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Document of The World Bank

Public Disclosure Authorized Report No: ICR1520

IMPLEMENTATION COMPLETION AND RESULTS REPORT (COFN-03810 IBRD-38060)

ON A

LOAN

Public Disclosure Authorized IN THE AMOUNT OF US$ 110 MILLION

TO THE

RUSSIAN FEDERATION

FOR A

ENVIRONMENTAL MANAGEMENT PROJECT

Public Disclosure Authorized March 30, 2012

Sustainable Development Department Russian Federation

Public Disclosure Authorized Europe and Central Asia

CURRENCY EQUIVALENTS (Exchange Rate Effective 06/30/2011)

Currency Unit = Ruble 1.00 Ruble = US$ 0.033 US$ 1.00 = 30.25 Rubles FISCAL YEAR Russian Federation: January 1 – December 31 World Bank: July 1 – June 30

ABBREVIATIONS AND ACRONYMS

CPPI Center for Preparation and Implementation of International Projects on Technical Assistance (originally Center for Project Preparation and Implementation) CAS World Bank Country Assistance Strategy EFP Environmental Framework Program EMP Environmental Management Project FLA Final Loan Agreement GC General Consultant GOR Government of Russia IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion Report IS International Shopping MEPNR Ministry of Environmental Protection and Natural Resources MNR Ministry of Natural Resources MNRE Ministry of Natural Resources and Ecology MOEDT Ministry of Economic Development and Trade MOF Ministry of Finance NEAP National Environmental Action Plan NPAF National Pollution Abatement Facility QAG Quality Assurance Group PEL Past Environmental Liability REAP Regional Environmental Action Plan RF Russian Federation Roshydromet Hydrometeorology and Environmental Monitoring Service of the Russian Federation SAR Staff Appraisal Report SB Supervisory Board SCEP State Committee for Environmental Protection SEAP Sectoral Environmental Action Plan TA Technical Assistance Vice President: Philippe H. Le Houerou Country Director: Michal J Rutkowski Sector Manager: Benoit Paul Blarel Project Team Leader: Adriana Damianova ICR Team Leader: Adriana Damianova Richard J. Cooke/ Bernard Baratz/ ICR Primary Authors: Vassili Rodionov Craig M. Meisner/Adriana ICR Editors: Damianova

Russian Federation Environmental Management Project

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 11 3. Assessment of Outcomes ...... 20

4. Assessment of Risk to Development Outcome ...... 25 5. Assessment of Bank and Borrower Performance ...... 25 6. Lessons Learned ...... 27 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...... 30 Annex 1. Project Costs and Financing ...... 31 Annex 2. Outputs by Component ...... 32 Annex 3. Economic and Financial Analysis ...... 47 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 48 Annex 5. Beneficiary Survey Results ...... 50 Annex 6. Stakeholder Workshop Report and Results ...... 50 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 51 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ...... 66 Annex 9. List of Supporting Documents ...... 67 MAP IBRD No.39156

A. Basic Information

Environmental Country: Russian Federation Project Name: Management Project COFN-03810,IBRD- Project ID: P008821 L/C/TF Number(s): 38060 ICR Date: 02/08/2012 ICR Type: Core ICR RUSSIAN Lending Instrument: FIL Borrower: FEDERATION Original Total USD 110.00M Disbursed Amount: USD 86.47M Commitment: Revised Amount: USD 86.47M Environmental Category: B Implementing Agencies: Ministry of Natural Resources and Ecology (MNRE) Ministry of Economic Development Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 12/16/1992 Effectiveness: 08/30/1995 08/30/1995 08/30/1995 09/27/1996 07/23/1997 01/19/1998 03/05/1999 01/25/2000 08/07/2002 Appraisal: 01/24/1994 Restructuring(s): 08/13/2003 03/31/2004 01/20/2006 06/28 /2007 05/14/2008 08/19/2009 12/22/2009 Approval: 11/08/1994 Mid-term Review: 02/10/1998 02/10/1999 Closing: 06/30/2001 06/30/2011

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Unsatisfactory Risk to Development Outcome: High

Bank Performance: Unsatisfactory Borrower Performance: Unsatisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Unsatisfactory Government: Unsatisfactory Implementing Quality of Supervision: Unsatisfactory Unsatisfactory Agency/Agencies: Overall Bank Overall Borrower Unsatisfactory Unsatisfactory Performance: Performance:

C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes Satisfactory time (Yes/No): Supervision (QSA): DO rating before Moderately

Closing/Inactive status: Satisfactory1

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 13 13 Other industry 67 67 Solid waste management 5 5 Sub-national government administration 9 9 Water supply 6 6

Theme Code (as % of total Bank financing) Administrative and civil service reform 11 11 Environmental policies and institutions 23 23 Other financial and private sector development 22 22 Pollution management and environmental health 22 22 Water resource management 22 22

1 This rating was assigned during the last restructuring (Dec., 2009) and retained until closing in recognition of agency efforts in advancing preparation of Part F (Past Environmental Liabilities) project - despite continued institutional delays. Hence this rating does not align with project DO ratings at closure – moderately unsatisfactory.

E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Johannes F. Linn Country Director: Michal Rutkowski R. Cheetham Sector Manager: Benoit Paul Blarel (Acting) John Brown Project Team Leader: Adriana J Damianova Roger J. Batstone ICR Team Leader: Adriana J Damianova ICR Primary Author: Richard J. Cooke Bernard Baratz Vassili Rodionov

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The Development Objective of the Environmental Management Project (EMP) was to provide critical support to the Environmental Framework Program (EFP) whose major objectives were to incorporate environmental and natural resources management concerns directly into the economic, social and political adjustment process, and strengthen financial delivery mechanism.

The specific objectives of the EMP were to assist the Russian authorities to: (i) strengthen and streamline federal and regional institutional structures for environmental and natural resource management; (ii) improve federal and regional environment policy and strategy formulation and implementation; (iii) upgrade environmental and natural resource management systems; (iv) address priority environmental management investment needs through the setting up of initial capitalization of the National Pollution Abatement Facility; (v) assist in the financing of economically viable, high priority resource recovery/pollution abatement projects in the country; and (vi) facilitate the flow of donor funds and resources to the environmental protection sector.

To monitor progress and development objective achievements two overall indicators were selected and reported in Implementation Supervision Reports (ISRs) to comply with Bank operational requirements at the time (see below). However, the Staff Appraisal Report (SAR) presented a set of key performance indicators for which each component was benchmarked (Table 4.4, page 64) and is reproduced, with results, as Table A2.1 in Annex 2 of this Implementation Completion Report (ICR).

Revised Project Development Objectives (as approved by original approving authority) There were no formal revisions to the Project's Development Objectives. See also Section 1.3 for further details.

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Achievement of reductions of emissions (discharges, wastes) projected in NPAF Indicator 1 : subproject appraisal documents Includes projected reductions for 5 completed projects and emissions - for 2 projects with Value 120,000 t signed quantitative or No reduction discharges - FLAs: emissions - Qualitative) 35,000 t solid 123,000 t; wastes - 250,000 t discharges - 35,000 t; solid wastes - 255,000 t Date achieved 11/08/1994 06/15/2011 06/15/2011 Comments (incl. % Targets achieved at subproject level. achievement)

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Amount of total investments in pollution abatement projects, including NPAF Indicator 1 : (loan) investments (i) USD102 (i) USD102 million million - total Value USD125 million, - total investment, investment, (quantitative None USD54.5 million (ii) USD37.7 (ii) USD37.7 or Qualitative) (NPAF) million - EMP loan million - EMP funds loan funds Date achieved 11/08/1994 06/15/2011 12/30/2010 06/15/2011 Comments Targets were 70-80% achieved. Targets were adjusted following cancellation of (incl. % USD 20.4 million NPAF funds achievement)

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 03/02/1995 0.00 2 03/08/1995 Highly Satisfactory Highly Satisfactory 0.00

3 07/06/1995 Satisfactory Unsatisfactory 0.00 4 11/27/1995 Satisfactory Unsatisfactory 1.84 5 06/11/1996 Satisfactory Satisfactory 4.86 6 01/02/1997 Satisfactory Satisfactory 16.51 7 12/03/1997 Satisfactory Satisfactory 25.65 8 04/20/1998 Satisfactory Unsatisfactory 33.15 9 02/26/1999 Satisfactory Unsatisfactory 42.85 10 03/31/1999 Satisfactory Satisfactory 42.16 11 11/30/1999 Satisfactory Unsatisfactory 45.28 12 04/14/2000 Satisfactory Unsatisfactory 46.90 13 06/30/2000 Satisfactory Satisfactory 48.02 14 12/27/2000 Satisfactory Satisfactory 51.67 15 04/02/2001 Satisfactory Satisfactory 52.97 16 10/10/2001 Satisfactory Satisfactory 56.10 17 12/18/2001 Unsatisfactory Unsatisfactory 56.54 18 06/28/2002 Unsatisfactory Unsatisfactory 64.94 19 12/27/2002 Unsatisfactory Unsatisfactory 64.58 20 01/15/2003 Unsatisfactory Unsatisfactory 64.65 21 06/11/2003 Satisfactory Satisfactory 64.84 22 12/30/2003 Satisfactory Satisfactory 65.63 23 06/29/2004 Satisfactory Satisfactory 67.38 24 12/28/2004 Satisfactory Unsatisfactory 72.26 25 06/24/2005 Moderately Satisfactory Unsatisfactory 77.68 26 12/29/2005 Moderately Satisfactory Moderately Satisfactory 78.22 27 07/16/2006 Moderately Satisfactory Moderately Satisfactory 82.07 Moderately Moderately 28 10/10/2006 82.15 Unsatisfactory Unsatisfactory 29 04/23/2007 Moderately Satisfactory Moderately Satisfactory 82.39 30 11/09/2007 Moderately Satisfactory Moderately Satisfactory 82.56 31 06/06/2008 Moderately Satisfactory Moderately Satisfactory 82.98 Moderately Moderately 32 02/08/2009 83.59 Unsatisfactory Unsatisfactory 33 06/25/2009 Unsatisfactory Unsatisfactory 83.74 34 12/12/2009 Moderately Satisfactory Moderately Satisfactory 85.85 35 06/29/2010 Moderately Satisfactory Moderately Satisfactory 86.05 Moderately 36 01/01/2011 Moderately Satisfactory 86.47 Unsatisfactory Moderately 37 06/29/2011 Unsatisfactory 86.48 Unsatisfactory

H. Restructuring (if any)

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions 08/30/1995 S U 0.00 Initial PPF advances Minor technical amendment to 09/27/1996 S S 12.04 LA LA amendment - adjustments to 07/23/1997 S S 21.94 threshold limits for non-ICB Procurements for the NPAF. LA amendment - adding standard UN-boycott provisions, and a new anti- 01/19/1998 S S 29.64 corruption provision; amendment to the procurement schedule related to the NPAF sub-loans. Extension of Swiss Grant closing date until December 31, 03/05/1999 N S U 42.85 1999. See section 1.6 for details. LA amendment - New Swiss Grant Agreement; participating financial intermediaries; 01/25/2000 S U 45.63 definitional changes of investment project, direct (sub-) borrower and sub-loan (NPAF). LA amendment – definitions of 08/07/2002 N U U 64.94 NPAF. See section 1.6 for details. LA amendment – Addition of 08/13/2003 S S 65.00 Roshydromet project LA amendment – definitional changes for Bureau of 03/31/2004 S S 66.11 Economic analysis; reallocation of proceeds among disbursement categories LA amendment – definitional change of investment project 01/20/2006 MS MS 78.22 and final borrower (NPAF); reallocation of proceeds among disbursement categories. LA amendment - definitional change of investment project; 06/28/2007 N MS MS 82.39 Swiss Grant thresholds; interest rate charges; closing date changed to December 31, 2009. LA amendment – NPAF 05/14/2008 MS MS 82.86 Agency Agreement; addition of Part F on Past Environmental

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions Liabilities (PEL) project preparation. LA amendment – As of June 25, 2009, cancelling $20,437,000 equivalent from Category (1) 08/19/2009 N U U 83.74 sub-loan expenditures for Part B(2) addition of implementation responsibilities for Part F. Extension of the closing date from December 31, 2009 to 12/22/2009 MS MS 85.85 June 30, 2012 to complete Part F of loan.

I. Disbursement Profile

1. Project Context, Development Objectives and Design

The Russian Federation Environmental Management Project (EMP) was prepared between 1992 and 1994 to provide support for the Environmental Framework Program (EFP) developed by the Russian Federation and, specifically, for the newly established Ministry of Environmental Protection and Natural Resources. The overall objective of the EFP was to incorporate environmental and resource management concerns into the economic, social and political adjustment process of post Soviet Russia and raise international financial support for EFP implementation.

The Russian Federation inherited an enormous and costly environmental legacy from decades of inefficient economic development and neglect of environment and natural resources management. The industry and energy sectors were responsible for the major sources of air pollution. Similarly, the ferrous and non-ferrous metal production, chemical manufacturing, petroleum, coal, pulp and paper industries were responsible for the bulk of hazardous and toxic discharges both as water effluents and as hazardous wastes.

The economic transition set in motion an ambitious reform agenda including privatization, industrial restructuring and market liberalization and had substantial impacts on the use of natural resources and the environment. Establishing an environmental management system with legal and institutional elements was part of the reform agenda aiming to address the growing concerns of environmental degradation within the confine of a market based economy. This coincided with the process of restructuring and adapting to the new economic and political realities. The key environmental issues that had to be addressed during the economic transition were: (a) unreliability of environmental data, (b) ineffective legal and regulatory system, (c) poorly defined management and organizational responsibilities, (d) inadequate budgets, (e) ineffective “command and control” mechanisms to address industrial pollution coupled with the lack of economic incentives for pollution abatement, (f) inappropriate discharge and ambient environmental standards, and (g) lack of financial incentives and resources in companies to invest in pollution control systems.

The EMP was approved by the Board in 1994 and originally scheduled for closure in 2000. Following multiple government requests the project was extended 4 times (two times for 2 years, one time for 5 years and one time for 1.5 year) and amended 13 times. The project closed on June 30, 2011.

Initially EMP consisted of technical assistance components (Part A) focusing on: (a) institutional and policy strengthening specifically related to Policy and Regulatory Support and Environmental Epidemiology, (b) water quality and water resource management, and (c) hazardous waste management. It also included additional components supporting a loan facility for funding of financially viable, high priority resource recovery/pollution abatement projects through the National Pollution Abatement Facility (NPAF) (Part B); support for establishing the Center for Project Preparation and Implementation (CPPI)2 for EMP and EFP implementation (Part C). Later on the scope of EMP was extended to include the GEF financed Biodiversity Conservation project (Part D) (1996), Project Preparation for Roshydromet Modernization and Institutional Strengthening (Part E) (2004), and Project Preparation on Elimination of Past Environmental Liability in the Russian Federation (Part F) (2008).

2 Subsequently referred to as the Center for Preparation and Implementation of International Projects on Technical Assistance (CPPI).

1 The original Technical Assistance (TA) components were completed in March 2002 and the CPPI component was closed in September, 2002. In order to provide for adequate reporting and assessment of the outcomes of the completed and very complex EMP TA/CPPI components, a Partial ICR was prepared in July, 2003 covering the activities under these components during the period of 1994-2002. The draft Partial ICR was sent to the Government of Russia for review in August 2003 (Letter #ECC10- N-2003-00437), but no formal response was received. Simultaneously, the EMP was restructured through an Amendment of the Loan Agreement to the effect that the NPAF component remained active under the auspices of the Ministry of Economic Development and Trade (MOEDT). The last restructuring of the EMP in December 2009 provided partial extension for 18 months, for one part of the Project, namely Part F “Preparation of Project on Elimination of Past Environmental Liabilities in the Russian Federation”, which remained active until June 30, 2011 under the auspices of Ministry of Natural Resources and Ecology (MNRE).

This ICR provides an integrated summary of EMP components and activities implemented during the period 1994-2011 and their evaluation against the Development Objectives specified in the Staff Appraisal Report (SAR)3 4.

1.1 Context at Appraisal

The Russian Federation inherited an enormously costly environmental legacy from decades of inefficient economic development. Soviet Union policies failed to factor in environment externalities in the national economic development strategies and investment plans. For the Chernobyl disaster alone, the cost of environmental mismanagement was estimated at tens of billions of dollars. The cost of depletion of natural resource and environmental degradation was not studied at the time of project preparation but is believed to have been significant and comparable to most industrialized countries. Studies carried out in 2006 using different economic indicators such as adjusted net savings that take into account depletion of natural capital, show that despite real GDP growth of 6.7 percent, adjusted net savings were negative (-13.8 percent), largely because of natural resource depletion (World Bank, World Development Indicators, 2006). The former Soviet Union was not unique in this respect; most industrialized countries followed a similar development path, although in many cases, they made more dramatic structural adjustments at an earlier stage of development.

Economic transition in Russia was accompanied by a fluctuating political commitment to incorporate environmental and natural resource management concerns directly into the economic adjustment process. Although, there were many gaps and deficient coordination among federal supervisory bodies in the process, among the drivers of the environment management systems reforms, the following two are central:

3 Staff Appraisal Report, Russian Federation Environmental Management Project, October 19, 1994, Report No. 12838 RU. 4 Provide critical support for the EFP whose objectives are to (a) incorporate environmental and natural resource management concerns directly into the economic, social and political adjustment process at the federal and regional levels of government, including the executive and legislative branches; (b) strengthen and streamline institutional and organizational structures for environmental and natural resource management; (c) improve environmental and natural resource policy and strategy formulation and implementation; (d) upgrade environmental and natural resource management systems; (e) strengthen financial delivery mechanisms to address priority environmental management investment needs through the setting up and initial capitalization of the NPAF; and (f) facilitate the flow of donor and multilateral funds and resources to the environmental protection sector. The project would provide critical support to the EFP.

2 First, in search of new sources of growth and comparative advantage, the use of natural resources such as forests, lands, oil, gas, minerals, water, and vegetation became much more intensive. Natural resource-intensive exports expanded to replace old traditional exports. Consequently, the decision- makers needed to cost existing natural resources used in trade at their full opportunity cost, to avoid giving a false sense of comparative advantage in the short and medium term and better regulate the use rates of those resources. Nonetheless, adjustment of environmental policies during Russia‟s economic transition was lengthy and characterized by frequent and inadequately formulated sector policies. Many of the reforms during this period implemented at the national level (such as privatization, industrial restructuring and market liberalization) were not entirely consistent with natural resource and environmental protection.

Secondly, including environmental concerns in macro-planning required a solution to many environmental quality and resource management problems. The institutions vested with major institutional and organizational changes faced the realities, from the beginning, that the depletion and degradation of the natural capital would be very difficult to correct without appropriate environmental assessment.

The Environmental Framework Program (EFP)

The EMP was designed to provide support for the Environmental Framework Program (EFP) and to the newly established Ministry of Environmental Protection and Natural Resources. The overall objective of the EFP was to incorporate environmental and resource management concerns into the economic, social and political adjustment process of post Soviet Russia and raise international financial support for EFP implementation.

Increasing numbers of government decision makers in the executive and legislative branches at the federal, regional and local levels were searching for ways to restructure and reform the economy to promote efficient and more sustainable economic growth - an impossible goal without taking environmental quality and natural resource management factors into consideration. Several important steps were taken in this regard. However, much more was required at all levels of the legislative and executive government; otherwise the initial momentum would be lost, along with the enormous opportunities that existed for influencing the reform process. The Environmental Framework Program (EFP) and the Environmental Management Project were designed to help the Government of Russia to meet this urgent need and to take advantage of these opportunities.

The implementation of the reform of system of environmental management was fragmented and poorly coordinated among the more than ten government agencies having some responsibility to address environmental concerns. The long-standing problem was that implementing ministries and overseeing government bodies had built-in conflicts of interest in responsibilities for both economic targets and environmental protection. At that time, several reorganization attempts of the Union-Republican State Environmental Protection Committee (Goskompriroda)5 to better integrate environmental management under the Ministry of Environmental Protection and Natural Resources (MEPNR) failed to achieve the reorganization objectives. This was mainly due to the legacy system of centralized management that emphasized production over efficiency; concentrated pollution-intensive industries in enormous complexes, compartmentalized decision making, and treated natural resources as free goods.

5 In 1988 the Union-Republican State Environmental Protection Committee (Goskompriroda) was established with a mandate to strengthen direct regulation and enforcement of environmental norms and standards and to coordinate the work of ministries and committees responsible for environmental management and nature protection.

The failure of the previous, centrally planned Soviet system to efficiently and effectively manage regional economic development and environmental issues was implicitly recognized in the Russian Federal Treaty of March 14, 1992,6 that formally devolved much of the former powers and resources of the central ministries and committees to regional and local level agencies. The trend toward decentralization had major implications for solving environmental and natural resource management problems. These changes, while creating much uncertainty and confusion, also presented unprecedented opportunities for providing strategically targeted support and assistance based on sound economic, social, environmental, and natural resource management principles. The EFP and the Environmental Management Project (EMP) were designed to support these changes.

Rationale for Bank assistance

Country Assistance Strategy (CAS) discussions were held in Russia on April 28, 1994. The EMP project was part of the CAS core lending program. The EMP was one of the projects that were considered relatively unaffected by changes in the macroeconomic environment. It met three of the priority objectives of the CAS by: (i) supporting the development of a market-oriented economy by demonstrating through the NPAF how to involve private sector in projects with tangible environmental benefits; (ii) redirecting public sector involvement in the economy by strengthening the policy-making and regulatory activities of key institutions involved in environmental management, and establishing a sound technical and policy framework for future environmental activities; and (iii) establishing a key role for the Bank in project design and helping to mobilize donor funds that might not otherwise be available to support priority activities in environmental management. The GOR and Bank recognized the vital importance of bilateral and multilateral grant funds in support of the environmental sector (including biodiversity conservation and sustainable management of natural resources) at this critical stage in Russia's economic transformation. A donor meeting hosted by the Bank on April 13, 1994, resulted in potential support for the EFP in the amount to $90 million from Canada, the European Union, Finland, Norway, Switzerland, the United States and the GEF.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

The PDO7 of the Environmental Management Project (EMP) was to provide critical support to the Environmental Framework Program (EFP) whose major objectives were to incorporate environmental and natural resources management concerns directly into the economic, social and political adjustment process, and strengthen financial delivery mechanism.

6 Treaty of Delimitation of Objects of Jurisdiction and Powers between the Federal Bodies of the State Authority of the Russian Federation and Bodies of Authority of the Republics within the Russian Federation. 7 The SAR refers to framework program objectives.

4 To monitor progress and objective achievement - the SAR presented a set of key performance indicators (Table 4.4, page 64) and is reproduced, with results, as Table A2.1 in Annex 2 of this Implementation Completion Report (ICR).

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

Although there were no formal revisions of Project Development Objectives, the project scope evolved during implementation as circumstances changed. For instance, the TA program witnessed significant shift of effort and emphasis away from the national level to more focused TA to regional and local level particularly after the mid-term review in 1999. Similarly, there was a shift away from policy oriented TA to more practical approaches to address environmental issues and regulatory enforcement, and a general reduction in the utilization of foreign, as opposed to local expertise. This helped to some extent to simply maintain a functioning cadre of environmental expertise within the national management system during the life of the project.

1.4 Main Beneficiaries

The primary beneficiaries identified at appraisal were the Ministry of Environment Protection and Natural Resources (MEPNR), Ministry of Finance (MOF), Regional Governments in the Urals, Upper Volga and North Caucasus; and private and state enterprises.

1.5 Original Components (as approved)

The EMP Technical Assistance component (Part A) consisted of the following four8 parts:

(a) Policy and Regulatory Support Component (US$ 15.24 million); (b) Environmental Epidemiology (US$ 6.68 million); (c) Water Quality and Water Resource Management component (US$ 8.79 million), and (d) Hazardous Waste Management component (US$ 6.86 million).

Within the context of the originally envisioned EFP program, of which EMP formed the core technical assistance element, selection of these four core components were assessed as appropriate and consistent with the project objectives. The Policy and Regulatory Component set an umbrella framework for national and regional change. The linkage of policy with environmental health in the second component reflected the focus on public health as part of the environmental policy reform. The component focused on water and hazardous waste represents a high priority area with significant unattended environmental issues that both the Government and Bank identified for institutional and technical support and leveraging broader international support for investments. The Center for Preparation and Implementation of International Projects on Technical Assistance (the Center for Project Preparation and Implementation (CPPI)) was designed as a vehicle to build implementation capacity to manage the EMP and coordinate donor funding of EFP.

Policy and Regulatory Support: This component was strongly supported by the Federal Environmental Commission (FEC) responsible on behalf of the Government (Council of Ministers) for high level

8 In the SAR the Policy and Regulatory Component and Environmental Epidemiology Components were nominally combined but in fact were defined and implemented separately.

5 interagency coordination on environmental issues on behalf of the Government (Council of Ministers). The two tiers functional organization of FEC included (i) the Federal Policy Unit (FPU) within the Commission, which acted as the policy development and strategic planning resource, and (ii) the Regional Environmental Policy Units (REPU). FPU was responsible for the following: (i) preparing assessments of environmental damage and health impacts; (ii) implementing legal and institutional changes; (iii) integrating environmental policy initiatives across government agencies; (iv) preparing specific Sectoral Environmental Action Plans (SEAPs); (v) updating the National Environmental Action Plan (NEAP); and (vi) supporting regional units including TA to the National Pollution Abatement Facility (NPAF). The REPUs were to be formed in two pilot regions, the Upper Volga and the Urals, tasked to develop Regional Environmental Action Plans (REAPs) and support implementation of new federal policies for addressing environmental damage.

Environmental Epidemiology: This component focused on the strengthening of existing national and regional environmental epidemiological management system, by supporting upgradation of data quality, methods of data collection and integration of environmental health information in the environmental policy decision making. The component aimed to identify the most urgent problems and develop policies to monitor their implementation. The Federal Environmental Epidemiological Center, with regional centers in the Upper Volga and Urals were central for improving the priority-setting at the regional level and data collection, and analytical capacity through training courses focusing on policy development.

Water Quality and Water Resource Management: This component intended to support water quality improvements in three pilot regions - the Upper Volga, Urals and North Caucasus. Specifically, it aimed to improve the effectiveness of water resources management plans, infrastructure, and institutional capacity. The component also aimed to pilot economic instruments and regulatory arrangements, based on OECD country experience, and thereby to expand the pipeline of investment projects in the sector. The TA was directed at improving of water management system of responsible agencies of MEPNR at both the federal and regional level. The federal level would be responsible for policy development and dissemination of the results from pilot regions elsewhere. At the regional level the project aimed to support specific planning studies and their implementation. The mixture of tasks among the regional sub-components provided basic coverage of priority water management issues.

Hazardous Waste Management component: This component focused on strategic planning capacity at the national level and introducing the application of basic regulatory tools at regional level. It provided targeted technical assistance following good practice models for “command and control” regulation which even nowadays remains generally accepted in most developed countries. The technical assistance targeted the designated institute under MEPNR responsible for policy and legislative development in waste management. At the regional level, the development of the “care and custody” regulatory system was to be implemented in cooperating oblasts in the Upper Volga. TA envisaged also upgrading of laboratory equipment in the respective environment committees.

National Pollution Abatement Facility (NPAF) (Part B): NPAF component was designed to support the Government of Russia as a financial delivery mechanism for addressing priority environmental management investments under the Environmental Framework Program (EFP). This included initial capitalization of the National Pollution Abatement Facility with US$55million from IBRD Loan and leveraging donor and multilateral funds for environmental protection. The fund instrument was developed to address energy and natural resources price distortions under the centrally planned economy and a lack of incentives to reduce pollution and improve the quality of air, water and soil. The mandate of NPAF was to cover a portion of project investment costs of priority commercially viable resource-recovery and pollution abatement investments. The NPAF had to serve as a mechanism to

6 effectively on-lend funds from the loan and other donors to individual sub-projects. NPAF was authorized to lend to state owned enterprises, local or foreign private entities, and joint ventures.

Investment priorities were to be established based upon the existing level of environmental degradation or threats to human health (air and water pollution, soil contamination) caused by industrial discharges. The premise was that environmental degradation and human health risks would be reversed by investing in pollution abatement and control measures to reduce harmful discharges in the environment or to recover waste streams. The project also aimed to support financially viable “win-win” investments. NPAF operated as a revolving fund whereby revenues from sub-loan repayments would sustain NPAF operations on the premise that there was sufficient demand for financing of “win-win” industrial investments. NPAF would also be allowed to sell or syndicate all or part of its existing loans to commercial banks on a non-recourse basis, thereby reducing the Governments‟ exposure to commercial risk. The proceeds of all loan sales were to be re-deposited in the NPAF to finance additional sub-loans9. The NPAF was designed to provide the institutional framework for the GEF ODS Phase-out Program although GEF grant resources to support these sub-projects were to remain independent of the NPAF‟s main activities.

An especially established legal entity entitled “Executive Directorate of the National Pollution Abatement Facility” or “NPAF ED” would be responsible to implement sub-loans on behalf of MOF. NPAF employed a consultant team under the CPPI to appraise and supervise investment projects. The oversight of NPAF was carried by a Supervisory Board (SB) comprising high level government officials, responsible for review and approval of investment proposals. The Ministry of Finance (MOF) was the lender of record, with responsibility to make decisions related to investment projects approved by the NPAF SB. The MOF was to establish a dedicated revolving account into which all debt service payments were to be deposited.

CPPI Component (Part C): The CPPI component was designed to provide EMP the necessary TA for Project implementation capacity through a PIU administering the loan on behalf of MEPNR. A foreign General Consultant (GC), with a full time resident project manager and international advisor for each TA component were to provide both project management and technical guidance on EMP implementation. A local consultant with experience in Bank procurement and disbursement procedures ensured administrative capacity. CPPI itself was created in advance of project implementation as a non- profit legal entity under MEPNR and the aegis of the Minister of Environmental Protection and Natural Resources. According to the matrix organizational structure of CPPI, it was responsible to administer the EMP components under the guidance of multi-agency supervisory committees. At the same time CPPI maintained direct relationships with primary counterpart agencies, or in the case of the Policy and Regulatory Support Component, with FEC.

1.6 Revised Components

Technical Assistance component

9 At the time of appraisal the revolving fund was designed in compliance with the Russian Budget Code. Some years later Russian public finance system went through a major consolidation. As a result all extra budgetary accounts had to be brought in compliance with the Budget Code. This directly affected the functioning of NPAF account after loan closure. As of September 2011, the EMP loan was repaid in full. According to the terms and conditions of the General Conditions Applicable to loan and Guarantee Agreements for Single Currency Loan dated February 9, 1993, Section 12.05, all obligations of the Borrower in relation to the Loan Agreement terminate.

7 Policy and Regulatory Support sub-component: This sub-component was progressively revised due to the ineffectiveness of the client at the federal level and the lack of an inter-agency champion. As a result, part of the component was moved to the Ministry of Economic Development and Trade. Activities were adjusted to refocus on regional initiatives and specific priorities supported by the MEPNR, such as development of environmental indicators, support to Russia‟s participation in global environmental treaties, and the development of a regulatory framework for introduction of environmental taxes.

Environmental Epidemiology sub-component: The sub-component was redesigned to eliminate the objective to create a Federal Environmental Epidemiological Center under the existing Federal Center of State Sanitary and Epidemiology Surveillance and expand the expertise and knowledge base.

Water Quality and Water Resource Management sub-component: There was no major revision in the course of this sub-component‟s implementation.

Hazardous Waste Management sub-component: The sub-component‟s implementation arrangements were modified in to include MEPNR as the national counterpart instead of the originally designated Ministry‟s institute which became independent. Furthermore, Sverdlovsk Oblast Environmental Committee was assigned implementation responsibility for development of the regulatory system for Sverdlovsk Oblast in the Urals, substituting the Upper Volga. The latter failed to follow through with committed counterpart support. These revisions were deemed as timely and appropriate and grounded to evolving institutional realities.

Two additional sub-components or programs emerged in the course of project implementation. This includes (a) Krasnoyarsk Emergency Forestry Pest Management Program, and (b) new initiatives.

a) Krasnoyarsk Emergency Forestry Pest Management Program was requested as an urgent assistance10 from the Bank to implement the Emergency Forestry Pest Management Program in Krasnoyarsk. US$ 5 million of EMP‟s unallocated resources were allocated in September 1996, to mitigate the consequences of Siberian silkworm outbreak by applying environmentally safe chemical and biological agents through aerial spraying. The objective to minimize negative impacts of the infestation was met. The experience gained during implementation triggered the interest of the Federal Forestry Service for preparation of the Russia Sustainable Forestry Pilot Project financed by IBRD loan.

b) In January 2001, EMP TA work program was nearly completed. The Ministry of Economic Development and Trade (MOEDT) and MNR requested the Bank to use the balance of the TA resources to fund four new initiatives: (i) Regional Environmental Support Program; (ii) Integration of Environment in Strategic Planning and Economic Decisions; (iii) Global Development Initiative Support Program, and (iv) NPAF Support and EMP Results dissemination. Regardless of the support of MOF and MNR the work on these initiatives was terminated in February-March 2002 when EMP TA components were closed. Nevertheless, several outputs were delivered which are worth noting. The Rostov Environmental Support Program was developed under initiative (i). Initiative (ii) supported the development of environmental and economic indicators and a methodology for valuation of environmental damages and natural resources. Initiative (iii) supported assistance for Russia‟s joining the Stockholm Convention, and Russia‟s preparation for the Johannesburg Earth Summit.

10 Request from Ministry of Finance in 1996 signed by Deputy Minister Mr. Kasyanov.

8 NPAF component

Although the overall objectives for the NPAF component did not change throughout the history of the project, it underwent two major restructurings.

The first restructuring was undertaken in 2000 as a result of the Mid-Term Review (1999) with an objective to allow for new on-lending schemes. The collapse of the banking sector in 1998 resulted in failure of commercial banks to initiate and manage “win-win” environmental investments in industries. The GORF decided to channel loan proceeds directly through the Ministry of Finance to the sub- borrower. In addition, the hypothesis that a wide variety of cost-effective environmental investment opportunities existed to materialize as “win-win” projects proved to be too narrow and optimistic for Russia‟s economy in transition. In the absence of market based incentives the demand for “win-win” investments was insignificant due to the following: (a) the financial viability of many potential sub- borrowers declined, shifting enterprise priorities from pollution control to economic survival; (b) weak enforcement and eroded levels of environmental penalty charges reduced incentives for environmental investment, and (c) firms perceived the potential financial returns in the form of saved pollution charges as insignificant11. The restructuring included refocusing of NPAF‟s on-lending modalities and activities as follows:

 On-lending through Regional Governments (Subjects of Federation, such as Oblasts), for high priority, environmental investment projects in enterprises;

 On-lending through Commercial Banks to financially viable enterprises for “win-win” environmental investment projects, and option that could be activated only once viable commercial banks were accredited by MOF;

 Urgent Environmental Public Investments to reduce imminent threats to human health and the environment; and

 Continued implementation of already approved subprojects12.

The second restructuring in 2002, followed a specific request from the GORF to finance construction of closed loop waste water treatment system at the Baikalsk Pulp and Paper Mill (BPPM), a priority project with significant environmental benefits for the fragile ecosystem of the Baikal Lake. The Loan Agreement was amended to extend the closing date by additional five years in order to complete the BPPM subproject. The size of the BPPM investment exceeded the threshold of US$ 7 million for sub- loans. This limit was also waived to accommodate the US$ 25 million needed for this investment. The second restructuring, also transferred the responsibility for implementation of NPAF component to the Ministry of Economic Development and Trade which embraced the EMP operation.

11 NPAF ED was responsible for technical appraisal and implementation support. At the time of the MTR, NPAF ED had evaluated 47 subproject proposals. The portfolio comprised 13 appraised subprojects. These were approved by the NPAF Supervisory Board and received no-objections by the World Bank. However, MOF signed sub-loan agreements with only three subprojects for a total sub-loan amount of about US$15 million. For the other ten appraised subprojects, concerns such as financial viability of applicant sub-borrowers, outstanding tax-debts of enterprises, and lack of administrative capacity to manage enterprise sub-loans was key for suspension of the applications. The MOF stopped signing further sub-loan agreements after 1997. It became clear that direct lending by MOF was inconsistent with its role as a macro-economic and financial policy maker. In 1998, MOF‟s attempt to work with NPAF and use commercial banks for on-lending to enterprises was unsuccessful. 12 At the time of this restructuring only three subprojects had been approved and one was under implementation.

9 1.7 Other significant changes

In the last two decades, Russia‟s environmental management system was characterized by frequent and inadequately formulated changes to its institutional structure and legal and regulatory framework at the federal, regional, and municipal levels. Principal among these were the changes of 1996, when Ministry of Environment and Natural Resources (MENR) was reorganized and became the State Committee for Environmental Protection (SCEP). In 2000, SCEP was abolished and its functions transferred to the Ministry of Natural Resources (MNR). The former MNR management expressed little interest in the project and NPAF activities. All these uncertainties led to changes in the original project design which include:

a) CPPI component restructuring: SCEP abolition in 2000 led to an administrative vacuum at the national level and affected CPPI implementation and its counterparts. This resulted in CPPI‟s assuming the role as the primary counterpart organization with a direct technical supervision role over the delivery of TA under the project. This was a fundamental design change that evolved over time. Ultimately, CPPI launched its operations independently from the new national environmental authority. This also meant that CPPI was responsible for contracting of technical assistance and supervision. Without real oversight from the GORF, this situation inevitably created tension about CPPI‟s role among the MOF and MNR.

Early on in 1996 CPPI underwent structural transformation13. Following SCEP‟s request, the Bank agreed CPPI to divide itself into some six new legal entities, each of which with a mandate to manage specific TA component activities, NPAF or GEF grants. Flaws during CPPI‟s operation raised the concerns of MOF and the World Bank flagged in a number of CPPR‟s and Project supervision missions. In 1999 CPPI was downsized and restructured to a single legal entity. The EMP Loan was amended to provide specifically for operating costs and CPPI staff 14 remuneration under category “incremental recurrent costs”. The last CPPI restructuring was undertaken in the second quarter of 2001. As a result CPPI was downsized to 16 positions, four TA teams were dissolved and instead, four groups of individual consultants were selected to implement four new work program priorities supported by MNR and MOEDT. Nonetheless, it appeared that new MNR management, appointed in mid-2001, did not support CPPI as an institution because MNR did not consider it as an entity directly accountable to MNR, instead of reporting to a multi-agency supervisory board. Ultimately, MNR suspended CPPI‟s operations which effectively terminated EMP‟s TA activities.

b) Additional EMP Components. The GORF requested to include three new components for which amendments to the Loan Agreement were executed in 1996, 2004 and 2008 respectively.

-The GEF financed Biodiversity Conservation project15 (Part D) aimed to assist the Russian Federation to protect and manage its globally significant biological diversity in accordance with

13 CPPI was established as a relatively small organization supervising consultants (firms and individual consultants for delivering TA. EMP included four TA components and NPAF, with geographic coverage of 10 cities in 3 regions; CPPI provided administrative support for preparation and implementation of GEF projects CPPI followed the reporting requirements of MOF; tax authorities and the Bank. By 1996, CPPI grew up and had over 200 employees all of them, including CPPI Director, funded from the consulting category of the loan. 14 CPPI had about 60 positions divided into administrative and functional units. 15 The total cost of the project was US$26.0 million equivalent of which GEF grant of US$20.1 million equivalent, and Government contribution of US$ 4.8 million equivalent. The Swiss Government provided a parallel grant of

10 the principles of environmentally sustainable development throughout the economic transition. Central to the project were enhanced protection of biodiversity, within and outside protected areas, in conformance with the Government‟s obligations under the Convention on Biological Diversity16. Project objectives included: i) supporting the development of federal and regional biodiversity strategies; ii) developing and implementing mechanisms and approaches for mainstreaming biodiversity conservation and environmental protection into policy making; iii) assessing the protected area institutional and operational framework and subsequently strengthening its effectiveness; iv) enabling participation of all interested stakeholders, including indigenous peoples and local communities, in biodiversity conservation; and v) demonstration of inter-regional and cross-sectoral approaches to biodiversity conservation and sustainable natural resource management. The GEF Biodiversity Conservation project has a separate ICR (Report No. 28177)17 where additional details on implementation assessment are provided.

-Project Preparation for Roshydromet Modernization and Institutional Strengthening (Part E) aimed to provide technical assistance and support the incremental costs relating to management of technical assistance activities for high-priority activities within Roshydromet and in line with the Borrower‟s institutional development objectives for modernizing hydrometeorology, environmental protection and monitoring.

-Project Preparation for Elimination of Past Environmental Liability in the Russian Federation (Part F): supported technical assistance activities and operational expenses of the NPAF Executive Directorate for the preparation of MNRE priorities to address past environmental damages and associated liabilities.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

The overall quality at entry, measured by current standards for development outcomes and country specific developments in retrospective, should be considered unsatisfactory. Both the Government and the Bank overestimated the capacity of the country to receive and sustain a large environmental TA that required consistent long-term government support at a high level. Similarly, it is also clear that the demand from the Borrower for the project‟s activities was limited. Judging by multiple restructurings and reorganization of implementation arrangements and project counterpart agencies, the design proved to be deficient as well.

That said, it is understood that the project design was consistent with the understanding and expectations of the Borrower and the Bank at the time the project definition. On that basis, one could argue that Project quality at entry was marginally unsatisfactory, despite inflated expectations that it would be able to affect policy and institutional change. However, given the size of environmental mismanagement in Russia it was unrealistic to expect measurable near term environmental damage reduction through a portfolio of subprojects funded by NPAF. The project was consistent with

US$1.1 million equivalent for support to public education programs. The project kept separate accounts from the EMP. 16 The Convention was opened for signature at the Earth Summit in Rio de Janeiro on 5 June 1992 and entered into force on 29 December 1993. 17 http://imagebank.worldbank.org/servlet/WDS_IBank_Servlet?pcont=details&menuPK=64154159&searchMenu PK=4209226&theSitePK=501889&eid=000012009_20040402124138&siteName=IMAGEBANK.

11 country strategy and the CAS; it aimed at integrating environmental protection into the transition process and having the resulting policy, regulatory and economic instruments act as a driver for investment, primarily in the private sector. A high level of government support appeared to exist for at entry which did not sustain through the life of the project.

The project took into account previous experience with pollution abatement projects in Indonesia, Chile and Poland. Recommendations incorporated into the design, according to the SAR, were: that limited absorptive capacity may exist in the federal Ministry of Environment; responsibility for environmental and natural resource management may be dispersed across a number of government ministries and agencies; confusion and frustration may result from uncoordinated donor and multilateral agency support programs; full commitment to the program by the beneficiaries is needed; strengthening of project implementation capacity prior to the loan avoids later delays; effective supervision and strong support by Bank's Resident Mission is desirable; and a well-designed monitoring and evaluation system to provide early warning of implementation delays. Lessons were also drawn from the first Russia Oil Rehabilitation Project and other operations in Russia.

The project attempted to address as many development issues in the sector as possible. This led to project complexity of unreasonable scale. Reality proved that even abridged EMP project which included four TA components and NPAF credit line to be implemented in a dozen of regions was far too challenging for implementation both for the client and the Bank. Better results could have been reached if project activities would have been focused on fewer interventions and less complex implementation structure.

Project risks were identified in the SAR along with mitigation options (pages 69-70). Most of the major risks were realized with many countermeasures failing to compensate for the magnitude of Government changes and level of economic instability during crisis periods. Despite continuous efforts to contain these situations – most measures proved to only be short-term fixes that were not sustainable under the political and economic development during the life of the Project.

The EMP Technical Assistance component (Part A)

Policy and Regulatory Support: The design of this policy component was overly ambitious for Russia at a time when its own institutional environment was so rapidly evolving. The basic premise that a high level governmental champion at the national level would support this component appears to have been misplaced from the outset, and, in light of the overall evolution of the environmental institutional structure, was not sustainable in any event. The federal Environmental Commission never became functional during the life of the project. The Federal policy unit‟s main client, the Ministry of Environmental Protection and Natural Resources (MEPNR) was progressively downgraded and eventually eliminated as a Federal Environmental Agency and its remaining parts were incorporated into the Ministry of Natural Resources. The planned staffing of the Federal and Regional Policy units to consist largely of environmental lawyers was unrealistic at the outset, as was the expectation that foreign technical assistance in this area could be effective in the Russian legal system. As a consequence, work under this component was refocused first on the development of specific environmental plans and strategies at the federal and regional level, and subsequently, on regional initiatives and priorities where client interest was greater.

Environmental Epidemiology: On the premise that EMP design builds on the linkage between environmental policy and public health, the component objectives were realistic and appropriate, and activities identified to do this were realistically scaled and consistent with the objectives. The design also assured at least a level of in-kind counterpart contribution of resources would be provided, particularly for the envisioned Federal Center. However, the design did not offer a clear mechanism for

12 integration of these results into public policy and action, either at the level of institutional clients or in the project‟s implementation structure.

Water Quality and Water Resource Management: The original concept this component‟s design was progressive. It nominally provided for seamless integration of TA results into policy and regulatory management in the sector, and targeted assistance on priority issues on a scale and level that was realistic and supported the dissemination of these results on a national basis.

Hazardous Waste Management: While in principal the design was appropriate for achieving the objectives, its basic weakness lies in the delivery arrangements into the mainstream environmental agencies, which was not direct or adequately tested initially.

NPAF Component (Part B)

NPAF component was designed as a financial delivery mechanism for priority environmental investments in line with the original “win-win” concept. Project definition for eligibility evolved including the selection criteria for priority investments which were revised considerably thus compromising on the original “win-win” concept. In short, the uncertainties and ever evolving implementation framework opened opportunities to offer any project that in some way can be considered “environmental” for NPAF‟s consideration. The procurement procedures used by NPAF did not accept commercial procurement practice which in the local context acted as a deterrent for delivering subproject results on schedule. Overall, the NPAF design could have benefitted from more streamlined on-lending arrangements at the outset as well as from adjustments to simplify the overly complicated appraisal process during project restructurings.

CPPI Component (Part C)

While the basic CPPI design as an instrument for delivery of TA was theoretically sound, assuming relatively mature and stable institutionally mature and well-established counterparts, in fact neither was the case. The design had a number of flaws: (i) the original staffing plan (11 positions) was inadequate to cope with the workload; (ii) all CPPI staff were initially consultants and were not formally under direct client‟s scrutiny; (iii) the sources of CPPI funding and definition of operating expenses were unclear. It was also unrealistic to expect the necessary local administrative and coordination capability to be developed quickly enough to effectively manage numerous and complex consultancy assignments particularly under the pressure imposed by the government and Bank for rapid implementation of the work.

The GEF Biodiversity Conservation Project (Part D)

The project was one of the earliest GEF projects in Russia, and its preparation was challenging for both the Bank and the Recipient. There was a need for the government to establish a number of new nation- wide operational policies, in particular, those related to channeling grant proceeds to numerous protected areas and other project beneficiaries in the regions. For all these reasons, the project start up was relatively slow and required extensive input from the Bank. According to the ICR (Report No. 28177) the project was not subject to quality at entry review. The review for the quality of supervision commented that the project was well prepared and had a straightforward design. For the purpose of the ICR, the GEF Biodiversity Conservation Project was rated satisfactory for quality at entry.

Overall, the EMP design and implementation structure envisioned at entry are judged as being unsatisfactory. It should have been recognized from the start that it might not be good to create an organization that was not properly integrated with the government (e.g. CPPI). The overall design also

13 did not take into account the limitations of local capacity in administrating a Bank loan, particularly with the large amount of international and local contracting and disbursement involved, all of which had to be accomplished with the confines of an uncertain and changing Russian public sector administrative and taxation system. The NPAF design followed some good international models for financing pollution abatement. However, given the political, social, and economic upheavals of the time, a more limited or pilot instrument with predefined portfolio of projects might have been more effective.

In terms of compliance with Bank‟s safeguard policies, the project quality at entry could be judged satisfactory.

2.2 Implementation

TA and CPPI Components

Factors affecting project implementation. A significant factor affecting implementation that was outside the control of the government and the implementing agency was the Russian financial crisis in 1998 which led to dramatic suspension of many TA initiatives. In contrast, the factor that was generally subject to government control was the decline in government commitment to environmental policy and institutional reform over the life of the project. This effectively eroded the basic rationale for the project and changed or eliminated client agencies for EMP TA designated to implement and sustain the results.

The fact that there was no workable arrangements at the level of client agencies to ensure material government contribution to the EMP TA activities, and most importantly to providing resources to client agencies so that they could utilize and implement the TA products caused implementation problems later on. This was particularly true at the national level where no stable or sustaining counterpart capability was ultimately available to receive the results. On the positive side, the fact that regional administrations and local federal agencies made best efforts in this regard, turned out to be practical for some utilization of TA products.

An additional factor affecting implementation was the complexity and variability of government financial management requirements governing disbursement and taxation that applied to the project and which added extra implementation time. As a result PIU‟s ability to continue many technical assistance contracts was undermined before they had fully delivered planned results. Prompt government action to address these issues would have significantly improved the effectiveness of TA activities.

A final factor that undermined the project efficiency was the mixed response of the client organizations to capitalize the expertise developed by the project by utilizing it in implementation. For example, positive results has occurred where people involved in the project moved back into client organizations and assumed responsibility for implementation as in the case for the Urals water and epidemiology sub- components. With respect to the hazardous waste sub-component client organizations did not employ project expertise which affected the implementation efficiency.

Factors related to implementing agency’s control: The principal factor affecting project outcomes within the control of the implementing agency, represented by MNR and its predecessors, as well as CPPI itself was the quality and consistency of supervision. From the outset, the directions provided by MNR for selection of staff and preparation of detailed work plans for the TA sub-components were limited. Progressively declining commitment of the government to environmental management affected both policy and institutional development, thus transforming these directions into symbolic form. This

14 situation left CPPI and its management effectively acting as the implementing agency, a role that it was both ill equipped to play in terms of mandate and functional organization.

Cost and financing: The overall project cost was consistent with the original estimates although the detailed allocation of loan resources between components was revised periodically, in part to accommodate the increasing complexity of project administration and to align resources among disbursements categories. The main reallocation was generally from the TA component budgets to CPPI. Savings were incurred in the TA components mainly due to less than planned expenditure on foreign technical assistance and broader employment of local experts. Reductions in originally contemplated foreign consultancies, quality and delivery deficiencies and suspension resulting from tax and disbursement problems reduced the TA component costs. As noted above, the originally contemplated government contribution did not materialize which restricted the ability to effectively transfer and implement TA products.

The scheduled performance of the project was unsatisfactory with significant delays and associated extensions. The project preparation advance had nominal impact on the client‟s implementation capacity. In addition, CPPI significantly delayed the staffing and organizational readiness, including hiring the General Consultant and local procurement consultants. Considerable delay occurred between September 1998 and March 1999 when project activities were basically suspended by MOF due to inappropriate changes in implementation arrangements. Another delay occurred in the second half of 2000 after replacement of main implementation agency and by effectively terminating TA work during the replacement of senior MNR management in the second half of 2001.

NPAF

Three distinct periods of NPAF‟s long implementation history were identified during the assessment:

1. 1994-2002: NPAF was established through a Resolution No. 808 of August 11, 1995 of the Russian Government which stipulates the responsibilities of MOF, MEPNR, CPPI and NPAF Supervisory Board, responsible for the overall coordination and monitoring of NPAF; criteria and procedures for selection and pre-appraisal of subprojects (Schedule 5 of the Loan Agreement) and building the initial portfolio of NPAF projects. Russian financial crisis in 1998 led to collapse of many appraised NPAF projects. Consequently, with a view to reducing the risks for the federal budget, the MOF made a decision to involve major Russian banks with government shares as financial intermediaries in NPAF implementation which led to project restructuring following the Mid-Term Review in 2002. This included development of new on-lending options for building a new portfolio; introduction of new on- lending modalities, “softening” eligibility criteria for selection of NPAF investments. NPAF new on- lending options included:

a) Sub-loans from MOF to oblasts used to develop a portfolio of seven subprojects in Yaroslavl oblast. Later on this portfolio was cancelled due to deterioration of oblast‟s finances;

b) Financial intermediation used to develop a portfolio of subprojects for pulp and paper mills (e.g., Arkhangelsk, Solombala, Kotlas, Baikalsk and Pitkyaranta), subprojects for Ostashkov Tannery and “Secondary Metals and Alloys” factory. Agreements for Baikalsk and Pitkyaranta subprojects were signed but later on cancelled due to inadequate attention to project environmental impacts;

c) Urgent environmental investments were allocated for a subproject for rehabilitation of the Krasnodar Dam. This subproject was dropped after withdrawal of the government‟s financial support.

2. 2003 -2005: Several subproject were launched mostly in the pulp and paper mills sector. NPAF committed resources and signed final Loan Agreements for implementation of 3 pulp and paper mills projects in Arkhangelsk, Kotlas and Solombala. These projects were successfully completed in 2006- 2007. Implementation of the remaining three projects including the largest and most complex project with Baikalsk pulp and paper mill experienced long delays and led to their cancelation in 2005.

3. 2006- 2009: This period is characterized with NPAF efforts to build a new portfolio after the cancelation of pulp and paper mills projects. About US$30 million NPAF resources remained uncommitted and the government decided to utilize these funds for pollution abatement projects. To make NPAF resources more attractive the government suggested and the Bank agreed to further soften the on-lending conditions through an additional MOF subsidy. From the potentially big project pipeline only a few projects reached to implementation. Major contributing factors for this situation are the complicated on-lending arrangements and ineffective financial intermediation, but mostly the impact of the 2008 financial crisis which significantly worsened the financial position of sub-borrowers. Only two medium-size projects (SMA Podolsk and Ostashkov Tannery) were implemented. About US$20.4 million of uncommitted NPAF funds were cancelled.

Factors affecting NPAF operation: A major factor affecting NPAF‟s operation which was outside the government control was the financial crisis of the Russian banking system in August of 1998, and led to suspension of all actions regarding bank crediting under the NPAF. Factors within the government or implementing agency control were those related to NPAF implementation capacity, administrative decisions and multiple structural reorganizations. For instance the MOF ceased direct lending to enterprises and the involvement of intermediary banks deepened the operational issues as the sub-loan processing time18 increased significantly. Increased supervision and measures to reduce risk translated in additional regulatory requirements (e.g., collateral, procurement, etc.), excessive and burdensome informational requirements, and delays introduced by an additional institutional layer requiring agreements between MOF and the intermediary bank (sub-borrower), and between the intermediary bank and the enterprise (final borrower); which further complicated implementation and acted as an impediment for effectiveness.

The financial intermediary (FI) 19 Roseximbank also proved to be ineffective. In one case, disagreement between the Roseximbank and the enterprise (KhabarovskEnergo20, part of RAO UES) on the final loan agreement could not be resolved. The RAO‟s dissatisfaction and disagreements about Roseximbank‟s financial conditions led to withdrawal of RAO‟s loan application.

18 The subproject of PLASTKARD was an exception where the long implementation time was caused by various internal reasons on the enterprise side, and was not a result of interactions with the MOF. 19 The EMP loan was prepared in accordance with BP10.00 Investment Lending: Identification to Board Presentation and its provisions to apply credible professional standards to the design, implementation, and evaluation of FI. OP 8.30 governing FIL and investment operation which include a credit component came into force in July 1998. There is no evidence that the provisions of OP8.30 for FI eligibility criteria for FI were applied retroactively. 20 The enterprise had a long, positive credit history as a client of 30 major banks in Russia (e.g., Sberbank, Vneshtorgbank, Alfa Bank, Bank of Moscow, etc.). None of these banks had similar lending requirements. Approximately RUR 500,000 was spent for assessing equipment to be used as collateral. The necessary information was given to Roseximbank between October and December, 2005. Nonetheless, Roseximbank neither identified the list of equipment for collateral, nor set an interest rate for the sub-loan. Later on, the equipment was considered old and non- qualifying as pledge according to MOF guidelines. Although there were legitimate alternative options which Roseximbank could have explored, frustrated with all these issues, the enterprise withdrew its loan application.

Of the nine investment sub-projects agreed for preparation and appraisal, five21 remained active and four were dropped, either because of enterprise withdrawal or because of concerns about enterprise eligibility or financial viability. The remaining three22 sub-projects were unable to disburse funds prior to loan closure.

Chief among the technical reasons which impacted the performance of NPAF ED and Roseximbank were slow processing and disbursement, complex on-lending arrangements, unprepared final borrowers, difficulties with preparation of feasibility studies, and the lack of understanding of Bank procurement procedures. Furthermore, the selection of Roseximbank, as a financial intermediary, proved to be a poor choice.

Uneven relationships with the implementing agencies represented by MNR, MEDT, and NPAF ED, as a result of multiple administrative reorganizations23, affected the quality and consistency of supervision of NPAF portfolio. Problems ranged from poor communication with environmental agencies concerning preparation of EIAs, to unwillingness of MNR to provide methodological guidance on environmental impact assessment of investment projects. Subsequently, this reduced NPAF‟s potential to expand the experience of mainstreaming EIA in investment cycle, in the federal environmental services. Lengthy introduction of the new schemes for budget crediting and budgetary accounting of NPAF funds resulted in significant implementation delays. Legal uncertainties regarding the responsibilities of CPPI and NPAF ED in the investment cycle, lingered for long time. In the absence of Agency Agreement between MOF and NPAF ED which was signed only in August, 2002, after the restructuring of NPAF and completion of CPPI activities, NPAF operations remained largely inefficient.

Financing of NPAF operations

The original NPAF financing included IBRD loan proceeds (LA #38060-RU), Swiss Grant (TF 03810 and TF 020217), and federal budget contributions. Initially, pre-investment environmental studies for NPAF portfolio projects were financed by the grant from the Swiss Agency for Cooperation with the Eastern Europe (US$3 million). After the grant closure the pre-investment studies were carried out by the enterprises using own resources. The Amendment to the Loan Agreement from January 2006 strengthened the incentives to preparation of investment proposals and introduced the possibility for financing 50 percent of the cost of consulting services from the loan and the remaining 50 percent from the federal budget. NPAF ED operational cost was financed through the loan and budget contributions in a ratio 50:50.

21 The five nominally active appraised sub-projects two (CJSC "Ostashkov Tannery", Podolsk Factory of Secondary Metals and Alloys) were rated as low to medium risk based on their having had signed FLAs in place and procurement initiated. 22 LLC “Heat-Pumping Systems”, CJSC “Altaivitaminy”, Pogar Potato Processing Plant. LLC “Heat-Pumping Systems” project also had a high positive impact and was a technically sound project but could not meet collateral requirements. 23 Government‟s Resolution dated August 11, 1995 #808 assigned responsibility for EMP implementation (including NPAF) to the Ministry of Environmental Protection (MNR, then Goscomecology and MNRE) and MOF. There is sufficient evidence that only MOF executed its functions in accordance with the Resolution. However, as the Project was formally initiated and supervised by Goscomecology, the relationship of the MOF to the NPAF was uneven. The support from Goscomecology did not materialize in full due to its unclear functional responsibility and multiple reorganizations. After the reorganization which placed Goscomecology under MNR, the latter withdrew its participation from NPAF management.

17 The IBRD loan was the basic source for financing of NPAF investment projects. NPAF sub-loans financed no more than 70 percent of the total investment cost, in a ratio 80:20 from loan and grant proceeds respectively. Remaining 30 percent of the total investment cost was contribution of the enterprise implementing the project. The enterprise contribution could include external sources of no more than 10 percent.

An Amendment to the Loan Agreement in 2007 introduced an additional source of NPAF investment financing – the NPAF revolving account24. The Amendment aimed to increase the attractiveness of NPAF investment credits by lowering the total interest. Starting June 2007, the scheme of NPAF investment projects was also modified to include change in the financing ratios of the 70 percent of the total investment cost to 40:20:40 from the IBRD loan, Grant and the NPAF revolving account respectively.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

The SAR included a detailed list of specific development objectives that tracked project progress and performance, and were the focus of Bank supervision missions (Table 4.4, page 64). At the time, this list was considered sufficiently comprehensive without being overly cumbersome to monitor and evaluate. On the other hand, while the topical areas largely reflected project components, without baseline or target values it can be argued that progress was difficult to gauge, or left to subjective assessment. The final results suggest that the monitoring system did prove useful for implementation, despite its lack of detail or a baseline (see Table A2.1, Annex 2 Key Performance Indicators in this ICR). Subsequent reporting requirements in ISRs, beginning around 2006, prompted the team to select two major indicators to periodically track – one related to NPAF emission reductions and the other on NPAF on-lending amounts (Section F of the Data Sheet).

2.4 Safeguard and Fiduciary Compliance

The EMP project was consistent with the Bank Operational Directive25 4.01, from October 1991, on policies and procedures for the environmental assessment of the Bank lending operations and environmental analysis. The project was assigned “B “rating for EA purposes whereby an environmental analysis was required although a full EA was not necessary. Annex 4.5 of the SAR provided details of the guidelines for NPAF funded projects to meet the Bank EA and Government requirements. The QAG review in 2004 rated safeguard and fiduciary aspects of the project as satisfactory, despite its short assessment period (2003-04), but according to ISRs thereafter procurement, financial management and safeguard compliance were, on average, marginally satisfactory thereafter.

2.5 Post-completion Operation/Next Phase

Results of TA component The overall sustainability of the institutional development resulting from EMP TA component is considered unlikely when assessed against the objectives. This is based on the general absence of receiving capacity for TA products at the national level of MNR, and its successors, as main designated client and to a lesser degree at the regional level. This is directly linked to the overall instability of the government institutional structure at the national level and suboptimal demand for the kind of institutional strengthening provided by the project. Two other major clients which benefited from EMP

24 Opened by the NPAF ED according to Section 4.02 of the Loan Agreement. 25 OD/GP 4.01 was replaced by OP/BP 4.01 in 2004.

18 TA results are Sanitary and Epidemiological Service of the Ministry of Health and MOEDT. It seems that products provided through various TA activities are likely to be in sustainable use by these institutions.

At the regional level, there are project results that are likely to be sustained in many cases, notably the REAP‟s, environmental epidemiology capacity in the Urals and water resources decision support systems. These were products of more progressive regional administrations that recognized the importance of environmental management and were effectively filling the void left by federal authorities. The other important but less tangible aspect of sustainability is the intellectual capacity built up by the TA at all levels throughout the country. While highly fragmented, this legacy represented the preservation of a cadre of environmental management professionals who had up to date knowledge in a wide variety of environmental management disciplines. Interestingly, this expertise is increasingly being used by the private industries recognizing its importance for modernization and attraction of investments.

Results of the Russia GEF Biodiversity Conservation Project

The ICR for Russia GEF Biodiversity Conservation Project (Report No. 28177) indicates that the project achieved all its major objectives. The development results were assessed as substantial. The project overall outcomes were rated satisfactory.

Results of NPAF component

The original NPAF concept was designed as a revolving fund with an idea that NPAF would be able to continue investing in pollution abatement projects after project closure. However, changes of the Budget Code in 1998 affected the operation of NPAF and led to its restructuring. The Budget Code did not provide for operation of such a fund. Nonetheless, the loan was restructured with an obligation to keep NPAF operational under the Loan Agreement owning to legislative waivers for projects financed by IFIs. Thus the revolving fund arrangement existed insofar as the IBRD loan was used and disappeared when the loan was repaid in September 201126.

The original project design concept was flawed (the “win-win” project pipeline) and was abandoned. The restructured project design was marginally effective. Given the long and tortured history of the NPAF component, it is not unreasonable to believe that in the absence of strong market incentives, regulatory and enforcement provisions supporting environmental improvements in the industry is likely to remain effective. It does not appear that any institutional capacity was developed or was of interest in being developed in the Ministries involved or in the financial intermediaries.

Results of Project Preparation Components

Part F financed the preparation of Roshydromet Modernization Project. The project was successfully prepared and approved by the Board of Executive Directors in 2006. Part F supported preparation of the project for Elimination of Past Environmental Liabilities in the Russian Federation. Preparation activities did not progress due to the counterpart‟s failure to make the required administrative and institutional arrangements and to complete the procurement of consultant services prior to EMP closure in June 2011.

26 Upon closure of NPAF Component the funds from the revolving account of NPAF in the amount of US$24 million were transferred to the Treasury according to the Russian Budget Code.

19 3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

The project‟s objectives, design and implementation were highly relevant to the priorities laid out in the series of Country Assistance/ Partnership Strategies (1995, 1997, 1999, 2002-2005, 2007-2009). The recently approved CPS (2012-2016) indicates renewed interest of the Government to strategically address environmental management risks as part of the economic growth and diversification agenda.

An assessment of EMP objectives should be undertaken considering (a) the scope of Russia‟s economic development and associated environmental problems and the level of political and public policy commitment to addressing, and (b) the institutional framework that was operative in the 1990‟s as well as how it has changed since then.

The period leading up to and following the break-up of the Soviet Union was marked by the emergence of strong public and political commitment to improving environmental management and performance. A reasonably well established institutional structure for environmental management created in the Soviet Union in 1988, including the policy and legal developments related to transition to a market economy, was considered as a natural baseline for strong uptake on mainstreaming environmental concerns into the economy. Political and economic motivation for environmentally sustainable development was largely overestimated 27 . Conversely, the potential institutional challenges and setbacks were underestimated.

In hindsight, both the beneficiary and international community believed in a „technocratic‟ approach to transition to a market economy influenced by exposure to technical, policy and institutional experience of OECD countries -- something that has proven true in areas other than environment. Furthermore, there was a strong belief that addressing the country‟s environmental problems could be more effectively accomplished by providing intellectual capacity within government, scientific and industrial organizations who would champion the change. The fundamental premise on which the EMP project was developed that this capacity was to be supported by policy tools, institutional experience and technology from Western Europe and North America where it was perceived that environment issues had been effectively addressed. While the assumption of strong and receptive intellectual capacity in the country remains valid, in mid 1990‟s onward a complex set of factors and changing circumstances occurred that undermined the EMP project concept. Perhaps the most predominate factor was the decline of government commitment to environmental management and the dominance of economic and fiscal considerations in public policy making. These considerations included measures to reduce the overall government structure, decentralize and privatize and make self-sufficient many services once provided by the government at little or no cost to the public. Driven by this impetus, the Government chose to reorganize and downscale the environmental management system. As a result, the State Committee for Environment was abolished in 2000 and its functions were merged with the Ministry of Natural Resources. Within this Ministry, the public policy emphasis has been on setting the conditions for exploitation of existing resources and assets with less emphasis on sustainable use and resource allocation and improved environmental performance.

27 The SAR (paragraph 1.6) states ”An increasing number of government decision-makers in executive and legislative branches at the federal and local levels in the Russian Federation are searching for ways to restructure and reform the economy to promote efficient and more sustainable economic growth – an impossible goal without taking environmental quality and natural resource management factors into account.”

20 With that background, the project‟s overall objective was unrealistic, particularly given the change in circumstances and poor understanding of the complexity and challenges related to the economic transition. To a greater or lesser degree the experience throughout the region28 was indicative of similar developments. In retrospect, it is also arguable that the country was ready to accept technical assistance products beyond a relatively narrow cadre of environmental experts within the national bureaucracy that itself was coping with more fundamental structural change in terms of its place and influence within the country. At the regional level, however, the project‟s objectives were more realistic and, to varying degrees, were achievable.

Project objectives related to facilitating environmental investment through technical assistance activities were also more reasonable and, to some degree, marginally successful. However, the overall impact is qualified by comparing successes to the scale of modernizing Russia‟s large, but outdated, industrial and infrastructure base. Similarly, the objective of facilitating the flow of donor funds for environmental protection was realistic, but achievements were modest compared to the overall need. The country has been unable to sustain the kind and level of political commitment to environmental protection necessary to mandate and fund the required institutional structures, adopt and implement policies and strategies, and operate upgraded national level management systems envisioned as the basis for the project‟s primary technical assistance objectives.

3.2 Achievement of Project Development Objectives

Overall, the achievement of project outcomes is evaluated unsatisfactory as the project failed to reach most of its major objectives. This section provides a general assessment of EMP outcomes as judged against the Project‟s Development Objectives defined in the SAR (Table 4.4, page 64) Specific activities that contributed to the achievement of these objectives are listed under Key Performance Indicators in Table A2.1, Annex 2 of this ICR.

Establishment of National Environmental Database: Although the scope and use of the environmental information database developed under the project remained limited the following is worth mentioning: (i) the National Waste Management Information System developed with MNR, provided a comprehensive database and covered waste generation, disposition, facilities options and regulatory control measures as well as transboundary movement monitoring and reporting; (b) baseline environmental performance database developed for four industrial sectors and maintained through the project to varying degrees, was used in industrial policy development, and (c) specific data bases applicable to local and regional level were developed for air and water quality, waste and public health indicators, either directly or as part of regional action plans or decision support systems. Overall these outcomes had marginal development impact at the national level.

Adoption of Action Plans at the Federal or Regional Level: The project produced Regional Environmental Action Plans (REAPs) in the Urals and Upper Volga as well as a follow-up REAP in Rostov Oblast, all of which were formally adopted for implementation within the respective regions. In the case of Sverdlovsk Oblast, the REAP formed the basis of a broader strategic environmental protection plan. In Kostroma, and particularly in Rostov Oblast, the development of the REAP led to the establishment of a meaningful environmental priority setting process which, in turn, led to a better political recognition of the importance of environmental concerns in development planning. In the case of the National Environmental Action Plan (NEAP), the project provided a substantive contribution to its updating in 1998, but the country has since withdrawn from maintaining NEAP as environmental

28 The EAP Task Force, Developing Effective Packages of Environmental Policy Instruments in the NIS: Experience and Directions for Reform, Prepared for the Kiev 2003 Conference, December 2002.

21 policy tool. Overall these outcomes generally met the project‟s objectives to the degree that was institutionally practical and are assessed as marginally satisfactory.

Adoption of Specific Environmental Action Plans: The project produced a number of specific environmental action plans which were consistent with, and contributed to, the achievement of project objectives. At the national level, these covered natural resource property rights distribution, environmental education, a sustainable development strategy, and four Sectoral Environmental Action Plans (SEAPs) for key pollution-intensive sectors. While most of these products were formally “accepted” by client agencies, they had very limited practical adoption and hence limited development impact simply because of the institutional instability existing at that level. At the regional and local level, outcomes in this area were primarily in the water sector related to rehabilitation and management plans of specific water bodies and resource conservation strategies. Overall these outcomes were considered generally unsatisfactory.

Adoption of Improved Regulatory and Enforcement Systems: The project contributed to regulatory and enforcement improvements largely through support to preparation of specific laws, regulations and implementation guidelines in a number of specific areas, mainly at the regional level. This includes the development and launch of a “care and custody” framework initiative for regulation of hazardous waste at the regional level in Sverdlovsk Oblast and to various degrees in other Oblasts. Similar regulatory initiatives were adopted for public health (monitoring and impact assessment), water management (Oblast regulations on drinking water supply, water rights and financing water-related infrastructure) and in various policy related regulations. Nationally, the project provided support for legislation on state environmental control and natural resource property rights which, however, was not adopted. With few exceptions, the policy development opportunities were not fully utilized, largely due to major institutional restructuring and/or dramatic downsizing of environmental protection bodies with the associated loss of capacity and institutional memory. Having said this, one positive example of a regulatory measure that was sustained is the use of health risk assessment by the Ministry of Health which became mandatory. Conversely, the implementation of regulations concerning hazardous waste management developed for regional application was effectively blocked by the Federal authorities. The overall assessment of outcomes under this objective is unsatisfactory.

Dissemination of Experience and Project Results: The project undertook extensive efforts to disseminate EMP results at both the national and regional levels. Several hundred reports and formal technical papers were produced and more than 100 workshops and seminars held through the country. An electronic database of EMP products and an e-archive of technical working papers were produced and broadly distributed among participating ministries, regions and other stakeholders. The CPPI itself and several of the TA components established web sites, the former being an accessible repository of major project results. Several examples of the outputs of this effort are worth mentioning: (i) REAP methodology was utilized in about 60 Oblasts and even, in the Urals region targeted municipal environmental action plans were developed in several cities; (ii) the waste classification system, compatible with international practice, was developed and used at the regional level and as a basis for updating the national waste management system now in use; (iii) the regional and national waste management information system and regulatory framework developed in the Urals has been transferred for adaptation to Rostov and other Oblasts to the degree allowed by the Federal intervention. However, the effect of dissemination efforts was generally unsustainable due to the decline in regional capacity and the lack of methodological guidance and support from MNR. Contrary to public sector inaction, it is interesting to note that the waste tracking system was utilized by at least one major oil and gas development project (Sakhalin II) as the control mechanism for its waste management program. The North Caucasus Water Management Decision Support System was disseminated and is being used in several dozen Russian Regions and Seversky Donetz basin in Ukraine. Methodological documents on health data collection and analysis, particularly in risk assessment, were also widely disseminated to

22 national, regional and local health authorities. Despite these notable achievements, the overall assessment of development outcomes in this area is only marginally satisfactory.

NPAF establishment and implementation: The entire period of NPAF‟s operation was characterized by uneven developments and challenges. From 1994 to 2009 NPAF ED received 599 borrowing applications for environmental investment projects. Out of these, 201 investment proposals were selected for appraisal and pre-investment studies. Others did not comply with NPAF selection criteria. A significant number of applications were withdrawn at early stage of pre-investment studies due to applicants‟ disagreement with the assessments of financial position of enterprises and the obligation for targeted use of funds, including for procurement of equipment and services. Applicants also faced serious difficulties in meeting application requirements of NPAF‟s format. To assist the applicants NPAF ED undertook 90 pre-investment studies and followed with detailed appraisal for 51 investments. Of these, only 39 investment projects were approved by the NPAF Supervisory Board and received “no objection” by the Bank. Only 7 projects were fully completed. Appraisal on the remaining investments was discontinued upon the request of applicants, mainly due to deterioration of their financial position resulting from the 1998 financial crisis. Overall, the development outcome of NPAF investment portfolio is considered unsatisfactory.

Institutional Improvement for Environmental Management: The assessment of project development impacts for institutional improvements for environmental management should be made on two levels. The first is in relation to the overall national institutional structure, where clearly the project had little impact due to the overriding institutional changes in the environmental management system at the national, and to some degree, at regional level. Yet, the expectation that the project could have a significant effect was unrealistic, nearly impossible, due to factors beyond the Bank‟s or counterparts‟ control.

The second level concerns the institutional tools and mechanisms for improved environmental management supported by the project. In this regard the project made valuable contributions in a number of areas such as environmental epidemiology and assessment, hazardous waste and water quality management, including policies, standards, methodologies and guidelines for valuation of environmental damage, integration of environmental management into investment project preparation, waste disposal technology and practice, water quality standards, policies and framework tools for decision support systems. The project also supported environmental management initiatives in the form of sectoral associations, expertise centers and inter-regional councils as well as, in one case, creating a trans-boundary environmental management agreement with Ukraine. A wide array of training activities was undertaken in such areas as epidemiology, hazardous waste and water. Training in environmental audit and formal EMS stimulated investment decisions among industrial sectors seeking to be more competitive in the marketplace. In summary, despite some partial impacts at the regional level the overall assessment of development impacts is that the activities for institutional improvement for environmental management was unsatisfactory.

Facilitating donor support of the environmental sector in Russia: The project served as a vehicle for facilitating broader support to EFP. Donor funded initiatives with CPPI facilitated donor funding and supported CPPI implementation capacity for delivery of these initiatives. This indicates that the development outcomes related to the latter were generally met. CPPI indeed provided basic project implementation unit function for a number of Bank operations including for the Krasnoyarsk Emergency Forestry Pest Management Program, the GEF financed Biodiversity Conservation and ODS Consumption Phase Out Project and the Special Initiative on ODS Production Closure, the latter two being the largest direct environmental investment projects undertaken in the industrial sector during the

23 period 1996-2006. Conversely, direct donor TA funding that was attracted to support the EFP under the CPPI administrative structure was more modest29 than initially envisaged. A much larger amount of donor resources was envisioned, with contributions from United States, the United Kingdom, Canada, and Finland, who expressed a significant interest in supporting the NPAF component, but their interest never materialized into an actual pledge of resources and subsequently faded out.

These results prove that an effort to coordinate donor investments in the environmental sector which is unsupported by institutional commitment is generally unsuccessful and therefore the overall development outcomes of these activities are deemed moderately unsatisfactory.

3.3 Efficiency No economic or financial assessments were performed at the time of appraisal. However, individual investments supported through the NPAF were screened for economic and financial viability (many of which were either rejected or applications retracted due to a lack of financial transparency; see Section 3.2). As also mentioned elsewhere, local banks (e.g. Roseximbank) imposed their own set of financial requirements which proved to be counterproductive to the on-lending function under the NPAF, while other financial intermediaries were partially successful in financing some investment projects (e.g. VneshtorgBank (VTB) financing three NPAF projects).

3.4 Justification of Overall Outcome Rating

Rating: Unsatisfactory

The relevance of the project was apparent and activities were directed towards areas that were, and are, relevant to improving environmental management in the Russian Federation. However, failure to achieve many objectives under the PDO (primarily at the national level) and a general sense that these were not achieved in an efficient manner (financial hurdles and overly bureaucratic), and not sustained over time, the project is rated as unsatisfactory overall.

3.5 Overarching Themes, Other Outcomes and Impacts

29 Two Swiss Grants were the only additional co-financing sources mobilized for NPAF purposes. Grant TF 020217 (US$3 million) was used as a project preparation and appraisal resource for the NPAF portfolio and only a relatively small portion was directed to source-based waste management (cleaner production/pollution prevention development) in two enterprises in Yaroslavl Oblast. 95 percent of Grant funds were utilized and the undisbursed amount of US$153,325 was cancelled and returned to Donor. The second Grant TF 03810 was for the joint co- financing of NPAF investments in resource recovery/pollution abatement. Grant proceeds financed 20 percent of the investment cost of five projects: This includes: (i) Technical modernization of cardboard production at “Karton”(Novodvinsk, Arkhangelsk region) aimed at reduction of energy consumption and atmospheric emissions of harmful substances (1996-1999); (ii) Reduction of energy consumption in cardboard production and utilization of bark-wood wastes (BWW) at production line of bleached deciduous pulp at Arkhangelsk PPM (2001-2005); (iii) Reduction of environmental impact of Kotlas PPM due to replacement of evaporation station (2002-2008); (iv) Reduction of adverse environmental impact on the Upper Volga basin through modernization of basic and auxiliary production units and treatment facilities at CJSC "Ostashkov Tannery" (2005-2009), Environmental enhancement of Podolsk City through the modernization of the gas purification system of the smelting shop of the Factory of secondary metals and alloys, Podolsk, Moscow oblast (2007-2009).

24 (a) Poverty Impacts, Gender Aspects, and Social Development Not applicable.

(b) Institutional Change/Strengthening See Section 3.2 above and Table A2.1, Annex 2 for further details on institutional strengthening and support.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable.

4. Assessment of Risk to Development Outcome Rating: High

EMP development outcomes are likely to be substantially at risk, especially at the national level, given the institutional and political environment that repeatedly counteracts project efforts. For example, most of the capacity building in Government institutions has dissipated since many of these institutions have been dismantled and resurrected under another mandate. Consequently, much of the intellectual capital supported by the project moved to the private sector which is an indirect positive outcome. The reluctance of agencies in formally adopting various strategies and action plans (e.g. SEAPs) is another indication of how uncertainty in the political-economic environment is leading to a lack of commitment – a risk that affected project implementation all along. Likewise, the NPAF Revolving Fund did not evolve into a sustainable financing instrument for pollution abatement and in 2009 the funds were returned to Treasury according to the Budget Code. One positive note stems from the sustainability of technical assistance efforts to the Sanitary and Epidemiological Service of the Ministry of Health and MOEDT. Also through its lengthy implementation history and institutional uncertainties, EMP often served as the only vehicle for maintaining the policy dialogue on environmental management and facilitated important Bank investments in meteorological and hydrological services and contributing to sustainability. However, this indirect contribution to environmental sustainability only attests to the fact that a prudent assessment of project implementation risks at the outset could have significantly improved the project design and development outcomes.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Unsatisfactory

The flaws of project design and implementation discussed in the previous sections attest to a lack of attention to the quality at entry and therefore the Bank performance is rated unsatisfactory. Quality at entry, described in section 2.1, was assessed as unsatisfactory, primarily due to overestimated government commitment to improve and “mainstream” environmental policy. The project preparation team also overestimated the capacity of the country to receive and sustain a large environmental TA initiative. In addition, inadequate implementation arrangements further eroded the potential of the project to make adjustments and address design flaws and underestimated risks during project implementation.

(b) Quality of Supervision (including of fiduciary and safeguards policies)

25 Rating: Unsatisfactory

The QAG Supervision Assessment (QSA, 2004) covered a limited implementation period and provided an Overall „Satisfactory‟30 rating. The QSA was carried out in FY03-04, and concluded with the general view that subsequent to the project restructuring in 2002, the „Satisfactory‟ QSA rating was completely applicable.

There is plenty of evidence of the dedication and professionalism of the supervision team and the patience and determination they exhibited at attempting to straighten out a massive amount of issues that were inherent in the project design. Of particular example is the manner in which the team held to sound judgment in rejecting the Baikalsk pulp and paper project zero discharge investment proposal. The QAG evaluation also noted the sound judgment of the task team which held a firm line regarding the agreed upon conditions for the municipal WWTP.

At the same time, the QAG Panels‟ observation regarding project monitoring was fully consistent with the project‟s shortcomings discussed above, pointing to the need for explicit attention to monitoring and reporting of progress indicators. QAG ratings for Fiduciary/Safeguard Aspects, and Adequacy of Supervision were rated „Satisfactory‟, while on Candor and Quality the project performance was rated „Moderately satisfactory‟ primarily because of the limited attention to the monitoring indicators in the supervision reports.

Since 2004, implementation progress varied from unsatisfactory to moderately satisfactory while disbursements barely moved from 2006 onwards (US$82 million in 2006 to US$86 million in 2011). Most activities were met with sufficient institutional resistance to erode any supervision effectiveness. This was mainly shown through the relatively few (final) completed NPAF investment projects. The Medium-Term Review which is a valuable tool for adjusting original project focus and aligning development objective with component restructuring was not used proactively. In this regard, overall quality of supervision is rated as „Unsatisfactory‟.

On the basis of unsatisfactory Quality at Entry, and implementation supervision, the overall Bank performance is assessed as „Unsatisfactory‟.

5.2 Borrower Performance (a) Government Performance Rating: Moderately Unsatisfactory

Borrower performance in project preparation was satisfactory, with the Ministry of Environmental Protection and Natural Resources actively participating in all aspects of project preparation. The performance of the Borrower while initially strong when the project was championed at the Ministerial level, weakened after the project began, for example, by the failure to substantiate the mandate of the Federal Environmental Commission. It subsequently degenerated throughout its implementation to the point where the lack of government action in areas such as resolving tax issues represented a significant factor in the project being unable to fully deliver EMP products.

30 Satisfactory or better on all aspects – a solid supervision effort, defined by sound and timely focus on implementation problems and development effectiveness.

26 (b) Implementing Agency or Agencies Performance Rating: Unsatisfactory

The performance of the primary implementing agency paralleled that of the Borrower and reached its lowest point when the Ministry of Natural Resources and Ministry of Economic Development displayed little interest in either active supervision of the project as its primary clients or in implementing its results.

Based on the moderately unsatisfactory rating of Government and the unsatisfactory performance of the Implementing Agency, the overall Borrower performance is rated „Unsatisfactory‟.

6. Lessons Learned

The long implementation history of EMP demonstrates that factors which played a major role in this project can be grouped into four categories: (i) client commitment and ownership; (ii) project complexity; (iii) institutional capacity and sustainability of TA; and (iv) elements of the Borrower‟s and Bank‟s roles in resolving implementation issues. A separate set of lessons emerged from the implementation of NPAF component specifically relevant to pollution abatement projects. The project yielded many good lessons which reflect different experiences of stakeholders which are interconnected and relevant to all parties in EMP implementation and beyond.

Client commitment and ownership

Overreliance on political commitment of one agency in a highly dynamic economic and institutional transition could lead to underestimating the importance of fully testing government commitment, ownership and prospects of sustaining project outcomes. The project largely failed to meet the overall objectives and expectations at the national level because of the lack of Borrower‟s commitment to policy and institutional improvements of environmental management system. More direct and early involvement of all stakeholders from the economic and financial ministries (MOEDT, MOF) as well as national legislative bodies (i.e. The Duma) in the project design and implementation could have strengthened outcome sustainability. Institutional counterpart commitment should be fully tested at appraisal and confirmed at negotiations including through establishment of reporting structures and explicit agreements on counterpart mandates and relationships. These should be confirmed prior to effectiveness perhaps through conditionality related to creditable interagency agreements being in place and verified regularly during supervision and provisions for timely restructuring - where there is an indication of ownership degradation or changes in the institutional structure.

Project complexity

An appropriate balance should be reached between the desire to maximize project impacts and minimize project complexity. Taking into account a multitude of development issues which Russia was facing in early 1990s the team was tempted to address as many development issues in the sector as possible. Reality proved that even abridged EMP project which included four TA components and NPAF credit line to be implemented in a dozen of regions was far too challenging for implementation both for the client and the Bank. Arguably, better results could have been reached if project activities would have been centered on fewer regions and components, and even on more focused interventions within those components. Future TA in this sector in Russia may benefit from a “bottom up” regional

27 approach rather than a “top down” approach until there is sustained interest and political commitment to utilize technical assistance by the national government for environmental management.

An early agreement with project counterparts on development objectives and outcomes/outputs that are realistic, focused and measurable could mitigate implementation risks related to project complexity. EMP illustrated that where the objectives and scope were best defined, undertaken on a reasonable scale, and were linked to specific tasks (i.e. waste management, water and epidemiological sub-components) better outputs were obtained. Conversely, in the policy sub-component where broad policy and environmental improvement objectives were set, it was more difficult to correlate outcomes and outputs with objectives. The assumption that the experience in Poland of measurable environmental performance improvement being correlated with reform of the environmental management system was not realistic for Russia, given the different history of market reforms and the substantial TA from bilateral sources that preceded Bank intervention in the case of Poland.

Institutional capacity and sustainability of TA

An early agreement on linkages and coordination between project components and implementation arrangements could motivate potential users of Technical Assistance (TA) products and have direct incentives for TA application. The sustainability of standalone TA is correlated to the ability of the project to create and sustain institutional ownership of TA products. An even more fundamental question is whether standalone TA, only loosely linked to direct investment, is optimal or viable in the Russian context. While the EMP TA components responded to specific national priorities, ranging from institutional reform in the environmental sector to that of economic development and investment, they largely failed in supporting investment priorities identified for actual financing. This points to the problem of the soundness of NPAF on-lending arrangements and had an effect of isolating the TA products - particularly REAPs and SEAPs - from the delivery of environmental investments. Additionally, it is recommended that implementation arrangements embed TA resources within the client organization and not allow the progressive separation of these resources under independent functional control as was ultimately the case of CPPI. Any future large scale technical assistance initiatives in the sector should be based on a track record of well-tested public policy in conjunction with a demand for this kind of TA.

Adaptation, appropriateness and the form of delivery of TA should be adapted to the local context. EMP illustrates the importance of critically testing the appropriateness of foreign technical assistance to the local situation, both in terms of capacity to apply it and its quality. Foreign technical assistance under EMP was largely delivered in large contract packages through foreign consulting firms selected using Bank procedures. While facilitating contracting, early implementation, rapid disbursement and easier supervision, this approach assumed that selected firms were well experienced both in modern environmental management approaches as practiced in OECD countries but also had the capacity to effectively transfer this into the local context. While this was the case for a number of contracts, particularly where well defined and agreed terms of reference existed, the overall performance in doing so was uneven. Few western consultants at the time had sufficient experience in the region, and particularly Russia, such that EMP was a learning experience for them as much as it was for the counterpart. The process of relying on foreign experts to deliver TA also eroded the borrower‟s confidence of the loan‟s marginal value of internalizing this capacity. Over time, foreign experts took on a more one-to-one advisory role with local counterparts. Future TA initiatives should carefully design the mix of foreign and local resource allocation and perhaps utilize a model of integrating foreign and local experts, something that may require examination of the procurement procedures used.

28 Resolving implementation issues

Multi-layered implementation arrangements and oversight responsibilities complicate project implementation and internal coordination. Notwithstanding other factors that created a relatively inefficient and overly bureaucratic implementation arrangement, a basic lesson from EMP is that complex implementation arrangements involving a matrix of interagency supervisory structures may not be workable when overlain on a direct relationship with TA clients. In combination with pre- established stable counterpart arrangements for receiving and applying TA products, future TA projects should maintain a clear separation between the counterpart agency‟s functional technical management and the provision of administrative PIU services.

Timely project restructuring is key to adapting to changing sector priorities and institutional context. EMP provides both positive and negative examples of reacting quickly to changing priorities and institutional instability in counterpart arrangements. A positive example was the hazardous waste sub-component where recognized weaknesses and early restructuring resulted in a generally satisfactory outcome - at least in terms of delivering planned products. Similarly, the refocusing of remaining TA resources at the end of the project on expanding project scope by dissemination and implementation of its more successful outputs in Rostov was significant. On the other hand, substantial restructuring of the policy and regulatory support sub-component was clearly required when it became clear that it did not have the high-level counterpart mandate on which its national level objectives depended. Furthermore, the applicability of a western model based of legal reform proved impractical. Additionally, the project team could have been more proactive to undertake early restructuring, reallocation of resources and/or partial cancellations of non-performing components in the face of diminishing client commitment.

Design and implementation flaws may not be remediated by numerous project extensions. The lengthy implementation of EMP raises the obvious question of why the Bank prolonged a non- performing project. Can Russia‟s stature as an important client rationally counterbalance the numerous difficulties encountered with multiple component and institutional changes affecting project implementation over the past fifteen years? While the answer is most likely a political one, it is also important to note that the project (fortunately or unfortunately) represented a venue to maintain the Bank-client dialogue on environmental policies, environmental management and public health issues. Be as it may, one lesson clearly emerges that project design, preparation and implementation encompasses most of the issues which current Bank operational policies, which evolved over the years, are aiming to address.

Implementation of NPAF component

NPAF’s design would have benefitted from a more streamlined on-lending approach, a well- functioning M&E system and targeting a more narrow set of priority areas. The low number of completed investment projects was a reflection of the limited number of actual “win-win” opportunities and the overly complex on-lending appraisal process. Future intermediary lending should be accompanied by a capacity assessment of the financial institution(s) involved. If it is determined to be limited, explicit institutional strengthening for preparing and appraising projects should be included in the project design. A well-defined environmental monitoring program integrated into the project design will allow for a more straightforward assessment of progress in meeting project objectives. Given the political, social, and economic upheavals of the time, a more limited or pilot operation might have been more effective, confining the operation to: (a) a priority industrial sector, (b) a specific priority region (e.g. a “hot spot”), (c) a priority media (e.g. air quality, specific river or lake quality etc.), and/or (d) a priority industrial pollutant (e.g. sulfur dioxide, dust etc. in air or nutrients such as phosphorous, or heavy metals in water, etc.).

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

Comments on the draft ICR dated February 19, 2012 were received from the Ministry of Finance (March 23, 2012), Ministry of Environment and Natural Resources (March 19, 2012) and Ministry of Economic Development (March 26, 2012). Comments are contained in Annex 7.

In summary, some of the comments (e.g., the Ministry of Environmental and Natural Resources) endorse the ICR assessment, while others (e.g., Ministries of Finance and Economic Development) disagree with the ICR‟s unsatisfactory rating of the overall project outcome, the Borrower‟s and the Bank‟s performance. On the premise that the ICR‟s purpose is to independently assess the project’s experience, capture the lessons learned and enhance the design, preparation and implementation of future operations, the EMP ICR was prepared to meet this objective by drawing attention to areas where major shortcomings occurred and affected project development outcomes. It also acknowledges the individual achievements, especially at the regional level, and points to the evolving policy and institutional context that created the enabling environment or acted as a barrier to project success. Certainly, the ICR aims to present an impartial and candid representation of actions of all parties concerned in what is believed to be one of the lengthiest project implementation experiences in the region. The ratings assigned to the key development aspects such as relevance, development impacts and efficacy are based on the project’s experience – and should not necessarily be generalized to what could be anticipated in future engagements.

(b) Cofinanciers

The Implementation Completion Memorandum with detailed summary of EMP activities financed by the Swiss co-financing grant (COFIN 03810) was sent to the donor for comments on December 13, 2010. No particular comments were provided. Relevant documents are on file.

30 Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) Center for Project Preparation and Implementation (Part C) 4.38 4.88 111 Hazardous Waste (Part A) 6.86 6.35 93 Policy and Regulatory (Part A) 15.24 15.10 99 National Pollution Abatement Fund (Part B) 52.09 50.00 96 Water Quality (Part A) 8.79 9.16 104 Environmental Epidemiology (Part A) 6.68 6.69 100 Preparation of Environmental Liabilities Project (Part F) 0.00 2.40 -

Total Baseline Cost 94.04 94.58 101 Physical Contingencies 4.97 0.00 Price Contingencies 11.09 0.00 Total Project Costs 110.10 94.58 86 Front-end fee PPF 0.00 0.00 Front-end fee IBRD 0.00 0.00 Total Financing Required 110.10 94.58 86

(b) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) Borrower 9.80 7.08 72 International Bank for Reconstruction and Development 1 110.10 86.47 79 Russian Enterprises and Banks 75.00 63.71 85 Swiss Grant TF020217 2 0.00 2.85 Swiss Grant TF03810 3 0.00 5.64 Total 194.90 165.75 85 1 – A total of USD$20,437,000 was canceled as of June 25, 2009. 2 - Support for project preparation and appraisal of NPAF portfolio. 3 - Financed 20% of the amounts disbursed under the NPAF sub-loans at five investment projects – Karton PPM, Arkhangelsk PPM, Kotlas PPM, Ostashkov Tannery, and Podolsk SMA factory.

31 Annex 2. Outputs by Component

Technical Assistant Component

Policy and Regulatory Support sub-component: The objective of the sub-component is to achieve a significant reduction in environmental damage in the Upper Volga and Urals over 3 to 5 years with a notional target of 25% reductions in critical ambient air and water pollutants. While available monitoring data shows that pollutant reductions have occurred in the Upper Volga, it cannot be reasonably measured that this objective was achieved, nor if it was reasonable, in the beginning. What was achieved in both regions was provision of a planning framework in the form of REAPs and subsidiary tools such as data base and decision support system to implement the necessary institutional and regulatory reforms to obtain pollution reduction. This in effect reflects partial achievement of one of two subsidiary objectives, namely developing capacity to set environmental priorities, institute environmental policies and monitor environmental conditions at the regional level. However, the outcomes in these areas at the national level were not achieved because of the government‟s declining interest in them. The second subsidiary objective related to establishing the administrative economic, legal and technical framework for emission reduction in specific sectors and regions through negotiated agreements was not achieved in any substantive way. Capacity building of staff working in environmental protection bodies through the development of training strategy and delivery of training courses were also not successful. The sub-component is assessed as unsatisfactory with respect to its outputs, both as measured by these objectives and the key performance indicators.

Environmental Epidemiology Sub-component: The sub-component‟s outputs basically match the component objectives set for related to capacity development and environmental health data. The relationships between environment and health were addressed and supported by specific studies developed under the sub-component. The outputs substantially contributed to the general objective of integrating environmental health impacts into the mainstream of environmental policies at the regional level in Urals and, to lesser extent, at the federal level. Sub-component outputs helped to improve the system for generating, collecting, managing and analyzing data on child health as the basis for monitoring the consequences of changes in population exposure to various pollutants. While the Federal Environmental Epidemiology Center which was to be a national focus for environmental health data collection and reporting, quality control of data, coordination of regional expertise centers was not formally established, its functions were taken over by the Federal Center of State Sanitary and Epidemiology Surveillance. On this basis, the overall outputs of the sub-component were satisfactory.

Water Quality and Water Resource Management Sub-component: This sub-component‟s can be considered to have met its overall objectives, at least to some degree at the regional level. It objective to contribute to improvement of water resources management and related utility services was achieved through delivery of improved management plans, application of modern approaches and experience from OECD countries, and expansion of the pipeline of priority investment projects. Similarly, some of the targeted regional objectives were achieved in small watershed management (North Caucasus and Upper Volga), introduction of modern databases and decision support systems, development of recommendations for financial and administrative improvements in operation of water utilities. However, the implementation of these products at the national level was generally limited and less than uniform in the some pilot regions, particularly the Upper Volga. Other objectives, such as introduction of water quality monitoring system, long-term water resources planning, improved financial, economic and institutional tools for better river basin management, training of staff and building of improved skills were ultimately not successful. Federal task of development national water quality standards and objectives did not lead to any measurable progress in setting up a more reasonable regulatory base. On this basis the overall sub-component outputs were considered unsatisfactory.

32 Hazardous Waste Management Sub-component: The sub-component outputs at the national level generally met the objective of providing MNR with the capacity to collect, classify, document, analyze and report waste management related information and to utilize this as the basis for defining national waste management policies and priority actions. A comprehensive information management tool for accomplishing this was delivered and implemented in MNR as was support in strategy development and in meeting national obligations related to international trans-boundary movement of waste. Similarly, at the regional level a relatively complete “care and custody” regulatory framework for hazardous waste was provided and started implementation in the competent authority in Sverdlovsk Oblast. This experience was transferred on a directed basis to Rostov Oblast for adaptation and implementation and was disseminated to other regions as well as being further developed in subsequent bilateral TA projects. Limitations in the outcomes were the delivery of support equipment to support regional inputs into national data management capability and the resources available to MNR at all levels to maintain implementation. The sub-component‟s outputs as delivered in 2002 can be considered satisfactory. However, the absence of any sustained implementation by MNR effectively negates this assessment.

Krasnoyarsk Emergency Forestry Pest Management Program. This program, aimed to mitigate the consequences of Siberian silkworm outbreak by applying environmentally safe chemical and biological agents by the low-cost techniques of aerial spraying, achieved its objectives and helped to minimize negative impacts of the infestation. Experience gained in the process of implementation and contacts established with the Federal Forestry Service helped to identify and prepare a Sustainable Forestry Pilot Loan.

New Initiatives. Implementation of four new initiatives (i.e Regional Environmental Support Program; Integration of Environment in Strategic Planning and Economic Decisions; Global Development Initiative Support Program, and NPAF Support and EMP Results dissemination started in the second quarter of 2001. Unfortunately, the work was terminated in February-March 2002 when EMP TA components were closed. Nevertheless, important outputs were delivered within the scope of Rostov Environmental Support Program, in global initiative support (assistance in preparation for signing of the Stockholm Convention), in developing environmental and economic indicators and preparing Russian national documents for the Johannesburg summit as well as in developing methodology of valuation of environmental damages and natural resources .

CPPI Component: The objective of the CPPI component was primarily to provide basic Project implementation capacity (function as PIU) in support of EMP with technical direction and management provided by the components and client organizations. In terms of outputs, this was basically achieved, initially by contracting large foreign technical assistance services contracts, later with local services of firms and individuals. However, CPPI‟s performance in managing procurement and disbursement was mixed and ultimately had an adverse impact on the overall quality of EMP outcomes. The suspension, and in some cases early termination of some planned foreign TA work due to contract and tax issues reduced the quality of TA products and delayed their delivery. The premature elimination of General Consultant support for these reasons was particularly critical in EMP‟s not fully capitalizing on the foreign TA that was invested in. At the same time it should be noted that in some cases (e.g. 2 contracts in Policy sub-component) termination of contracts by CPPI was warranted due to basically poor performance of consultants and low value added.

Perhaps more significantly, procurement and delivery of significant quantities of equipment required to support implementation of TA products was not undertaken in a timely fashion to the point that some was not actually delivered by the time this component was closed. In the second major objective of the CPPI component, namely providing a vehicle for implementation broader EFP donor funded initiatives, it basically achieved the capacity to prepare and manage several GEF operations and a few bilateral grants. As a general assessment, the outputs of the component are considered unsatisfactory.

NPAF Component: For the period from 1995-2009 NPAF received 599 applications from industrial enterprises for financing environmental investment projects. Of these, 398 were rejected and the remaining 201 were selected for appraisal and pre-investment studies. Of these, 111 projects were withdrawn at an early stage of the pre-investment studies because of the applicants‟ disagreement with the required procedures for assessment of the financial position of the enterprises and the obligation for targeted use of funds (i.e. for procurement of equipment and services). Applicants also had substantial difficulties in meeting NPAFs information requirements for the loan application. As a result, only 90 projects remained for which NPAF ED undertook pre-investment studies in accordance with World Bank procedures (44 with the support of international consultants funded from the Swiss Grant TF 020217). Thirty seven of these projects did not have satisfactory outcomes for their pre-investment studies and were dropped, leaving 51 projects for detailed appraisal. As a result of the detailed appraisal, 39 projects were approved by the NPAF Supervisory Board and received “no-objection” from the World Bank. Subsequently, 14 projects were discontinued upon request from the applicants due to their deteriorating financial position, and of the remaining 25 projects only seven remained active, the remaining sixteen applicants dropped due to various reasons, some were frustrated by the whole process and had easier access to funds from other sources. From the seven remaining projects, six have been fully completed and one was partially completed.

Overall, seven NPAF projects have been completed (six fully and one partially. Five projects were implemented with State banks (VTB and Roseximbank), and two projects were processed through direct lending from MOF to the final beneficiary. Their salient characteristics are presented in Table A2.2 below.

It is of interest to note that none of the implemented investment projects is in line with the original “win-win” concept. At best, some of the projects could be defined as energy efficiency: achieving both a reduction in operating costs and associated reductions in emissions of fuel combustion products, and some others are simply industrial modernization. However, in no case were valuable by-products recovered for sale/offset operation costs. Eventually, the selection criteria for priority investments were relaxed considerably, and the original “win-win” objective was lost. A variety of subprojects were considered including rehabilitation of a hydro dam, development of district heating scheme using mine waters, and improvement of a lake environment through removal of bottom sediments, etc.. In short, the uncertainties and ever evolving implementation framework opened opportunities to offer any project that in some way can be considered “environmental” for NPAF‟s consideration.

The GEF-financed Biodiversity Conservation Project: The project consisted of four components each of which contributed to the broader Environmental Framework Program supported by EMP and its implementation was associated with the EMP through the CPPI. The following are key outputs from the GEF-financed Biodiversity Conservation project as reported in the separate ICR (Report No. 28177)31:

Component A "Strategic Overview". This component developed the national and regional biodiversity conservation strategies and launched new economic, financial, legislative and information mechanisms for their implementation. The National Biodiversity Conservation Strategy and Action Plan for the Russian Federation were developed, adopted by national authorities and endorsed by all stakeholders and the public.

31http://imagebank.worldbank.org/servlet/WDS_IBank_Servlet?pcont=details&menuPK=64154159&searchMenu PK=4209226&theSitePK=501889&eid=000012009_20040402124138&siteName=IMAGEBANK.

34 Component B "Strengthening Protected Area System". This component supported a range of important nation-wide and region-specific institutional and operational improvements to ensure the long-term sustainability of biodiversity conservation in Russia, and financed targeted PA-based conservation programs, which achieved substantial results on the ground.

Component C "Lake Baikal Regional Program". This component established a functioning framework for inter-sectoral and inter-regional coordination enabling the incorporation of biodiversity conservation into the policy of sustainable socio-economic development of the Lake Baikal Region.

Component D "Project Management and Coordination". This component financed the operation of the Project Implementation Group (PIG), which ensured planning and coordination of day-to-day project activities, their technical supervision, and the transparent administration of funds.

Project Preparation for Roshydromet Modernization and Institutional Strengthening: The EMP supported the preparation of Roshydromet Modernization Project which was approved by the Board of Executive Directors in 2005. The project aimed to strengthen the technical and institutional capacity of Roshydromet to provide accurate and timely hydrometeorological services to its clients as well as to the World Meteorological Organization (WMO), in which Russia has historically played a leading role. The project financed complex modernization of Roshydromet‟s computing and communication facilities and observational networks, and boosted its institutional development on the basis of more balanced interaction with sectoral and other clients on the federal, regional, and municipal levels.

Project Preparation for Elimination of Past Environmental Liability in the Russian Federation (Part F): During the last decade the issue of past environmental liabilities (PEL) attracted renewed interest in Russia, both at the national and regional level. It has been acknowledged in several national programs as a priority. Two federal stakeholder agencies, Rostekhnadzor and the Ministry of Economic Development and Trade (MEDT), subsequently requested the World Bank to study the issue, and follow up with an investment project. The preparation stared in late 2007 and continued unevenly through 2010. Due to counterpart‟s failure to make the required administrative and institutional arrangements and to complete the procurement of consultant services prior to EMP closure in June 2011, the project preparation did not make progress.

Table A2.1 Key Performance Indicators

Indicator Delivered Outputs 1. Establishment of National National Databases  Policy Sub-component: SEAP databases set up, and maintained/disseminated by CPPI through project life. SEAPs for Basic Chemistry, Non Ferrous and Ferrous sectors are utilized to the various degree by sectoral stakeholders  Hazardous Waste Sub-component: National Waste Management Information System incorporated historical waste generation, disposition, and management options and provided capacity to collect current information upon transfer to MNR. Components of system further refined by subsequent bilateral TA  Hazardous Waste Sub-component: Waste management regulation database and database capacity for waste tracking in a regional regulatory management system  Epidemiology Sub-component: Efforts limited to evaluation of existing national databases and upgrading methodology of development  Water Sub-component: Web based water management regulations database  Policy: Register and database of acting legislative and normative acts, normative- technical documents covering safety and labor protection in marine oil and gas

35 Indicator Delivered Outputs exploration

Sub-National  Policy Sub-component: Regional GIS data bases (air quality/water quality/waste) in Upper Volga Oblasts developed for the sub-component are used and maintained by Regional MNR offices for decision making  Policy Sub-component: Database contained in Upper Volga Regional environmental decision support system operating in 2 Oblasts  Water Sub-component: North Caucasus – Water quality and water resource management database included in information management and decision support system (conformity certificate № SBS MNR-00-19 dated June 10th, 2000)  Water Sub-component: Upper Volga Integrated Regional Information Management System provides working regional data base on water quality and water resource management  Water Sub-component: Decision Support Information System for Water Utilities  Water Sub-component: Graphical Decision Support Information System for Water Management at the regional level  Water Sub-component: Decision Support Information System for river basin water management applicable to Ustie, Koloksha, Chusovaya, and Iset river basins and systems  Water Sub-component: Drinking water quality monitoring database of chemical and biological pollution indicators for 1999 and the first quarter of 2000 in Sverdlovsk region  Hazardous Waste Sub-component: Databases on waste generation, disposition, and management options incorporated into regional data management system operational in Sverdlovsk and Rostov Oblasts  Hazardous Waste Sub-component: Database on legal regulatory acts and other documents regulating waste management in Rostov Oblast  Epidemiology Sub-component: Databases of priority health indicators established at municipal level SANEPID in 8 cities in Urals and Cherepovets (Upper Volga) 2. Adoption of  NEAP: Input into MNR development of NEAP on Environmental Policy Concept, Overall Federal or Methodology for Regional Environmental Plans - NEAP was recommended by Regional Action Government of the RF on November 12, 1998 (protocol No 41) Plans  National Program on Wastes: Input to the development of the program and following regulatory and infrastructure development programs  REAPs: Formally adopted by the following Oblast Governments and/or Legislatures: Yaroslavl, Kostroma, Vologda and Ivanovo (Upper Volga), Sverdlovsk (Urals) , and Rostov (North Caucasus)  SEAPs: Accepted by the Client Sectoral Ministry as an input to policy planning. Never formally adopted due to institutional restructuring  Sverdlovsk Oblast Directive Program for Environment 2000-2004 3. Adoption of  Concept of Natural Resource Property Rights Distribution for MNR submitted to Specific the Committee on Natural Resources of the State Duma on April 10, 1997 Environmental  Federal Program on Environmental Education for SCEP/MoE - approved by Action Plans SCEP  National Strategy on Sustainable Development for MoE – approved by Government on December 11, 1997  Ekaterinburg Environmental and Health Action Plan approved by the city authorities  Strategy for Industrial Waste Management Infrastructure Development in Sverdlovsk Oblast

36 Indicator Delivered Outputs (i) Water Quality  Management plan for the Tsimlyansk reservoir in the North Caucasus approved by and Water Resource the Don River Basin Water Authority on July 24, 2000 and agreed with Deputy Management Governor of Rostov Oblast Administration  Management plans for the Gorky and Rybinsk reservoirs in Upper Volga approved by MNR on December 30, 1997  Program for the rehabilitation and protection of small rivers in Rostov Oblast – accepted by client and is in process of implementation by the Oblast Committee on Environmental Protection and Natural Resources  Strategic Action Plan for the Lower Don Water Conservation System – accepted by Client and is in process of implementation  Yaroslavl and Kostroma Target Programs on Drinking Water Quality approved by Heads of Administration (Governor)  Small Watershed Management Plans in Upper Volga and North Caucasus regions  Programs for the conservation of small rivers in Upper Volga and North Caucasus regions  Concepts and structure of programs “Clean Water” for drinking water supply improvement/water use optimization for the cities Kostroma and Ivanovo have been prepared and approved by regional Administrations  Business plan for reconstruction of the Ekaterinburg water supply network (ii) Iron and Steel  SEAP developed, and transferred to client Ministry. Accepted by client but never formally adopted largely due to institutional restructuring (iii) Non-Ferrous  SEAP developed, and transferred to client Ministry. Accepted by client but never Metals formally adopted largely due to institutional restructuring (iv) Basic  SEAP developed, and transferred to client Ministry. Accepted by client but never Organic/Inorganic formally adopted largely due to institutional restructuring Chemicals (v) Oil Refining and  SEAP developed for oil refining sector only, and transferred to client Ministry. Petrochemicals Accepted by client but never formally adopted largely due to institutional restructuring (vi) Agriculture –  This SEAP was excluded from the final project work program due to absence of Intensive Livestock sectoral client agency Operations 4. Adoption of  Regulatory package for state environmental control including draft Federal Law Improved “On State Environmental Control”– accepted by SCEP Regulatory and  Law on Natural Resources State Property –considered by Committee of Duma but Enforcement not formally enacted Systems  Federal Law “On Industrial and Domestic Waste” № 89-ФЗ, June 24 1998 and Federal Law “Оn Amendments and Supplements to Federal Law “On Industrial and Domestic Waste” # 169-ФЗ of December 29, 2000  Russian Concept of Earmarked Environmental Investments  14 Oblast laws have been developed, 23 executive orders of Oblasts administrations and 37 regulatory documents as products of REAP in Upper Volga and Urals. All documents entered into force by orders of Oblast authorities  12 Regulatory acts developed and adopted in Rostov Oblast from REAP  Governmental Decree “On the Implementation of Risk Assessment for Environmental and Public Health Management in Russian Federation” (decrees of Ministry of Health № 25 of 10.11.97 and of State Committee for Environmental Protection of RF № 03-19/24-3483 of 10.11.97)  Order of the Ministry of Health of the Russian Federation and Federal Hydromet and Environmental Monitoring Service #410/122 of November 15, 1999 “On the improvement of effectiveness of social hygienic and environmental monitoring

37 Indicator Delivered Outputs systems in RF” (i) Water Quality  Legislation for Target Budgetary Fund for Water Bodies Restoration and and Water Resource Conservation in Yaroslavl Oblast Management  Legislation on Water Use in Kostroma and Yaroslavl Oblasts  Oblast-level law “About regulation of water-right relations in Sverdlovsk Oblast” dated 27.05.99  Oblast level law “About drinking water supply in Sverdlovsk Oblast” dated 22.01.99  Oblast level law “On payments for water resources use” dated 20.04.99  Rostov Oblast Administration Decree “On monitoring of the water bodies within the Rostov Oblast”  Basic Regulations on Water Resources Use of the Verkhne-Makarovskoe, Volchikhinsk Reservoirs on the Chusovaya River, the Novomariinsk and Revdinske reservoirs on the Revda River, the Iset and Verkhne-Iset Reservoirs on the Iset River (ii) Hazardous  Regulation on Hazardous Waste Transportation and Control over their Delivery in Waste Management the Sverdlovsk Oblast  Registration and Follow-up Control of Nature Users Involved in Waste Management in Sverdlovsk Oblast (effective at the level of the RF Subject by Resolution #.39A of 18.07.00 with the Phased Implementation Schedule approved on 01.08.00)  Guidance on Waste Inventory (became effective at the Subject level as per order No.438 of 05.11.98 by Sverdlovsk Oblast SCEP and the Resolution of the Sverdlovsk Government No. 309-ПП of 18.04.00) (iii) Environmental Project contributed to the development of various EA and EIA regulatory documents Assessment and guidelines 5. Dissemination of Publications/Papers/Presentations (Numbers/Subjects etc) Experience and Results of Projects for: (i) Adoption at  National waste management information system transferred and operational in federal level MNR (ii) Adoption by  REAPs –methodology applied for development of REAPs in 60 others oblasts as other regions well as Municipal level plans in Urals  Concepts from Draft Law “On Natural Resources State Property” have been applied in regional environmental protection laws in Vologda and Yaroslavl oblasts  Dissemination of regional waste classification system in Urals region, adoption in several oblasts  Dissemination of regional modules of national waste data management system including training and IT equipment to 26 regions  Utilization of Urals waste tracking system as federal and regional model as well as for large private enterprises implementing EMS programs  North Caucasus Water Management Decision Support System was disseminated and implemented in all Southern Okrug and more than 20 other Russian Subjects of Federation and Seversky Donetz River Basin Authority in the Ukraine  Dissemination of methodological documents respecting health data collection and analysis – 15 workshops, 45 published reports/papers in Russian, 49 conference presentations in Russia, 3 international presentation.  Oblast Level Waste Laws based on Sverdlovsk regulatory Framework – (Rostov, Stravropol) 6. National  At the time of project preparation there was no requirement for a log-frame or

38 Indicator Delivered Outputs Pollution specification of performance indicators. Furthermore, no log-frame or performance Abatement Facility indicators for the NPAF component were used before 2004. The indicators developed in 2004 included: (i) amount of disbursed investments in pollution abatement projects, including NPAF sub-loans; (ii) number of completed projects; (iii) achievement of projected environmental outputs through reduction of emissions/discharges/wastes; (iv) quality of information on outcomes.  Preparation of IPs for financing out of NPAF funds: - 599 Investment Proposals on IPs were considered - 90 IPs were subject to pre-investment studies - 39 IPs were approved by the NPAF Supervisory Board for financing - 7 IPs (at DAO "Karton", at OJSC "Plastkard", at OJSC "Arkhangelsk PPM", at OJSC "Solombala PPM", at OJSC "Kotlas PPM", at CJSC "Ostashkov Tannery", at JSC “Secondary Metals and Alloys”) were implemented.  Seven IPs completed: - Modernization of two black liquor regeneration lines at the DAO "Cardboard" and reconstruction of the press unit of cardboard machine at KARTON Pulp and Paper Mill; - Environmental load reduction by modernization of production process and equipment, reduction of energy consumption by VC and PVC productions, reduction of wet gases transport costs by organizing their transfer from the VNPZ located nearby at Chemical Enterprises PLASTKARD; - Bark-wood waste recovery and reduction of power consumption for cellulose production at the OJSC "Solombala Pulp-and-Paper Mill”; - Boiler modernization for bark wood waste incineration in "fluidized bed", providing increasing boiler efficiency and complete utilization of bark wood waste at ARKHANGELSK Pulp and Paper Mill; - Reduction in power consumption for pulp production and stabilization of process equipment performance at all evaporation stations and other related technological units (washing installations, SRB). Thus providing reduction of air emissions of pollutants, of discharge of polluted wastewater into surface bodies, and reduction in water consumption as a whole at KOTLAS Pulp and Paper Mill; - Reduction of adverse environmental impact on the Upper Volga basin through modernization of basic and auxiliary production units and treatment facilities at CJSC "Ostashkov Tannery"; - Environmental enhancement in Podolsk city by reconstruction of the basic manufacture on the JSC «Factory of Secondary Metals and Alloys» (SMA)  Implementation of investment projects at enterprises of PPI (pulp and paper industry) has provided decrease in emissions of polluting substances more than by 50 %. Emissions of noxious highly toxic substances from DAO "Karton" production were completely eliminated  OJSC «Kotlas PPM» essentially reduced the discharges of polluting substances into the Vychegda River (by 65 % in recalculation BOD20, including reduction of discharged lignosulfonates by 58 %)  Project implementation at Arkhangelsk PPM has allowed increasing the bark-wood waste (BWW) utilization for thermal energy generation not only in comparison with earlier utilized volume of BWW, but also in comparison with the designed parameters of the project. Incineration of BWW allows the enterprise to save costs for acquisition of fossil natural fuel  Project implementation at chemical plant “Plastkard” resulted in complete elimination of wet gas and fuel gas emissions, reduction of total emissions by 79% and reduction of solid waste formation by 48%  CJSC «Ostashkov Tannery» project completed at the end of December, 2009 allowed to substantially decrease technogenic loading on the environment, e.g.

39 Indicator Delivered Outputs BOD by 92%, trivalent chrome by 83% and waste formation by 87%  Although the bankruptcy of JSC «Factory of Secondary Metals and Alloys» did prevented the project to be fully implemented, the partial implementation of the project will 7. Improved Institutional Arrangements for Environmental Management (i) Improved  Oblast (Upper Volga) Environmental Management Decision Support System – management and approved by Yaroslavl and Kostroma Oblast MNR. Certified by SCEP in 1999 organizational  Methodology for Valuation of Natural Resources and Environmental Damage – structure for policy accepted by Client (Ministry of Economic Development and Trade) and regulatory  Inter-Regional Environmental Council for Upper Volga support  Urals Environmental Committee of Sverdlovsk Oblast of Industrialists and Entrepreneurs  Upper Volga Environmental Center  Urals Cleaner Production Center  Urals Regional Center on Environmental Epidemiology  Center of Environmental Epidemiology, Moscow  Methodological recommendations to determine baselines for carbon emissions in power projects  Organizational and financial mechanisms for the preparation and implementation of renewable power sources projects under the targeted federal programs “The South of Russia” and “Energy Efficient Economy” (ii) Improved  Guidance Document on Environmental and Health Action Plans – utilized in environmental Sverdlovsk Oblast epidemiology and  Methodical Guidelines for the Development and Implementation of Municipal environmental Environmental Action Plan assessment  Guidelines on Preparation of Environmentally Sound Investment Projects - management recommended by MOEDT and State Committee for Construction for use at structure feasibility studies (design phase)  Methodological guidelines on use of sustainable development indicators in the development of oblast and municipal environmental programs to set up environmental priorities  Methodological recommendations for economic assessment of forest resources to establish economically justified forest charges and forest use rentals  Guidelines on past environmental liability  Methodological guidelines on low-cost projects for the enterprises of heat-power engineering, machinery building, ferrous metallurgy, non-ferrous metallurgy  Training Guidelines “Cleaner Production: Approaches, Assessment and Recommendations”  Guidelines for the introduction of the EMS in agreement with ISO-14001  Guidelines for the development and implementation of Municipal Environmental Action Plan  Studies of the drinking water quality impact on the gastro-intestinal morbidity in the city of Cherepovets  Analysis of dependence between the pollution of atmospheric air and mortality in the cities of Nizhny Tagil and Ekaterinburg  Assessment of risk to human health in the city of Upper Pyshma caused by pollution to the environment through the various route of pollution based on the

40 Indicator Delivered Outputs monitoring data  Comparative assessment of economic effectiveness of measures to reduce industrial emissions from the JSC “Severstal” in the city of Cherepovets  Studies of atmospheric air pollution impact on the incidence of respiratory symptoms and level of maximum volume of the breathed out air of children with and without the signs of respiratory pathology in the city of Nizhny Tagil of Sverdlovsk Oblast  Analysis of individual and environmental risks of development of chronic and respiratory pathology of elementary schoolchildren in 9 cities of Russian Federation  Studies on macro level estimates of environmental damages in Russia with a case study on environmental costs of fuel-mix change  Study on forecast, valuation and conditions of Russia entering the WTO (parts dealing with natural resources and environmental protection) (iii) New  New national waste classification system compatible with international standards management and (Basel Convention) adopted based on EMP and subsequent bilateral initiatives organizational  Provision of Basel Convention reporting and technical evaluation capacity to MNR structure for for meeting international obligations hazardous waste  Adopted and Implemented guidance documents on waste generator registration and inventory (Urals, Rostov)  Implementation of comprehensive waste classification system and supporting manual in Urals and Rostov  Issuance of guidance documents, formal regulation and enforcement standards for landfills in Urals  Implementation of licensing procedures for waste management facilities in Urals  Guidelines for co-disposal of waste  Guidelines for landfill upgrading  Guidelines for Sitting Hazardous Waste Facilities  Guidelines for Operation and Management of Waste Disposal Facilities  Guidelines for Obsolete Pesticide Management  ISO 25 Quality Manual for Environmental Laboratories in Sverdlovsk Oblast  Implementation of formal regulatory requirements on waste generator registration and inventory reporting in Urals  Implementation of a waste manifest based tracking system in Sverdlovsk Oblast  Establishment of waste classification laboratory methods and capacity in Sverdlovsk Oblast  Rules on Production and Consumption Waste Management in the Rostov Oblast  Waste Facilities and Enterprises Licensing Procedure for the Rostov Oblast  Guidelines for Landfill Development for Baltic Region (HELCOM) (iv) Improved  Modernized national water quality standards and objectives have been developed management and but not formally approved by MNR organizational  National policy on sustainable water use – Approved by the Board of MNR on June structure for water 23, 1999 (Protocol No 10/1) quality management  Water management policy for Sverdlovsk Oblast – Approved by Oblast Government  Agreement between Sverdlovsk and Chelyabinsk Oblasts on shared water use and protection  Agreement with Ukraine on water issues in North Caucasus  Decision support system for water quality management in the North Caucasus  Upper Volga Regional Association of Water Users - the “Clean Water” - founded by the CPPI and municipal enterprises “Vodocanal” of the cities Vologda,

41 Indicator Delivered Outputs Griazevets, Ivanovo, Kostroma, Rybinsk, Tver, Cherepovets, Sharia, Sheksna  Agreement on adaptation of the integrated water bodies monitoring system within the Kundruchya river basin has been signed by Chiefs of Administrations of the towns Krasny Sulin, Gukovo and Novoshakhtinsk  The Upper Volga Basin Water Management Office an Agreement has been prepared between Vologda, Tver and Yaroslavl oblasts on shared payment for the Rybinsk Reservoir water use for electric power generation  Agreements on cooperation between Administrations of the three districts (Borisoglebsky, Rostovsky and Gavrilov-Yamskoy) of Yaroslavl oblast on Basin Council of the Ustie river in Upper Volga region  Optimization of the information network of the Yaroslavl Sanitary and Epidemiological Inspection using the information system “EKO” developed by Upper Volga water sub-component  Special studies on: - Water eco-systems in the Ustie river basin - Clearing and development of the riparian areas in the Koloksha river basin - Removal of sunk wood from the riparian area (left bank) of the Zhelvata river - pre-project work to assemble installations for production of hypo-chloride (towns of Kostroma, Ivanovo, Yaroslavl) has been carried out jointly with the “Clean Water” Association - Leakages in the water supply system of Sharia town - Experiment on installation of water meters in Sharia town - Full capacity commissioning of the water treatment facilities in Sheksna settlement - Preparation of the rationale to incorporate the expenditures for implementation of the Program “Clean Water” into 2001 budget of the Rybinsk Municipal District - Reorganization of the communal services/utilities of the settlement Nekrasovskoye through giving to Nekrasovskoye water supply and wastewater services the status of an autonomous enterprise. Computerization of the management system - Splitting of the industrial and municipal water supply of Samet village has been carried out.  Methodological recommendations on: - Assessment of the environmental investment projects - Assessment of costs and tariffs for services provided by water supply and wastewater utilities - Preparation of the municipal programs “Clean Water” drinking water supply improvement and water use optimization - Preparation of the programs for drinking water supply improvement in settlements - Organization of the initial (preliminary) study of small rivers watersheds - Short-term water quality objectives to assess a water body condition - Long-term water quality objectives - Short-term water quality objectives to assess the Chusovaya river status (Sverdlovsk oblast)  Application of GIS-analysis methods for assessment of the human health risk induced by drinking water pollution (v) Training and  Federal Policy Training Program - training courses on Policy, Law and upgrading the skills Epidemiology for more than 120 representatives of 9 regions of the RF of Russian experts  Environmental Health – 6 formal training courses (135 certified epidemiological for environmental professionals), 10 Methodological Seminars (349 Trainees) management  15 working meetings and seminars for Environmental Epidemiology including planning, carrying out and disseminating outputs of the Component

42 Indicator Delivered Outputs  Water Sub-component training program - 34 workshops for training and dissemination of the results, 720 specialists trained  Training in new waste classification systems in key industries in Urals  Hazardous Waste Training - 52 specialists trained  Environmental Audit /ISO 14000 Training (HW and Policy Sub-components) – 72 specialists trained  23 workshops and conferences for training on and dissemination of regulatory system results of HW - 270 specialists trained  Training course package “Small river water resources management” 8. Facilitating donor List of the Donor projects and programs which benefited directly or indirectly from support of the various EMP Loan activities, particularly from the work of CPPI component environmental sector in Russia GEF projects  GEF: Biodiversity Project (1996)  GEF: ODS Consumption Phase Out Project (1996)  GEF: Greater Rostov Environmental Strategic Action Plan (1997)  World Bank/GEF: Special Initiative on ODS Production Closure (1999)  GEF: Dnieper River Basin Project (1999)  GEF (PDF-B): Rostov. Reduction of Nutrient Discharges and Methane Emissions (2002)  GEF: Regional Baltic Sea Project (2003)

TACIS Projects  TACIS/EBRD: Environmental Consultants Training Program (2000)  TACIS: Institutional Support for SCEP (2000)  TACIS/DFID: Support for training programs in Urals Cleaner Production Center (2000,2001)  TACIS: Support for Implementation of Environmental Policies and NEAPs in the NIS (2000)  TACIS: MNR support in Water Resource Management (2001) TACIS: Harmonization of Environmental Standards (2002)  TACIS: Support for Waste Management in Russia (2002)

International Financial Institutions  World Bank: Sustainable Forestry Pilot Loan (2000)  EBRD: Northern Dimension Environmental Partnership (2001)  EBRD: Loan for the Yaroslavl Vodokanal (Expansion of Waste Water Plant) based on EMP/NPAF Pre-Investment Studies (2002)  NEFCO: North-West Biofuel +

Bilateral projects  Swiss Grant: Pre-Feasibility Studies and Hazardous Waste Management (1995)  Swiss Grant: Co-financing (20%) of 5 NPAF investment projects (1996-2009)  Dutch Grant: Integrated Water Resources Management in the Lower Don and Urals (1995)  Dutch Grant: Water Supply and Training Center (2001)  CIDA: Pechora River Basin Management Project (1995)  US EPA: Moscow Water Supply and Water Resources Management Project (1995)  UK Know How Fund: Solid Municipal Waste Management Strategy in Pilot

43 Indicator Delivered Outputs Russian City (Rostov) (1998)  CIDA: Environmental Management Decision Making Project –CIDA (2000)  Baltic-21: Ecoforum Baltica (1999)  Baltic 21: Environmental Technologies in St. Petersburg  USA Mineral Mining Service and Norwegian Petroleum Directorate: Safety and Environmental Protection for Russian Offshore Oil and Gas Operations  CIDA: Dnieper River Project  DFID: Ekaterinburg Waste Infrastructure Development Project (2001)  DFID: Development of indicators for measuring the sustainability of economic and social reforms in the Russian Federation (2002)

Table A2.2 Environmental Benefits of Implemented NPAF Investment Projects

Parameter Unit Before the IP After Reduction (-) implementation of Increase (+), % the IP 1. Technical modernization of cardboard production at “Karton”(Novodvinsk, Arkhangelsk region) aimed at reduction of energy consumption and atmospheric emissions of harmful substances (1996-1999) 1.1 Mass of emissions with flue gases, 6652.5 3618.7 -46 t/year inter alia:  Dimethyl disulfide t/year 628 0 -100  Methyl mercaptan t/year 150 0 -100  Dimethyl sulphide t/year 450 0 -100 1.2 Mass of emissions at HPP-1 t/year 1753 1091 -38 1.3 Specific value of vapor consumption Gcal/t of 1.89 1.596 -16 at KDM-2 cardboard 2. Improvement of environmental situation in Volgograd city through essential reduction of air emissions from chemical enterprises "Plastkard" and "Volgogradneftepererabotka" (1998-2006) 2.1 VC production t/year 66,912 84,920 +27 2.2 Gross emission from IP objects t/year 1,285 1,029.3 -20 (without combustible gas) 2.3 Emissions of combustible gas t/year 35,208 0 -100 2.4 Emissions of "fat" gas from the t/year 30,000 0 -100 refinery 2.5 Emission of greenhouse gases from t/year 143,691 0 -100 IP objects 2.6 Formation of hazardous wastes, t/year 5,032 2,040 -60 including: 700 364 -48 Soot-resin pulp t/year (0.01 t/t of VC) (0.004 t/t of VC) 540 396 -27 Vat residue of VC rectification t/year (0.008 t/t of VC) (0.004 t/t of VC) Vat residue of ethylene dichloride 3,792 1,280 -66 t/year rectification (0.056 t/t of VC) (0.015 t/t of VC) 2.7 Utilization of chlorine formed at t/year 40,080 55,155 +38 OJSC "Kaustik" 3. Bark-wood waste recovery and reduction of power consumption for cellulose production at the OJSC "Solombala PPM” (2000-2005) 3.1 Cellulose production t/year 185,720 231,980 +25

44 Parameter Unit Before the IP After Reduction (-) implementation of Increase (+), % the IP 3.2 Gross emissions from the mill, inter 5,772.5 7,342 +27 t/year alia: (0.0311 t/t of pulp) (0.0316 t/t of pulp)  Methyl mercaptan t/year 18.3 2.8 -85 3.3 267,662.3 142,422.2 -47 Emission of greenhouse gases t/year (1.4 t/t of pulp) (0.6 t/t of pulp) 3.4 Emissions of ashes from fuel

incineration at HPP-1:  Coal ashes t/year 2,695.1 577.9 -79  Black oil ashes t/year 4.1 1.1 -73  Wood ashes t/year 404.7 624.5 +54 3.5 compact BWW utilization at HPP-1 107,136 366,058 +342 m3/year 3.6 Black oil consumption at HPP-1 t/year 46,797 28,333 +40 3.7 Coal consumption at HPP-1 t/year 83,308 32,561 -61 4. Reduction in power consumption for cardboard production and utilizations of bark-wood waste in the line of bleached deciduous cellulose at OJSC "Arkhangelsk PPM"(2001-2005) 4.1 Cardboard production (KDM-1) t/year 215,444 281,431 +31% 4.2 Gross emissions as a whole at t/year 69,221 29,214.9 -58.8 Arkhangelsk PPM 4.3 Emissions from HPP-1, inter alia: t/year 3,670 1,992 -46 (0.017 t/t of (0.007 t/t of cardboard) cardboard) Coal ashes t/year 1,426.3 888.8 -38 (0.007 t/t of (0.003 t/t of cardboard) cardboard) Wood ashes t/year 94.6 18.9 -80 (0.00044 t/t of (0.00007 t/t of cardboard) cardboard) 4.4 Emissions from bark boilers of HPP- t/year -59 3 2,649 1,092

(0.0103 t/t of (0.0007 t/t of cardboard) cardboard)

4.5 2,008,597 Direct greenhouse gas emissions 1,901,452 -5.3 t/year (9.32 t/t of from HPP-1 and HPP-3 (6.75 t/t of cardboard) cardboard) 4.6 compact BWW utilization in HPP-3 256,668 325,309 +27 m3/year 4.7 compact BWW utilization in HPP-1 228,250 216,142 -5.4 m3/year 4.8 Specific consumption of thermal Gcal/t of 1.766 1.195 32.3 energy at KDM-1 (HPP-1) cardboard 5. Reduction of environmental impact from Kotlas PPM through the replacement of evaporation station" (2002- 2008) 5.1 Cellulose production t/year 874,768 1,066,853 +22 5.2 Gross emission at the KPPM, 22,165 12,163.4 -45 t/year including: (0.025 t/t of pulp) (0.011 t/t of pulp) Evil-smelling sulphur-containing t/year 1,645 382.5

45 Parameter Unit Before the IP After Reduction (-) implementation of Increase (+), % the IP compounds (0.0018 t/t of pulp) (0.0003 t/t of pulp) 5.3 Emission from evaporation devices t/year 421 0 -100 5.4 Emissions from SRB t/year 2,975 1,231.6 -59 5.5 Wastewater discharge from treatment million 212.8 143.6 -33 facilities of the KPPM m3/year 5.6 Discharge of polluting substances with sewage into the Vychegda River:

Recalculated to BOD20 t/year 10,594 3,725.8 -65 Recalculated to COD t/year 88,455 66,680.3 -25 Lignosulfonates t/year 37,242 15,712.6 -58 Suspended matter t/year 11,028 3,229.5 -71 5.7 Power consumption kW-h/kg of 12 6.03 -50 evaporated moisture 5.8 tons of Fuel consumption reference fuel/kg of 0.025 0.014 -44 evaporated moisture 5.9 Gcal/kg of Heat consumption for evaporation pulp 0.36 0.29 -19

6. Reduction of adverse environmental impact on the Upper Volga basin through modernization of basic and auxiliary production units and treatment facilities at CJSC "Ostashkov Tannery" (2008-2009) 6.1 Water intake from the lake for needs m3/year 556,360 208,660 -63 of the basic production 6.2 Waste water discharges from the m3/year 561,624 208,660 -63 basic production 6.3 Discharge of polluting substances to

the lake:

Recalculated to BOD5 t/year 35.29 3.0 -92 Suspended matter t/year 35.76 19.7 -45 Chrome trivalent t/year 0.58 0.099 -83 6.4 Generation of production wastes t/year 5,812.2 672.14 -87 7. Environmental enhancement of Podolsk City by modernization of gas purification system of the melting shop of the “Factory of secondary metals and alloys”, Podolsk, Moscow oblast (2007-2009) 7.1 Emissions from melting shop t/year 70.1 45.6* -35* Notes: * - Presented reductions are forecasts under the project "Factory of Secondary Metals and Alloys" due to changes in the economic situation of the enterprise which declared bankruptcy. In March 2010 the basic capital assets of the factory were sold to the new owner – OJSC "Permtsvetmet". Realization of liabilities of the enterprise under the Final Loan Agreement is regulated by the Federal Law of October 10, 2002, #127-FZ "On the insolvency (bankruptcy)". NPAF ED was informed in writing that the new owner plans to use the supplied equipment for its intended purpose.

Annex 3. Economic and Financial Analysis No economic or financial analysis was performed in the SAR.

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Responsibility/ Names Title Unit Specialty Lending Roger Batstone Task Team Leader ECSRE G. Hughes Senior Advisor Alfred Watkins Senior Economist T. Garvey Water Resources Specialist J. Kindler Richard Cooke Consultant Gennady Pilch Counsel LEGEC M. Dickerson P. Wilczynski Sr. Environmental Engineer J. von Rijckevorsel A. Sajo V. Voronin A. Barannik Vladimir Tsirkunov Sr. Environmental Engineer ECCRU A. Bond J. Mundy A. Sfeir-Younis Hans-Roland Lindgren Environmental Economist S. Campello N. Bouwer Ken Green Environmental Safeguards Specialist J. Levin Consultant

Supervision/ICR Adriana Damianova Lead Environmental Specialist ECSS3 Anna-Maria Bogdanova Operations Analyst ECCU1 Richard J. Cooke Consultant ECSSD Valencia M. Copeland Program Assistant ECSSD Galina S. Kuznetsova Sr Financial Management Specialist ECSC3 Aziz Mamatov E T Consultant ECSPS Vassili Rodionov Consultant ECSS3 Vladimir V. Tsirkunov Senior Environmental Engineer ECSS3 Alexandre Roukavichnikov Procurement Specialist ECSC2

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY93 Not available 574.74 FY94 Not available 536.80 FY95 Not available 81.36

Total: 1192.90 Supervision/ICR FY93 Not available 0.00 FY94 Not available 0.00 FY95 Not available 90.67 FY96 Not available 134.42 FY97 Not available 114.19 FY98 Not available 82.30 FY99 Not available 137.18 FY00 46 125.72 FY01 32 88.36 FY02 35 166.80 FY03 32 156.93 FY04 29 92.01 FY05 21 124.57 FY06 17 101.53 FY07 18 137.83 FY08 13 128.11 FY09 17 111.46 FY10 14 99.33 FY11 14 97.59 FY12 5 17.43

Total: 293 2006.43

Annex 5. Beneficiary Survey Results Not applicable.

Annex 6. Stakeholder Workshop Report and Results Not applicable

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

The following is the Summary provided in the Borrower‟s ICR for the NPAF component. The original report is over 138 pages in length, and the provided Summary best represents the counterparts‟ views of what was achieved in the NPAF component. The letter from Government after reviewing this ICR is provided at the end.

Project title Environmental Management Project (EMP) Part B title of the Project Russian National Pollution Abatement Facility (NPAF) Project management NPAF Supervisory Board which includes representatives of:  Ministry of Finance of the Russian Federation;  Ministry of Economic Development of the Russian Federation;  Ministry of Natural Resources and Environment of the Russian Federation;  Other participants of NPAF implementation. Project Implementation Legal entity "Executive Directorate of the Russian National Pollution Abatement Unit Facility" (NPAF ED) NPAF Sub-borrowers DAO "Karton" OJSC "Plastkard" OJSC "Vysokogorsk GOK" OJSC "Fritex" OJSC Bank VTB (earlier – OJSC "Foreign Trade Bank" (Vneshtorgbank) CJSC "Roseximbank" NPAF Final Borrowers OJSC "Arhangelsk PPM" OJSC "Solombala PPM" OJSC "Kotlas PPM" OJSC "PP "Pitkyaranta" OJSC "Baikal PPM" CJSC "Factory of Secondary Metals and Alloys" CJSC "Ostashkov Tannery" Motivation for NPAF Supervisory Board decisions on NPAF funds granting for implementation of granting of IPs (dated June 4, 1996, October 5, 1998, May 30, 2001, January 15, 2003, December 21, 2006, March 17, 2008) investments out of NPAF funds

GENERAL RESULTS OF NPAF IMPLEMENTATION

Preparation IP to financing 599 Investment Proposals on IPs were considered out of NPAF funds 90 IPs were subject to pre-investment studies 39 IPs were approved by the NPAF Supervisory Board for financing 6 IPs (at DAO "Karton", at OJSC "Plastkard", at OJSC "Arkhangelsk PPM", at OJSC "Solombala PPM", at OJSC "Kotlas PPM", at CJSC "Ostashkov Tannery")were completely implemented 1 IP was partially implemented (at CJSC "Factory of Secondary Metals and Alloys") Development of IP Three schemes of IP financing are studied and validated in practice:

financing schemes and  Direct lending (Ministry of Finance Russia – Enterprise), mechanism for N PAF funds reinvestment  Crediting through a financial intermediary (Ministry of Finance Russia – Participating bank – Final Borrower/enterprise),  Crediting through a financial intermediary (Ministry of Finance Russia – Participating bank – the Final Borrower/enterprise) with involvement of an additional financial source – repayment funds out of the NPAF Account.

Volume of funds used 109.6 mln. USD, including 43.8 mln. USD of Loan (38060-RU) and Grant (TF under the NPAF 20217 and TF 03810) funds. Volume of funds used for 102.0 mln. USD, including 38.3 mln. USD of NPAF credit resources and 63.7 mln. financing environmental USD of equity of enterprises IPs under the NPAF Budgetary efficiency of By the results of NPAF implementation, the total budgetary efficiency of the NPAF implementation Program considering expected additional tax revenues in budgets of all levels from enterprises will make about 141.5 mln. USD, including:  137.7 mln. USD (expected additional tax revenues from the enterprises in budgets of all levels as a result of IP implementation);  3.5 mln. USD (margin of Ministry of Finance of Russia, IP appraisal fee, interests charged on the part of Sub-Loangranted from the NPAF Account, fines and fines);  0.3 mln. USD (accrude interests on the residues on bank accounts opened under the NPAF). Environmental efficiency IP implementation under the NPAF has led to reduction in: of IP implementation  Masses of gross emissions of polluting substances at each enterprise, under the NPAF  Emissions of greenhouse gases,  Emissions of most toxic evil-smelling sulphur-containing compounds from PPMs,  Water consumption and water removal at Ostashkov factory,  Discharges of polluting substances into water bodies at Kotlas PPM and Ostashkov Tannery,  Formation of industrial wastes at OJSC "Plastkard" and Ostashkov Tannery.

COMPARATIVE PARAMETERS OF THE NPAF FINANCING PLAN Planned Actual Deviation Absolute value Percentage Total amount of NPAF funds, mln. USD, 137.00 109.64 - 27.36 -20.0 including: IFO Funds, mln. USD, including: 61.30 43.81 - 17.49 -28.5 %

Loan 38060-RU 61.30 35.11 - 26.19 -42.7 % Grant TF 20217 3.00 + 3.00 - Grant TF 03810 5.70 + 5.70 - Funds of the Russian co-financing, mln. USD 75.70 65.83 - 9.87 -11.9 %

REALIZATION OF LIABILITIES UNDER SUB-LOAN AGREEMENTS

BY SUB-BORROWERS Liabilities of sub-borrowers, Divergence Sub-borrower 000 USD. Accrued Paid Absolute % value DAO "Karton" 9,344 9,344 - - OJSC "Fritex" 27 27 - - OJSC "Vysokogorsk GOK" 97 - -97 -100 OJSC "Plastkard" 8,333 7,030 -1,303 -16 OJSC Bank VTB 23,233 23,233 - - CJSC "Roseximbank" 55 55 - - Total: 41,089 39,689 -1,401 -3

COMPARATIVE EVALUATION OF PLANNED AND ACTUAL PARAMETERS OF ECONOMIC RESULTS OF IPs Incomes/economic effect, 000 USD. Divergence Enterprise realising IP Plan Result Absolute % value, 000 USD. DAO "Karton" 3,818 1,715 -2,103 -55 OJSC "Plastkard" 15,747 13,499 -2,248 -14 OJSC "Arhangelsk PPM" 603 54,926 +54,323 +9,009 OJSC "Solombala PPM" 2,508 4,559 +2,051 +82 OJSC "Kotlas PPM" 6,891 33,491 +26,600 +386 CJSC "Factory of Secondary Metals and 777 226 -551 -71 Alloys" CJSC "Ostashkovsk Tannery" 10,333 23,841 +13,508 +131 Total 40,630 132,257 +91,580 +225

EVALUATION OF ENVIRONMENTAL EFFICIENCY OF NPAF INVESTMENT PROJECTS, REALIZED IMPLEMENTED SINCE 1996 THROUGH 2008 Parameters of IP environmental efficiency № Parametr Units Before the After the IP implementation Efficie IP Forecast Actual ncy, % 1. Modernisation of cardboard production at DAO "Karton" for reduction in energy consumption and in harmful air emissions (Novodvinsk, Arkhangelsk oblast) (1996-1999) 1.1 Mass of emissions with flue t/year n.a. 3618.7 45.6 gases: 6652.5  Dimethyl disulfide 628 absent absent 100  Methyl mercaptan 150 absent absent 100  Dimethyl sulphide 450 absent absent 100 1.2 Mass of emissions at HPP-1 t/year 1753 n.a. 1091 37.8 1.3 Decrease in specific norm of Gcal/t a 1.89 1.8 1.596 15.6

the consumption of a vapour cardboard at KDM-2 2. "Reduction in power consumption for cardboard production and utilizations of bark-wood waste in the line of bleached deciduous cellulose at OJSC "Arkhangelsk PPM"(2001-2005) 2.1 Cardboard production (KDM- t/year 215,444 281,431 1) 2.2 Gross emissions as a whole at t/year 69,221 n.a. 29,214.9 57.8 Arkhangelsk PPM 2.3 Emissions from HPP-1 t/year 3,670 3,350 1,992 45.7 t/t of Unit parameter 0.017 0.007 cardboard Coal ashes t/year 1,426.3 888.8 t/t of Unit parameter 0.007 0.003 cardboard Wood ashes t/year 94.6 18.9 t/t of Unit parameter 0.00044 0.00007 cardboard 2.4 Emissions from bark boilers t/year 2,649 3,142 1,092 58.8 of HPP-3 t/t of Unit parameter 0.0103 0.0039 cardboard Ashes of black oil from IP t/year 2.52 0.017 objects Wood ashes from IP objects t/year 369.9 365.03 t/t of Unit parameter 0.0014 0.0012 cardboard 2.5 Direct greenhouse gas emissions from HPP-1 and t/year 2,008,597 n.a. 1,901,452 5.3 HPP-3 t/t of Unit parameter 9.32 6.75 cardboard 2.6 compact BWW utilization in HPP-3 256,668 304,400 325,309 126.7 m3/year 2.7 compact BWW utilization in HPP-1 228,250 n.a. 216,142 -2.3 m3/year 2.8 Specific consumption of Gcal/t a thermal energy at KDM-1 1.766 n.a. 1.195 32.3 cardboard (HPP-1) 3. "Bark-wood waste recovery and reduction of power consumption for cellulose production at the OJSC "Solombala Pulp-and-Paper Mill" (2000-2005) 3.1 Pulping t/year 185,720 200,000 231,980 3.2 Gross emission from the mill t/year 5,772.5 7,754 7,342 -27.2 Unit parameter t/t of pulp 0.0311 0.0387 0.0316 Methyl mercaptan t/year 18.3 17.5 2.8 84.7 3.3 Emission of greenhouse gases t/year 267,662.3 279,223.3 142,422.2 46.8 Unit parameter t/t of pulp 1.4 1.4 0.6 3.4 Emissions of ashes from fuel

incineration at HPP-1, including: Coal ashes t/year 2,695.1 1,752.8 577.9 78.6 Unit parameter t/t of pulp 0.014 0.009 0.002 Black oil ashes t/year 4.1 2.6 1.1 73.2 Wood ashes t/year 404.7 526 624.5 -54.3 Unit parameter t/t of pulp 0.00217 0.00263 0.00269 3.5 compact BWW utilization at PP-1 107,136 255,000 366,058 241.7 mz/year 3.6 Black oil consumption at t/year 46,797 34,777 28,333 39.5 HPP-1 3.7 consumption of coal at HPP-1 t/year 83,308 29,965 32,561 60.9 4. "Improvement of environmental situation in Volgograd city through essential reduction of air emissions from chemical enterprises "Plastkard" and "Volgogradneftepererabotka" (1998-2006) 4.1 VC production t/year 66,912 81,200 84,920 4.2 Gross emission from IP objects (without combustible t/year 1,285 n.a. 1,029.3 19.9 gas) 4.3 Emissions of combustible gas t/year 35,208 absent absent 100 4.4 Emissions of "fat" gas from t/year 30,000 absent absent 100 the refinery 4.5 Emission of greenhouse gases t/year 143,691 absent absent 100 from IP objects 4.6 Formation of dangerous t/year 5,032 2,040 59.5 waste, including: Soot-resin pulp t/year 700 350 364 48.0 Unit parameter t/t VC 0.01 0.0043 0.004 Vat residue of VC t/year 540 n.a. 396 26.7 rectification Unit parameter t/t VC 0.008 0.004 Vat residue of ethylene t/year 3,792 n.a. 1,280 66.2 dichloride rectification Unit parameter t/t VC 0.056 0.015 4.7 Utilization of chlorine formed t/year 40,080 40,000 55,155 37.6 at OJSC "Kaustik" 5. "Reduction of environmental impact from the Kotlas Pulp-and-Paper Mill through the replacement of evaporation station" (2002-2008) 5.1 Pulping t/year 874,768 1,066,853 5.2 Gross emission at the KPPM, t/year 22,165 16,012 12,163.4 45.1 including: Unit parameter t/t of pulp 0.025 0.011 Evil-smelling sulphur- t/year 1,645 834 382.5 76.7 containing compounds Unit parameter t/t of pulp 0.0018 0.0003 5.3 Emission from evaporation t/year 421 4.4 absent 100 devices

5.4 Emissions from a SRB t/year 2,975 1,255 1231.6 58.6 5.5 Sewage disposal from Million treatment facilities of the 212.8 192.0 143.6 32.5 m3/year KPPM 5.6 Discharge of polluting substances with sewage into the Vychegda River:

Recalculated to BOD20 t/year 10,594 7,904 3,725.8 64.8 Recalculated to COD t/year 88,455 67,366 66,680.3 24.6 Lignosulfonates t/year 37,242 8,003 15,712.6 57.8 Suspended matter t/year 11,028 7,300 3,229.5 70.7 5.7 Power consumption kW-h/kg* 12 4 6.03 49.8 5.8 Fuel consumption t.u.t./kg * 0.025 0.015 0.014 44.0 5.9 Heat consumption for gkal/kg of 0.36 0.2 0.29 19.4 evaporation pulp

6. "Reduction of adverse environmental impact on the Upper Volga basin through modernization of basic and auxiliary production units and treatment facilities at CJSC "Ostashkov Tannery" (2008- 2009) 6.1 Consumption of lake water for m3/year 556,360 504,370 208,660 62.5 needs of the basic production 6.2 consumption of sewage from m3/year 561,624 509,662 208,660 62.8 the basic production 6.3 Discharge of polluting

substances in lake: Recalculated to BOD5 t/year 35.29 14.69 3.0 91.4 Suspended matter t/year 35.76 32.16 19.7 44.9 Chrome trivalent t/year 0.58 0.35 0.099 82.9 6.4 Production wastes t/year 5,812.2 5,734.2 672.14 87.1 * For evaporated water

The basic lessons of NPAF implementation are the following:

(1) The NPAF implementation has shown expediency and feasibility of the "win-win" IP concept based on economic interest of environmentally unfavorable enterprises. Following this concept opens a real way for environmental enhancement in Russia in the next 15-20 years. At the same time, a significant demand for investment funds for environmental projects from municipal enterprises of housing and communal services, including newly created enterprises for utilization of production and consumption waste, with remote environmental effect32 could not be satisfied under NPAF‟s rigid selection criteria. It is obvious that a similar facility should have more flexibility in IP selection and in their financing conditions; by supplying project environmental efficiency and stabilization of its impact to the project area‟s environment.

32 Environmental enhancement of Lake Nero due to its purification from bottom sediments and organization of low waste manufacture of environmentally sound production from sapropel (OJSC "Sapropel-Nero", Rostov, Yaroslavl oblast).

(2) The majority of enterprises/applicants were incapable of quickly developing high quality project documentation and according to the international requirements. As a result, the period of IP preparation, its evaluation and approval was extended to 1.5 – 2 years. Cases took place, when the enterprise-applicant, in expectation of positive decisions under the project from NPAF SB and the IBRD, started implementation of separate elements of IP. This led to a necessity to introduce amendments into Appraisal Reports, lists of environmental conditions for its implementation, procurement plans and implementation agreements. This decision resulted in the establishment of official specifications to the structure and content of documentation, satisfying both the criteria of international organizations and the requirements of the Russian legislation; as well as in observance of regulations of activities by all Facility stockholders. (3) In the conditions of high economic instability in the country, the IP assessment should adhere to maximum conservative forecasts and assumptions regarding terms of implementation, IP budget and its commercial effectiveness. Any delay arising in the course of project preparation and implementation can contribute to the cost of delay and deviation from planned budgets. (4) Enterprises/applicants should bear responsibility for the actions regarding IPs under the NPAF. Working with almost 350 applications was terminated in the absence of due activities of enterprises. (5) Established IBRD procedures for procurement of goods, works and services for IP are quite acceptable and executable to large Russian industrial enterprises. At the same time, problems, which can arise at organization and implementation of tenders, registration of contracts, etc, should not become a "stumbling-block" in IP implementation. (6) It is also extremely important for projects (programs) that are financed out of funds of international financial institutions have an effective management system with a single responsible agency at the top and entirely responsible for project results. In the case of NPAF, the removal of one of the responsible ministries from NPAF management became a barrier to activities of others. (7) The on-lending scheme developed under the NPAF is a financial innovation in Russia. Given the difficult financial position of industrial enterprises, the environment should not come at the expense of access to investment funds. The granting of credits at low interest rates promotes technical modernization, which has direct benefits from emission (discharge) reductions of polluting substances, utilization of waste, rehabilitation of polluted territories, etc.

Comments received from the Government of Russia on the draft ICR dated February 19, 2012, received before March 28, 2012:

1) Letter of the Ministry of Environment and Natural Resources to Mr. M. Rutkowski, Country Director

Dear Mr. Rutkowski,

The Ministry of Environment and Natural Resources of Russia has reviewed the letter from the World Bank dated February 24 this year (2012) No 2012-00074/ECCU1 on the completion and results of the Environment Management Project (COFN-0381OIBRD-38060RU) and informs you of the following:

We agree as a whole with the conclusions and recommendations regarding the implementation of the Environment Management Project in the Russian Federation in the part of the competencies of the Ministry of environment and natural resources of Russia.

We express appreciation to the World Bank for cooperation on the above project and are ready to continue interaction on new directions within the framework of the current reform of the environmental legislation in the Russian Federation.

Respectfully R. R. Gizatulin Deputy Minister

2) Letter of the Ministry of Economic Development signed by Mr. Boris Morgunov, Advisor(email dated March 26, 2012)

FROM: Моргунов Борис Алексеевич , , , 03/26/2012 06:31 AM RE: Кас. Отчета о завершении и результатах (ОЗРП) Проекта управления окружающей средой в Российской Федерации (COFN-03810 IBRD-38060 RU)

Уважаемые коллеги, мне представляется, что в п. 3.2 целесообразно использовать материалы приложения 7 (выписка прилагается), поскольку (на мой взгляд) положительные результаты РПОИ в проекте Отчета недооценены. Надеюсь, что это полезно. Б.А.Моргунов

(MED continued) As stated in Annex 7 – Summary of Borrower's ICR and/or Comments on Draft ICR, basic lessons of NPAF implementation are as follows:

utilization of production and consumption waste, with remote environmental effect33 could not be satisfied under NPAF‟s rigid selection criteria. It is obvious that a similar facility should have more flexibility in IP selection and in their financing conditions; by supplying project environmental efficiency and stabilization of its impact to the project area‟s environment. (2) The majority of enterprises/applicants were incapable of quickly developing high quality project documentation and according to the international requirements. As a result, the period of IP preparation, its evaluation and approval was extended to 1.5 – 2 years. Cases took place, when the enterprise-applicant, in expectation of positive decisions under the project from NPAF SB and the IBRD, started implementation of separate elements of IP. This led to a necessity to introduce amendments into Appraisal Reports, lists of environmental conditions for its implementation, procurement plans and implementation agreements. This decision resulted in the establishment of official specifications to the structure and content of documentation, satisfying both the criteria of international organizations and the requirements of the Russian legislation; as well as in observance of regulations of activities by all Facility stakeholders. (3) In the conditions of high economic instability in the country, the IP assessment should adhere to maximum conservative forecasts and assumptions regarding terms of implementation, IP budget and its commercial effectiveness. Any delay arising in the course of project preparation and implementation can contribute to the cost of delay and deviation from planned budgets. (4) Enterprises/applicants should bear responsibility for the actions regarding IPs under the NPAF. Working with almost 350 applications was terminated in the absence of due activities of enterprises. (5) The established IBRD procedures for procurement of goods, works and services for IP are quite acceptable and executable to large Russian industrial enterprises. At the same time, problems, which can arise at organization and implementation of tenders, registration of contracts, etc, should not become a "stumbling-block" in IP implementation. (6) It is also extremely important for projects (programs) that are financed out of funds of international financial institutions have an effective management system with a single responsible agency at the top and entirely responsible for project results. In the case of NPAF, the removal of one of the responsible ministries from NPAF management became a barrier to activities of others. (7) The on-lending scheme developed under the NPAF is a financial innovation in Russia. Given the difficult financial position of industrial enterprises, the environment should not come at the expense of access to investment funds. The granting of credits at low interest rates promotes technical modernization, which has direct benefits from emission (discharge) reductions of polluting substances, utilization of waste, rehabilitation of polluted territories, etc.

(MED continued)

From the Implementation Completion and Results Report of the National Pollution Abatement Facility

33 Environmental enhancement of Lake Nero due to its purification from bottom sediments and organization of low waste manufacture of environmentally sound production from Sapropel (OJSC "Sapropel-Nero", Rostov, Yaroslavl oblast).

NPAF LESSONS (CONCLUSIONS)

NPAF reviewed 599 (five hundred and ninety nine) investment proposals. Out of these, 90 (ninety) investment proposals were selected for implementation of pre-investment studies, including 39 (thirty nine) IPs that were approved by the NPAF Supervisory Board for funding under NPAF, 6 (six) IPs that were fully completed, and 1 (one) IP that was partially implemented. All completed projects allowed achieving the expected environmental benefits.

Total disbursement under NPAF amounted to $109.6 million, including loan (38060-RU) and grant (TF 20217/TF 03810) proceeds of $43.8 million. The total amount of borrowings taken to finance environmental IPs under NPAF was $106.0 million, including $38.3 million of NPAF credit resources and $63.7 million of enterprises‟ equity.

Based on NPAF implementation outcomes, the total fiscal efficiency of the Facility, with due regard for expected additional tax revenues from enterprises to the budgets of all levels, would be $142 million.

Three (3) IP financing schemes were elaborated in detail and tested in practice in the process of NPAF implementation:  Direct lending (Russian Ministry of Finance Russia – Enterprise);  Lending through a financial intermediary (Ministry of Finance Russia – Participating Bank – Final Borrower/Enterprise); and  Lending through a financial intermediary (Russian Ministry of Finance – Participating Bank –Final Borrower/Enterprise) with the involvement of an additional financial source, i.e. repayment funds out of the NPAF Account.

Therefore, NPAF basically implemented its major tasks formulated in various Agreements.

Basic lessons of NPAF implementation are as follows:

(1) NPAF implementation demonstrated expediency and feasibility of the "win-win" IP concept based on economic interest of environmentally unfavorable enterprises. Following this concept opens a real way for environmental enhancement in Russia in the next 15-20 years. At the same time, a significant demand for investment funds for environmental projects from municipal enterprises of housing and communal services, including newly created enterprises for utilization of production and consumption waste, with remote environmental effect34 could not be satisfied under NPAF‟s rigid selection criteria. It is obvious that a similar facility should have more flexibility in IP selection and in their financing conditions; by supplying project environmental efficiency and stabilization of its impact to the project area‟s environment.

34 Environmental enhancement of Lake Nero due to its purification from bottom sediments and organization of low waste manufacture of environmentally sound production from sapropel (OJSC "Sapropel-Nero", Rostov, Yaroslavl oblast).

the IBRD, started implementation of separate elements of IP. This led to a necessity to introduce amendments into Appraisal Reports, lists of environmental conditions for its implementation, procurement plans and implementation agreements. This decision resulted in the establishment of official specifications to the structure and content of documentation, satisfying both the criteria of international organizations and the requirements of the Russian legislation; as well as in observance of regulations of activities by all Facility stakeholders.

(3) In the conditions of high economic instability in the country, the IP assessment should adhere to maximum conservative forecasts and assumptions regarding terms of implementation, IP budget and its commercial effectiveness. Any delay arising in the course of project preparation and implementation can contribute to the cost of delay and deviation from planned budgets.

(4) Enterprises/applicants should bear responsibility for the actions regarding IPs under the NPAF. Working with almost 350 applications was terminated in the absence of due activities of enterprises.

(5) The established IBRD procedures for procurement of goods, works and services for IP are quite acceptable and executable to large Russian industrial enterprises. At the same time, problems, which can arise at organization and implementation of tenders, registration of contracts, etc, should not become a "stumbling-block" in IP implementation.

(6) It is also extremely important for projects (programs) that are financed out of funds of international financial institutions have an effective management system with a single responsible agency at the top and entirely responsible for project results. In the case of NPAF, the removal of one of the responsible ministries from NPAF management became a barrier to activities of others.

(7) The on-lending scheme developed under the NPAF is a financial innovation in Russia. Given the difficult financial position of industrial enterprises, the environment should not come at the expense of access to investment funds. The granting of credits at low interest rates promotes technical modernization, which has direct benefits from emission (discharge) reductions of polluting substances, utilization of waste, rehabilitation of polluted territories, etc.

3) Letter of the Ministry of Finance signed by Mr. Bokarev, Director of Department of International Finance (dated March 23, 2012)

MOF’s comments (translated) Re.: the Environmental Management Project Implementation Completion and Results Report

- page 2, paragraph 3: The Report refers to data from some studies to estimate the cost of depletion of natural resources in the USSR. In view of subjective nature of such estimates, we deem it appropriate to exclude respective wordings from the text. - page 3, paragraph 1, the last sentence: In our opinion, this description of the Russian political and economic reality is not directly related to the matter of the Report and has a touch of subjectivity and even prejudice, to some extent. We deem necessary to avoid such essentially controversial judgements in project- specific documents like this one. - page 14, paragraph 2 from the beginning of section 2.2: We deem it incorrect to assert that the Government of the Russian Federation was not “providing resources to client agencies”. In accordance with the legislation of the Russian Federation, allocations from the federal budget should be made available on the basis of requests from the responsible federal executive authorities for these or those purposes provided there is a feasibility study or a regulatory justification for such expenditures. As far as we know, the failure to utilise the project products was accounted for by the fact that the stakeholder agencies did not have adequate environmental programs to earmark funding for, rather than by a refusal to provide such resources. - page 14, paragraph 3 from the beginning of section 2.2: In our opinion, it is necessary to delete the first sentence of this paragraph, which attributes to the financial system reform such characteristics as “a complexity and variability of government financial management requirements”. With respect of this sentence, it should be also noted that requirements of the Government of the Russian Federation cannot be imposed because they are legally binding, and as such, must be met, among other things, during the implementation of projects supported by international financial institutions. - page 15, paragraph 5: We propose to revise the wording: “The MOF announced unwillingness to be a lender of record” to make it more specific, reading as follows “With a view to reducing the risks for the federal budget, the MOF adopted the decision to involve major Russian banks with government shares to act as financial intermediaries for the NAPF implementation”. - page 16, paragraph 4: In addition to the previous comment, we propose to revise another sentence, which is the last one in this paragraph because in its present wording, it makes an impression that one of the reasons of the delays was the compliance of the Project Implementing Entities with the Russian budget and civil legislation. In the meanwhile, the additional supervision and risk insurance turned out to quite justified, taking into account lack of experience in implementing projects like the NPAF in the Russian Federation. - page 19, paragraph 1 in the Results of NPAF component section: There are several comments to be made, including those pertaining to facts. First of all, we deem it important to note in this section that the operational arrangements (concept) for the NPAF as a revolving fund („NPAF Account‟ according to the Russian terminology) were not thoroughly elaborately originally. The adoption of the new Budget Code in 1998 did not affect the operation of the NPAF Account under the project owing to the legislative waivers for projects of

international financial institutions. At the same time, upon final closure of the NPAF on April 20, 2010, and upon completion of required supervisory activities, the funds from the NPAF Account were channeled to the federal budget as revenue in the middle of the year 2010, in full compliance with the Russian budget legislation. - page 19, the last paragraph: We cannot agree with the following statement: “Preparation activities did not make progress due to institutional slowness and impasse in the procurement of consultant services prior to EMP closure in June 2011”. In our opinion (which was also expressed in our official correspondence with the Bank during the respective period), there was no progress in the preparation of the project for Elimination of Past Environmental Liabilities in the Russian Federation due to the MNR's failure to make required administrative steps and it was that very failure which made it impossible to start the preparation of the above referred project.

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

N/A

Annex 9. List of Supporting Documents

Implementation Completion Report of the Russian National Pollution Abatement Facility, Russian Federation, Environment Management Project, Moscow, 2010.

Implementation Completion Memorandum (ICM) for the Swiss Grant for Co-financing Environmental Investments under the NPAF Component of the Environmental Management Project (EMP) (TF03810)

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