Bosnia and Herzegovina Infrastructure Report Q1 2013

BMI View: There is continued uncertainty for the construction and infrastructure sector in Bosnia andHerzegovina (BiH), with the eurozone crisis dampening confidence in the sector. Tensions between ethnicgroups in Bosnia continue to weigh on the country's EU accession prospects, development potential andrisk profile. Construction industry value is forecast to stand at US$0.7bn in 2013, rising only slightly by2021, to US$1.2bn. Average year-on-year growth between 2013 and 2021 is expected to sit at 2.8%.

Key factors contributing to growth:

Bosnia's state-owned utility Elektroprivreda BiH (EPBiH) shortlisted international companiesand consortia for the second phase of participation in the development of a coal-fired unit at theTuzla power plant. The winning company or consortia will work with EPBiH on the constructionof the 450 megawatt (MW) unit at the latter's Tuzla plant, which annually generatesapproximately 3,100 gigawatt hours (GWh) at six units. The new unit is likely to involve aconstruction cost of nearly BAM1.5bn (US$997mn).

Bosnian power utility Elektroprivreda Republike Srpske (EPRS) and Germany-based RWE'ssubsidiary RWE Innogy signed a joint venture (JV) deal for the construction of four run-of-theriverpower plants on the Drina River of Bosnia. EPRS will hold a 40% stake in the JV. Thehydropower plants, involving an estimated construction cost of EUR460mn (US$596.27mn),will have a combined power generation capacity of 210MW. The construction of the plants isexpected to start from 2014, with the plants likely to become operational in 2019, Heiladded. Once operational, the plants must produce 750GWh every year.

Bosnia's Republic of Srpska signed a deal worth EUR180mn (US$230.4mn) with a consortiumof companies from FYR Macedonia and Bosnia for the construction of a 36km section ofmotorway to form part of a 75km motorway linking Banja Luka with the Bosnian section of thepan-European highway, Corridor VC, in Doboj. The project to build the motorway between thenorthern towns of Prnjavor and Doboj will be financed with a EUR150mn (US$192mn) loangranted by the European Bank for Reconstruction and Development.

Bosnia has secured a fresh two-year Stand-By Arrangement (SBA) from the International MonetaryFund (IMF), which had previously suspended loans as a result of slow progress on economic reforms anda lengthy spell of political stalemate. Although the SBA has improved short-term fiscal stability, we warnthat with confidence intrinsically tied to the bailout programme and given the anaemic pace of reform,investor sentiment could turn sour quickly should the IMF suspend any outstanding loan tranches over thenext few years.

Tensions between ethnic groups in Bosnia will continue to weigh on the country's EU accessionprospects, development potential and risk profile through the next decade. Indeed, the risks to the statusquo are primarily weighted to the downside, in our view, with a number of issues having the potential toresult in a further deterioration in the political situation. That said, we expect the international communityto remain firmly committed to Bosnia, which should prevent a relapse into large-scale armed conflict.