Document of The World Bank

Public Disclosure Authorized FOR OFFICIAL USE ONLY

Report No: 2792 1-W Public Disclosure Authorized PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 14.1 MILLION (US$2 1 MILLION EQUIVALENT)

TO

SERBIA AND MONTENEGRO

FOR A Public Disclosure Authorized

SERBIA ENERGY EFFICIENCY PROJECT

FEBRUARY 18,2004

Infrastructure and Energy Department South East Europe Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their Public Disclosure Authorized official duties. Its contents may not otherwise be disclosed without World Bank authorization. 1 CURRENCY EQUIVALENTS (Exchange Rate Effective February 18, 2004)

Currency Unit = Dinar (YUD) YUD 1.00 = US$0.017 US$l.OO = YUD 57.60

FISCAL YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS CHP Combined Heat and Power ccs Clinical Center of Serbia EAR European Agency for Reconstruction EBRD European Bank for Reconstruction and Development EIB European Investment Bank GOS ICB Intemational Competitive Bidding IDA International Development Association KfW Kreditanstalt fur Wiederaufbau (Bank for Reconstruction) MOES Ministry ofEducation and Sports MOF Ministry of Finance MOH Ministry ofHealth MOME Ministry of Mining and Energy NCB National Competitive Bidding NGO Non Governmental Organization PIP Project Implementation Plan PMR Project Monitoring Report PSC Project Steering Committee QCBS Quality- and Cost-Based Selection RFP Request for Proposals S aM SEEA Serbian Energy Efficiency Agency SIDA Swedish Intemational Development Agency SOE Statement of Expenses TORS Terms of Reference USAID United States Agency for International Development

Vice President: Shigeo Katsu, ECAVP Acting Country ManagerDirector: Nancy Cooke, ECCU4 Sector ManagedDirector: Henk Busz, ECSIE Task Team Leader/Task Manager: Mohinder Gulati, ECSIE FOR OFFICIAL USE ONLY

SERBIA AND MONTENEGRO SERBIA ENERGY EFFICIENCY PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 2 2. Key performance indicators 3

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 7

C. Project Description Summary

1. Project components 10 2. Key policy and institutional reforms supported by the project 13 3. Benefits and target population 15 4. Institutional and implementation arrangements 16

D. Project Rationale

1. Project altematives considered and reasons for rejection 18 2. Major related projects financed by the Bank andor other development agencies 19 3. Lessons learned and reflected in the project design 19 4. Indications of borrower commitment and ownership 20 5. Value added of Bank support in this project 20

E. Summary Project Analysis

1. Economic 21 2. Financial 22 3. Technical 22 4. Institutional 22 5. Environmental 24 6. Social 25 7. Safeguard Policies 27

F. Sustainability and Risks

1, Sustainability 28

This document has a restricted distribution and may be used by the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. 2. Critical risks 28 3. Possible controversial aspects 29

G. Main Conditions

1. Effectiveness Condition 29 2. Other 30

H. Readiness for Implementation 30

I.Compliance with Bank Policies 31

Annexes

Annex 1: Project Design Summary 32 Annex 2: Detailed Project Description 36 Annex 3: Estimated Project Costs 39 Annex 4: Cost Benefit Analysis Summary 40 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 46 Annex 6: (A) Procurement Arrangements 41 (B) Financial Management and Disbursement Arrangements 54 Annex 7: Project Processing Schedule 58 Annex 8: Documents in the Project File 59 Annex 9: Statement of Loans and Credits 60 Annex 10: Country at a Glance 62 Annex 11: Terms of Reference of Design and Supervision Consultants for (A) CCS, (B) Public 64 Buildings, and (C) Communications, Monitoring, and Evaluation SERBIA AND MONTENEGRO Serbia Energy Efficiency Project Project Appraisal Document Europe and Central Asia Region ECSIE

Date: February 18,2004 Team Leader: Mohinder P. Gulati Sector ManagedDirector: Henk Busz Sector(s): District heating and energy efficiency services 4cting Country Director: Nancy Cooke (1 00%) Project ID: PO75343 Theme(s): Climate change (P), Pollution management and Lending Instrument: Specific Investment Loan (SIL) ~nv~~~nmentalhealth (P), Access to urban services for the

30RROWER 4.00 I 0.00 1 4.00 :DA 11.65 I 9.35 I 21.00

~ rota/: I 15.65 I 9.35 I 25.00 - P Borrower: SERBIA AND MONTENEGRO Responsible agency: GOVERNMENT OF SERBIA,SEEA,MOH,MOES Ministry of Mining and Energy Address: Nemanija 22-26, Tel: (381 11) 33-46-755 Fax: (381 11) 36-12-307 Email: Other Agency(ies): Serbian Energy Efficiency Agency Address: Koste Glavinica 2, Belgrade Contact Person: Nenad Pavlovic Tel: (381 11) 369-0987 Fax: Email: Estimated Disbursements ( Bank FYlUS$m):

Project implementation period: June 2004 - October 2009 Expected effectiveness date: 06/01/2004 Expected closing date: 04/30/2010 iPi13 rom Re" UI en ImO A. Project Development Objective

1. Project development objective: (see Annex 1) The development objective of the project is to improve energy efficiency in heating buildings in order to make heating more affordable as well as improve the functional and health environment of the users. An important associated objective is to reduce the local and global environmental impact of the use of dirty fuels for heating buildings in Serbia.

These objectives will be achieved by financing (a) the replacement of inefficient and heavy oil-fired boilers, now at the end of their economically useful life, with a gas-fired co-generation plant at the Clinical Center of Serbia (CCS) in Belgrade, considered as a high priority investment by the government and the Belgrade City administration. To this end, a gas pipeline to the CCS will be extended by the gas supplier NIS-Energogas, from the nearest medium pressure gas pipeline about 4 kilometers away; (b) energy efficiency improvements in selected public buildings such as schools and hospitals throughout Serbia, including a maternity hospital in the Clinical Center; and (c) technical assistance for capacity building, developing methodologies for energy audits and investment proposals, public outreacWcommunications and monitoring and evaluation, and training of municipal and government officials in evaluating capital expenditure decisions on energy efficiency investments.

An associated GEF residential energy efficiency project is being prepared in parallel but according to a different schedule. While the IDA project will focus on improving the functional and health environments of social sector buildings, the GEF project would support the removal of barriers to energy efficiency improvements in residential buildings. The GEF project is expected to help establish an Energy Efficiency Fund (EEF) for providing affordable financing to residential consumers to improve energy efficiency of their homes and buildings. The combination of IDA and GEF support for public and residential buildings, respectively, would help the Government of Serbia (GOS) develop effective programs and institutions that will facilitate sustainable public and private initiatives for improving energy efficiency in key building categories (Le. public and residential buildings). They are linked through their common development and global environment objectives, as well as through integrated implementation arrangements through the Serbian Energy Efficiency Agency (SEEA), which is expected to play an important role in operationalizing energy efficiency policies adopted by the Government of Serbia (GOS).

Inefficient use of energy is a major concern in Serbia. Consumption of primary energy in Serbia for every dollar of GDP is thirteen times more than in Germany, ten times more than France, five times more than Slovenia, and almost twice that of (see Section B.2). Several donors and lenders are supporting reconstruction and rehabilitation of assets of power and district heating companies to improve supply-side efficiency. Working with the newly created Serbian Energy Efficiency Agency (SEEA), which has a broad mandate of inter-alia improving energy efficiency in Serbia, the project will foster partnerships with several other donors assisting Serbia in promoting demand-side efficiency. Other than the transport sector, there are three major categories of consumers of energy: industry, residential, and public service facilities. Energy efficiency in industry would be addressed through structural reforms and through an ongoing program funded by the European Agency for Reconstruction (EAR). In addition, SIDA, EBRD and KfW are focusing on demonstration projects in the residential sector. USAID is supporting the SEEA with technical assistance for the preparation of the proposed IDA and GEF projects. The EAR is providing overall institutional development support to help SEEA start up operations. The proposed IDA Credit would help implement an energy efficiency program in selected public buildings and demonstrate to the municipal and government officials and local communities the benefits of investment in energy efficiency measures.

-2- The proposed IDA and GEF projects will also reinforce the Government’s program of energy sector reform, which includes institutional reforms (enactment of a new Energy Law, creation of regulatory agencies, restructuring of the sector), gradual introduction of competition in generation and supply, and stepwise tariff adjustments to levels that cover costs. The Bank is supporting the power sector reforms in Serbia through the Electric Power Emergency Reconstruction Project. However, rising electricity and other energy tariffs are generating concern among the population and consequently political resistance to reforms. The project will help partially mitigate this impact by promoting energy efficiency to contain costs to consumers, without reducing the derived benefits. The investment in the Clinical Center and energy efficiency improvements in public and residential buildings will result in substantial environmental benefits by reducing local air pollution as well as emission ofGreen House Gases.

2. Key performance indicators: (see Annex 1) Progress towards the development objectives would be monitored through a set of indicators agreed with the Borrower. The energy efficiency component will emphasize monitoring and evaluation, linking energy efficiency measures with improved hctionality and health environments in buildings. Monitoring indicators include:

Key outcome indicators such as: Quantified energy savings ofthe retrofitted public buildings, and cost of heat per square meter; Improvement in air quality through reduction in emission of local air pollutants (sulfur dioxide nitrogen oxide, and particulates) and greenhouse gases (carbon dioxide) produced by the boilers used by the Clinical Center for meeting its heat demand; Increased end-user satisfaction measured through improvement in indoor air quality, indoor temperature, and perception surveys of improvement in comfort of students and patients.

Key output indicators such as: Improved heat generation efficiency and reduction in heat losses in the rehabilitated network of the Clinical Center; Number ofbuildings retrofitted with energy efficiency equipment; Outreach programs performed.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R-2002-0142 Date of latest CAS discussion: TSS update 818102 ) The Bank’s assistance program for FY03-04 is outlined in the Transitional Support Strategy (TSS), and its August 2002 update, for the Federal Republic of (now Serbia and Montenegro. Throughout the text “Federal Republic of Yugoslavia” and “Serbia and Montenegro” are used interchangeably). A February 2004 update of the TSS shall be presented to the Executive Directors of the World Bank and International Development Assocation in March 2004. The TSS envisions an assistance program with highly selective investment lending to maximize policy reform and institution building. The proposed project supports two development objectives of the TSS: (i)Restoring macroeconomic stability and external balance; and (ii)stimulating near-term growth and creating a basis for a sustainable supply response.

The energy sector was among the main sources of the quasi-fiscal deficit as low energy prices at the beginning of 2001 caused a quasi-fiscal deficit of about $1.1 billion or 10 percent of GDP. As part of its

-3- program to strengthen public expenditure management, the Government is committed to an energy price reform strategy that aims to eliminate the quasi-fiscal deficit by 2005. For example, the electricity price increase to an average 3.7 US cents (July 2003) from 0.9 US cents per kWh (Oct 2000) and growth in GDP in the past two years have enabled the quasi fiscal deficit from the energy sector to decline to about 4% by the end of2002, less than half ofthe level of early 2001. However, further price increases are likely to run into political problems as affordability has become an important issue for a significant proportion of the population. According to the 2002 LSMS (Household Budget Survey), heating expenses (all energy sources) constituted on average 9.6% of the total household expenditures. For the two lowest deciles, these percentages were 12% and 14% respectively. However, another survey (Center for Marketing Research Marten Board International) claims that 21% oftheir respondents have their heating expenses between 25% and 49%, and that 7% of them claim to spend more than 50% ofhousehold expenditure on energy.

The TSS, together with its July 2002 update, sets out broad criteria for selecting investment operations: (i) demand from the government is high; (ii)Bank experience in the region with similar projects is strong; (iii) donor financing can be mobilized; and (iv) where policy formulation and investment needs come together, matching the Bank's comparative advantage. The commitment of the Government to energy reforms and energy efficiency in particular is strong, partly because of growing concern for the impact of price increases on the population. Policy formulation supported through the Structural Adjustment Credit I, states the adoption of a government program to improve energy efficiency as an explicit objective. Pursuant to that objective, the Government has, in October 2002, established Serbian Energy Efficiency Agency (SEEA) to guide policy and implement urgently needed programs to increase energy efficiency. The proposed project would help SEEA develop its capacity to provide policy advice to the Government, design and execute programs that raise awareness of energy saving opportunities, and introduce incentives that will help stakeholders act on these opportunities.

Additionally, the proposed project will assist SEEA to bring together the several donor- and international agency- supported energy efficiency initiatives. USAID, EAR, KfW, SIDA, the Government of Norway as well as EBRD are providing or planning to provide investment and technical assistance for energy efficiency activities. The SEEA would leverage the proposed IDA support to strengthen partnerships with the donor community to develop a systematic and comprehensive approach toward energy efficiency.

2. Main sector issues and Government strategy: The energy sector has been a source of serious instability in the FRY economy in the recent years. After suffering a significant contraction of its GDP, high levels of inflation, public debt and unemployment during the 199Os, the Serbian economy has resumed growth in the last three years but problems of high fiscal and current account deficit (5% and 8.9% of GDP in 2002) persist. The state owned energy sector entities are significant contributors to the fiscal and quasi-fiscal deficits of the economy on account of their low operational efficiencies, high levels of financial losses and debt service defaults caused in part by energy prices being lower than their cost of supply. Energy imports contributed significantly to trade deficit and current account deficits. The quasi fiscal deficit arising from the energy sector has since come down from 10% of GDP in 2000 to about 4% at the end of2002 and is targeted to be eliminated by 2005. 1 The Serbian economy is highly energy intensive. Problems in the energy sector reflect the cumulative effect of policies that channeled mass subsidies to firms, and the population, through cheap energy. This stimulated excessive and wasteful consumption making the Serbian economy very energy intensive, whilst at the same time depriving the energy sector of capital to develop its capacity to meet growing demand. Per dollar of GDP, Serbia uses about eight to thirteen times more energy than its West European neighbors, and four to five times more compared to its immediate neighbors such as and Slovenia (Table 1).

-4- Table 1: Key Energy Indicators of Selected Countries in 2000

Total Primary Energy Supply Electricity Consumption (TOE) (kWh) Country per capita Per ‘000 US$ of GDP per capita Per US$ of GDP France 4.25 0.15 7301 0.25 Germany 4.13 0.13 6683 0.2 Spain 3.13 0.18 5248 0.3 U.S.A. 8.35 0.26 13843 0.42 Bulgaria 2.3 1.53 3675 2.44 Hungary 2.47 0.46 333 1 0.61 Romania 1.62 1.11 1988 1.36 Slovenia 3.29 0.28 578 1 0.5 Serbia & 1.29 1.04 3219 2.6 Montenegro

Source: International Energy Agency TOE : Tons of Oil Equivalent

Heating of buildings is a major contributor to . Ofthe 2 billion cubic meters (bcm) of natural gas consumed in Serbia (of which 85% is imported), only 12% is consumed by industry as feedstock, while 87% is used for heating purposes -- industry about 50%, district heating companies 20%, households 13% and schools and hospitals 4%. Compared to access rates of only 6% for natural gas and about 20% for district heating, more than 99% people have access to electricity. Because oflow electricity prices in the past, there was an excessive use of electricity for heating, the least fuel efficient way of space heating. About 57% of total annual sales of electricity is to households who use about half of it for heating. During winter, 40% of electricity consumption is for heating. Recently conducted survey results revealed that nearly 20% of residential buildings use electricity as a primary source of heating. In addition, one-third ofthe residents connected to district heating feel they receive insufficient heating and ofthese over 90% use electricity as a supplementary heating source.

Serbia has a large, unrealized potential for energy efficiency improvements in the building sector. A USAID-funded feasibility study prepared for the project revealed buildings in Serbia have either very poor or no insulation, worn-out building seals and inefficient heating supply systems. The survey covered public buildings such as schools and hospitals and residential buildings across Serbia. Serbian education authorities manage about 2.9 million m2 of floor area, while the health authorities manage more than 1 million m2 in about 280 hospitals. For school buildings, 70 percent of which use decentralized heating sources (using fuel oil, gas, coal, wood, electricity) energy efficiency investments of about US$ 60 million could yield potential annual cost savings of approximately US$15 million equivalent. Improvements in hospital buildings, 70 percent of which also use decentralized heating sources, investment of about US$ 40 million could result into annual cost savings of about US$10 million. For residential buildings the total investment potential for energy efficiency improvements and conversions is about US$4 billion that could yield up to approximately US$1 billion in annual cost savings to consumers. This translates into a market potential of about US$4-5 billion investments in residential, school and hospital buildings alone.

Use of dirty fuels for heating is causing environmental problems. There is a widespread use of dirty fuels such as coal and mazut, even in decentralized heat generation sources. Clinical Center in Belgrade is

-5- a prime example of this phenomenon, and is a major source of air pollution in a heavily populated area of the city. The existing heat sources in the CCS use annually about 7,000 tons of coal, 11,500 tons of heavy fuel oil, and about 650 tons of light fuel oil. Its 72 boiler units, some more than 40 years old, spread the pollutants in and around the hospital area because of low stack heights. Its annual emissions of pollutants are about 780 tons of Sulfur Dioxide, 100 tons of Nitrogen Oxides, 130 tons ash, and about 25 million cubic meters of Carbon Dioxide. Since the heating season is only six months, this translates into 4 tons of SOX, half a ton of NOx, and three quarters of ton of ash falling in and around the hospital area every day during winter. The CCS and its vicinity are the most heavily polluted area in Serbia and Montenegro ( 2001 Statistical Yearbook of Yugoslavia). The health effects of exposure to high levels of air pollutants e.g. premature mortality, respiratory and cardiovascular disease, increased prevalence of chronic bronchitis, and increased morbidity are well known (Environmental Costs of Fossil Fuels, Kseniya Lvovsky et. al. World Bank 2000). The exposure levels in the Clinical Center, which receives for treatment large number of patients from all over Serbia and houses national Institutes of Cardiovascular Diseases, Hematology, Pulmonary Diseases etc. are quite high.

Rising heat prices raise concerns of affordability and a possible shift to dirty fuels. Because of poor and uneven quality of heating, public and private consumers tend to use electricity, which is an inefficient source of space heating, as a supplementary or sometimes even as a primary source. Electricity prices have been increased more than fourfold in three years from less than 1 US centlkWh in October 2000 to US cents 3.7 ikWh in July 2003. Several cities have also increased heat tariffs. The most recent heat tariff increase for Belgrade city in November 2002 resulted in a 33% increase for residential consumers and 5% for commercial consumers. Future price increases will be increasingly difficult to implement due to affordability issues. Affordability is one of the primary concerns of the population and the Government. Rising prices of electricity and heating may cause consumers to shift to dirty fuels such as brown coal, wood, and oil. As price increases continue, the impact must be mitigated inter alia, by enabling consumers to use energy more efficiently and to reduce energy consumption, particularly for the poorer segments of the population.

There are several barriers to improve end-use efficiency in Serbia. The municipal and local government officials, who control the district heating companies, need to direct the heating companies to adopt consumption based tariffs and metering of consumers. They also need to adopt energy efficiency as a criteria in their decisions for capital as well as maintenance expenditures in public buildings. Further, there is a need to provide to the consumers not only information on possible energy efficiency measures but also improve the availability of medium-to-long term financing, qualified energy auditors and competent contractors to execute the work. To generate acceptance by the local communities and political support for such measures, it is important for them to gain practical experience of energy efficiency investments, realization of energy savings and the financial and other benefits from it. Though some of the conditions necessary for change in attitude of consumers towards energy use are being put in place, there are several barriers to faster adoption of energy efficiency measures by the policy makers, the utilities, and the consumers. Some of these barriers are listed below, but are described in more detail in the next section along with a description ofhow this project proposes to address them:

> Fuel and physical constraints of the heating market; > Institutional constraints to energy efficiency; > Lack of information and awareness; > Inadequate access to financing; and > Lack of coordinated policy

The Government strategy. The Government is attempting a comprehensive program of energy sector

-6- reform, that includes adoption of an Energy Sector Strategy covering all sub-sectors, enactment of an Energy Law, restructuring and commercialization of energy companies, tariff rationalization that incorporates life-line tariffs, and decreasing energy costs through an energy efficiency program. The power sector reforms in Serbia are being supported through parallel Bank operations such as Structural Adjustment Credit-I and ongoing Electric Power Emergency Reconstruction Project.

The pricing reforms undertaken by GOS will affect energy efficiency needs in three ways: first, it will shift incentives for energy efficiency to the end user - the homeowner in residential areas, the management in industry and the Government in public buildings; second, it will encourage end users to shift from electricity to alternative sources of heat supply in the long run; third, it will create incentives for efficient use of energy by the municipalities who have the responsibility for the proper functioning ofessential social services, such as hospitals and schools.

To reduce inefficiency in production, supply, and end-use of energy the government has adopted a comprehensive approach to:

P integrate energy efficiency in the draft Energy Law, P develop secondary legislation and regulation, P establish an institution to promote energy efficiency, provide policy advise to the government, and technical advise to the industry and the end users, P create awareness among the political and administrative decision makers of the benefits of energy efficiency to encourage consideration of energy efficiency as a criteria in their capital expenditure decisions and to direct the heat supply companies to provide appropriate incentives to their customers, through consumption-based tariffs and metering, to use energy more efficiently. P undertake investment in asset rehabilitation and efficiency improvement of power and heat utilities with the assistance ofdonors, retrofitting of public buildings, and providing affordable financing to the residential consumers.

Several donors and lenders have provided grants and loans for repairing conflict damaged assets, and rehabilitation of production and supply infrastructure of the national power utility (EPS) and major district heating companies. The SEEA is coordinating many of these energy efficiency related activities. With the assistance of the Government ofNorway and EAR a program has been launched for improving the energy efficiency ofthe industrial sector, the proposed IDA project will focus on public buildings, and a GEF project under preparation will provide affordable financing for the residential sector. Since most of the district heating companies are under the management control of local governments, it is necessary that the local political leaders and the government officials develop practical experience in energy efficiency investments. Investment in public buildings (schools and hospitals) has proven to be an effective instrument for gaining the support of local communities and governments and providing them with a learning experience essential to change their attitude and behavior towards use of energy.

-7- 3. Sector issues to be addressed by the project and strategic choices: Improving the energy efficiency of the public buildings. To create an incentive and encourage public officials to use savings from energy efficiency as one of the criteria in their capital expenditure and asset maintenance expenditure decisions, it is necessary that they gain practical experience through managing public investments in a few high priority buildings which will also reinforce political approval of their energy efficiency related expenditure decisions. While winter temperatures are not as cold as in north Europe, average degree days in Serbia are in the range of 2400 to 2700, requiring heating over a period of about 180 days to ensure proper functioning and effective provision of essential services, such as education and health. Hence the wide geographic spread in selection of schools and hospitals for investment through the IDA project.

About fifty percent ofthe school buildings are over 40 years old, are predominantly two story buildings and have been deteriorating due to poor maintenance especially during the last ten years. The condition of hospital buildings is similar to those in schools if not worse. The 11 schools and 27 hospital buildings audited for the feasibility study revealed a very low thermal resistance that is two to three times lower than comparable United States values for wall and roof areas (in roof areas it is even four to eight times higher). The roofs and walls of the audited buildings were not insulated or had very little insulation. The lack of maintenance of windows, in particular those over thirty years old, has created large gaps in the seals allowing wind pressure as well as thermal gradients to cause the outside air to pass through the gaps into the building, adding to the heating load.

Overcoming Barriers to Energy Efficiency While the benefits of energy efficient technologies are fairly well known among the energy efficiency and conservation community in Serbia, end users are not implementing energy efficiency projects. With the help of the feasibility study, several barriers to increased energy efficiency in public buildings were identified by the SEEA:

Fuel and Physical Constraints of the Heating Market Consumers willing to shift to alternative fuel sources as prices are adjusted to reflect economic costs, are constrained by the physical characteristics of the heat supply and internal building infrastructure that make the capital cost of switching fuels prohibitive. Natural gas distribution systems are mainly concentrated in the north of Serbia. Up to now only about 6 percent of households heat their homes with natural gas. Although the Government has a proposed strategy to switch consumers from using electricity to gas, directly and indiretly, for heating needs, the transmission and distribution margins, particularly on the wholesale price to district heating companies and distribution companies, are not adequate currently to finance the capital costs of system expansion. District heating networks in high density urban areas, where district heating is likely to be the least cost source of heat supply, are also limited - only 55 percent of households in Belgrade and 34 percent of other urban households have a district heating connection according to the 2002 household survey performed for the Bank’s Poverty Assessment. The project will address this barrier by demonstrating the financial benefits of energy efficiency retrofitting of buildings as well as switching to cheaper and cleaner fuels, wherever feasible. In addition to financial benefits, the project will demonstrate indirect benefits to energy eficiency retrojtting from improved functionality of the building stock to the end users in the schools and hospitals.

Institutional Constraints to Energy Efficiency The core requirements for energy efficient heating services in public buildings are not met in Serbia. In addition to price distortions in oil and natural gas, district heating remains largely unmetered and tariffs are set without regard to actual energy consumption at the building level. The lack of clarity in metering and consumption-based billing of district heating in particular is causing a constraint on investment in energy efficiency. While tariffs for district heating have

-8- significantly increased in the last few years (in Belgrade from 6 to 20 Dinars/m2), they remain below estimated levels required for the companies to cover their cash operating costs. This creates a disincentive for those public buildings connected to district heat to reduce consumption and at the same time does not enable heat suppliers to improve the efficiency of heat productions and delivery. In addition, from the consumer point of view, rising DH prices now compare poorly with dirtier fuels such as brown coal. A recent Bank study of several ECA countries (See Coping with the Cold, Lampietti, et. al., World Bank, 2003) suggests that there are large substitution effects when heat prices rise, particularly among the lower income deciles. The poor move not necessarily to cheaper sources per unit of heat supply, but to alternatives which have lower fixed costs, even if the proportion of variable costs is relatively higher than for the other alternatives. These alternatives include electricity, which is relatively clean, but also dirtier fuels. The same set of arguments may apply to public buildings, despite the adverse environmental effects.

The direct financial benefits of energy efficiency measures are not captured by school or hospital administrators. Heating bills for primary and secondary schools are paid out of general municipal funds. While municipalities in which the school buildings are located gain from energy savings, it is not guaranteed the savings would be shared with 'the school for other important expenditures, including maintenance. Moreover, heating bills in hospitals are paid out of hospital budgets that are financed from the Health Insurance Fund (HIF). Any budget savings are passed directly back to the HIF. A draft health law contains a provision that allows 15 percent of savings to be retained by the institution.

The project will address institutional constraints by (i) increasing the capacity of the Serbian Energy Efficiency Agency to coordinate various donor activities involved in heat reform and monitor data to support the development of metering and consumption based billing for district heating; and (ii) piloting savings sharing schemes in selected schools.

Lack of Information Asset managers in local governments and the Health and Education ministries responsible for building operation and maintenance and long term capital planning lack information about energy efficient technologies and renovation measures, the costs and benefits of energy-saving investments, the implementation experiences of others, and the ability to use energy savings to finance some building renewal. Energy efficiency projects are relatively small and can carry high transaction costs, especially when using new and unfamiliar procedures. Especially where the benefits are considered small, building managers are reluctant to incur these costs. The project will address this constraint through (i) use of local consultants to perform energy audits and prepare investment proposals under the project's methodology; (ii) coordinating with other donors, in particular with the EAR, in training of building engineers and government facilities managers in the use of energy eficiency criteriafor investment and maintenance planning; and (iii) distributing information from the monitoring and evaluation effort to key stakeholders through various media, including workshops.

Dijjficulties in Arranging Financing Serbian municipalities in particular face budget constraints that severely restrict their capital spending plans. While able to borrow, municipalities currently lack expenditure stability or revenue autonomy to prepare long term capital spending plans. In addition, all urban land was nationalized in the late 1980s, placing a significant barrier to secured lending to municipalities by the commercial banking sector. The physical constraints of the heating market noted above require longer maturities to allow more comprehensive initial investments which can both renew building equipment and achieve significant energy savings and in some cases pollution emission reductions. Related to lack of information is the lack of confidence in the possibility of energy and financial savings and weak capital budgeting processes. The project will address this constraint through demonstrating the energy and financial savings of energy efficiency measures. Proven financial viability of investment in

-9- energy eflciency could help attract financing from public and commercial sources.

Lack of Coordinated Policy While there is not yet a coordinated policy framework, the Government of Serbia is in advanced stages of preparing a comprehensive Energy Strategy that would serve as the basis for energy policy planning and implementation. Energy efficiency is included in the draft Energy Law currently under review. The project would help strengthen the SEEA’s ability to bring practical experience, gained in the Serbian context, to bear on the process of policy formulation and its future revision.

3.2 Strategic Choices

The proposed project would retrofit schools and hospitals - social facilities that are an integral part of local and, in the case of the Clinical Center, national communities - so that benefits are readily visible and understandable to the population. The project would help the Government demonstrate linkages of energy efficiency measures with financial as well as functional and health environment improvements. Although financial benefits accrue to the population only indirectly, through reduced municipal expenditures and thereby reduced local and national tax requirements, the benefits of improvement in functional and health environment accrue directly to patients and students, and their families. This combination of demonstrated public and private benefits would help bolster local political and popular interest for follow on measures in energy efficiency. Not less important, the successful implementation of a straightforward public sector energy efficiency program would build up the capacity and credibility of the newly-created SEEA for promoting energy efficiency. The proposed project would support the SEEA, which has the mandate of providing national policy advice and generating programs to promote energy efficiency in buildings and industry.

The rationale for the project’s geographic reach is to maximize its demonstration effect. The Clinical Center of Serbia, the largest hospital in the country, is located in Belgrade but is not connected to the district heating system. The CCS area is one of the most polluted areas in the city due to emissions from its heat plants. Substantial environmental benefits would accrue through the replacement of coal and mazut with natural gas as the fuel for the heat plants at the Clinical Center. Retrofit of the hospital facilities would help to reduce heat load, and require a smaller sized plant (60 MW) compared to the existing 77 MW, thereby further saving energy. A 2 MW Combined Heat and Power (CHP) plant will be added to take advantage of the base-load year-round demand of steam and sanitary hot water in the hospital. To demonstrate a comprehensive approach to improving energy efficiency, it was decided to include retrofitting of one of the high priority buildings of the CCS in the investment program. The CCS management and the Ministry of Health have suggested retrofitting of the maternity hospital at which about 7,000 babies are delivered every year. This building is located at the edge of a cliff and faces the full brunt of cold (Kosava) winds during winter.

Selection of schools and hospitals was coordinated with education and health ministries, respectively, provincial government, municipalities, as well as other Bank and donor funded projects to ensure an equitable coverage based on clearly defined and transparent selection criteria that are also consistent with primary sector objectives of education and health sectors. The process and the criteria are described in detail in the Project Implementation Plan. The eligibility and selection criteria include:

0 sites with high energy savings potential, electricity substitution, and environmental impact; 0 sites which are not likely to be closed or privatized; 0 buildings of which the basic function will not be significantly changed;

- 10- 0 good geographical distribution; 0 sites with significant number of users; 0 sites with substantial social and demographic impact.

Through this process, 30 primary schools and 24 hospitals spread across Serbia have been selected. The same criteria will be applied to the selection of additional buildings to be included in the investment program during the project implementation.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project would consist of three components: (i)Environmental Improvement, Rehabilitation of the Heat Supply System, and Energy Efficiency Improvements in the Clinical Center of Serbia (CCS) in Belgrade. This component will consist of three sub-components: (a) conversion of nineteen lignite and mazut fired boiler plants at the Clinical Center to one natural gas-fired CHP plant for production of about 60 MW of heat, sanitary hot water, and steam, and 2 MW ofpower, (b) reconfiguration and modernization of the heat distribution system, and (c) energy efficient retrofitting of a maternity hospital in the CCS, selected as a high priority building by the Government. (ii)Energy Ef$ciency Improvements in Social Service buildings (Schools and Hospitals) across Serbia. This component will optimize space heating in selected school and hospital buildings across Serbia through tailored investment packages combining supply and demand side improvements. These would include substation modernization, automatic temperature control, insulation, and improvement in lighting in the schools. (iii)Technical Assistance for (a) project implementation through (i)engaging consultants, on behalf of Ministries of Education and Health, for design, supervision, and quality control in execution of works in schools and hospitals, (ii) design and implementation of a monitoring and evaluation system, (iii)communication with the local communities where the participating schools and hospitals are located; (iv) engaging consultants for energy auditing and investment proposal preparation for additional buildings; (b) design and execution of a training program for the building and energy engineers in state of the art methodologies in energy auditing and energy efficiency project development; (c) design and execution of training of government facilities managers, and public officials in the use of energy efficiency criteria in capital budgeting; and (d) project financial management and auditing.

Component (i). Environmental Improvement, Rehabilitation of the Heat Supply System, and Energy Efficiency Improvements in the Clinical Center. The Clinical Center complex includes 76 buildings, with a total covered area of 391 thousand square meters, spread over an area of 38 hectares. These buildings include hospitals, specialized clinics, faculties and research institutes, as well as administration, service and storage buildings. The energy supply services within the CCS consist of heat supply from 19 separate boiler plants (some more than 40 years old, using lignite and heavy oil) comprising of total 72 boiler units with a variety of unit sizes. Electricity is supplied to the CCS, through underground cables, by the local power distribution company. The heat is distributed either by steam or by hot water through pipes mainly laid in channel beds. The annual fuel consumption of the heat plant is about 11,500 tons of heavy fuel oil, 650 tons of light fuel oil and 6,850 tons of coal, for which storage facilities are also provided.

The Clinical Center boiler plants are characterized by (i)low efficiency, (ii)costly operation and maintenance, (iii)low reliability of energy supply, and (iv) environmental pollution. By burning dirty fuels with outdated equipment, the existing boiler plants located at the center of Belgrade city are a major source of air pollution, in particular, for the patients of the Clinical Center most directly exposed to its emissions.

-11 - A feasibility study for evaluation of various alternatives for supply of heating, hot water, and steam to the Clinical Center and to determine the least-cost solution has been completed in September 2003. The feasibility study recommended a centralized gas-fired combined heat and power (CHP) plant of 42 MW heat, 12 MW of hot water and steam, a separate plant of 5 tonslhour of steam, and a 2 MW capacity power plant. The size of the power plant is determined by the baseload requirements of sanitary hot water and process steam throughout the year. In addition to the CHP plant, the distribution system for heat, hot water, and steam will also be reconfigured and replaced by new pipes, building sub-stations, and control valves.

The project will, therefore, support (i)replacement of all old boilers with a new gas-fired plant of about 60 MW heat, sanitary hot water, and steam, and 2 MW of power generation, (ii)modernization of building heat sub-stations and reconfiguration of the distribution system, and (iii)retrofitting of the maternity hospital covering about 12,000 m2 to improve envelope insulation, roof insulation, window repair or replacement, and installation of thermostatic regulators. Though no committed funding is available at present time for the remaining buildings, the CCS plans to retrofit these buildings in the future in a phased manner.

Component (ii).Energy Efficiency Improvements in Social Service buildings (Schools and Hospitals) across Serbia. This component will finance the installation of energy efficiency equipment and retrofitting in schools and hospitals. The initial investment program consists of 17 primary schools with heated floor space of about 51,000 m2 and 12 hospital buildings with a total heated floor space of about 68,000 m2. A total of about 60-70 buildings and the heating systems which supply them would be retrofitted over the five year implementation period.

The types of eligible measures are inter alia: (i)roof and wall insulation, (ii)window repair or replacement, (iii)basement ceiling insulation, (iv) piping insulation, (v) balancing valves, (vi) thermostatic valves, and (vii) automatic temperature controls. For schools served by a district heating utility, a package of roof insulation, weather-stripping and an indoorloutdoor controller with a 3-way valve yield about a 4 year payback whereas for fuel oil heated schools the investment package could cover a wider range of measures due to the higher cost of the fuel oil. Inter-fuel substitution could be considered if significant cost savings can be achieved without switching to dirtier fuels. In addition, a limited investment in Combined Heat and Power facilities, similar to the types of investments in the CCS heat supply could be considered. The lighting in the surveyed schools was found to be inadequate, often a source of eye strain for the children, and poorly designed. The project will improve the lighting in the retrofitted schools by providing adequate and energy efficient luminaires.

To help implement the public building component, consultants will be engaged for design, supervision, and monitoring and evaluation. The Ministries of Education and Health, and SEEA agreed on a criteria for investment in energy efficiency measures that would have a demonstrable impact on energy savings.

Component (iii):Technical Assistance. Technical assistance provided through the project would help SEEA to develop monitoring and evaluation capacity, training and communications activities that it would use not only for the implementation of the proposed IDA project but also for follow on activities, in particular for the residential consumers.

(i) Design and supervision of works in social service buildings. International and local consultants will be hired to prepare designs, technical specifications, bid document preparation, procurement, implementation of civil works, and quality control. These consultants will also ensure the operators will be properly trained in operation and maintenance of the rehabilitated heating assets.

-12- (ii) Monitoring and Evaluation. Local consultants will be hired and a limited amount of equipment shall be purchased for a comprehensive monitoring and evaluation program. The participating schools and hospitals will be asked to assist in the collection of data to measure actual energy consumption and costs. In addition, social monitoring data will be collected to establish the impact the investments and training, if any, have had on energy efficiency behavior of beneficiaries. Baseline data will be collected as a requirement for participating in the project. The data collection and analysis will be performed by SEEA with the assistance of consultants. The scope of work of the design and supervision consultants, including technical monitoring and evaluation, is described at Section B ofAnnexure 1 1.

(iii) External communications. Communication consultants, preferably with experience in energy efficiency communications, will be hired to assist SEEA with the development and implementation of a communications plan for the project. The project will also finance a small amount of the initial costs of the communications program which will focus efforts on maximizing the local impact of the investments (e.g. development of pedagogical materials related to energy efficiency in rehabilitated schools for an energy efficiency learning event) and communicating the aggregate impact and lessons learned ofthe project to key stakeholders in the government, private sector and public at large. The consultant will also be responsible for developing the overall monitoring and evaluation system for the project as well as designing and executing specifically the monitoring and evaluation of social impacts. The scope of work of the consultants, including social impact monitoring, is described at Section C ofAnnexure 11.

(iv) Energy Auditing. The project will finance the energy audit and project preparation costs for selected public buildings.

(v) Project financial management assistance. Accounting software will be purchased and a local accounting consultant will be hired to design and implement proper accounting and internal controls for the project as well as generate project management reports in a format acceptable to the Bank.

(vi) Auditing. The cost of audits of the project financial statements will be financed out of the proceeds of the IDA credit.

In addition to the activities specifically supported by the Credit, relevant activities are expected to be supported through an energy efficiency program (the SEEA Special Fund Programme for Energy Efficiency in Building Stock) funded by the European Agency for Reconstruction (EAR) and managed by the SEEA. The EAR is expected to support a training program, executed by SEEA, in energy auditing and project development in municipal and public buildings. The training is targeted at building engineers and local government facilities managers responsible for planning and budgeting ofinvestment and maintenance activities for various public facilities. The SEEA has indicated it will ensure consistency between the energy audit methodologies employed under this project and the training program so as that its programs are self-reinforcing and maximize coverage across the country;

ndicative Bank- % of Component costs % of financing Bank- (US$M) Total (US$M) financing Investments at the CCS 7.47 29.9 6.35 30.2 Energy efficiency improvements in social services facilities 12.36 49.4 10.13 48.2 Technical Assistance to SEEA 0.46 1.8 0.37 1.8 Incremental Operating Costs 0.50 2.0 0.44 2.1 Price and Physical Contigencies 2.71 10.8 2.21 10.5

- 13- Unallocated 1.50 6.0 1.50 7.1 Total Project Costs 25.00 100.0 21.00 100.0 Total Financing Required 25.00 100.0 21.00 100.0

2. Key policy and institutional reforms supported by the project: Policy and institutional measures supported by this project have been initiated and, while some institutional measures have already been completed during the project preparation, others will be implemented during the course of the project:

Under its reform agenda, the Government has committed to a step-wise electricity price increase, raising average electricity tariffs from US$ 0.9 cents / kWh in October 2000 to 3.7 cents / kWh in July 2003. However, affordability concerns may slow down the pace of hrther reform. By helping the Government to demonstrate benefits of end-use efficiency, and of investing in better consumer controls over their heat consumption, especially with respect to a reduction of the use of electricity for heating, this project would help reduce some ofthe impediments to further energy pricing and sector reforms.

The technical assistance program includes training hnded by EAR for municipal and government officials in evaluation of energy efficiency investments and on how to integrate it in the criteria for capital as well as operation and maintenance expenditure for public buildings. Increased awareness and improved understanding of issues underpinning energy consumption behavior of end-users will help the municipal officials to support a shift to consumption based tariffs and metering by district heating companies under their charge.

As a part of the Government’s energy sector reform agenda that it committed to under the Structural Adjustment Credit I in December 2001, an Energy Law, satisfactory to the Bank, has been drafted and sent to the Parliament in July 2003 for its approval. The Energy Law will set conditions for the establishment of an independent regulator for the energy sector, including the heat market. This legal reform and subsequent implementation of the institutional changes contemplated in the legislation will set the proper enabling environment for the introduction of consumption-based heat tariffs for the residential consumers and metering of heat consumption by district heating companies, which form the basis of incentives for end-use energy efficiency. KfW is providing technical assistance financing for a review of metering and consumption-based heat tariffs.

The Government has incorporated energy efficiency as an important element of the sector’s legal framework. The draft Energy Law states as a policy objective the “provision of conditions for enhancing energy efficiency in the whole chain ofenergy related activities and energy consumption.”

The Government established a specialized agency (SEEA) under its Secretariat to foster policies and investments in energy efficiency. During project preparation, the SEEA has become fully operational. Additionally, the Government’s draft Energy Law formalizes the institutional role ofthe SEEA in the sector and establishes it as a separate legal entity, devoting an entire chapter in the Law for this purpose (Articles 151 - 162).

Box 1.Article 154 of the Draft Energy Law: Activities of the Serbian Energy Efficiency Agency

Activities of the Energy Efficiency Agency comprise:

1) Cooperation with the Government of the Republic of Serbia and the Ministry on creating and implementation of I

- 14- the national energy sector policy, with the aim to align it with the concept of rational use of energy carriers and efficient use of energy; Cooperation on preparation of regulations, standards and norms necessary for aligning with international standards stimulating rational use of energy carriers and efficient use of energy; Preparation of criteria for assessment of efficiency of use of electrical appliances and requests for their labeling in compliance with appropriate international norms; Preparation and verification ofdatabases on the state of energy consumption in the Republic of Serbia and trends ofindicators of the energy use in the corresponding energy consumption sectors; Rendering of advisory and technical support to the local administration unit bodies, district heating companies, governmental and public institutions and customers, with the aim to increase efficiency of energy consumption; Preparation and execution of initiatives stimulating increased use of new and renewable energy sources at the local market, in accordance with national objectives; Information on the measures for rational use of energy carriers and increase of energy efficiency and promotion ofresults achieved in implemented programs and projects; Energy-related education and informing of the public and energy customers on potentials for the increase of energy efficiency, promotion of measures for rational use of energy carriers in the production and consumption sectors and vocational trainings ofexpert teams; Initiating and stimulating implementation of demonstration projects and dissemination of positive experiences from the countries that successfully implemented energy efficiency programs; Rendering financial and technical support in the preparation and implementation ofprioritized energy efficiency projects; Exchange of experiences and promotion of domestic results in the fields of rational use of energy carriers and efficient use of energy at the international level; Performing other activities in compliance with the existing laws and regulations. lFrom unofficial translation, draft Energy Law, February 2003

The proposed IDA project places SEEA in a position to work with key line ministries and local authorities on making an impact on a key building sector (public buildings), and provides it with an opportunity to strengthen its capacity to undertake other and arguably more complex programs, such as in the residential building sector, where energy efficiency potential is high and the need acute.

3. Benefits and target population: > The project will benefit: (i)students and education staff across Serbia by improving heating quality and in relevant cases improving air quality in renovated buildings. The students, in particular, will benefit from the replacement of poorly designed and inadequate lighting with improved energy efficient lighting systems; (ii)health care professionals and patients by improving heating quality and in relevant cases improving air quality in selected buildings across Serbia, as well as Belgrade residents in neighborhoods surrounding the CCS; (iii)the municipalities which will save heating expenses for renovated school buildings and increase the life of the buildings; (iv) the health insurance fimd which will save funds required to pay for heating expenses of the participating hospitals.

> By replacing coal and heavy fie1 oil fired heat plants with natural gas fired heating plants and reducing the heat distribution losses, the CCS will reduce annual emissions of SOX from its present level of about 780 tons to about 20 tons, that of NOx from about 100 tons to about 40 tons, and totally eliminate emission of ash from the present level of about 130 tonsiyear. The CCS will also not need to transport and store, in the hospital complex, large quantities of coal, oil, and ash. In addition, the elimination of the use of coal will reduce C02 emissions by about 25 million cubic meters annually, contributing to the reduction of Green House Gases. Extension of the gas pipeline to the CCS will also enable increasing access to gas supply for the residents of the CCS area, thereby enabling them to shift away from use of electricity and dirty fuels for their heat requirements.

- 15- P By increasing energy efficiency in selected schools and hospitals, the project will reduce their energy bills. In addition, the project will extend the life of the buildings by making investments critical to the preservation ofthe building envelope.

P The proposed project will introduce through the SEEA a systematic approach towards understanding end-user behavior, with an emphasis on learning through monitoring and evaluation, while at the same time targeting investments with a reasonable payback to help rationalize heat energy demand. In order to be effective, the SEEA will need to accumulate a critical mass of experience on the instruments and policies that work in Serbia. Several donor agencies have implemented demonstration projects, and it is incumbent upon SEEA to internalize the lessons learned from these projects.

P Several Ministries and agencies of the Government of Serbia, Provincial Government, the Belgrade city administration, and municipalities across Serbia, are participating in this project to varying degrees. The Government of Serbia views the inter-agency coordination mechanisms and processes, established for implementation ofthis multi-sectoral project, as a major institutional development benefit.

> The involvement of local communities in implementation of energy efficiency improvements in high visibility public service buildings, and possible sharing of benefits ofenergy savings proposed to be piloted in schools, will help create an awareness and acceptance of energy efficiency measures that may be instituted in future by the public utilities and the local governments, for the residential sector.

The institutional development aspects of the project are as important as the investments. The involvement of international and local energy engineers and the local construction industry in the project will help the Government tap the private initiative needed for project benefits to reach end-users.

4. Institutional and implementation arrangements: The overall responsibility for implementation of the project will rest with the Government of Serbia. Because of involvement of several Ministries, provincial government and municipalities, a “Project Steering Committee” (PSC) has been established for coordination among them. The Committee is chaired by the Ministry of Mining and Energy and has representatives of the Ministries of Finance and Economy, Health, Education, Construction and Planning, Science, and the SEEA, and CCS. The PSC will coordinate, among various Ministries and agencies, the activities of project preparation; approval of investment packages for schools and hospitals; compliance with World Bank procurement guidelines; and monitoring of project implementation. The Ministry of Mining and Energy will establish a small PIU to carry out the day to day activities of project implementation, including operation of the Special Account and consolidating Project Management Reports, under the supervision of the PSC. The responsibilities of various agencies will be as follows: for Component [i)the Ministry of Health, with the assistance of CCS, for implementation of heating system, CHP plant, and energy efficiency improvements in the maternity hospital; for Component (ii)the Ministry of Education for implementation of energy efficiency improvements in the school buildings, and Ministry of Health for implementation of similar works in the hospitals. SEEA will provide technical support and supervise the work of design and supervision consultants for the public buildings; and for Component (iii)the MOME with the assistance of SEEA, for the technical assistawe activities, e.g. monitoring, evaluation, and communications, and energy auditing. Clinical Center: The Clinical Center has staff with adequate qualifications and experience to manage the present infrastructure facilities. However, they will need assistance in managing the implementation of new investments. Therefore, implementation of the CCS investments will be managed by this group with the assistance of design and supervision consultants (CCS D&S consultants) to be engaged under the project.

-16- An Expression of Interest has been issued in November 2003 to prepare a short-list of qualified consulting firms. The consultants will prepare the design, technical specifications, procurement documents, and assist in contract management and supervision of implementation. The scope of work of the consultants is attached at Annex 11. The contracts will be signed jointly by MOH and CCS. NIS-Energogas, the local gas supplier, will finance and construct the extension of gas pipeline to the CCS. However, it has been agreed that they will coordinate with the CCS design and supervision consultants to ensure compatibility of technical specifications and synchronization of schedules. The procurement activities of the heat plant and the gas pipeline will be synchronized and contracts for their construction awarded simultaneously. A gas supply agreement has been signed between the CCS and the NIS-Energogas. Social Service Buildings: The energy audit for the selected schools and hospitals have been completed and investment proposals are currently under preparation. SEEA will act as technical advisor to the Ministries of Health and Education for implementation of social service building component. The consultants will be hired by SEENMOME to design, prepare technical specifications and bidding documents, and assist in procurement, contract administration, quality control, supervision of execution of work, and monitoring and evaluation of retrofitting of all schools and hospitals financed under the project. For hospitals, the Ministry of Health will sign the contracts for supply and installation of equipment and execution of works for all hospitals, and make necessary provision of funds in its budget. An officer of the MoH and the Director of each of the participating hospitals will be the joint contract administrators. The consultant engaged by SEEA will submit their supervision reports to the respective Director of the hospital and to the MoH and PSC through SEEA. Similar arrangements will be made by the Ministry of Education for implementation ofthe project in the schools. Technical Assistance: For the public building component, the consultants will be engaged for technical design, procurement packaging, procurement of contractors, contract administration, quality control, and supervision of execution ofworks. The SEEA would be responsible for ensuring the performance ofpublic building consultants and will designate a small team of staff for the purpose. Incremental operating costs of this unit will be met through the proceeds of the Credit. MOMEBEEA will engage consultants for communications, monitoring and evaluation, as well as preparation of energy audits and investment proposals. The selected TA activities complement the institutional development initiatives supported by other donors, in particular the USAID and the EAR.

The EAR has provided a grant of US$ 4.5 million equivalent for meeting operating costs of the SEEA for first two years of its operations, and for its institutional development. Assistance for setting up the agency was provided by the consultants (Ramboll). The consultants to be engaged, through EAR funding, are expected to provide technical assistance in: (a) institutional development of SEEA; (b) alignment of energy efficiency laws of Serbia with EU recommendations; (c) for the building sector preparing a master plan for the city, and upgrade the building codes, etc.; (d) preparation of feasibility studies for increasing efficient use of energy in industry, municipalities, and the local utilities; and (e) for monitoring and evaluation of SEEA activities. With the assistance of the consultants, SEEA would develop an operations manual which would contain, inter alia, detailed operational policies and procedures for the agency, staffing requirements, and administrative systems.

Funds Flow The IDA Credit will be made available to Serbia and Montenegro (SaM) under a Credit Agreement, governing the terms and conditions of the Credit. The Government of SaM would on-lend the funds on IDA terms to the Republic of Serbia based on a Sub-credit Agreement with terms and conditions satisfactory to IDA. The project expenditure will be accounted for by the Republic of Serbia as a part of its budgetary expenditure on capital improvements in schools and hospitals and for technical assistance.

- 17- Counterpart funds will be drawn down in accordance with the regular budgetary mechanisms of the Republic of Serbia and will be subject to the control and oversight of the Treasury department of the Ministry of Finance. The following legal agreements will define the flow of funds and the respective parties' roles and responsibilities:

The Development Credit Agreement, between IDA and Serbia and Montenegro (SaM); The Sub-credit Agreement, between SaM and Republic of Serbia.

Most disbursements under component one of the project (US$ 8.4 million) are expected to take place as direct payments from the Credit Account. For the remaining payments, a special account (SA) will be opened by the GOS in one of the Serbian commercial banks pre-qualified to hold Special Accounts. MOME will operate the Special Account. A detailed procedure for MOH and MOES to access the Special Account is described in the project implementation plan.

For accelerating project implementation, the Government of Serbia plans to engage design and supervision consultants for the CCS and for the public buildings, before the Credit is approved. The Govemment will follow the Bank procurement guidelines for engaging these consultants, and has already started the process by inviting expressions of interest from qualified consulting firms. If the Government is able to sign the contract before the Credit approval, it may have to make payment of advance money for mobilization. Therefore, retroactive financing of an amount not exceeding equivalent of US$ 200,000 is proposed to be provided through the proceeds of the Credit.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: Supply vs. Demand-side. To ensure synergy of an integrated approach to support supply-side and demand-side energy efficiency investments, the project team considered to also include investments to improve the supply side. However, investments in rehabilitation and augmentation of the DH network are now being adequately financed by KfW and EBRD. The proposed project will therefore complement these initiatives by focusing solely on promoting end-use energy efficiency in public buildings (and in the private buildings through the separate GEF project), addressing the affordability concerns raised by energy pricing reforms.

CCS Heat System - District Heating vs decentralized CHP plant. To meet the heat demand of the CCS and reduce air pollution, one of the alternatives was to connect it to the district heating network for its heat requirements and finance a small local heat source for hot water and steam. However, the hospital requires heat for twenty four hours a day, as against only fifteen hours of supply by the district heating company. Hence the selection of a gas-fired plant for the CCS to produce heat, hot water, and steam, and achieve the environmental benefits.

Hospitals, Schools vs. Other Public Buildings. The Ministry of Mining and Energy considered the merits of different public buildings for demonstration effects, Le. municipal halls, administration buildings, etc. The selection of schools and hospitals offer the strongest opportunity for the Government to demonstrate to public sector institutions -- state and municipal -- the linkages between energy efficiency investments and financial benefits (savings) that accrue to public administrations, along with its positive environmental, functional, and health benefits that accrue to the population. Because of the high visibility and involvement

- 18- of the local communities, the benefits achieved in these public service buildings will help increase awareness. This will also help the utilities and the government obtain cooperation of consumers when they try to implement energy efficiency measures that seek to change consumers attitude towards energy use.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings I (Ban k-Rnancet projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Energy Sector / Pricing Reform Structural Adjustment Credit S S

Emergency Rehabilitation / Energy Electric Power Emergency S S Strategy / Energy Sector Reform Reconstruction Project

Education Sector Serbia Education Improvement S S Project

Health Sector Serbia Health Project S S 3ther development agencies Energy Efficiency in Public Buildings; Community Revitalization Local Government Capacity through Democratic Action / Local Government Initiatives / Serbia Emergency Energy Efficiency Programme (USAID Energy Efficiency in Residential Demonstration projects (KfW); Buildings Heat Pricing Study (KfW) National Energy Efficiency Program Energy Priority Programme (EAR) Emergency Fuel and Electricity Imports Energy for Democracy (EAR); Serbian Assistance Fund for Energy (USAID, EAR) District Heat Rehabilitation Belgrade District Heating Rehabilitation (EBRD) (Highly U nsatistactory)

3. Lessons learned and reflected in the project design: The construction of gas-fired heat generation plant is technically a relatively simple investment but its success depends on good technical specifications, procurement, and contract administration. The Bank procurement guidelines will be followed. Qualified technical consultants are being hired for all aspects of design, procurement, contracting, and supervision of implementation. The scope of work of the Design and Supervision consultants is attached at Annexure 11.

As regards the energy efficiency component, the proposed project design takes lessons learned from several such projects such as Belarus (Social Sector Energy Eficiency Project, 2001), Lithuania (Energy Eficiency/Housing Pilot Project 1996 and Vilnius District Heating Project GEF 2003), Poland (Krakow

- 19- Energy EfJiciency Project, 2001) Romania (Energy EfJiciency Project, 2002):

0 The need for strong sponsorship and commitment at the ministry-level to successfully start-up operations and then provide leadership and support to address issues that inevitably come up during project implementation.

Coordinated and significant donor support is needed to finance technical assistance for institutional development.

0 Investment proposals should be of high quality. In addition to strong local technical capacity, the projects often require inputs on state of the art methodologies.

0 To obtain early waming signals and gamer benefits of lessons learnt in implementation, establish a good monitoring and evaluation (M&E) program. This component involves leaming by doing and understanding of social attitudes towards adopting new technologies. Successful preparation in other Bank projects included pilots that helped the implementing agency understand some of the complexities and adjust project design prior to full-scale implementation. Technical demonstrations have been implemented with the assistance of donors. The planned monitoring and evaluation of initial projects shall help SEEA and its consultants in calibrating the strategy for promoting investments in energy efficiency.

4. Indications of borrower commitment and ownership: After the conflict ended, the Government of Serbia and Montenegro accorded the energy sector its highest priority for immediate attention by the donor community. Price reform in electricity is on schedule, and despite many difficulties EPS has started to disconnect delinquent customers since March 2002. Significant tariff adjustments have been implemented for electricity and heat utilities. Electricity imports have been supported by the donor community, but donor priorities are being re-directed to other needs. The Government is aware of this and, therefore, despite its budget constraints has set up a new agency, SEEA, to deal with energy efficiency issues.

Within a short period of time, the Government has achieved impressive progress in establishing the energy efficiency as an integral part of the energy sector reform agenda, created institutional mechanisms to promote energy efficiency, established processes for inter-governmental coordination and mobilized the support of several agencies, provincial government, and the municipalities. Extensive involvement of senior political and bureaucratic officials in guiding project preparation is an indication of the importance the government attaches to this project. Extensive public consultations, including focus group discussions, have been held in the context of feasibility studies for the CCS, energy efficiency fund, and public buildings stock survey.

Replacing the old and crumbling heating system at the Clinical Center and reducing air pollution has been accorded very high priority by the Government as well as the Belgrade City administration. Even though the CCS is under the control of the Ministry ofHealth, the Belgrade city administration has recognized the environmental and infrastructure development benefits from the project to the residents of the city and has, therefore, committed to contribute resources from its budget for rehabilitation of the heat supply system at the CCS.

5. Value added of Bank support in this project: The major role the Bank plays in the Serbian energy sector reform agenda helps it leverage rather small

- 20 - amounts of IDA resources and weigh in on important demand-side policy reforms identified during project preparation and implementation. Likewise, the results ofthis project shall provide practical inputs to better inform evolution of Serbia's energy strategy, which the Bank is supporting through SAC I and the Electric Power Emergency Reconstruction Project. The additional input from the demand-side would strengthen the value added the Bank is providing mainly through supply side reforms and help the Government develop a comprehensive energy policy agenda. EBRD has approved a loan of US$ 20 million for rehabilitation and modemization of the district heating network in Belgrade, while KfW is financing similar investments in Novi-Beograd and other urban areas. The proposed project will help enhance the benefits of supply side improvements through simultaneous financing of energy efficiency investments. The proposed project will help Serbia go beyond the technology demonstration pilots and help overcome several barriers to the development of the energy efficiency market- in particular the lack of information, lack of coordinated policies, absence of practical examples of bringing together different government agencies that need to come together for realizing the untapped potential of energy efficiency in Serbia. This project will help set the stage for improving end-use efficiency in the residential sector by providing the necessary practical experience to the public officials which they need before taking the necessary policy and tariff decisions, develop methodologies for energy audits and contractual arrangements for energy efficiency investments, and trigger development of a market for energy efficiency services. The Bank would leverage its experience in facilitating public and private initiatives to undertake energy efficiency improvements. The Bank would also help mobilize other donor assistance for energy efficiency.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$l 1.7 million; ERR = 32.4 % (see Annex 4) 0 Cost effectiveness 0 Other (specify) An economic cost benefit analysis of the CCS component indicates a rate of return of 32.4% for replacement of heat plant, heat distribution system, and construction of the CHP plant. Given the low efficiency of old and poorly maintained heat boilers and high distribution losses, this is not surprising. Extemalities such as environmental benefits have not been included in the estimates of returns. The financial rate of retum of the investment in heat supply system of the CCS is 3 1.5%. Sensitivity analysis, carried out with respect to changes in (i)investment, (ii)price of gas, and (iii)price of electricity show the rate ofreturn to be quite robust (Table 2).

Table 2: Sensitivity Analysis of Economic Rate of Return

Change Gas price Electricity price Investment cost Base case 32.4% 32.4% 32.4% Increase by 20% 18.1% 36.2% 26.9% Increase by 10% 25.7% 34.2% 29.4% Decrease by 10% 38.4% 30.7% 36.0%

In the worst case the ERR would be 14.6% if the investment cost and gas price increase by 20% at the same time and the electricity price remains on the current level.

-21 - Energy efficiency investments produce various streams of benefits, some of which are difficult to quantify. Rates of retum will also differ by type of facility. Moreover, the programmatic approach to the retrofit of schools and hospitals provides flexibility to include more buildings in the event investment costs are lower than estimated; therefore, investment plans in the outer part of the implementation period will be finalized in the first year of implementation. In addition, rates ofretum on individual facility investments could vary because school and hospital administrators may decide to take advantage of the energy saved from the investments and heat the buildings at a higher, more comfortable temperature (such as in cases where buildings are under-heated). The investment packages were optimized for demonstration purposes to include measures, such as installation of new windows, that contribute significantly to energy savings but have high replacement costs and measures with shorter payback periods. For the purposes of economic analysis, the retums include only reduced fuel costs from reduced energy consumption of the relevant system and cost savings from the differences in prices achieved by switching fuels (3 buildings are planned to switch to cleaner fuels). Other benefits not included because their quantification is problematic, are: (a) increases in indoor comfort; (b) reduced air pollution from fuel combustion; (c) improvements in building stock, reducing operation and maintenance of facilities. Therefore, the ERR may underestimate the true economic retum to schools, hospitals and society. Under these assumptions, the cost-benefit analysis ofthe rehabilitation of school and hospital buildings indicates a 15 % rate of retum. The financial analysis of the proposed investment in selected public buildings indicates a retum of 24%.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Counterpart funds requirements for the Project are modest. Based on submission of annual budget proposals from the Ministries of Energy, Education, and Health, the Ministry of Finance will make the necessary provision of funds in the budget for the counterpart funds as well as for withdrawal of proceeds of the Credit. The risk of non-availability of counterpart funds is partially mitigated by the Belgrade City administration's commitment to provide US$ 500,000 equivalent for the CCS component. Recurrent costs of operating and maintaining investments are borne by the municipalities and the Health Insurance Fund, who will benefit from cost reductions due to efficiency improvements.

Fiscal Impact: NA

3. Technical: CCS component: The feasibility study has addressed all the important technical, economic and environmental issues in order to select a sustainable least cost heating solution for the CCS such as: (a) selection of the least cost altemative, (b) environmental issues related to gas conversion and gas pipeline construction, and (c) acceptable route for the gas supply pipeline with approval from the appropriate authorities. The technology to be used is well established and technical staff in Serbian agencies are familiar with the technology, specifications, and construction standards. The necessary compatibility in technical specifications, and synchronization of implementation schedule of the CHP plant and the gas pipeline would be ensured through close monitoring by the PSC. Though the quantity of power purchased by the CCS will reduce substantially after the construction of CHP plant, it will have some seasonal, off-peak surplus available for salehanking with the power supplier. A power purchase agreement between the CCS and the power supplier, for salebanking of surplus, off-peak, power generated by the CHP plant has been signed.

Energy Efficiency Comuonent: Special attention needs to be given to determining the heating conditions in each building class. Technical measures will need to be calibrated with this information so as to increase

- 22 - the energy savings and the likelihood of meeting payback targets. While designing the energy efficiency improvement measures, special attention would be given to maintenance of air quality, ventilation, indoor temperature, and humidity levels, often ignored in order to maintain indoor temperature. While selecting energy efficient lighting for the schools, adequacy of lumens and appropriateness of design for lighting for the class rooms will be ensured.

4. Institutional: A capacity assessment of the MOH, MOES, SEEA, and MOME for procurement has been carried out and considered satisfactory. However, to augment the procurement capacity of the agencies, the MOH will engage design and supervision consultants for the CCS, and MOME and SEEA will engage design and supervision consultants for the public buildings, who will help in technical design and specifications, preparation ofbidding documents, contract negotiations, and supervision.

The main project-related institutional issue for both components is the inexperience of the CCS technical staff in managing a large construction contract and operating and maintaining a gas fired CHP plant and of SEEA staff in design, specifications, and supervision of contracts for energy efficiency works. The CCS management is in the process of engaging qualified consultants to assist in design and supervision of construction of CHP plant and the gas pipeline. The suppliers of the CHP plant will be required to train the CCS staff in its operation and maintenance and environmental management. The consultants will be financed through the proceeds of the Credit. The SEEA staff is also new and not adequately experienced in energy efficiency issues, though in the last year they have acquitted themselves very well in building up the energy efficiency program. The question of SEEA’s capacity is being addressed through the EAR funded technical assistance provided for the first two years of SEEA’s operations, and through technical assistance in design and supervision ofworks in social service buildings financed through the IDA Credit.

Participation of hospital and school administrators in contract management will ensure that the retrofitting measures meet their needs and the contractors perform quality work. The PSC proposes to invite the administrators of the participating schools and hospitals, and the municipal officials of relevant municipalities to a workshop to explain to them the details of energy audit, investment packages, procurement, contract management and approval of contractor’s invoices, and quality control. 4.1 Executing agencies: The Government of Serbia’s Ministries of Mining and Energy, Health, and Education will be the executing agencies. The MOME has the responsibility for defining and implementing the policies for the energy sector and for promoting energy efficiency. The assets of all hospitals, including the CCS, are owned by the Government of Serbia (Ministry of Health) but its recurring costs, including maintenance expenditure, are paid by the Health Insurance Fund which buys the services of the hospitals for public benefit. The CCS, being a large national hospital and a medical college, has the capacity and authority to manage large contracts. The assets of schools are mostly owned by the Government of Serbia (Ministry of Education) but their recurring costs are paid by the municipalities. Therefore, though technically the executing agencies will be the Ministries of Energy, Health, and Education, the participation of provincial government and municipalities is necessary to achieve the development and implementation objectives of the project. 4.2 Project management: The PSC will be responsible for coordinating and providing direction on all the activities of the project to all the agencies involved. It will be assisted by a small PIU at the Ministry of Mining and Energy, and will benefit from the already existing PIUs at the Ministry of Health and Education. The contracts will be signed jointly by the MOH and CCS for implementation of the CHP plant and retrofitting of the matemity

- 23 - hospital, by the Ministry of Education for all the schools, by the Ministry of Health for all the hospitals, and jointly by the MOME and SEEA for technical assistance. The CCS will engage design and supervision consultants for the CCS component, who will also coordinate with NIS-Energogas the gas supplier for extension of the gas pipeline. The MOME and SEEA will procure public building consultants for design and supervision of schools and hospitals. (Annexure 6(B) provides a diagrammatic presentation of the arrangements, described in more details in the PIP). MOH and MOES will, by a Government decision, authorize SEEA to manage the quality and output of the design and supervision consultants for the public buildings. 4.3 Procurement issues: Procurement ofCHP plant, reconfiguration and replacement ofheat distribution network, and retrofitting of public buildings will be done through international competitive bidding. For evaluation ofbids the evaluation team will include representatives ofthe Ministries of Energy, Finance, representatives of other Ministries and agencies as appropriate for their respective components. Procurement of communication consultants will be done by SEEA through Quality and Cost Based Selection procedure. Procurement capacity assessment of the MOH, MOES, MOME, and SEEA has been done by the Bank team and is considered satisfactory. 4.4 Financial management issues: A financial management review was undertaken during project appraisal, to determine whether the financial management arrangements for the Project are acceptable to the Bank. It has been concluded that the Project does not currently satisfy the Bank’s financial management requirements, however, subject to the completion of the agreed action plan, the project is expected to satisfy these requirements prior to the negotiations.

The SaM CFAA report notes that there are a number of risks on the management of public funds in SaM. The risks to the public funds include: (a) poor public sector financial management in the past, (b) unfinished reforms - the governments of both Serbia and Montenegro have commenced a process of major reform, which looks good as designed, but it is still too early to say if the reforms will be totally successful, (c) capacity constraints in both the Federal and Republic governments, (d) weak banking sectors, (e) weak audit capacity, (f) poor implementation capacity in line ministries, and (g) the lack of extensive Bank implementation experiences within SaM. Since re-joining the membership of the World Bank, SaM has been using individual implementation units for each investment project (traditional PIU model), located within the relevant line ministries or project beneficiaries, to mitigate some of these risks.

Disbursements from the IDA credit will follow the transaction-based method, Le., the traditional IDA procedures including direct payments, special commitments and reimbursements, either with full documentation or certified statements of expenditures. It is not anticipated that the project will migrate to report based disbursement. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. An Environmental Assessment report has been prepared for the Clinical Center component. Significant environmental benefits are expected from the proposed works, which include replacement of the present fuel (coal, mazut and light fuel oil) by natural gas, closure of all existing, old and dilapidated boiler plants, and construction of a new centralized boiler plant including a combined heat and power (CHP) generating facility, Ash will be practically eliminated, whereas sulfur dioxide and nitrogen oxide emissions will be greatly reduced. Noise and dust associated with coal and fuel oil transportation and ash removal will also

- 24 - be eliminated. However, connecting the Clinical Center to the gas pipeline and construction of gas-fired boilers will require appropriate environmental and safety measures, and these have been addressed as part of the environmental management plan (EMP). Compliance with the environmental safeguards enumerated in the EMP for construction and operation of the CHP plant, is included as a covenant in the Credit Agreement.

The energy efficiency retrofitting projects will involve improvements to heating systems, insulation, thermostatic valves and other installations in buildings, as well as heat substations and networks. The SEEA will ensure that the sub-projects meet all occupational health and safety regulations, and comply with the Serbian environmental regulations as well as the Bank's safeguards policies. Any large scale new construction with significant environmental impacts is unlikely to be financed under this component. 5.2 What are the main features of the EMP and are they adcquatc? The EMP addresses the issues related to design, construction and operation of the centralized boiler plant and connecting the gas pipeline. Measures have been outlined for noise abatement from the CHP plant, and NOx and SO2 emissions reduction from the boilers, assuring safety of the gas pipeline connection, as well as mitigation of the minor adverse impacts during construction. Necessary technical specifications with respect to these will be prepared as part of the technical design, and their implementation included in the installation and construction contract as well as in operational and management practices of CCS's engineering staff. For the energy efficiency component, other than handling of asbestos and minor construction related disturbances, major safeguards issues are not expected. The SEEA will ensure that the construction contracts include clauses that would require contractors to comply with the safeguards standards. 5.3 For Category A and B projects, timeline and status ofEA: Date of receipt of final draft: For the Clinic Center: EA start-up date: 15 December 2002 Date offirst EA draft: 08 September 2003 Date of final draft: 17 October 2003 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? The EMP has been disclosed in the country and at the Bank's Infoshop. Consultations have been held with the local community while deciding the route of the gas pipeline. Further, the local communities are planned to be consulted for retrofit projects in schools. A public consultation meeting was organized in the Clinical Center in September, 2003 to discuss the environmental aspects of the project with the relevant stakeholders, including NGOs and the public. More than 150 people from the community, public officials, and representatives of the donors participated. Three presentations were made about the project which were followed by discussions. The participants appreciated the process of consultation, potential benefit of reduction in air pollution, improvement in the maternity hospital, and in other hospitals and schools. 5.5 What mechanisms have been established to monitor and evaluate the impact ofthe project on the environment? Do thc indicators reflect the objectivcs and results of thc EMP? The EMP includes a monitoring plan for air emissions from the boilers during operation in accordance with the Serbian environmental regulations. Provisions are also made for monitoring the implementation of environmental measures during construction activities. While direct environmental benefits are not expected to be monitored, foregone use of dirty fuels due to project inputs has been calculated to estimate positive environmental benefits.

- 25 - 6. Social: 6.1 Summarize key social issues relevant to the project objcctives, and spccify the project's social development outcomes. The project is designed to address the high cost of heating public buildings and the environmental impact of use of dirty fuels for heating.

As far as the retrofitting of social sector buildings is concemed, the social assessment done in April 2003 by the Alliance to Save Energy (an NGO engaged as consultants for SEEA under USAID funding) has revealed a complex situation. The school and hospital buildings are owned by the Republic. As explained in Section E-4, the operating costs of the hospitals are funded through the Health Insurance Fund and the budget of the Ministry of Health, while operation and maintenance costs of schools are funded by the local municipalities. Municipal budgets are generally insufficient to fund both capital investments and substantial building maintenance projects. They simply depend on the government, i.e. line ministries' budgets. However, in-depth interviews by ASE with the city officials have demonstrated a readiness of local governments to support retrofitting of their schools and hospitals, and most recently some municipalities have retrofitted a few school buildings through their budgetary resources.

To create incentives for the local communities to continue to maintain the energy efficiency measures the provincial government of has indicated its willingness to pilot a program of sharing the benefits of energy savings with the school, to be used for predefined purposes such as purchase ofsports equipment, additional pedagogical tools etc. at the discretion ofthe local community and the school administration.

In the schools, energy efficiency awareness will be spread among the teachers and the students, and through them to the local community, by including play-way pedagogical methods about energy and the benefits of end-use efficiency. A similar program in IDA funded project in Belarus has yielded good benefits.

The modem gas-fired CHP plant at the CCS will require staff rationalization in number (from 77 to 25) as well as skills. At present CCS employs 17 engineers, 35 fully qualified operators and 25 partially qualifiedauxiliary workers. Of these 38% are above the age of 50. The technically qualified staff will be trained and redeployed for operating the CCS CHP plant and heating system. The issue of surplus staff will be dealt with under a broader scheme to be designed under the CCS rationalization project, expected to be financed by EIB.

A detailed feasibility report conducted for the construction of the CHP plant and the gas pipeline has confirmed that there will be no acquisition of land and displacement of people. A highly publicized public consultation meeting was held in Belgrade, where the details of the project, route of the gas pipeline, and replacement of existing coal and oil-fired heat plant with that a gas-fired plant were shared with the public, media, and NGOs. 6.2 Participatory Approach: How are key stakeholders participating in the project? The project design is intended for continuous leaming throughout implementation so as to better understand the functioning of a demand-side program that is based on public-private initiative in Serbia. During the initial selection of social sector buildings, the ministries of health and education have been exposed to many local initiatives to involve parents, teachers, medical staff, and health NGO groups into monitoring and evaluation of project implementation. The school children in the participating schools can become very important agents to reach a wider population with information about energy efficiency beyond the direct beneficiaries. This would help prepare the ground work for other demand-driven projects, such as the associated GEF project, which will focus on the residential sector where beneficiaries will be asked to make

- 26 - collective decisions about energy efficiency improvements. Thus, when the selection process is completed, appropriate participatory approaches, such as advisory groups, information dissemination and feedback, and a continuous public consultation will be initiated with the assistance of communication consultants in some localities and then replicated in others. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The project team has been working closely with a locally-established intemational NGO, Alliance to Save Energy, working as consultants to SEEA under a USAID grant. A subcommittee on energy efficiency has been established under the auspices of the Standing Committee of Local Authorities. USAID is funding a program to strengthen local capacity through this Committee. A local network ofjournalists interested in energy issues has been recently established and is increasingly spreading information about energy and this project in close cooperation with the ASE. The PRSP National Strategy was approved in September, 2003. A special PRSP Energy Team has made its contributions, and a substantive consultations were conducted between May and September 2003. A second phase of the social assessment, undertaken by ASE in April 2003, was a very specific consultation process in which a number of municipal officials, tenant associations, hospital and schools' professional groups were consulted. In the context of public consultation for environmental assessment for a CHP plant at the CCS, held in Belgrade, the broader details of the project, the implementation plans, and the likely benefits were shared with the civic society. A communication program will be launched and discussions will be held with the local communities to mobilize citizens to (i)learn more about energy savings/efficiency and (ii)to lay the ground work for the GEF project, i.e. to mobilize homeowner associations and encourage local self-help groups and NGOs to promote collective decision making by the homeowners and learn about the commercial banks' operations and procedures. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomcs? The SEEA has incorporated specific selection and appraisal criteria for energy efficiency investment that substantially include social and demographic elements. The selected social sector buildings will cover the whole country and be focused on some poor regions or poor urban and rural areas or areas with substantive numbers of refugees and IDPs. When project implementation starts, SEEA will implement communications activities designed to involve the many beneficiaries, i.e. parents, teachers, and NGOs. This communication plan could include town-hall type meetings, press briefings, and radioiTV contact programs. A social sector specialist of the Bank will be involved in the supervision ofthe project. 6.5 How will the project monitor performance in terms of social development outcomes? SEEA will outline a draft scheme of monitoring and evaluation, which would go beyond pure technical and financial elements and include social elements. This plan will include monitoring of the perception and attitudes of direct beneficiaries with regard to the levels of comfort, air quality, quality of lighting, and observed energy savings. In addition, progress in implementation and the information on the benefits realized through the project will be shared with the local communities. This especially refers to sharing of evaluation report of achieved energy savings.

Policy Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestrv (OP 4.36. GP 4.36) 0 Yes 0 No I I I

- 27 - Pest Management (OP 4.09) 0 Yes 0 NO Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) 0 Yes 0 No Involuntary Resettlement (OP/BP 4.12) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes 0 NO Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 NO Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)" 0 Yes 0 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. An environmental assessment, including environmental management plan, has been prepared in compliance with OP 4.01 on Environmental Assessment. Bank supervision missions will include, when appropriate, an environmental specialist who will review activities undertaken to comply with the Bank's environmental policies, Periodic progress reports of implementation will include compliance with safeguards.

F. Sustainability and Risks 1, Sustainability: The proposed project would make investments that produce demonstrable benefits in more efficient space heating and introduce building level improvements that increase users' collective control of heat consumption, empowering hospital and school administrators and municipalities with information and experience to make decisions about space heating.

The project focuses on energy efficiency as the principal objective and therefore investments would need to be limited to those which yield high energy savings per normalized heat volume. The sustainability of the project would be in part achieved through the ability of the beneficiaries to achieve expected benefits. High energy savings and financial benefits, demonstrated through this project, will create necessary incentive (i) for the public officials to use budgetary resources for energy efficiency measures in their capital and maintenance expenditure decisions for public buildings, and (ii)for the residential consumers to seek financing for similar measures in their homes and buildings.

Through the USAID supported initiative of Standing Committee of Local authorities, discussions over the last year by SEEA and its consultants, and rising prices of energy have all led to a growing awareness among public officials about energy efficiency. For example, the provincial government of Vojvodina has made a beginning by allocating, albeit small amounts, in its budget of last year for investment in retrofitting schools. The city of Belgrade is also promoting energy efficiency measures.

Learning from the practical experience of implementing energy efficiency measures in public buildings and realization of financial savings and fbnctional improvements, the public officials would be encouraged to take decisions for implementation of consumption based tariffs and metering of heat consumption -- a measure necessary for creating incentive for consumers connected to district heating to change their energy consumption behavior and control their consumption.

2, Critical Risks (rcflecting thc failure of critical assumptions found in the fourth column of Annex 1):

~~ Risk I Risk Rating I Risk Mitigation Measure From Outputs to Objective S Energy reforms and social issues arising from them are dealt with primarily through a series of SACS. Poverty and living standards surveys

- 28 - (conducted through other Bank operations) and the poverty reduction strategy, currently under preparation, will help improve criteria for supporting the poor. Energy strategy, including heat strategy, M A draft energy strategy has been prepared and is is not adopted and its implementation not currently under discussion. A draft energy law started. has been approved by the government and submitted for approval of the Parliament. SEEA is not part of energy policy-making S Technical Assistance from EAR is being process. provided for SEEA’s institutional development. Outputs from this and the proposed GEF project shall provide SEEA the experience needed to underpin policy advice. Co-financing for the gas pipeline is not M NIS-Energogas is commited to finance and available and adequate gas is not made construct the gas pipeline. Contract award for available the heat plant will be subject to the award of contract for construction of gas pipeline. For design, supervision, supply and M Bank’s procurement procedures will be used and erection of equipment, technically Bank team will be closely involved in review of competent consultants and qualified procurement, and supervision of contractors are not selected. implementation. From Components to Outputs Sufficient Counterpart financing for the The budget proposals for FY 2004 are CCS, schools and hospitals is not considered adequate for the project’s first year available. expenditure. Assurances from the Ministry of Finance shall be sought to ensure counterpart financing is provided for future years. The City administration has promised to contribute US$ 500,000 equivalent to fund the CCS component. Weak implementation capacity of SEEA Through the project, competent and qualified and the CCS affects the pace of consultants will be engaged for providing implementation assistance to both the agencies in technical designs and specifications, preparation of bidding documents, procurement, quality control, and contract administration. OGrall Risk Rating M Macroeconomic and political stability remain key risk drivers that would significantly affect the demand-side measures proposed under the project. However, electricity and heat tariffs have been substantially increased, and are expected to be increased still further. The commitment ofthe Government and the various local governments to this project is very high. iisk Rating - H (High Risk), S (Substantial Ris , M (Modest Risk), 1 :Negligible or Low Risk)

3. Possible Controversial Aspects:

- 29 - G. Main Credit Conditions

1. Effectiveness Condition (i)execution of a sub-credit agreement between SaM and the Republic of Serbia, satisfactory to the Association;

(ii)receipt by the Association of a satisfactory legal opinion from SaM regarding the execution and binding nature of the DCA, following DCA ratification by SaM parliament, and regarding the execution and binding nature ofthe sub-credit agreement between SaM and the Republic ofSerbia; and

(iii)receipt from the Republic of Serbia of a satisfactory legal opinion regarding the execution and binding nature of the sub-credit agreement.

2. Other [classify according to covenant types used in the Legal Agreements.]

Safeguards Covenants (i)The project construction will comply with the environmental safeguards described in the Environmental Management Plan.

Financial Covenants

(ii) The MOME's PIU shall maintain a satisfactory Project Financial Management System, including records and accounts, and to prepare financial statements in accordance with accounting standards satisfactory to the Bank. The PIU shall provide annual project accounts and an audit report to the Association within five months of each fiscal year (with the audit to be carried out by independent auditors in accordance with International Standards on Auditing, and TORSsatisfactory to the Association).

(iii) The PIU shall prepare quarterly Financial Monitoring Reports (FMRs) which will include, at a minimum: a statement of sources and uses of funds for the Project that shows year to date and cumulative amounts, and explains variances between the actual and planned uses of such funds; 0 describes physical progress in Project implementation, both cumulatively and for the period covered by the said report, and explains variances between the actual and planned Project implementation; and sets forth the status of procurement under the Project 0 The first FMR will be furnished to the Association not later than forty-five (45) days after the end of the first calendar quarter after the Effective Date

H. Readiness for Implementation H 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0 1. b) Not applicable.

0 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. H 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory

- 30 - quality. 4. The following items are lacking and are discussed under loan conditions (Section G):

I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

- Nancy Cooke Sector ManagerlDirector Acting Country Director

- 31 - Annex 1: Project Design Summary SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project Key Performance Data Collection Strategy Hierarchv of Obiectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector1 country reports: from Goal to Bank Mission) TSS Goal: Reduce Adequate increase in power 3ank supervision and country 'olitical commitment to nacroeconomic imbalances in tariffs to cover cost of supply. rogress reports. eform is strong. :nergy. TSS Goal: Stimulating New energy policy, and new 3xternal financing iear-term growth and energy law adopted. equirements met through xeating a basis for levelopment agency financing ustainable supply response. .nd fiscally responsible budgets.

Jroject Development Outcome / Impact 'reject reports: from Objective to Goal) 3 bjective: Indicators: To improve end-use energy Reduction in emission of local Zonsolidated quarterly reports 20s committed and :fficiency in heating buildings air pollutants (sulfur dioxide, ~y the Project Steering mplementing energy reform o make heating more nitrogen oxide, and Zommittee. igenda in a timely way. iffordable as well as improve particulates) and greenhouse unctional and health gases (carbon dioxide) kfonitoring reports on 'ublic officials use energy mvironment of the users. An produced by the boilers used :missions and on heat losses :fficiency as one of the mportant associated objective by the Clinical Center for n the distribution system, :riteria in their capital s to reduce the local and meeting its heat demand +om the CCS. :xpenditure and operation and global environmental impact naintenance expenditure for )fthe use of dirty hels for 3ank supervision missions. he public buildings. ieating buildings in Serbia. Quantified energy savings of the retrofitted public Zonsultations with MOME, buildings, and cost of heat per 3EEA, Ministry of Health, square meter. ainistry of Education, and he municipalities.

Increased end-user satisfaction measured through perception surveys -this :odd include perspectives in improved functionality and health environments.

~~ ~ lutput from each 3utput Indicators: 'reject reports: from Outputs to Objective) Zomponent: Zomponent 1: 2uarterly reports by PIUs, Snvironmental Supervision missions, and mprovement,rehabilitation :onsultations with GOS. If heat supply system, and 'nergy efficiency

- 32 - improvement in the CCS. (1) Significantly lower emission of air pollution and GHG from the CCS complex within Belgrade's heavily polluted urban center and (2) lower cost of energy consumption for CCS. 1.1 The Clinical Center The Clinical Center uses gas The gas pipeline is extended connected to gas supply and or meeting its needs of heat, o the Clinical Center, gas-fired heat and power lot water, and steam. idequate gas is made production plant installed. wailable, and the CCS staff )perates and maintains the )lant well. 1.2. Retrofitting of the mprovement in patient and A&E reports lospital technical staff maternity hospital completed )ther end-user comfort, air )perates and maintains the according to specifications. pality, and indoor air acilities well. emperature, and reduction in :nergy consumption 1.3 Technical assistance for jatisfactory progress in 'rogress reports, including Zompetent technical project implementation at lesigning, procurement and eport on quality of work :onsultants are engaged; CCS delivered. mplementation of sub xecuted :ounterparts are available at xojects and quality of works XSfor contract :xecuted according to the idministration. :ontracts luarterly reports by SEEA. 3nergy pricing reforms Component 2: Energy hpervision missions :ontinue; Energy strategy Efficiency improvements in :onsultations with GOS and idopted and its Social Services Facilities ;EEA. mplementation started; SEEP (Schools and Hospitals) s part of energy across Serbia )olicy-making process. Lower cost of energy consumption and improved user comfort within participating hospitals and schools. 2.1 Energy efficiency (umber of buildings 'ublic buildings selected equipment installed and etrofitted. iccording to an agreed rehabilitated in social services :riteria; Satisfactory facilities. mplementation arrangements nade for execution of works; Subprojects are completed uithin the cost estimates, and ;avings are realized. Component 3. Technical Assistance Relevant TA activities professionally implemented, on time, and within budget. 3.1 Technical assistance for ;atisfactory progress in 'rogress reports, including Zompetent technical project implementation in lesigning, procurement and eport on quality of work :onsultants are engaged; social service buildings mplementation of sub xecuted :ounterparts are available at provided lrojects and quality of works 3EEA for contract

- 33 - executed according to administration. contracts 3.2 External Communications Communication plan and 'rogress reports, including SEEA Communications technical assistance provided budget completed annually. vl&E report. Strategy prepared, Project to SEEA. x"unication plan prepared Number of local communities md consistent with Strategy, consulted; other outreach Zonsultants engaged to programs performed. implement the plan. Feedback mechanisms put in place for making outreach program effective. 3.3 Energy Audits Number of Energy Audits and Adequate number of Investment Proposals technically qualified completed. professionals interested in this business, and ready to invest in training for future business opportunities. 3.4 Monitoring and Satisfactory M&E program Competent consultants Evaluation program designed; data collected, zngaged to design and implemented analyzed, and used for implement the M&E program. feedback to the policy makers, M&E integrated in SEEA's and for refining business process. communication plans for promoting energy efficiency measures. Project Components / Inputs: (budget for each Jroject reports: (from Components to Su b-components: component) Outputs) Component 1: US$ 8.4 million 'roject progress and Sufficient counterpart Iisbursement reports financing. quarterly and annual).

teview of technical Competent supplier and pecifications, and contractor are engaged for mngagement of consultants supply of equipment and hrough Bank procurement Zxecution of works; For the irocedures gas pipeline satisfactory implementation arrangements are made.

- 34 - Subcomponent (d) Ceview oftechnical Competent contractors and Energy efficiency ipecifications, and suppliers are engaged for improvements in the ngagement of consultants execution ofworks maternity hospital at the CCS hrough Bank procurement wocedures

Component 2: Energy IS$ 14.12 million 2omponent 2: Energy Energy efficiency measures Efficiency improvements in 3fficiency improvements in realize expected savings. Schools and Hospitals across Social Service buildings Serbia Satisfactory implementation nstallation of energy arrangements are made Installation of energy :fficiency equipment and between the Ministries of efficiency equipment and enovations in social service Education and Health and renovations in selected social acilities (schools and SEEA. service facilities (initial iospitals). investment program consists GOS and the municipalities to of 17 schools and 12 provide incentives for the hospitals,). schools and hospitals to continue to maintain energy efficiency measures. Component 3: Technical JS$0.47 million )reject progress reports, Qualified consultants are Assistance iupervision missions engaged for various activities Technical assistance for included in the design and supervision of sub-component; SEEA is able implementation ofpublic to provide counterpart staff to buildings retrofitting work with the consultants. (Component 2); Energy Auditing and preparation of investment proposals; Communication, Monitoring and Evaluation;

Component 4: Incremental JSO.50 million )reject progress reports, MOH, MOES, MOE and Operating Costs iupervision missions SEEA are able to execute implementation responsibilities cost-effectively

- 35 - Annex 2: Detailed Project Description SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project The project would consist of three components: (i)Environmental Improvement, Rehabilitation of Heat Supply System, and Energy Eflciency Improvements in the Clinical Center of Serbia (CCS) in Belgrade. This component will consist of three sub-components: (a) conversion of nineteen lignite and mazut fired boiler plants at the Clinical Center to one natural gas-fired combined heat and power (CHP) plant for production of about 60 MW of heat, sanitary hot water, and steam, and 2 MW of power, (b) reconfiguration and modernization of the heat distribution system, and (c) energy efficient retrofitting of a matemity hospital in the CCS, selected as a high priority building by the Government. (ii)Energy Eflciency Improvements in Social Sewice buildings (Schools and Hospitals) across Serbia. This component will optimize space heating in selected school and hospital buildings across Serbia through tailored investment packages combining supply and demand side improvements. These would include substation modernization, automatic temperature control, insulation, and improvement in lighting in the schools. (iii)Technical Assistance for project implementation through (i)engaging consultants, on behalf of Ministries of Education and Health, for design, supervision, and quality control in execution of works in schools and hospitals, (ii)design and implementation of a monitoring and evaluation system, (iii) communication with the local communities where the participating schools and hospitals are located; (iv) engaging consultants for energy auditing and investment proposal preparation for additional buildings; and (v) project financial management and auditing. By Component:

Project Component 1 - US$8.41 million Heating, heat distribution system, and CHP plant:

This component includes a new gas fired boiler plant and a small CHP plant based on a gas engine. The fuel conversion to natural gas requires a medium pressure gas connection pipeline from the existing gas network to the CCS and a gas pressure reduction station at the CCS. The component also includes a new heat transmission system for heat and hot water and steam from the boiler plant to the buildings with a modem heating substation in each building.

The existing boiler plants will be replaced by a centralized gas fired boiler plant which will be located near the existing main boiler plant. The new boiler plant will have a capacity of 42 MW of heat, and 12 MW steam and sanitary hot water. In addition to the main boiler plant 2 small steam boilers will be added to an existing boiler plant which supplies steam to the laundry. The boilers will be high-efficiency gas boilers with modern automation and control system allowing them to operate within a large load range. To secure the heat supply to the hospital in emergency cases the boilers will be equipped with dual fuel burners allowing fuel oil to be used as reserve fuel.

A small CHP plant will be constructed at the site of the main boiler plant. The CHP plant will be a gas engine with electric output about 2 MWe and heat output about 2.1 MWt. The CHP unit is designed so that it can operate on full capacity also during the summer days based on the heat load of hot sanitary water and steam. Most of the time the generated electricity will be used by the hospital. However, there will be an arrangement with the power distribution company for exchange of off-peak power with peak power. In addition, the hospital may still need to buy small quantity of power to meet its peak requirements.

The medium pressure gas pipeline (about 4 km) from the existing gas network will be extended to the CCS. A gas pressure reduction station will be located in the CCS area. NIS Enrgogas (a national gas company)

- 36 - will supply the gas, own the gas pipeline and the pressure reduction station. The low pressure gas pipeline at the hospital area will belong the CCS. NIS Energogas will also prepare the technical specification for the gas pipeline and be responsible for obtaining all necessary licenses and permits. The gas pipeline will be constructed along the main highway and is not crossing privately owned land thus NIS Energogas should not have any difficulties with right-of-way issues.

The heating substations shall be located in individual buildings where hot sanitary water will prepared in heat exchangers based on the need of each building. The heating substations shall be equipped with modem control devices to regulate the temperature of the circulating space heating water depending on outside weather conditions. A heat energy meter will also be installed at each substation.

Retrofitting of the matemity hospital building (about 12,000 square meters) in the CCS complex, will include improving insulation of roof and walls, new PVC windows, and improved energy efficient lighting. The maternity hospital building will also be equipped with the substation as explained in the preceding paragraph and in addition, temperature regulators will be installed at the radiators inside the rooms. The design and supervision consultants to be engaged for the CCS will be responsible for preparing the technical specifications, assist in procurement of equipment and works, and supervise the execution of work.

Project Component 2 - US$14.12 million Energy Efficiency Improvements in Social Service buildings (Schools and Hospitals) across Serbia A total of about 60-70 buildings and the heating systems which supply them are proposed to be retrofitted over a period of five years. Energy audits for 29 of these buildings, comprising of 17 primary schools and 12 hospitals have been completed and investment proposals have been prepared.

The investment packages will include inter-alia (i)insulation of walls, roof, basement walls, basement ceiling, (ii)for the heating system, replacement of bumer with a fully modulating bumer, control system to regulate the amount of heat require, balancing valves to regulate the flow of hot water through the pipes, and piping insulation, and (iii)replacement or rehabilitation of windows. This component may also include fuel conversion as well as limited investment in combined heat and power similar to investment in the CCS. For school buildings lighting for the class rooms will be designed to meet the twin objectives of energy efficiency and user comfort since in most of the schools where energy audit was carried out lighting was found to be much less than the levels necessary for the children to concentrate without undue stress on their eyes. Investment packages will be designed specific to each building. Average cost of investment package is estimated to be about US$ 0.098 million per school and US$ 0.16 million per hospital.

Respective Ministries will be responsible for contracting the supply and installation of equipment and execution of works. SEEA will provide technical support to both the Ministries and engage consultants to design, prepare technical specifications, assist in procurement, supervise execution of works and quality control. In addition to an official from the Ministry of Health and Ministry of Education, the Director/Administrator of each participating hospital and school will be contract managers for their respective buildings.

Project Component 3 - US$ 0.46 million Technical Assistance

In addition to engaging consultants for providing technical support for project implementation to the Ministries of Health and Education, SEEA will develop the market by increasing awareness among the local communities, public officials, energy suppliers, and potential financers of such investments. This

- 37 - component will also help in creating local capacity in the market for providing energy audit services, supply of equipment, and contractual arrangements for providing high quality of workmanship in execution ofworks. In particular, this component will include engagement ofconsultants for:

(i) Design and supervision of works in social service buildings. International and local consultants will be hired to prepare designs, technical specifications, bid document preparation, procurement, implementation of civil works, and quality control. These consultants will also ensure the operators will be properly trained in operation and maintenance ofthe rehabilitated heating assets.

(ii) Monitoring and Evaluation. Local consultants will be hired and a limited amount of equipment shall be purchased for a comprehensive monitoring and evaluation program. The participating schools and hospitals will be asked to assist in the collection of data to measure actual energy consumption and costs. In addition, social monitoring data will be collected to establish the impact the investments and training, if any, have had on energy efficiency behavior of beneficiaries. Baseline data will be collected as a requirement for participating in the project. The data collection and analysis will be performed by SEEA with the assistance of consultants. The scope of work of the design and supervision consultants, including technical monitoring and evaluation, is described at Section B of Annexure 11.

(iii) External communications. Communication consultants, preferably with experience in, energy efficiency communications, will be hired to assist SEEA with the development and implementation of a communications plan for the project. The project will also finance a small amount ofthe initial costs of the communications program which will focus efforts on maximizing the local impact of the investments (e.g. development of pedagogical materials related to energy efficiency in rehabilitated schools for an energy efficiency learning event) and communicating the aggregate impact and lessons learned of the project to key stakeholders in the government, private sector and public at large. The consultant will also be responsible for developing the overall monitoring and evaluation system for the project as well as designing and executing specifically the monitoring and evaluation of social impacts. The scope of work of the consultants, including social impact monitoring, is described at Section C ofAnnexure 11.

(iv) Energy Auditing. The project will finance the energy audit and project preparation costs for selected public buildings.

(v) Project financial management assistance. Accounting software will be purchased and a local accounting consultant will be hired to design and implement proper accounting and internal controls for the project as well as generate project management reports in a format acceptable to the Bank.

(vi) Auditing. The cost of audits of the project financial statements will be financed out of the proceeds of the IDA credit.

- 38 - Annex 3: Estimated Project Costs SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

Local Foreign Total Project Cost By Component US $million Environmental Improvement, heating system renovation, and 7.47 energy efficiency improvement at the CCS Energy Efficiency Improvcmcnts in Social Service buildings 7.88 4.48 12.36 (Schools and Hospitals) across Serbia Technical Assistance 0.46 0.00 0.46 Incremental Operating Costs 0.50 0.00 0.50 Unallocated 0.75 0.75 1.50 Total Baseline Cost 13.42 8.87 22.29 Physical Contingencies 0.76 0.16 0.92 Price Contingencies 1.47 0.32 1.79

I Total Financing Required 1 15.65 1 9.35 1 25.00

Local ' Foreign Total Project Cost By Category US $million US $million US $million Goods 6.00 8.00 14.00 Works 7.00 0.00 Services 1.40 0.60 Incremental Operating Costs 0.50 0.00 Unallocated 0.75 0.75 Total Project Costs' 15.65 Total Financing Required 15.65 25.00

I Identifiable taxes and duties arc 2 (US%m)and the total project cost, net oftaxes, is 23 (US$m). Therefore, the project cost sharing ratio is 91.3% oftotal project cost net of taxes.

- 39 - Annex 4: Cost Benefit Analysis Summary SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

[For projects with benefits that are measured in monetary terms]

1 If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation ofthe difference is warranted, e.g. "The value of financial benefits is less than that ofeconomic benefits because of controls on electricity tariffs."

Summary of Benefits and Costs: Least Cost Heating Alternative for the CCS

Centralized gas based heat supply is the least cost heating alternative for CCS. A feasibility study was prepared by a consultant, Energoprojekt Entel, analyzing the various heat supply alternatives to meet the heat, hot sanitary water and steam demand of the CCS. The study compared the following heat alternatives:

(a) Conversion and rehabilitation of a number of the boiler units and replacement of the rest older units by new gas fired ones; as well as with repairs or replacement of certain sections of the steam or water distribution network;

(b) Replacement of all the existing boiler plants by new decentralized gas fired ones either at the original or other sites; rehabilitation or replacement of certain sections of the steam or water distribution network;

(c) Rehabilitation of a number of the boiler units fired with their original fuels to serve for steam supply andor peak loads and connection to the district heating network for base-load heat supply, and repair or replacement of certain sections ofthe local steam or water distribution network;

(d) Replacement of all the existing boiler plants by one or more new centralized gas fired ones at selected site(s), as well as with reconstruction or replacement of certain sections of the steam or water distribution network;

The analysis shows that the centralized heating alternative (d) is the least cost heating alternative for the

- 40 - CCS. The alternative is described in detail in Annex 2.

Cost Benefit Analvsis Heating Svstem

The cost benefit analysis for the proposed investment program for the heating system shows the economic rate of return of 36.5% for the CCS component with the total investment of US$ 5,.87 million. The main assumptions in the cost benefit analysis area:

(a) The annual heat consumption for the buildings is assumed to be reduced from 103,000 MWh to 97,000 MWh because of better regulation at the heating substation based on individual needs of each building and the retrofitting the maternity hospital building; (b) The annual heat losses in the heat and steam transmission system will be reduced from current 20,000 MWh to 1,900 MWh because of new preinsulated pipeline system; (c) The boiler efficiency ofthe existing oil fired boilers is about 75% and coal fired boilers about 50%. After the project the boiler efficiency ofthe gas-fired boilers will about 93%; and (d) Annual operation and maintenance costs will be reduced by about US$ 100,000 because of lower repair costs and less staff needed to operate the modern heating system compared to the out-dated existing system.

Cost Benefit Analvsis for the Heating Svstem including the CHP plant

Based on the above-mentioned assumptions the cost benefit analysis for the whole proposed investment program for the heating system including the CHP plant shows the economic rate of return of32.4% for the CCS component with the total investment of US$ 7.21 million.

Price assumptions:

Item Unit Unit price I Notes Coal US$/ton 80 Mazut US$/ton 227 Light fie1 oil US$/ton 680 Natural gas US$/lOOO m3 175 Electricity purchase price US$/MWh 40 Electricity sales price US$/MWh 32

I I I I I

The table below shows the cost-benefit analysis for the heating system at the CCS.

-41 - ECONOMIC ANALYSIS OF CENTRALIZED HEATING ALTERNATIVE AT CCS

Heat energy balance (MWh) 2004 2005 2006 2007 2008 2009 2010

Hot sanitary water 18,000 18,000 18,000 18,000 18,000 18,000 18,000 Steam 9,000 9,000 9,000 9,000 9,000 9,000 9,000 Total heat demand 103,000 97,000 97,000 97,000 97,000 97,000 97,000 Heat losses and own consumption 20,000 1,900 1,900 1,900 1,900 1,900 1,900 Boiler losses 41,000 10,500 10,500 10,500 10,500 10,500 10,500 Total fuel requirement for heat 164,000 109,400 109,400 109,400 109,400 109,400 109,400 Used fuels Mazut (tons) 11,500 0 0 0 0 0 0 Light fuel oil (tons) 650 0 0 0 0 0 0 Coal (tons) 6,800 0 0 0 0 0 0 Natural gas (1000 m3) 0 10,940 10,940 10,940 10,940 10,940 10,940

Annual heating costs (1000 US$) Mazut 2,614 0 0 0 0 0 0 Light fuel oil 443 0 0 0 0 0 0 Coal 54 I 0 0 0 0 0 0 Fuel storage costs 360 0 0 0 0 0 0 Natural gas 0 1,927 1,927 1,927 1,927 1,927 1,927 Operation and maintenance 398 298 298 298 298 298 298 Total heat energy costs 4,355 2,225 2,225 2,225 2,225 2,225 2,225

~ ~~~ WITHOUT PROJECT 2004 2005 2006 2007 2008 2009 2010 Heat energy balance (MWh) Space heating 76,000 76,000 76,000 76,000 76,000 76,000 76,000 Hot sanitary water 18,000 18,000 18,000 18,000 18,000 18,000 18,000 Steam 9,000 9,000 9,000 9,000 9,000 9,000 9,000 Total heat demand 103,000 103,000 103,000 103,000 103,000 103,000 103,000 Heat losses and own consumption 20,000 20,000 20,000 20,000 20,000 20,000 20,000 Boiler losses 41,000 41,000 41,000 41,000 41,000 41,000 41,000 Total fuel requirement for heat 164,000 164,000 164,000 164,000 164,000 164,000 164,000 Used fuels Mazut (tons) 11,500 11,500 11,500 11,500 11,500 11,500 11,500 Light fuel oil (tons) 650 650 650 650 650 650 650 Coal (tons) 6,800 6,800 6,800 6,800 6,800 6,800 6,800 Natural eas (1000 m3) 0 0 0 0 0 0 0 Annual heating costs (1000 US$) Mazut 2,614 2,614 2,614 ' 2,614 2,614 2,614 2,6141 Light fuel oil 443 443 443 443 443 443 443 Coal 541 54 1 54 1 541 541 54 1 54 1 Fuel storage costs 360 360 360 360 360 360 360 Natural gas 0 0 0 0 0 0 0 Operation and maintenance 398 402 406 410 414 418 422 ITotal heat energy costs 4,355 4,359 4,363 4,367 4,371 4,375 4,379 ICost benefit analysis (1000 US$) Investment 5,873 Total savings 2,135 2,139 2,143 2,146 2,150 2,154 Net benefits (5,873) 2,135 2,139 2,143 2,146 2,150 2,154 Economic Rate of Return (20 years) % 36.5% Net Present Value (20 years, 10%) 1000 US$ 11,381

- 42 - The table below shows the cost-benefit analysis for the Heating System including the CHP plant,

- 43 - ECONOMIC ANALYSIS OF CENTRALIZED HEATING SYSTEM INCLUDING CHP 2004 2005 2006 2001 2008 2009 2010 WITH PROJECT Heat energy balance (MWh) Total fuel requirement for heat 164,000 109,400 109,400 109,400 109,400 109,400 109,400 Electricitv halance (MWh) Electricity demand 19000 19000 19000 19000 19000 19000 19000 Electricity production 0 16000 16000 16000 16000 16000 16000 Electricity sales 0 3000 3000 3000 3000 3000 3000 Electricity purchase 19000 6000 6000 6000 6000 6000 6000 Used fuels Mazut (tons) 11,500 530 530 530 530 530 530 Light fuel oil (tons) 650 0 0 0 0 0 C Coal (tons) 6,800 0 0 0 0 0 C Natural gas (1000 m3) 0 10,450 10,450 10,450 10,450 10,450 10,45C Additional gas needed for CHP (1000 MWh) 0 1950 1950 1950 1950 1950 195c Annual heating costs (1000 US$) Mazut 2,614 0 0 0 0 0 C Light fuel oil 443 0 0 0 0 0 c Coal 54 I 0 0 0 0 0 ( Fuel storage costs 360 0 0 0 0 0 C Natural gas 0 2,270 2,270 2,270 2,270 2,270 2,27C Operation and maintenance 398 373 373 373 373 373 373 Electrict purchase costs 760 144 I44 144 144 144 144 Total energy costs 5,115 2,787 2,181 2,787 2,781 2,781 2,185

WITHOUT PROJECT 2004 2005 2006 2001 2008 2009 2010 Heat energy balance (MWh) Total fuel requirement for heat 164,000 164,000 164,000 164,000 164,000 164,000 164,000 Electricity balance (MWh) Electricity purchase 19000 19000 19000 19000 19000 19000 19000 Used fuels Mazut (tons) 11,500 11,500 11,500 11,500 11,500 11,500 11,500 Light fuel oil (tons) 650 650 650 650 650 650 Coal (tons) 6,800 6,800 6,800 6,800 6,800 6,800 6,800 INatural gas (1000 m’) 0 0 0 0 0 0 0 Annual energy costs (1000 US$) IMazut 2,614 2,614 2,614 2,614 2,614 2,614 2,614 Light fuel oil 443 443 443 443 443 443 443 Coal 541 541 541 54 1 541 541 541 Fuel storage costs 360 360 360 360 3 60 360 360 Natural gas 0 0 0 0 0 0 0 Operation and maintenance 398 402 406 410 414 418 422 Electricity purchase cost 760 760 760 760 160 760 760 Total heat energy costs ,115 5,119 5,123 ,121 5,131 ,135 5,139 Cost benefit analysis (1000 US$) Investment 7,2 13 Total savings 2,332 2,336 2,340 2,344 2,348 2,352 Net benefits (7,213) 2,332 2,336 2,340 2,344 2,348 2,352 Economic Rate of Return (20 years) % 32.4% Net Present Value (20 years, 10%) 1000 US$ 11,692

- 44 - Main Assumptions: Please see the previous section

Sensitivity analysis / Switching values of critical items:

Economic Rate of Return

Change Gas price 1 Electricity price 1 Investment cost Base case 32.4% 32.4% 32.4% Increase by 20% 18.1% 36.2% 26.9% Increase by 10% 25.7% 34.2% 29.4% Decrease by 10% 38.4% 30.7% 36.0%

In the worst case the ERR would be 14.6% if the investment cost and gas price increase by 20% at the same time and the electricity price remains on the current level.

Energy efficiency investments produce various streams of benefits, some of which are difficult to quantify. Rates of return will also differ by type of facility. Moreover, the programmatic approach to the retrofit of schools and hospitals provides flexibility to include more buildings in the event investment costs are lower than estimated; therefore, investment plans in the outer part of the implementation period will be finalized in the first year of implementation. In addition, rates of return on individual facility investments could vary because school and hospital administrators may decide to take advantage of the energy saved from the investments and heat the buildings at a higher, more comfortable temperature (such as in cases where buildings are under-heated). The investment packages were optimized for demonstration purposes to include measures, such as installation of new windows, that contribute significantly to energy savings but have high replacement costs and measures with shorter payback periods. For the purposes of economic analysis, the returns include only reduced fuel costs from reduced energy consumption of the relevant system and cost savings from the differences in prices achieved by switching fuels (3 buildings are planned to switch to cleaner fuels). Other benefits not included because their quantification is problematic, are: (a) increases in indoor comfort; (b) reduced air pollution from fuel combustion; (c) improvements in building stock, reducing operation and maintenance of facilities. Therefore, the EIRR may underestimate the true economic return to schools, hospitals and society. Under these assumptions, the cost-benefit analysis ofthe rehabilitation of school and hospital buildings indicates a 15 % rate of return. The financial analysis ofthe proposed investment in selected public buildings indicates a healthy return of 24%.

- 45 - Annex 5: Financial Summary SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project Years Ending US$ million

j Year1 1 year2 1 Year3 I year4 I Year5 1 Year6 1 Year 7 Total Financing Required Project Costs Investment Costs 4.0 8.0 7.6 4.8 0.6 0.0 0.0 Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Costs 4.0 8.0 7.6 4.8 0.6 0.0 0.0 Total Financing 4.0 8.0 7.6 4.8 0.6 0.0 0.0 Financing IBRDllDA 3.4 6.7 6.4 4.0 0.5 0.0 0.0 Government 0.6 1.3 1.2 0.8 0.1 0.0 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial ' 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 4.0 8.0 7.6 4.8 0.6 0.0 0.0

OPERATIONAL PERIOD Year 1 year2 I year3 1 year4 I Year5 I Year6 ' Year 7 Total Financing Required Project Costs Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recurrent Costs 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Total Project Costs 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Total Financing 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Financing IBRDllDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Centra I 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBenefi iaries 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 4.1 4.1 4.1 4.1 4.1 4.1 4.1

Main assumptions:

- 46 - Annex 6(A): Procurement Arrangements SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

Procurement

The components of the proposed Project, their estimated cost and procurement methods are summarized in Table A of this annex. The review thresholds for each of the procurement method are presented in Table B of this annex. Table B1 presents a procurement plan for the contract packages and estimated schedule of the major procurement actions. Table B2 summarizes the capacity of the implementing agencies and the proposed arrangements for procurement and monitoring. The Project will be financed from the proceeds of the proposed Credit of US$21 million equivalent and local expenditure contributions from the Republic of Serbia (US$4 million). The total cost of the Project is estimated to be US$25 million.

A Project Steering Committee (PSC) was established recently by the Ministry of Mining and Energy (MOME) with the participation of Ministries of Finance, Health, and Education, the Serbia Energy Efficiency Agency, and the Clinical Center of Serbia (CCS). The PSC has started functioning and is now managing coordination between various implementing agencies and the beneficiaries

The Goods and Works, wholly or partially financed by IDA, will be procured in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits published in January 1995 and revised in January and August 1996, September 1997 and January 1999. Consultant’s services, wholly or partly financed by IDA, will be procured in accordance with the Guidelines for Selection and Employment of Consultants by World Bank Borrowers published in January 1997 and revised in September 1997, January 1999 and May 2002. Standard documents published by the World Bank will be used by the implementing agencies for the preparation of bidding documents and request for consultant’s proposals. A general procurement notice containing information about bidding and consulting opportunities was published in September 2003 in Development Business and Market, and in Serbian newspaper with national circulation.

Procurement of Goods (ICB-Supply and Installation, Shopping) Contracts estimated to cost US $500,000 equivalent or more per contract shall be procured under International Competitive Bidding. Contract for (a) CHP, Boiler Plant and Steam Boilers (estimated to cost about US $4.5 million) and (b) Distribution networkhubstation (including balancing valves, energy monitoring and management system) estimated to cost about US $2.5 million will be procured by International Competitive Bidding (ICB) with post qualification based on the Bank’s Standard Supply and Installation Document (single-stage bidding). Bidding for these lots shall be through a single bidding document. After technical design is completed, the design and supervision consultant will explore the possibility of combining these two lots as a single package if from engineering and or competition point of view, the same is considered optimum. The procurement for this component will be managed by CCS with assistance of Ministry of Health PIU and Design and Supervision consultants. Contract shall be signed jointly by MOH (the Employer in the contract) and CCS (the User).

Monitoring instruments for a value not exceeding of US$20,000 shall be procured following National or International Shopping procedures. SEEA will manage the procurement.

Procurement of Works (NCB and Minor Works) Contracts estimated to cost less than US$l,OOO,OOO equivalent per contract may be procured under National Competitive Bidding (NCB) procedures with the country specific conditions added to ensure compliance with the World Bank Guidelines. In addition, contracts to be procured under NCB have to be advertised in the entire Serbia and Montenegro, and not

- 47 - only within the Republic of Serbia. These contracts relate mostly to energy efficiency improvements in selected social service buildings to be implemented through SEEA. Specific works shall be (i) rehabilitation of maternity hospital (ii) rehabilitation of schools and (iii ) rehabilitation of hospitals. This will involve one bidding in each year with several lots (say 4 to 5) for school rehabilitation and similarly one bidding with several lots(say 4 to 5) for hospitals including for CCS maternity hospital. It is expected that value of each such bidding will range from $500,000 to $1,000,000 for an aggregate value of about US $7 million.

Procurement will be the responsibility of MOES for the schools and MOH for the hospitals, with the assistance of Design and Supervision Consultant / SEEA. Contracts shall be signed by MOES for the schools and MOH for the hospitals.

It is expected that procurement for most of the above contracts shall follow NCB procedures. However, small contracts with a threshold of less than US$lOO,OOO equivalent per contract may be procured under Minor Works (MW) procedures.

Selection Procedures for Consulting Services. Selection of Consulting firms for Design and Supervision support for CCS (estimated cost US$556,000 equivalent) will be done through "Quality and Cost based Selection" (QCBS) procedure. Consultancy contract shall be procured by MOH, PIU and signed jointly by MOH and CCS. Consultants shall report to CCS. Design and supervision for public building (estimated cost US$l,OOO,OOO) shall also follow QCBS procedure. Contract will be procured by SEEA and signed jointly by MoME and SEEA. Selection for technical assistance for monitoring, evaluation and communication (estimated cost US$200,000) will be through selection based on "Consultant Qualification" (CQ).

Consultant services for technical assistance for energy audits (between 10 to 30 contracts with total estimated cost of US$170,000) will be contracted out under selection based on Consultant's Qualification procedures (CQ) or selection of individual consultants (Section V of Consultants Guidelines). Annual auditing services, estimated to cost US$70,000 equivalent, will be procured through the "Least Cost" procedures (LC). Procurement methods (Table A)

Procurement Method' Expenditure Category ICB NCB Othe: N.B.F. Total Cost I.Works 0.00 7.00 0.00 0.00 7.00 (0.00) (5.60) (0.00) (0.00) (5.60) 2. Goods 13.98 0.00 0.02 0.00 14.00 (11.84) (0.00) (0.02) (0.00) (11.86) 3. Services 0.00 0.00 2.50 0.00 2.50 including incremental operating (0.00) (0.00) (2.04) (0.00) (2.04) costs 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Unallocated 0.00 0.00 1SO 0.00 1SO

- 48 - (0.00) (0.00) (1.50) (0.00) (1.50) Total 13.98 7.00 4.02 0.00 25.00 (11.84) (5.60) (3.56) (0.00) (2 1.OO)

2’ Includes civil works and goods to be procured through national or international shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to project implementation, management, and monitoring.

- 49 - Selection Method Consultant Services Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total cos( A. Firms 1.56 0.00 0.00 0.07 0.37 0.00 0.00 2.00 (1.24) (0.00) (0.00) (0.06) (0.30) (0.00) (0.00) (1.60) B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Total 1.56 0.00 0.00 0.07 0.37 0.00 0.00 2.00 I (1.24) I (0.00) I (0.00) I (0.06) I (0.30) 1 (0.00) I (0.00) I (1.60) I '' Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Credit.

- 50 - Prior review thresholds (Table B) Contracts subject to prior review: (i)first two NCB Works, and first two NCB Goods contracts; (ii)all ICB contracts for Goods (including Supply Installation) and first contract for shopping for goods; (iii) first two Minor Work (MW) contracts; (iv) all contracts with consulting firms estimated to cost US$lOO,OOO or more; (v) all contracts with individual consultants estimated to US$50,000 or more; and (vi) the Terms of Reference for all consultant contracts with consulting firms and the terms of Reference and CVs’ of individuals irrespective of their costs.

Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) I.Works less than 1000; NCB; 2.00; less than 100 Minor Works 0.20 2. Goods above 500; ICB; 13.98; Including Supply and between 20 and 500; NCB; 1.oo; Installation below 20 Shaming 0.02 3. Services(loca1 and below 50; CQ; 0.37; foreign firms) between 50 andl50; LCWFBS; 0.07; above 150 QCBS 1.56

Total value of contracts subject to prior review: US$19.2 Overall Procurement Risk Assessment: High Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-reviewlaudits)

-51 - Table B1: Procurement Plan

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1 W 0.75 1 W 0.75 1 W 0.75 1 G 2.70 1 W 0.75 1 W 0.30 1 W 0.55 1 CF 1.M)

rda ch- 050 1 CF 0.07 LCS AMua4/ 6 a 0.17 CQ/l&. 1 a 020 cQI1m. 1 G OM IS 24pG-4 17%by@ W E-hV24 1'Deoos da ch- 1.50 25.m

November 2003 and the report is available separately as project document.

The nature of the project is such that it requires close coordination among different entities under the various administrative ministries. Some of these entities have limited experience of procurement (MOH and MOES), while others (SEEA,MOME,CCS) have practically no experience on carrying out Bank-fhded procurement. Compounded with these shortcomings, these entitiedagencies are operating in a high risk country in respect of its public procurement system. In light of these shortcomings, on procurement risk these implementing agencies are considered "high risk".

These risks will be mitigated through (i)Borrower engaging a Design and Supervision Consultant (D&S) including for procurement assistance (ii)training and capacity building of staff of implementing agencies (ii)more prior reviews by the Bank and (iii)procurement supervision including limited post reviews

A CPAR for the Federal Republic of Yugoslavia was completed in June 2002.

- 52 - Are the bidding documents for the procurement actions for the first year ready by negotiations: Draft Request for Proposal Documents for Design and Consultancy contracts shall be ready by negotiations

Training Information and Development on Procurement Estimated Date of Project Launch Workshop: May 2004 Date of publication of General Procurement Notice: September 2003 Indicate if there is procurement subject to mandatory SPN/EOI in Development Business: All ICB and consultancy above $200,000 Retroactive Financing: approximately US$ 200,000 Advance Procurement: US$50,000

Explain briefly the Procurement Monitoring System MOH/MOES will have the responsibility for all procurement activities and for installation and management of the procurement monitoring system for its respective component described above. Procurement information will be collected and consolidated by MOME and submitted to the Bank in the quarterly progress reports. This information would include (a) revised cost estimates for individual contracts; (b) revised timing of procurement actions including advertising, bidding, contract award and completion time for individual contracts; and (c) compliance with aggregate limits on specific methods ofprocurement.

Action Plan to Build Procurement Capacity of Implementing Agencies

--MOH PIU will hire a part time procurement specialist to run the procurement process of D&S consultant for Clinic Center from the stage of short listing to the issuing of RFP and thereafter assist the evaluation committee in the selection process.

--SEEA will identify a procurement staff with adequate experience to carry out selection of D&S consultant for Public Buildings. Later a procurement counterpart to D&S consultant should be placed in position, who will be a procurement coordinator.

--MOH PIU would need to hire a staff for taking care of procurement activities for Energy Efficiency project as existing staff are working on a full time basis for health project. This staff should be a counterpart staff for D&S consultant and do all procurement coordination.

-All procurement specialist and those staff who are involved in contract implementation should receive intensive training in procurement of works, goods and consultant services, preferably at Turin ILO or other similar training programs.

Co-financing: Explain briefly the Procurement arrangements under co-financing: NO co-financing.

Procurement Staffing: Devesh Chandra Mishra 202-458-4952, H6-233

Explain briefly the expected role of the Field Office in Procurement: No procurement service support is currently envisioned from the Resident Mission. __ __ .--- .- . - ' Thresholds generally differ by country and project. Consult "Assessment of Agency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.

- 53 - Annex 6(B): Financial Management and Disbursement Arrangements SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

Financial ManaPement 1. Summary of the FinancialManagement Assessment Country Issues

The SaM CFAA report notes that there are a number of risks on the management of public funds in SaM. The risks to the public funds include: (a) poor public sector financial management in the past, (b) unfinished reforms - the governments of both Serbia and Montenegro have commenced a process of major reform, which looks good as designed, but it is still too early to say if the reforms will be totally successful, (c) capacity constraints in both the Federal and Republic governments, (d) weak banking sectors, (e) weak audit capacity, (f) poor implementation capacity in line ministries, and (g) the lack of extensive Bank implementation experiences within SaM. Since re-joining the membership of the World Bank, SaM has been using individual implementation units for each investment project (traditional PIU model), located within the relevant line ministries or project beneficiaries, to mitigate some of these risks.

Strengths and Weaknesses

Technical implementation, including procurement and financial management functions, is spread across several agenciedministries and smooth implementation will depend upon the maintenance of good lines of communication between the various units. The risk of interruption to Project processing as a result of this decentralised mode of implementation is mitigated by (i)the use of one central PIU (within MoME) to retain original documentation, to facilitate auditing and the preparation ofreports to the Bank, the Project Steering Committee, the MoF and the participating line ministries; and (ii)the procurement packaging which results in a small number ofhigher value contracts/transactions.

Implementing Entities

The overall responsibility for implementation of the project will rest with the Government of Serbia. Because of involvement of several Ministries, provincial government and municipalities, a “Project Steering Committee” (PSC) has been established for coordination among them. The Committee is chaired by the Ministry of Mining and Energy and has representatives of the Ministries of Finance, Health, Education, SEEA, and the CCS. The PSC will coordinate, among various Ministries and agencies, the activities of project preparation; approval of investment packages for schools and hospitals; compliance with World Bank procurement guidelines; and monitoring of project implementation. The Ministry of Mining and Energy will establish a small PIU to carry out the day to day activities of project implementation, including operation of the Special Account and consolidating Project Management Reports, under the supervision of the PSC. The responsibilities of various agencies will be as follows: for Component (i)the Ministry of Health, with the assistance of CCS, for implementation of heating system, CHP plant, and energy efficiency improvements in the maternity hospital; for Comuonent (ii)the Ministry of Education for implementation of energy efficiency improvements in the school buildings, and Ministry of Health for implementation of similar works in the hospitals. SEEA will provide technical support and supervise the work of design and supervision consultants for the public buildings; and for Component (iii) the MOME with the assistance of SEEA, for the technical assistance activities e.g. monitoring, evaluation, and communications, and energy auditing.

- 54 - Funds Flow The IDA Credit will be made available to Serbia and Montenegro (SaM) under a Credit Agreement, goveming the terms and conditions of the Credit. The Government of SaM would on-lend the funds on IDA terms to the Republic of Serbia based on a Sub-credit Agreement with terms and conditions satisfactory to IDA. The project expenditure will be accounted for by the Republic of Serbia as a part of its budgetary expenditure on capital improvements in schools and hospitals and for technical assistance. Counterpart funds will be drawn down in accordance with the regular budgetary mechanisms of the Republic of Serbia and will be subject to the control and oversight of the Treasury department of the Ministry of Finance. The following legal agreements will confirm the flow of finds and the respective parties' roles and responsibilities:

The Development Credit Agreement, between IDA and Serbia and Montenegro (SaM); The Sub-credit Agreement, between SaM and Republic of Serbia.

Most disbursements under component one of the project (USD 8.4 million) are expected to take place as direct payments from the Credit Account. For the remaining payments, a special account (SA) will be opened by the GOS in one of the Serbian commercial banks pre-qualified to hold Special Accounts. MOME will operate the Special Account. A detailed procedure for MOH and MOES to access the Special Account is described in the project implementation plan.

For accelerating project implementation, the Government of Serbia plans to engage design and supervision consultants for the CCS and for the public buildings, before the Credit is approved. The Government plans to follow the Bank procurement guidelines for engaging these consultants, and has already started the process by inviting expressions of interest from qualified consulting firms. If the Government is able to sign the contract before the Credit approval, it may have to make payment of advance money for mobilization. Therefore, retroactive financing of an amount not exceeding equivalent of US$ 200,000 is proposed to be provided through the proceeds of the Credit.

Staffing of the AccountingIFinance Function

The majority of procurement and invoice processing will be performed by the existing PIU's within the MoH and the MoES. Each PIU will engage additional procurement/disbursement staff, funded from the credit, who will work under the supervision of the existing PIU Directors. The MoME has appointed a finance officer to prepare documentation for the Bank, to control the Special Account and to consolidate the financial information provided by the MoH and the MoES.

Accounting Policies and Procedures

A PIP has been prepared for the project which describes the flow of documentation between the various ministries and the financial operations of the project. A detailed accounting procedures manual, acceptable to the Bank, has also been prepared. The Project will maintain records on the accruals basis.

- 55 - Reporting and Monitoring

The MoME PIU will prepare financial monitoring reports (FMRs) on a quarterly basis. The FMRs include:

a Project Sources and Uses of Funds a Uses of Funds by Project Activity a Special Account Statement a Project progress report a Procurement report

The first Financial Monitoring Report will be furnished to the IDA not later than 45 days after the end of the first calendar quarter after the Effective Date, and will cover the period from the Effective Date to the end of the first calendar quarter. FMR formats were agreed with the PIU and were confirmed during negotiations.

Information Systems

The PIU will maintain its accounting records on a small off-the-shelf commercial accounting package that is capable of directly producing the financial reports required by the Bank. Procurement plans will be maintained on spreadsheets and will be reconciled to the budget data in Quickbooks.

Supervision Plan The reports of the progress of the project implementation will be monitored in detail during supervision missions. FMRs will be reviewed on a regular basis by the Belgrade-based FMS and the results or issues followed up during the supervision missions. Audited financial reports of the Project will be reviewed and issues identified followed up.

2. Audit Arrangements The project steering committee will be responsible for ensuring that the PIU within the MoME has the project financial statements audited by an independent auditor acceptable to the IDA, in accordance with standards on auditing that are acceptable to the IDA. It will be agreed during negotiations that auditing standards acceptable to the IDA are International Standards on Auditing promulgated by the International Federation of Accountants (IFAC). It will be agreed during negotiations that auditors acceptable to the IDA are those auditors that have been unconditionally pre-qualified to audit IDA funded projects in SaM. The cost of the audit will be financed from the proceeds ofthe credit. An audit opinion on the project's financial statements, statements of expenditures, and Special Account will be required within five months ofthe end of the fiscal year and also of the closing of the project TORSfor the audit of the project financial statements were confirmed during negotiations.

3. Disbursement Arrangements The project is expected to be implemented over a period of four and a half years, which includes six months for the completion of accounts and the submission of withdrawal applications. The estimate of the volume of counterpart funds required to fully implement the Project exceeds the Standard Disbursement Percentage for Serbia.

- 56 - Disbursements from the IDA credit will follow the transaction-based method, i.e., the traditional Bank procedures including reimbursements with full documentation, SOE's, direct payments and special commitments. Allocation of credit proceeds (Table C)

Table C: Allocation of Credit Proceeds

Expenditure Category I Amount in US$million I Financing Percentage Goods 11.87 87 Works 5.60 80 Consulting Services 1.60 Firms - 80 Individual - 70 Incremental Operating Costs 0.43 87 Unallocated 1.50

Total 21.00

Use of statements of expenditures (SOEs): Category Threshold Limit (US$ '000)

Works-- NCB 1,000 (except first two contracts) Minor Works 100 (except first two contracts) Goods -- NCB 500 (except first two contracts) Shopping (International and National) 20 (except the first contract) Consultancy- Firms 100 - Individuals 50

Special account: To facilitate timely project implementation, the MoME, with the assistance of the MOF, will establish, maintain and operate, under conditions acceptable to the Bank, a Special Account in Euro, in one of the five pre-qualified commercial banks operating in Belgrade. An initial authorized Special Account allocation of € 0.3 million will be established. The authorized allocation of the Special Account will be € 1.0 million, once the aggregate disbursements of the Credit total US$ 3.5 million equivalent or more. Replenishment applications should be submitted by the PIU monthly or when one third of the fkds of the SA have been used, whichever occurs first, and must include reconciled bank statements as well as other appropriate supporting documents.

- 57 - Annex 7: Project Processing Schedule SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

I Project Schedule Planned Actual ITime taken to prepare the project (months) I 16 I 27 I IFirst Bank mission (identification) I I 09/17/2001 I IAppraisal mission departure I 11/10/2003 I 11/10/2003 I 1 Negotiations I 0 111212004 I 02/06/2004 I Fanned Date of Effectiveness I 05/01/2004 I I

Prepared by: Mohinder Gulati

Preparation assistance: Juderica Dias

Bank staff who worked on the project.- included: Name Speciality Mohinder Gulati Team Leader Gailius J. Draugelis Energy Efficiency, Municipal Finance Pekka K. Salminen District Heating and Power Engineer Miroslav Ruzica Social Scientist Nirmala Saraswat Environment Engineer D.C. Mishra Procurement Michael Gascoyne Financial Management and Financial Analysis Miroslav Frick Operations Marc Bellanger Consultant, Energy Efficiency Expert Juderica Dias Program Assistant Vesna Kostic External Affairs Gennady Pilch Legal Counsel Joseph Paul Formoso Disbursement

- 58 - Annex 8: Documents in the Project File* SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

A. Project Implementation Plan Draft dated November 2 1,2003

B. Bank Staff Assessments (i)Serbia Energy Sector: Status, Key issues and an Agenda for Action (draft August 2003); (ii)Several reports on review of energy audit methodology, investment packages, etc. by Marc Bellanger, consultant engaged through a French CTF (iii)Procurement Capacity Assessment of MOH, MOES, MOME, SEEA, dated November, 2003

C. Other (iii) Feasibility study for replacement of heat plant at the CCS (September, 2003) prepared by Energoproject-Entel (iv) Environmental assessment report for the CHP and extension of the gas pipeline to the CCS (September, 2003) prepared by Energoproject-Entel; (v) Feasibility study for the public buildings prepared by Nexant (December, 2002); (vi) Energy Audit (AugusdSeptember, 2003) prepared by individual consultants engaged by SEEA using Bank TF 29870 ; (vii) SMMRI reports September 2002 and May 2003; (viii) Feasibility study for establishing SEEA, prepared under EAR funding by MVV. *Including electronic files

- 59 - Annex 9: Statement of Loans and Credits SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project 06-Aug-2003 Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA SF Cancel. Undisb. Orig Frm Rev'd PO74666 2003 PFSACZ 0.00 60.00 0.00 0.00 40.96 -22.17 0.00 PO74464 2003 EXP FIN FAC 0.00 11.50 0.00 0.00 12.76 14.53 0.00 PO76764 2003 SAC (MONTENEGRO) 0.00 15.00 0.00 0.00 8.34 4.53 0.00 PO77473 2003 EMG POWER LIC (MONTENEGRO) 0.00 5.00 0.00 0.00 5.33 0.62 0.00 PO69374 2003 LABOR LIC 0.00 2.75 0.00 0.00 2.60 0.24 0.00 PO76390 2003 SOSAC 0.00 60.00 0.00 0.00 42.15 -29.23 0.00 PO77732 2003 PRlV & REST,OF BANKSiENTPRS TA 0.00 11.00 0.00 0.00 11.76 0.92 0.00 PO77675 2003 HEALTH 0.00 20.00 0.00 0.00 20.61 1.07 0.00 PO75189 2002 EDUC IMPRVMT 0.00 10.00 0.00 0.00 9.79 0.84 0.00 PO74090 2002 TRADE &TRANSPORT FACILITATION IN SEE 0.00 6.76 0.00 0.00 7.71 0.59 0.00 PO74124 2002 SOCASST 0.00 0.00 10.00 0.00 0.41 0.41 0.00 PO74136 2002 EMG ELEC POWER RECN 0.00 0.00 6.00 0.00 2.43 2.43 0.67 PO74616 2002 MONTENEGRO ENV INFRA 0.00 0.00 2.00 0.00 1.33 -0.67 0.00 PO74127 2001 FIN SEC DEVT TA GRANT 0.00 0.00 6.00 0.00 2.06 1.63 0.00 PO74145 2001 PRlV SECT DEVT TA 0.00 0.00 6.00 0.00 2.01 1.68 0.00

Total: 0.00 242.01 30.00 0.00 170.46 -22.00 0.67

- 60 - SERBIA AND MONTENEGRO STATEMENT OF IFC's Held and Disbursed Portfolio June 30 - 2003 In Millions US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2002 Fresh&Co 8.82 0.00 0.00 0.00 8.82 0.00 0.00 0.00 1982187 Igalo 3.17 0.00 0.00 0.00 3.17 0.00 0.00 0.00 1985 Jugobanka 0.00 0.00 0.00 1.07 0.00 0.00 0.00 1.07 2002 MEB Kosovo 0.00 1.11 0.00 0.00 0.00 1.11 0.00 0.00 MFB Yugoslavia 8.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002103 Monte Hotels 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 1980 Radoje 1.17 0.00 0.00 0.00 1.17 0.00 0.00 0.00 1980 Raiffeisen Yug 0.00 1.43 0.00 0.00 0.00 1.43 0.00 0.00 SMSIE Yugo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Tigar Tyre 18.33 0.00 4.11 0.00 13.74 0.00 4.11 0.00 1980 Vojvodjanska 25.52 0.00 0.00 7.25 25.52 0.00 0.00 7.25 2002 1987189 Total Portfolio: 67.01 2.54 4.11 8.32 54.42 2.54 4.11 8.32

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

- 61 - Annex IO: Country at a Glance SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

Serbia and Montenegro at a glance 2/4/04

Europe 8 Lower- POVERTY and SOCIAL Serbia and Central mlddle- Montenegro Asla Income Development dlamond' 2002 Population, mid-year (millions) 6.3 475 2,164 Life expectancy GNI per capita (Atlas method, US$) 1,400 1,960 1,240 GNI (Atlas method, US5 billions) 11.6 930 2,677 T. Average annual growth, 1996-02 Population 1%) 0.1 0.1 1 .o GNI Gross Labor force 1%) 0.4 0.6 1.2 per primary Most recent estimate (latest year available, 1996-02) capita enrollment Poverty (% of population below national povertv line) 10 Urban population 1% of total population) 53 63 46 Life expectancy at birth (years) 72 69 69 I Infant mortality (per 1,000 live births) 12 20 33 Chiid malnutrition (% of children under 5) 2 11 Access to Improved water source Access to an improved water source 1% of population) 90 80 Illiteracy (% of population ape IS+) 3 15 Gross primary enrollment I% of school-age population) 69 102 107 ----Serbia and Montenegro Maie 69 103 107 Lower-middie-Income aroun Female 70 101 107

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratlos' 11.6 15.7 I GDP (US5 billions) 13.6 16.1 Gross domestic investmentiGDP Trade Exports of goods and serviceslGDP 23.7 20.7 Gross domestic savingsiGDP -7.2 -7.0 Gross national savings/GDP 9.1 7.2 -4.6 -8.6 Current account balanceiGDP Domestic c-i- 4 Investment Interest paymentsiGDP 0.6 savings , Total debt/GDP 101.4 76.0 Total debt service/exports 2.4 3.5 Present value of dabtiGDP li' Present value of debtlexports Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annual growth) GDP 5.5 4.0 3.6 ----Serbia and Montenegro GDP per capita 5.7 4.3 3.8 Lower-middie-income group Exports of goods and services 7.7 18.2 16.6

STRUCTURE of the ECONOMY 1982 I992 2001 2002 1 Growth of Investment and GDP [Oh) (% of GDP) 1 Agriculture Industry Manufacturing Services Private consumption 69.6 60.7 General government consumption 17.4 16.3 Imports of goods and services 44.6 43.8

1982-92 1992-02 2001 2002 Growth of exports and Imports [%) (average annual growth) L Agriculture industry Manufacturing Services Private consumption 14.9 6.3 iit General government consumption 6.1 11.6 Gross domestic investment 9.2 34.4 Imports of goods and services 30.0 26.3

Note: 2002 data are preiiminary estimates. Group data are through 2001 *The diamonds show four key indicators in the country [in bold) compared with its income-group average. If data are missing, the diamond will be incomdete.

- 62 - Serbia and Montenegro ~ ~ ___

PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prices (% change) Consumer prices 91.1 21.2 Implicit GDP deflator 91.7 25.5 Government finance (% of GDP, includes current grants) Current revenue 38.9 42.8 97 $8 $9 00 0, Current budget balance 0.2 -1.1 io:6 *--GDP -0-CPI "1 deflator Overall surplus/deficit -1.4 -4.5

TRADE 1982 1992 2001 2002 Export and Import levels (US$ mill.) (US$ millions) 2,412 Total exports (fob) 2,003 7000 T I Food Other fuel 5,000 Manufactures 4,000 Total imports (cif) 4,837 6,320 3,000 Food 2,000 Fuel and energy 1,000 Capital goods 0 96 97 98 99 00 01 Export price index (1995=100) Exports lmpolts Import price index (1995=100J O2 Terms of trade (1995=100J i I

BALANCE of PAYMENTS 1982 2002 1992 2001 Current account balance to GDP (Oh) (US$ millions) i Exports of goods and services 2,743 3,241 0 Imports of goods and services 5,160 6,857 1 Resource balance -2,417 -3,616 2 3 Net income -26 -111 4 Net current transfers 1,915 2,343 5 6 Current account balance -520 -1,384 7 8 Financing items (net) 923 2,200 9 Chanaes in net reserves -395 -816 10 Memo: Reserves including gold (US$ mllll0nS) 1,169 2,280 Conversion rate (DEC, ioca//US$J 66.7 64.2

EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ mllllons) Composition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 11,740 11,912 IBRD 1,840 2,175 IDA 0 167 Total debt service 107 188 IBRD 75 IDA 0 Composition of net resource flows Official grants Official creditors 242 Private creditors Foreiqn direct investment Portfolio equity World Bank program Commitments A - IBRD E. Bilateral Disbursements B. IDA D - Other multilateral F. Private Principal repayments 0 C - IMF G .Short-term Net flows Interest pavments 75 Net transfers

___~~ Development Economics 2/4/04

- 63 - Additional Annex 1I Draft Terms of Reference of Design and Supervision Consultants for (A) CCS, and (B) Public Buildings (C) Monitoring, Evaluation and Communications SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

A. Clinical Center of Serbia: Terms of Reference of Design and Supervision Consultants

1. OBJECTIVES

1.1 The main objective of the investment program for CCS is to improve the energy efficiency of the heating systems in CCS, lower energy costs, improve the quality of heat supply and to reduce environmental pollution in the center of Belgrade.

1.2 The objective of the Consultancy is to assist the CCS to manage the investment program, procurement, and implementation supervision ofthe proposed investment.

2. SCOPE OF WORK

2.1 The Consultant shall provide assistance to the CCS to enable it to achieve the objectives outlined above. The Scope of Work of the Consultant is outlined below. The work of the Consultant is structured in three separate consecutive phases described in the following sections. 2.2 The consultant shall include in the requirements of the bidding documents provisions that meet the continuous heat and steam supply requirements to the consumers at the CCS and minimize the interruptions in heat, sanitary hot water and steam supply during the project implementation.

I. Preparation of project design documentation, bidding documents and technical specifications The consultant shall: a. Review existing studies and documents relevant to the proposed investment program [list of studies to be included in Annex 11; b. Optimize the size of and the connection scheme of the heating plants (preliminary a gas engine 2 MWe/2MWt, hot water boilers 3 x 14 MW (with a reservation for an additional 14 MW boiler unit to be implemented later) , steam boilers 2 x 6 t/h and 2x 2.5 t/h) taking into account the requirements of winter and summer operation, the real heat and steam demand and also analyze the viability of a heat and/or steam accumulator in connection with the CHP plant; c. Optimize the size, location and timing of the steam boiler plant (preliminarily 2x 2.5 t/h) depending on the real steam need for the hospital laundry; d. Perform a hydraulic analysis of the heat and steam transmission network using real heat and steam loads of the buildings and based on the analysis prepare plan for replacement of pipes and optimize the pipe dimensions of new the heating and steam pipelines. e. Prepare a least cost analysis for the heat and hot sanitary water distribution system by comparing the existing centralized production of hot sanitary water (4-pipe system) and decentralized system with individual substations in each building (2-pipe system). Optimize the size and required scope of works and equipment in each substation; f. After the approval of the optimized plant and distribution concept by the CCS the consultant shall prepare a technical specifications for supply and installation bidding document including technical requirements for equipment, functional specifications, dimensions and quantities and principle schemes and drawings as needed for the bidders to prepare their bids. The approximate scope is defined in the

- 64 - feasibility study and includes: CHP plant based on a gas engine with the capacity of about 2 MW electricity and 2 MW heat including connection to the power grid; Gas fired boiler plant with boiler including 3 x 14 MW hot-water boilers and 2 x 6 t/h steam boilers, which will be located in the same building as the CHP and necessary auxiliary equipment. Heavy fuel oil will be used as reserve fuel for the hot water and steam boiler; Gas fired steam boilers 2 x 2.5 MW, which will be located in a separate existing building; Heat and steam distribution pipelines within CCS area estimated length for hot water network approx. 5 km (trench) and steam and condensate pipeline approx. 1 km, Heat distribution system with substations for approx 70 buildings at CCS; Balancing valves on the risers in order to improve the network efficiency as a complement to the temperature control in the new substations; Dispatch center for energy supply system with in CCS including monitoring and management of heat, hot sanitary water, steam and electricity supply and production and gas and electricity purchase, The bidding documents for the supply and installation contract will require that the Contractor will be responsible to prepare the detailed technical design, and obtain necessary approvals and as-built drawings of the heating plants and networks based on the suppliers equipment.

g. Provide advise on the appropriate bidding packaging for the above mentioned components to be procured in accordance with the Bank’s Standard Bidding Document (SBD) for Supply and Installation of equipment and update the procurement plan. The draft procurement plan includes one supply and bidding package for all tasks mentioned in Paragraph f above. The draft procurement plan is in [Annex 21. h. Coordinate with NIS Energogas the schedule and technical requirements for construction of a gas pipeline to the CCS for gas supply. NIS Energogas is responsible for design and implementation of the gas transmission pipe to the CCS and the gas measuring and reduction station (MRS) at CCS and the low pressure gas pipeline from the MRS to the above-mentioned boiler plants; i. Coordinate with the consultant who will be employed under separate terms for design and supervision of energy efficiency improvements at the maternity hospital in CCS. This project will demonstrate demand side energy efficiency measures in one building (maternity hospital) in CCS; j. Review and streamline the CSS procurement routines and organization to facilitate a project implementation according to the implementation plan approved by the CCS. k. Assess training needs of the CCS energy management staff for operation, maintenance, and environmental management of the heat plant, and incorporate these requirements into the relevant bidding documents; 1. Assess environmental and safety issues arising from the investment program and recommend necessary mitigating measures to be implemented during construction and subsequent operation of the plant to ensure compliance with national and World Bank standards. The requirements of satisfactory implementation of mitigation measures should be incorporated into the bidding documents and contracts; m. Define the quality assurance requirements in the bidding documents; n. Identify precise criteria to enable objective evaluation of bids;

11. Procurement The Consultant shall assist the CCS in completing all aspects related to the bidding process, communication with the Bank, preparation of bidding documents, evaluation of bids and contract negotiations ensuring all steps are in line with the World Bank’s procurement guidelines. Specifically,

- 65 - the Consultant shall: a. Plan and assist the CCS to conduct all steps of the procurement process including publishing of procurement notices, pre-bid meetings and site visits, issuing the bidding document, b. Assist the CCS in the bid openings, clarifications during bidding process and preparation of bid evaluation reports, c. Assist the CCS in preparation of contract documents, possible amendments etc. d. Coordination with gas supply pipeline construction and connection to the CCS’s heating plant.

111. Project Implementation Supervision The Consultant shall: a. Assist the CCS in managing and supervising the investment program in accordance with intemational practices for project management; b. Assist the CCS to monitor Suppliers’ and Contractors’ implementation activities and ensure compliance with the contract terms and overall scope of the investment program and controlling the quality of supplied equipment and installation works; c. Review Contractors actual progress and in case of unsatisfactory progress by the contractors advise the CCS the necessary remedial steps; d. Review Contractor’s claims for scope changes or other possible events that may impact the budget, invoices for payments and performance or time schedule and where relevant ensure that settlements are conducted on a fair and reasonable basis; e. Advise the CCS on the certificates and permits required for the project; ensure that all required operating manuals or other documents have been made available and are in satisfactory order; f. Advise whether all necessary guarantees have been furnished by the suppliers and contractors and are adequate to cover the contractor’s liabilities and obligations; g. Assess Contractors’ completion reports or other completion procedures, advise on methods for inspection, trials, and acceptance and accordingly advise whether completion is satisfactory and identify deficiencies, if any, to the required standards and recommended actions to rectify the deficiencies; h. Ensure that the quality of supplied equipment and performed works comply with the quality requirements of the bidding documents;

i. Assist the CCS to prepare: ( i)the quarterly progress reports of the project implementation for the Association (ii)provide information to the CCS accountant necessary for financial and material accounting, (iii)reports that may be required by the Association and the Government of Serbia, and

j. Assist the CCS in preparing an evaluation and monitoring plan how to identify, measure and demonstrate the benefits of the investments for the CCS. B. Public Buildings: Terms of Reference of Design and Supervision Consultants

1. OBJECTIVES.

On behalf of the Ministries of Health and Education, the Serbian Energy Efficiency Agency (SEEA) intends to hire a Consultant who will perform the engineering services, i.e. preparation of layout and technical specifications and drawings to be integral part of the biddings documents, assistance to the Client with the evaluation of bids, supervision and commissioning of works, quality control and contract administration for public building (schools and hospitals) retrofit that include but are not limited to:

- 66 - B Reconstruction of building heat substations B Reconstruction of boiler houses including conversion of boilers to local solid fuels Rehabilitation of lighting systems Installation of thermostatic valves on radiators, Installation ofbalancing valves on raisers Refurbishment or replacement ofwindows Insulation and renovation of roof Insulation of walls and radiator niches Ifneeded, insulation of selected piping inside the buildings Renovation of selected piping of district heating network

The expected results ofthe Energy Efficiency Project can be summarized as follows: m Saving ofheat energy m Improvement of comfort and working conditions in the social public buildings Raising ofawareness of social sector employees and demonstration ofthe feasibility of such energy savings

2. SCOPE OF WORK

2.1- General definition of services

The services to be provided by the Consultant include the following: Task 1. Design: preparation of the lay-out, drawings, technical specifications, bidding documents and procurement packaging for the various procurement categories, i.e. works for reconstruction andor building retrofit, supply and installation of equipment; Task 2. Assistance in the evaluation of the bids and contract award; Task 3. Supervision of works installation, assistance in quality control, timely completion of sub-projects, acceptance of the works commissioned on the sites. Task 4. Technical monitoring and evaluation: definition of monitoring plan, assistance for purchasing equipment, installation of equipment,

The equipment and works for energy efficiency improvements of schools and hospitals shall to be procured in compliance with the IBRD’s procurement guidelines. The preliminary procurement plan includes 2 to 4 bidding packages per year which shall be conducted based on the IBRD’s Standard Bidding Documents for Works under National Competitive Bidding (NCB) procedures. After first year’s biddings have been concluded the consultant may advise to revise the procurement plan for the following years.

2.2- Coordination

2.2.1 Coordination with the Clinical Centre of Serbia The Maternity hospital of the Clinical Centre of Serbia (CCS) is one of the objects where energy saving measures will be implemented. As mentioned in the Background, the Energy Efficiency Project will finance the replacement of inefficient lignite and heavy oil-fired boilers with a gas-fired plant, as well as the network distributing the heat to each building, and the building heat substation. The design and supervision of the CCS new heating plant will be achieved though a

- 67 - separate consultancy service (CCS Consultant).

Therefore the Public Building Consultants are required to coordinate with the CCS Consultant who will be hired through a separate call for tender, in particular concerning the following points: 8 Design of the heat substation. The materials and equipments that will be designed for the Matemity hospital heat substation will have to be compatible with the newly retrofitted building: heat losses and heat demand will be different from the existing situation. The heat exchanger capacity will differ. 8 Connection of pipes from the new substation to the existing internal heating system. 8 Selection and adjustment of the automatic temperature control. Due to the reduction of the heat losses while the internal heating system will remain, the temperature curve and the automatic temperature control will differ from the other CCS building, and will have to be specifically adjusted in the Maternity hospital. The Public Building Consultant will refer to the Client to be informed about the CCS consultant after designation, and will initiate coordination meetings with the CCS consultant.

2.2.2 Coordination with the schools and hospitals administration The Ministries of Health and Education have, together with SEEA, established a frst list of 35 schools and 39 hospitals that are eligible for demonstrative energy efficiency retrofitting. The average heated floor area of these sites is 2681 mz for schools and 3723 mz for hospitals. Out of this first list, 14 hospitals and 13 schools were identified as a priority from the point of view of (i)high energy expenses, (ii)very poor energy efficiency of the building and (iii)willingness of the site administration for cooperating in the energy efficiency program. The 3 year program that is being implemented in the Energy Efficiency Project will include about 50 schools and hospitals. The Consultant will be responsible for the design and supervision of these building retrofitting during the 3years implementation program.

As mentioned throughout the present document, the Consultant will coordinate with the schools and hospitals administrator mainly for: . Collecting information on the existing operation of the building for what concerns the heating system, the ventilation (air infiltration through windows, periodic window opening), existing comfort and temperature; . Being informed on the main problems inherent to building heating and ventilating 8 Understanding which are the retrofitting priorities from the administrator and users point of view 8 Regarding Hospitals, the Consultant is required to consult with the Ministry of Health for the purpose of meeting facility standards. The Client will be informed about any information that could influence or change the definition of the investment package.

2.3- Detailed sco-~eof work

2.3.1 Preparation of lay-out design and technical specifcations for bidding document s for supply of equipment and for construction works

The preliminary list of buildings and the selected energy saving measures to be implemented are given in Annex 2 for the information of the bidders.

The Consultant shall:

- 68 - 0 Prepare in cooperation with the local administration (of schools and hospitals) and central administration (Ministries of Health and Education) as well as with the final users, of the project sites standard technical conditions and approved order necessary for design according to the local regulations; 0 Based on (i)the existing energy audits, (ii)visit of schools, @)and coordination with schools and hospitals administrators and local authorities, recommend acceptance or revisions, if necessary, of the energy saving measures originally proposed by the Client for the selected objects; recommend, based on the audit conducted, exclusion of any object from the original list if the Consultant considers measures planned for implementation to be not cost effective; 0 Obtain approval from the Client (schools/hospitals administrators, local authorities (Municipalities for schoo1s)and Ministries) on the updated list of sites andor measures to be implemented; 0 Prepare the layout design and the technical specifications including the components that are given in Annex 1; The Consultant shall take into consideration national and local (if necessary) regulations on environmental protection, any environmental management plans for govemment facilities such as hospitals, and shall stipulate in the bidding documents the use of environmentally friendly materials, equipment and technologies; the drawings will include the details that are usually produced in Serbia and will be issued at the scales required by the national norms and standards. For the technical requirements that will be linked to new equipment or are not included in the National Norms, the Consultant shall follow the DIN standards or other recognized intemational standards. 0 Transmit the bidding documents in the format that meets the World Bank and the SEEA requirements, In that sense, the Consultant shall work in close co-operation with the Client represented by SEEA in order to incorporate the Client’s recommendations on the quality of materials, applicable technologies; 0 Include requirements for training in the operation and maintenance of new equipment and installations in the bidding document for contractors; 0 Obtain approval (if necessary) of final technical design from the appropriate authorities;

0 Prepare the procurement packages, the list of goods to be supplied and installed, and a cost estimate ofgoods and other related Contractor Services for installation. 0 Produced the technical documentation in Serbian. For the first 3 projects of each kind the technical documentation will be fully translated in English. 0 At the Client’s request, assist the Client with preparation of clarifications to bidders’ inquiries concerning the technical documentation in both languages, Serbian and English.

2.3.2- Assistance with evaluation of bids

The consultant shall:

assist the Client with evaluation ofbids received under all the tenders for which the lay-out design was developed by the Consultant, in accordance with the norms and procedures stipulated in the biding documents. 0 verify compliance of technical aspects of the bids with requirements set out in the bidding document, including weaknesses and missing information as well as issues concerning quality of goods, materials and technology proposed; 0 analyse responsiveness of the bids to the Norms and Standards specified in the bidding documents

2.3.3- Supervision and acceptance of works and commissioned goods at the project sites

- 69 - The Consultant shall: verify and approve final technical designs developed by a successful bidder coordinate with the schools and hospital administration and the local authorities (on behalf of the Ministries of Health and Education) for preparing with the contractor the works plan and schedule; carry out the supervision of rehabilitation and construction works, and for the supply and installation of goods; visit the sites every two weeks and report on the work progress and on the work compliance with the work plan and the final technical design, taking into account all national standards and norms that could be affected by the energy efficiency works. verify payment certificates presented by Contractors or Suppliers, address problems faced by the contractor as delays ofdelivery and installation, and recommend their solutions, ensure the quality of all materials and equipments that will be delivered on the work site, in particular for their compliance with the norms, and the environmental requirements; 0 ensure the quality of the installation of all materials and equipments; organise and lead the acceptance and official agreement on the implemented installation works at the fill works completion. report to the client about all defects in goods and works and all facts of usage ofunsound materials and equipment; prepare requests to the supplier and/or the Contractor to eliminate and preclude all defects, to replace the non conforming equipment, and to install the goods in accordance with requirements of the contracts; assist the Client to organise and lead the final commissioning of the work site, certify final payment certificates including report to the Client on payment ofretention; assist the Client to take over the project sites from Contractors; 0 introduce and obtain (if necessary) approval of appropriate Serbian authorities of all modifications agreed upon the Client during contract implementation into detailed technical design. 0 Be responsible for (i)supervising the training from the contractor to the final Client (Schools and Hospitals,) if stipulated and the maintenance staff, (ii)ensure the issuance by the contractor of a documentation on the installed products and equipment, providing the Client with the technical specification of the products and equipments, the operation procedures and the maintenance procedures and schedule; (iii)bring to the Client all complementary information on the new equipment and materials that are to be installed on the building.

2.3.4- Technical monitoring The technical monitoring of the retrofitted buildings will pursue the following objectives: Determine the real energy saving before and after building retrofitting Quantify the difference of the indoor temperature before and after building retrofitting, and together with the climatic variation, adjust the gross energy saving in order to establish the savings for normative heating seasons and inside air temperatures Assess the comfort improvement in term oftemperature and functional improvement, Assess the effectiveness of the implemented energy saving measures such as room temperature control, reduction of air infiltration through windows, control of the humidity level through the natural ventilation, satisfaction ofusers.

The consultant shall: Prepare the monitoring plan which will include but not be limited to: o Determine the data to be collected in each school or hospital: heat consumption, temperatures,

- 70 - humidity, fuel consumption, lighting efficiency and illumination level (lux on the tables and on the black board), particularly in the schools o Establish the list of equipment that have to be purchased, taking into account the existing equipment: heat meter (about one per building), fuel meter (about one per building), temperature (between 100 and 200 sensors) and humidity sensors (between 10 and 20) o Recommend a metering protocol, in general, and specifically for each site such as frequency of data collection, units, calibration of equipment, organization ofmanual readings (if any) o Recommend the organization of data collection, in coordination with the schools and hospitals administrators o Define the methodology of analysing the collected data, o Define the reporting format 0 Assist the Client (SEEA) in purchasing the equipment Calibrate the equipment and install them in the schools and hospitals Collect the data Analyse the data and prepare the report

In the frame work of this task, the Consultant shall: 1 coordinate the monitoring component with the installation of the energy saving equipment, in particular for installing the heat meter and the energy meter . collect the information and the data collected during the heating season before the building retrofitting and in particular (i)the energy consumption, (ii)the temperature inside the different rooms, (iii)the comfort level as assessed by the users . coordinate with the Communication Consultant and will provide him with all information, data and results concerning the design, the implementation and the monitoring and evaluation of the projects. The reports will form the basis for the information activities of this communication specialist. The Consultant will highlight the main steps leading to the cost-effective improvements and the process from energy audit to saving, featuring the demonstration projects. 1 Assist the Client developing a benefit sharing scheme through which the schools and the hospitals will be given part of the energy saving. This scheme will define a way for determining the energy saving and for calculating the saved energy price on an annual basis.

2.4-Description of uotential enern efficiency measures

The investment could include but not be limited to the following energy efficiency measures:

2.4.1- Radiators niche insulation

This energy saving measures aims to implement insulation material between the radiators and the wall in the buildings where the radiators have been installed in a niche. The project will include works for supplying and installing the insulation material behind the radiators.

2.4.2- Retroj?tting of windows

The consultant will design the retrofitting of windows on the basis of a pre-design audit, and in co-ordination with SEEA. The definition and the type of the renovation will be selected according to the building condition and environment. The reconstruction types will be selected from the following options:

- 71 - Full replacement of windows with no reduction of glazing area. Window repair and fitting of mountings Window replacement

2.4.3- Roof insulation and renovation

The consultant will design the roof renovation including both the insulation material and the asphalted roofing. The Consultant will define the technology on the basis of the energy audit and through discussion with the SEEA. The reconstruction types will be selected from the following options: Full replacement of roofing, with insulation preserving the existing structure. Substitution of the flat roof with a pitched roof, including insulation material, generally installed on the attic floor. 1 Repair and insulation of a pitched roof. 1 Replacement and insulation of a pitched roof.

1 Other options of reconstruction.

2.4.4- Wall insulation

The consultant will design the wall renovation including both the insulation material and plaster board.. The Consultant will define the technology on the basis of the existing energy audit and through discussion with the SEEA. The insulation types will be selected from the following options: 1 Inside insulation including a plaster board, allowing the implementation of rendering and painting. 1 Outside insulation with a normalized technology including a good quality glue mortar, insulation material, an extemal coating of glue mortar with mesh, a finishing coat an rendering. 1 Eventually, other options of insulation.

2.4.5- Thermostatic and balancing valves

The consultant will design the installation of thermostatic radiator valves and balancing valves on the risers in order to improve the radiator and network efficiency as a complement to the temperature control that will be installed in the new substations

2.4.6- Heat substation

The Consultant will define the technical specifications for the parts of the substations that are to be replaced or modemized.

2.4.7- Reconstruction of boiler houses (including fuel conversion of boilers)

The scope for the reconstruction design of the boiler houses will be based on the energy audit and discussed with SEEA. The decision to replace totally or partially the boiler house will be made jointly with the SEEA. The choice of fuel for the boiler will be made in the same conditions. The project will include works both for dismantling the old equipment and for supplying and installing a new one. In the case of conversion to the gas and DH network, Consultant should design new substation or boiler room in coordination with the gas or DH supplier.

- 72 - 2.4.8- Rehabilitation of Lighting systems

The Consultant will execute the design of the lighting system in the room and in the buildings that will be selected together with SEEA. As a rule, in the schools the rehabilitation of lighting will include the full replacement of existing lighting by efficient luminaires and bulbs to ensure adequate and proper lighting in the classroom, and to improve the learning environment.

C. Terms of Reference of Monitoring, Evaluation and Communications Consultant

1. OBJECTIVES

The objective of this assignment is to (i)manage project monitoring and evaluation; (ii)design and execute social monitoring and evaluation of the project and (iii)design an external communications campaign for the project and coordinate its implementation.

2. SCOPE OF WORK

The Consultant will: o Design, execute and analyze surveys designed to systematically measure the social impact of project activities. As part of this assignment the Consultant will (a) identify key officials at the Republic and local level as well as independent and authoritative persons who could become spokespeople and “champions” for the Project; (b) develop a quantified and measurable baseline of perceptions regarding energy efficiency of key stakeholders identified in (a) above. The baseline should represent the existing social attitudes and perceptions that are barriers that are to be overcome if the Government is to meet the objectives of the Project; (c) develop and execute a plan to measure changes in perceptions at key milestones during the project, which are expected to follow closely the project’s physical investment plan (i.e. baseline data collected and analyzed prior to physical investment and after physical investment); (d) prepare a baseline report and monitoring and evaluation reports after each milestone survey result; (e) prepare a final report on the social impact of the project. The surveys should cover but not be limited to monitoring requirements agreed by the GOS with the Bank for the project, and be fully consistent with and complementary to the communications strategy and activities of the SEEA which is supported by funding from the European Agency for Reconstruction. (information on requirements and strategy to be provided by SEEA). A suggested methodology on survey development and analysis is attached in Annex 1 that is to be used as a only as broad guideline of the Employer’s requirements. The Consultant is encouraged to revise and propose a methodology in the inception report. o Prepare reports on a semi-annual basis on project impacts, incorporating results of social impacts of the project as well as results of technical monitoring and evaluation activities that are to be executed by other Consultants (for the Design and Supervision of Public Buildings works) to be engaged under separate Terms of Reference. The Consultant is expected to initiate coordination with the Public Building Consultant responsible for technical monitoring of the project to ensure timely inputs and clarifications. The report will also evaluate the effectiveness of communications activities related to the project and recommend key messages which resonate with stakeholders, correcting them for results of the feedback collected from technical and social monitoring.

- 73 - o Building on the information about the technical and social benefits of the Project, the consultant will develop a annual external project communications plan, including detailed tactical plans and budget, to reach beneficiaries ofthe investments financed through the project, stakeholders and public at large and disseminate information about the benefits ofthe Project and its technical and social impact.

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