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Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 32428-UA PROJECT APPRAISAL DOCUMENT ON Public Disclosure Authorized A PROPOSED LOAN IN THE AMOUNT OF US$106 MILLION TO UKRAINE FOR A Public Disclosure Authorized HYDROPOWER REHABILITATION PROJECT IN SUPPORT OF THE ENERGY SECTOR REFORM AND DEVELOPMENT PROGW May 24,2005 Infrastructure and Energy Sector Unit Europe and Central Asia Region Public Disclosure Authorized This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 3 1,2005) Currency Unit = Ukraine (UAH) UAHl = US$0.19 US$1 = UAH5.28 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loan BCM Billion Cubic Meters CAS Country Assistance Strategy CEE Central and Eastem Europe CF Carbon Financing CIDA Canadian Agency for Intemational Development co2 Carbon Dioxide ccu Coal Company ofUkraine DPL Development Policy Loan EBRD European Bank for Reconstruction and Development EC European Commission ECU Energy Company of Ukraine ERR Economic Intemal Rate of Retum EMP Environmental Management Plan EU European Union FIRR Financial Internal Rate of Retum G7 Group of Seven GDP Gross Domestic Product GHG Greenhouse Gas GWh Gigawatt-hour HPP Hydropower Plant IMF International Monetary Fund JI Joint Implementation KfW Bank for Reconstruction (Germany) KP Kyoto Protocol MFE Ministry of Fuel and Energy MIS Management Information System MW Megawatt NERC National Electricity Regulatory Commission NOx Nitrogen Oxide NPV Net Present Value OP Operational Policy PAL Programmatic Adjustment Loan PHRD Japanese Aid Agency PrU Project Implementation Unit PPIAF Public-Private Infrastructure Advisory Facility FOR OFFICIAL USE ONLY PWG Permanent Working Group SCADA Supervisory Control and Data Acquisition Sida Swedish Agency for Intemational Development SIL Specific Investment Loan so2 Sulphur Dioxide TACIS European Commission’s Agency for Technical Assistance to the CIS Countries TEN-E Trans-European Electricity Networks TPP Thermal Power Plant TSO Transmission System Operator UCTE Union for the Coordination of Transmission of Electricity in Europe UHE UkrHydroEnergo USAID United States Agency for Intemational Development WEM Wholesale Electricity Market WTO World Trade Organization Vice President: Shigeo Katsu Country Director: Paul Bermingham Sector Manager: Peter Thomson Task Team Leader: Dejan Ostojic This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. EUROPE AND CENTRAL ASIA Hydropower Rehabilitation Project in Support of the Energy Sector Reform and Development Program CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues .................................................................................................... 1 2 . Rationale for Bank involvement ......................................................................................... 3 3 . Higher level objectives to which the project contributes .................................................... 4 B. PROJECT DESCRIPTION ................................................................................................. 5 1. Lending instrument ............................................................................................................. 5 2 . Program objective and phases ............................................................................................. 6 3 . Project development objective and key indicators .............................................................. 7 4 . Project components ............................................................................................................. 8 5 . Lessons leamed and reflected in the project design ............................................................ 9 6 . Alternatives considered and reasons for rejection ............................................................ 10 C . IMPLEMENTATION ........................................................................................................ 11 1. Partnership arrangements .................................................................................................. 11 2 . Institutional and implementation arrangements ................................................................ 12 3 . Monitoring and evaluation ofoutcomeshesults ................................................................ 13 ... 4 . Sustainability..................................................................................................................... 13 5 . Critical risks and possible controversial aspects ............................................................... 14 6 . Loan conditions and covenants ......................................................................................... 16 D. APPRAISAL SUMMARY ................................................................................................. 17 1. Economic and financial analyses ...................................................................................... 17 2 . Technical ........................................................................................................................... 19 3 . Fiduciary ........................................................................................................................... 20 4 . Social................................................................................................................................. 21 5 . Environment...................................................................................................................... 22 6 . Safeguard policies ............................................................................................................. 23 7 . Policy Exceptions and Readiness ...................................................................................... 24 Annex 1: Country. Sector and Program Background............................................................. 25 Annex 2: Major Related Projects Financed by the Bank and other Agencies ...................... 39 Annex 3: Results Framework and Monitoring ........................................................................ 43 Annex 4: Detailed Project Description...................................................................................... 45 Annex 5: Project Costs ............................................................................................................... 51 Annex 6: Implementation Arrangements ................................................................................. 53 Annex 7: Financial Management and Disbursement Arrangements ..................................... 59 Annex 8: Procurement Arrangements ...................................................................................... 65 Annex 9: Economic and Financial Analysis ............................................................................. 72 Annex 10: Safeguard Policy Issues ............................................................................................ 93 Annex 12: Documents in the Project Files .............................................................................. 102 Annex 13: Statement of Loans and Credits ............................................................................ 103 Annex 14: Country at a Glance ........................................................................ 105 Map IBRD 34052 UKRAINE HYDROPOWER REHABILITATION PROJECT IN SUPPORT OF THE ENERGY SECTOR REFORM AND DEVELOPMENT PROGRAM PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSIE Date: May 25,2005 Team Leader: Dejan R. Ostojic Country Director: Paul Bermingham Sectors: Power (1 00%) Sector ManagerDirector: Peter Thomson Themes: Regional integration (P);Regulation and competition policy (P) Project ID: PO83702 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan Safeguard screening category: Limited impact W' ' Project Financing Data [XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): 106.00 Pronosed terms: VSL RECONSTRUCTION AND DEVELOPMENT Total: 261.80 112.70 374.50 Borrower: Ukraine Responsible Agency: UkrHydroEnergo 07300 Vyshhorod Kyiv Region Ukraine Annual 0.0 7.0 27.0 32.0 17.0 12.0 7.0 4.0 Cumulative 0.0 7.0 34.0 66.0 83.0 95.0 102.0 106.0 Project implementation period: Start: October 1,2005 End: December 3 1,201 1 Expected effectiveness date: September 30,2005 Expected closing date: June 30,2012 Does the project depart from the CAS in content or other significant respects? [ ]Yes [ XI No Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 [XIYes [ ]No Have these been approved by Bank management? [XIYes [ ]No Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ]No Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Ref: PAD D. 7 Project development objective Ref: PAD B.2, Technical Annex 3 and, therefore, facilitate unimpeded operation of the energy market, both domestically and internationally. The main