entire process i s public and transparent, and carried out in compliance with the Law on General Administrative Procedure, the Law on Expropriation, and the Law on Public Roads (Narodne Novine 100/96).

Once an investment i s designated as one o f State interest, the public or private entity responsible for the investment i s given responsibility for carrying out the acquisition according to regulations and for paying compensation. Without the designation o f State Interest, there i s no expropriation or resettlement, only willing buyer/willing seller arrangements. The entity can also commission another entity to manage the process on i t s behalf. With respect to the Project, the investments for which land acquisition i s required, have been designated as “of State interest” and, therefore, the above-described procedures w i l l apply. Also, Croatian Roads i s the responsible entity for road construction to be carried out under the Project and has designated the City o f Rijeka to act on i t s behalf in the land acquisition process, assisted by private lawyers contracted by Croatian Roads.

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The process includes the following steps regardless o f outcome:

1. Public announcement o f plans 2. Not i fy landowners when tentative alignment i s set 3. Compile maps and acquisition needs once alignment i s adopted 4. Preliminary value assessment (land and structures) 5. Negotiation with owners, presentation o f alternatives, valuation o f crops, trees, etc.

If the negotiations are concluded satisfactorily,

land transferred and registered

transfers the expropriated site

a.

b.

For cash compensation, a contract i s drafted and signed, payment i s concluded and the

For exchange, a swap site i s agreed, purchased and transferred to the new owner, who

If the negotiations are not concluded satisfactorilv,(and the deal i s not made), then Croatian Roads submits the proposal for expropriation o f the real property to the responsible government administration office that enacts the decision on expropriation, which can be disputed by an appeal (within 15 days o f the submission o f the decision on expropriation to the party involved) that wi l l be decided upon by the ministry in charge as the appellate body. A dissatisfied party can appeal the decision made by the appellate body by initiating a challenge at the responsible County court.

1.

2.

If the Decision i s not challenged, it becomes final after 15 days and the property can be entered immediately upon payment. If owners are not located, or if co-owners have not agreed among themselves on the compensation, payment i s made to an escrow account and the property can be entered immediately. If the owner appeals to the Appellate court , Croatian Roads will make payment to the owner and take possession o f the site when court decision i s made and the property can be entered once the decision on expropriation becomes final.

3.

EXPROPRIATION RELEVANT TO THE PROJECT

A. ROAD D-8, Section Orehovica - Draga - Sv. Kuzam.

This section i s part o f the Rijeka Bypass Road allowing the traffic to avoid passing through the congested city center o f Rijeka.

Land acquisition. The total land acquired for the road construction i s 450,047 m2 including 1,030 lots. The land acquisition was completed in December 2002; the offered price was at or above the prevailing market price. However, there are 17 cases where the sellers are not fully satisfied, and they want to sell more land than the land needed for the road construction. These challenges are expected to be settled during 200312004.

There are no expected implications o f these challenges on the Project. If the challenge regards the price, and the County and the Appellate court takes a decision, Croatian Roads makes payment and can expropriate. This does not preclude additional challenge. If the challenge i s the amount o f land taken, once the County Court takes a decision, Croatian Roads makes payment and can expropriate. The landowner can continue to appeal and, if judgment i s ultimately favorable, payment and

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expropriation follow.

No secondary encroachers are impacted by the land acquisition and planned construction works.

Resettlement. The construction o f the junction between this section with the next section Sv. Kuzam - Krizisce, and Road D-40 includes two plots with residences, thus the expropriation will also result in resettlement. Negotiations for procurement o f the land were completed satisfactorily and both families indicated in interviews that they are satisfied with the price offered by Croatian Roads, which at or above market price. In one case a family o f four w i l l buy a new place when they receive payment, expected in the very near future. In the other case, the owner i s a 84 year-old woman, who w i l l move to the residence o f her son after receiving compensation. Croatian Roads will cover the moving costs for both families. In both cases, compensation includes the market cost o f land and structures, as well as crops and productive trees, and other assets.

B. ROADD-404

Road D-404 will connect the Port o f Rijeka with road D-8, starting at the part o f the port area called Brajdica. The connector road, 3.5 km, w i l l be constructed partly in tunnels (1552.5 m) partly on viaducts (534.5 m). The part o f the road passing the important reservoir for drinking water, close to the Draga junction, i s to be built entirely as a viaduct, and the road i s to be about 15-20 m above the ground and will have no impact on the water resource as all run-off water from the road surface will be collected and diverted to a treatment plant. This also implies that eventual spillage o f fluids in case o f an accident will be collected and any impact on the water resource can be fully avoided.

Land acquisition. The construction o f the road requires the procurement o f 60 uninhabited plots, comprising 32,000 m2. The acquisition i s currently ongoing and i s handled by an independent solicitor agency contracted by the City o f Rijeka, which i s carrying out al l the land acquisition on behalf o f Croatian Roads. The price being offered, and subject to negotiation between the landowner and the City, i s market price plus 10%. The negotiated prices w i l l be submitted to the World Bank and subject to review during project supervision. A l i s t o f the plots including also the owners i s available in the Annex to this Plan.

Resettlement. Within the port area (Brajdica), the construction requires the demolition o f a number o f buildings (14). Most o f these buildings are warehouses for storing lumber or used as office space. However, among the buildings are also two buildings currently used for residential purposes; building #8 (6 families), #12 (4 families). These two buildings, and several others that will not be demolished, appear to have been constructed for other purposes (one old station, one station master's office complex, several storage buildings, and others). Several decades ago they were converted into residences by the Railways to house employees o f the railway. The residences were privatized, although some residents are s t i l l paying them o f f on a long-term basis. Current residents are either railroad employees or retired employees.

Two similar buildings, #13 and #14, one o f which was called the "Barracks," were demolished about two years ago. Before demolition, owners o f the flats were provided with substitute flats in the city. According to residents who wil l be moved, their former neighbors were satisfied with the options they were given and have settled satisfactorily in their new homes.

The ten families who own flats in the two buildings to be demolished (#8 and #12), were notified three years ago that they would also be relocated and given substitute housing. They were given no

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details regarding the timing o f the relocation or specific provisions at the time o f the announcement, however, but they expect action to be taken in the near future. The families involved are listed in the Annex to this Plan.

The resettlement process i s being handled by Croatian Roads directly or through an authorized representative, and a lawyer engaged for land acquisition. A lawyer from the Croatian Roads recently met with residents to ask about their preferences and requirements, which will guide the search for housing to be purchased for them. The procedures include the following steps:

(a) Residents are requested to express the preferred areas in Rijeka to be considered for their new home, as wel l as number o f rooms they need. (b) Authorized lawyer helps the City o f Rijeka search for suitable alternative apartments in the desired areas, or nearby. (c) Residents are offered a selection o f options, which they visit themselves. (d) When a resident decides to accept one o f the options (or others, if the initial selection i s unacceptable to them), the City o f Rijeka buys the apartment and transfers ownership to the residents in exchange for their current flats. (e) The transfer i s made without payment, unless a family agrees to pay a supplement for housing that i s significantly more expensive than a reasonable exchange entitlement. (9 The City covers the cost o f moving and disconnecting and reconnecting utilities.

The World Bank mission met with some o f the inhabitants (4 families) and learned that they were willing to accept the move. In particular two o f the families expressed a positive attitude toward moving, in principle, and were happy to move as soon as possible from the area, which actually i s an industrial area with a lot o f train traffic on one side and warehouses on the other side. Nonetheless, the families expressed some concern about their options, especially regarding the number o f rooms in the new flats, indicating some uncertainty about the extent io which they can actually negotiate. The authorized lawyer gave assurances, however, each family i s advised o f their rights and that the specific needs o f each family w i l l be honored in the final selection and purchase o f the substitute residence.

This process i s expected to be completed before the end o f 2003. Lawyers have met with each family to discuss preferences and needs and the search i s underway for housing. City officials are confident that there i s a large enough supply of flats on the market to obtain suitable housing for each family. The City i s committed to locate units that are similar in size and number o f rooms to the units being vacated. The City offers options, and each family has the final say in making a choice; there i s no forced relocation. Cash compensation i s an option, but the value o f new housing i s much higher than the units being vacated, thus there i s l i t t le expectation that a family would exercise the option. One o f the families has a tiny lutchen garden, and wants to move to a place that also has a garden. The other families have no productive assets to lose in the relocation process. Relocation w i l l not affect employment. I t i s expected that families will factor commuting time and costs when they decide which housing alternative to accept. This i s not perceived by affected families to be a burden.

The resettlement process o f the ten families will be carried out in accordance with a timetable attached to this plan. The results o f the process (location and cost o f new housing) will be transmitted to the World Bank and subject to review during project supervision. As in the case with land acquisition, owners o f vacated flats can appeal the actions o f administrative bodies (e.g. Municipality o f f i jeka, Croatian Roads) in court.

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The amount o f resettlement was kept to a minimum, leaving a number o f other residential buildings along the road alignment that will not be expropriated. During a visit to the site, residents o f the remaining units expressed disappointment that their buildings were not be demolished, as they would also like the opportunity to move elsewhere..

C. Black Spot and Bridge Rehabilitation

None o f the works related to removing black stops and rehabilitating the bridge are expected to involve either land acquisition or affect third parties. If any need for land acquisition i s identified during project implementation, however, the PIU will assess the situation, develop a plan and request the Bank's no objection prior to initiating the work.

FUJEKA GATEWAY PROJECT

RESETTLEMENT SCHEDULE

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Residents in buildings # 8 (Address: Brajdica l la , Rijeka)

Household Description o f the

apartment(s) (m2)

Estimated unit

price/(m2

Estimated total price

e

Actual nit price

/m2

Price total e

Contract Signing

Property agreed for relocation

(apartment area + 10%)

71,67

(m2)

~

65,15 m2 1. Mijat PribaniC 947,84 61.75 1,78 947,84 67.926,95 by ‘4%

30,2003 ~

2. Nikola DujmeSiC 42,95 m2 980,61 42.1 17,20 47,25 980,61 46.328,92

3. Marijan JurkoviC 67,62 m2 927,24 62.699,97 74,38 927,24 68.969,97 by Sept

30,2003

4. ie l jko TomiEiC

by Sept 30,2003 46,98 m2

61,47 m2

959,79

1.071,15

45.090,93

65.843 3 9

5 1,68

67,62

959,79

1.071,15

49.600,03

72.427,95 5. Milan Jelovac

by Oct 30,2003

6. Predrag StojanoviC HZ 55,18 m2 1.043,98 57.606,82 60,70 1.043,98 63.36730 by Nov

30,2003

Residents in buildings # 12 (Address: Brajdica 6, Rijeka)

37,19 m2 1. Duro VuceliC

by June 1.080,80 1 44.214,45 I 30, 2o03

by June 1.048,55 I 61.291,94 1 30, 2o03 2. Ivan CindriC I 53,14 m2

893,45 I 48.978,93 1 60,30 1 54,82m2 3. Stjepan CindriC

by July 30, 893,45 1 53.876,82 1 2o03

1 31,47m2 4. Vlado BoiiCeviC 1.127,21 I 35.473,30 I 34,62 by July 30, 1.127,21 1 39.020,63 I 2o03

1.008,06 I 515.477,4 1 567,57 1.008,06 567.025,2 1 Overall Total 1 51597 mz

Relocation date: Two months upon contract signing.

The table will be updated by Croatian Roads on a quarterly basis and provided to the Bank for review.

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Additional Annex 14: Government Project Policy Letter (Signed) CROATIA: RIJEKA GATEWAY PROJECT

International Bank for Reconstruction and Development Mr. Andrew N. Vorkink South Central Europe Country Unit Europe and Central Asia Region Zagreb, Croatia

Re: Croatia: Rijeka Gateway Project Project Policy Letter

The Government o f the Republic o f Croatia has requested the International Bank for Reconstruction and Development (IBRD) for a loan o f about US$ 156.5 mi l l ion equivalent to support the implementation o f the proposed Rijeka Gateway Project. The Government states i t s commitment to the objectives o f the Project, which include: (i) increasing efficiency and improving financial, social and environmental conditions at Rijeka Port by privatizing port operations, rehabilitating infrastructure and replacing heavy cargo handling equipment; (ii) improving the financial performance o f Rijeka Port wi th a view to gradually reduce Government contributions in the longer term; (iii) preparing to redevelop part o f Rijeka Port for urban purposes; (iv) gradually reducing the negative impact o f current Plovput’s light dues on the competitiveness o f Rijeka vis-a-vis competing ports; and (v) improving international road connections l inked to the Rijeka Port, and the administration o f the road sector. Over the last three years, the Ministry o f Finance, the Ministry o f Marit ime Affairs, Transport and Communications, the Municipality o f Rijeka, and the three borrowers, the Port o f Rijeka Authority (PRA), Hrvatske Ceste (HC), and Hrvatske Autoceste (HAC), have cooperated with the IBRD in preparing this Project. They have initiated a number o f reforms with the support o f studies financed under a $337,500 PHRD grant from Japan and a US$ 1.5 mi l l ion loan under the IBRD Project Preparation Facility.

The Government i s aware that it must take additional measures in order to achieve the above project objectives. Among these, we agree to take the fol lowing key steps:

(a) Legislative changes: We will submit the required legislative changes to Parliament by the end o f the year 2003 so as to permit: (i) PRA to offer 25 year leases or concessions to private terminal operators on i ts own authority; and (ii) PRA and the Ci ty o f Rijeka to redevelop maritime domain at Rijeka port for non-maritime purposes.

(b) Financial support for PRA: During the period 2004-2009, which i s a transition period during project implementation, we will provide PRA wi th the necessary financial support from the state budget or otherwise in order to assure that i t maintains a satisfactory debt service coverage ratio as described in the table below. I t i s estimated that around HRK 320 mi l l ion wil l be required during 2004-2009 for this purpose. It i s also estimated that the required level o f annual support

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will gradually decline as the Project makes an impact on PRA’s financial performance.

(c) Privatization o f port operations: The Government will support the privatization o f the Rijeka port operations in accordance with the timetable shown below. The strategy will be to attract investors and privatize port operations rather than to privatize LR as a whole. T o this end, LR will be split into successor companies by the end o f 2004, in accordance with the terms o f the Priority Concession granted to LR. Supporting measures will be implemented under the Project, including the provision o f new heavy cargo handling equipment, financing severance packages for redundant workers, and technical assistance to improve LR’s performance and make the successor companies attractive to private partners. LR’s performance will be monitored against i t s Business Plan as agreed among LR, PRA and the Government at negotiations. The Government agrees to: (i) take al l necessary steps to support the implementation o f this Business Plan and subsequent Social Program; and (ii) if LR does not meet agreed performance targets, as detailed in the table below, to consider canceling the Priority Concession before its term and awarding concessions for port operations - on a terminal by terminal, or combination o f terminals basis - to potential private investors on the basis o f a competitive public tender.

1 Containers 13 17 19 22 69 (moveslcranelhour)

(d) Plovput’s Light dues: The Government will take appropriate actions to gradually reduce the negative impact o f the current excessively high Plovput’s Light dues, which are undermining the competitiveness o f Rijeka Port with competing neighboring ports in Northern Adriatic, in accordance with the timetable given below.

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(e) Road Maintenance Policy: The Government recognizes that Croatia’s existing road network i s one o f i t s most valuable public assets, with a replacement cost o f about U S $ 33 billion, and that this value can only be conserved by timely maintenance o f the road network. Maintenance expenditures have been inadequate in the past, and the Government agrees to support Hrvatske Ceste’s road management program, also supported under the project, which envisages a gradual increase o f the road maintenance standards for both routine and periodic maintenance, from 62% in 2003 to 100% in 201 1. The Government agrees to support the program, which includes a minimum level o f road maintenance finding as shown in the table below:

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Table: Summary of Agreed Measures and their Timing

(e) Reduction of Plovput light dues negative impact on Rijeka

(0 Road maintenance budget 122 131 134 143 135 (routine and periodic maintenance o f main and local roads and motonvays including bridges, US$ millions)

Yours sincerely,

Mato Crkvenac, Minister Ministry o f Finance

Roland hvan id , Minister Ministry o f Marit ime Affairs, Transport and Communications

Zagreb, M a y 22,2003

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Rijeka PortRehablitation andNew Construction

Extent ofBank-Financed

D8 Bypass

Port ConnectorRoad D404

RijekaBypass D8

For detail see map, below.

Krk BridgeRehablitation

KRKISLAND

OREHOVICA

RUJEVICA SKURINJE

RIJEKA

SUSAK

BAKAR

KRALJEVICA

HRELJIN

SV. KUZAM

DRAGA

MEJA

KOSTRENA

CAVLE

DIRACJE

OSTROVICA

KRIZISCE

Skrljevo IndustrialFree Zone

v

10° 20° 30°

10° 20°

40°40°

50°

CROATIA

BlackSea

AegeanSea

Adriat icSea

TyrrhenianSea

GERMANY

P O L A N DCZECH

REP.

SLOVAK REP.

AUSTRIASWITZ.

ITALY

UKRAINE

MOLDOVA

HUNGARY

R O M A N I A

BULGARIA

TURKEYGREECE

SLOVENIA

BOSNIA ANDHERZEGOVINA

SERBIAAND

MONTENEGRO

FYRMACEDONIA

ALBANIA

Area of Map

ZAGREBACKOBERTH

V PRASKOBERTH

V

BRATISLAVSKOBERTH

VISINOVPIER ORLANDOV

PIER

BUDIMPESTANSKOBERTH

BECKOBERTH

V

DE FRANCESHIEVBERTH

RIJECKI BREAKWATER

Skl. 27 Skl. 26

Skl. 30Skl. 29

Skl. 22 Skl. 21Skl. 18

Skl. 16Skl. 17

Skl. 15 Skl. 14

Skl. 9

Skl. 12Skl. 13

Skl. 7Silos

Skl. 23N 23b

N 23aSkl. 19

Skl. 20

N 24

Skl. 34N 35

0 100 200 300 400 500

METERS

PROJECT WORKS AREA BOUNDARY

WAREHOUSES TO BE DEMOLISHED UNDER THE PROJECT

WAREHOUSES TO BE REHABILITATED UNDER THE PROJECT

OTHER WAREHOUSES AND BUILDINGS

RIJEKA PORT

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

CROATIA

RIJEKA GATEWAY PROJECTPROJECT WORKS*

NEW CONSTRUCTION:

ROADS

REHABILITATION:

BRIDGE

FUTURE ROADS, OTHER LENDERS

EXISTING MAIN ROADS

EXISTING SECONDARY ROADS

*30 contracts, scattered across the country are included under the project to eliminate dangerous conditions at certain positions on the road network, the so-called, "Black Spots."

IBRD 32355

APRIL 2003

0 1 2 3

KILOMETERS