MANAGEMENT RESPONSE TO REQUEST FOR INSPECTION PANEL REVIEW OF THE KOSOVO POWER PROJECT (PROPOSED) Management has reviewed the Request for Inspection of the Kosovo Power Project (pro- posed), received by the Inspection Panel on March 29, 2012 and registered on April 12, 2012 (RQ12/01). Management has prepared the following response. May 21, 2012 CONTENTS Abbreviations and Acronyms ......................................................................................... iv Executive Summary .......................................................................................................... v I. Introduction .............................................................................................................. 1 II. The Request .............................................................................................................. 1 III. Project Background ................................................................................................. 2 IV. Management’s Response ......................................................................................... 5 Map Map 1. IBRD No. 39302 Boxes Box 1. Emergency Evacuation of an At-Risk Part of Hade Village in 2004/05 Annexes Annex 1. Claims and Responses Annex 2. Selected List of Meetings with Civil Society Organizations Regarding Ko- sovo’s Energy Sector Annex 3 List of Publicly Available Documents Regarding the Proposed Kosovo Power Project Annex 4. Country Partnership Strategy for the Republic of Kosovo FY12-15 Annex 5. Comprehensive Water Sector Assessment Annex 6. Comparative Evaluation of the Bank’s Option Study with Sierra Club Re- port Annex 7. Comparative Evaluation of the Bank's Option Study with RAEL Report Annex 8. Chronology of the Bank’s Engagement in the Energy sector in Kosovo Annex 9. “Kosova e Re” Power Project Timeline Annex 10. Responses to Technical Annex iii ABBREVIATIONS AND ACRONYMS BEEPS Business Environment and Enterprise Survey BP Bank Procedure CEA Country Environmental Analysis CPS Country Partnership Strategy EAR European Agency for Reconstruction EC European Commission ECA Europe and Central Asia Region ESIA Environmental and Social Impact Assessment EU European Union FY Fiscal Year IDA International Development Association IFC International Finance Corporation IPN Inspection Panel KEK Kosovo Energy Corporation KfW Kreditanstalt fur Wiederaufbau KPP Kosovo Power Project (proposed) KRPP Kosova e Re Power Plant MW Megawatt NMF New Mining Field OMS Operational Manual Statement OP Operational Policy PISG Provincial Institutions of Self Governance PM Particulate matter PRG Partial Risk Guarantee RAP Resettlement Action Plan RFP Request for Proposals RPF Resettlement Policy Framework SESA Strategic Environmental and Social Assessment SFDCC Strategic Framework for Development and Climate Change TOR Terms of Reference UNMIK United Nations Interim Administration Mission in Kosovo USAID United States Agency for International Development WBIF Western Balkans Investment Framework iv EXECUTIVE SUMMARY i. On April 12, 2012, the Inspection Panel registered a Request for Inspection (he- reafter referred to as “the Request”) concerning the proposed Kosovo Power Project (KPP), for which the Government of Kosovo has requested financing from the Interna- tional Development Association (IDA). The Project ii. The proposed Project is currently at the concept stage and major components of project assessment are yet to be completed. Management would therefore not be in a po- sition to decide to propose this project for Board consideration for at least another year. iii. The proposed KPP would aim to help Kosovo secure a reliable supply of energy for the country’s economy and significantly reduce the severe environmental and social impacts of an outdated electricity generation system that relies on the 1960s era “Kosovo A” power plant and the 1970s era “Kosovo B” power plant. To comply with its obliga- tions under the Energy Community Treaty, the Government of Kosovo intends to de- commission Kosovo A, which is one of the largest point sources of pollution in Europe, and bring Kosovo B into compliance with EU standards by improving its operations and environmental performance. iv. The proposed Project would comprise three components: (i) rehabilitation of the existing Kosovo B plant; (ii) construction of a new 600 MW power generation plant (“Kosova e Re Power Project” or “KRPP”) using modern technology that is compliant with the European Union Industrial Emissions Directive;1 and (iii) development of the lignite mine, Sibovc South, that will supply fuel to the new KRPP, as well as to Kosovo A and Kosovo B for their remaining operational lifetimes. Kovovo’s Energy Predicament v. Kosovo’s energy crisis is slowing the country’s economic development. Kosovo is one of Europe’s poorest countries and more than a third of its citizens live below the poverty line. Almost half of its population is unemployed (three out of four people under the age of 25 are unemployed). vi. A major obstacle to Kosovo’s economic growth and development is inadequate and unreliable electricity, with frequent power outages disrupting manufacturing, educa- tion, and health services. Without reliable, affordable electricity, Kosovo’s businesses cannot invest, operate or create jobs. vii. A number of independent and World Bank-financed analyses have shown that Kosovo’s electricity supply options are constrained by: limited availability of renewable 1 The proposed KRPP would be required to be built as a carbon-capture and sequestration-ready facility to comply with another relevant EU Directive. v Republic of Kosovo resources, ageing and unreliable power generation plants, supply shortages in the Balkans that limit Kosovo’s ability to import electricity, and an absence of any natural gas re- sources, or pipeline to import gas. viii. The World Bank has examined carefully Kosovo’s energy options and the eco- nomics of each. There is considerable potential for energy efficiency and limited poten- tial for renewable energy and these should be developed in addition to providing the firm baseload capacity Kosovo needs. The analysis finds that the lowest-cost reliable energy supply that would meet Kosovo’s baseload and peak demand is a mix of thermal and re- newable energy sources (750 MW of renewable energy, replacement of Kosovo A with 600 MW of new power generation, and the rehabilitation of Kosovo B). ix. An External Expert Panel reviewed the proposed KPP and found it to be consis- tent with the Bank’s Strategic Framework for Development and Climate Change (SFDCC). The External Expert Panel suggested some improvements which are being in- corporated in the project design. Request for Inspection x. Representatives of residents of several communities in the vicinity of the pro- posed Project, as well as several Kosovar civil society organizations (“the Requesters”) filed the Request for Inspection. xi. The Requesters believe that they would be adversely affected by the proposed Project through the anticipated negative impacts on their communities and the environ- ment. They specifically claim that the proposed Project would result in additional envi- ronmental pollution, water shortage, and adverse economic impacts from zoning, reset- tlement and privatization. Management’s Response xii. Management notes that much of the harm alleged by the Requesters is unlikely to arise from the proposed Project, but rather is a description of the adverse impacts that currently prevail on the ground. In Management’s view the claims of harm presented in the Request for Inspection either relate to: (i) existing and historical conditions on the ground (air, water and land pollution, economic impact from zoning, water usage); (ii) issues that are outside Bank policy and Panel mandate; or (iii) are based on the general assumption that the proposed Project would be carried out in noncompliance with Bank policy leading to direct and serious harm. xiii. In Management’s view, the proposed Project would address many of the adverse environmental and social impacts raised by the Requesters. Management agrees that many of the impacts raised in the Request are indeed severe and have persisted since Ko- sovo A and Kosovo B began operation. However, without the development of alternative power generation capacity that would enable the decommissioning of Kosovo A and re- habilitation of Kosovo B, Kosovo would remain dependent on the operation of these two power plants, which are responsible for the associated adverse impacts. vi Kosovo Power Project (proposed) xiv. Management disagrees that the harmful impacts cited in the Request will result from the proposed Project. The proposed Project is being prepared in line with Bank pol- icies and procedures to avoid and mitigate potential environmental and social adverse impacts. xv. A critical piece of due diligence that will be undertaken for the proposed Project is a comprehensive Environmental and Social Impact Assessment (ESIA), which will sa- tisfy all requirements of OP 4.01 – Environmental Assessment. Many of the Requesters’ allegations of harm arise from an assumption that a Strategic Environmental and Social Assessment (SESA) that was undertaken in 2008 is the sole document intended to satisfy the requirements of OP 4.01 with respect to environmental and social assessment of the proposed KPP. This is not correct. The 2008 SESA considered issues relating to the de- velopment of a 2000 MW power generation plant called “Kosovo C”. Following further consideration