Document of The World Bank

FOR OFFICIAL USE ONLY

Report NO: 32335-BA

I ~ T E ~ A T I O N A L ~ E ~ L O P ~ N T ASSOCIATION

PROPOSED ADDITIONAL FINANCING OF SDR 1.40 MILLION

(USS2.0 MILLION EQUIVAL,ENT)

TO

BOSNIA AND HERZEGOVINA

FOR THE

SOCIAL INSURANCE TECHNICAL ASSISTANCE PROJECT

PROJECT PAPER

June 1,2005

Human Development Sector Unit South East Europe Country Unit Europe and Central Asia Region

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

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BiH CAS CEE CFAA DFID E3F ECA EDSs FBH FHIF P I 0 FMS FMOH HSEP HIF IDA M C A MHSW

CURRF"Y EQUIVALENTS (Exchange Rate Effective May 23,2005)

Currency Unit = Konvertible Marks (KMJ KM1.OO = U5$0.6466

US$l,00 =KM 1.3466 1 XDR= 1.51209 US%

FISCAL YEAR January 1 - December 3 1

A g g R ~ ~ A T I ~ N S AND ACRONYMS

3osnia and Herzegovina Country Assistance Strategy Central and Eastem Europe Country Financial Accountability Assessment Department for International Development Extra Budgetary Fund Europe and Central Asia Economic Development Strategy Federation o f Bosnia and Herzegovina Federation Health Insurance Fund Pension and Invalid Institute Financial Management System Federation Ministry o f Health Health Sector Enhancement Project Health Insurance Fund International Development Association Ministry o f Civil Affairs Ministry o f Health and Social Welfare (RS)

MSP MOF MS OHR PAYG PCU PFSACII PIU QAG ff RS SC SDR SFRY SITAP SOSAC SOTAC UK USAID

Ministry of Labor and Social Policy (FBH) Ministry o f Finance Marginally Satisfactory Office of the High Representative Pay- As-You-Go Project Coordination Unit Public Fhance Sector Adjustment Credit I1 Project Implementation Unit Quality Assurance Group Project Paper Republika Srpska Steering Committee Special Drawing Rights Socialist Federal Republic o f Yugoslavia Social. hsurance Technical Assistance Project Social Sector Adjustment Credit Social Sector Technical Assistance Credit

United States Agency for International Devel. United Kingdom

Vice President: I Shigeo Katzu

Sector Manager: 1 Arnin H. Fidler Country Director: j Orsalia Kalantzopoulos

Task Team Leader: 1 Betty Hanan

BOSNIA AND HERZEGOVINA

SOCIAL INSifRANCE TECH'NICAL ASSISTANCE PROJECT

Date: June 1,2005 Country Director: Orsalia Kalantzopoulos

Sector ~ a n a g e r ~ ~ r e c t o r ~ h i n Fidler

Project XI): PO95596

Team Leader: Betty Hanan Sectors: Health ((;S%/b>, Compulsory pension and unemployment insurance (35%) Themes: Social risk mitigation (P), Health system Performance (PI Environmental screening category: Not

Responsible Agencies: State: Ministry o f Civil Affairs Federation o f Bosnia and Herzegovina (FBI€): Ministry o f Health; Ministry o f Labor and Social Policy; Ministry for Issues o f Veterans and Disabled Veterans o f the D~fensiye-Lib~rati~n War; Health Insurance and Reinsurance Institute; Pension and Disability Insurance Institute; and Tax Administration. Republika Srpska (TIS): Ministry o f Health and Social Welfare; Ministry o f Labor and Veterans-Invalids' Protection; Health Insurance Fund; Pensions and Disability Insurance Fund; and Tax ~ d m ~ s ~ a t ~ o n .

Lending Instrument: Technical Assistance Credit (TAC)

Implementing agencies:

Federation Ministry o f Health Project Implementation Unit Trg heroja 14 71000 Sarajevo Bosnia and Herzegovina Tel: 387-33- 203-477 Fax: 387-33-203478 E-mail : EIfrp@,Bifi.Net. 3 a

Safeguard screening category: No impact

Ministry o f Health and Social Welfare o f RS Project Coordination Unit Kralj a Petra I Karadjordj evica 13 3 78000 3m.a Luka Bosnia and Herzegovina Tel: 387-5 1-3 19-1 S I Fax: 387-5 1-3 1c)-l68 E-mail: moh.~cu~,~l ic.net

FY 2006 4nnual 0.4 Cumulative 0.4

2007 2008 0.9 0.7 1.3 2.0

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

Revised project development obj e~t ives /outco~es~ Consistent with the original project, the development objectives remain unchanged: to strengthen the effectiveness and efficiency o f health and pension insurance systems by provision o f high quality technical assistance and training to help implement existing reforms and to help design options for future social insurance reforms.

For Loan~/Credits/Grants : Total Bank financing (US$m>: 2.00

... 111

SOSNLA AND HFXZEGOVXNA PROJECT PAfER

FOR THE SOCIAL F N S U C E TECHNICAL ASSISTANCE PROjECT

1. Introduction

1. This Project Paper seeks the approval o f the Executive Directors to provide an additional credit in the m o u n t o f SDR 1,40 million (US$:! mil l ion equivalent) to the Bosnia and Herzegovina Social Insurance Technical Assistance Project (PO7 1004), Credit 3778-3OS.

2. The additional credit would finance scaled-up activities that would enhance the impact o f the project. The additional activities would contribute to efforts to contain growing expenditures for the social insurance systems while helping to strengthen govemance and institutional capacity to design and implement institutional, policy, and financing reforms in the social insurance systems. In particular, the additional financing wil l enable the provision of technical assistance needed to: (i) perfbrm external audits o f cantonal level health insurance funds, large hospitals and other health providers in both Entities, (ii) develop the legal and institutional framework for the establishment o f a unified system o f disability assessment for all categories o f beneficiaries, and (iii) support the joint inter-entity pension reform working group. These activities would contribute to M e r strengthening the effectiveness and efficiency o f the health and pension insurance systems.

3, The Project i s being cofinanced by the UK Department for International Development (DFID), which i s contributing US$ 1 -73 mill ion equivalent towards the financing o f technical assistance and training or 18% o f the original total project costs. The project complements activities supporting the modernization o f the Treasury financed by USAID.

2. Background and Rationale €or Additional Financing

4. U r i ~ i ~ ~ ~ project design. The original credit was for SDR 5.2 million (iJS$7 mill ion equivalent). The project was approved on June 10, 2003 and the credit became effective on October 3, 2003. The objective o f the project, which will remain unchanged with the additional activities, i s to strengthen the effectiveness and efficiency o f health and pension insurance systems by the provision o f high quality technical assistance and training to help implement existing reforms and to help design options for future social insurance reforms. The project i s providing technical assistance that is, inter alia, facilitating the learning process o f the institutions through problem solving. It addresses three areas: (i) effective implementation o f health and pension-related reforms supported under the Public Finance Sector Adjustment Credit (PFSAC 11); (ii) an in depth analysis o f key policy issues which affect health and pension insurance systems to develop well-founded recommendations for future reforms; and (iii) technical assistance and limited investment support to strengthen those aspects o f External 3udgetary Funds (EBF) operations that are likely to be part o f their core mandate, in whichever policy framework they operate. The project i s also: (i) supporting the overhaul o f the PAYG pension system in the medium- term and assessing the

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preconditions for further institutional, parametric and systemic changes and (ii) promoting the harmonization of health and pension policy frameworks between the two entities. There have been no changes in the design o f the project or the project development objectives.

5 ~ Project ~ ~ ~ ~ u r ~ # ~ ~ ~ to date. Progress with implementation o f most sub-components i s satisfactory. Eight major contracts are under full implementation and three others are at the contractual signing stage. O f the eight, three have been fully implemented or are about to be completed. The last supervision mission (March 2005) downgraded the project performance to Marginally Satisfactory (MS) to reflect problems developed with the implementation of one sub-component. These problems are being addressed, Troubles in this sub-component are not expected to affect the success o f proposed scaled-up activities. The additional activities would contribute to efforts to contain growing expenditures for the social insurance systems while helping to strengthen govemance and institutional capacity. In terms of development objectives and related outcomes, the project is performing well, Efforts are being displayed by both implementing agencies and contractors to work together to ensure institutional building under the project. Training under each o f the sub-components i s taking place through a number o f w~rkshops/courses and through formal courses and study tours. The in-country training as well as foreign training i s helping improve the efficiency o f health and insurance systems. As o f May 19, 2005, USg1.52 mi l l ion has been disbursed from the IDA Credit and US$0.50 mill ion from the DFID grant. Disbursements are expected to accelerate in the coming weeks with payments under ongoing and new contracts. (For more information on project performance and institutional arrangements, please refer to paras 1 8- 1 9).

6. ~ ~ ~ u ~ ~ ~ o r the # d ~ i t ~ o ~ ~ ~ ~ ~ ~ ~ ~ i ~ g . The additional financing request i s a result o f an intensive and productive dialogue in the social sectors where the Bank enjoys a strong relationship with the governments. The Bank has financed over 10 operations in the social sectors since the conflict, Implementation performance o f these operations has been consistently satisfactory. SITAP was among nine projects (out o f 130) rated highly satisfactory by the Quality Assessment Group (QAG) in i ts evaluation o f September 2004. The QAG evaluation rated the project highly satisfactory for focus on development eEectiveness and supervision inputs and processes. The activities proposed under the additional financing have been under active discussion with the governments during the past several months. Recent audit reports indicate problems in financial management and accountability in the social insurance system. The request comes from the highest levels o f government, i.e. Entity Prime Ministers and Ministers o f Health. The additional activities would contribute to efforts to contain growing expenditures for the social insurance systems while helping to strengthen govemance and institutional capacity to design and implement institutional, policy, and financing reforms in the social insurance system. In addition, in addressing financial management issues, they will build sustainable financial management capacity and improve transparency. At the request o f the Govement , the Bank has approached several. donors to explore options €or financing o f these activities, However, these efforts have not been successful.

7. Consistent with the Government and the Bank’s sector policy and strategies, the objective o f the additional financing is to scale-up activities through the provision o f

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technical assistance to: (i) perform extemal audits o f cantonal level health insurance funds, large hospitals and other health providers in both Entities, (ii) develop the legal and institutional framework for the establishment o f a unified system o f disability assessment, and (iii) support the joint inter-entity pension reform working group. These activities would contribute to ibrther strengthening the effectiveness and efficiency o f the health and social insurance systems, A description o f the additional activities to be undertaken follows:

Audit o f Cantonal HIFs, Large Hospitals and health providers

8. As other countries in Central and Eastern Europe (CEE), Bosnia and Herzegovina (BiH) follows the health insurance model whereby employers and employees contribute to publicly-managed funds that finance the bulk o f health care provision. Health financing relies heavily on payroll taxation and the collection capacity o f tax authorities. In both Entities, the main source o f health care financing i s the Health Insurance Funds (HIFs), which derive the majority (75-80 percent) o f their resources from wage taxes. Public sector expenditures on health amount to 7.6 percent o f GDP, which is significantly above CEE average and the second highest figures in the ECA region after Croatia. In addition, it is estimated that out o f pocket expenditures amount to another 4.7 percent o f GDP, though private expenditures are not captured effectively, as much o f these expenditures are done in the form o f informal payments, rather than eo-payments.

9, The current contribution rate for formal employees i s one o f the highest in the ECA region - 18 percent o f gross salary in the Federation and 15 percent o f net salary in RS, Compliance rates are relatively low, leading to a situation where the public sector i s the main contributor to health insurance. The system has a rather non-transparent f low o f funds among various extra-budgetary funds, which are supposed to make contributions on behalf o f their beneficiaries (pensioners, registered unemployed) and limited Govement contributions on behalf o f some o f those who are exempt from making contributions. A Country Financial Accountability Assessment (CFAA) for BiH was carried out in 200 1. The CFAA identified systemic and structural weaknesses in public sector budgeting, accounting, reporting, and auditing. Although there have been several positive developments in the past years, most notably, implementation of a fully automated treasury system across all the Cantons in the Federation and all the regions in RS, recent audit reports indicate numerous problems in financial management and accountability in the health sector in general and HIFs in particular. All this contributes to growth in expenditures, inequities, constitute a limiting factor for the competitiveness o f formal sector enterprises, encourage the proliferation o f the informal sector, and undermine the sustainability o f the social insurance system. Overall, the burden o f the health sector on the economy i s substantial and from a macro-economic perspective, containing the growth o f health expenditures is essential.

10. To help tackle these issues and to build sustainable financial management capacity in the health sector, the Bank-financed Health Sector Enhancement Project (HSEP) includes funding to strengthen auditing and financial management and to conduct audits o f Entity level health insurance funds and two large hospitals in each Entity. During the processing o f HSEP, the Entity Ministr ies o f Health requested Bank assistance to mobilize additional resources to undertake similar work at the level o f the cantonal health insurance funds and

3

the largest health care providers in both Entities. The proposed additional financing will provide technical assistance to cany out accounting and internal control reviews o f cantonal health insurance funds and the largest hospitals and other health providers in both Entities. This will result in clear steps to improve transparency and accountability in the management o f resources. The outcome o f this review will, inter alia, include as a f irst step the development o f an Action Plan. A second step will be to overhaul and strengthen the financial management systems (FMS) o f the HIFs by beginning the implementation o f the agreed Plan. The third stage in this process would be to evaluate the effectiveness o f the implementation o f the Plan on the operations o f WIFs and major hospitals and then take appropriate measures to address the gaps.

Development of the legal and institutional framework €or the establishment of a unified system of disability assessment

11. Disability programs in BiH include cash and in-kind benefits, as well as services. The program mix comprises: (i) social insurance benefits under pension and invalid insurance; (ii) programs and benefits for disabled war veterans; (iii) benefits for civil victims o f war; and (iv) benefits for children and adults with disabilities, As a result o f the war, the total proportion o f persons with disabilities is higher in BiH than in any other country in Europe. Overall, about one out o f every 10 potential workers has a disability. Despite this, the system for assessing disability i s outdated and implemented in an. inconsistent manner across programs and across areas o f each Entity. There i s also considerable anecdotal evidence o f abuses in the system, with informal payments made to doctors that conduct the assessment, considered to be a common practice. The result is a series o f disability programs which consume significant resources, but continue to include unjustified beneficiaries and may exclude deserving claimants,

12. Initial technical assistance on disability assessment reforms was provided under the Social Sector Technical Assistance Credit (SOTAC) as well as part o f SOSAC 11 preparation. The analysis of disability policy and programs supported under SOTAC showed that the current system of disability assessment i s ill-suited to deal with the disability challenges that Bosnia and Herzegovina faces today. The technical assistance recommended the development o f new disability assessment rulebooks as well as the consolidation o f disability assessment for adults in one institution. The development o f new disability rulebooks are part o f the core reform program supported by SOSAC II.

13. The support in this area would focus on the development o f the institutional and legal framework for a unified system o f disability assessment, This would include support for: (i) the establishment of a central institution responsible for the assessment o f disability for all beneficiaries irrespective o f their status &e. civilians, civilian victims o f war, war veterans), (ii) the development o f business processes, (iii) the definition o f the organizational structure o f the new institution, (iv) the preparation o f new disability rulebooks that would be applicable to all categories o f beneficiaries. Since they are at an advanced stage, the audits currently being performed under the Veterans Law shall be completed in accordance with the current rulebooks. However, upon the development o f the new system, and enactment of the new rulebooks, the legal framework will be amended to allow another audit o f all individual

4

decisions on the level o f disability to be undertaken by the newly established institution. In addition, technical assistance under this activity would support the development of a Disability Policy Strategy Note to promote the development o f a modem system o f protection o f disabled people.

Support to the Inter-Entity Pension Reform Working Group

14. While many countries in Europe and Central Asia (ECA) experienced significant deterioration in their contributor base during the 199Os, in only a few cases was the decline as dramatic as in BiH, Even in the absence o f the conflict, BiH's pension contribution base would most probably have deteriorated significantly, resulting in a financial crisis. However, th is process was accelerated by the war, which prematurely ended the financial viability o f the pre-war scheme. Overall, the ratio o f pensioners to contributors had reached 1 : 1. .3 by the end o f the conflict, with only a marginal improvement to 1 : 1.4 in the FBH since then. In RS the situation i s worse, with each contributing worker supporting more than one pensioner (1.08: 1). As a result, even high payroll taxes and budget transfers in RS produce an average pension that i s less than 30 percent o f income per capita. In contrast, a somewhat better ratio o f pensioners to contributors in the FBH allows for much higher absolute and relative pension levels, even though the pension spending to GDP ratio is lower,

15. In response to the ongoing financial imbalances in the pension systems o f both Entities, more dramatic action was taken in 2000. The Office o f the High Representative (OHR) imposed a strict cash rationing system on both Entity pension funds, whereby pension benefits in any month are only fmanced from contribution revenues in the previous month, plus legally mandated budgetary transfers for specific groups o f privileged pensioners. Pension levels are controlled by use o f a coefficient that, if necessary, lowers paid pension levels to a percentage o f legal entitlement, with the coefficient a function o f prior month pension contribution revenues. As intended, the policy of introduction o f cash rationing has precluded the accumulation o f firther systemic arrears. By late 2002, the system appeared to have stabilized, with monthly pensions paid with a full coefficient, and the stock o f arrears have declined.

16, The combination o f the Socialist Federal Republic o f Yugoslavia (SFRY) inheritance and post-war developments has resulted in a range o f institutional issues in the BiH pensions systems that are in need o f attention, These relate to the operation o f existing Entity systems, relations between Entity systems, and the evolving role o f the State level in the hture system. With respect to the operations o f the current Entity pension systems, the attempts o f both Pension Funds to control expenditure management in the face o f fluctuating revenues have meant that their institutional focus has been very short-term, with little or no strategic planning. This is not simply a product o f the conflict, Pension funds throughout SFRY countries typically exhibit outmoded managerial structures and practices, weak and non- transparent business processes and internal controls, including uncertain data security. In addition to intra-Entity institutional issues, there remain serious coordination problems between the two Pension Funds, These contribute to ongoing problems with recognition and payment o f pensions for people moving between Entities, either during their working l i fe or once they are receiving pensions, Even in cases where the payment liability is undisputed,

5

there i s no linking or compatibility o f IT systems to allow basic data exchange between the Funds.

17. There are also outstanding policy issues in the pensions system on the entitlements side. Pensions’ policy and a ~ i n i s t r a t i o n officials and pensioners themselves view the current cash rationing system as very much an interim arrangement, and see a strong need for systemic refom, In recognition of the importance of coordinated policies, which ensure the harmonious operation o f the Entities’ pension systems to create preconditions for a future pension reform. that may eventually lead to the establishment o f a unified, State-level pension provision, the three Prime Ministers have agreed to form an Inter-Entity Pension Policy Working Group, The responsibility o f the Working Group i s to: (a) provide policy advice to the Entity Prime Ministers regarding the legal and technical requirements to harmonize pension policies and pension legislation across the Entities, institutional cooperation in the fields o f pension provisions and pension contribution collection, and international social security agreements and (b) formulate a Joint Pension Policy explaining the agreed social policy goals and operating principles o f a future pension system, the method o f assessing benefits based on past and future contribution histories and the methods and timeframe o f harmonizing pension contribution and pension assessment d e s , which are core SOSAC I1 second tranche measures. The Working Group i s to meet every two weeks with the meeting place alternating between Sarajevo and Banja Luka. The Bank was requested to assist the Working Group through the provision o f technical advice on pension system related matters.

3. Proposed Changes

18, The proposed activities will not change the overall project development objectives (DO); the DO will remain unchanged. The proposed activities will complement those already underway and will further strengthen the efficiency and effectiveness o f the health and social insurance systems. The institutional arrangements, which are working well under the original project, will be the same (see paras 22-23). Each implementing agency has Focal, Points responsible for overall coordination o f implementation in their respective min is~/agency. The project i s supported by a Project Steering Committee (SC) comprising high level officials from each o f the implementing agencies and the Entity level Ministries o f Finance. The objective o f the SC is to oversee project implementation and to help address complex issues that arise during project implementation that c m o t be resolved at the individual institution level, Tfie SC also acts as an important policy discussion forum so that the views and concerns of the implementing agencies are reflected in policy development.

19. There will be no changes in the closing date and implementation schedule.

Additional activities will commence immediately after hnding becomes available.

4. Consistency with the CAS

20, The proposed additional activities are fully consistent with the CAS discussed at the Board in September 2004. Under the third pillar of the CAS - investing in key social and economic infrastructure, one o f the key objectives and expected outcomes i s improved social sector management. An additional objective o f the CAS i s to continue to strengthen

institutions and governance. The additional activities would contribute to efforts to contain growing expenditures for the social insurance systems while helping to strengthen governance and institutional capacity to design and implement institutional, policy, and financing reforms in the health and pensions sectors. This would contribute to improved transparency in management o f key public expenditures and programs, Overall support for these objectives should contribute to the overarching CAS goal o f poverty alleviation.

5. Appraisal o f Scaled-up Project Activities

21. There are limited foreseen institutional risks with the proposed activities, The implementing agencies for the additional activities will be the same as those for the original project: (i> the Entity level Ministr ies o f Health, (ii) Entity level Ministries o f Labor, (iii> the Pension Funds, (iv> Entity level Health Insurance Funds, (v> Tax Adminis~ations, and (vi) the Ministry o f Civ i l Affairs. The implementing agencies are the direct beneficiaries o f technical assistance, training, and goods supported under the original project and to be supported under the additional financing.

22, As with the original project, the fiduciary tasks o f procurement and financial management will be carried out by the existing Project Coordination Unit in the RS Ministry o f Health and Social Welfare and the Project Implementation Unit in the Federation Ministry of Health, 30th Units have considerable experience with Bank-financed projects and are integral part of both Ministries o f Health. Procurement and Financial Management under the project work well and have consistently been rated Satisfactory. A large number o f procurement packages have been processed. The quality and accuracy o f d o c ~ e n ~ t i o n is generally good. Procurement i s carried out jointly by the two Entities in terms o f preparation o f TOR, tendering, evaluation o f proposals, negotiations. Joint tendering for all o f the packages under SITAP i s ensuring consistency o f approach and strategic direction, and harmonization of issues being addressed under the project. Project audits have been conducted on a timely manner and the audits have been consistently unqualified. The Coordination Un i ts are also responsible for consolidating quarterly and annual progress management reports and annual work programs and budgets prepared by each implementing agency. Project reporting i s also working well. All reports, annual work programs and budgets are submitted in a timely and effective manner.

23. The proposed activities will not alter the environmental category o f the project (C> or trigger any new safeguard policies. The scale-up would not involve any exceptions to Bank policies.

6. Expected Outcomes

24. following includes the additional outcomes to be expected €ram the new activities:

New activities will contribute to meeting development objectives and outcomes. The

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Output Indicator Output

Audits o f the cantonal HIFs and large hospitals completed and proposal for accounting standards developed with proposed regulation on internal controls New disability assessment system in place

Data Collection

Joint pension reform strategy developed

New unified system established and legal framework, including amendments of the laws and the preparation and enactment of the new rulebooks, completed and assessments conducted WG meeting regularly Draft strategy completed and submittecf

7. Benefits and R i s k s

Reports from institution for disability assessment

Regular progress reports and draft

- Risk Mitigation Measure

Entity Governments commitment to the audits would mitigate the risk. Entity Governments commitment to speed up the activities on the establishment of the new system,

The endorsement o f the Inter-Entity Pension Reform Working Group (WG) with clear TOR for i ts work by three Prime Ministers and Bank’s techmi support to the work of the WG would mitigate the ri

Strategy Number of cantonal HIFs and 1 Audit reports

Risk

large hospitals where audit was completed

Risk Rating

the Prime Ministers j strategy

25, There are several anticipated benefits associated with the project, including the additional activities proposed. First, with more professionally trained management staf f in the health and social protection institutions, the leadership o f those institutions should be better equipped to plan and direct the activities of the institutions to fulfill the social obligations to their clients. Better planning and improved strategic direction in both health and social protection systems would be enhanced thereby improving the systems’ responsiveness to patients, pensioners and enterprises. Improved financial data, reporting and revenue collections for social contributions would improve solvency for HIFs and the PFs thereby increasing health and pension resources benefiting patients, pensioners and, indirectly, enterprises.

26, The additional activities might encounter the following risks:

Resistance to the development o f the new, unified system for disability assessment by existing institutions participating in the

Resistance to the inter-Entity cooperation on pension issues undermines the Inter- Entity Pension Reform Working Group’s progress in the development o f the jo int pension reform strategy. Risk Rating -H (High Risk), S (Substantial Risk), M (Modest Ri!

8.

27.

Financial Terms and Conditions for the Additional Financing

Financial terms and conditions for the additional financing will remain unchanged.

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9. Allocation of Proceeds of Additional Financing

Allocation of Proceeds of Additional Financing toy Category (In US$ equivalent *)

( 1 ) Goods 390,000 (2) Consultant Services including audit 1,500,000 (3) Training 0 (4) Incremental Operating Costs 60,000 (5) Unallocated 50,000

TOTAL 2,000,000

* Amounts have been rounded to the nearest thousand.

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