Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD728 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$90 MILLION TO THE REPUBLIC OF BELARUS FOR A BIOMASS DISTRICT HEATING PROJECT MARCH 5, 2014 Sustainable Development Department Ukraine, Belarus and Moldova Country Unit Europe and Central Asia Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective February 25, 2014) Currency Unit = Belarusian Rubles US$1.00 = 9,740 Belarusian Rubles FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy kWh kilowatt-hour CHP combined heat and power MW megawatt CO2 carbon dioxide MWh megawatt-hour EA Environmental Assessment NPV net present value EMP Environmental Management Plan ERR economic rate of return PDO Project Development Objectives ESMAP Energy Sector Management PEFC Program for the Endorsement of Assistance Program Forest Certification FM Financial Management PMU Project Management Unit FSC Forest Stewardship Council POM Project Operational Manual FY Financial Year WB The World Bank GDP gross domestic product GWh Gigawatt-hour IPCC Intergovernmental Panel on Climate Change Regional Vice President: Laura Tuck Country Director: Qimiao Fan Sector Director: Laszlo Lovei Sector Manager: Ranjit J. Lamech Task Team Leader: Fan Zhang REPUBLIC OF BELARUS Biomass District Heating Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ............................................................................................................ 1 B. Sectoral and Institutional Context................................................................................. 1 C. Higher-Level Objectives to which the Project Contributes .......................................... 6 II. PROJECT DEVELOPMENT OBJECTIVES ................................................................6 A. PDO............................................................................................................................... 6 B. Project Beneficiaries ..................................................................................................... 6 C. PDO-Level Results Indicators ...................................................................................... 7 III. PROJECT DESCRIPTION ..............................................................................................7 A. Project Components ...................................................................................................... 7 B. Project Financing .......................................................................................................... 9 C. Lessons Learned and Reflected in the Project Design ................................................ 10 IV. IMPLEMENTATION .....................................................................................................10 A. Institutional and Implementation Arrangements ........................................................ 10 B. Results Monitoring and Evaluation ............................................................................ 11 C. Sustainability............................................................................................................... 11 V. KEY RISKS AND MITIGATION MEASURES ..........................................................12 A. Risk Ratings Summary Table ..................................................................................... 12 B. Overall Risk Rating Explanation ................................................................................ 12 VI. APPRAISAL SUMMARY ..............................................................................................13 A. Economic and Financial (if applicable) Analysis ....................................................... 13 B. Technical ..................................................................................................................... 15 C. Financial Management ................................................................................................ 15 D. Procurement ................................................................................................................ 16 E. Social (Including Safeguards) ..................................................................................... 16 F. Environment (Including Safeguards) .......................................................................... 18 G. Other Safeguards Policies Triggered M(if required) .................................................. 18 Annex 1: Results Framework and Monitoring .........................................................................19 Annex 2: Detailed Project Description .......................................................................................27 Annex 3: Implementation Arrangements ..................................................................................41 Annex 4: Operational Risk Assessment Framework ................................................................55 Annex 5: Implementation Support Plan ....................................................................................60 Annex 6: Economic Analysis .......................................................................................................62 MAP IBRD 33370 . PAD DATA SHEET Republic of Belarus Biomass District Heating Project (P146194) PROJECT APPRAISAL DOCUMENT . EUROPE AND CENTRAL ASIA ECSEG Report No.: PAD728 . Basic Information Project ID Lending Instrument EA Category Team Leader P146194 Investment Project B - Partial Assessment Fan Zhang Financing Project Implementation Start Date Project Implementation End Date 1-April-2014 31-Dec-2019 Expected Effectiveness Date Expected Closing Date 15-July-2014 31-Dec-2019 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Ranjit J. Lamech Laszlo Lovei Qimiao Fan Laura Tuck . Borrower: Republic of Belarus Responsible Agency: BelInvestEnergoSberezhenije (PMU) Contact: Energy Efficiency Department Title: Telephone /Fax: (375-17) 306-4683 Email: bies@niks.by No.: . Project Financing Data(in USD Millions) [X] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee Total Project Cost: 90.00 Total Bank Financing: 90.00 Financing Gap: 0.00 i . Financing Source Amount Borrower 0.00 International Bank for Reconstruction and 90.0 Development Total 90.0 . Expected Disbursements (in USD Millions) Fiscal 2014 2015 2016 2017 2018 2019 2020 Year Annual 0.00 1.8 9.1 21.8 27.1 22.9 7.3 Cumulati 0.00 1.8 10.9 32.7 59.8 82.7 90.0 ve . Proposed Development Objective(s) The Project Development Objective is to scale up the efficient use of renewable biomass in heat and electricity generation in selected towns in Belarus. . Components Component Name Cost (USD Millions) District Heating Energy Efficiency 23.35 Biomass Heat Generation 64.98 Technical Assistance 1.445 . Institutional Data Sector Board Energy and Mining . Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Energy and mining Other renewable energy 80 88 Energy and mining Energy efficiency in heat 18 12 and power Public administration, law, and Public administration— 2 justice energy and mining Total 100 ii I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. . Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Urban development Citywide infrastructure and service 80 delivery Environment and natural resources Climate change 20 management Total 100 . Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [ X ] respects? . Does the project require any waivers of Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ X] Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ] Explanation: Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 iii . Legal Covenants Name Recurrent Due Date Frequency Section I.A. 1 of Schedule 2 X CONTINUOUS Description of Covenant The Borrower shall, through EED, carry out the Project in accordance with the Project Operations Manual (hereinafter, the “POM”). Except as the Bank shall otherwise agree, the Borrower shall not assign, amend, abrogate or waive the POM or any of its provisions thereof. Name Recurrent Due Date Frequency Section I.A. 2 of Schedule 2 X CONTINUOUS Description of Covenant At all times during Project implementation, the Borrower, through EED, shall ensure that the PMU is maintained with adequate funds, facilities, services and other resources and with qualified staff in sufficient numbers, all satisfactory to the Bank. Name Recurrent Due Date Frequency Section I.A. 3 of Schedule 2 X CONTINUOUS Description of Covenant The Borrower shall, through EED, enter into adequate arrangements, satisfactory to the Bank, with each Participating District Heating Utility which shall regulate and ensure, inter alia: (i) the appointment by each Participating DH Utility of a Project coordinator who shall serve as a focal point and be responsible for the day-to-day cooperation with the PMU for the purposes of the Project; (ii) a commitment on the part of each Participating District Heating Utility to provide technical supervision under the Project. The Borrower, through EED shall exercise its rights and carry out is obligations under said arrangements in such manner as to protect its own interests and those of the Bank, and to accomplish the purposes of the Project. Name Recurrent Due Date Frequency Section III. D.2 of Schedule 2 Yearly Description of Covenant The Borrower shall: (a) No later than November 15 of every year during the implementation of the Project, beginning on November 15, 2015, prepare and furnish to the Bank a procurement progress report (Procurement Report), in form and substance acceptable to the Bank, which shall include, inter alia: (i) a description of issues arising during the full procurement cycle under the Project, from design through planning, bidding, contract implementation and completion; (ii) a list of proposed measures and actions to be taken to resolve the issues identified under (i) above; and (iii) a proposed timeline for the implementation of the said measures and actions. (b) No later than December 15 of every year during the implementation of the Project, beginning on December 15, 2015, exchange views with the Bank on the results of the Procurement Progress Report completed for the Borrower’s previous calendar year and thereafter implement such recommended measures, taking into account the Bank’s views on the matter . Conditions Name Type iv Description of Condition Team Composition Bank Staff Name Title Specialization Unit Pekka Kalevi Salminen Senior Energy Specialist Senior Energy Specialist ECSEG Elena Klochan Sr Country Program Sr Country Program ECCBY Officer Officer Irina Oleinik Communications Officer Communications Officer ECCBY Alexei Slenzak Senior Operations Senior Environmental ECSEN Officer Specialist Barbara Ziolkowska Procurement Analyst Procurement Analyst ECSO2 Maiada Mahmoud Abdel Finance Officer Finance Officer CTRLA Fattah Kassem Irina Babich Financial Management Financial Management ECSO3 Specialist Specialist Fan Zhang Energy Economist Team Lead ECSEG Klavdiya Maksymenko Social Development Social Development ECSSO Specialist Specialist Elena Segura Labadia Senior Counsel Senior Counsel LEGLE Irina Voitekhovitch E T Consultant E T Consultant ECSEG Non-Bank Staff Name Title Office Phone City Murat Alehodzhin Energy Economist . Locations Country First Location Planned Actual Comments Administrative Division Belarus Grodno oblast Volkovysk X Belarus Brest oblast Ivanovo X Baranovichi Bereza Belarus Gomel oblast Zarechie X Kalinkovichi Zyabrovka v Belarus Minsk oblast Starye Dorogi X Kholopenichi Cherven Belarus Mogilov oblast Kadino X Cherikov Veremeiki vi I. STRATEGIC CONTEXT A. Country Context 1. After a decade of strong economic growth, Belarus has faced recurring macroeconomic turmoil in recent years. Loose fiscal and monetary policies in 2010 generated a short-term economic recovery but resulted in a widening current account deficit (15 percent of GDP in 2010) and heightened pressure on foreign exchange reserves. This put the economy into a tailspin during much of 2011, leading to loss of control of the exchange rate and sharply accelerating inflation. After a period of multiple exchange rates and severe foreign exchange liquidity constraints, the Belarusian ruble lost close to 70 percent of its value relative to the U.S. dollar and inflation soared to 109 percent in December 2011. 2. Authorities addressed the crisis through a combination of tightened macroeconomic policies and a new, more favorable energy deal with the Russian Federation. Together, these measures stabilized the economy. Growth declined to 1.5 percent in 2012 (from 5.5 percent the previous year). Inflation was contained but remained high in regional comparison at 21.9 percent during 2012. Strong export growth, especially during the first half of the year, and terms-of-trade gains reduced the current account deficit to 2.8 percent in 2012. But external pressures reemerged during the initial months of 2013, which saw a significant decline in export revenue. 3. Macroeconomic stability is expected to remain fragile. Imbalances could reemerge if macroeconomic policies are loosened prematurely in pursuit of high growth and especially if underlying structural problems—such as stagnant productivity, loss of competitiveness, and excessive reliance on external financing and cheap energy imports—are not addressed. In step with continued stabilization-oriented macroeconomic policies, structural reforms to reduce the role of the state, transform the state-owned enterprise sector, and promote private and financial sector development and integration into the global economy are crucial for Belarus to realize its growth potential. B. Sectoral and Institutional Context 4. Lacking a sufficient energy resource base, Belarus relies heavily on imported energy resources (mostly oil and natural gas) to meet domestic energy demand. Annual costs related to energy imports amount to about 22 percent of GDP. The main source of imports is Russia. Natural gas is the dominant fuel in Belarus’s energy mix, and about 80 percent of heat and electricity is produced from gas imported from Russia. 5. District heating plays an important role in the energy system of Belarus and is critical for meeting the basic heating needs of the population. Belarus has an extensive district heating system, including thousands of boilers operated by state-owned utilities under the Ministry of Energy and the Ministry of Housing and Utilities. The bulk of the system was built during 1970s and 1980s. Heat generation consumes about 8 billion cubic meters of gas annually—40 percent of the country’s gas consumption in 2008. Ninety percent of the population relies on district heating for heat supply. 6. Viewing energy services as a social good, the government subsidizes electricity, gas, and district heating for households. District heating tariffs are currently at about 11–17 percent of 1 cost-recovery levels, depending on the heat producer. The direct fiscal cost of underpriced energy amounts to about 2 percent of GDP annually. There is also a complex system of cross- subsidization between nonresidential and residential consumers and between electricity and heat. 7. Although Belarus has imported energy from Russia at below-world-market prices, the import price of natural gas has been rising sharply in recent years, increasing from US$47 per thousand cubic meters in 2005 to US$263.50 per thousand cubic meters in 2011. The most recent energy trade agreement with Russia, concluded in late 2011, reduced the gas import price for 2012–14 to US$165.60 per thousand cubic meters. In response to rising energy costs and fiscal pressures, the government plans to gradually eliminate cross-subsidization and achieve fully cost-recovering residential electricity and gas tariffs by 2015. Residential heating tariffs are expected to reach 60 percent of cost-recovery levels by 2015. (a) Key Issues (i) Affordability of district heating after cost-reflective pricing reform. Depending on the scenario for natural gas prices 1, residential heating tariffs could increase by 112–256 percent in real terms after the removal of subsidies. The Public Expenditure Review conducted by the World Bank for Belarus in 2011 estimated that as a result of the planned increase in residential energy tariffs, the national poverty rate could increase from 5.4 percent in 2009 to about 6.3–7.2 percent in 2014. That is, without remedial actions, up to 190,000 additional people in Belarus could fall into poverty and an additional 120,000 would become vulnerable or at risk of poverty. (ii) Vulnerability to gas price shocks and supply disruption. Heavy dependence on imported energy from a single source exposes Belarus to greater energy price volatility and supply disruption risks. In 2010, for example, deteriorating relations with Russia led to the temporary removal of discounts on energy imports, sharply increasing the current account deficit and contributing significantly to the 2011 foreign exchange crisis. Over time, gas import prices are expected to move towards market levels, affecting the balance of payments and fiscal situation if remedial measures are not taken in advance. (iii) High energy and carbon intensities compared with countries in the European Union. Despite remarkable progress in reducing energy intensity (with a 45 percent decrease from 2000 to 2010), Belarus still lags behind the EU-27 countries, whose average energy and carbon intensities are about half those of Belarus. In the district heating sector, the estimated energy savings potential from wide-scale energy efficiency investment is about 30 percent of current gas use. However, energy efficiency financing in district heating has been limited. Energy efficiency measures widely used in district heating systems in Western Europe—such as automated building-level heat substations, which on average reduce energy consumption by 15–25 percent compared with centralized group heat substations—have received only limited application in Belarus. 1 World Bank, “Belarus Public Expenditure Review”, (Washington DC, 2011). Estimates based on four alternative scenarios for natural gas price: (i) World Bank’s Global Economic Prospects projections; (ii)/(iii) 20 percent reduction/increase compared to (i); (iv) priced equally to low sulfur fuel oil. 2 (iv) Underutilized potential of wood biomass resources. Forests are one of Belarus’s richest natural resources. They cover about 39 percent of the country’s land area—the fifth largest share in Europe and Central Asia. Although forests have been efficiently and professionally managed to a high standard, there is room to further explore their potential for contributing to economic growth. The forestry sector in Belarus contributed 2.1 percent of GDP in 2011, 2 compared with 3–5 percent for the more developed forestry industries of Scandinavia and Canada. Using low-quality wood, now treated as industrial waste, for heat and power generation could promote the development of the wood processing industry, encourage sustainable forest management, and create new job opportunities. (b) Forestry Sector 8. Belarus has abundant biomass resources, spread relatively evenly across the country. Forests are owned by the state and managed by state forestry enterprises subordinate to the Ministry of Forestry. Belarus has developed a package of standards and a Code of Technical Practice for the national forest certification system subject to requirements of international conventions, regulations on sustainable forest governance, and the Biodiversity Conservation National Strategy and Action Plan. By 2012, 94 of the 95 state forestry enterprises were certified to Program for the Endorsement of Forest Certification (PEFC) standards. 3 A total of 8.1 million hectares are PEFC certified, representing more than 86 percent of the total forest area in Belarus and 99 percent of that managed by the Ministry of Forestry. In addition, 47 state forestry enterprises have Forest Stewardship Council (FSC) 4 forest management and chain of custody certificates. 9. Forests in Belarus are well stocked and growing (in both standing volume and area). Currently, there is an overcapacity of fuelwood supply. According to a recent World Bank estimate, fuelwood supply could reach 11.3 million cubic meters by 2020, sufficient to meet the government’s target to increase the share of local fuels (mainly biomass) in heat generation from 25 percent in 2011 to 32 percent in 2020. The current price of local biomass is about half the 2013 price of imported natural gas on an energy-equivalent basis even without taking into account the environmental benefits of renewable energy. Improving the energy efficiency of heat generation and scaling up the use of wood biomass would therefore help address the challenges in the energy sector mentioned here—by reducing energy production costs, diversifying energy supply, and further unlocking the potential of forestry resources in Belarus. 2 World Bank, “Belarus Forestry Policy Note” (Washington, DC, 2013). 3 PEFC was founded in 1999 as an international umbrella organization providing independent assessment, endorsement and recognition of national forest certification systems. PEFC is the only international forest certification scheme that bases its criteria on internationally accepted intergovernmental conventions and guidelines on sustainable forest management. 4 FSC is a global forest certification system established for forests and forest products. Forest management according to FSC’s internationally recognized standards delivers environmental services to local and global communities, including clean air and water, and contributes to mitigating the effects of climate change. FSC directly or indirectly addresses issues such as illegal logging, deforestation and global warming and has positive effects on economic development, environmental conservation, poverty alleviation and social and political empowerment. 3 (c) Rationale for Bank Involvement (i) The proposed project is aligned with Belarus’s main national energy programs: (1) the National Energy Efficiency Program (2011-15) and (2) programs to increase the use of local fuels for energy generation, including the State Program on the Development of Local and Renewable Energy Sources (2011-15) and the National Program on the Construction of Local-Fuel-Fired Energy Sources (2011-15). The National Energy Efficiency Program specifies the rehabilitation of existing energy assets as a development priority. Under the two national programs to expand local fuel use, the government aims to attract US$628 million in investment through credits, state and local budgets, and foreign investment during 2011–15 to develop local-fuel-based heat boilers and combined heat and power plants—with a target of installed thermal capacity of 1,286 megawatts (MW) and electricity capacity of 49 MW. (ii) The project would support the World Bank’s twin goal of promoting poverty reduction and boosting shared prosperity in a sustainable manner. Because heat accounts for the largest share of household energy expenditure, the proposed increase in heat tariffs would have a significant poverty impact on poor and vulnerable households. By improving energy efficiency and replacing imported natural gas with less expensive local wood biomass, the project would reduce the cost of heat supply on average by 63 percent in participating project towns and lower the heat tariff by an estimated 38 percent after the implementation of the tariff reform, therefore reducing the financial burden of heat on poor households. The project would also help reduce the government’s budget allocation for energy expenditures. Over a 20-year lifetime, the project is expected to generate total savings of at least US$313.6 million, which could be used toward other pressing development needs in the country. In addition, by promoting the development of the wood processing industry, the project would help promote economic growth and create job opportunities in rural areas. Moreover, the project would help improve district heating services for local communities and enhance living and working conditions for the population. Finally, the project would contribute to the reduction of greenhouse gas emissions, with total projected lifetime carbon dioxide (CO2) emissions savings to be 2.1 million tons. (iii) Although the current residential heat tariff remains below cost-recovery levels, continued engagement in the sector by the Bank would assist the country in moving toward a cost-reflective tariff in a socially acceptable way. First, the Bank has an ongoing policy dialogue with the government aimed at supporting its efforts to formulate tariff reform strategies. A joint working group that includes representatives from several ministries - Finance, Economy, Energy, and Housing and Utilities—as well as from the World Bank has been established to implement an economic and sector work financed by the Energy Sector Management Assistance Program (ESMAP), “Belarus Heat Tariff Reform and Social Impact Mitigation.” The study is analyzing the incidence of current energy subsidies in Belarus, estimating the poverty and social impacts of proposed tariff reform, and working to identify and strengthen mechanisms to mitigate adverse impacts of tariff increases. Results of the analytical work will be used to help the government structure a dialogue and effective communication with the public to build awareness of and consensus on the importance of tariff reform. 4 Second, energy tariff reform is a key item on the government’s political agenda. In addition, the government has shown the political will to gradually increase energy tariffs to the level of economic costs, as evidenced by recent increases in residential energy tariffs. During 2013, residential heat tariffs have been increased twice— by 5 percent in January and 9 percent in August. Residential electricity tariffs have been increased four times in 2013—by 9.5percent in January, 18.4 percent in February, 15.7 percent in June and 14 percent in August. Moreover, nonresidential energy tariffs for heat, electricity and gas are above cost-recovery levels and have increased in step with rising production costs. Because of the cross-subsidization from the nonresidential to the residential sector, the average weighted cost recovery rate for energy supply was around 53 percent in 2011. Third, investments in energy efficiency and renewable energy development financed under the project would help reduce the cost of heat supply and therefore reduce the gap between the residential heat tariff and the cost of service. Assuming that the heat tariff stays at the 2013 level, the cost recovery rate for residential heat supply would increase on average by 30 percent in the project towns after project completion. Fourth, the government aims to compensate poor households for energy tariff increase through general social assistance programs. The Bank has been working with the government on improving the targeting of existing social protection mechanisms. A social assistance policy note prepared by the Bank and discussed with the government in 2011 focuses on these issues. The work is currently being updated by the Social Protection Unit of the Bank. In addition, the Bank is advising the government on improving demand-side energy efficiency which would provide long-term recurrent assistance to poor households to reduce their energy bills. (iv) The Bank is well positioned to assist the government of Belarus in addressing the key challenges discussed above. Since the late 1990s, the Bank has assisted the government in improving energy efficiency and increasing the use of renewable energy through investment financing, policy advisory support, and technical assistance. These efforts have included two demand-side energy efficiency projects—the Social Infrastructure Retrofitting Project and the Post-Chernobyl Recovery Project—and a supply-side project aimed at improving energy efficiency in heat and power generation— the Energy Efficiency Project. In 2010 an ESMAP study assisted in reviewing Belarus’s legal and regulatory framework for renewable energy and opportunities for harmonization with the European Union. This study also informs the government’s work in drafting secondary renewable energy legislation, including on biomass-based district heating. The proposed loan is aimed at scaling up the Bank’s ongoing support for improving the reliability and security of energy supply in Belarus and contributing to climate change mitigation. In a broader context, the project would be part of the Bank’s efforts to scale up its support for improving the efficiency, quality, and sustainability of municipal and communal public utility services in Belarus. These efforts include the Water Supply and Sanitation Project, the Road Upgrade and Modernization Project, and the Integrated Solid Waste Management Project. The Bank is also technically well positioned to support the proposed investment. A recently completed analytical and advisory activity, “Belarus Biomass-Based District 5 Heating,” provides solid analytical underpinnings to guide project design. The study identifies technically and economically feasible options for converting natural-gas-fired heat boilers to biomass heat boilers. Feasibility analysis carried out by the study on four representative district heating systems indicates that the proposed investments in energy efficiency and biomass boilers are economically viable. The study provides guidance on how to determine the optimal size and technology options for biomass boilers. The study also reviews the current biomass fuel contracting practices in Belarus and recommends a shift from volume-based biomass pricing to energy-content-based pricing. (v) The project would help scale up biomass-based district heating and introduce international best practices. Biomass boilers for heating have been deployed in Belarus in the past. However, most of them (at least 90 percent) are less than 1 MW and are mainly manually loaded with wood logs. Implementation of the proposed project would help scale up the deployment of automated wood chip heating systems in project towns with a total installed thermal capacity of 103 MW (almost one third of the existing capacity of district heating systems in selected project towns) and bring in international best practices for biomass heating and biomass fuel pricing. (vi) The project would demonstrate renewable electricity generation and expand the use of modern energy efficiency technologies in Belarus. The renewable energy law in Belarus guarantees an attractive feed-in tariff for biomass-based electricity (18.76 U.S. cents per kilowatt-hour [kWh] as of 2013 for the first 10 years of operation and 11.9 U.S. cents per kWh for years 11–20). This high feed-in tariff is not financially sustainable, however. Moreover, it has attracted only limited investment in biomass-based electricity generation. The reason is that the feed-in tariff is directly linked to industrial electricity prices, which are likely to be revised downward after the planned removal of cross- subsidies. The project would support biomass-fired combined heat and power plants so as to demonstrate the viability of renewable electricity generation in Belarus. On the side of energy efficiency, the project aims to expand the penetration of the building-level substation technology and demonstrate the financial viability of this technology. C. Higher-Level Objectives to which the Project Contributes 10. The Project Development Objective is fully aligned with the Belarus Country Partnership Strategy for the FY14–17 period, in which the second pillar is to support improvement of the quality and efficiency of public infrastructure services, use of agricultural and forestry resources, and global public goods benefits. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 11. The Project Development Objective (PDO) is to scale up the efficient use of renewable biomass in heat and electricity generation in selected towns in Belarus. B. Project Beneficiaries 12. The project beneficiaries would include participating district heating utilities, for which investments financed by the project would improve the efficiency of heat supply and increase the 6 use of local biomass fuel, thereby lowering operating costs and improving fuel security. Forestry enterprises, equipment suppliers, and service providers would benefit from increased demand for biomass and for energy-efficiency-related goods and services. The government would achieve fiscal savings through a reduction in imports of natural gas. Finally, the population in project areas would benefit from improvement in the quality and reliability of heat and hot water supply. C. PDO-Level Results Indicators 13. The PDO-level results indicators are: (a) Projected lifetime energy savings due to investments financed under the project (megawatt-hours [MWh]). (b) Heat and electricity generated from renewable biomass associated with investments financed under the project (MWh per year). (c) Projected lifetime reduction in CO2 emissions due to investments financed under the project (metric ton). Annex 1 provides a detailed results monitoring framework. III. PROJECT DESCRIPTION A. Project Components 14. The proposed project is expected to improve the energy efficiency of district heating and increase the use of local wood biomass (replacing natural gas for base-load heat generation) in 13 district heating systems (towns) in Brest, Gomel, Grodno, Minsk, and Mogilev oblasts. The selection of participating district heating utilities is based on the following criteria: (i) consumer demand for heat is densely concentrated and is stable or growing; (ii) there is sufficient wood biomass within a reasonable distance from the heat sources; (iii) wood biomass is supplied by certified forestry enterprises from sustainably managed forests; and (iv) biomass will replace imported fuel (gas or oil) for base-load heat generation. Table 1 lists the participating utilities. Table 1 Participating District Heating Utilities Oblast City or settlement Utility (site owner) Grodno Volkovysk Unitary utility Volkovysskoe Kommunalnoe Hozyaistvo Brest Ivanovo Communal unitary diversified industrial enterprise Ivanovskoe Zhkh Baranovichi Unitary industrial utility BaranovichiKommunteploset Bereza Brest oblast unitary enterprise Upravlenie Zhkh Gomel Zarechie Unitary utility Rechitskii Raizhilkomkhoz Kalinkovichi Unitary utility Kommunalnik Kalinkovichskii Zyabrovka Unitary utility Gomelskii Raizhilkomkhoz Minsk Starye Dorogi Unitary utility Starodorozhskoe Zhkh Kholopenichi Unitary utility Zhilteploservis Cherven Republic unitary enterprise Chervenskoe Zhkh Mogilev Kadino Unitary utility Zhilkomkhoz Cherikov Unitary industrial utility Cherikovskii Zhilkommunkhoz Veremeiki Unitary industrial utility Cherikovskii Zhilkommunkhoz 7 15. The project has the following three components: Component 1: District Heating Energy Efficiency (estimated cost: US$23.35 million) 16. This component would include the following energy efficiency investments in the selected district heating systems: (a) Modernization and/or construction of heat substations by installing individual building- level heat substations with temperature controls. Historically, most Belarusian district heating companies have delivered heat using centralized heat substations. Converting centralized heat substations to building-level substations with temperature controls would allow the delivery of heat to each building in accordance with its heat demand and could reduce building-level heat consumption by 15–25 percent. (b) Reconstruction and/or construction of district heating networks and upgrading of peak- load gas boilers. The reconstruction of heat networks would include replacing obsolete heat pipes that have large heat and water leaks with preinsulated heat pipes and constructing new heat networks. This would significantly reduce losses in heat transmission. Installing new peak-load gas boilers to replace outdated ones would increase generation efficiency from the current 75–85 percent to more than 90 percent. Component 2: Biomass Heat Generation (estimated cost: US$64.98 million) 17. This component would include investment in base-load biomass boilers, biomass-based small combined heat and power (CHP) plants, and in some towns also wood chipping equipment. (a) Biomass boilers and CHP plants. This component would support investments in base- load biomass boilers or small CHP plants using wood chips or wood wastes as the main fuel, to replace existing base-load gas or oil boilers. The investments would cover the design and construction of boiler houses, boilers, and ancillary equipment. (b) Wood chipping equipment and biomass fuel storage facilities. Wood biomass would be harvested by certified forestry enterprises. If forestry enterprises supply only wood logs, the project would finance the purchase of wood chippers. The project would also finance the construction of biomass storage facilities near the boiler houses. Component 3: Technical Assistance (estimated cost: US$1.445 million) 18. This component would finance capacity building for the participating district heating utilities and implementation support to the Project Management Unit (PMU), including the following: (a) Improvement of existing social accountability mechanisms. The proposed project would support participating utilities to communicate more proactively with their customers. Expert support and training events in developing proactive communication plans will be provided. For small towns, social accountability efforts would focus on improving the access to and the availability of information for consumers and civil society organizations on district heating services, the structure of bills, project design and implementation, etc. For large towns, the project would support efforts led by the Energy Efficiency 8 Department to review and improve the efficiency of existing grievance redress mechanisms. In addition, the project would support the monitoring by consumer groups on continuous information provision on all aspects of service delivery. The consumer groups will be engaged in regular monitoring of proactive information sharing by the participating utilities in accordance with the project results framework. The project would also support utilities to develop/improve websites and display the information publicly in the utilities’ premises based on the recommendations from the consumer. (b) Support for a shift to energy-content-based biomass pricing. In Belarus, wood biomass pricing is based largely on volume—solid cubic meters of raw material. The project would provide technical assistance to support a government effort to move toward pricing based on the energy content of the timber (that is, a unit price per gigajoule or MWh of delivered biomass), including financing the purchase of equipment to measure the energy content of biomass. This would acknowledge the direct correlation between energy, moisture content, and other parameters of the fuel; encourage greater focus on the quality of the fuel; and increase efficiency in the use of biomass resources. (c) Other project implementation support. This would include (i) implementation support consultancy to support the PMU and the district heating utilities in the implementation and supervision of the project; (ii) training and capacity building for the utilities based on international best practices for energy efficiency improvements in district heating and proven biomass technologies; (iii) annual financial audits of the project accounts; and (iv) other consultancy services. B. Project Financing 19. The proposed project would be implemented over five years, through an Investment Project Financing operation from IBRD to the government of Belarus in the amount of about US$90 million (table 2). Table 2 Project Cost and Financing IBRD financing Project cost Project component US$ millions As % of total (US$ millions) District Heating Energy Efficiency 23.35 23.35 100 Biomass Heat Generation 64.98 64.98 100 Technical Assistance and Capacity 1.445 1.445 100 Building Total baseline costs 89.775 89.775 100 Total project costs 89.775 89.775 Front-end fees 0.225 0.225 Total financing required 90.00 90.00 100 9 C. Lessons Learned and Reflected in the Project Design 20. The design of the project draws on experience and lessons learned in previous World Bank–financed energy efficiency and biomass district heating projects within and outside the region. The key lessons include the following: (a) The combination of base-load biomass and peak-load gas produces the best economic rates of return. Peak-load biomass is not recommended because the amount of heat generated annually would be too small to justify the higher up-front investment costs. (b) Energy efficiency investments, including critical network rehabilitation investments, improve the sustainability and affordability of district heating projects, and result in long-term savings for the utilities. (c) The size of procurement packages for works (in this case, for pipe installation works) should be designed in such a way that several local and foreign companies have the financial and technical capacity to execute them, thus allowing adequate competition. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 21. The project would be implemented by the Energy Efficiency Department of the State Committee for Standardization, the existing PMU (BelInvestEnergoSberezhenije) and district heating companies in the selected project areas. The Energy Efficiency Department is the agency responsible for the implementation of main national energy programs. The PMU is subordinate to the Energy Efficiency Department. It would be responsible for daily project implementation and for the monitoring of and adherence to World Bank requirements. The PMU has successfully implemented the Bank-financed Social Infrastructure Retrofitting Project and is currently implementing the Energy Efficiency Project and the Post-Chernobyl Recovery Project. The PMU has adequate and practical knowledge of Bank procedures. It also has both the technical capacity and the necessary links to ministries and oblasts to prepare and implement the proposed project. 22. All the participating district heating utilities are subordinate to the Ministry of Housing and Utilities and the oblast/rayon(city) executive committees. Each utility has assigned a coordinator (project manager) responsible for project implementation to work with the PMU. The district heating utilities would be responsible for providing terms of reference for design documents (or approving design documents when they are available), ensuring appropriate technical supervision of the contracts, accepting payment orders, and submitting adequate documentation to the PMU so that it can prepare and sign disbursement applications. 23. Forests are owned by the state and managed by state forestry enterprises subordinate to the Ministry of Forestry. Biomass fuel would be supplied by state forestry enterprises in close proximity to participating district heating utilities (within a distance of 0–60 kilometers) under long-term fuelwood delivery agreements. The forestry enterprises would supply wood logs, wood chips, or both. If only wood logs are delivered, the district heating utilities would produce wood chips themselves. Annex 2 describes the fuel supply chain in detail. 10 24. The bidding documents would be prepared by the PMU’s procurement staff in close collaboration with the technical staff of all participating district heating utilities. The PMU’s Tender Committee would evaluate bids or proposals. The Review Committee, which includes ministry representatives and technical staff of the participating utilities, would clear evaluation reports before sending them to the Bank on a “no objection” basis. The PMU would also be responsible for disbursement and financial management. 25. The PMU would operate in accordance with the Project Operational Manual (POM). The manual will outline the implementation arrangements, including procurement, contract management, payment authorization, environmental management, social safeguards, periodic reporting, and relationships between the implementing and beneficiary agencies. More details on institutional and implementation arrangements are described in Annex 3. B. Results Monitoring and Evaluation 26. The monitoring and evaluation of outcomes and results during implementation would follow standard Bank practices. Project monitoring and evaluation would include (i) project results indicators as specified in annex 1, (ii) quarterly progress reports on project implementation, and (iii) a midterm review of implementation progress. Project results indicators would be collected semiannually by the PMU from participating utilities. The PMU would be responsible for the overall monitoring and evaluation of implementation results and for the preparation of semiannual and midterm review progress reports. 27. In addition to the monitoring of intermediate results indicators that reflect the project’s implementation progress, the project would also monitor two additional intermediate results indicators – the average cost-recovery rate for residential district heating and whether strengthened social protection measures have been adopted, the former of which indicates if the announced tariff reform has been implemented as planned, and the latter indicates whether complementary polices have been put in place to protect poor and vulnerable households after proposed tariff reform. Monitoring of these two indicators would facilitate continued policy dialogue with the government on the topic. 28. The Bank implementation support team would monitor implementation progress and evaluate the outcomes quarterly and annually, using information from reports prepared by the PMU. Discussions during implementation support related to institutional capacity building, financial viability, along with technical reviews, and site visits would provide additional support for the project monitoring. C. Sustainability 29. The borrower’s commitment to the project is high. The government considers improving energy efficiency and increasing the use of local fuel to be priorities for enhancing energy security and the sustainability of economic growth. It has adopted national strategies and programs to improve energy efficiency, and its strong commitment in this area is among the main reasons for the impressive reduction in energy intensity in Belarus. In addition, the government recently adopted a renewable energy law and has developed a number of renewable energy programs and strategies. It has also set a national target to increase the share of local fuels (mainly biomass) in the energy supply mix. 11 30. The participating municipalities, their district heating utilities, and local suppliers of biomass fuel are also fully committed to the project. Municipalities and their district heating utilities have their own targets, set by the central government, to increase energy efficiency and the use of local fuel. The project is fully aligned with these government-issued mandates. Local biomass fuel suppliers are committed to the project because it would create new market demand for underutilized wood products, including wood chips and industrial wood wastes. 31. The sustainability of the proposed project would also depend on the proper operation and maintenance of the project-financed assets by the participating utilities. The project would support energy efficiency investments in the district heating systems so as to optimize the operation of heat supply and lower costs. The project would also include technical assistance to improve the technical capacity of district heating utilities. 32. The long-term sustainability of the project would depend on the government’s ability to achieve cost-recovery tariffs. A cost-based pricing mechanism is essential for encouraging more efficient operation of the district heating utilities, improving their investment and maintenance, and strengthening their financial position. Investment in energy efficiency and renewable energy under the project would help buffer the impact of rising prices on poor people and therefore mitigate the potential political and social resistance to the tariff reform. Continued policy dialogue with the government would help the reform move forward in a socially acceptable way. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Risk category Rating Stakeholder risk Moderate Implementing agency risk - Capacity Moderate - Governance Moderate Project risk - Design Low - Social and environmental Low - Program and donor Moderate - Delivery monitoring and sustainability Moderate - Other (optional) - Other (optional) Overall implementation risk Moderate B. Overall Risk Rating Explanation 33. The overall implementation risk is proposed to be moderate on the basis of following main considerations. First, although the current collection rate in Belarus is high, an increase in tariffs could lead to an increase in arrears and nonpayment. Ongoing engagement with civil 12 society organizations and stakeholder roundtables on key policy issues would collectively help build awareness of and consensus on the importance of tariff adjustments and the benefits of energy efficiency and biomass investments. 34. Second, some of the participating utilities lack prior experience with World Bank projects and are unfamiliar with established Bank procedures. Their capacity constraints could affect project implementation. Technical assistance through the project and up-front training on Bank rules and guidance would help mitigate this risk. In addition, the PMU and the Bank supervision team would work closely with the participating utilities and provide timely training and implementation support during project implementation. 35. Third, the success of the project would depend in part on counterpart financing. Given the current below-cost-recovery tariffs, government resource allocation would be important in ensuring project delivery in the event of a project cost overrun and in ensuring the operation and maintenance of project-financed infrastructure. Lack of timely budget allocation would pose a direct threat to the implementation and supervision of the project. In the past, the government has given priority to Bank-supported projects, such as the Energy Efficiency Project, in its resource allocation. This risk could be mitigated through continued dialogue with the government on both the importance of energy efficiency and renewable energy development and of tariff reforms. 36. Fourth, given Belarus’s highly centralized decision making and state-dominated economic growth model, there is a risk of poor performance due to delays in major decisions and in the staffing process. The Bank team would work closely with the PMU and the participating utilities to provide timely implementation support. 37. Fifth, the long-term sustainability of the project would hinge on cost-recovery tariffs to ensure proper operation and maintenance of project-financed infrastructure. However, the removal of subsidies is a politically difficult action. Continued dialogue with the government and technical assistance—including on the social protection mechanisms and communication strategy developed under the ongoing ESMAP-financed economic and sector work, “Belarus Heat Tariff Reform and Social Impact Mitigation”—would help mitigate the risk. VI. APPRAISAL SUMMARY A. Economic Analysis 38. An economic appraisal is conducted for all 13 subprojects proposed under the loan and for the project as a whole. The analysis takes into account four major benefits that would result from investments under the project: (i) a reduction in energy losses through network rehabilitation and investment in more efficient peak-load gas boilers, (ii) a reduction in heat consumption and the corresponding heat production costs through the installation of individual building-level heat substations, (iii) fuel cost savings from the replacement of natural gas with local wood biomass, and (iv) the economic benefits of reductions in CO2 emissions through energy efficiency and renewable energy investment. There would also be economic benefits associated with the improved quality and reliability of district heating services, but these are more difficult to quantify. The economic costs of each subproject would include (i) the total capital investment costs and (ii) operating costs, including fuel costs, electricity consumption for auxiliaries, and operation, repair, and maintenance costs. 13 39. The estimates of the net present value and economic rate of return (at a discount rate of 10 percent and assuming a 20-year operating horizon) of the investment program in each town and of the overall project are summarized in table 3. The table also summarizes the results of a sensitivity analysis assuming (i) a natural gas price increase of 20 percent to US$360 per thousand cubic meters, (ii) a wood chip price increase of 20 percent, (iii) a capital cost overrun of 20 percent, and (iv) a wood chip price increase of 20 percent combined with a capital cost overrun of 20 percent. Detailed analysis of the economic benefits and costs for each subproject and for the project as a whole is presented in annex 6. Table 3 Estimated Economic Rate of Return and Net Present Value of the Project Base case Sensitivity analysis Economic Net present Natural Wood- Capital Wood-chip Rate of Value Gas Price chip Cost Price Subproject/ Return % US$ million -+20% Price +20%% +20% & Capital town +20% Cost +20% Volkovysk 13.7 2.95 18.4 11.1 8.5 5.4 Ivanovo 19.8 3.42 24.9 18.2 16.2 14.8 Baranovichi 12.4 1.45 14.7 11.9 9.7 9.2 Bereza 18.0 1.59 23.4 15.8 14.6 12.7 Zarechie 20.3 2.04 25.0 19.5 15.9 15.0 Kalinkovichi 24.5 15.50 31.1 21.6 17.8 14.6 Zyabrovka 14.1 0.55 17.9 12.4 9.7 7.9 Starye Dorogi 15.3 3.18 19.1 14.3 11.5 10.3 Kholopenichi 14.1 0.53 17.3 13.3 10.4 9.6 Cherven 20.4 5.03 25.3 19.2 15.7 14.5 Kadino 23.6 3.77 29.6 22.1 18.2 16.7 Cherikov 22.4 1.88 29.0 19.8 18.4 16.1 Veremeiki 14.1 0.51 17.2 13.4 11.2 10.5 Overall Project 18.3 42.40 23.0 16.5 13.6 11.8 Financial Analysis 40. No financial analysis is being conducted for the subprojects because the participating district heating utilities do not operate on a commercial basis and depend on oblast budget allocations for routine operation. The investments would be financed by central and oblast governments, and the loan amount would not appear on the balance sheets of the district heating utilities. Nonetheless, analysis has been conducted to estimate how project implementation would affect the cost of supply of the residential heating sector in each participating town. 41. In projecting the cost of heat supply after project implementation, the analysis takes into account the following cost components: (1) fuel costs obtained from the official Project Business Plan; (2) asset depreciation, assuming 20 years of operational lifetime for all assets; and (3) other material costs obtained from the official Project Business Plan. Table 4 summarizes the unit cost of heat supply in each project town before and after the project. The average unit cost would decrease by 37 percent, from 79 USD per Gcal (before the project) to 58 USD per Gcal (after the project). The details of the financial analysis are provided in annex 6. 14 Table 4 Cost of Heat Supply before and after Project Implementation Indicator Include (USD/Gcal) Current Projected Subproject/Town cost of heat cost of heat specific other supply supply fuel cost assets material (USD/Gcal) (USD/Gcal) for heat depreciation costs supply Volkovyssk 58 51.9 32.6 4.95 14.4 Ivanovo 66 46.4 25.1 7.95 13.4 Baranovichi 60.6 54.8 26.6 14.00 14.2 Bereza 64.3 59.5 26.5 10.51 22.5 Zarechie 108 51.4 15.5 33.3 2.5 Zyabrovks 100.8 61.8 34.6 11.56 15.6 Kalinkovichi 62 56.7 26.8 8.37 21.5 Starye Dorogi 69.1 57.6 28.6 10.64 18.3 Holopenichi 85.8 42.9 14.2 22.38 6.3 Cherven 68.5 54.1 25 9.32 19.8 Kadino 99.1 79.6 26.2 10.39 43 Cherikov 85 61 20.5 10.06 30.5 Veremeiki 97 72.5 19 18.59 35 B. Technical 42. The technical design of the project and its components would be based on international best practices for district heating energy efficiency improvements and biomass use for heat generation. The district heating rehabilitation and energy efficiency improvements follow the same principles successfully applied in district heating projects financed by the Bank and other international financial institutions in Central and Eastern Europe during the past two decades. 43. The biomass boilers for heat generation would be based on conventional and well-proven technologies already used in Belarus and in neighboring countries. The typical boiler capacities would be between 2 and 5 MW with movable grate combustion arrangements. The boiler houses would be equipped with automated mechanical fuel handling and feeding systems for the biomass (wood chips). The feasibility studies conducted for each of the sites demonstrate that the biomass boilers selected would operate as base-load boilers with long annual operating times, providing favorable conditions for biomass use. More details of the technical design are described in Annex 2. C. Financial Management 44. Financial Management and disbursement arrangements for implementing of the project have been confirmed as Satisfactory. The project’s overall financial management risk is rated as moderate. 45. Financial management and disbursement functions for the project will be carried out by the Energy Efficiency Department, specifically by its subordinate entity the PMU. The PMU has extensive experience in supporting Bank-financed projects. It has an accountant and a financial 15 management specialist, who would perform the financial management and disbursements functions in this project. Both have practical experience from implementing the ongoing Bank- financed projects and also have attended a number of fiduciary training events organized by the Bank. The follow of funds arrangements will follow the standard Bank procedures, including direct payment/special commitment and reimbursement/advance mechanisms, and separate designated account will be opened for this project. The project funds would not need to be included in the state budget prior to the project disbursements, and no cofinancing is envisaged. 46. Accounting and reporting for the project will be carried out in the existing automated accounting and reporting systems used by the PMU for other projects. A separate set of accounts will be used to record project transactions, to keep the accounting records segregated from those for other ongoing projects, in both the currency of payment and the U.S. dollar equivalents. Quarterly reports (IFRs) will be submitted using the acceptable sample format agreed at negotiations. The project audit will be conducted by independent private auditors acceptable to the Bank, in accordance with International Standards on Auditing (ISA) under the terms of reference acceptable to the Bank. Both the PMU and the Bank would make the audited financial statements publicly available on their websites, as required by the World Bank Group Policy on Access to Information. 47. The project standard full-scope FM monitoring visits will be carried out on the basis of the risk profile of the project, normally once a year. Monitoring visits may be made more frequently if it is determined that this is necessary or if changes occur in the FM and disbursement arrangements and assessed risk. D. Procurement 48. Procurement activities under the proposed project would be carried out by the PMU, in accordance with the World Bank’s “Guidelines: Procurement of Goods, Works and Non- Consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011, and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011, and the provisions stipulated in the Loan Agreement. A procurement assessment completed in September 2013 concluded that the PMU has adequate experience and capacity to carry out the procurement activities related to the project. Taking into account the PMU’s long experience with Bank- financed projects and successful implementation of ongoing projects (the Post-Chernobyl Recovery Project and the Energy Efficiency Project, including Additional Financing), the assessment found the overall procurement risk for the project to be moderate. A procurement plan covering the first 18 months of the project implementation has been sent to the Bank for assessment. A summary of the procurement arrangements, including procurement implementation risks and mitigation measures, is provided in annex 3. E. Social (Including Safeguards) (a) Safeguards 49. Most of the specific project sites and investments identified during preparation do not require land acquisition. In Kalinkovichi, however, land now being used for a storage place needs to be acquired from a private enterprise. The project therefore triggers OP 4.12. An 16 Abbreviated Resettlement Action Plan has been prepared and duly disclosed in the town of Kalinkovichi in Russian and in the Bank’s Infoshop. The loan proceeds will not be used to finance the land acquisition. The PMU and the staff of the utility in charge of the subproject in Kalinkovichi will be trained in the Bank’s safeguards policies prior to the start of project implementation. (b) Social Accountability 50. The participating utilities, which receive state funding and have high collection rates because of the low tariffs, face no acute issues with customers’ trust and satisfaction with the services. However, citizens indicate that the government does not provide important types of housing and utility information (in particular, details about how communal utility bills are calculated and structured, information on communal budgets and expenditures, and schedules for planned building repairs and public works). The information provided by the government on housing and utility issues is often discretionary, varying among oblasts, rayons, and cities. 51. Better provision of information on housing and utility issues that matter to citizens could improve the public perception of housing and utility authorities. Most of the participating utilities lack sufficient experience and capacity to communicate proactively with their customers. Support in developing proactive communication plans will be provided to the utilities through a series of training events and expert support in developing communication materials. 52. In addition, specific support will be provided to the utilities to reinforce their customer relations functions, including improvement of their websites or display information publicly in the utilities’ premises (where a website is not a feasible option). A consultant will assist utilities selected by the Energy Efficiency Department in setting up an efficient mechanism for managing inquiries and complaints. 53. Finally, efforts will be made to assist the participating utilities to involve consumer monitoring of all aspects of service delivery. The consumer groups will be engaged in regular monitoring of proactive information sharing by the participating utilities in accordance with the project results framework. (c) Information Disclosure 54. In every settlement where the project will operate, a public information meeting on the project will be held. The meeting will be publicized beforehand by printing an announcement in the local press and by posting information on its theme, time, and place in such public places as the utility’s office, local authorities’ offices, and the website of the utility or municipality. In addition, information on the project along with the Environmental Management Plan will be posted on the websites of the PMU and the Energy Efficiency Department. 55. In every locality, the public consultation will start with a presentation by the utility and the PMU on the current state of affairs and the project’s main activities and expected results in that locality. The minutes of the public consultation in each locality will contain copies of the announcements, the presentations made, a summary of comments received, and a list of participants. These summaries will be disclosed in the same way as the announcements inviting 17 people to participate. A training session will be conducted to enhance the capacity of the PMU and participating utilities to hold meaningful public consultations. (d) Gender Aspects 56. A gender perspective is integrated into project implementation to ensure that the project would not lead to unintended adverse gender impacts. Project communication efforts would be aimed at increasing awareness of energy efficiency technology options among both men and women. F. Environment (Including Safeguards) 57. The project has been classified as category B for the purposes of OP 4.01 on Environmental Assessment because it is not expected to involve any large-scale, significant, or irreversible adverse environmental impacts. Physical works on most of the project sites would take place on the existing industrial or district heating footprint. A few sites would involve small- scale greenfield construction. On the basis of previous experience with similar investments, the rehabilitation and replacement works are not expected to generate any hazardous materials that would require special disposal. The locations where boilers would be converted to use biomass fuels (wood chips and shavings; sawdust) are known, so the basic issue of the sustainability of biomass production is addressed during project design rather than being included in the Environmental Management Plan (EMP) to be addressed during project implementation. 58. The types of activities to be implemented would have either minor or no adverse environmental impacts and would provide significant environmental benefits (through reductions in the emissions of greenhouse gases such as CO2). Negative environmental impacts would be associated primarily with construction activities (dust, noise, disposal of nonhazardous waste) and would be mitigated through good construction and housekeeping practices. An EMP (or Checklist EMP) has been prepared by the client. 59. The project does not trigger OP 4.36. However, appropriate measures to ensure sustainability will be included in the EMP. To ensure that the biomass comes from sustainable sources, project preparation in each selected site would require (i) information on the process and status of sustainability certification of forestry enterprises in Belarus and provisions to be included in agreements with beneficiary utilities requiring that they obtain the biofuel from certified sustainable sources (as opposed to uncertified enterprises or through self-collection of local wood resources); and (ii) an assessment by the client of estimated current and projected supply and demand for biofuel in the project areas, to confirm that there is adequate material available from existing forestry enterprise activities so that the increased demand would not lead to changes in forest management or utilization practices (if project-related increases in demand could put at risk the sustainability of forest resource use). G. Other Safeguards Policies Triggered 60. No other safeguard policy will be triggered. 18 Annex 1: Results Framework and Monitoring . Belarus: Biomass District Heating Project (P146194) Results Framework . . Project Development Objectives . PDO Statement The Project Development Objective is to scale up the efficient use of biomass in heat and electricity generation in selected towns in Belarus. These results are at Project Level . Project Development Objective Indicators Responsibility Cumulative target values Data source/ for Unit of End methodology data collection Indicator name Core Baseline YR1 YR2 YR3 YR4 Frequency measure target PMU project Projected PMU and Megawatt- progress and lifetime energy 0 0 230,000 700,000 940,000 1,180,000 Semiannual local hour monitoring savings counterparts report Heat and electricity generated from PMU project renewable PMU and Megawatt- progress and biomass 0 0 1,660,000 4,980,000 6,650,000 8,300,000 Semiannual local hour monitoring associated with counterparts report investments financed under the project 19 Responsibility Cumulative target values Data source/ for Unit of End methodology data collection Indicator name Core Baseline YR1 YR2 YR3 YR4 Frequency measure target Projected lifetime PMU project reduction in CO2 PMU and progress and emissions due to Metric ton 0 0 430,000 1,300,000 1,700,000 2,100,000 Semiannual local monitoring investments counterparts report financed under the project . Intermediate Results Indicators Responsibility Cumulative target values Data source/ for Unit of End methodology data collection Indicator name Core Baseline YR1 YR2 YR3 YR4 Frequency measure target Generation capacity of PMU project PMU and renewable Megawatt 0 0 31.8 74.2 95.4 106.0 Semiannual progress local energy report counterparts (biomass) constructed PMU project PMU and Direct project Number 0 0 15,752 47,256 63,008 78,760 Semiannual progress local beneficiaries report counterparts PMU's Percentage PMU and Female project Sub-Type 0 0 0.5 0.5 0.5 0.5 semi-annual local beneficiaries progress Supplemental counterparts report 20 Cumulative target values Responsibility Data source/ for Unit of End methodology data collection Indicator name Core Baseline YR1 YR2 YR3 YR4 Frequency measure target Number of forestry enterprises PMU project PMU and adopting Number 0 0 0 5 20 25 Annual progress local energy-content- report counterparts based wood biomass pricing Strengthened Ministry of of Social Labor and Protection Yes/No No No No Yes Yes Yes Annual PMU Social Measures Protection Adopted Average cost- Ministry of recovery rate for Energy, Percent 15 40 50 60 70 80 Annual PMU residential Ministry of district heating ZhKH Consumer Index of PMU project Access to information Semiannual progress PMU Information access report Semiannual PMU project Volkovyisk Index 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Ivanovo 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Baranovichi 2 2 3 3 3 3 progress PMU report 21 Responsibility Cumulative target values Data source/ for Unit of End methodology data collection Indicator name Core Baseline YR1 YR2 YR3 YR4 Frequency measure target Index Semiannual PMU project Bereza 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Zarechie 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Zyabrovka 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Kalinkovichi 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Starye Dorogi 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Kholopenichi 1 1 2 2 3 3 progress PMU report Index Semiannual PMU project Cherven 2 2 3 3 3 3 progress PMU report Index Semiannual PMU project Kadino 1 1 2 2 3 3 progress PMU report Index Semiannual PMU project Cherikov 3 3 3 3 3 3 progress PMU report 22 Responsibility Cumulative target values Data source/ for Unit of End methodology data collection Indicator name Core Baseline YR1 YR2 YR3 YR4 Frequency measure target Index Semiannual PMU project Veremeiki 1 1 2 2 3 3 progress PMU report Site-specific PMU PMU and designs Number 0 5 10 13 13 13 Semiannual progress local completed reports counterparts Supply and installation PMU PMU and contracts Number 0 0 5 10 13 13 Semiannual progress local competitively reports counterparts awarded PMU PMU and Construction Percentage 0 0 30 70 90 100 Semiannual progress local progress reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 0 30 80 100 Semiannual progress local Volkovysk breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 30 80 100 100 Semiannual progress local Baranovichi breakdown reports counterparts Percentage, PMU PMU and Construction subtype 0 0 30 80 100 100 Semiannual progress local progress Bereza breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 30 80 100 100 Semiannual progress local Zarechie breakdown reports counterparts 23 Responsibility Cumulative target values Data source/ for Unit of End methodology data collection Indicator name Core Baseline YR1 YR2 YR3 YR4 Frequency measure target Construction Percentage, PMU PMU and progress subtype 0 0 30 80 100 100 Semiannual progress local Ivanovo breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 0 30 80 100 Semiannual progress local Kalinkovichi breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 40 90 100 100 Semiannual progress local Zyabrovka breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 0 30 80 100 Semiannual progress local Starye Dorogi breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 40 90 100 100 Semiannual progress local Kholopenichi breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 40 90 100 100 Semiannual progress local Cherven breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 30 80 100 100 Semiannual progress local Kadino breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 40 90 100 100 Semiannual progress local Cherikov breakdown reports counterparts Construction Percentage, PMU PMU and progress subtype 0 0 30 80 100 100 Semiannual progress local Veremeiki breakdown reports counterparts 24 Annex 1: Results Framework and Monitoring Results Framework . Project Development Objective Indicators Indicator name Description (indicator definition, etc.) Projected lifetime energy savings This indicator projects lifetime energy savings directly attributable to the project, converted to megawatt-hours (MWh). The baseline value is expected to be zero. Heat and electricity generated from renewable biomass This indicator measures the heat and electricity generation from biomass boilers associated with investments financed under the project constructed under the project, converted to MWh. The baseline value is zero. Projected lifetime reduction in CO2 emissions due to This indicator projects lifetime reduction in CO2 emissions directly attributable to the investments financed under the project. project. The baseline value is zero. . Intermediate Results Indicators Indicator name Description (indicator definition, etc.) Generation capacity of renewable energy (biomass) This indicator measures the capacity of renewable energy (biomass) constructed under constructed the project. The baseline value for this indicator is zero. Direct project beneficiaries Direct beneficiaries are people or groups who directly derive benefits from an intervention (such as children who benefit from an immunization program or families that have a new piped water connection). Please note that this indicator requires supplemental information. Supplemental value: Female beneficiaries (percentage). Based on the assessment and definition of direct project beneficiaries, specify what proportion of the direct project beneficiaries are female. This indicator is calculated as a percentage. Number of forestry enterprises adopting energy-content- Number of forestry enterprises adopting energy-content-based wood biomass pricing. based wood biomass pricing. The baseline value is zero. 25 Intermediate Results Indicators Indicator name Description (indicator definition, etc.) Strengthened Social Protection Measures Adopted This indicator measures whether the government has taken measures to improve the targeting and/or coverage of existing social safety net in order to ensure the affordability of residential district heating after tariff reform for poor and vulnerable households. Average cost-recovery rate for residential district heating This indicator measures the average cost recovery rate for residential district heating assuming a constant exchange rate of 2013. The baseline value is 15 percent. Consumer access to information Consumer access to information is measured on a scale from 1 to 3, with scores assigned in the following way. A score of 3: website of a district heating utility is updated consistently (on a monthly basis) and has information on the services provided by the utility, the expected quality, the rights and responsibilities of customers, the mechanisms for dealing with complaints, addresses and phone numbers, working hours of responsible persons, and detailed disaggregated information on tariffs; and the information is visibly displayed on the utility’s premises. A score of 2: the same information can be accessed by telephone, and the information is visibly displayed on the utility’s premises. A score of 1: the information is visibly displayed on the utility’s premises. Site-specific designs completed This indicator measures the progress of site-specific design. The baseline value for this indicator is zero. Supply and installation contracts competitively awarded This indicator measures the progress of bidding contracting processes. The baseline value for this indicator is zero. Construction progress This indicator measures construction progress in each project town. The baseline value for this indicator is zero. 26 Annex 2: Detailed Project Description 1. The Biomass District Heating Project is expected to improve the energy efficiency of district heating and increase the use of local wood biomass (replacing natural gas for base-load heat generation) in 13 district heating systems (towns) in Brest, Gomel, Grodno, Minsk, and Mogilev oblasts. The project would have three components: District Heating Energy Efficiency, Biomass Heat Generation, and Technical Assistance and Capacity Building. 2. The following paragraphs describe the design and objectives of the project components and the selection criteria for district heating systems as well as basic project-related information on each town selected. Project Components Component 1: District Heating Energy Efficiency (estimated cost: US$23.35 million) 3. This component would include the following energy efficiency investments in the selected district heating systems: (a) Modernization of heat substations by introducing individual building-level heat substations with temperature controls. Historically, most Belarusian district heating companies have delivered heat using centralized heat substations. With a centralized heat substation, the supply of heat to each building depends on the average demand of the buildings connected to the substation. Converting to individual building-level heat substations with temperature controls would allow the delivery of heat to each building in accordance with its heat demand. Experience in neighboring countries shows that investing in individual building-level heat substations would significantly improve heat supply efficiency and would reduce building-level heat consumption by 15–25 percent. By better matching heat supply to demand at the building level, individual building-level heat substations would also improve the quality of heat service. 5 (b) Reconstruction of district heating networks and upgrading of peak-load gas boilers. The reconstruction of heat networks would include replacing obsolete heat pipes that have large heat and water leaks with preinsulated heat pipes and constructing new heat networks. This would significantly reduce losses in heat transmission, which currently amount to up to 50 percent of heat generation for the selected district heating utilities. And installing new peak-load gas boilers to replace outdated ones would increase generation efficiency from the current 75–85 percent to more than 90 percent. 5 The next step for improving efficiency in the district heating sector is to install heat allocators and heat control valves in individual apartments. This would allow households to match their heat consumption to their desired comfort level and, more importantly, to their affordability limits. The installation of apartment-level heat metering and heat control has proved to be a cost-efficient mechanism for saving energy and for ensuring financially sustainable operation of district heating utilities in other countries of the region, especially as heat tariffs increase. The project could finance their installation in some pilot buildings. 27 4. The feasibility studies conducted by the local design institutes, with the support of the Project Management Unit (PMU) and the Energy Efficiency Department, propose the investments specified in table A2-1 in the selected towns for the District Heating Energy Efficiency Component. Table A2-1 Proposed Investments under the District Heating Energy Efficiency Component Pipeline Cost Individual replacement and Peak-load gas estimate Subproject/ building-level construction boilers including (US$ town substations (kilometers) reserve boilers millions) Volkovysk 2 8.5 (r) 1 boiler 35 MW 1 boiler 23 MW 4.68 1 boiler 12 MW (reserve) Ivanovo - 3.5 (r) 2 boilers 6 MW each and 1.56 one boiler 1 MW Baranovichi - 2.36 (r) + 1.3 (c) 2 boilers 4.5 MW each 1.12 Bereza - 0.75 (c) - 0.17 Zarechie 1 boiler 4.5 MW, (currently conserved - 3.9 (r) 1.40 in the existing boiler house) Kalinkovichi 41 11 (r) + 2.46 (c) 2 boilers 20 MW each 6.40 Zyabrovka - 1.5 (r) 2 boilers 2.5 MW each 0.51 Starye 30 1.76 (r) - 1.08 Dorogi Kholopenichi 0.4 (r) + 7.23 (c) - 0.92 Cherven - 13.5 (r) +2.52 (c) 2 boilers 3.0 MW each 2.30 Kadino - 3 (r) - 0.62 Cherikov 11 6.35(r) - 0.96 Veremeiki 28 8.5(r) 2 boilers 1.5 MW each 1.63 Overall 112 64.27 (r) + 14.26 (c) 147.5 MW 23.35 project Note: - = not applicable, (r) = network replacement, (c) = network construction Component 2: Biomass Heat Generation (estimated cost: US$64.98 million) 5. This component would include investment in base-load biomass boilers, biomass-based small combined heat and power (CHP) plants, and in some towns also wood chipping equipment. (a) Biomass boilers and CHP plants. This component would support investments in biomass boilers or small CHP plants using wood chips or wood wastes as the main fuel, to replace existing base-load gas boilers. The investments would cover the design, supply, and installation of boiler houses with boilers and ancillary 28 equipment. The small CHP plants would be based on modern technologies, such as organic Rankine cycle technology, which is suitable for biomass-fired boilers. (b) Wood chipping equipment and biomass fuel storage facilities. Wood biomass would be harvested by certified forestry enterprises. If the forestry enterprises supply only wood logs, the project would finance the purchase of wood chippers. The project would also finance the construction of biomass storage facilities near the boiler houses. 6. The feasibility studies propose the investments specified in table A2-2 in the selected towns for the Biomass Heat Generation Component. Table A2-2 Proposed Investments under the Biomass Heat Generation Component Cost Biomass-fired estimate Subproject/ heat-only Biomass-fired Wood chipping (US$ town boilers CHP plants equipment millions) Volkovysk CHP Wood chippers - Heat 8.5 MWth 9.43 Transport vehicles Electricity 1.3MWel Ivanovo Boiler house 3 biomass boilers 3.5 - Wood chipper 5.65 MW each Baranovichi CHP Wood chippers - Heat 5.1 MWth Electricity 9.88 0.95 MWel Bereza Boiler house 2 biomass boilers - Wood chipper 3.21 2.0 MW each Zarechie Boiler house 2 biomass boilers - Wood chipper 2.30 3.0 MW each Kalinkovichi CHP Boiler 10 MW Heat 6.5 MWth Electricity Wood chipper 10.81 1.6 MWel Zyabrovka Boiler house 3.5 MW and - Wood chipper 1.89 0.5 MW boilers Starye Dorogi Boiler house 4.5 MW and - Wood chipper 8.52 2 boilers 7.5 MW each Kholopenichi Boiler house 1.0 MW and - Wood chipper 1.35 2.0 MW boilers Cherven Boiler house 6.0 MW and - Wood chipper 5.71 2 boilers 3.0 MW each Kadino Boiler house 2.0 MW and - Wood chipper 3.89 2 boilers 3.0 MW each Cherikov Boiler house 2 boilers 2.0 MW each - Wood chipper 1.69 29 Cost Biomass-fired estimate Subproject/ heat-only Biomass-fired Wood chipping (US$ town boilers CHP plants equipment millions) Veremeiki Boiler house 1 boiler 1.0 MW - Wood chipper 0.65 Overall project Heat 20.1 MWth 82 MW 64.98 Electricity 3.85 MWel Note: - = not applicable. Component 3: Technical Assistance and Capacity Building (estimated cost: US$1.445 million) 7. This component would finance capacity building for the participating district heating utilities and implementation support to the PMU, including the following: (a) Improvement of existing social accountability mechanisms. The proposed project would support participating utilities to communicate more proactively with their customers. Support in developing proactive communication plans will be provided to the utilities through a series of training events developed for the deputy directors of the utilities and through expert support in developing communication materials. For small towns, social accountability efforts would focus on improving the access to and the availability of information for consumers and civil society organizations on district heating services, the structure of bills, benefits of energy efficiency, project design and implementation, and the like. For large towns, the project would support efforts led by the Energy Efficiency Department to review and improve the efficiency of existing grievance redress mechanisms and feedback analysis to enhance service delivery. An expert would analyze the grievances coming to the utilities and reactions provided to them and provide recommendations on how to increase the efficiency of the handling of grievances. In addition, the project would support the monitoring by consumer groups on continuous information provision on all aspects of service delivery. The consumer groups will be engaged in regular monitoring of proactive information sharing by the participating utilities in accordance with the project results framework. The project would also support utilities to develop websites or improve the content of existing websites based on the recommendations from the consumer groups in order to facilitate better information sharing. (b) Support for a shift to energy-content-based biomass pricing. In Belarus, wood biomass pricing is based largely on volume—solid cubic meters of raw material. The project would provide technical assistance to support a government effort to move toward pricing based on the energy content of the timber (that is, a unit price per gigajoule or MWh of delivered biomass), including financing the purchase of equipment to measure the energy content of biomass. This would acknowledge the direct correlation between energy, moisture content, and other parameters of the 30 fuel; encourage greater focus on the quality of the fuel; and increase efficiency in the use of biomass resources. (c) Other project implementation support. This would include (i) implementation support consultancy to support the PMU and the district heating utilities in the implementation and supervision of the project; (ii) training and capacity building for the utilities based on international best practices for energy efficiency improvements in district heating and proven biomass technologies; (iii) annual financial audits of the project accounts; and (iv) other consultancy services. Technical Design of the Project 8. Biomass-based CHP plants would employ modern technologies for small CHPs such as organic Rankine cycle technology, which uses an organic, high-molecular-mass fluid with a liquid-vapor phase change, or “boiling point,” occurring at a lower temperature than the water- steam phase change. The fluid allows Rankine cycle heat recovery from lower-temperature sources such as biomass combustion. There are four small CHP plants (2–4 MWel/unit) based on organic Rankine cycle technology in Belarus, with positive operational experience. 9. Technical alternatives considered for Component 2 Biomass Heat Generation include decentralized building-level wood pellet boilers or gas-fired apartment level boilers. The reasons for rejecting these alternatives are (1) the price of wood pellets is higher than wood chips and there is limited cost-savings advantage of replacing gas with wood pellets; (2) Heat density in selected project towns is high enough to justify centralized heat generation. Residential buildings in Belarus have been designed for district heating and are not suitable for apartment level boilers; and (3) there are environmental and logistical concerns of using building-level biomass boilers. Selected District Heating Systems 10. The selection of district heating systems is based on the following criteria: (i) consumer demand for heat is densely concentrated and is stable or growing; (ii) there is sufficient wood biomass within a reasonable distance from the heat sources; (iii) wood biomass is supplied by certified forestry enterprises from sustainably managed forests; and (iv) biomass will replace imported fuel (gas or oil) for base-load heat generation. 11. All 13 towns selected for the project have met the above criteria: All towns have existing district heating systems, and consumer demand for heat is densely concentrated. All beneficiary utilities have secured biomass supply from forestry enterprises certified to Program for the Endorsement of Forest Certification (PEFC) or Forest Stewardship Council (FSC) standards. The radius for biomass collection ranges from 0 to 60 kilometers from the heat source in the 13 towns. 6 And as a result of the project, the share of biomass for heat generation would increase from close to 0 percent to between 60 to 100 percent at all project sites. The following paragraphs describe the current district heating systems and fuel supply arrangements in each 6 According to the analyses under the ESMAP-financed study “Belarus Biomass-Based District Heating,” the viable radius for biomass collection is about 75 kilometers from the heat source. 31 town. Tables A2-1 and A2-2 summarize the proposed investments in each town. Table A2-3 summarizes the expected results of the proposed investment. Ivanovo (Brest Oblast) 12. Current System. Ivanovo has a population of about 16,000. Currently, there are two boiler houses in the city—the boiler house of a cheese factory and Boiler House No. 3 of the communal unitary enterprise Ivanovskoe Zhkh. Boiler House No. 3 has five boilers, with a total installed capacity of 21.28 megawatts (MW): two boilers were built in 1977 for hot water production, two boilers were built in 2004 for steam production to heat up mazut, and another boiler was built in 1990 for hot water production. Gas is the main type of fuel used in the boiler house. Mazut is available for reserve purposes. To meet the demand for heat and hot water, Ivanovskoe Zhkh purchases heat produced at the cheese factory’s boiler house, amounting to 13,683 MWh annually. The total district heating network extends for 16.3 kilometers, with an average annual heat loss of 20 percent. There are four group heat substations currently being used. 13. Proposed Investment. The following investments are to be supported by the project: (i) constructing a new 10.5 MW biomass-fired boiler house (3 boilers, 3.5 MW each) to replace existing natural gas based heat generation purchased from the boiler house of the cheese factory; the construction of a new biomass-fired boiler house will allow the company to close down and dismantle mazut facilities, (ii) replacing the two old boilers built in 1977 (with an average efficiency of 80%) with new natural gas fired boilers with a total capacity of 12 MW (2 boilers, 6 MW each, no less than 92% efficiency rating), (iii) constructing one small natural gas fired modular boiler house with a capacity of 1 MW to close out 2.5 km of network with significant heat losses, and (iv) replacing 3,536 m of heat networks to reduce heat losses from 17.9% to 15.2%. The project would also finance the purchase of wood chippers. Before the project, heat and hot water are 100% produced by natural gas. After the project, 75% of the heat load will be supplied by biomass, 25% by natural gas. 14. Fuel Supply. The Brest Oblast Executive Committee has provided a guarantee letter dated September 18, 2013, to ensure the provision of biomass fuel to the Brest oblast utilities starting from 2015. Wood biomass would be supplied by the Brest state forestry union, which is both FSC and PEFC certified. The distance between the heat source and the biomass supply is between 30 and 60 kilometers. Bereza (Brest Oblast) 15. Current System. Bereza has a population of about 29,800. Heat is currently supplied to three residential areas connected to the participating district heating system from three boiler houses: the boiler house of a meat canning factory, the boiler house of a cheese making factory, and Municipal Boiler House No. 8. The meat canning factory’s boiler house supplies heat to the Tyshkevitch residential area. The pipeline from the factory is 4,652 meters long. There are no other consumers served from this network. The heat loss of the network is about 16.7 percent. 16. Proposed investment. (i) Constructing a new 4MW biomass-fired boiler house consisting of 2 boilers each with a 2MW installed capacity. The new boiler house will replace the natural 32 gas-based boiler of the meat canning factory to supply heat to the Tyshkevicha residential area. Heat losses will be reduced from 16.7% to 6% after the project. (ii) Constructing 750m heat network to connect the newly constructed boiler house with two other residential areas. As a result, the new biomass boiler house will provide hot water supply to all three residential areas in the summer time. The project would also finance the purchase of wood chippers. Before the project, heat and hot water are 100% produced by natural gas. After the project, 100% of the heat load will be supplied by biomass. 17. Fuel Supply. The Brest Oblast Executive Committee has provided a guarantee letter dated September 18, 2013, confirming the provision of biomass fuel for the project starting from 2015. Wood biomass would be supplied by the Brest state forestry union, which is both FSC and PEFC certified. The distance between the heat source and the biomass supply is about 20 kilometers. Baranovichi (Brest Oblast) 18. Current System. Baranovitchi has a population of about 168,000. Two boiler houses currently provide heat supply to the selected project area in Tekser district and Brestskaya Street. The Tekser boiler house has a total capacity of 16.4 MW. It has one boiler built in 2005 and 14 units of Fakel-G boilers (built between 1989 and 2003). The Brestskaya Street boiler house has a total capacity of 9.28 MW. It has 11 units of NIISTU boilers built between 1985 and 2003. The fuel supply to both boiler houses consists of 81 percent natural gas and 19 percent local wood chips. 19. Proposed investment. (i) Constructing a new biomass based CHP at the existing Tekster boiler house site with a total installed thermal capacity of 5.1 MWth and electricity capacity of 1 MWel (based on ORC technology). The new boiler house will replace the heat load supplied by the Brest Street boiler house; (ii) replacing existing natural gas fired hot water boilers (5 units of Fakel-G (1989, efficiency 85%), 10 units of NIISTU-5 (1987, efficiency 75%) and 1 unit of NIISTU-5 (2003, efficiency 83.6%) with two peak-load natural gas-fired boilers of 4.5 MW each (efficiency above 93%); (iii) constructing a 1.3km heat pipe to connect two boiler houses, and (iv) replacing 2.36 km of existing heat network. After the project, the Brestskaya Street boiler house will operate as the CTP. The project would also finance the purchase of wood chippers. Before the project, heat supply is based on 84.5% of natural gas and 15.5% of wood biomass. After the project, 62.9% of the heat load will be supplied by biomass, 37.1% by natural gas. 20. Fuel Supply. The municipality has an annual contract with Baranovichi Forestry as of March 1, 2013, to cover annual wood biomass fuel supply for the Baranovitchi heating system. Baranovichi Forestry is both FSC and PEFC certified. The distance between the heat source and the biomass supply is between 35 and 57 kilometers. Volkovysk (Grodno Oblast) 21. Current System. Volkovysk has a population of about 40,000. Heat is currently supplied to the residential area by two boiler houses: the gas-fired boiler house at Pankova Street (with an installed capacity of 72 MW), which operates in parallel with the gas-fired boiler house at Sotsialisticheskaya Street (with an installed capacity of 18.56 MW). The boiler house at Pankova 33 Street supplies heat and hot water only during the winter, while the boiler house at Sotsialisticheskaya Street operates only during the summer and supplies hot water for consumers connected to both boiler houses between 6am and 10pm. 22. The boiler house at Pankova Street includes four boilers: two peak-load gas-fired boilers in satisfactory condition, one base-load gas-fired boiler in satisfactory condition, and one peak- load gas-fired boiler requiring modernization. The boiler house at Sotsialisticheskaya Street includes three boilers. 23. Proposed investment. (i) Constructing a new biomass-fired CHP (thermal capacity 8.5 MW, electrical capacity 1.3 MWel); (ii) replacing old natural gas-fired boilers (with an average efficiency rating of 79%) with three new gas fired boilers - boiler No. 1 (34.8 MW, efficiency 93.87%), boiler No. 2 (23.2 MW, efficiency 93.75%) and boiler No.3 (11.6 MW, reserve, efficiency 94.38%); (iii) rehabilitating 8.5 km of district heating network which would reduce heat losses from 8.5% to 5.6%; and (iv) replacing one centralized group heat substations with 2 individual heat substations. The project would also finance the purchase of wood chippers. Before the project, heat supply is 100% produced by natural gas. After the project, 61% of the heat load will be supplied by biomass, 39% by natural gas. After the project, hot water will be supplied 24 hours a day. 24. Fuel Supply. Biomass would be supplied by the Grodno state forestry union (all forestry enterprises in the union are PEFC certified). Starye Dorogi (Minsk Oblast) 25. Current System. Starye Dorogi has a population of about 10,800. Boiler House No. 1 supplies heat to residential buildings, industrial enterprises, and administrative buildings. Its total installed capacity is 41.5 MW, consisting of four boilers all built in 1985 with an average efficiency rating of 85 percent. The main fuels currently used are natural gas and mazut. There are 7 group heat substations and 15 individual building-level heat substations (mostly in new buildings). The heat network is a two-pipe system with a total length of 32 kilometers. The distance from the boiler house to the most remote group heat substations is 2.3 kilometers, and the distance to the nearest is 1.5 kilometers. Heat is supplied by two gas-fired boilers; one mazut- fired boiler is switched on only during the winter when the temperature is below −15° C. 26. Proposed investment: (i) constructing a new biomass-fired boiler house with 22.62 MW installed capacity (one 4.5 MW boiler and two boilers of 7.5 MW each), (ii) replacing 1.77 km of pipeline (total network losses after replacement will be reduced from 19% to 16.3%), and (iii) installing 30 individual heat substations. The existing gas and mazut-fired boilers will remain for peak/reserve purpose. The project would also finance the purchase of wood chippers. Before the project, heat supply is based on almost 100% of natural gas. After the project, 95% of the heat load will be supplied by biomass, 5% by natural gas. 27. Fuel Supply. Wood biomass would be supplied by Starye Dorogi Forestry, which is both FSC and PEFC certified. Starye Dorogi Forestry has provided a letter confirming the availability of annual wood biomass supply in the amount of 29,000 cubic meters for the project. The 34 estimated annual biomass consumption of the boiler house that would be built under the project is about 26,170 cubic meters. The distance between the heat source and the biomass supply is between 3 and 35 kilometers. Cherven (Minsk Oblast) 28. Current System. Cherven has a population of about 9,000. There are three boiler houses in the town: the Bolnitsa boiler house (with a total capacity of 4.98 MW), including five gas- fired boilers (built in 1982, with an efficiency rating of 92 percent); the Tsentralnaja boiler house (4.98 MW), including five gas-fired boilers (built in 1967, with an efficiency rating of 75 percent); and the Gruppovaja boiler house (22 MW), including three gas-fired boilers (built in 1989, with an efficiency rating of 90 percent). All three boiler houses operate individually, and there is no connection between them. Hot water is supplied only on weekends. The total network length is 52 kilometers, including 10 kilometers of preinsulated pipes and 24 kilometers of network in poor condition. There is no group or individual building-level heat substations. 29. Proposed investment. (i) Constructing a new biomass-fired boiler house at the site of Gruppovaya boiler house with a total capacity 12 MW, (ii) installing two peak natural gas-fired boilers with a total installed capacity of 6 MW. With the replacement of old gas boilers, efficiency is expected to increase from 75% to 93%, (iii) connecting Tsentralnaya and Bolnitsa boiler houses to Gruppovaya boiler house by constructing 2.52 km of connection bridge and, (iv) replacing 13.5 km of district heating network. Heat losses will be reduced from 19.3% to 6%. The project would also finance the purchase of wood chippers. Before the project, heat supply is based on 100% of natural gas. After the project, 95% of the heat load will be supplied by biomass, 5 % by natural gas. 30. Fuel Supply. Wood biomass would be supplied by Cherven Forestry, which is FSC certified. Cherven Forestry has provided a letter confirming the availability of annual wood biomass supply in the amount of 21,960 cubic meters for the project. The estimated annual biomass consumption of Cherven is about 21,661 cubic meters. The distance between the heat source and the biomass supply is within 30 kilometers. Kholopenichi (Minsk Oblast) 31. Current System. Kholopenichi has a population of about 1,500. There are four heat sources: a municipal gas-fired boiler house with a total capacity of 2 MW (two 1-MW boilers, with an efficiency rating of 89 percent); the school’s boiler house (built in 1968), with a total capacity of 0.54 MW (three boilers, with an efficiency rating of 75 percent) fired with wood logs and peat; the children’s center’s boiler house, which is divided into two parts—an old one built in 1961, with an installed capacity of 0.54 MW (three boilers, with an efficiency rating of 59 percent) fired with wood logs and peat, and a new one built in 2003, with an installed capacity of 0.68 MW (two gas-fired boilers, with an efficiency rating of 90 percent); and purchased heat from the gas-fired boiler house of a milk factory. The boiler houses operate individually, with no connections between them. 35 32. Proposed investment. (i) Constructing a new biomass-fired boiler house with a total capacity of 3 MW (one 1 MW boiler and one 2 MW boiler) at the Municipal boiler house with the share of biomass in the fuel mix increasing from 59% and 75% to 84%; closure of the children center boiler house (old part) and elimination of heat purchase from the milk factory; (ii) connecting three boiler houses to school, children center and the residential area connected to the milk factory boiler house; (iii) replacing 0.4 km of heating network and laying 7.23 km of new heating network (heat losses will be reduced from 14.3% to 4%) .The existing boiler houses will remain for reserve purposes. The project would also finance the purchase of wood chippers. Before the project, the fuel used for heat supply is consisted of 49% natural gas, 30% wood biomass, 8.7% peat and 12.3% purchased heat. After the project, 100% of the heat load will be supplied by biomass. 33. Fuel Supply. Wood biomass would be supplied by Krupki Forestry (PEFC certified; FSC certification will be awarded on January 1, 2014) and Krupki Military Forestry (PEFC certified). Krupki Military Forestry has provided a letter confirming the availability of annual wood biomass supply up to the amount of 4,800 cubic meters for the project. The estimated annual boiler house biomass consumption is about 2,631 cubic meters. The distance between the heat source and the biomass supply is 60 kilometers. Kadino (Mogilev Oblast) 34. Current System. Kadino has a population of about 1,800. Heat is supplied by the central boiler house, built in 1980, which belongs to an agricultural enterprise. The key consumer is the agricultural enterprise, which uses heat for greenhouses. The same boiler house also provides heat to the residential and social sectors. The total installed capacity of the boiler house is 116 MW. The total connected load of the residential and social sector is 5 MW. The prospective increase in the heat load is 2.1 MW due to the planned construction of six new multistory residential buildings. The network length is 24.7 kilometers. The length of the connecting pipeline from the boiler house to the settlement is 2.2 kilometers. 35. Proposed investment. (i) Constructing a new biomass-fired boiler house with an installed capacity of 8MW. The new boiler house will replace the central boiler house of the agricultural enterprise to supply heat to the residential and social sector; and (ii) replacing 3 km of heat network. As a result, heat losses will be reduced from 16.9% to 6%. The project would also finance the purchase of wood chippers. Before the project, heat is 100% generated with natural gas. After the project, 100% of the heat load will be supplied by biomass. 36. Fuel Supply. Biomass would be supplied by the Mogilev state forestry union (all 13 forestry enterprises in the union are PEFC certified). The Mogilev Oblast Executive Committee has provided a guarantee letter dated March 25, 2013, confirming the provision of biomass fuel in the annual amount of 21,000 cubic meters. The estimated annual biomass consumption of the boiler house is 17,562 cubic meters. The distance between the heat source and the biomass supply is within 25 kilometers. 36 Veremeiki (Mogilev Oblast) 37. Current System. Veremeiki has a population of about 1,500. Heat is supplied from a gas- fired boiler house with an installed capacity of 7.3 MW (two boilers built in 1996, with an efficiency rating of 86 percent, and one boiler built in 2011). The total connected load is 3.1 MW. No group or individual building-level heat substations are currently installed. Hot water is not supplied, and there are no plans to do so as all houses are equipped with gas or electric water heaters. 38. Proposed investment. (i) Constructing a new boiler house with a total installed capacity of 1 MW (one biomass fired boiler of 1 MW, efficiency 84%); (ii) replacing 6.1 km of district heating network. As a result, heat losses will be reduced from 30% to 6%; and (iii) installing 28 individual heat substations. Before the project, heat is 100% generated with natural gas. After the project, 67.3% of the heat load will be supplied by biomass, 32.7% by natural gas. 39. Fuel Supply. Biomass would be supplied by Cherikov Forestry (FSC certified) and OJSC MogilevDrev (FSC and ISO19001-2008 certified). Cherikov Forestry has provided a letter confirming the supply of 2,500 cubic meters of wood chips in 2014. OJSC MogilevDrev has provided a letter confirming the supply of 7,000 cubic meters of wood chips in 2014 for the Cherikov and Veremeiki boiler houses. The estimated annual wood biomass consumption of the Veremeiki boiler house is 3,597 cubic meters. The distance between the heat source and the biomass supply is between 10 and 35 kilometers. Cherikov (Mogilev Oblast) 40. Current System. Cherikov has a population of about 8,200. Heat is supplied from the gas-fired central boiler house, with a total installed capacity of 22.3 MW. The boiler house has four boilers: two gas-fired boilers built in 2010, and two gas-fired boilers built in 1979. The total network length is 36.2 kilometers. All heat regulation is done directly at the boiler house as no group or individual building-level heat substations are available. 41. Proposed investment. (i) Replacing 2 gas-fired boilers built in 1979 (current efficiency at 80%) with two biomass-fired boilers of 2 MW each (efficiency at 84%). Biomass boilers will be used for the base load; gas boilers will be switched on only during winter season; (ii) replacing 6.35 km of district heating network. As a result, heat losses will be decreased from 25% to 17.7%, and (iii) installing 11 individual heat substations. Before the project, heat is 100% generated with natural gas. After the project, 100% of the heat load will be supplied by biomass. 42. Fuel Supply. Biomass would be supplied by Cherikov Forestry (FSC certified) and OJSC MogilevDrev (FSC and ISO19001-2008 certified). Cherikov Forestry has provided a letter confirming the supply of 2,500 cubic meters of wood chips in 2014. OJSC MogilevDrev has provided a letter confirming the supply of 7,000 cubic meters of wood chips in 2014 for the Cherikov and Veremeiki boiler houses. The estimated annual biomass consumption of the Cherikov boiler house is 16,125 cubic meters. The distance between the heat source and the biomass supply is between 10 and 35 kilometers, and the distance between the boiler houses and the forest is between 10 and 25 kilometers. 37 Zyabrovka (Gomel Oblast) 43. Current System. Zyabrovka has a population of about 5,000. There are two boiler houses. Boiler House Nо. 89, built in 1964, has a total installed capacity of 8.5 MW. This boiler house has two gas-fired Fakel boilers (1 MW, with an efficiency rating of 84 percent), six gas-fired NIISTY-5 boilers (0.67 MW, with an efficiency rating of 84 percent), and one wood-log-fired boiler (with an efficiency rating of 65 percent). The other boiler house (N157), also built in 1964, has a total installed capacity of 6.96 MW. This boiler house has six gas-fired boilers (with an efficiency rating of 80 percent). Sixty percent of the network has been replaced. 44. Proposed investment. (i) Constructing a new biomass-fired boiler house near boiler house N89. The new boiler house will consist of two boilers with an installed capacity of 3.5 MW and 0.5 MW, respectively. The efficiency rating is about 84%. (ii) Replacing existing inefficient gas- fired boilers (efficiency of about 80%) with new peakload gas-fired boilers (2 boilers, 2.5 MW each, efficiency 93%). (ii) Optimization of heat network, including connecting boiler house N89 with boiler house N157 and replacing old network with preinsulated pipes with increased diameter (1.5 km). Heat loss will be reduced from 23% to 20%. The project would also finance the purchase of wood chippers. 45. Fuel Supply. Biomass will be supplied from Gomel forestry (PEFC certified). Confirmation letter from Gomel forestry as of September 1, 2013 on annual wood fuel supply at the total required amount. The distance between the heat source and biomass supply is by 25 kilometers. Total annual boiler house consumption – 11720 m3. Zarechie (Gomel Oblast) 46. Current System. Zarechie has a population of about 1,300. The boiler house has a total installed capacity of 15 MW, including two mazut-fired boilers (with an efficiency rating of 83 percent), two biomass-fired boilers (with an efficiency rating of 65 percent), and one gas-fired boiler (for backup). Residential buildings have individual building-level heat substations installed. 47. Proposed investment. (i) Constructing of a new biomass-fired boiler house with an installed capacity of 6 MW; taking the existing gas-fired boiler to replace the old mazut-fired boiler and biomass-fired boilers for peakloads. Efficiency of the boiler house is expected to increase by 19 percentage points, and (ii) replacing of 3.9 km of district heating network with preinsulated pipes; bringing the boiler house closer to the settlement to reduce 3.8 km of heat network. As a result, the heat losses will be decreased from 50% to 4%. The project would also finance the purchase of wood chippers. Before the project, heat is 100% generated by natural gas. After the project, close to100% of the heat load will be supplied by biomass. 48. Fuel Supply. Biomass would be supplied by Rechitsa Forestry (FSC certified), based on a contract (No. 03-01-D-1) dated January 3, 2013. The distance between the boiler house and the forest is between 0.1 and 20 kilometers. 38 Kalinkovichi (Gomel Oblast) 49. Current System. Kalinkovichi has a population of 40,000. The project would be developed in the boiler house at Surkova Street. The current boiler house has an installed capacity of 67.8 MW, including four steam gas-fired boilers (two boilers built in 1978 and two boilers built in 1980 and in 1993). The total connected heat load is 48 MW. There are plans to disconnect Kalinkovichi Milk Factory (with a steam load of 6.96 MW) and connect a new residential area (with a connected load of 10.8 MW). There are also three other boiler houses in the selected project area—the Sovetskaya Street boiler house, the Pervomaiskaya Street boiler house, and the Knjazevo Street boiler house. 50. Project scope. (i) Constructing a new boiler house at Surkova street including a biomass- fired CHP (based on ORC technology) with 6.5 MWth of thermal capacity and 1.6 MWel of electric capacity and a hot water boiler of 10 MW. (ii) Replacing two peakload boilers built in 1978 (efficiency rating of 80%) with two new natural gas-fired two boilers of 20 MW each (efficiency rating 93%), (iii) constructing connection bridges between boiler houses (2.46 km) and reconstructing 11 km of existing district heating network (the heat losses will be decreased from 35% to 18.4%), and (iv) installing 41 individual heat substations. The project would also finance the purchase of wood chippers. Before the project, heat is 100% generated by natural gas. After the project, 77% of the heat load will be supplied by biomass and 33% by natural gas. 51. Fuel Supply. Biomass would be supplied by the Gomel state forestry union (all 11 forestry enterprises in the union are PEFC certified, and 6 have also been FSC certified). The Gomel state forestry union has provided a guarantee letter dated August 1, 2013, confirming the annual provision of up to 171,000 cubic meters of wood logs (equivalent to 171,000 cubic meters of wood chips) and 30,000 cubic meters of wood chips. The estimated annual biomass consumption of the boiler houses is 44,887 cubic meters. The distance between the heat source and the biomass supply is about 50 kilometers. Table A2-3 Expected Results of Project Investment Efficiency of Network heat losses Fuel mix for heat generation peak-load gas boilers Oblast City Before After Before After Before project After project project project project project Biomass Above Ivanovo 80% 18% 15% Gas (100%) (75%) 92% Gas (25%) Brest Gas Biomass Bereza N.A. 17% 6% oblast (100%) (100%) Biomass Above Gas (84.5%) (62.9%) Baranovichi 75-85% 10% 8.6% 93% Biomass (15.5%) Gas (37.1%) Biomass Grodno Gas Volkovysk 79% 94% 9% 6% (61%) oblast (100%) Gas(39%) 39 Efficiency of Network heat losses Fuel mix for heat generation peak-load gas boilers Oblast City Before After Before After Before project After project project project project project Biomass (95%) Starye Dorogi N.A. 19% 16.3% Gas (100%) Gas (5%) Biomass (95%) Cherven 75% 93% 19% 6% Gas (100%) Gas (5%) Minsk Gas (49%) oblast Biomass (30%) Biomass Kholopenichi N.A. 14% 4% Peat (8.7%) (100%) Purchased heat (12.3%) Biomass Kadino N.A. 17% 6% Gas (100%) (100%) Biomass Mogilov Gas (67.3%) Veremeiki 86% 93% 30% 6% oblast (100%) Gas (32.7%) Biomass Cherikov N.A. 25% 18% Gas (100%) (100%) Gas Biomass (75%) (90%) Zyabrovka 80% 93% 23% 20% Biomass Gas (24%) (10%) Gomel Gas Biomass Zarechie N.A. 50% 4% oblast (100%) (100%) Biomass Gas (77%) Kalinkovichi 80% 93% 35% 18% (100%) Gas (33%) 40 Annex 3: Implementation Arrangements Project Institutional and Implementation Arrangements 1. The project would be implemented by the Energy Efficiency Department of the State Committee for Standardization, the existing Project Management Unit (PMU) BelInvestEnergoSberezhenije, and district heating utilities in the selected project areas. The Energy Efficiency Department is the agency responsible for the implementation of the State Energy Saving Program, the National Program on the Development of Local and Renewable Energy Sources, and the State Program on the Construction of Local-Fuel-Fired Energy Sources. All these programs are dedicated to improving energy efficiency and increasing the use of local and renewable energy sources in Belarus. 2. The PMU is subordinate to the Energy Efficiency Department. It would be responsible for daily project implementation and for the monitoring of and adherence to World Bank requirements. The PMU has successfully implemented the Bank-financed Social Infrastructure Retrofitting Project and is currently implementing the Energy Efficiency Project and the Post- Chernobyl Recovery Project. The PMU has adequate and practical knowledge of Bank procedures. It also has both the technical capacity and the necessary links to ministries and oblasts to prepare and implement the proposed project. The PMU has skilled managerial, technical, procurement, and financial management staff, and these staff would receive further training for the specific needs of the project. 3. The project would include 13 district heating systems located in Grodno, Brest, Gomel, Minsk, and Mogilev oblasts (table A3-1). All the participating utilities belong to the Ministry of Housing and Utilities. Each utility has assigned a coordinator (project manager) responsible for project implementation to work with the PMU. The district heating utilities would be responsible for providing terms of reference for design documents (or approving design documents when they are available), ensuring appropriate technical supervision of the contracts, accepting payment orders, and submitting adequate documentation to the PMU so that it can prepare and sign disbursement applications. Table A3-1 Participating District Heating Utilities City or Oblast Utility (site owner) settlement Grodno Volkovysk Unitary utility Volkovysskoe Kommunalnoe Hozyaistvo Brest Communal unitary diversified industrial enterprise Ivanovskoe Ivanovo Zhkh Baranovichi Unitary industrial utility BaranovichiKommunteploset Bereza Brest oblast unitary enterprise Upravlenie Zhkh Gomel Zarechie Unitary utility Rechitskii Raizhilkomkhoz Kalinkovichi Unitary utility Kommunalnik Kalinkovichskii Zyabrovka Unitary utility Gomelskii Raizhilkomkhoz Minsk Starye Dorogi Unitary utility Starodorozhskoe Zhkh Kholopenichi Unitary utility Zhilteploservis 41 City or Oblast Utility (site owner) settlement Cherven Republic unitary enterprise Chervenskoe Zhkh Mogilev Kadino Unitary utility Zhilkomkhoz Cherikov Unitary industrial utility Cherikovskii Zhilkommunkhoz Veremeiki Unitary industrial utility Cherikovskii Zhilkommunkhoz 4. Forests are owned by the state and managed by state forestry enterprises subordinate to the Ministry of Forestry. Biomass fuel would be supplied by state forestry enterprises in close proximity to participating district heating utilities (within a distance of 0–60 kilometers) under long-term fuelwood delivery agreements. The forestry enterprises would supply wood logs, wood chips, or both. If only wood logs are delivered, the district heating companies would produce wood chips themselves. All participating state forestry enterprises have been recognized for sustainable forest governance subject to requirements of international conventions and were certified to Program for the Endorsement of Forest Certification (PEFC) standards, Forest Stewardship Council (FSC) standards, or both. 5. The project would be implemented through a Plant Design, Supply, and Installation contract at each selected site. This contract method has been tested and applied in previous Bank operations, and the PMU is well acquainted with it. The bidding documents would be prepared by the PMU’s procurement staff in close collaboration with the technical staff of all participating district heating utilities. The technical staff of the utilities would be responsible for preparing the technical documents required to develop the bidding documents and for evaluating the technical aspects of the bidding documents. The PMU’s Tender Committee would evaluate bids or proposals. The Review Committee, which includes ministry representatives and technical staff of the participating district heating utilities, would clear evaluation reports before sending them to the Bank on a “no objection” basis. The PMU would also be responsible for disbursement and financial management. 6. The PMU would operate in accordance with the Project Operational Manual, which will be drafted prior to negotiation. The manual will outline the implementation arrangements, including procurement, contract management, payment authorization, environmental management, periodic reporting, and relationships between the implementing and beneficiary agencies. 42 7. Figure A3-1 summarizes the project institutional and implementation arrangements. Figure A3-1 Project Institutional and Implementation Arrangements Financial Management, Disbursements, and Procurement Financial Management 8. Based on the Financial Management (FM) assessment of the project was completed in October 2013, the project FM arrangements are acceptable for project implementation, and the associated FM risk is Moderate. There are no further FM conditions for implementation of this project. 9. All fiduciary functions for this project will be carried out by the Project Management Unit (PMU) subordinated to the Energy Efficiency Department (EED). PMU is currently implementing EEP and PCRP Additional Financing, and last FM monitoring in October 2013 confirmed acceptability of FM arrangements at PMU. As in the other projects, implemented by the PMU, the accountant and financial specialist of PMU will be responsible for all disbursements and payments in this project, accounting and reporting, functioning of internal controls, and facilitation of annual audit. Financial staff will report to the director of PMU. The 43 financial staff has adequate and practical knowledge of Bank procedures, has attended a number of Bank-organized trainings. 10. The internal control procedures for the project for this project will be based on those that already in place for the on-going projects, and they will be specified in the financial management and disbursement sections of the Project POM, which will be finalized before negotiations. The key controls for FM and disbursements include segregation of duties, reconciliation of accounting records, review and authorization of reports, authorization of withdrawal applications and payment orders. Proper functioning of the internal controls will also be reviewed during the annual project audit, and important recommendations included in the letter to management. 11. Accounting records for this project will be maintained in the same accounting and reporting system, which is currently being used for other Bank-financed projects. Specifically, software “Zajm” and “Prosto Buhgalteria” are being used. “Zajm” software was further upgraded in 2013 to allow wider functionality, including accounting in multiple currencies. Separate set of accounts will be used for this Project, so that the accounting records are segregated from other records of the PMU. The project accounting records will be maintained on cash basis, with the disclosure of commitments; accounting records of BelInvestEnergoSberezhenije will continue to be maintained on the basis of National Accounting Standards. Originals of accounting documents, including acts of acceptance, invoices, bank statements, etc, will be maintained by PMU in orderly manner and retained for the period required by local legislation. 12. Quarterly IFRs will be submitted to the Bank 45 days after the end of each calendar quarter, starting from the quarter in which the first disbursements occur. The IFRs will be submitted as part of quarterly project reports. The IFRs will include information on sources and uses of duns, Designated account statements, as well as details of disbursements. The sample format of the IFRs will be agreed at negotiations, and also included in POM. The project accountant will also prepare and submit regular reports to various national control bodies, as required by the national legislation. 13. The project financial audit will be conducted by independent private auditors acceptable to the World Bank, on the ToRs acceptable to the Bank. The auditors will be engaged through standard terms of reference acceptable to the World Bank and procured by the PMU in accordance with World Bank procurement guidelines. The cost of the audit will be financed out of the proceeds of the loan. The audited financial statements together with the auditor’s opinion and the management letter will be provided to the World Bank within six months of the end of the fiscal year. Following the Bank’s formal receipt of project audited financial statements from the Borrower; the Bank will make them available to the public on its website in accordance with the World Bank Policy on Access to Information. In addition, the PMU will make the project audited financial statements available to the public in a timely manner acceptable to the Bank. Disbursements 14. Disbursement Arrangements. The proceeds of the IBRD loan will be disbursed in accordance with the traditional disbursement procedures of the Bank. These will be used to finance project activities through the disbursement procedures currently used—that is, Advances, 44 Direct Payments, Reimbursements, and Special Commitments accompanied by appropriate supporting documentation (Summary Sheets with records and/or Statements of Expenditures (SOEs)) in accordance with the procedures described in the Bank’s Disbursement Guidelines. The minimum application size for direct payment, reimbursement and special commitments will be specified in the Disbursement Letter. 15. Designated Account. The PMU will open a segregated Designated Account in a Commercial Bank acceptable to the Bank in U.S. dollars to cover the eligible project expenditures. The Ceiling of the Designated Account will be specified in the disbursement letter. The PMU will be responsible for submitting monthly replenishment applications with appropriate supporting documentation along with a reconciled bank statement. The Designated Account will be audited annually in conjunction with the audit of the project financial statements. 16. Statement of Expenditures (SOEs). Necessary supporting documents will be sent to the Bank as indicated in the Disbursement Letter. The documentation supporting expenditures will be retained at the PMU and be readily accessible for review by the external auditors and periodic Bank supervision missions. All disbursements will be subject to the conditions of the Loan Agreement and disbursement procedures as defined in the Disbursement Letter. Procurement 17. General. Procurement of goods, works, and nonconsulting services for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement of Goods, Works and Non-Consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011 (Procurement Guidelines); and procurement of consultant services would be carried out in accordance with the World Bank’s “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” dated January 2011 (Consultant Guidelines), and the provisions stipulated in the Loan Agreement. The Bank's “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants,” dated October 15, 2006, and revised in January 2011 (Anti-Corruption Guidelines) would apply to this project. A General Procurement Notice will be published on the Bank’s external website and the UN Development Business website before the loan negotiations. The following section describes the procurement implementation arrangements agreed with the PMU. Procurement Implementation Arrangements 18. Procurement of Works and Design, Supply, and Installation of Plant and Equipment. The project’s components would cover reconstruction of district heating systems and support investment in biomass boilers. The Bank’s latest Standard Bidding Documents for Procurement of Plant Design, Supply, and Installation would be used in the contracts where the value of the plant and equipment represents the major part of the contract; the contracts require comprehensive testing and acceptance procedures; or the contracts require essential functional guarantees from the contractor on a single-responsibility basis. Procurement of minor works is also foreseen in the project’s components, especially for network construction or rehabilitation 45 and the construction of new buildings (storage buildings). The most recent version of the Bank’s Standard Bidding Documents (SBD) Procurement of Small Works would be used for the procurement of these contracts. 19. Procurement of Goods and Nonconsulting Services. Procurement of goods e.g. wood chipping equipment and transport vehicles is foreseen under the project. The most recent version of the Bank’s Standard Bidding Documents (SBD) for Goods shall be used for all International Competitive Biddings (ICBs) and a shopping procedure for goods estimated to cost up to the equivalent of US$100,000. Training and workshops related to capacity building shall be procured as non-consulting services. 20. Selection of Consultants. The consultant services under the project would include inter alia capacity building for the participating district heating utilities, technical assistance to government, implementation support consultancy to support the PMU and the utilities in the implementation and supervision of the project, annual financial audits of the project accounts and other consultancy envisaged under Component 3. 21. Short lists of consultants for services estimated to cost less than the equivalent of US$200,000 per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 22. Procurement Plan and Method and Review Thresholds. The PMU has developed a Procurement Plan for the first 18 months of the project that also provides a basis for the procurement methods and thresholds. This plan has been agreed between the PMU and the Bank and will be published on the Bank’s external website after loan negotiations. The Procurement Plan would be updated at least annually or as required to reflect actual project implementation needs. The agreed procurement packages and their schedules are given in table A3-2. The three packages to be tendered first (on June 2014) are in Cherven town, Kholopenichi settlement and Cherikov town. 46 Table A3-2 Procurement Plan Contract Package Review Method Procurement Expected Method Expected Contract Contract Description Type Bid/Proposal Completion Opening Date Date Berioza Town, Brest Oblast (reconstruction of heat supply networks; September, 1. supply and installation of biomass boilers and equipment, supply and S&I ICB Prior May, 2014 2016 installation of gas fired peak boilers) Baranovichi Town, Brest Oblast (reconstruction of heat supply networks; October, 2. supply and installation of biomass boilers and equipment, supply and S&I ICB Prior June, 2014 2016 installation of gas fired peak boilers) Ivanovo Town, Brest Oblast (reconstruction of heat supply networks; October, 3. supply and installation of biomass boilers and equipment, supply and S&I ICB Prior July, 2014 2016 installation of gas fired peak boilers) Volkovysk Town, Grodno Oblast (reconstruction of heat supply networks; November, 4. supply and installation of biomass boilers and equipment, supply and S&I ICB Prior August, 2014 2016 installation of gas fired peak boilers) 47 Contract Package Review Method Procurement Expected Method Expected Contract Contract Description Type Bid/Proposal Completion Opening Date Date Ziabrovka Settlement, Gomel Oblast (reconstruction of heat supply September, December, 5. networks; supply and installation of biomass boilers and equipment, S&I ICB Post 2014 2016 supply and installation of gas fired peak boilers) Zarechie Settlement, Gomel Oblast (reconstruction of heat supply 6. networks; supply and installation of biomass boilers and equipment, S&I ICB Post October, 2014 January, 2017 supply and installation of gas fired peak boilers) Cherven Town, Minsk Oblast (reconstruction of heat supply networks; November, February, 7. supply and installation of biomass boilers and equipment, supply and S&I ICB Prior 2014 2017 installation of gas fired peak boilers) Starye Dorogi, Minsk Oblast (reconstruction of heat supply networks; December, 8. supply and installation of biomass boilers and equipment, supply and S&I ICB Prior March, 2017 2014 installation of gas fired peak boilers) 48 Contract Package Review Method Procurement Expected Method Expected Contract Contract Description Type Bid/Proposal Completion Opening Date Date Kholopenichi Settlement, Minsk Oblast (reconstruction of heat supply 9. networks; supply and installation of biomass boilers and equipment, S&I ICB Post January, 2015 April, 2017 supply and installation of gas fired peak boilers) Kalinkovichi Town, Gomel Oblast (reconstruction of heat supply 10. networks; supply and installation of biomass boilers and equipment, S&I ICB Prior February, 2015 May, 2017 supply and installation of gas fired peak boilers) Kadino Seiilement, Mogilev Oblast (reconstruction of heat supply June 11. networks; supply and installation of biomass boilers and equipment, S&I ICB Post March, 2015 , 2017 supply and installation of gas fired peak boilers) Veremeiki Village, Mogilev Oblast (reconstruction of heat supply 12. networks; supply and installation of biomass boilers and equipment, S&I ICB Post April, 2015 July, 2017 supply and installation of gas fired peak boilers) Cherikov Town, Mogilev Oblast (reconstruction of heat supply networks; 13. supply and installation of biomass boilers and equipment, supply and S&I ICB Post May, 2015 August, 2017 installation of gas fired peak boilers) 49 Contract Package Review Method Procurement Expected Method Expected Contract Contract Description Type Bid/Proposal Completion Opening Date Date Component 3 Consulting services for design and supervision over energy efficiency December 1. QCBS Prior May 2014 measures 2018 2. Financial Audit 2014-2015 CQS Post November 2015 June 2016 Financial Audit 2016 Consultin CQS Post November 2016 June 2017 g Services Financial Audit 2017 CQS Post November 2017 June 2018 Financial Audit 2018 CQS Post November 2018 June 2019 Technical Assistance IC (several NA NA NA 50 Contract Package Review Method Procurement Expected Method Expected Contract Contract Description Type Bid/Proposal Completion Opening Date Date contracts) November Social Monitoring CQS Post February 16 2018 51 23. The Bank will review the procurement arrangements as performed by the PMU— including contract packaging, applicable procedures, methods, and the scheduling of procurement processes—for conformity with the Bank’s Procurement and Consultant Guidelines, the proposed implementation program, and the disbursement schedule. The Bank’s prior review thresholds are provided in the agreed procurement plan. The procurements not receiving prior review by the Bank would be subject, on a random basis, to the Bank’s ex post review in accordance with the procedures set forth in appendix 1 of the Procurement and Consultant Guidelines. One in 10 contracts under the project would receive ex post review. The ex post review of procurement documents would normally be undertaken during the Bank’s implementation support missions or as the Bank may request for any contract at any time. Procurement Capacity and Risk Assessment 24. Procurement activities would be carried out by the PMU. The PMU will be responsible for daily project implementation, management and monitoring. The PMU currently has seven procurement staff who have sufficient knowledge of and experience with Bank procurement, including large-value Design, Supply, and Installation–type contracts. The Procurement Specialists attended several procurement training events (the latest one in June 2013 in Turin, Italy). Since the project would be implemented in 13 district heating systems (towns) in Brest, Gomel, Grodno, Minsk, and Mogilev oblasts, the PMU would also ensure smooth coordination with the local governments and their districts, including site owners. The PMU would be in charge of the entire procurement process, including planning, preparation of bidding documents, evaluation of bids, award of contracts, and contract management. The districts would perform a site supervision function with the support of the PMU in each oblast. The districts and the PMU may also rely on external consultancy support to support the PMU and the utilities in the implementation and supervision of the respective contracts. A Procurement Capacity and Risk Assessment of the PMU undertaken in September 2013 concluded that the PMU has adequate and practical knowledge of Bank procedures. The PMU has successfully implemented three Bank-financed projects, including two that are ongoing. The PMU has skilled managerial, procurement, and technical staff to manage the proposed project. 25. The key issues and risks relating to procurement for the implementation of the project have been identified. They include (i) risk of inadequate and low competition for contracts; (ii) unfamiliarity with the Bank’s new guidelines and new Standard Bidding Documents; (iii) unfamiliarity of some districts with the contract provisions in the Bank’s Standard Bidding Documents and with contract management; and (iv) potential risk of delays in the implementation of large-value contracts due to their complexity. 26. To mitigate the procurement-related risks identified, several measures were agreed between the Bank and the PMU during project preparation (table A3-3). 52 Table A3-3 Measures to Mitigate Procurement-Related Risks Responsible Mitigation measure party Deadline 1 Organize a procurement training for the staff Bank Negotiations involved in project procurement activities in the Bank’s new guidelines and new Standard Bidding Documents 2 Prepare a detailed procurement plan for the first 18 PMU Appraisal months of the implementation of the project 3 Organize a business outreach for potential bidders PMU Negotiations or consultants before launching the first bidding procedures 4 Start preparation of the bidding documents for the PMU Negotiations first year of project implementation well in advance to facilitate the initiation of the procurement procedures as soon as the project becomes effective 5 PMU will hire consultants to support the districts PMU Recurrent on specialized subjects 5 The Bank's procurement specialist will work Bank Recurrent closely with PMU and will organize procurement refresher training events to project staff whenever required during project implementation Environmental and Social (Including Safeguards) 27. Any potential adverse environmental impacts are not expected to be significant and could be effectively prevented or minimized through appropriate preventive actions or mitigation measures. These measures are identified in the Environmental Management Plan, a draft of which has been prepared, disclosed, and consulted on by the client. A designated environmental safeguards specialist at the PMU would monitor the environmental performance of project implementation. 28. The client has developed the abbreviated Resettlement Action Plan (RAP) for the project in Kalinkovichi that requires land acquisition, which has been disclosed in the country in the local language (Russian) and in the World Bank’s Infoshop. The utility will ensure that all the measures set out in the abbreviated RAP are implemented prior to start of project works in Kalinkovichi. The PMU would be in regular contact with participating utilities in the course of the project’s implementation and would monitor the situation with land acquisition.. The World Bank Task Team will monitor the implementation of the RAP as part of its regular supervision missions. 53 Monitoring and Evaluation 29. The monitoring and evaluation of outcomes and results during implementation would follow standard Bank practices. Project monitoring and evaluation would involve the following: (a) Project results indicators as specified in annex 1. (b) Quarterly progress reports on project implementation. (c) A midterm review of implementation progress. 30. Project results indicators would be collected semiannually by the PMU from participating utilities. The PMU would be responsible for the overall monitoring and evaluation of implementation results and for the preparation of semiannual and midterm review progress reports. The review of implementation progress would be based on the intermediate results indicators. As the project advances, monitoring would focus on the PDO-level results indicators. 31. The Bank implementation support team would monitor implementation progress and evaluate outcomes quarterly and annually, using information from reports prepared by the PMU. Discussions during supervision related to institutional capacity building, financial viability, along with technical reviews, and site visits would provide additional support for the project monitoring. 32. For subprojects, pre-project energy consumption and projected energy and emissions savings will be estimated on the basis of technical feasibility reports prepared by the PMU and participating utilities; post-project energy savings would be calculated on the basis of actual performance, assessed by comparing baseline and metered energy consumption. These data would be aggregated and reported in the IBRD progress reports. Since investments would precede the energy savings and corresponding reductions in emissions, project indicators include a time lag between them. Differences between estimated and actual savings would be documented to allow the clients to improve their technical analyses in subsequent projects. 54 Annex 4: Operational Risk Assessment Framework Belarus: Biomass District Heating Project (P146194) Stage: Appraisal . Project Stakeholder Risks Stakeholder Risk Rating Moderate Risk Description: Risk Management: Risk of public resistance to planned tariff reform, Ongoing engagement with civil society organizations and stakeholder roundtables on including from households and civil society organizations. key policy issues would collectively help build public awareness of and consensus on the importance of tariff adjustments and the benefits of energy efficiency and biomass investments under the project. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both CONTINUO US Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Moderate Risk Description: Risk Management: Although the Project Management Unit (PMU) has strong Technical assistance through the project and up-front training on Bank rules, guidance procurement, financial management, and contract and safeguards policies would help mitigate this risk. In addition, the PMU and the Bank management capacity and is familiar with the Bank’s supervision team would work closely with the participating utilities and provide timely policies and procedures, many of the participating utilities training (including on monitoring and evaluation of project outcomes) and lack prior experience with Bank projects and are implementation support during project implementation. unfamiliar with established Bank procedures, such as those related land acquisition and involuntary During the first two years of project implementation, the Bank team would concentrate resettlement. They may also have technical capacity on supporting the PMU through the procurement process for the works and the 55 constraints (such as in timely decision making) that could supervision of contracts. A Bank procurement and safeguards specialist would be affect project implementation. available to provide support and timely inputs. Starting from the third year of project implementation, the team would concentrate mostly on monitoring the progress and quality of works and financial management. Project site visits would be scheduled twice a year under normal circumstances. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both CONTINUO US Governance Rating Moderate Risk Description: Risk Management: Risks of poor performance due to delays in major Technical assistance through the project and up-front training on Bank rules and decisions, staffing, and the legislative process; and risks of guidance would help mitigate these risks. In addition, the PMU and the Bank problems in project implementation resulting from lack of supervision team would work closely with the participating utilities and provide timely coordination between the PMU and the multiple training and implementation support during project implementation. participating utilities. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both CONTINUO US Risk Management: This risk would be mitigated through close monitoring of the PMU, which has well- trained procurement staff, and through the use of existing systems of checks and balances, project and company audits, and close implementation support by the Bank. The project would be implemented in accordance with the Bank’s Anti-Corruption Guidelines dated October 15, 2006. The PMU and the Bank would pay particular attention to the composition of the evaluation committees, ensuring that they include highly qualified technical experts and that members have no conflicts of interest. Procurement training for potential members of evaluation committees would be organized in connection with the project launch workshop. In addition, the PMU would ensure that the loan proceeds are used economically and for the purpose intended by publishing procurement notices and contract award information in the national 56 newspaper and on the project website, requiring that PMU staff provide written confirmation that they have followed the applicable ethical standards and code of conduct, providing to the Bank every complaint received from any supplier or consultant relating to the procurement process, and maintaining up-to-date procurement records that are made available to Bank staff, auditors, and the like. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Implementation 31-Dec-2019 Project Risks Design Rating Low Risk Description: Risk Management: The project design is straightforward and includes no Design by technically qualified staff of the participating utilities, use of proven complicating elements. The PMU has procured biomass technology, and implementation support by experienced technical experts as part of the boilers under the Post-Chernobyl Recovery Project and is Bank team. familiar with the key technical issues and with the Bank’s Resp: Status: Stage: Recurrent: Due Date: Frequency: Design, Supply, and Installation–type contracts. Both In Progress Both 30-Sep-2016 Social and Environmental Rating Low Risk Description: Risk Management: Sustainable forest management may not be guaranteed if A key criterion for site selection is a well-developed biomass supply chain, with a noncertified entities are involved in forest harvesting. certain percentage of the feedstock under long-term contract before construction activities begin. In addition, all participating utilities would be required to submit detailed information on their biomass supply chain to ensure that wood products are supplied by certified forestry enterprises from sustainably managed forests. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both 30-Sep-2019 Program and Donor Rating Moderate Risk Description: Risk Management: The removal of subsidies is a politically difficult action, Continued dialogue with the government and technical assistance—including on the and tariffs that are below cost-recovery levels would social protection mechanisms and communication strategy developed under the ongoing 57 create a risk of lack of sufficient funding to support ESMAP-financed economic and sector work “Belarus Heat Tariff Reform and Social project operation and maintenance. There are not many of Impact Mitigation”—would help mitigate this risk. donors involved in Belarus and in the district heating Resp: Status: Stage: Recurrent: Due Date: Frequency: sector. The risk of lack of donor coordination is low while the project could well serve leveraging some dialogue and Both In Progress Both CONTINUO impact. US Delivery Monitoring and Sustainability Rating Moderate Risk Description: Risk Management: Risks of inadequate monitoring and reporting because The monitoring and evaluation of outcomes and results during implementation would many of the participating utilities would have to go follow standard Bank practice. The PMU would be responsible for the overall through a learning curve to handle project-related monitoring and evaluation of implementation results and for the preparation of activities expeditiously and effectively. Long-term semiannual and midterm review progress reports. The Bank implementation support sustainability would also hinge on achieving cost-recovery team would monitor implementation progress and evaluate the outcomes quarterly and tariffs, which is a politically difficult action. annually, using information from reports prepared by the PMU. Discussions during supervision related to institutional capacity building and financial viability, along with technical reviews and site visits, would provide additional support for the project monitoring. The Bank would provide technical assistance to support the government in formulating heat tariff reform strategies. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Not Yet Due Implementation 30-Sep-2019 Other (Optional) Rating Risk Description: Risk Management: Resp: Status: Stage: Recurrent: Due Date: Frequency: Other (Optional) Rating Risk Description: Risk Management: 58 Resp: Status: Stage: Recurrent: Due Date: Frequency: Overall Risk Overall Implementation Risk: Rating Moderate Risk Description: The overall implementation risk is proposed to be moderate on the basis of following main considerations. First, although the current collection rate in Belarus is high, an increase in tariffs could lead to an increase in arrears and nonpayment. Ongoing engagement with civil society organizations and stakeholder roundtables on key policy issues would collectively help build awareness of and consensus on the importance of tariff adjustments and the benefits of energy efficiency and biomass investments. Second, some of the participating utilities lack prior experience with World Bank projects and are unfamiliar with established Bank procedures. Their capacity constraints could affect project implementation. Technical assistance through the project and up-front training on Bank rules and guidance would help mitigate this risk. In addition, the PMU and the Bank supervision team would work closely with the participating utilities and provide timely training (including on monitoring and evaluation of project outcomes) and implementation support during project implementation. Third, part of the success of the project relies on counterpart financing. Given the current below cost-recovery tariffs, government resource allocation is important in ensuring project delivery in the event of project cost overrun and in ensuring the operation and maintenance of project- financed infrastructure. Without timely budget allocation, there is a direct threat to the project implementation and supervision. In the past, the government has given resource allocation priority to Bank supported projects, such as the Energy Efficiency Project. This risk can be mitigated through continued dialogue with the government on the importance of energy efficiency and renewable energy development and on tariff reforms. Fourth, given Belarus’s highly centralized decision making and state-dominated economic growth model, there is a risk of poor performance due to delays in major decisions and in the staffing process. The Bank team would work closely with the PMU and the participating utilities to provide timely implementation support. Fifth, the long-term sustainability of the project would hinge on cost-recovery tariffs to ensure proper operation and maintenance of project-financed infrastructure. However, the removal of subsidies is a politically difficult action. Continued dialogue with the government and technical assistance— including on the social protection mechanisms and communication strategy developed under the ongoing ESMAP-financed economic and sector work, “Belarus Heat Tariff Reform and Social Impact Mitigation”—would help mitigate the risk. 59 Annex 5: Implementation Support Plan Strategy and Approach for Implementation Support 1. The implementation support strategy developed for the proposed project takes into account the risks and mitigation measures identified in the Operational Risk Assessment Framework and the objective of providing flexible and efficient implementation support to the clients. (a) Technical Support. World Bank implementation support missions would include a district heating technical specialist throughout project implementation to help guide the design of the subprojects, subproject commissioning, and policy dialogue. (b) Procurement. A procurement specialist would carry out ongoing supervision under the loan. The specialist would also participate in project implementation support missions and site visits, respond to just-in-time requests, and provide ongoing guidance to the Project Management Unit (PMU) and participating district heating utilities for their procurement activities. (c) Financial Management. The project standard full-scope financial management monitoring visits would be carried out on the basis of the risk profile of the project, normally once a year. Monitoring visits may be made more frequently if this is determined to be necessary or if changes occur in the financial management and disbursement arrangements and assessed risk. (d) Safeguards. The Bank environmental specialist based in the region would be a member of the project team throughout the project cycle. Besides supervising compliance with environmental safeguards, the specialist would provide assistance and support in the first years of the project in the delivery of the IPM program and in the habitat and biodiversity elements of the Environmental Management Plan. The social safeguards specialist would train the PMU in the Bank’s social safeguards policies to ensure full understanding of the policies. The social development specialist would join the supervision missions and visit the project sites to provide the PMU with any additional support needed and would assist in preparing the Resettlement Action Plan. Implementation Support Plan 2. Implementation support for the proposed project is summarized in table A5-1. 60 Table A5-1 Implementation Support Needs and Resources Time Focus Skills needed Resource estimate Year 1 Task management Project management 8 staff weeks (SWs) (HQ based) Energy specialist, technical reviews Energy specialist (HQ 6 SWs based) Review of bidding documents and Procurement specialist 4 SWs contracts, procurement support (Warsaw based) Financial management supervision Financial management 2 SWs specialist (Kiev based) Project supervision coordination Operations specialist 6 SWs (Minsk based) Safeguards Environmental specialist 2s (Kiev based) Safeguards Social development 1 SW specialist (Kiev based) Social accountability Social development 1 SW specialist (Kiev based) Communication Communication 1 SW specialist (Minsk based) Years 2–5 Task management Project management 6 SWs per year (HQ based) Energy specialist, technical reviews Energy specialist (HQ 6 SWs per year based) Review of bidding documents and Procurement specialist 4 SWs contracts, procurement support (Warsaw based) Financial management supervision Financial management 1.5 SWs specialist (Kiev based) Project supervision coordination Operations specialist 4 SWs per year (Minsk based) Safeguards Environmental specialist 1 SW per year (Kiev based) Safeguards Social development 1 SW per year specialist (Kiev based) Social accountability Social development 1 SW per year specialist (Kiev based) Communication Communication 1 SW per year specialist (Minsk based) 61 Annex 6: Economic and Financial Analysis 1. The proposed project includes subprojects in 13 towns and settlements in five oblasts of Belarus (Grodno, Brest, Gomel, Minsk, and Mogilev). The economic analysis of the project takes into account the circumstances of each town and is used to determine whether the subprojects selected would yield acceptable levels of net benefits as measured by the net present value (NPV) and economic internal rate of return (ERR). The results for the subprojects are aggregated to estimate the overall costs and benefits and net economic benefit (NPV and ERR) for the project as a whole. Relevance of Project Investments to the Project Development Objectives 2. The proposed investments under the project are of high relevance for meeting the Project Development Objective of scaling up the efficient use of biomass in heat and electricity generation in selected towns in Belarus. Typical investments under the project would fall into the following two categories: (a) Energy efficiency improvements in district heating: (i) Introduction of individual building-level heat substations. (ii) Rehabilitation and reconstruction of district heating networks. (b) Investments in biomass boilers or small combined heat and power (CHP) plants using biomass as the main fuel. 3. The proposed investment programs vary in composition across the towns and would be tailored to their circumstances. Rationale for Public Sector Investment 4. In Belarus, district heating services have traditionally been supplied by public sector companies under municipal ownership. Given the basic essential services nature of the activities, the municipal governments have been closely involved in approving key aspects of the operations. The municipal district heating companies are expected to remain the principal suppliers of these essential services whose efficiency needs to be improved. The local and global benefits associated with the use of renewable energy also justify public sector support. Rationale for Bank Involvement 5. The Bank has in the past assisted the government of Belarus in increasing the use of indigenous renewable energy and improving energy efficiency in the district heating sector, both through investment financing and through policy advisory support and technical assistance. The proposed project is consistent with the government’s priorities and is part of the Bank’s efforts to scale up its activities to address energy security and climate change challenges. It is also expected that the project would demonstrate the viability of the proposed energy efficiency and renewable energy investment and provide best practice examples in Belarus. 62 Economic Analysis 6. An economic analysis is conducted for each subproject to calculate its ERR and NPV. The following sections summarize the methodology, assumptions, and results of the cost-benefit analysis. Economic Costs and Benefits 7. The economic costs of each subproject would include (i) the total investment costs of the energy generating equipment, pipelines, individual substations, and wood fuel preparation equipment, including design and construction costs; and (ii) operating costs, including fuel costs, electricity consumption for auxiliaries, and operation, repair, and maintenance costs. The analysis excludes taxes, including import duties (if any) and value added tax. 8. The principal quantifiable economic benefits under the selected investments would come from (i) savings in operating costs through improvements in the operating efficiency of the facilities, (ii) a reduction in natural gas consumption through the replacement of natural gas with biomass and the increased efficiency of new gas-fired peak-load heat boilers, (iii) a reduction in heat consumption (and thus in gas used in heat production) through the installation of individual building-level heat substations, and (iv) reductions in CO2 emissions. In some cases, there may be additional revenues due to increases in heat supply, but these would be less significant. The main economic benefit would be an increase in energy efficiency, which would result in fuel savings (reduction in natural gas usage in 12 subprojects and heavy fuel oil saving in one sub- project) during energy production. The total annual reduction in fuel use from the 13 subprojects is estimated at 55.5 million cubic meters of natural gas and 1.6 thousand tons of heavy fuel oil. The economic benefits would also include increased reliability of supply and other improvements in the quality of service, which are more difficult to quantify. Methodology 9. The net economic benefits of the project are estimated on an incremental basis, that is, as the difference between costs and benefits under the “with project” and “without project” scenarios. 10. Without project implementation, heat would be provided by existing low-efficiency boilers running predominantly on natural gas. The fuel consumption of existing boiler houses is calculated on the basis of actual fuel consumption and the amount of heat generated per year. 11. With project implementation, heat would be generated by biomass boilers or small CHP plants (or both), which would replace the existing low-efficiency boilers. At a few project sites, existing low-efficiency peak-load gas boilers would be replaced by higher-efficiency gas boilers. It is assumed that the electricity produced by the small CHP plants would be used for own- consumption in heat generation, thus reducing operating costs, and in some cases to replace the electricity generation in condensing power plants in Belarus. The difference in fuel consumption between the “without project” and “with project” scenarios represents fuel savings. 63 12. The average emission factor of CO2 from heat and electricity generation in Belarus is 302 gCO2/ per kWh in 2010. 7 This number is used to calculate avoided carbon emissions due to energy savings and replacing natural gas with renewable biomass. The estimated monetary benefits from reduced CO2 emissions range widely, reflecting differences in estimation methodologies and uncertainties related to the impact of climate change. The mean value of the estimated social cost of one ton of CO2 emissions identified by the review of Intergovernmental Panel of Climate Change (IPCC) is $12 per ton of CO2 in 2005 prices 8. Applying an annual growth rate of 2.4 percent to the social cost of carbon 9 and 10 percent discount rate, the potential benefits from reduced CO2 emissions is $22 per ton of CO2 which is used in this analysis. Assumptions 13. The analysis includes the following assumptions: (a) An economic price for natural gas of US$300 per thousand cubic meters is used in the economic analysis for all subprojects. This gas price is higher than the current price in Belarus but lower than that in Central Europe, and is in line with the International Energy Agency’s long-term projection for the gas price in that region. (b) An economic price for wood chips of US$20 per cubic meter is used for all subprojects. (c) A change from centralized heat substations to individual building-level heat substations is expected to lead to energy savings of 15–20 percent at the building level. (d) The efficiency of the gas-fired boilers currently used at the project sites is 75–85 percent; the efficiency of new gas boilers is 92–93 percent. (e) The efficiency of new biomass boilers is 84 percent. (f) The fuel consumption of condensing power plants is estimated on the basis of the actual fuel consumption of the Lukoml gas-fired condensing power plant (Belarus), and it is assumed that the same amount of electricity would be generated there rather than by the small CHP plants under the project. Transmission losses of 2 percent are also taken into account, since these occur in the transmission of electricity from the condensing power plants; these losses could be avoided in the case of CHP plants located near consumers. (g) A discount rate of 10 percent is used to calculate the net present value. Summary of Economic Costs and Benefits 14. Detailed analysis of the economic costs and benefits for each subproject and for the project as a whole will be available in the project files. Table A6-2 shows estimates of the ERR and NPV (at a discount rate of 10 percent and assuming 20 years of operation) of the investment program in each town and for the overall project. 7 International Energy Agency, CO2 emissions from Fuel Combustion: Highlights. (Paris, 2012) 8 IPCC Fourth Assessment Report Working Group II Report, Impacts, Adaptation and Vulnerability, 2007. 9 This growth rate is suggested by the IPCC Fourth Assessment Report Working Group II Report Impacts, Adaptation and Vulnerability (2007, p.822). 64 15. For the project as a whole, the estimated ERR is 18.9 percent and the NPV is US$42.4 million, confirming the project’s economic viability. The ERRs of the subprojects range from 12.4 percent to 24.5 percent. 16. Table A6-2 also shows the results of a sensitivity analysis conducted using the following variables: (i) a natural gas price increase of 20 percent to US$360 per thousand cubic meters, (ii) a wood chip price increase of 20 percent, (iii) a capital cost overrun of 20 percent, and (iv) a wood chip price increase of 20 percent combined with a capital cost overrun of 20 percent. Table A6-2 Estimated Economic Rate of Return and Net Present Value of the Project Base Case Sensitivity Analysis Subproject/ Economic Net present Natural Wood- Capital Wood-chip town Rate of Value Gas Price chip Cost Price Return % US$ million +20% Price +20%% +20% & Capital +20% Cost +20% Volkovysk 13.7 2.95 18.4 11.1 8.5 5.4 Ivanovo 19.8 3.42 24.9 18.2 16.2 14.8 Baranovichi 12.4 1.45 14.7 11.9 9.7 9.2 Bereza 18.0 1.59 23.4 15.8 14.6 12.7 Zarechie 20.3 2.04 25.0 19.5 15.9 15.0 Kalinkovichi 24.5 15.50 31.1 21.6 17.8 14.6 Zyabrovka 14.1 0.55 17.9 12.4 9.7 7.9 Starye Dorogi 15.3 3.18 19.1 14.3 11.5 10.3 Kholopenichi 14.1 0.53 17.3 13.3 10.4 9.6 Cherven 20.4 5.03 25.3 19.2 15.7 14.5 Kadino 23.6 3.77 29.6 22.1 18.2 16.7 Cherikov 22.4 1.88 29.0 19.8 18.4 16.1 Veremeiki 14.1 0.51 17.2 13.4 11.2 10.5 Overall Project 18.3 42.40 23.0 16.5 13.6 11.8 65 Financial Analysis 17. No financial analysis is being conducted for the subprojects because the participating district heating utilities do not operate on a commercial basis and depend on oblast budget allocations for routine operation. The investments would be financed by central and oblast governments, and the loan amount would not appear on the balance sheets of the district heating utilities. Nonetheless, analysis has been conducted to estimate how project implementation would affect the cost of supply of the residential heating sector in each participating town. 18. For this analysis, the current cost of heat supply is obtained from the official Project Business Plan developed by the Energy Efficiency Department. In projecting the cost of heat supply after project implementation, the analysis takes into account the following cost components: (1) fuel costs obtained from the official Project Business Plan; (2) asset depreciation, assuming 20 years of operational lifetime for all assets; and (3) other material costs obtained from the official Project Business Plan. 19. Table A6-3 describes the details of the project cost component, heat load, the estimated current cost of heat supply and the estimated cost of heat supply in each project town. The average unit cost would decrease by 37 percent, from 79 USD per Gcal (before the project) to 58 USD per Gcal (after the project). 66 Table A6-3 Estimated Cost of Heat Supply before and after Project Implementation 67 68 24°E 26°E 28°E 30°E 32°E B ELAR U S SELECTED CITIES AND TOWNS L AT V I A To Rezekne VOBLAST' CAPITALS To To Daugavpils Nevel NATIONAL CAPITAL BELARUS RIVERS MAIN ROADS Braslau RAILROADS LITHUANIA Navapolack Poloysk vin a a Dz ya v VOBLAST' BOUNDARIES odo V itebsk Vitebsk To Utena VITEBSK Za kh INTERNATIONAL BOUNDARIES To Postavy Hlybokae Vilnius Lepel To Casniki Smolensk To a RUSSIAN FED. Vilnius V ili y V Vilejka ilejka Orsha RUSSIAN Dzyarzhynskaya Molodechno Talacyn Talacyn 54°N To Hara (346 m) Borisov Gorky F E D E R AT I O N Alytus B 54°N er ez To ina Mogilev Roslavl Lida Ne MINSK Berazino Grodno m Krichev MINSK MOGILEV an zh Slavharad So Kascjukovicy To Bialystok GRODNO Osipovichi Volkovysk Volkovysk Slonim Bobruysk Baranovichi Dovsk Slutsk To Klintsy To Zlobin Zabalocce Bialystok Ivattsevichi Soligorsk Dn ep r Bjaroza Svetlahorsk Gomel' To Klintsy BREST GOMEL Rechitsa POLAND Kobrin Luninets Micasevicy Dobrus 52°N Kalinkavicy 52°N Brest To Biala Dneprovsko- Pinsk yat Mozyr Podlaska Bugskiy Canal Turov Turov Prip To Chernigov Hojniki Stolin To To Sarny Kovel' To To Chelm Sarny To Chernihiv To Ovruch To Chernobyl 0 25 50 75 100 Kilometers This map was produced by the Map Design Unit of The World Bank. UKRAINE JANUARY 2005 IBRD 33370 0 25 50 75 Miles The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 22°E 24°E 26°E 28°E 30°E 32°E 34°E