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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL FINANCING LOAN IN THE AMOUNT OF US$15 MILLION TO THE REPUBLIC OF BELARUS FOR THE SOCIAL INFRASTRUCTURE RETROFITTING PROJECT November 5,2007 Sustainable Development Department Belarus, Moldova and Ukraine Country Unit Europe and Central Asia Region Report No: BY This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective August 30,2007) CurrencyUnit = US$ US$ = 2,15 1 S O Belarusian Rubles FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS CAS CER EED EMP ERR IBRD ICB PMU Country Assistance Strategy Certified Emission Reductions Energy Efficiency Department Environmental Management Plan Economic Rate of Return International Bank for Reconstruction and Development International Competitive Bidding Project Management Unit Vice President: Country ManagerDirector: Sector Manager: Task Team Leader: : Shigeo Katsu Paul Bermingham Charles Feinstein Pekka Salminen 2

3 FOR OFFICIAL USE ONLY Table of Contents INTRODUCTORY STATEMENT BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING... 5 PROPOSED CHANGES... 7 CONSISTENCY WITH CAS ECONOMIC ANALYSIS APPRAISAL OF SCALE-UP PROJECT EXPECTED OUTCOMES BENEFITS AND RISKS FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. 3

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5 PROJECT PAPER DATA SHEET Borrower: Belarus Responsible agency: BelInvestEnergoSberezhenije (PMU) FY Annual FY08 FY09 FYlO FY11 3.O Bank policies? Revised project development objectives/outcomes: The objectives of the project remain the same: The project s objective is to improve the functional and health environments of social sector facilities, with particular emphasis on reducing energy consumption. The project will retrofit social sector facilities to encourage a more effective use of resources, reducing operation and maintenance costs in schools, hospitals, medical and other selected social facilities such as orphanages, and community homes for the elderly and disabled. Does the scaled-up or restructured project trigger any new safeguard policies? No For Additional Financing [XI Loan [ ] Credit [ 3 Grant For LoansKreditdGrants: Total Bank financing (US$m.): 15.0 million Proposed terms: IBRD Loan Financing Plan (US$m.) Source Local Foreign Total Borrower IBRD/IDA Others Total

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7 1. INTRODUCTORY STATEMENT 1.1 This Project Paper seeks the approval of the Executive Directors to provide additional financing in an amount of US$ 15.0 million to Belarus for the Social Infrastructure Retrofitting Project (P044748) Loan Number 7056-BY. 1.2 The proposed additional loan would be used to complete the rehabilitation of the original investment program for energy efficiency improvements in social sector buildings (schools and hospitals) across Belarus. Higher than estimated bid prices on the energy efficiency improvements due to the strong Euro and increases in wages in Belarus forced the implementing agencies to reduce the number of buildings covered in the original project. The cost overrun estimate is about US$ 6 million. Additional energy efficiency retrofitting in about 140 buildings (schools and hospitals) across Belarus shall be implemented for an additional US$ 9 million, including required consultants and support to the project management unit (PMU). The PMU has been funded from the government energy efficiency budget. 1.3 There will be no co-financing from other donors for this particular project. Subject to Belarus ratification of Kyoto Protocol, emission reductions achieved through energy efficiency measures will be eligible for trade under the Clean Development Mechanism and could provide an additional income stream to be used to finance activities funded within and beyond the scope of this Energy Efficiency Program in Belarus. 2. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING 2.1 Project Development Objectives and Scope: The original loan for US$22.6 million for the Social Infrastructure Retrofit Project was approved in June 2001, and became effective on December 26, The project development objective is to improve the functional and health environments of social sector facilities, with particular emphasis on reducing energy consumption. The project will retrofit social sector facilities to encourage a more effective use of resources, reducing operations and maintenance costs in schools, medical and other selected social facilities such as orphanages, and community homes for the elderly and the disabled. These objectives would be achieved by financing (a) retrofitting of education, health and other selected social sector buildings 5

8 with energy efficiency measures, and (b) technical assistance and project management. The project objectives are still the same. 2.2 Project Performance to Date: Project implementation started slowly mainly because of a delay in employing the design and supervision consultant, which delayed the project implementation by about one year. The project implementation has been satisfactory. All project components are proceeding satisfactorily. (a) Heat substation improvements: The target of the original project was to replace 541 heating substations in schools and hospitals heated by district heating in different cities in Belarus. As of October 2007, 519 substations have been replaced and the existing contracts include completion of the remaining 22 substations by end- November At that time all planned 541 substations will be replaced with modern energy efficient heating substations. (b) Boiler Improvements: The boiler component has been more challenging and slow in progress for many reasons. The original target was to replace 42 boiler houses with modern gas-fired or bio-fuel boilers. The current contracts which are under implementation include completion of 27 boiler houses of which 16 have been completed. The remaining 11 boiler houses will be completed by end One bidding package was cancelled because of lack of funds and will be financed with the additional financing. (c) Window replacements: The original target was to replace windows in 28 buildings of which 24 buildings have been completed. Windows in one building have been replaced with local funds and 3 buildings had to be excluded from the existing contracts because of lack of funds. They will be financed with the additional financing. (d) Demonstration sites: The original project included 2 bidding packages for demonstration sites where several energy efficiency measures would be implemented. Because of lack of funds only one bidding package could be contracted for 6 buildings out of which 4 are completed and 2 will be completed in November The original target was 12 buildings. The remaining 6 buildings will be completed with the additional financing. (e) Energy efficient lighting: The lighting component, replacement of old inefficient lighting systems with modern energy efficient lighting in 232 buildings has been fully completed. The original target was 202 buildings. (0 Institutional Support Component: the PMU is performing satisfactorily, and is staffed with competent personnel, who are familiar with Bank procedures. Procurement has been progressing satisfactorily. The PMU submits routine progress and financial management reports in a timely manner. 2.3 Implementation progress (IP) and Development Objective (DO) ratings for the project have been satisfactory. The audit reports have been found satisfactory and the 6

9 project has not had any environmental, social or other safeguard problems. As of October 2007, disbursement had reached US$19.5 million, about 86% of the loan, and the contracted amount is 100% of the existing loan amount. 2.4 Counterpart financing was delayed in 2007 because the source of the funds has been changed from the Innovation Fund (surcharge on gas price) to the National Development Fund. The funds were made available only in September 2007, which has partly caused the delay in completion of the last contracts because the local portion of the contracts (40%) could not be paid in a timely manner. The Belarusian counterpart confirmed that the counterpart financing for energy efficiency projects will be properly secured in the state budget for the following years. Similar delays are not expected to take place in the future. 2.5 Rationale for the Borrower s Request: The Belarus government realizes the importance of energy efficiency measures as a tool to reduce energy intensiveness and dependency on energy import and at the same time improve the heating and lighting service quality inside buildings. Belarus has a national energy efficiency program which has invested in energy efficiency improvements about US$1 billion within 5 years. The energy import prices have increased in Belarus in 2006 and 2007, for instance the price for natural gas has increased from about US$50 to about US$120 per 1,000 m3. 3. PROPOSED CHANGES 3.1 The objective of the proposed program will remain in line with the original development objective of the Social Infrastructure Retrofit Project. Continued energy efficiency improvements in schools and hospitals and social buildings are very much in line with the government s priorities. The proposed project scope will comprise the following main components: (a) Energy Efficiency Measures (US$ million) in schools and hospitals: The additional financing will be used to finance similar improvements as in the original project. Typical measures are: window replacement; wall and roof insulation; heat substation replacement; boiler replacement; and energy efficient lighting. (b) Consultancy Services (US$ 0.88 million): The PMU has been involved in the project to provide technical and monitoring services with the help of consultants financed under the loan. The consultancy services shall continue under the additional financing for: (i) project feasibility studies, design and supervision, (ii) monitoring and evaluation, and (iii) annual financial audits. The PMU shall be funded from the government energy efficiency budget. 7

10 3.2 The estimated cost are shown in the following table: Estimated Project Costs and Financing (US$ million) Component I Cost estimate I Counterpart financing I Additional financing Energy efficiency improvements in social sector buildings Consultancy services including financial audits PMU operating costs Front-end Fee Total Summary of other changes are in the following table: Summarv of Other Comdementarv Changes 8

11 4. CONSISTENCY WITH CAS 4.1 The proposed program is also consistent with the draft Country Assistance Strategy FY08-10, which aims to: (i) support Belarus efforts in delivering public goods and social services to the vulnerable segments of the population (ii) continue addressing issues of global concern; and (iii) provide flexible, focused AAA in selected areas supporting the liberalization of the economy. By improving the energy efficiency of social service buildings (schools, hospitals, orphanages, homes for the elderly), the additional financing will reduce heating costs and heating emissions, and thus reduce the drain on public resources. It will also improve comfort levels in heated schools, orphanages, homes for the elderly and hospitals. The Bank continues to emphasize the need for attention to limiting the risks that the energy sector poses for macroeconomic and fiscal sustainability, and assuring that the energy needs of the economy are met satisfactorily. In addition, the government also aims to improve the technical performance, governance and financial viability of the energy sector; and to upgrade national infrastructure. The main aim of the proposed additional financing is to enable the government to complete the original scope of the project and to scale up energy efficiency improvements to include lighting in schools, energy efficiency improvements in additional schools and hospitals across Belarus. Continued energy efficiency improvements in schools and hospitals are in line with the priorities of the government. Important results have been attained-the energy intensity of the country has been gradually decreasing. In the past five years investments in energy efficiency accounted for about US$1.17 billion, leading to the reduction in energy intensity by 25 percent. 9

12 5. ECONOMIC ANALYSIS 5.1 The main justification for the additional financing is to complete the substantial investment undertaken with Bank financing by rehabilitating the social infrastructure investments including: (i) lighting systems, (ii) replacement of windows, (iii) replacement of boiler plants, and (iv) modern heating substations. 5.2 At appraisal (in 2000) the project economic rate of return was 24.4%, calculated with the economic price for natural gas of US$60/1000 cubic meter. 5.3 The economic environment in Belarus has changed since appraisal with the main differences being: (i) investment costs have increased due to the strong Euro and increases in wages in Belarus, (ii) also energy prices (gas, electricity) have increased especially during 2006 and 2007 resulting in higher benefits on energy efficiency investments. The current border price for gas is about US$100/1000 cubic meters. The economic analysis is calculated with the gas price of US$120/1000 cubic meters. 5.4 Based on the same methodology calculated with current investment costs and energy prices the economic rate of return is estimated to be 24.7%, which is about the same as at the appraisal of the original project. 6. APPRAISAL OF SCALE-UP PROJECT 6.1 Technical: The original project has retrofitted many hospitals and schools; however the number of remaining buildings requiring energy efficiency measures is large and remains a priority for the Government. The project scale up will implement energy efficiency improvements at schools and hospitals across Belarus, consistent with the respective plan developed by the Energy Efficiency Department (EED) and the PMU in consultation with the Bank. Thus, the scale up scope includes about 140 educational facilities (schools, kindergartens, other), health facilities (hospitals, polyclinics) and social buildings. The EED will identify the specific sites for energy efficiency improvements under the project in consultation with the PMU and the Bank. 10

13 6.2 Financing plan: The financing plan for the additional financing is shown in the table above indicating the need for additional financing for the proposed energy efficiency measures. The government has committed to provide counterpart financing in an amount of US$3.9 million. 6.3 Social: There are no issues related to land acquisition, resettlement or social safeguards in the project. The building efficiency improvements undertaken have already demonstrated positive social impacts and the project is expected to widen such impacts through the additional financing and scale up of the scope. 6.4 Institutional: The existing arrangements include a PMU with staff and facilities financed by the Government s Energy Efficiency Department for day-to-day management of the project, for coordinating and overseeing overall implementation of the project. The PMU provides support for energy audits, technical review, monitoring, etc. These arrangements have been functioning well and will be continued for the additional financing project also. The PMU will be strengthened through additional staffing in technical and procurement areas to handle the expanded scope of the project. 6.5 Environmental: The proposed program extension does not change the environmental category of the project (Category B), as all impacts are expected to be positive. An Environmental Management Plan (EMP) for the energy efficiency retrofitting was prepared during the original project and will continue to be used in the additional financing. Energy efficiency measures in schools, hospitals and social buildings are expected to have a positive impact on environment. 6.6 The project, including the energy efficiency measures in all the buildings, will lead to a significant reduction of greenhouse gas emissions (C02), which could also generate Certified Emission Reductions (CER) for trading after Belarus is eligible for them according to the Kyoto Protocol procedures. 6.7 Procurement: Procurement arrangements will be similar to the ongoing project, and will be in accordance with the Bank s latest procurement guidelines. The relevant thresholds for prior review and for procurement methods will be as under the ongoing project. The procurement plan is included in the minutes of the contract negotiations. The existing contract for the design and supervision consultant will be extended to cover the first year s investments for the additional financing. A new tendering procedure will be organized for the design and supervision consultant for the 2009 and 2010 investments based on local competition Financial management: The financial management functions of the additional financing will be handled by the PMU, which will be responsible for the flow of funds, budgeting, accounting, reporting, auditing and internal controls. There would be no changes in the financial management arrangements which are now in place at the PMU for the implementation of the Social Infrastructure Retrofitting Project. Currently, the financial management arrangements of the Project are acceptable to the Bank. 11

14 6.9. The financial management arrangements of the Social Infrastructure Retrofitting Project implemented by the PMU at BelInvestEnergoSberezhenije have been reviewed periodically as part of project FM monitoring and have been found satisfactory. According to the latest Financial Management monitoring of Social Infrastructure Retrofitting Project as of July 10, 2007, the financial management arrangements of the project continue to be satisfactory, and most of the Bank s recommendations have been implemented from the previous FM monitoring in September Implementation of the recommendations made during the current supervision will be monitored during the following monitoring visits. In addition to the recommendations which are to be followed during the remaining implementation period of SIRP, it was agreed that the additionally, PMU would establish the procedure of quarterly budgeting and revise the project POM., in order to enhance the financial management system for the additional financing. Both actions have been completed prior to negotiations The Social Infrastructure Retrofitting Project is in compliance with the audit covenant: the audit report on project financial statements for the fiscal years 2006 and 2005 have been received on time and were found satisfactory. The auditors have issued unqualified opinion for both years; however, no management letter was issued based on those audits. The PMRs for the year 2006 were submitted with a small delay of up to one month in both reporting periods, and were found satisfactory. The FM supervision report of July 2007 contains several recommendations on further enhancement of the quality of the periodic reports and their timely submission to the Bank in the next reporting periods Similar FM arrangements will be adopted for the additional financing. The audit of the project financial statements will be conducted by independent private auditors acceptable to the Bank, on terms of reference agreed with the Bank. The annual audited project financial statements will be submitted to the Bank within six months of the end of each fiscal year and also at the closing of the project. The existing formats of the IFRs (formerly PMRs) will be used and the PMU will produce a full set of IFRs every six months throughout the life of the project and will submit them to the Bank no later than 45 days after the end of each six months period Disbursement Arrangements: The existing disbursement arrangements will continue for the additional financing project with a change in the percentage of expenditures to be financed for all new activities to 100 percent. The allocation of financing proceeds is as follows. 12

15 Category Additional Amount of the Loan Allocated (Expressed in Dollars) % of Expenditures to be Financed (1 ) Goods, Works and Consultancy services 14,962, % (2) Front-end Fee on the Additional Financing 37,500 TOTAL 15,000, EXPECTED OUTCOMES 7.1 The project will enhance achievements and outcomes of the Social Infrastructure Retrofitting project, increasing the number of schools, hospitals and orphanages to be retrofitted. The expected outcomes are: (i) decreased energy consummation; (ii) improved heating services for social sector buildings improved customer satisfaction; and (iii) reduced environmental emissions. Another beneficial outcome would be potential carbon credits accruing from the project through reduced carbon intensity and avoided carbon dioxide emissions, which could be traded when Belarus ratifies the Kyoto Protocol. 7.2 The project will continue to monitor the same indicators as for the original project, including number of buildings retrofitted including buildings where: (i) windows; (ii) substations; (iii) boilers; and (iv) lighting systems are changed. In addition the total saved energy amount for the whole project is monitored. 8. BENEFITS AND RISKS 8.1 Risks: A potential risk to implementation is delays in procurement and implementation because of the capacity of the PMU. The PMU has restructured its organization and employed new staff in 2007 which is assessed to be adequate to 13

16 implement simultaneously Social Infrastructure Retrofitting Project and Post Chernobyl Recovery Project. Additional training for the procurement staff has been provided in 2007 to strengthen the capacity of the PMU. The lessons learned have been used to improve the bidding and technical design documents. 8.2 Benefits: The project has clear benefits for Belarus and especially for social sector buildings including the following: (i) more efficient use of energy in social sector buildings; (ii) improved service level; and (iii) reduction of environmental emissions. All the above are in line with the project s original development objectives. A large part of project benefits are difficult to quantify. These benefits include an increased comfort and improved health users of the rehabilitated schools and hospitals, and lower air pollution. 9. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING 9.1 The Borrower has indicated that the additional loan would be an IBRD variable spread loan in US Dollars, repayable in 17 years including a 5 year grace period. The above-mentioned terms to be finally determined in loan negotiations. The Borrower has selected these terms because they are similar to the terms of the original loan. 14

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