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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 Government of Serbia 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 Serbia and Montenegro 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, Belgrade 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 lignite 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 Romania (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