Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 45056-BY

PROJECT APPRAISAL DOCUMENT

O N A

PROPOSED L O A N

IN THE AMOUNT OF US$125 MILLION

TO THE

REPUBLIC OF BELARUS

FOR AN

ENERGY EFFICIENCY PROJECT

May 1,2009

Sustainable Development Department Ukraine, Belarus and Moldova Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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FOR OFFICIAL USE ONLY S&I SIL SIRP Toe tcm TOR VAT VSL WB

Supply and Installation Specific Investment Loan Social Infrastructure Retrofitting Project Tonne o f Oil Equivalent Thousand cubic meters Terms o f Reference Value Added Tax Variable Spread Loan The World Bank

Vice President: Shigeo Katsu, ECAVP Country Director: Martin Raiser, ECCU2

Sector Manager: Task Team Leader:

Ranjit J. Lamech, ECSSD Pekka Kalevi Salminen, ECSSD

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

... 111

BELARUS Energy Efficiency Project

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 I . A . B . C .

I1 . A . B . C . D . E .

I11 . A . B . C . D . E .

I V . A . B . C . D . E . F . G . H .

Country and sector issues .................................................................................................... 1

Rationale for Bank involvement ......................................................................................... 4

Higher level objectives to which the project contributes .................................................... 5

PROJECT DESCRIPTION ............................................................................................. 5 Lending instrument ............................................................................................................. 5

Project components ............................................................................................................. 5

Project development objective and key indicators .............................................................. 5

Lessons learned and reflected in the project design ............................................................ 6

Alternatives . considered and reasons for rejection .............................................................. 6

IMPLEMENTATION ...................................................................................................... 7 Institutional and implementation arrangements .................................................................. 7 Monitoring and evaluation o f outcomes/results .................................................................. 8 Sustainability ....................................................................................................................... 8 Critical risks and possible controversial aspects ................................................................. 9

Loadcredit conditions and covenants ............................................................................... 10

APPRAISAL SUMMARY ............................................................................................. 11 Economic and financial analyses ...................................................................................... 11

Financial Analysis ............................................................................................................. 12

Technical ........................................................................................................................... 13

Fiduciary ........................................................................................................................... 13

Social ................................................................................................................................. 14

Environment ...................................................................................................................... 14

Safeguard policies ............................................................................................................. 16

Polilcy Exceptions and Readiness .................................................................................... 16

. . .

iv

Annex 1: Country and Sector or Program Background ......................................................... 17

Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies ................. 23

Annex 3: Results Framework and Monitoring ........................................................................ 24

Annex 4: Detailed Project Description ...................................................................................... 27

Annex 5: Project Costs ............................................................................................................... 30

Annex 6: Implementation Arrangements ................................................................................. 31

Annex 7: Financial Management ............................................................................................... 33

Annex 8: Procurement Arrangements ..................................................................................... 41

Annex 9: Economic and Financial Analysis ............................................................................. 46

Annex 10: Safeguard Policy Issues ............................................................................................ 57

Annex 11: Project Preparation and Supervision ..................................................................... 63

Annex 12: Documents in the Project File ................................................................................. 65

Annex 13: Statement of Loans and Credits .............................................................................. 66

Annex 14: Country at a Glance ................................................................................................. 67

Annex 15: MAP IBI2D 33370 ..................................................................................................... 69

V

BELARUS

Source Loca l Borrower 68.10 International Bank for Reconstruction and 0.00

ENERGY EFFICIENCY

PROJECT APPRAISAL DOCUMENT

Foreign Tota l 0.00 68.10

125.00 125.00

EUROPE AND CENTRAL ASIA

Development Total:

ECSSD

68.10 125.00 193.10

Date: May 1,2009 Country Director: Martin Raiser Sector ManagedDirector: Ranjit J. Lamech

Team Leader: Pekka Kalevi Salminen Sectors: Power (60%);District heating and energy efficiency services (40%) Themes: Other urban development (P);State enterprise/bank restructuring and privatization (S);Climate change ( S ) Environmental screening category: Partial Assessment

Project ID: P108023

Lending Instrument: Specific Investment Loan Project Financing Data

[XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Borrower: Government o f the Republic o f Belarus Belarus

Responsible Agency: Belinvestenergosberezhenie Revoliutsionnaya str. 13A Minsk 220030 Belarus Tel: 375-17- 227 20 78 voitekhovich@niks.b y

Fax: 375-17-206 46 83

vi

FY 2010 2011 2012 2013 2014 Annual 2.00 12.50 25.00 35.50 37.50 Cumulative 2.00 14.50 39.50 75.00 112.50 Project implementation period: Start September 30,2009 End: December 31,2014 Expected effectiveness date: September 30, 2009 Expected closing date: December 3 1 , 201 4 Does the project depart from the CAS in content or other significant respects? Ref: P A D I. C. Does the project require any exceptions f rom Bank policies? Ref: P A D I K G. Have these been approved by Bank management? I s approval for any pol icy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? Ref: P A D III. E. Does the project meet the Regional criteria for readiness for implementation? Ref: P A D I K G. Project development objective Ref: PAD II. C., Technical Annex 3 The development objective i s to improve energy efficiency in heat and power generation in selected towns in Belarus.

[ ]Yes [XINO

[ ]Yes [XINO [ ]Yes [XINO [ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

2015 12.50

125.00

Project description [one-sentence summary of each component] Ref: P A D ILD., Technical Annex 4 The project wil l support: (1) Conversion o f existing heat-only boiler plants to combined heat and power plants using natural gas as the main fuel at 6 sites; (2) Design and supervision consultancy financed by Belarus; (3) Project implementation and management, including staff costs, operating costs, training and audits.

Which safeguard policies are triggered, if any? Ref: PAD IKF . , Technical Annex 10 The project i s classified as a Category B project under OP4.01, Environmental Assessment. N o other Safeguard policies are triggered.

Significant, non-standard conditions, if any, for: Ref: P A D III. F.

Loadcredit effectiveness: Execution and ratification o f Subsidiary Loan Agreements between Minskenergo and the Borrower, between Mogilevenergo and the Borrower, and between each o f the four participating oblasts and the Borrower.

Covenants applicable to project implementation: (a) The Borrower, through the PMU, shall maintain satisfactory project FM arrangements, including records and accounts, throughout the implementation o f the project;

(b) The Borrower, through the PMU, shall submit to the Bank the quarterly un-audited Interim Financial Reports (IFRs), based o n a format to be agreed at Negotiations. The IFRs shall be

vii

submitted within 45 days after each calendar quarter end;

(c) Project financial statements wi l l be audited on an annual basis under terms o f reference acceptable to the Bank by an auditor acceptable to the Bank. The audit report shall be submitted to the Bank within six months from the end o f each fiscal year. The audit terms o f reference were agreed at Negotiations.

(d) The Borrower shall during Project implementation ensure sufficient funding and resources for cofinancing o f the Project.

(e) The Borrower shall maintain the P M U during project implementation with staff whose qualifications and terms o f reference shall be satisfactory to the Bank and resources adequate to enable it to effectively implement the Project.

( f ) The Borrower, through the EED, shall cause the P M U to take actions required to ensure that the Project Operational Manual (POM) i s applied and followed at a l l times in the implementation, monitoring and evaluation o f the Project.

(g)The Borrower shall maintain the Project Coordinators, who shall work in close cooperation with the P M U and be responsible for the coordination o f Component 1 activities, until completion o f the Project.

(h) The Borrower shall ensure that al l measures necessary for the carrying out o f the Environmental Management Plans (EMPs) shall be taken in a timely manner.

viii

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

Economic and Geographic Context

1. The Republic o f Belarus, situated in Eastern Europe, i s a landlocked country with a total surface area o f 20.8 mill ion ha. It i s bordered by the Russian Federation, Ukraine, Poland, Lithuania and Latvia. The country has four distinctive geographic regions. The north has many lakes and hills, and i s covered with forests. The east i s an elevated plain region. The Polessye, a lowland area o f rivers and swamps, occupies the south, and the west i s an agricultural region with mixed conifer forests. The marshy land o f the Polessye i s the largest swamp area in Europe. The climate i s continental in the central and eastern parts o f the country and maritime in the rest o f the country. The average annual precipitation i s about 700 mm, and varies between 550 mm in the southeast to 800 mm in the elevated areas o f the central part o f the country. Groundwater resources are available throughout the country. They amount to 18 km3 per year and drain entirely into surface water bodies.

2. The country with a population o f 9.7 mill ion (2006 data), has an urbanization rate o f 71 percent. Belarus has the potential for providing a high level o f income for its population. Belarus has access to growing markets, productive agricultural and forestry resources, and the population i s highly educated. The country i s divided into six oblasts (regions), with their administrative centers in Minsk, Brest, Vitebsk, Gomel, Grodno and Mogilev. There are 110 towns, o f which 15 towns have a population o f over 100,000.

3. The Belarus economy grew at about 10 percent in 2006, averaging 8.2 percent between 2002 and 2005. A substantial terms o f trade improvement (primarily, energy terms o f trade) and strong partner country growth were important factors behind these high growth rates. The centralized economic system distributed these terms o f trade gains across the economy through higher wages and transfers, boosting domestic demand. The Government’s generous income policies boosted household consumption by 14.2 percent in real terms in 2006. The poverty headcount ratio (national definition) fe l l from 30.5 percent o f the population in 2002 to 11.1 percent in 2006.

4. An improved macroeconomic environment also supported economic growth. Price controls and the peg o f the Belarus Ruble to the dollar helped lower inflation from high double digits in 2001 to 7 percent in 2006. Since 2004, the consolidated budgets have been roughly in balance and even recorded a surplus o f 1.4 percent o f GDP in 2006. Domestic debt has been stable at about 6 percent o f GDP (5.1 percent in 2006). Total public debt accounted for a s t i l l low 19 percent o f GDP by the end o f 2006, o f which three quarters i s short-term.

5. However, 2007 marked a clear break in Belarus’ favorable trade status with Russia. New o i l and gas agreements concluded between Russia and Belarus at the beginning o f 2007 implied a substantial deterioration o f Belarus’ energy terms o f trade. With Russia’s push towards market prices for i t s exports, the natural gas import price more than doubled in 2007 to U$ 1 OO/tcm, and, according to the agreement, wil l gradually increase to European market levels

1

by 201 1. In addition, on account o f Russia progressively eliminating the subsidized export taxes on o i l exports to Belarus, the import price for Belarus increased further.’ As a result o f these agreements, Belarus’ net energy import bil l has increased by almost US$2.5 billion, i.e., the 2007 energy terms o f trade shock was equivalent to about 5 percent o f GDP.

6. Against this background, Belarus’ performance in 2007 was better than expected. The GDP growth decelerated somewhat but remained high (8.2%), the current account deficit (CAD) widened to 3.9 percent o f GDP but less than implied by the energy price shock, and official reserves tripled. Poverty rates declined further (to 7.7 percent o f population). The most important factors behind the 2007 outcome are: (i) improved terms o f trade for Belarus’ main exports (fertilizers, metals, foodstuffs); (ii) acquired external financing in excess o f expected C A D (of almost US$3.5 billion, out o f which about US$1.3 bil l ion i s FDI and about US$2 bil l ion in terms o f new debt); (iii) improved energy efficiency; and (iv) tightened fiscal policy and moderated wage growth.

7. On average, 2008 was also a good year in terms o f the overall economic situation in Belarus, with a GDP growth as high as about 10 percent against 8.6 in 2007; the officially registered unemployment rate o f 0.8 percent in 2008 against 1 .O percent in 2007, and the poverty incidence (according to the national definition) o f 6.1 percent in 2008 compared to 7.7 percent in 2007. However, at the end o f 2008 the worldwide financial/economic crises hit Belarus, especially i t s exporting industry. The slowdown in partner countries, deterioration in terms of trade and real exchange rate appreciation in late 2008, combined with limited access to external capital markets and delays in payment for Belarusian exports, has heightened external payment difficulties. The current account shocks, along with the National Bank (NBRB) efforts to support the currency peg against the U S dollar, resulted in a sizeable drop in international reserves (declining by over US$1.5 bil l ion dollars from end-August 2008 despite a US$ l bil l ion loan from Russia, to reach US$3 bil l ion at end-2008 or around 1 month o f imports). In the face o f these mounting pressures and with a poor outlook for 2009 (growth could slow to 1-2 percent), the authorities requested financial assistance from the IMF and World Bank. As a response to the external pressures, the IMF Board approved a 15-month US$2.5 bil l ion Stand-By Arrangement (SBA) program on 12 January 2009. The authorities’ policy adjustment has involved expenditure reduction, through limiting nominal wage growth, cutting real investments and targeting a zero fiscal deficit, and expenditure switching through exchange rate policy.

8. Transmission o f the external shocks, and policy responses, to the real sector has driven sharp slowdowns in industrial output, retail sales and GDP growth. Industrial production, down 4.5% year on year in Q1 2009, i s increasingly going to inventories (the ratio o f inventories to output was almost 70% in Q1 2009, over two-thirds higher than Q1 2008). Data for January- February shows a fall in average profitability and rise in the share o f loss-making enterprises with the NBRB survey data indicating higher costs and reduced availability o f credit, wi th arrears also rising. GDP growth fell to 1.1% year on year in Q1 2009, versus 11.2% in Q1 2008. The Ministry o f Economy has lowered i ts baseline 2009 growth forecast to O%, from 2-3% in December, with a downside scenario o f a 4-5% contraction. The Government’s downgrading of the outlook has been accompanied by significant additional adjustment in fiscal planning to meet

From 2007, Russia started to apply oil export tax to exports o f oil to Belarus in the amount o f 29 percent of export tax applied to the third countries (and it i s expected to rise to 36 percent by 2009).

2

the zero deficit target. Under the revised macro-framework for 2009, estimated revenue shortfall wil l be 18%, calling for even stronger expenditures adjustment. The impact o f the economic and financial crisis has catalyzed the work on economic liberalization, started from end-2007. The outlook beyond 2009 looks moderately optimistic and conditional on the economic recovery o f major trading partners (and, f i rs t o f all, Russia) and the further domestic pol icy adjustments and advancing the liberalization agenda.

9. Energy Sector. During recent years, Belarus has made significant efforts to reduce energy intensity and improve efficiency. The achieved results are encouraging; energy intensity was about 0.76 tonne o f o i l equivalent (toe) per dollar o f GDP in the mid-1 990s and was reduced to 0.35 in 2007 and to 0.32 in 2008 (down by 8.4 percent compared to 2007). The government’s energy efficiency program aims to further reduce the energy intensity o f the economy by over 30 percent by 2010. The aim i s to strengthen energy security through capital investments in asset renovation, efficient utilization o f fuel and energy resources, and more extensive use o f domestic, alternative and renewable sources o f energy, such as biomass.

10. The government has approved large energy programs in 2006 and 2007 which aim to reduce energy intensity, increase the share o f domestic sources in energy generation, and increase energy security. The programs are: (i) program to modernize major energy generating plants; (ii) program to convert existing heating plants to combined heat and power generation; (iii) energy efficiency program; and (iv) renewable energy program.

11. In 2006, the Bank prepared the energy sector report “Belarus: Addressing Challenges Facing the Energy Sector” which emphasizes the same issues as the Government’s new programs mentioned above. In addition, the report recommends the gradual introduction o f structural and institutional reforms in the sector in order to move from vertically integrated state owned utilities towards more liberalized energy markets. After the report was issued, there have been positive developments in Belarus related to plans for the unbundling o f the state owned energy companies and changes in the regulatory and institutional framework.

12. The European Commission (EC) and the Government o f Belarus opened their energy dialogue in 2007 and continued with a new set o f meetings in Minsk in January 2008. The E C allocated Euro 5 mi l l ion for technical assistance in the Belarus energy sector. Part o f the E C funds will be used during the Bank’s energy efficiency project implementation for technical assistance on the energy market rules and regulatory issues.

13. The government o f Belarus has expressed its interest to borrow from the Bank for energy efficiency projects during the preparation o f the CAS and also during the identification o f the proposed project. The Ministry o f Energy, Minskenergo, Mogilevenergo, and the Energy Efficiency Department have shown their commitment to the Project by working with the Bank during project preparation. They have prepared and financed from their o w n sources the required feasibility studies, environmental management plans and technical designs. The Country Assistance Strategy (CAS) for 2008-201 1 was approved in December 2007, and it includes the proposed Energy Efficiency Project.

3

B. Rationale for Bank involvement

14. The project is aligned to the Belarus main national energy programs: (i) program to modernize major energy generating plants; (ii) program to convert existing heating plants to combined heat and power generation; (iii) energy efficiency program, The implementation o f the above-mentioned programs started in 2007, with the total estimated costs o f the three programs being about US$9 bi l l ion by 201 1. The programs specify the development priorities concerning rehabilitation of the existing energy assets and their sources o f funding for the next five years. The objectives o f the programs are to:

a. b.

c. d. e.

Improve energy efficiency o f the existing power and heat generation plants; Convert existing heat-only-boiler plants to more efficient combined heat and power

Improve quality o f power and heating services; Improve the security o f supply o f power and heat; Reduce dependency on energy imports.

plants;

15. In 2008, the investments in the energy sector were 19 percent higher compared to 2007. However, due to the crisis i t is expected that in 2009, Belarus wil l reduce the planned investments in the energy sector by 15 percent. Under the l imited access to external financing, the country experiences a significant constraint towards the development o f its energy sector, which reduces the reliability and security o f energy supplies, and, thus, creates a significant barrier towards the economic recovery and further economic development. Therefore, the investments in the energy sector o f Belarus are crucial to the country.

16. In 2006 the Bank’s Board o f Executive Directors approved a US$50 mi l l ion loan for the Post-Chernobyl Recovery Project (PCRP) focusing primarily on energy efficiency and on the provision o f reliable heat and hot water services in order to improve living conditions. As the Bank begins to re-explore lending opportunities in Belarus, the energy sector i s again emerging as an important priority. Fol lowing two demand side energy efficiency projects - the Social Infrastructure Retrofitting Project (SIRP) and the Post Chernobyl Recovery Project (PCRP) -- the proposed project is planned to improve energy efficiency on the supply side o f power and heat generation. The Bank i s wel l positioned to assist the GOB in addressing these challenges, given i t s involvement in social and economic issues, i ts recent experience with the preparation and approval o f the Post-Chernobyl Recovery Project and i t s ample experience in transition countries. The Bank has extensive knowledge and experience in implementing energy sector- related operations, not just in Europe and Central Asia but across the globe.

17. According to the CAS, the Bank wil l maintain a l imited and selective presence in lending, including improving energy efficiency. This project i s expected to enhance the efficiency and sustainability o f the energy sector and generate tangible economic benefits and i s therefore wel l aligned to the CAS objectives.

4

C. Higher level objectives to which the project contributes

18. The proposed project is consistent with the FY08-FY11 CAS objectives to assist Belarus to address global environment and energy challenges and enhance the competitiveness o f its economy to assure rising incomes and to protect the welfare o f the weakest. The CAS concern with global public goods includes attention to reducing energy intensity, access to the benefits fkom the Kyoto Protocol and other international arrangements and incentives, attention to environmental challenges, follow-up work on dealing with the Chernobyl consequences, and trade and adjustment to shocks.

11. PROJECT D E S C R I P T I O N

A. Lending instrument

19. The project wi l l be financed through a Specific Investment Loan (SIL) with a Variable Spread (VSL) in U S dollars. The loan wil l be offered under the new terms with no commitment fee and wil l be subject to a one time front-end fee o f 25 basis points, which wil l be financed from the Loan.

20. The proposed Bank loan would be made to the Republic o f Belarus. The Ministry o f Finance (MOF) indicated that i t intends to on-lend the proceeds to (i) Minskenergo and Mogilevenergo for investments that would be implemented by them; and (ii) to the oblasts concerned for the smaller investments that would be implemented by the utilities owned by the local governments. In the case o f sub-loans made to Minskenergo and Mogilevenergo, under the agreement with MOF, they would be responsible for the debt service on the sub-loans. For the sub-loans for the smaller investments, the MOF would enter into agreements with the concerned oblast committees which, in turn, would agree with the beneficiary enterprises under their jurisdiction in regard to the financing and debt service arrangements o n their respective sub- loans.

B. Project development objective and key indicators

21. power generation in selected towns in Belarus.

The development objective o f the project is to improve energy efficiency in heat and

22. The key performance indicators wil l be based on sub-project specific indicators o n operational efficiencies achieved in the sub projects. Annex 3 provides the detailed results monitoring framework. For each sub-project the fol lowing key performance indicators wil l be measured:

0 Reduction o f gas consumption 0 Total efficiency o f heat and power generation

C. Project components

23. Conversion of existing heat-only-boiler plants to combined heat and power plants. (US$18 1.6 million). The project wi l l convert existing heat-only-boiler plants to combined heat

5

and power plants at 6 sites. All plants wil l use natural gas as the main fbel. The largest plant wil l be in Borisov with a combined heat and power (CHP) unit with an electricity capacity o f about 65 MW, followed by the Mogi lev combined cycle CHP plant o f 15.5 MW o f electricity capacity. The other sites wil l be based on gas engine technology and are located in Retchitsa (3 MW), Ruba (3 MW), Oshmiany (3 MW) and Borisov (1 MW). The introduction o f combined heat and power generation wil l improve efficiency o f the plants and thus reduce gas consumption.

24. Design and supervision consultancy (US$9 million). The design and supervision consultancy will be performed by Belarusian design institutes and financed by the Belarusian side. In addition, the component wil l also finance construction management and investment monitoring.

25. Project Implementation and Management: (US$2.5 million). A Project Management Unit (PMU) wil l carry out the procurement, contract supervision, and financial management of the project including auditing and other fiduciary requirements. The staffing and incremental operating costs for the P M U wil l be financed by the Government, and the WB loan funds wil l cover the cost o f additional training for P M U staff and financial audits.

D. Lessons learned and reflected in the project design

26. The Bank’s involvement in the energy sector in many o f the transition countries of the region for over 15 years has provided the WB team with many lessons, a few o f which have been highlighted below and reflected in the design o f the proposed project.

27. Complexity: Experience has shown that projects in transition countries need to be simple in design as the Government i s keen to deliver immediate and visible benefits to the population and less keen on being subjected to heavy reform agendas. This has resulted in project initiatives not materializing. Accordingly, the proposed project is simple in design and i s closely aligned to the Government’s national energy efficiency program which targets investments in the rehabilitation and reconstruction o f energy infrastructure. The project fits with the Government’s objectives to provide energy efficient power and heat generation.

28. Supporting Client Objectives: Bank experience in Belarus shows that technical capacity i s generally high, and that implementation can proceed satisfactorily given a supportive governance environment. Bank projects in Belarus have faced difficulties in achieving their objectives and scored l o w o n sustainability, largely due to the inability and unwillingness to implement difficult reform conditions. A s also mentioned above, this project i s closely aligned to the Government’s national energy efficiency program and is not designed to push for any major reform o f the energy sector at this t ime but rather to support the government’s plan for the development o f the energy sector.

E. Alternatives considered and reasons for rejection

29. During the identification and preparation stages the Government proposed several project ideas for the Bank to consider. A number o f alternatives were reviewed and rejected after

6

discussions with the Ministry o f Energy and the Energy Efficiency Department, including the following:

0 Demand side energy efficiency improvements in public buildings, which was rejected because the Bank already i s financing two ongoing loans on the demand side. I t was agreed to complete the implementation o f the ongoing projects before starting similar activities; A Biomass (and peat) fired CHP plant in Lida was also discussed, but the pre- feasibility study indicated that the site i s not suitable for solid fuels, and in addition the economic indicators were not attractive enough; Rehabilitation o f a high voltage power transmission l ine in Brest was preliminarily discussed with the Ministry o f Energy. However, i t was decided that the investment i s too costly to include in this project, but the Bank may consider preparing a separate power transmission project later on; and Repowering of two units o f a large gas fired condensing power plant was also proposed by the Government but the investment costs were very high and could not be included in this project.

0

111. IMPLEMENTATION

A. Institutional and implementation arrangements

30. The project wi l l be implemented by the existing Project Management Unit (PMU) that is successfully implementing the ongoing Bank financed SIRP and PCRP projects. The P M U has the necessary knowledge and capacity to implement the project, although i t does not yet have experience in handling large supply and installation contracts. The goal i s to streamline the implementation arrangements within the existing framework o f implementation and coordination o f the government’s program o f investments in energy efficiency and reconstruction o f the energy infrastructure, to utilize existing capacities, and to avoid additional layers o f authority.

3 1. The Energy Efficiency Department (EED) under the Committee o f Standardization is the agency responsible for the National Energy Efficiency Program dedicated to improving energy efficiency in Belarus. It i s separate from the Ministry o f Energy (MOE). EED has been appointed by the government to coordinate and supervise project implementation.

32. The Project Management Unit (PMU - Belinvestenergoberezhenie) i s subordinate to the EED. It will be responsible for daily project implementation and monitoring and adherence to the World Bank requirements. The P M U has adequate and practical knowledge o f Bank procedures. I t also has the technical capacities as wel l as the necessary linkages to the ministries and Oblasts to prepare and implement the proposed project. The PMU has skilled managerial, technical, procurement and financial management staff which wil l be further trained for the specific needs o f the project.

33. Minskenergo and Mogilevenergo, which are owners o f Borisov and Mogilev boiler houses, have assigned a coordinator (project manager) and deputy coordinator to work with the PMU. The Borrower shall maintain the Project Coordinators f rom Minskenergo and

7

Mogilevenergo and EED until completion o f the Project, who shall work in close cooperation with the PMU, and be responsible for the coordination o f the Project implementation. Minskenergo and Mogilevenergo wil l be responsible for the preparation o f the technical specifications, drawings, etc. o f the bidding documents. They will s ign contracts with suppliers and the P M U wil l co-sign the contracts as the processor o f payments from the Loan. Minskenergo and Mogilevenergo wil l be responsible for ensuring appropriate technical supervision o f the contracts, accepting payment orders, and submitting adequate documentation to the P M U so that i t can prepare and sign disbursement applications. The PMU’s responsibilities will be to organize the procurement and disbursement procedures in accordance with Bank requirements.

34. The P M U will operate in accordance with the Project Operational Manual (POM) which was approved by the Bank and EED before the negotiations. The P O M outlines the implementation arrangements including procurement, contract management, payment authorization, environmental management, and periodic reporting and relationships between the implementing and beneficiary agencies.

B. Monitoring and evaluation of outcomes/results

35. The monitoring and evaluation o f outcomes and results during implementation would fol low standard Bank practice. Performance monitoring o f the proposed Project would include: (a) the performance indicators o f the participating utilities and (b) progress in preparation and implementation o f investment programs and in the execution o f contracts.

36. The PMU team will carry out the necessary analyses o f the various indicator data. The Bank supervision team would monitor implementation progress and evaluate the outcomes on a quarterly and annual basis, using information obtained from reports prepared by the PMU. Discussions during supervision related to institutional capacity building, financial viability, technical reviews and site visits would provide additional support for the project monitoring.

C. Sustainability

37. The project supports the government’s energy efficiency program by financing a small part o f the large multiyear investment plan. I t i s aligned with the fol lowing government objectives: (i) to increase efficiency in the utilization o f energy resources in the country; (ii) to reduce dependency on imported energy, and (iii) to improve security o f electricity and heat supply.

38. Given the government’s track record o f commitment to these areas, the project i s sustainable. Belarus’ successful record in increasing tariffs, improving cost recovery and collections along with i t s commitment to physical improvement o f the system is a reassuring s i g n o f commitment and sustainability. The strategy o f improving physical performance o f the system to avoid losses ensured that tariff increases were minimal and avoided burdening the population with payments for wasted fuel and system inefficiencies that were beyond the customers’ control. This combined strategy o f physical and financial improvements contributes to the sustainability o f the system.

8

39. Belarus has ratified the Kyoto Protocol, but i s waiting for other countries to rat i fy the amendments in order to fully benefit from carbon trading. Because o f the expected length o f time to complete the ratification o f the required amendment, i t may not be feasible for Belarus to engage in the compliance market before the expiration o f the Kyoto Protocol in 2012. However, Belarus can pursue pi lot transactions in the voluntary carbon market from the emission reductions generated from this Project.

D. Critical risks and possible controversial aspects

The overall project risk and related mitigation measures have been identified as shown in the table below.-Aher mitigation the

R I S K

Rapidly increasing gas prices may make it dif f icult for Belarus to provide local financing.

Inexperience o f Minskenergo and Mogilevenergo with IF1 financed projects and international procurement.

Unfamiliarity o f P M U with Bank’s standard Supply and Installation o f Plant and Equipment bidding document and Prequalification Document and related procedures. Possible cost overruns, particularly on the large contracts. [mplementation delays due to ie lay in availability o f

roject risk i s rated as moderate. R I S K MITIGATION MEASURES

The project i s closely aligned with key national energy programs, which are a high priority o f government. Implementation started in 2007 and the programs specify the government’s development priorities and their sources o f funding for the next f ive vears. The PMU, which i s already experienced in managing two Bank-financed projects, wil l handle procurement and fiduciary aspects. Minskenergo and Mogilevenergo and their technical consultant wil l handle the technical aspects, in which they are competent. A Presidential Resolution indicating the respective responsibilities o f the PMU, the energodclients and the oblasts was approved prior to negotiations. Meetings during the preparation phase indicate good coordination among P M U and the energos.

Training in S& I and prequalification. Consultant to review technical specifications.

Belarus has agreed to finance costs that cannot be covered by the Bank Loan.

IBRD’s General conditions require the Borrower to ensure sufficient funding and

RISK RATING AFTER

MITIGATION

M

M

S

M

M

9

R I S K RATING 1 AFTER

R I S K MITIGATION MEASURES R I S K

counterpart funds.

Overall Risk Rating after Mitigation

E. Loadcredit conditions and covenants

MITIGATION other resources for cofinancing o f the Project. The Bank and P M U will follow up on budget allocations in the annual draft budget in June o f each year, starting in June 2009..

M

40. The following conditions and covenants apply:

The Additional Effectiveness Conditions: Execution and ratification o f Subsidiary Loan Agreements between Minskenergo and the Borrower, between Mogilevenergo and the Borrower, and between four Participating Oblasts and the Borrower.

Implementation Covenants:

0 The Borrower, through the PMU, shall maintain satisfactory project FM arrangements, including records and accounts, throughout the implementation o f the project

The Borrower, through the PMU, shall submit to the Bank the quarterly un-audited IFRs, based on a format agreed at Negotiations. The IFRs shall be submitted within 45 days after each calendar quarter end.

0 Project financial statements wil l be audited on an annual basis under terms o f reference acceptable to the Bank by an auditor acceptable to the Bank. The audit report shall be submitted to the Bank within six months from the end o f each fiscal year. The audit terms o f reference were agreed at Negotiations.

0 The Borrower shall during Project implementation ensure sufficient funding and resources for co-financing o f the Project.

0 The Borrower shall maintain the P M U during project implementation with staff whose qualifications and terms o f reference shall be satisfactory to the Bank and resources adequate to enable it to effectively implement the Project.

0 The Borrower, through the EED, shall cause the P M U to take actions required to ensure that the Project Operational Manual (POM) i s applied and followed at all times in the implementation, monitoring and evaluation o f the Project.

10

The Borrower shall maintain the Project Coordinators, who shall work in close cooperation with the PMU and be responsible for the coordination o f Component 1 activities, until completion o f the Project

0 The Borrower shall ensure that al l measures necessary for the carrying out o f the Environmental Management Plans (EMPs) shall be taken in a timely manner.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

41. As described above the project wil l convert existing heat-only boilers (HOBs) into combined heat and power plants (CHPs) which can produce both electricity and heat. This conversion wil l lead to more efficient generation o f heat and electricity compared to separate generation o f heat by HOBs and electricity by condensing power plants- which i s the current situation in much o f Belarus. The main benefit o f the project wil l be an improvement o f energy efficiency in heat and power generation resulting in a reduction in natural gas usage.

42. The project wil l also provide additional generating capacity to the Belarus power system (since the condensing plants wil l not be eliminated), which will be needed since Belarus electricity demand i s increasing and in practice the electricity imports from Russia cannot be increased due to the generation capacity limitations in Russia in the short and medium term. The project, in its small part, wil l provide additional generating capacity to the Belarus power system. However the economic indicators show that the project i s justified solely by the natural gas saved without taking into account the increase in generating capacity.

43. A cost-benefit analysis was conducted to estimate the economic rate o f return (ERR) and net present value (NPV) for each sub-project. The economic costs include total investment costs (excluding taxes and duties) o f the generating equipment, construction costs, and connection costs to gas, power and heating networks. The major benefit considered in the analysis i s the reduction in gas purchases due to improved heat and electricity generation efficiency. Other benefits which are quantified include savings in maintenance and repair costs, and environmental benefits. In the economic analysis a gas price o f US$300 per thousand cubic meters has been used. It is higher than the current gas price in Belarus, but lower than the current gas price in Central Europe. This gas price i s in l ine with the long term projection o f the IEA for the gas price in Central Europe. The assumptions and results o f the analysis are discussed in detail in Annex 9.

44. The economic rate o f return for the whole project i s estimated to be 18.8 percent without environmental benefits and similarly the net present value i s estimated to be about US$62.6 million. The ERR for sub-projects varies between 16.1 percent and 21.2 percent.

45. A sensitivity analysis shows that the project economic results are sound: (i) 20 percent increase o f the investment costs would st i l l result in an ERR o f 15.2 percent; (ii) 20 percent reduction in gas price would result in an ERR o f 14.1 percent; and (iii) 20 percent increase in gas price would result in an ERR o f 23.0 percent.

11

B. Financial Analysis

46. Financial analyses have been carried out: (i) at the project level, to estimate the financial rate o f return (FRR) for the investments under the Borisov and Mogi lev components of the project; and (ii) at the entity level for Minskenergo and Mogilevenergo to assess their financial situation and their ability to meet their respective financial obligations in regard to operating expenses, debt service and local contributions to investment financing during the project implementation and operation periods. Details are provided in Annex 9.

47. Project Level Financial Analysis. For the Borisov and Mogilev project components, FRRs have been estimated based o n the incremental financial costs (including capital costs) and benefits (including cost savings) resulting f rom the project investments. Adjustments have been made to the economic cost-benefit streams to derive the financial benefit streams. The base FRRs are estimated to be 14 percent for the Borisov component and 13 percent for the Mogi lev component. Sensitivity analyses were carried out to estimate the effects o n the FRRs o f changes in key underlying parameters including capital costs and fuel cost savings. The sensitivity analyses show that the FRRs are reasonably robust and remain over 10 percent for substantial adverse deviations in the key parameters.

48. Financial Sustainability. The two participating energos, Minskenergo and Mogilevenergo, along with four other regional energos and 27 service and other organizations, are member enterprises o f Belenergo, the entity which is responsible for electricity and heat generation and supply in Belarus. Belenergo serves as the coordinating agency within its member electricity and heat supplier organizations. Tariffs for Belenergo are set by the Ministry o f Economy, which acts as the regulating authority, and are formulated on a cost-plus basis taking into account the financial needs o f the Belenergo system as a whole. Since cost structures and consumer composition vary among the energos, this results in some energos making a profi t and others a loss, e.g. both Minskenergo and Mogilevenergo make profits before taxes, but some other energos make a loss. Belenergo then carries out internal financial transfers among the energos taking into account their financial needs. The overall tar i f fs include a provision for some investment financing but the levels are not sufficient for the energos to undertake investment financing entirely f rom internal funds. In recent years, the Belenergo system has therefore relied on borrowing from local and foreign sources to supplement the internal funds.

49. The Government’s program in regard to electricity and heat tariffs has focused o n (i) increasing tariffs to cost-recovery levels (at the Belenergo level) ; (ii) reducing cross subsidies between consumer groups; and (iii) improving payment discipline to improve the collection rate and eliminate barter. As a result, collection performance (including collection o f arrears) has been around 100 percent in recent years and barter settlements have been eliminated. Cross- subsidies between residential and other consumers have been reduced, but some cross-subsidies s t i l l remain. Tariffs for residential consumers are subject to approval by the Council o f Ministers.

50. Financial projections, based on conservative assumptions, have been prepared for Minskenergo and Mogilevenergo, and they indicate that the two energos should be able to meet their financial obligations in regard to operations expenses, debt service and contributions to

12

project financing, during the construction and operations phases o f the project. The project investments are relatively small in relation to Belenergo’s overall investment program.

C. Technical

5 1. This energy efficiency project covers 6 sub-projects with a total value o f about US$193.1 million. Approximately 75 percent o f the loan funds are expected to be used for converting existing heat-only-boiler plants to combined heat and power plants ut i l iz ing natural gas. The project studies and engineering designs will be carried out by experienced national design institutes assisted by external specialists for preparation o f bidding documents. Selection o f design parameters, technologies, construction materials and equipment wil l be based on international practices, taking into account national and international experience in combined heat and power generation and specific conditions in Belarus.

52. The rationale for the selection and prioritization o f the investment program i s to: (i) increase efficiency in the utilization o f energy resources and reduce gas consumption; (ii) reduce dependency on imported energy, and (iii) improve security o f electricity and heat supply. The proposed investment program focuses on improving the efficiency o f power and heat generation and thus reducing the need to increase prices o f electricity and heat.

D. Fiduciary

53. Financial management issues. An assessment o f FM arrangements for implementation o f the project has been carried out by the Bank’s FM specialist during July 2008 - March 2009. The FM assessment focused on review o f FM arrangements in the PMU, including budgeting, accounting, financial reporting, auditing and internal controls, and the project accounting system, overview o f the envisaged scheme o f disbursement and f low o f funds and payment o f co- financing. The P M U staff has gained familiarity with IBRD procedures and requirements for financial management and disbursement through implementation o f other IBRD loans. The assessment has concluded that the FM arrangements for implementation o f the project meet the Bank’s FM requirements, and adequate mitigation measures will ensure that the residual risk remains acceptable to the Bank. The details o f the assessment are provided in Annex 7.

54. Under prevailing accounting, financial reporting and auditing regulations in Belarus, most entities prepare their financial statements o n a cash basis. In the case o f the Belenergo system (including Minskenergo and Mogilevenergo), use o f the cash basis i s mandated under an official decree. There i s at present no program at the country or sector level to move towards International Financial Reporting Standards or accrual basis accounting. Therefore, keeping in mind also the longer term sustainability aspects, i t i s judged that i t would be more appropriate for the two energos to continue to utilize cash basis accounting and financial reporting as required within the Belenergo system. Annual audits by external auditors acceptable to the Bank wil l be required for the project financial statements, but wil l not be required for the entity-level financial statements o f the energos. Instead, if required, the cash-basis statements provided by the energos would be supplemented with reviews and/or compilations/reclassifications to enable better interpretation.

13

55. Procurement issues. The P M U has a Director, Deputy Director, Procurement Specialists, Financial Management Specialists, and a Deputy Chief Engineer. A legal expert from the Energy Efficiency Department wi l l provide support to the PMU. The assessment o f the PMU “Belinvestenergosberezhenie” to implement procurement o f the project was carried out in July 2008. Based on the entity’s experience with Bank-financed projects under the Social Infrastructure Retrofitting and the Post-Chernobyl Recovery projects, and the responses received during the assessment o f their capacity, it was concluded that the PMU has sufficient experience to implement the Energy Efficiency Project. However the PMU does not have experience in preparing the Prequalification and Supply and Installation o f Plant and Equipment documents. The Bank provided hands-on training during the appraisal mission and a consultant with experience o f the Bank’s procurement guidelines and particularly in the above-mentioned complex documents wil l provide assistance as and when needed. The P M U staff shall also be trained by the Bank. (See also Annex 8).

56. Two o f the Supply and Installation contracts for conversion o f heat-only-boiler plants wil l be o f a large value and thus a risk for cost overruns. In order to receive adequate interest from bidders to compete o n these contracts, the tenders wil l be announced widely in local and international press. The Bank and the government have agreed that in case o f cost overrun the additional costs wil l be financed by the local financial sources.

57. Supervision wil l need to be more intensive than usual in the first two years o f project implementation due to the large contract for Borisov. More than the normal supervision budget will most l ikely be required. An international consultant wil l be hired to br ief design institute staff on the technical specifications required for Supply and Installation contracts and review the technical specifications once they have been prepared. Procurement supervision wil l be carried out once every six months in order to strengthen the skills o f the P M U in the procurement and implementation o f Supply and Installation contracts. Procurement supervision missions wil l review the progress o f procurement, implementation o f the contracts and provide training as required.

*

E. Social

58. The project wil l not involve changes in energy infrastructure or institutions that wil l pose any adverse impacts o n final consumers, particularly with regard to energy tar i f fs or ownership o f energy generating assets. Moreover, i t is possible that increasing energy efficiency may help mitigate the impact o f possible increases in residential energy prices in the future. As part o f the environmental assessment, the project components and associated short-term environmental impacts expected to occur during the construction phase have been discussed with key stakeholder groups, including: government officials; local NGOs; and local populations and businesses located in Borisov, Mogilev, Rechitsa, Ruba, and Oshmiany.

F. Environment

59. In accordance with the World Bank’s safeguard policies and procedures, the project has been classified as Category B for environmental assessment purposes. There are two separate

14

EAs and EMPs, one for the larger GCCT-based sites in Borisov and Mogilev and one for the smaller gas engine-based CHPs in Borisov, Rechitsa, Ruba and Oshmiany.

60. The project wi l l have predominantly positive impacts on the environment and human health from: (i) decreased amount o f fossil fuels burned at the national level resulting f rom enhanced energy efficiency o f boiler houses, and (ii) reduced air pollution at the national level from reduced amount o f fossil fuels burned.

61. The EMPs include the following: mitigation plan, monitoring plan, institutional strengthening needs, institutional arrangements for environmental management, implementation schedule, and a record o f public consultations. During project implementation, E M P provisions wil l be applied to all activities undertaken under the project. Appropriate mitigation measures specified in the EMP wil l be incorporated as requirements in the bidding document. The contracts will include adequate provisions to ensure that contractors undertake EMP-specified measures.

62. The proposed project is in compliance with the Government o f Belarus and Wor ld Bank regulations, policies and procedures for environmental assessment (EA). The anticipated adverse environmental impacts wil l occur mainly during the construction stage and are l ikely to be site- specific. The project wil l not affect human populations or involve conversion or degradation o f natural habitats, or have a negative impact on forest ecosystems. The proposed mitigation measures will significantly reduce any adverse impacts. Public consultations were held at each project site as described in the EAs.

63. The Belarusian side has committed to regular monitoring o f project impact on the environment. A detailed monitoring program to validate the effectiveness o f the mitigating measures i s included in the EMP. The monitoring program wil l be the responsibility o f the EED, Minskenergo and Mogilevenergo, in collaboration with the environmental authorities.

. 64. The project is assigned an environmental screening category By as i t i s expected to have generally positive impact on the environment. The minor negative impacts which inevitably occur during the c iv i l works will be mitigated by proper planning and adherence to measures described in the Project Operational Manual, specifically the environmental guidelines. The EA has been completed along with the E M P and these documents have been publicly disclosed locally including the NGOs and also disclosed in the Bank's Infoshop on September 16, 2008. The revised site specific EAs were disclosed in the Infoshop on April 9,2009.

15

G. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [ I [XI Pest Management (OP 4.09) [ I [XI Physical Cultural Resources (OP/BP 4.1 1) [ I [XI Involuntary Resettlement (OP/BP 4.12) 11 [XI Indigenous Peoples (OP/BP 4.10) [ I [XI Forests (OP/BP 4.36) [ I [XI Safety o f Dams (OP/BP 4.37) [ I [XI Projects in Disputed Areas (OP/BP 7.60)* [ I [XI Projects on International Waterways (OP/BP 7.50) [ I [XI

H. Polilcy Exceptions and Readiness

65. There are no policy exceptions, and the Project i s ready for implementation.

* By supporting theproposedproject, the Bank does not intend to prejudice thejnal determination of theparties’ claims on the disputed areas

16

Annex 1: Country and Sector or Program Background

Belarus: Energy Efficiency Project

Production gross Production net Net import Consumption gross Losses Consumption net

1. Belarus does not possess a sufficient energy resource base and relies heavily o n the import o f energy resources, which covers about 80% o f the domestic demand, while annual costs related to energy supply make up about 15 percent o f the national GDP. Furthermore, the installed electricity generation capacity o f the Belarusian energy system (about 7,900 MW) i s not sufficient to cover the domestic electricity demand. Thus, in 2007, Belarus generated 3 1.8 TWh and imported 4.34 TWh. Russia i s the main source o f energy resources and electricity imports.

2003 2004 2005 2006 2007 GWh GWh GWh GWh GWh

25,937 30,370 30,113 30,929 30,73 1 23,862 28,048 27,828 28,746 28,898 6,829 3,249 4,043 5,480 4,340

30,691 3 1,297 31,871 32,389 32,572 3,945 3,991 4,033 3,643 3,674

26,746 27,306 2 7,838 28,746 28,898

2. More than 90 percent o f electricity in Belarus i s generated by the combustion o f natural gas. Thus, the Belarusian energy system i s significantly sensitive to the fluctuations o f natural gas prices.

17

3. There has been a rapid increase in natural gas prices imported from Russia. The natural gas price rose from approximately US$47 per thousand cubic meters (tcm) in 2006 to US$lOO per tcm in 2007, and US$129 per tcm in the second hal f o f 2008. I t i s expected that the natural gas price wil l constitute US$148 per tcm in 2009. The natural gas price i s expected to reach the European level by 201 1, which currently exceeds US$300 per tcm.

4. Taking into account the projected increase in electricity demand both in Russia and Belarus, and considering electricity supply security aspects, the GOB puts a high priority on increasing energy efficiency and thus reducing dependence on electricity supplies from Russia, and increasing domestic electricity generation.

5. Belarus has made a remarkable effort to decrease the energy intensity o f i t s economy. During the decade following the mid-1 990s, energy intensity o f the national economy decreased by 49.3 percent, and reached 0.35 toe per thousand 2000 US$ o f GDP as shown in the figure below.

GDP Energy Intensity of Belarus, toe per thousand 2000 US$ (PPP)

v. I V

0.60

0.50

0.40

0.30

0.20

0.10

0.0 I I , , 1996 1998 2000 2002 2004 2006 2008

year

18

GDP Energy Intensity, 2005, toe per thousand 2000 US$ (PPP)

0.6

0.5

! 0.3 5 0 I g 0.2 I

0.1

0

6. The remarkable decrease in energy intensity in Belarus since the m id -1990 '~~ has occurred partly because o f structural shifts in the economy away from Soviet-era infrastructure as this i s becoming obsolete and partly because o f the government's active role in improving energy efficiency o f the industrial and public sectors. The systematic energy efficiency improvement measures in Belarus were initiated by the creation o f the Committee for Energy Efficiency (currently the Department o f Energy Efficiency o f the Committee for Standardization) in 1996. The first national energy efficiency program was approved by the Government in 1996 and was called the National Program for Energy Savings to Year 2000 (NPES 2000) and included the following objectives: (i) identify energy-saving potential and establish the most efficient ways o f i t s realization (ii) maximize utilization o f local fuels and wood production waste, decrease fuel and energy imports (iii) create conditions for reducing energy production costs and increasing product competitiveness, (iv) coordinate the efforts o f and spending by all parties aimed at more efficient utilization o f fuel and energy, and (v) decrease power consumption per gross domestic product. Similarly the second national energy efficiency program for 200 1-2006 was approved in 200 1 and the third national energy efficiency program for 2006-2010 in 2006.

7. As a result, Belarus has succeeded in sustaining and even improving the performance o f i t s energy sector. The investments in the sector were sufficient to maintain sector assets in a satisfactory condition and to carry out modernization projects, which contributed to improved energy efficiency. Thus, in the past five years investments in energy efficiency accounted for about US$l .17 billion, leading to the reduction in energy intensity by 25 percent.

19

8. energy consumption has been stable resulting in a decrease o f the energy intensity.

The figure below demonstrates that since 1997 the GDP has grown annually but the

GDP, Primary Energy Consumption, GDP Energy Intensity (expressed in percent of the 1997 level)

250

200

150

100

50

---- - - - - - - - - - - - . - I.. I I -- I I

0 1 , I , , , I I I

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

year

1 -GDP - - Primary Energy Consumption - - - I GDP Energy Intensity I

9. The above-mentioned programs support the energy efficiency improvements relying on both demand side measures and supply side measures in the industry and public sectors. For i t s part the World Bank has supported the demand side energy efficiency measures in the public sector under the Social Infrastructure Retrofitting Project and the Post-Chernobyl Recovery Project. These projects are improving the energy efficiency o f public buildings; however there i s further potential for demand-side energy efficiency measures in Belarus. The actual results achieved in the two mentioned Bank-financed projects as wel l as f rom the projects financed by the government demonstrate that with demand-side energy efficiency improvements a reduction o f about 15-20% in energy consumption can be achieved. The new project supports the supply side o f the energy chain and i s a part o f an overall least-cost strategy to optimize the entire energy supply chain.

10. During recent years, Belarus has adopted a number o f state programs aimed at the reduction o f energy intensity, increase in the share o f local fuels, and increase in energy security. In 2007, the state program to modernize major energy generating plants was launched. The program stipulates a total investment in the energy sector amounting to approximately US$9 billion. According to the above program, about US$1 bi l l ion wil l be used on the promotion of local fuels and renewable energy, US$5 to 6 bi l l ion wil l be used o n energy saving measures, and approximately US$3 b i l l ion o n the modernization and upgrade o f the energy system. It is projected that as a result o f the implementation o f the program’s objectives, energy intensity of the national economy wil l decrease by 3 1 percent by 201 1 in comparison with 2005 and the

20

share o f local fuels and renewable energy in the fuel mix for electricity and heat generation wil l constitute 20.5 percent by 201 1.

11. According to the Ministry o f Statistics and Analysis o f the Republic o f Belarus, the energy sector has improved i t s financial situation. Beginning in 2003, collections for electricity, heat and gas supply reached 100 percent. The profitability o f the power generation sector increased from 3.0 percent in 2002 to 12.9 percent in 2006.

12. The Ministry o f Energy i s responsible for the management o f the Belarusian energy sector, which embodies three major state owned entities: Beltransgas, an entity responsible for natural gas transit, transmission and storage o f natural gas; Beltopgas, an entity responsible for the domestic exploitation o f natural gas, distribution and supply o f natural gas; and Belenergo, an entity responsible for electricity and heat generation, transmission, distribution and imports o f electricity.

13. Belenergo i s a state owned vertically integrated monopoly. I t consists o f 33 entities, including 6 oblast level energy companies namely, Brestenergo, Vitebskenergo, Gomelenergo, Grodnoenergo, Minskenergo and Mogilevenergo, as wel l as a number o f entities responsible for various services related to the operation o f the energy system o f Belarus. Belenergo i s responsible for the exploitation o f electricity and heat supply sources with significant installed capacities. The Ministry o f Housing and Services i s responsible for the exploitation o f smaller heat supply sources.

14. The main entity in charge o f the development of the energy efficiency improvement strategy i s the Energy Efficiency Department (EED) o f the Committee for Standardization. According to EED, the priority energy efficiency activities for the Republic o f Belarus for 2008 - 2010 are the conversion o f heat loads from boiler houses to CHPs, increase in the use o f secondary energy resources and combustible production waste, increase in use o f domestic fuels and renewable energy sources, putting into operation of power generation equipment, ensuring efficient use o f power production equipment, optimization o f heat supply systems, and implementation o f wide scale investment projects on energy efficiency.

21

Structure o f the Belarus Energy Sector'

Government of Belarus

Ownership

heads

President

Council of Energy Efficiency

ministers, Issues Decrees, Orders I SOEs * Ministry of Economy

1. Ministry of Energy

Policy implementation; - Direct control

t Beltransgas

8 Storage

I v

i I I Beltopgas 1

Tariff regulation

Gas and Electricity Sectors

1 I Transmission 1 Supply i 1 1 -~

The figure was taken from the report "Belarus: Addressing Challenges Facing the Energy Sector" prepared by the World Bank

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Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies B E L A R U S : Energy Efficiency Project

1. The Belarus Social Infrastructure Retrofitting Project (Loan No. 7056-BY and additional financing Loan No. 4876-BY) The original loan for US$22.6 mi l l ion for the Social Infrastructure Retrofitting Project was approved in June 2001, and became effective on December 26, 2001 and was closed on March 3 1 , 2008. The additional financing for the project o f US$15 mi l l ion i s under implementation. The project development objective i s to improve the functional and health environments o f social sector facilities, with particular emphasis on reducing energy consumption. The project wil l retrofit social sector facilities to encourage a more effective use o f resources, reducing operations and maintenance costs in schools, medical and other selected social facilities such as orphanages, and community homes for the elderly and the disabled. These objectives would be achieved by financing: (a) retrofitting o f education, health and other selected social sector buildings with energy efficiency measures, and (b) technical assistance and project management. Project Implementation and Development Objective Ratings are satisfactory.

2. T h e Belarus Post-Chernobyl Recovery Project (Loan No. 4821-BY, US$50 million). The project aims to provide the population residing in the Chernobyl affected area with energy efficient and reliable heat and hot water services in order to improve their living environment. There are three project components. Component 1, the Energy Efficiency Component, improves energy efficiency through upgrading or replacement o f heat production and distribution equipment, and improving thermal insulation and lighting in public buildings. Component 2, the Residential Gas Connection Component, provides household connections to the existing gas distribution network to improve heat supply and replace utilization o f dirty fuels, including those that may be contaminated with radioactive material. Component 3, Project Implementation and Management Support, includes (a) design and supervision for project investments; (b) staffing, equipment, and training; (c) public information; and (d) auditing and other fiduciary or technical services. Project Implementation and Development Objective Ratings are satisfactory.

23

Annex 3: Results Framework and Moni tor ing

BELARUS: Energy Efficiency

Results Framework

1. Results Framework

PDO

The development objective o f the project is to improve energy efficiency in heat and power generation in selected towns in Belarus.

Intermediate Outcomes

Component 1 : Conversion o f existing heat-only boiler plants to combined heat and power plants:

The progress in project implementation w i l l be followed for each project site:

0 S&I contracts competitively awarded

0 Construction progress Commissioning o f project sites and start o f commercial operation

Component 2: Design and Supervision Consultancy:

Site specific designs completed

Component 3: Project Implementation and Management: Training and capacity building o f P M U and other counter parts to implement S&I contracts

Project Outcome Indicators

Site specific indicators (Borisov, Mogilev, Rechitsa, Ruba, Oshmiany, Borisov)

Gassavings 0 Total efficiency o f heat and

power generation

Intermediate Outcome Indicators

Site specific progress (Borisov, Mogilev, Rechitsa, Ruba, Oshmiany, Borisov)

Contract awards by dates

0 Percentage completed 0 Completion by dates

Site specific completion by dates (Borisov, Mogilev, Rechitsa, Ruba, Oshmiany, Borisov)

0 Number o f P M U and counterpart staff trained and capable to use S&I bidding documents 0 Quality and timeliness o f bidding documents

Use of Project Outcome Information

Improvement in energy efficiency in the project sites i s used by public officials to promote hrther energy efficiency programs in Belarus. The results w i l l also be used to demonstrate to private sector investors the viability o f small scale CHPs. Use of Intermediate Outcome

Monitoring Monitored outcome indicators will be used to assess implementation performance o f the project. If the progress i s not as planned, then mitigation measures will be proposed including hrther capacity support to the P M U and consultants.

Monitored outcome indicators wil l be used to assess implementation performance o f the project. If the progress is not as planned, then mitigation measures will be proposed including hrther capacity support to the P M U and consultant.

Annual project reviews during supervision w i l l be used to assess the P M U capacity and skil ls. If needed, further capacity support will be provided.

24

E

52 00, m

0 Y

rD

o o o o o c

- -

o o o o o c

s s 0 0 m m

0 0 0 0 0 0 0 0 0 0 0 0

Annex 4: Detailed Project Description

BELARUS: Energy Efficiency Project

1. The Energy Efficiency Project wil l consist o f the fol lowing three components: (i) conversion o f heat-only-boiler plants to combined heat and power plants, (ii) technical design o f the project sites, and (iii) project implementation and management. The components are described in detail below.

2. Component 1 - Conversion of existing heat-only-boiler plants to combined heat and power plants (US$181.6 million). This component wil l convert existing heat-only-boiler plants to combined heat and power plants (CHPs) at 6 sites in different parts o f Belarus. All plants will use natural gas as the main fuel. The purpose o f the conversion is to improve the energy efficiency in the heat and power generation from about 55-62% in separate heat and power generation plant to about 85% in combined generation. Two o f the sites, in Borisov and Mogilev, wi l l be based on combined cycle technology involving gas turbines, heat recovery boiler, and steam turbine. The planned power generation capacities in the Borisov and Mogilev plants are 65 MW and 15.5 MW with a heat output o f about 45 and 15.7 Gcalhr respectively. The other sites are small and use combined heat and power generation based on gas engine technology with heat recovery. The planned power generation capacity o f the units in these remaining sites varies from 1 MW to 3 MW. The sub-project sites are described below:

Borisov sub-component

a) The proposed project i s to construct a gas combined cycle technology (GCCT)- based CHP in the city o f Borisov on the basis o f the existing boiler house (HOB#3), which i s currently equipped with natural gas-fired water heating boilers and steam boilers with a total installed heat capacity o f 300 MW. The existing equipment was installed during the period 1986-1994. The existing equipment i s outdated and does not meet modern requirements for efficient fuel use. The project foresees the installation o f the GCCT unit with an electric capacity o f 65 MW, which consists o f the gas turbine with a capacity o f 45 MW, a heat recovery boiler and the steam turbine with a capacity o f 20 MW. The installation o f the modern GCCT equipment, which allows for combined generation o f electricity and heat energy, with an adequate capacity factor wil l result in a significant improvement in energy efficiency up to about 85% as wel l as in a reduction o f emissions. The principal scheme o f a GCCT unit i s shown below:

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6 I Feed water tank

Heat recovery steam boiler

L Natural gas* I

I 8 I

I l- Power output w

Gas turbine Generator

Steam turbine Y Power output

w Generator

I DH heat I u exchangers

DH system

Figure: Principal scheme of a GCCT unit

The plant in Borisov is owned and operated by Minskenergo which is a state owned power company responsible for power generation and transmission in the Minsk Oblast. The large heating plants in the Oblast also belong to Minskenergo. The new plant wil l generate heat for the Borisov district heating system and power for Minskenergo.

The existing site o f HOB # 3 is suitable for the new equipment and the existing infrastructure supports the new plant. The existing natural gas connection i s adequate for the new plant. On the power side the plant will be connected to an existing 110 kV electricity substation which i s located at a distance o f about 500 meters from the plant. The district heating connection exists but new pumping arrangements and pipe connections are needed to optimize heat and power generation. The connections to the existing infrastructure on the power and heating side wil l be financed from Minskenergo’s own sources.

Mogilev sub-compon en t

d) An installation o f a gas combined cycle technology (GCCT)-based CHP with an electric capacity of 15.5 MW and about 18.2 MW (15.7 Gcalh) heat i s proposed at the Mogi lev boiler house (HOB#3). The GCCT unit wil l consist o f two gas turbines o f 6 MW each, one steam turbine o f 3.5 MW and a recovery boiler o f 12.5 t/h.

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Currently, HOB#3 i s equipped with natural gas-fired hot water boilers and steam boilers with a total installed heat capacity o f 244 MW. The existing equipment i s outdated and does not meet modern requirements for efficient fuel use. The installation o f a modern GCCT, which allows for combined generation o f electricity and heat energy, with an adequate capacity factor will result in a significant improvement in energy efficiency as wel l as in a significant reduction o f emissions.

e) The plant in Mogilev i s owned and operated by Mogilevenergo, which i s a state owned power company responsible for power generation and transmission in Mogilev Oblast. The new plant wil l generate heat to the district heating system in Mogilev and power to Mogilevenergo.

f) The existing plant area is suitable for the new investments, and the gas connection i s adequate for the new unit. The heat and power connections to existing district heating and power systems do not require major changes.

Sub-components in Retchitsa, Ruda, Oshmiany and Borisov:

The sub-components located in Retchitsa, Ruda, Oshmiany and Borisov aim to convert existing small boiler houses to small scale combined heat and power plants. The planned units wi l l be based on gas engine technology. The electric capacity o f the plants will be 3 MW each except in a small boiler house in Borisov, where the electric capacity will be 1 MW.

The plants wil l generate heat to the local district heating systems which are operated by local district heating utilities under the Ministry o f Housing and Utilities. The power wil l partly be used by the heating companies for their own use and partly sold to the local oblast energo.

In al l the sites the existing infrastructure connections to gas, power and heat networks are adequate and do not need investments.

3. Component 2 - Design and supervision consultancy (US$9 million). T h i s component will cover the technical design and engineering o f the new plants. It has been agreed the Belarusian side wil l finance this component so that Minskenergo and Mogilevenergo will contract local design institutes to do the design works for Borisov and Mogi lev plants. The designs wil l include al l specifications and drawings required for supply and installation bidding documents. The design institutes wil l also participate in the technical supervision o f the implementation. Similarly for the smaller sites in Retchitsa, Ruba, Oshmiany and Borisov the Energy Efficiency Department wil l contract a design institute to do the technical designs and supervision.

4. Component 3 Project Implementation and Management (US$2.5 million). This component wil l finance the project management unit (PMU). The salaries and operating costs will be financed by the Belarusian side. The Bank loan wil l be used to finance annual financial audit contracts and training o f the P M U staff o n procurement and financial management.

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Annex 5: Project Costs

B E L A R U S : E n e r g y Efficiency Project

Local Foreign Total

Project Cost By Component andor Activity US$ mil l ion US$ mil l ion US$ mil l ion Component 1 Conversion o f heat-only-boiler plants to combined heat and power plants

Borisov (65 MW) Mogilev (1 5.5 MW) Retchitsa (3 MW) Ruba (3 MW) Oshmiany (3 MW) Borisov (1 MW)

Component 2 Design and supervision consultancy Component 3 Project implementation and management

Total Baseline Cost Physical Contingencies Price Contingencies

Total Project Costs' Interest during construction

Front-end Fee

31.0 82.0 113.0 5.0 19.8 24.8 1 .o 4.1 5.1 1 .o 4.1 5.1 1 .o 4.1 5.1 0.3 1.4 1.7

9.0 0.0 9.0

2.5 0.0 2.5

50.8 115.4 166.3 1.3 5.3 6.7 4.0 15.9 19.9

56.1 136.7 192.8 0.0 0.0 0.0 0.3 0.0 0.3125

Total Financing Required 56.4 136.7 193.1

'Identifiable taxes and duties are US$ 34.7 million, and the total project cost, net o f taxes, i s US$ mill ion 158.4. Therefore, the share o f project cost net o f taxes i s 82.0%.

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Annex 6: Implementation Arrangements

BELARUS: Energy Efficiency Project

Institutional and implementation arrangements

1. The project will be implemented by the existing Project Management Unit (PMU) that i s successfully implementing the ongoing Bank financed Social Infrastructure Retrofitting Project (SIRP) and Post Chernobyl Recovery Project (PCRP). The PMU has the necessary knowledge and capacity to implement the project. The aim o f the implementation arrangements i s to streamline the project within the existing framework o f implementation and coordination o f the government’s program o f investments in energy efficiency and reconstruction o f the energy infrastructure, to utilize existing capacities, and to avoid additional layers o f authority.

2. The Energy Efficiency Department (EED) under the State Committee for Standardization is the agency responsible for the National Energy Efficiency Program dedicated to improving energy efficiency in Belarus. It i s separate f rom the Ministry o f Energy.

3. The Project Management Unit (PMU - Belinvestenergoberezhenie) is subordinate to the EED. The P M U has a Director and a Deputy Director, who are responsible for implementation o f the proposed Energy Efficiency Project. The P M U is organized into 3 functional sections: Procurement Section and Technical Section, both headed by the Deputy Chief Engineer; and Financial and Economical Section, headed by the head o f the Financial and Economical Section. (See Organization Chart at the end o f this Annex.) The PMU will be responsible for the daily implementation, supervision and monitoring o f the project and adherence to the World Bank requirements, and wil l be the contact point for the Bank team in al l communications. The P M U will coordinate with the project owners (Minskenergo, Mogilevenergo) and the EED on the preparation o f project technical documentation, prepare bidding documents, organize bidding procedures, lead the bid evaluation, coordinate the preparation and signing o f contracts and supervise contract implementation. The P M U wil l also be responsible for monitoring and evaluation o f the project progress and key performance indicators and report to the Ministries and the Bank semi-annually in progress reports. The P M U has adequate and practical knowledge o f Bank procedures. I t also has the technical capacities as well as the necessary linkages to the ministries and Oblasts to prepare and implement the proposed project. The P M U has skilled managerial, technical, procurement and financial management staff which wil l be further trained for the specific needs o f the project.

4. Minskenergo and Mogilevenergo, which are owners o f Borisov and Mogilev boiler houses, have assigned a coordinator (project manager) and deputy coordinator to work with the PMU. Minskenergo and Mogilevenergo will be responsible for the preparation o f the technical specifications, drawings, etc., which the P M U wil l use to prepare the bidding documents. Minskenergo and Mogilevenergo wil l sign contracts with suppliers as the “owner”; the director o f the P M U wil l co-sign contracts as the processor o f loan funds. The owners wil l be responsible for ensuring appropriate technical supervision o f the contracts, accepting the payment orders, and submitting adequate documentation to the P M U so that it can prepare and sign disbursement applications. The PMU’s responsibilities will be to organize the procurement and disbursement procedures in accordance with Bank requirements.

31

5. For the four sites to be converted to small scale combined heat and power plants (Retchitsa, Ruda, Oshmiany and Borisov) the Energy Efficiency Department, through the PMU, has contracted design institutes for the preparation o f technical specifications, drawings, etc. for the bidding documents. A project coordinator wil l be designated for each site, in addition to a contact person at the Energy Efficiency Department.

Procurement Section v v 1 +5 Technical Section Financial and

Economical Section 3

1 + 4 WB bidding Technical Part j Documents ofbidding +

Documents Ah

6. The P M U wil l operate in accordance with the Project Operational Manual (POM) which was approved by the Bank and EED before the negotiations. The P O M outlines the implementation arrangements including procurement, contract management, payment authorization, environmental management, and periodic reporting and relationships between the implementing and beneficiary agencies.

P M U - Belinvestenergoberezhenie, functional structure

32

Annex 7: Financial Management

BELARUS: Energy Efficiency Project

INHERENT RISKS Country level. Rapidly increasing gas prices may afect Belarus ’ ability to provide financing.

Entity level. Minskenergo and Mogilevenergo are not experienced with IFIfinanced projects and procurement rules

Project level. Implementation delays due to delayed availability of counterpart funds Overall Inherent Risk CONTROL RISKS

Staffing -some recently hired staf

Country Financial Management Issues 1. Belarus, a Public Expenditure Review was completed by the Bank in June 2003,

Although no Country Financial Accountability Assessment has been carried out for

Conditions of FM Resid Negotiations Risk Risk Mitigating Measures ual Board or

Risk Effectiveness

S The project i s aligned with the national energy M No efficiency programs which specify funding and their sources.

S P M U will handle fiduciary aspects while Minskenergo M No and Mogilevenergo will handle technical aspects. Resolution specifying responsibilities o f P M U and Energos was issued. The financial monitoring indicators have been developed.

for project funding for each year, starting from June 2009.

S The Bank and P M U will review the budget allocation M No

S M No

S P M U will benefit from the institutional memory. Staff M No

2. A Fiscal Report on Observance o f Standards and Codes was carried out by the International Monetary Fund (IMF) in November 2004. According to the IMF, Belarus meets the requirements o f the fiscal transparency code in some important areas, and there i s a comprehensive legal and administrative fiamework for management o f budget resources. The Budget Systems Law contains an explicit commitment to an open and transparent budget process, and budget coverage improved considerably with the inclusion o f f ive major extra budgetary funds into the Budget in 1998. However, there are several areas where current practices fa l l short o f the fiscal transparency code and improvements are required, such as l imited reporting on the public enterprise sector. Furthermore the authorities are planning a number o f important reforms to further improve fiscal management.

3. accounting standards and auditing standards are not fully compliant with international practices.

Based on the recent draft report on public expenditure management in Belarus, national

Financial Risk Analysis

4. summary o f identified risks and mitigation measures i s as follows:

The overall project residual r isk after the mitigating measures i s acceptable. The

33

and procedures

Budgeting -inaccurate budgeting of use of funds for upcoming periods may result in delays in payment

Funds flow - withdrawal applications may not be acceptable, especially for direct payments or LCs, which have not been used by the PMU Accounting system - Accounting records for the project may be mixed with records of other projects or get lost in a computer breakdown Financial Reporting -As IF& wi l l not be generated automatically, errors due to human factor are

possible Internal Controls and accounting- Improperly firnctioning internal controls may lead to misuse of funds or errors in accounts/reports of the project

Auditing - Project audits may not be delivered on time and be acceptable

Procurement -Lack of PMU knowledge of S & I documents, risk of higher prices for larger contracts, risk of Review Committee comprising ministry staff OVERALL CONTROL RISK

1 OVERALLFMRISK

FM Risk -

S

Risk Mitigating Measures

with experience o f working on other Bank- financed projects will be responsible for implementation o f this project; new staff has attended training and will continue to receive on-the-job training. More detailed monthly budgeting will be based on the agreed project procurement data and contract terms. Based on detailed budgets, payments w i l l be projected and funds transferred to designated account or directly to sumlier Quality o f disbursement documents are to be monitored continuously and during project supervisions; if improvement i s needed, additional trainingheminar can be organized. Direct support from the Bank disbursement specialists will be provided. A separate set o f accounts will be created for the project. The system o f backups envisages that the project related data i s regularly saved on the server and external information storage.

P M U will check the IFRs against the data from Client Connection and bank statements. IFRs are to be prepared by the accountant and verified by the Chief Accountant. P O M has been developed. Adherence to internal control procedures will be verified (1) directly during the Bank’s supervision and (2) indirectly through review o f IFRs and audit reports. A Management Letter on internal controls will be issued by auditors each year. External audit o f project financial statements wi l l be performed on an annual basis, based on TORS agreed with the Bank, by an auditor acceptable to the Bank. The process o f auditor appointment will be monitored by the Bank prior to the audit due date. Consultancy support, training and workshops, clearance o f the Tender Committee. The Bank will monitor the procurement process, especially for large value contracts.

Resid ual

Risk

M

M

M

M

S

M

S

M

M

Conditions oj Negotiations

Board or Effectiveness

N o

No

No

No

No

No

No

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Project implementation arrangements

5. While the Ministry o f Finance wil l be the primary borrower o f the loan, the loan funds wil l be on-lent by means o f Subsidiary Loan Agreement to Minskenergo, Mogilevenergo and the four participating oblast committees. The existing PMU, “Belinvestenergosberezhenie”, wil l be responsible for project implementation, including general project management, project supervision and monitoring, procurement, and financial management including al l disbursements. The P M U is currently responsible for implementation o f SIRP additional financing and PCRP loans; in the past i t had successfully implemented the original SIRP loan. As the original SIRP loan has closed in 2008, i t i s considered that the P M U has sufficient financial management capacity to implement the proposed Energy Efficiency loan. All financial management functions, including withdrawals, operating the Designated Account (DA), accounting, reporting, auditing will be carried out by the PMU, in coordination with Minskenergo and Mogilevenergo, especially in the area o f co-financing, technical aspects o f acceptance o f goods/services, as wel l as accounting and retention o f documents.

Cofinancing

6. Project activities wil l be co-financed, partly from the state budget and partly from own funds of energo companies. Each contract wil l specify the percentage o f required co-financing; contracts could be partially or fully paid from co-financing. For payment f rom the state budget, the funds wil l be disbursed through the treasury system to suppliers and contractors. For payments f rom the energos’ own funds, payments wil l be done from the existing accounts o f the energo companies directly to suppliers and contractors. The P M U wil l keep al l accounting records of payments o f co-financing for projects fully or partially paid from co-financing.

Staffmg

7. Regular employees o f “Belinvestenergosberezhenie” (the PMU) wil l work o n project implementation. Specifically, the head o f the economic-finance department and one o f the accountants wil l work on financial management o f the project. The P M U director and head o f the economic-finance department were appointed in 2008; they are relatively new to Bank- financed projects, but they have become familiar with the rules and procedures in Bank-financed loans, and will continue to be supported by existing financial staff who have experience from working on SIRP and PCRP loans.

8. The head o f the economic-finance department would have the role o f oversight o f the financial management function, and would hold overall responsibility for periodic reporting to various controlling authorities. One o f the existing accountants, currently responsible for day-to- day operations in existing Bank loans has been appointed to carry out day-to-day accounting o f project and counterpart funds. The accountant has earlier received on-the-job training and attended some o f the Bank organized training on financial management; additional training wil l be provided as necessary.

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Budgeting

9. The responsibility for ini t ial preparation o f the project budgets will be with the PMU, specifically with the head o f the economic-finance department in cooperation with the procurement specialist and the director o f the PMU. The project budgets wil l be prepared based on the procurement plan agreed with the Bank, and include detailed projections o f payments on at least a quarterly basis. The quarterly payment budgets wil l need to be included in the quarterly IFRs. The project budgets do not need to be included in the State budget. However, counterpart financing paid from the state budget will need to be included in the state budget o n an annual basis.

Funds flow

10. The funds f low wil l be either v ia direct payments from the Loan account (for larger payments), v ia the letter o f credit mechanism, or through the designated account that wil l be opened in U S dollars in BelInvestBank, a local state owned bank, acceptable to the WB, where DA for PCRP i s currently operated. A transit account in Belarus Rubles can be opened in BelInvestBank for making payments in the local currency, if necessary. Both the designated account in U S dollars and the transit account wil l be operated by the PMU, and the payment orders wil l need to be authorized by the head o f economic-finance department and the director o f the P M U (or their appointed deputies).

11. diagram are detailed in the Project Operations Manual (POM).

The funds f low and disbursement procedures including controls and f low o f funds

Accounting Policies and Procedures

12. The accounting for the project wil l be done o n a cash basis with additional information provided for commitments on signed contracts. The accounting records will be maintained in sufficient detail to record expenditures in U S D and local currency, by project component, by source o f finance, and also to record balances and movements in designated and loan accounts, and transit account if used. The P M U or the energo wil l retain originals o f a l l documentation for the duration o f the project.

Reporting

13. Reporting for the project wi l l fol low the Bank requirements for the quarterly un-audited IFRs preparation, and the PMU would also submit al l project reports to various government authorities as required by the national legislation. All financial and monitoring reports will be prepared by the P M U accountant, in cooperation with the procurement specialist as necessary and reviewed by the head or deputy head o f the economic-finance department, prior to submission.

14. The P M U will prepare quarterly IFRs and send these to the Bank within 45 days after the end o f each calendar quarter. The sample IFRs have been developed and were agreed at Negotiations. This format includes the fol lowing reports: (i) sources and uses o f funds (ii) uses o f funds by components - consolidated (iii) Designated accounts statement. The report includes

36

data for al l components, including co-financing, and information o n movement in the designated and transit accounts.

Accounting and reporting of the Energo companies

15. Under prevailing accounting, financial reporting and auditing regulations in B e l m s , most entities prepare their financial statements on a cash basis. In the case o f the Belenergo system (including Minskenergo and Mogilevenergo) use o f the cash basis i s mandated by government decree. At present there i s no program at the country or sector level to move towards International Financial Reporting Standards, or even accrual basis accounting. Therefore, keeping in mind the longer term sustainability aspects, i t i s judged by the project team that no additional requirements would be imposed o n the two energos, and it would be more appropriate for the two energos to continue to utilize cash basis accounting and reporting as required within the Belenergo system.

16. The two energos are not required by legislation to undergo periodic audit. The project team has decided not to require annual audits o f the financial statements o f the energo companies by external auditors acceptable to the Bank. However, if required, the cash-basis statements provided by the energos would be supplemented with reviews and/or compilations/reclassifications to enable better interpretation and reliability.

Information system

17. The P M U has an accounting system, which is used for the existing and previous loans, and will continue to be used for accounting o f this loan. A segregated set o f accounts wil l be used for this project. The accounting system o f the P M U has two elements; both are protected by a system o f passwords and backups.

a. General accounting module 1-C “Prosto Buhhalteria” - to account for a l l transactions o f P M U under local accounting standards

b. Loan accounting module “Zajm” - to record al l details o f transactions for loan funds and counterpart funding in order to comply with WB requirements and generate periodic reports to the Bank.

The energo companies wil l keep records only related to their part o f the project as required by the accounting regulations, and the PMU will do regular reconciliation o f own records with records o f the energo companies.

Internal controls

18. The internal control framework for the Project was designed to minimize the risk o f misuse o f funds. Internal controls include review and authorization, segregation o f duties, regular accounts reconciliation, and regular reporting. The internal controls include procedures mentioned in relevant sections above as wel l as the following:

a. Signing ofcontracts Contracts shall be signed by the energo company, and by the supplier o f the goods/services, and co-signed by the P M U director.

37

b.

C.

d.

e.

f.

Acceptance ofsewices. The acts and invoices will be verified and approved by the technical staff o f the beneficiary company and signed by the director o f the beneficiary company then reviewed and approved by the financial staff o f the PMU, and then finally countersigned by the P M U director. Payments wil l be processed by the PMU after al l necessary authorizations. Technical supewision/technical audits. Quality o f works wil l be continuously verified by technical specialists o f Minskenergo and Mogilevenergo, and also monitored during project supervision missions. Direct payments to contractors. Some o f the payments o f project funds wil l be done via direct paymentshpecial commitments, upon provision o f full set of supporting documents to the Bank. Authorization of applications. The withdrawal applications wil l be prepared by the PMU, authorized by the P M U director or his deputy. Control over Designated Account and Transit Account. All payments from Designated/Transit Accounts wil l be subject to authorization by the P M U head of economic-finance department and the P M U director. Regular reconciliations with the bank statements and Client Connection wil l be performed.

19. Internal controls have been detailed in the FM sections o f the Project Operational Manual (POM), and the document may need to be further revised and detailed during project implementation. The P O M will be a detailed practical guidance to project staff during project implementation.

External audit

21. Annual audit o f the Project financial statements wil l be required, and wil l be performed by acceptable private auditors on terms o f reference (TORs) acceptable to the Bank. The audit TORs will be based on a format which has been prepared and agreed during the Project Negotiations. The Project audit report wil l include an opinion on the project financial statements (including statements o f expenditures), the Designated Account and SOEs. Auditors’ management letter wil l be required based on the audit, and auditors would comment on weaknesses o f internal controls and give their other observations and recommendations. The annual audited financial statements, including management letter, will be provided to the Bank within six months after the end o f each fiscal year.

The energo companies, Minskenergo and Mogilevenergo, are beneficiaries o f the loan but not implementing entities, and hence their audit i s not required by the Bank’s audit policy.

22. Moreover, the financial audit o f energo companies was not judged by the project team to be critical for ensuring project success and for achievement o f the development objectives. Audits o f energo companies are not required by legislation, and there i s at present no program at the country or sector level to alter the audit environment. Therefore, assurance procedures agreed by the project team wil l be l imited to reclassification and possibly review o f the entity financial statements.

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Disbursement Arrangements

Allocation of loan proceeds

Amount of the Loan Allocated

(US$ million)

Category Percentage of Expenditures to be

Financed

Supply and installation contracts

Consultancy and training contracts

Front end fee

124,400,000 80%

287,500 100%

3 12,500 100%

TOTAL

Disbursement procedures

125,000,000

23. Bank funds would be disbursed under the Bank’s transactional procedures including direct payments from the loan account, reimbursement and Special Commitments and disbursements through the Designated Account using full documentation against contracts for works US$200,000 equivalent or above, goods and consulting services contracts for f i r m s US$lOO,OOO equivalent and above and US$25,000 equivalent or more against contracts for individual consultants. Statement o f Expenditures (SOEs) would be used against contracts less than US$lOO,OOO for goods, less than US$200,000 for works, less than US$lOO,OOO for consulting f i r m s and less than US$25,000 for individual consultants. Supporting documentation for SOEs including completion reports and certificates would be retained by the Borrower and made available to the Bank during Project monitoring and supervision visits. This documentation would be retained for at least one year after receipt by the World Bank o f the audit report for the year in which the last disbursement was made.

Designated Account

24. For the purposes o f the Project, a Designated Account (DA) may be opened and managed at BelInvestBank which i s one o f the commercial banks acceptable to the World Bank including appropriate protection against set-off, seizure and attachment. The ceiling for the Designated Account wil l be US$5.0 million. The frequency o f reporting eligible expenditures paid from the Designated Account would be on a monthly basis, supported by necessary documentation as stated in the Disbursement Letter and along with the DA bank statement and a reconciliation o f the DA bank statement.

Plan for periodic supervision visits

25. The project supervision wil l be dimensioned using the risk based supervision model and will cover all aspects o f FM arrangements for Project implementation at the PMU and also at the energo companies. Particular attention would be paid to the identified risky areas, internal

39

controls review, and specifically interaction between P M U and energo companies, in which the PMU and energo companies have no prior experience. Preference, where possible, will be given to jo int financial management and procurement supervision. During project implementation, the Bank wil l routinely review the project’s IFRs and the project’s annual audited financial statements and auditor’s management letters.

40

Annex 8: Procurement Arrangements

BELARUS: Energy Efficiency Project

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and Credits” dated May 2004, revised October 2006; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004, revised October 2006, and provisions stipulated in the Loan Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time Erame as agreed between the Borrower and the Bank are detailed in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice was published on January 21,2009.

2. Procurement of Works: N o works contracts are foreseen in the project.

3. Procurement of Goods/Supply and Installation: Goods procured under this project will include (i) Conversion o f Heat Only Boilers (HOB) to Combined Heat and Power (CHP) plants based on the gas combined cycle technology (GCCT) for Borisov; (ii) Conversion o f HOB to CHP based on GCCT in Mogilev; and (iii) 4 lots o f Conversion o f HOB to mini-CHP. Prequalification o f bidders, using the Bank’s Prequalification Document, wil l be carried out for all above-mentioned. The Supply and Installation o f Plant and Equipment documents wil l be used for all packages.

4. Procurement of non-consulting services: N o non-consulting services are foreseen in the project.

5. Selection of Consultants: Consulting services are foreseen at this stage only for annual financial audits which wil l be based on the short l i s t o f local f i rms for contracts estimated to cost $100,000. If other consultancy services are needed, it wil l be reflected in the updated Procurement Plan and contingency funds wil l be used.

6. contracts will be carried out by the Bank team.

Training of PMU Staff: Training on Supply and Installation bidding procedures and

7. Operational Costs: The loan will not finance any operational costs.

B. Assessment of the Agency’s Capacity to Implement Procurement

8. Procurement activities wil l be carried out by the Project Management Unit (PMU), Belinvestenergosberezhenie. The P M U has a Director, Deputy Director, Procurement Specialist, Financial Management Specialist and a Chief Engineer. The Legal Expert in the Energy Efficiency Department wil l provide support to the PMU.

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9. The bidding documents wil l be prepared by the P M U procurement staff in close collaboration with the technical staff o f Borisov, Mogi lev and other clients under the Project. The technical experts o f the clients will be responsible for technical aspects (including the technical specifications). Evaluation o f bids or proposals wil l be conducted by the Tender Committee in the PMU. The Evaluation Reports will be cleared by the Review Committee, which is represented by the Ministries and the technical staff o f the clients before sending the reports to the Bank for no-objection. Once the Bank gives its no-objection, no further changes to the Report wil l be permitted. The P M U began preparation o f the Bidding Documents soon after the appraisal mission and it i s expected that the first bidding document wil l be sent for review by the Bank shortly.

10. An assessment o f the entity to carry out procurement was undertaken by Ms. Angelica Fernandes on July 24, 2008 at Minsk. This assessment reviewed the organizational structure for implementing the project and the capacity o f the project’s staff responsible for procurement.

11. The r isks identified in the assessment and the related mitigation measures are summarized below:

Risk Description

Lack o f knowledge in the use o f the prequalification and the supply and installation o f plant and equipment documents

Review Committee comprises representatives o f the Ministries

Legal expertise

Risks o f higher prices for the two large value contracts

Overall Rating: Overall project r

Rating

Substantial

Substantial

Moderate

Substantial

k for procurement i s rated substant

Mitigation Measures

(i) A consultant to provide procurement support to the PMU; (ii)Provide training during supervision missions; (iii) recruited consultant with knowledge o f Bank guidelines and use o f the documents to provide hands-on training; and (iv) attend the Bank’s workshops when available

The Tender Committee shall clear the evaluation reports with the Review Committee before sending to the Bank for no- objection

A legal expert from the Energy Efficiency Department wil l provide support to the PMU.

(i) GPN published on January 2 1, 2009; (ii) Advertise widely; (iii) Contact qualified companies and encourage them to bid. If this fails (i) increase the contingency in the Loan; (ii) request Belarus to finance more o f the project.

11.

42

C. Governance and Anti-Corruption

12. The Bank’s Anti-Corruption Guidelines (“Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”) dated October 15, 2006 wil l be adopted by the Government for the implementation o f the project. This requirement i s included in the Loan Agreement.

13. The P M U and the Bank will pay particular attention to the composition o f the evaluation committees, which wil l include members o f highly qualified technical experts and without conflict o f interest. Procurement training for the potential members o f evaluation committees wil l be organized in connection with the project launch workshop. In addition, the PMU will take the fol lowing measures in order to ensure that the loan proceeds are used economically and for the purpose intended:

a. In addition to the publication o f procurement notices and contract award information as required by the Bank Procurement and Consultant Guidelines, al l procurement notices and contract award information wil l be published in the national gazette and on the project’s website.

b. Based on the applicable law, a br ie f document wil l be prepared on ethical standards and code o f conduct to be followed by the P M U staff, which wil l be made available in hard copy to al l staff involved in project implementation and the project’s web site;

c. Each staff involved in procurement, including each member o f a tender or evaluation committee, will be required to certify in writing that his or her involvement does not create any conflict o f interest, i.e., relationship with a supplier or consultant, etc.;

d. Put in place the necessary mechanisms to ensure that suppliers and contractors are paid according to contract terms without delays;

e. T o bring to the Bank’s notice each and every complaint received from any supplier or consultant relating to the procurement process, and to record and dispose o f these complaints promptly and diligently; and

f. T o maintain up-to-date procurement records and to make these available to the Bank staff, auditors, etc.

D Procurement Plan

14. The Borrower and the Bank during negotiations agreed o n a Procurement Plan for project implementation which provides the basis for procurement methods. The agreed plan wil l be available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual

43

project implementation needs and improvements in institutional capacity. There wil l be no post review contracts.

E. Frequency of Procurement Supervision

15. I t i s recommended that supervision be carried out once every six months in order to strengthen the skills o f the PMU in the procurement and implementation o f the supply and installation contracts. The supervision missions, including procurement and technical specialists, wil l review the progress o f procurement, implementation o f the contracts and provide training if necessary.

F. Others

16. The start dates are tentative.

Procurement packages with methods and time schedules are shown on the next page.

44

m 0

7

'I 7

+

c $8 e 8 Z E ,"a + 0 0

.? I * I

"

Annex 9: Economic and Financial Analysis

BELARUS: Energy Efficiency

Economic Analysis

1. This project i s designed to improve the efficiency o f Belarus’ heat and electricity generation systems by replacing the current heat only boilers (HOBS) and gas-fired condensing power plants with combined heat and power plants (CHP). The CHP plants are substantially more efficient as i s illustrated below.

2. Using the Borisov 65 MW CHP sub-project as an example, the figure below shows how much fuel could be saved by using combined heat and power generation (a CHP plant) as opposed to separate heat and electricity generation to cover a given heat and electric demand. With separate generation, electricity i s produced by a condensing power plant and heat i s produced separately by a HOB. The total fuel consumption in this case i s 2,022.3 GWh. With combined generation, heat and electricity are produced by a CHP plant with total fuel consumption o f 1,458.3 GWh. The fuel savings resulting f rom the CHP operation is 564 GWH or 28%.

Figure: Fuel Savings for Heat and Electricity Supply from Borisov 65 MW CHP sub-project

1458.3 i

Cogeneration

Losses

Separate generation Losses

106.8 fl

Losses 612.3 Energy saving in cogeneration

2022.3 - 1458.3 = 28% - -

2022.3

2022.3

3. In the project two different technologies wil l be used for constructing the new CHPs. The CHPs in Borisov and Mogi lev wil l be based on gas combined cycle

46

technology with a gas turbine, heat recovery boiler and steam turbine. The estimated efficiency o f such units i s about 85%. The smaller CHPs under this project will be based on the gas engine technology where the total efficiency wil l remain somewhat lower, about 83 %.

4. An economic analysis was conducted for each investment under the project in order to calculate i t s economic rate o f return (ERR) and net present value (NPV). The methodology, assumptions and results o f the cost-benefit analysis are summarized below.

5. Economic Costs. The economic costs o f each sub-project include (a) total investment costs o f the energy generating equipment, construction costs, and connection costs to gas, power and district heating networks, (b) operations costs including fuel costs, electricity consumption for auxiliaries, operation, repair, and maintenance costs etc. Taxes including import duties (if any) and VAT are excluded.

6. The main economic benefit i s an increase in energy efficiency, which results in fuel savings (reduction in natural gas usage) during the production o f heat and electric energy. The total annual reduction in natural gas usage from al l sub-components i s estimated at 88.3 mi l l ion cubic meters.

Economic BeneJits.

7. Local pollution emission reduction benefits are estimated at the level o f about 165,200 tons per year o f carbon dioxide (COz). It i s dif f icult to value this C02 reduction because the Kyoto Protocol wil l have ended before the new CHPs start production and because in any case Belarus has not yet completed i t s ratification o f Kyoto. Given this high degree o f uncertainty, for the base case the average price prevailing at the voluntary carbon markets o f US$ 8 per ton o f carbon dioxide was used to estimate the environmental benefits o f the project.

8. Other benefits are (i) the reduction o f operating and maintenance costs caused by the installation o f new equipment, which requires less maintenance, (ii) increase in generating capacity o f 90.5 MW. The reduction in operating and maintenance cost was quantified and included in the analysis. N o value was assigned to the increase in generating capacity since no market price was available in Belarus for that service. If, however, a recent value in South Eastern Europe (US$220,000 per MW per year)5 were used, the value o f this additional 90.5 MW o f capacity would be US$19.9 mi l l ion per year.

9. Methodology. In order to assess fuel savings resulting from the project, two scenarios were assessed. The first scenario is without project implementation and the second i s with project implementation. For each scenario the amount o f natural gas used i s calculated and then the difference i s the reduction in gas usage resulting f rom the project.

10. Without project implementation, the heat demand would be provided by existing heat only boilers (HOBs) and the electricity demand would be provided by existing gas-fired condensing power plants. The fuel consumption by HOBs i s calculated

Bank Report number 34774, ICR for the Power System Improvement Project in Macedonia. 47

based on the actual specific fuel consumption and the amount o f heat energy generated per annum6. The fuel consumption by condensing power plants i s estimated based on the actual specific fuel consumption o f the Lukoml gas-fired condensing power plant (Belarus) assuming that the same amount o f electricity would b e generated there instead o f the CHP plants under the project. Transmission losses o f two percent are also taken into account since they occur during the transmission o f electricity from the condensing power plants, which could be avoided in the case o f the CHP plants located near consumers.

11. With project implementation, combined heat and power plants (CHPs) wil l replace the heat generation in heat-only-boilers and condensing power generation The CHP plants wil l co-generate both heat and electricity with substantially higher efficiency (up to 25- 30 percent increase), resulting in reduced gas consumption. The difference in fuel consumption under without project and with project implementation scenarios represents fuel savings.

12. Assumptions

a. The economic price o f natural gas o f 300 USD per thousand cubic meters i s used in the economic analysis for al l the investment sub-projects. I t i s much higher than the current gas price in Belarus, but lower than the current gas price in Central Europe. This gas price i s in l ine with the long term projection o f the IEA for the gas price in Central Europe.

b. The efficiency o f the currently installed equipment i s estimated as follows:

i.

11.

111.

iv. v.

Existing HOBs - 90.4% and 92.1% depending on site specific boiler data Existing condensing power plant (Lukoml) - 38.8% Total efficiency o f heat and electricity generation without project implementation i s approximately 60% N e w gas engine fired CHP plants - 83% N e w combined cycle CHP plants in Borisov and Mogi lev 85%

.. ...

c. A discount rate o f 10 percent i s used to calculate the net present value.

d. Expenditures on labor costs are the same both for the “with-project” and the “without-project” scenarios since no new workers are expected to be hired but rather some o f the existing staff wil l be trained to use the new units.

In the case o f converting HOBs into small scale CHP by installing gas engines, the capacity o f the latter i s chosen based on the average off-heating season hot water supply (HWS) load (under the condition that the accumulating tanks w i l l be installed), i.e. the installed heat capacity o f a gas engine matches the average off-heating season HWS load. Thus, gas engines will fully cover HWS load during the off-heating season and partially cover HWS load during the heating season, with the remaining part o f heat demand covered by the existing equipment (HOBs). Therefore, in order to conduct CBA for th is component, the amount o f heat used to cover the average off-heating season HWS load throughout the year i s used to estimate fuel consumption o f the existing equipment.

48

13, Investment costs (without taxes) are provided in the table below.

Sub-project

Borisov

Mogilev

3 MW gas engine u n i t s 1 MW gas engine unit

Description Investment Cost, US$ million

Gas combined cycle CHP 65 92.7 MW o f electricity and 52.3 MW heat. Gas combined cycle CHP 15.5 24.8 MW o f electricity and 18.2 MW heat 3 gas engine units, 3 MW Gas engine, 1 MW 1.7

5.1 each (15.3 in total)

14. The calculated ERR for the whole project i s 18.8% and the NPV is US$62.6 million, confirming the economic viability o f the project. The ERRS o f the individual sub-projects vary between 16.1 % and 2 1 -2%.

15. A sensitivity analysis was conducted using the fol lowing variables: (i) natural gas price decrease o f 20% to US$240 per thousand cubic meters, (ii) natural gas price increase o f 20% to US$360 per thousand cubic meters, (iii) cost overrun o f 10 %, (iv) a cost overrun o f 20%.

M a i n Economic Indicators

Financial Analysis

16. Project- Level Financial Analysis: Financial internal rates o f return (FRRs) have been estimated for the Borisov and Mogi lev components based on the incremental costs (capital and operating), and incremental benefits (net energy cost savings). Cost and benefit streams for the economic analyses have been adjusted to derive the financial cost and benefit streams. The financial prices for gas purchase are assumed to progressively increase fiom the current levels to the economic levels (US$300/1,000 m3

49

by 2012. The base FRRs are estimated at 14% for the Borisov component and 13% for the Mogilev component. Sensitivity analyses have been carried out to estimate the effects on the FRRs o f changes in key underlying parameters including capital costs and net fuel savings. Results are summarized in the fol lowing table.

Base FRR

14%

13%

Component Sensitivity (Capital costs + 20%)

11%

10%

Borisov component

Mogilev component

Sensitivity (net energy cost savings - 20%)

10%

10%

17. Financial Sustainability: The two participating energos, Minskenergo and Mogilevenergo, are member enterprises o f Belenergo, the entity which i s responsible for electricity and heat production and supply in Belarus. Belenergo consists o f six regional energos and 27 service and other organizations. It serves as the coordinating agency within its member electricity and heat supplier organizations. Belenergo prepares plans for the sectors as a whole, including energy balances, and coordinates imports and exports o f electricity. Information regarding Belenergo i s summarized in Table 1 to this Annex.

18. Tariffs for Belenergo are set by the Ministry o f Economy, which acts as the regulating authority. The tariffs are set on a cost-plus basis for the Belenergo system as a whole. Since cost structures and consumer composition vary among the regional energos, this results in some energos making a profi t whi le others make a loss. Belenergo then carries out inter-energo adjustments and transfers taking into account their financial needs. The overall tariffs include a provision for some investment financing but the levels are not sufficient for the energos to carry out al l the required investments entirely from internal funds. In recent years, the Belenergo system has there fore relied on borrowing from local and foreign sources to supplement the internal funds.

19. Tariffs for the municipally-owned electricity and heat plants are set by the Ministry o f Economy but are also subject to approval by the regional level committees involved.

20. Prior to 2001, the electricity and heat sector faced substantial financial deficits as a result o f (i) l o w tariffs, (ii) extensive cross-subsidies, and (iii) weak financial payment discipline. The Government undertook a major reform starting in 2001 as a result o f which: (a) tariffs have been increased to cost-recovery levels (at the level o f Belenergo), (b) cross-subsidies between residential and non-residential consumers have been reduced, and (c) payment discipline has been strengthened, including requiring consumers to pay

50

current bills in full. There has also been a progressive collection o f arrears. The energos report that collection rates (annual collections/annual billings) are currently at or around 100%.

2 1. Minskenergo and Mogilevenergo (the participating energos): Basic system information and financial statements for the two energos are given in Tables 2 to 5 at the end o f this Annex. Under prevailing accounting and auditing regulations in Belarus, the Belenergo system i s mandated to produce i t s statements on a cash basis. Cash-basis income statements and cash f low statements for the period 2005 to 2008 (plan) are given in Tables 3 and 5 Both energos are reporting making a net prof i t before taxes.

22. Financial projections: Projections up to the year 2016 are presented in Tables 3 and 5. The projections are based on conservative assumptions as to growth o f electricity and heat sales. The main assumptions are the following:

0

0

0

Electricity and heat sales volume to grow annually by 1% per year. Internal gas purchase prices to be progressively adjusted to international levels (assumed at USD 300 per 1,000 m3 by 2012). The two energos will realize progressive operating efficiency improvements (as a result o f their ongoing investment programs) that would help reduce the full impact o f the increase in natural gas prices. Other cash operating expenses to move in l ine with domestic inflation. Electricity and heat tariffs to be adjusted annually each year to enable maintaining in real terms the level o f prof i t planned for in 2008

0

0

23. Based on the foregoing, the projections indicate that the two energos would be able to meet their financial obligations in regard to operating expenses, debt service and internal contribution to investment financing in the project construction and operation periods.

51

Table 1: Belenergo: Summary Information

Electric Power Capacity Minskenergo RUE Mogilevenergo RUE Other regional energos

Total capacity Electric Power Generation Minskenergo RUE Mogilevenergo RUE Other regional energos

Total generation Electricity imports from abroad Electric Power Sales Minskenergo RUE Mogilevenergo RUE Other regional energos

Heat Production Minskenergo RUE M og ileven ergo RUE Other regional energos

Total production Heat Sales Minskenergo RUE Mogilevenergo RUE Other regional energos

Total sales

Total sales

Belenergo Financial Summary Operating revenues (net of taxes) Operating expenses Operating profit Income before tax Tax on income Net income after tax Current assets Net fixed assets Total assets Current liabilities Medium & long term debt Equity & reserves Total liabilities & equity

Unit - MW MW MW MW

GWh GWh GWh GWh GWh

GWh GWh GWh GWh

000 Gcal 000 Gcal 000 Gcal

000 Gcal 000 Gcal 000 Gcal 000 Gcal

BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn BYR bn

1814 558

5347 7719

7502 1599

21 012 301 13

9793 2910

151 35 27838

13573 5449

16415 35437

1 1720 5076

14884 31 680

4721 41 98

523 387 221 166

1102 5485 7707 1781

59 5867 7707

1814 558

5341 771 3

7836 1590

21 504 30930

9885 3046

1581 5 28746

13787 5573

17060 36420

11 909 5203

15566 32678

571 8 5002 71 6 528 264 264

1333 71 00 9473 1480 382

761 1 9473

1766 558

5324 7649

7307 1451

21974 30732

10035 3049

15816 28900

12700 5224

18495 3641 9

10954 4880

15260 31094

7269 6605 664 51 4 240 2 74

1431 8369

11128 1481 398

9249 11128

I

52

Table 2: Minskenergo: Basic System Information

2005 2006 Actual Actual

Electricity generation 8 supply Thermal generation Hydro generation Total generation

Own consumption Purchases from Belenergo system (including imports) Electricity supply Transmission & distribution losses Losses (YO) Electricity sales

Residenlial consumers Industrial consumers Other consume6

Heat production 8 supply Heat production Steam production Total heat and steam production Own consumpSon Heat and steam sales

Residential consumers Other consumerS

Electricity sales prices (excluding VAT 8 taxes) Residential consumers Industrial consume6 Govt. &budgetary institulions Other consumers

Heat and steam sales prices (excluding VAT 8 taxes) Residential consumers Industrial consume6 Govt. &budgetary institutions Other consumers

Electricity, gas and fuels purchases 8 average prices Electricity purchase volume Average electricity purchase price Gas purchase volume Average gas purchase price Fuel oil purchase volume Average fuel oil purchase price

Average electricity sales price

Average heat and steam sales price

2007 2008 Actual Plan

Unit

GWh GWh GW h GWh GWh GWh GWh

% GWh GWh GWh GWh

000 Gcal 000 Gcal 000 Gcal 000 Gcal 000 Gcal 000 Gcal 000 Gcal

BY WkW h BYWkWh BYWkWh BYWkWh BYWkWh

BYWGcal BYWGcal BYWGcal BYWGcal BYWGcal

GW h BYWkWh

mn m3 5Y WOO0 m3

bns BYRlton

7502 0

7502 722

4579 11359 1566

14 9793 2170 5265 2358

12720 855

13575 1855

11720 8323

3397.0

73.2 127.2 101.1 114.9 111.7

25729 34721 31547 34890 28125

4579

3260 131844

70606 201 820

7836 0

7836 723

4494 11607

1722 15

9885 2123 5313 2449

12876 91 1

13787 1878

11909 8488

3421 .O

77.4 148.8 117.6 136.0 129.5

26850 38636 33882 38635 29900

4494

3343 137072 123962 250893

7307 0

7307 676

5118 11749 1714

15 10035 2262 5306 2467

11852 848

12700 1746

10954 7894

3060.0

92.7 201.7 169.4 183.8 172.1

31155 59687 50198 58958 38385

5118

3178 261809 24704

302224

8095 0

8095 759

4549 11885 1720

14 10165 2411 5307 2447

12456 890

13346 1817

11529 8328

3201.0

107.4 228.3 212.1 220.8 197.4

31303 66131 55590 65773 40254

4549

3470 327096

31400 340867

53

Table 4: Mogilevenergo: Basic System Information

2005 Actual

Electricity generation & supply Thermal generation Hydro generation Total generation

Own consumption Purchases from Belenergo system (including imports) Electricity supply Transmission & distribution losses Losses (%) Electricity sales

Residential consumets Industrial consumers Other consumets

Heat production & supply Heat production Steam production Total heat and steam production Losses Heat and steam sales Electricity sales prices (excluding VAT & taxes) Residential consumers Industrial consumes Other consumers

Heat and steam sales prices (excluding VAT &taxes) Residential consumers Industrial consumes Other consumers

Electricity, gas and fuels purchases & average prices Electricity purchase volume Average electricity purchase price Gas purchase volume Average gas purchase price

Average electricity sales price

Average heat and steam sales price

2006 2007 2008 Actual Actual Plan

Unit - GWh GWh GWh GWh GWh GWh GWh

% GWh GWh GWh GWh

000 Gcal 000 Gcal 000 Gcal 000 Gcal 000 Gcal

3YWkWt 3YWkWt 3YWkWt 3YWkWk

3YWGca 3YWGca 3YWGca 3YWGca

GWh 3YWkWt mn m3

m/ooo n '

1582 17

1599 243

2005 3360 450

13 2910

402 1880 629

3609 1841 5449 373

5076

75.7 1 17.5 98.6

125.4

28661 23054 32012 27382

2005 50.4 1079

130683

1576 15

1590 252

2139 3478 432

12 3046 420

1957 669

3671 1903 5573 370

5203

89.3 139.6 11 7.0 149.0

33894 261 68 35668 30099

21 39 51.9 1000

136820

1437 14

1451 240

2288 3499 450

13 3049 448

1954 647

3323 1901 5224 344

4880

107.0 189.7 172.4 198.5

36087 44200 531 45 43793

2288 79.0 955

261 180

1479 15

1494 242

2219 3471 447

13 3025 453

1931 641

3392 1828 5220 375

4845

115.4 216.3 207.5 215.3

36556 54231 58047 49331

2219 101.4

938 327519

55

c c c c C C C C C C E C C C C C n n n n n n n n n n n n n n n ~

m m m m m m m m m m m m m m m u F F F ? F F F F F F ? F F F F ! c c c c c c c c c c n n n n n n n n n n

Annex 10: Safeguard Policy Issues BELARUS: Energy Efficiency Project

Environmental

OP 4.01 Environmental Assessment (EA)

1. The proposed Energy Efficiency Project i s in compliance with the environmental requirements o f the Government o f Belarus and the Wor ld Bank. In accordance with the World Bank Environmental Assessment (EA) safeguard pol icy and procedures OP/BP/GP 4.01 the project has been assigned Category B and an Environmental Assessment and an Environmental Management Plan i s required.

2. Paragraph 5 below contains summaries o f (i) impacts, which may occur during the construction and operation stages; and (ii) summary o f measures proposed to mitigate the impacts during the construction and operation stages. No physical cultural resources would be impacted.

3. The project wil l convert existing heat-only-boiler plants to combined heat and power plants at 6 sites. All plants wil l use natural gas as the main fuel. The largest plant wil l be in Borisov with a new combined cycle CHP unit with an electricity capacity of about 65 MW, followed by the Mogi lev combined cycle CHP plant o f 15.5 MW of electricity capacity. The other sites wil l be based on gas engine technology and are located in Retchitsa (3 MW), Ruba (3 MW), Oshmiany (3 MW) and Borisov (1 MW). The introduction o f combined heat and power generation wil l improve efficiency o f the plants and thus reduce system-wide natural gas consumption. The gas usage at the sites wil l increase because in the current situation there is no electricity generation, but on the country level the gas usage wil l be reduced because o f the high efficiency o f the combined heat and power plants. The current total efficiency o f separate heat and power generation i s in the range o f 52 - 60% depending on the site. After the project the total efficiency wil l be about 85%.

4. Site specific Environmental Assessments (EAs) for the activities o f the project have been undertaken and site specific Environmental Management Plans (EMPs) satisfactory to the Bank have been prepared and the Borrower has agreed to implement them. The site specific EAs and EMPs include a summary o f local baseline air quality conditions as wel l as the results o f the modeling o f emissions from the proposed sub- projects. Technical specifications o f the bidding documents for a l l sites will include more specific provisions for the choice o f air pollution control technology (especially NOx). Site-specific EMPs include technical guidance on such technology. The bidding documents would include requirements for waste management. The fol lowing conclusions emerged from the environmental assessment o f the project:

a. The environmental study confirms that the project falls under an environmental screening category B according to the provisions o f the World Bank Operational Pol icy 4.0 1, ‘Environmental Assessment’;

57

b. The project wil l have predominantly positive impacts on the environment and human health from reduced air pollution at the national level from reduced amount o f fossil fuels burned. The proposed conversion o f the heat boilers into CHPs will improve the thermal efficiency o f the power system o f Belarus as a whole and reduce fuel consumption and the emissions o f greenhouse gases. However, the local consumption o f fuel at the converted HOBS will increase, leading to increased local emissions levels at the sites. According to the detailed modeling o f emissions resulting f rom the sub-projects, the level o f emissions wil l not exceed the national requirement for maximum allowed concentration (Table 1). Increased local emissions create the need to assess and monitor the local air pollution levels for NOx and CO, as wel l as fine particulates in cases where/when fuel o i l i s used as back-up fuel; N o m 0 2 is o f particular concern as it i s relatively more dif f icult to control while the applicable standards are tight (100 &g/m3 dai ly average i s the maximum allowable concentration in Belarus). The minor negative impacts which inevitably occur during the c iv i l works wil l be mitigated by proper planning and adherence to measures described in the Project Operational Manual, specifically the environmental guidelines;

c. The anticipated adverse environmental impacts wil l occur mainly during the construction stage. The project i s not expected to affect human populations or involve significant conversion or degradation o f natural habitats, or have significant negative impact on forest ecosystems. The proposed mitigation measures will reduce the adverse impacts.

Table 1 : Results o f the emission modeling exercises

5. In addition, the project team environmental and social specialists reviewed the capacity o f PMU, Minskenergo, Mogilevenergo and the Energy Efficiency Department to implement EMPs and found this to be adequate. However, further training i s proposed for the staff responsible for supervision. Since this project wil l require supervision by the borrower (either directly or through a supervision contractor) the project wil l include training and capacity-enhancement on environmental management and compliance. The contractor is obligated to document the “company approach” for environment and worker health and safety before they start any works.

6. The EAs have been completed along with the EMPs and these documents have been publicly disclosed locally including disclosure on websites o f project agencies, and also disclosed in the Bank’s Infoshop on September 17, 2008. The revised site specific EAs and EMPs have been disclosed in the Bank’s Infoshop on April 9,2009.

58

7. The following impacts may occur during the construction and operation stages:

Construction Phase:

Noise pollution. Noise from a variety o f construction works can affect construction workers, along with people living in close proximity o f the construction sites. Social infrastructure objects (hospitals, schools etc.) are o f particular concern.

Temporary air pollution (NOx, dust etc.) from construction works and increased trafflc. Use o f machinery, especially heavy machinery to perform construction work and increased traffic to and from the construction sites wil l lead to temporary increase in air pollution (NOx, fugitive dust, etc.) at the construction sites and along the roads leading to these sites.

Pollution of soil and water at the construction site through oil and/or fuel spillages. Accidental spillages and leakages from temporary o i l and/or fuel storage, along with oi l /hel leakages from machinery at the construction site can pollute soil, ground and surface water. There i s a possibility that transformer o i l used in old equipment can contain polychlorinated biphenyls7 (PCBs).

Improper storage of construction waste at the construction site can cause soil and water pollution, injuries to contractors’ workers and other persons during works.

Injuries to contractors’ workers if applicable safety and occupational health standards are not observed.

Damage to human health due to exposure to asbestos containing materials. Asbestos containing materials could be encountered during construction works on old boiler houses.

Loss of or damage to archaeological artifacts. Archaeological “chance finds” might occur during excavation works.

Increased risk of trafflc accidents from increased trafflc of heavy machinery. Increased traffic to and from the construction site increases the risk o f traffic accidents.

Increased soil erosion. Construction works can cause disturbance o f topsoil and paved areas, which, in turn, can lead to soil erosion.

Pollution caused by poor disposal of waste materials. Improper disposal o f construction waste might lead to soil and water pollution at the waste disposal sites.

PCBs - Polychlorinated Biphenyls considered persistent organic pollutants 59

Operation Phase:

Increased local air pollution. Air pollution can increase locally due to the increase the amount o f fuel burned. According to the detailed emissions modeling (Table l), it i s not expected that the increased local air pollution in the boiler houses’ air sheds wil l exceed the established standards.

Soil and ground water pollution and damage to human health from accidental spillage of fuel (diesel and fuel oil) and turbine and transformer oil from storage tanks and during shipment. Substantial amount o f fuel and o i l wil l be stored on the boiler house sites in above ground storage tanks. Leakages and accidental spillages o f these substances can cause damage to the environment and human health.

An official from the Belarusian Ministry o f Natural Resources and Environmental Protection (MoEnv) stated that nowadays only PCBs free transformer o i l is used in Belarus.

Risk of fires. Burning and storing large amount o f fuel poses an increased threat o f fires at boiler houses.

8. The measures proposed to mitigate the impacts are:

Preparation of subproject specific Environmental Management Plans at the detailed design phase, which would identifv potential environmental issues and specific mitigation measures based on EMP.

A requirement for contractors at contract tendering stage to include in their proposals the measures to mitigate adverse environmental impacts based on EMP.

Mitigation measures -Construction Phase:

Noise. Works are to be performed strictly during normal weekday working hours. If there i s a need to carry out works with higher level o f noise at night t ime the population o f nearby regions o f settlement wil l be notified 10 days in advance. Noise barriers should be installed when i t appears necessary and workers wil l be provided ear plugs as a protection measure to perform high-level noise works.

Temporary air pollution (NOx, dust etc.) from construction works and increased traffic. Dust and traffic emissions wil l be minimized by good operations management and site supervision. Dust suppression measures (e.g. water sprinkling) will be applied during long dry periods; construction workers wil l be provided with anti-dust masks, when necessary.

Pollution of soil and water at the construction site through oil or fuel spillages. Oil/fuel pollution will be minimized by good operations management and constant site supervision. Machinery wil l be checked daily for leaking o i l and

60

fuel. Washing o f machinery at construction site will be prohibited. Waste o i l will be collected in secure containers and stored at a designated secure area prior to disposal. In case PCBs are found through the analysis o f documentation giving details on specification o f o i l used in transformers (company servicing transformers, responsible for changing oils has specifications for types o f oils used), they wil l be removed in full compliance with the respective international procedures.

Soil and water pollution, injuries to contractors’ workers and other persons during works from improper storage of construction waste at the construction site. Construction waste i s to be stored in a secure, designated area prior to removal to a designated waste landfi l l site. Those wastes wil l be transported by a company licensed for such activities. Working areas wil l be temporarily out of bounds to non-works personnel.

Injuries to contractors’ workers. Adherence to safe working procedures wil l be enforced and constantly monitored by the construction site management.

Damage to human health due to exposure to asbestos containing materials. In the event that asbestos-containing materials are encountered, workers must wear protective glasses, masks and gloves. Disposal o f asbestos containing waste will be performed by an authorized organization in full compliance with the respective international procedures.

Loss of or damage to archaeological artifacts. If any archaeological artifacts are found, work wil l be stopped and the respective local authorities and experts informed.

Increased risk of traffic accidents from increased traffic of heavy machinery. A traffic management plan wil l be developed for each construction site and followed. Such a management plan wil l include, among other issues, identification o f optimal routes and time for construction materials delivery, transportation o f construction waste to disposal sites etc. If necessary, traffic wi l l be temporarily diverted and safe speed l imits wil l be established and enforced during the construction period.

Increased soil erosion. Disturbed topsoil wil l be remediated and rapidly growing vegetation wil l be planted; disturbed paved areas wil l be re-paved.

Pollution caused by poor disposal of waste materials. Scrap metal wi l l be separated from the other construction waste for re-use. Middle size concrete scum without reinforcing rods may be used for filling deep gullies, hollows and other types o f road fixing. Construction waste wi l l be disposed o f only at the designated landfi l l sites.

Mitigation measures - Operation Phase:

Increased local air pollution. Priority should be given to new low-emission equipment and technologies. N e w equipment should meet the established

61

Belarusian pollutants emission standards. This requirement wil l be included in bidding documentation. If necessary, additional pollution control equipment should be installed.

Soil and ground water pollution and damage to human health from accidental spillage of fuel (diesel and fuel oil) and turbine and transformer oil from storage tanks and during shipment. Proper system to contain spills (e.g. dikes and portable booms) should be designed, along with emergency response equipment to collect spilled material. Appropriate emergency response procedures should be developed. Personnel should have adequate knowledge o f how to act in case o f o i l h e 1 spillages and leakages; and o f the use and maintenance o f emergency response equipment. Training and regular drills simulating emergencies should be performed.

Noise. Workers operating the boiler houses may suffer from excessive noise from CHP machinery. Appropriate Occupation and Health protection actions wil l be taken.

Risk offires. Respective Belamsian fire protection standards and rules have to be observed. Regular inspection o f the boiler house by the respective fire protection authorities wi l l be conducted. Emergency plan in case o f fires should be developed. Workers should undergo regular training on how to act in case o f fire.

62

Annex 11: Project Preparation and Supervision

BELARUS: Energy Efficiency Project

Planned Actual PCN review 03/05/2008 03/06/2008 Initial PID to PIC 03/06/2008 03/12/2008 Initial I S D S to PIC 03/17/2008 04/23/2008 Appraisal 09/15/2008 09/17/2008 Negotiations 02/09/2009 03/3 1/2009 Board/RVP approval 05/28/2009 Planned date o f effectiveness 10/3 1/2009 Planned date o f mid-term review Planned closing date 12/3 1 /2014

Key institutions responsible for preparation o f the project: Belinvestenergosberezhenie (PMU) Minskenergo Mogilevenergo

Bank staff and consultants who worked on the Droiect included: ~

Name Title Unit Pekka Kalevi Salminen Sr. Energy Specialist ECSSD Dejan Ostojic Elena Klochan

Maria L. Amelina

Irina Babich

Anna L Wielogorska

Angelica Fernandes Hannah M. Koilpillai Nicholay Chistyakov Anarkan Akerova Jam Masterson Dmytro Glazkov Alexander Sharabaroff Kishore Nadkarni James Sayle Moose Igor Tchoulba Rozena Serrano

ECSSD ECCU2

ECSSD ECSPS

ECSPS

ECSPS LOAFC LOAFC LEGEM ECSSD ECSSD

ECSSD ECSSD ECSSD ECSSD

Lead Energy Specialist Senior Country Program

Officer Senior Social Development

Specialist Financial Management

Specialist Senior Procurement

Specialist Procurement Analyst

Senior Finance Officer Senior Finance Officer

Counsel Operations Officer Operations Analyst

Consultant Consultant Consultant Consultant

Program Assistant Ludmila Mazai Program Assistant ECCU2 Bank funds expended to date on project preparation:

1. Bank resources: US$207,115.00 2. Trust funds: 0

63

3. Total: US$207,115.00

Estimated Approval and Supervision costs: 1. Remaining costs to approval: U S $ 10,000 2. Estimated annual supervision cost: US$lOO,OOO

64

Annex 12: Documents in the Project Fi le

B E L A R U S : Energy Efficiency Project

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

Pre-feasibility Study “Reconstruction o f the Heat-Only Boiler House #3 in Borisov with the Implementation o f Gas Combined Cycle Technology”, Belnipienergoprom, July 2007 (Russian, English)

Pre-feasibility Study “Reconstruction o f the Heat-Only Boiler House #3 in Mogilev with the Installation o f the Electricity Generation Equipment” (option #4), Belnipienergoprom, April 2007 (Russian)

Pre-feasibility Study “Proposals for the Installation o f the Power Generating Equipment at the Heat-Only Boiler House #3 in Mogilev” (option #5), Belnipienergoprom, July 2008 (Russian)

Pre-feasibility Study “Conversion o f HOBS into CHPs: Borisov HOB#l”, Energy Efficiency Department, July 2008 (Russian, English)

Pre-feasibility Study “Conversion o f HOBS into CHPs: Ruba”, Energy Efficiency Department, July 2008 (Russian, English)

Pre-feasibility Study “Conversion o f HOBS into CHPs: Retchitsa”, Energy Eficiency Department, July 2008 (Russian, English)

Pre-feasibility Study “Conversion o f HOBS into CHPs: Oshmiany”, Energy Efficiency Department, July 2008 (Russian, English)

Project Identification Report “Belarus Energy Efficiency Project”, Poj;ry, May 2008 (English)

Environmental Assessment for a Combined Cycle CHP

Environmental Assessment for Energy Efficiency Department Components

“CHP System Development in Belarus, Tackling the Next Challenge”, Co-Generation and On-Site Power Production (COSPP), January-February 2008

Procurement Assessment, July 2008

Financial Management Assessment, July 2008 and September 2008

Program to Modernize Major Energy Generating Plants (State Comprehensive Program o f the Modernization o f Major Generating Assets o f the Belarusian Energy System, Energy Savings and the Increase o f the Share o f Domestic Fuels for the Period until 201 l), Decree o f the President o f the Republic o f Belarus, November 2007 (Russian)

Energy Efficiency Program (The Republican Program for Energy Savings for 2006- 2010), The Council o f Ministers o f the Republic o f Belarus, February 2006 (Russian)

“Belarus: Addressing Challenges Facing the Energy Sector,” World Bank Working Paper, June 6,2006.

65

Annex 13: Statement of Loans and Credits

BELARUS: Energy Efficiency Project ~~

Difference between expected and actual

disbursements Original Amount in US$ Millions

Project ID Ey Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO951 15 2006 POST-CHERNOBYL RECOVERY 50.00 0.00 0.00 0.00 0.00 43.73 10.07 0.00 PO44748 200 1 SOC INF RETROFIT 22.60 0.00 0.00 0.00 0.00 15.16 0.16 0.16

Total: 72.60 0.00 0.00 0.00 0.00 58.89 10.23 0.16

BELARUS STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f U S Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2005 BelgazBank 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 DBBC 9.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00

2004 DBBC 0.00 3.00 0.00 0.00 0.00 3.00 0.00 0.00 2006 DBBC 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.00

Priorbank 20.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2003 Priorbank 9.33 0.00 0.00 0.00 9.33 0.00 0.00 0.00 2004 Priorbark 18.18 0.00 0.00 0.00 18.18 0.00 , 0.00 0.00

Total portfolio: 61.51 3.52 0.00 0.00 54.51 3.52 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

66

Annex 14: Country at a Glance

BELARUS: Energy Efficiency Project POVERTY and SOCIAL

2006

GNIpercapita (Allasmethod, US$) 3,470

Average annual growth, 2000-06

Belarus

Population, mid-year (millions) 9.7

GNI(At1asmethod. US$ billions) 33.7

Population (%) -0.5 Laborforce (%) 0.1

M o s t recent estimate (latest year available, 2000-06) Poverty (%of population &lo wnationalpo verryllne) 42 Urban population (%of tofalpopulation) 73 Life expectancyat birth (pars) 68 Infant mortality(psr 1OOOlivebirfhs) 0 Child malnutrition (%of childrenunder5) Access to an impmvedwatersource (%ofpopulafion) 0 0 Literacy (%ofpopulation age #+ Gross primaryenrollment (%of school-age population) 01

Male 0 3 Female 0 0

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1966 1996

GDP (US$ billions) .. #.8 Gross capital formationIGDP .. 23.5 Exports of goods and SeNiCeSlGDP .. 46.3 Gross domestic savingslGDP .. 8.4 Gross national savingslGDP .. 8.9

Current account balance1GDP .. -3.5 Interest paymentslGDP .. 0.3 Total debffGDP .; 0.3 Total debt serviceleqorts .. 2.3 Present value of debt1GDP Present value of debtleqorts

1966-96 1996.06 2005 (average annuelgrowth) GDP -7.6 7.0 9.4 GDP percapita -7.6 7.4 0.0 Exports of goods and services -15.5 8.6 -2.7

Europe (L Lower, Central mlddle.

Asla Income

460 4,796 2206

0.0 0.5

64 69 28 5

92 97 0 2 0 3 0 0

2005

302 28.5 59.8 292 29.9

16 0 2 15.7 3.7 15.6

25.5

2,276 2,037 4,635

0.9 14

47 71 31 ?3 81 89 le M tM

2006

36.9 30.4 59.9 26.1 26.3

-4.1

2006 2006-10

9.9 6.2 0.6 6.7 9.9 8.3

1 Development dlamond'

Life eqectancy

I T GNI Gross per primary capita enrollment

Access to improvedwatersource

-Belarus I - Lo wr-middle-income group

Economlc ratios.

Trade

Indebtedness

-Belarus

- Lowr-middle-income w o u ~

STRUCTURE of the ECONOMY

67

BALANCE o f P A Y M E N T S

(US$ millions) ' w o r t s of goods andservices Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net resewes

1986 1996

6.698 7,275 -576

-31 91

-518

595 -79

2005

18,182 l7,844

338

56 182

556

-n -539

2006

22,07 23,723 -1586

- 0 7 182

-15P

150 1

Current account balance to GDP (%) n Memo: Reserves including gold (US$ millions) Conversion rate (DEC.local/US$)

EXTERNAL DEBT and RESOURCE FLOWS 1986

(US$ millions) Total debt outstanding and disbursed

IBRD ' IDA

Total debt service IBRD IDA

Composition of net resourcefiow Official grants Official creditors Private creditors Foreign direct investment (net inflow) Portfolio equity(net inflows)

Wolld Bank program Commitments Disbursements Principal repayments Net flows Merest payments Net transfers

469 B.0

1996

1960 Pi

0

158 8 0

38 33

1 !05

1297 2.153.8

2005

4,734 59 0

679 B 0

26 94 42

305 1

0 7

18 -9 3

-P

1383 2,l44.6

2006

50 0

18 0

0 5 15 -0

3 -B

Composlt lon o f 2005 debt (US$ mill.)

I A:59 D:22 I

I A . IBRD E - Bilrtsd B . IDA D - Other d l i l a l d F - Private C - I M F G - Shxt-term

Note:This tablewas producedfrom theDeveiopment Economics LDB database. 9/28/07

68

MAP SECTION

P O L A N D

RUSSIAN FED.

L A T V I A

L I T H U A N I A

R U S S I A NF E D E R A T I O N

U K R A I N E

To Vilnius

To Alytus

To Vilnius

To Utena

To Daugavpils

To Rezekne

To Nevel

To Smolensk

To Roslavl

To Klintsy

To Chernigov

To Chernihiv

To Chernobyl

To Ovruch

To Klintsy

To Sarny

To SarnyTo

Kovel'To

Chelm

To BialaPodlaska

To Bialystok

To Bialystok

V I T E B S KV I T E B S K

M I N S KM I N S K M O G I L E VM O G I L E V

G O M E LG O M E L

G R O D N OG R O D N O

B R E S TB R E S T

DzyarzhynskayaDzyarzhynskayaHara (346 m)Hara (346 m)

Dneprovsko-Dneprovsko-Bugskiy CanalBugskiy Canal

VViilliiyyaa

ZZaakkhhooddooyyaavvaa DDzzvvii

nnaa

SSoozzhh

DDnneepprr

BBeerreezziinnaa

PPrriippyyaatt

NNeemmaann

KobrinKobrin

BjarozaBjaroza

BaranovichiBaranovichi

IvattsevichiIvattsevichi

PinskPinsk

LuninetsLuninets

LidaLida

VVolkovyskolkovyskSlonimSlonim

CasnikiCasniki

MolodechnoMolodechnoVVilejkailejka

BorisovBorisov

TTalacynalacyn

BerazinoBerazino

SoligorskSoligorsk

HojnikiHojniki

MicasevicyMicasevicyKalinkavicyKalinkavicy

RechitsaRechitsa DobrusDobrus

SlutskSlutsk

OsipovichiOsipovichi

BobruyskBobruysk DovskDovsk

ZabalocceZabalocce

TTurovurov

StolinStolin

MozyrMozyr

ZlobinZlobin

SvetlahorskSvetlahorsk

GorkyGorky

OrshaOrsha

NavapolackNavapolack PoloyskPoloysk

LepelLepel

KrichevKrichev

SlavharadSlavharad

KascjukovicyKascjukovicy

PostavyPostavy HlybokaeHlybokae

BraslauBraslau

BrestBrest

GrodnoGrodno

Gomel'Gomel'

MogilevMogilev

VVitebskitebsk

MINSKMINSK

V I T E B S K

M I N S K M O G I L E V

G O M E L

G R O D N O

B R E S TKobrin

Bjaroza

Baranovichi

Ivattsevichi

Pinsk

Luninets

Lida

VolkovyskSlonim

Casniki

MolodechnoVilejka

Borisov

Talacyn

Berazino

Soligorsk

Hojniki

MicasevicyKalinkavicy

Rechitsa Dobrus

Slutsk

Osipovichi

Bobruysk Dovsk

Zabalocce

Turov

Stolin

Mozyr

Zlobin

Svetlahorsk

Gorky

Orsha

Navapolack Poloysk

Lepel

Krichev

Slavharad

Kascjukovicy

Postavy Hlybokae

Braslau

Brest

Grodno

Gomel'

Mogilev

Vitebsk

MINSK

P O L A N D

RUSSIAN FED.

L A T V I A

L I T H U A N I A

R U S S I A NF E D E R A T I O N

U K R A I N E

Dneprovsko-Bugskiy Canal

Viliya

Zakhodoyava Dzvi

na

Sozh

Dnepr

Berezina

Pripyat

Neman

To Vilnius

To Alytus

To Vilnius

To Utena

To Daugavpils

To Rezekne

To Nevel

To Smolensk

To Roslavl

To Klintsy

To Chernigov

To Chernihiv

To Chernobyl

To Ovruch

To Klintsy

To Sarny

To SarnyTo

Kovel'To

Chelm

To BialaPodlaska

To Bialystok

To Bialystok

DzyarzhynskayaHara (346 m)

22°E 24°E

24°E

26°E

26°E

28°E

28°E 30°E

30°E

32°E

32°E 34°E

52°N

54°N

52°N

54°N

BELARUS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 25 50 75

0 25 50 75 Miles

100 Kilometers

IBRD 33370

JAN

UA

RY 2005

BELARUSSELECTED CITIES AND TOWNS

VOBLAST' CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

VOBLAST' BOUNDARIES

INTERNATIONAL BOUNDARIES