Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 2792 1 -W

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

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

TO

SERBIA AND MONTENEGRO

FOR A

SERBIA ENERGY EFFICIENCY PROJECT

FEBRUARY 18,2004

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

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization. 1

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

(Exchange Rate Effective February 18, 2004)

Currency Unit = Dinar (YUD) YUD 1.00 = US$0.017

U S $ l . O O = YUD 57.60

CHP ccs EAR EBRD EIB GOS I C B IDA KfW MOES M O F M O H M O M E N C B NGO PIP P M R PSC QCBS RFP S a M SEEA SIDA SOE TORS U S A I D

FISCAL YEAR January 1 -- December 31

ABBREVIATIONS AND ACRONYMS Combined Heat and Power Clinical Center o f Serbia European Agency for Reconstruction European Bank for Reconstruction and Development European Investment Bank Government o f Serbia Intemational Competitive Bidding International Development Association Kreditanstalt fur Wiederaufbau (Bank for Reconstruction) Ministry o f Education and Sports Ministry o f Finance Ministry o f Health Ministry o f Mining and Energy National Competitive Bidding N o n Governmental Organization Project Implementation Plan Project Monitoring Report Project Steering Committee Quality- and Cost-Based Selection Request for Proposals Serbia and Montenegro Serbian Energy Efficiency Agency Swedish Intemational Development Agency Statement o f Expenses Terms o f Reference United States Agency for International Development

Vice President: Shigeo Katsu, ECAVP Nancy Cooke, ECCU4

Mohinder Gulati, ECSIE

Acting Country ManagerDirector:

Task Team Leader/Task Manager: Sector ManagedDirector: Henk Busz, ECSIE

FOR OFFICIAL USE ONLY

SERBIA AND MONTENEGRO SERBIA ENERGY EFFICIENCY PROJECT

CONTENTS

A. Project Development Objective

1. Project development objective 2. Key performance indicators

B. Strategic Context

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

C. Project Description Summary

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

D. Project Rationale

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

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

Page

2 3

3 4 7

10 13 15 16

18 19 19 20 20

21 22 22 22 24 25 27

F. Sustainability and Risks

1, Sustainability 28

This document has a restricted distribution and m a y be used b y the performance of their official duties. I t s contents m a y not be otherwise disclosed without W o r l d Bank authorization.

2. Critical risks 3. Possible controversial aspects

G. Main Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1 : Project Design Summary Annex 2: Detailed Project Description Annex 3: Estimated Project Costs Annex 4: Cost Benefit Analysis Summary Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary Annex 6: (A) Procurement Arrangements

(B) Financial Management and Disbursement Arrangements Annex 7: Project Processing Schedule Annex 8: Documents in the Project File Annex 9: Statement o f Loans and Credits Annex 10: Country at a Glance Annex 11: Terms o f Reference o f Design and Supervision Consultants for (A) CCS, (B) Public

Buildings, and (C) Communications, Monitoring, and Evaluation

28 29

29 30

30

31

32 36 39 40 46 41 54 58 59 60 62 64

SERBIA AND MONTENEGRO Serbia Energy Efficiency Project

Project Appraisal Document Europe and Central Asia Region

ECSIE

Date: February 18,2004 Sector ManagedDirector: Henk Busz 4cting Country Director: Nancy Cooke Project ID: PO75343 Lending Instrument: Specific Investment Loan (SIL)

T e a m Leader: Mohinder P. Gulati Sector(s): District heating and energy efficiency services (1 00%) Theme(s): Climate change (P), Pollution management and ~ n v ~ ~ ~ n m e n t a l health (P), Access to urban services for the

30RROWER 4.00 I 0.00 1 4.00 :DA

~ - P I I I

Borrower: SERBIA AND MONTENEGRO

11.65 I 9.35 I 21.00

Responsible agency: GOVERNMENT OF SERBIA,SEEA,MOH,MOES Ministry of Mining and Energy Address: Nemanija 22-26, Belgrade Tel: (381 11) 33-46-755 Other Agency(ies): Serbian Energy Efficiency Agency Address: Koste Glavinica 2, Belgrade Contact Person: Nenad Pavlovic Tel: (381 11) 369-0987 Fax: Email:

Fax: (381 11) 36-12-307

rota/:

Email:

15.65 I 9.35 I 25.00

Estimated Disbursements ( Bank FYlUS$m):

Project implementation period: June 2004 - October 2009 Expected effectiveness date: 06/01/2004 Expected closing date: 04/30/2010 i Pi13 rom Re" U I en ImO

A. Project Development Objective

1. Project development objective: (see Annex 1)

The development objective o f the project i s to improve energy efficiency in heating buildings in order to make heating more affordable as well as improve the functional and health environment o f the users. An important associated objective i s to reduce the local and global environmental impact o f the use o f dirty fuels for heating buildings in Serbia.

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

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

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

- 2 -

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

2. K e y performance indicators: (see Annex 1)

Progress towards the development objectives would be monitored through a set o f indicators agreed with the Borrower. The energy efficiency component w i l l emphasize monitoring and evaluation, linking energy efficiency measures with improved hc t i ona l i t y and health environments in buildings. Monitoring indicators include:

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

Key output indicators such as: Improved heat generation efficiency and reduction in heat losses in the rehabilitated network o f the Clinical Center; Number o f buildings retrofitted wi th energy efficiency equipment; Outreach programs performed.

B. Strategic Context 1. Sector-related Count ry Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R-2002-0142

The Bank’s assistance program for FY03-04 i s outlined in the Transitional Support Strategy (TSS), and i t s August 2002 update, for the Federal Republic o f Yugoslavia (now Serbia and Montenegro. Throughout the text “Federal Republic o f Yugoslavia” and “Serbia and Montenegro” are used interchangeably). A February 2004 update o f the TSS shall be presented to the Executive Directors o f the World Bank and International Development Assocation in March 2004. The TSS envisions an assistance program with highly selective investment lending to maximize policy reform and institution building. The proposed project supports two development objectives o f the TSS: (i) Restoring macroeconomic stability and external balance; and (ii) stimulating near-term growth and creating a basis for a sustainable supply response.

Date of latest CAS discussion: TSS update 818102 )

The energy sector was among the main sources o f the quasi-fiscal deficit as l o w energy prices at the beginning o f 2001 caused a quasi-fiscal deficit o f about $1.1 bi l l ion or 10 percent o f GDP. As part o f i t s

- 3 -

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

The TSS, together wi th i ts July 2002 update, sets out broad criteria for selecting investment operations: (i) demand from the government i s high; (ii) Bank experience in the region with similar projects i s strong; (iii) donor financing can be mobilized; and (iv) where policy formulation and investment needs come together, matching the Bank's comparative advantage. The commitment o f the Government to energy reforms and energy efficiency in particular i s strong, partly because o f growing concern for the impact o f price increases on the population. Policy formulation supported through the Structural Adjustment Credit I, states the adoption o f a government program to improve energy efficiency as an explicit objective. Pursuant to that objective, the Government has, in October 2002, established Serbian Energy Efficiency Agency (SEEA) to guide policy and implement urgently needed programs to increase energy efficiency. The proposed project would help SEEA develop i t s capacity to provide policy advice to the Government, design and execute programs that raise awareness o f energy saving opportunities, and introduce incentives that wil l help stakeholders act on these opportunities.

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

2. M a i n sector issues and Government strategy:

The energy sector has been a source of serious instability in the FRY economy in the recent years. After suffering a significant contraction o f i t s GDP, high levels o f inflation, public debt and unemployment during the 199Os, the Serbian economy has resumed growth in the last three years but problems o f high fiscal and current account deficit (5% and 8.9% o f GDP in 2002) persist. The state owned energy sector entities are significant contributors to the fiscal and quasi-fiscal deficits o f the economy on account o f their low operational efficiencies, h igh levels o f financial losses and debt service defaults caused in part by energy prices being lower than their cost o f supply. Energy imports contributed significantly to trade deficit and current account deficits. The quasi fiscal deficit arising from the energy sector has since come down from 10% o f GDP in 2000 to about 4% at the end of2002 and i s targeted to be eliminated by 2005.

The Serbian economy i s highly energy intensive. Problems in the energy sector reflect the cumulative effect o f policies that channeled mass subsidies to f i rms, and the population, through cheap energy. This stimulated excessive and wasteful consumption making the Serbian economy very energy intensive, whilst at the same time depriving the energy sector o f capital to develop i t s capacity to meet growing demand. Per dollar o f GDP, Serbia uses about eight to thirteen times more energy than i ts West European neighbors, and four to five times more compared to i t s immediate neighbors such as Hungary and Slovenia (Table 1).

1

- 4 -

Table 1: Key Energy Indicators of Selected Countries in 2000

Country France Germany Spain U.S.A. Bulgaria Hungary Romania Slovenia Serbia & Montenegro

Total Primary Energy Supply (TOE)

per capita Per ‘000 US$ o f GDP 4.25 0.15 4.13 0.13 3.13 0.18 8.35 0.26 2.3 1.53

2.47 0.46 1.62 1.11 3.29 0.28 1.29 1.04

Electricity Consumption (kWh)

per capita Per US$ of GDP 7301 0.25 6683 0.2 5248 0.3 13843 0.42 3675 2.44 333 1 0.61 1988 1.36 578 1 0.5 3219 2.6

Source: International Energy Agency TOE : Tons o f Oil Equivalent

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

Serbia has a large, unrealized potential for energy efficiency improvements in the building sector. A USAID-funded feasibility study prepared for the project revealed buildings in Serbia have either very poor or no insulation, worn-out building seals and inefficient heating supply systems. The survey covered public buildings such as schools and hospitals and residential buildings across Serbia. Serbian education authorities manage about 2.9 mi l l ion m 2 o f floor area, while the health authorities manage more than 1 mi l l ion m 2 in about 280 hospitals. For school buildings, 70 percent o f which use decentralized heating sources (using fue l oil, gas, coal, wood, electricity) energy efficiency investments o f about US$ 60 mi l l ion could yield potential annual cost savings o f approximately US$15 mi l l ion equivalent. Improvements in hospital buildings, 70 percent o f which also use decentralized heating sources, investment o f about US$ 40 mi l l ion could result into annual cost savings o f about US$10 million. For residential buildings the total investment potential for energy efficiency improvements and conversions i s about US$4 bi l l ion that could yield up to approximately US$1 bi l l ion in annual cost savings to consumers. This translates into a market potential o f about US$4-5 bi l l ion investments in residential, school and hospital buildings alone.

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

- 5 -

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

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

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

> > > > > Lack o f coordinated policy

Fuel and physical constraints o f the heating market; Institutional constraints to energy efficiency; Lack o f information and awareness; Inadequate access to financing; and

The Government strategy. The Government i s attempting a comprehensive program o f energy sector

- 6 -

reform, that includes adoption o f an Energy Sector Strategy covering al l sub-sectors, enactment o f an Energy Law, restructuring and commercialization o f energy companies, tari f f rationalization that incorporates l i fe- l ine tariffs, and decreasing energy costs through an energy efficiency program. The power sector reforms in Serbia are being supported through parallel Bank operations such as Structural Adjustment Credit-I and ongoing Electric Power Emergency Reconstruction Project.

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

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

P P P

P

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

P

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

- 7 -

3. Sector issues to be addressed by the project and strategic choices:

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

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

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

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

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

- 8 -

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

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

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

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

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

- 9 -

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

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

3.2 Strategic Choices

The proposed project would retrofit schools and hospitals - social facilities that are an integral part o f local and, in the case o f the Clinical Center, national communities - so that benefits are readily visible and understandable to the population. The project would help the Government demonstrate linkages o f energy efficiency measures with financial as wel l as functional and health environment improvements. Although financial benefits accrue to the population only indirectly, through reduced municipal expenditures and thereby reduced local and national tax requirements, the benefits o f improvement in functional and health environment accrue directly to patients and students, and their families. This combination o f demonstrated public and private benefits would help bolster local political and popular interest for fol low on measures in energy efficiency. No t less important, the successful implementation o f a straightforward public sector energy efficiency program would build up the capacity and credibility o f the newly-created SEEA for promoting energy efficiency. The proposed project would support the SEEA, which has the mandate o f providing national policy advice and generating programs to promote energy efficiency in buildings and industry.

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

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

0

0

0

sites wi th high energy savings potential, electricity substitution, and environmental impact; sites which are not likely to be closed or privatized; buildings o f which the basic function w i l l not be significantly changed;

- 1 0 -

0 good geographical distribution; 0

0

sites with significant number o f users; sites w i th substantial social and demographic impact.

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

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

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

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

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

- 1 1 -

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

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

Component (ii). Energy Efficiency Improvements in Social Service buildings (Schools and Hospitals) across Serbia. This component w i l l finance the installation o f energy efficiency equipment and retrofitting in schools and hospitals. The initial investment program consists o f 17 primary schools w i th heated floor space o f about 51,000 m 2 and 12 hospital buildings wi th a total heated floor space o f about 68,000 m2. A total of about 60-70 buildings and the heating systems which supply them would be retrofitted over the five year implementation period.

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

To help implement the public building component, consultants w i l l be engaged for design, supervision, and monitoring and evaluation. The Ministr ies o f Education and Health, and SEEA agreed on a criteria for investment in energy efficiency measures that would have a demonstrable impact on energy savings.

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

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

- 1 2 -

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

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

(iv) Energy Auditing. selected public buildings.

The project w i l l finance the energy audit and project preparation costs for

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

(vi) o f the IDA credit.

Auditing. The cost o f audits o f the project financial statements w i l l be financed out o f the proceeds

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

Component

Investments at the CCS Energy efficiency improvements in social services facilities Technical Assistance to SEEA Incremental Operating Costs Price and Physical Contigencies

ndicative costs

(US$M) 7.47

12.36 0.46 0.50 2.71

% of Total

29.9 49.4

1.8 2.0

10.8

Bank- financing

(US$M) 6.35

10.13 0.37 0.44 2.21

% of Bank-

financing 30.2 48.2

1.8 2.1

10.5

- 13-

Unallocated 1.50 Total Project Costs 25.00

Total Financing Required 25.00

2. K e y pol icy and inst i tut ional reforms supported b y the project:

Policy and institutional measures supported by this project have been initiated and, while some institutional measures have already been completed during the project preparation, others w i l l be implemented during the course o f the project:

6.0 1.50 7.1 100.0 21.00 100.0 100.0 21.00 100.0

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

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

As a part o f the Government’s energy sector reform agenda that it committed to under the Structural Adjustment Credit I in December 2001, an Energy Law, satisfactory to the Bank, has been drafted and sent to the Parliament in July 2003 for i t s approval. The Energy Law w i l l set conditions for the establishment o f an independent regulator for the energy sector, including the heat market. This legal reform and subsequent implementation o f the institutional changes contemplated in the legislation w i l l set the proper enabling environment for the introduction o f consumption-based heat tariffs for the residential consumers and metering o f heat consumption by district heating companies, which form the basis o f incentives for end-use energy efficiency. KfW i s providing technical assistance financing for a review o f metering and consumption-based heat tariffs.

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

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

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

Activities o f the Energy Efficiency Agency comprise:

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

- 1 4 -

the national energy sector policy, with the aim to al ign i t w i th the concept o f rational use o f energy carriers and efficient use o f energy; Cooperation o n preparation o f regulations, standards and norms necessary for aligning with international standards stimulating rational use o f energy carriers and efficient use o f energy; Preparation o f criteria for assessment o f efficiency o f use o f electrical appliances and requests for their labeling in compliance with appropriate international norms; Preparation and verif ication o f databases on the state o f energy consumption in the Republic o f Serbia and trends o f indicators o f the energy use in the corresponding energy consumption sectors; Rendering o f advisory and technical support to the local administration unit bodies, district heating companies, governmental and public institutions and customers, w i th the aim to increase efficiency o f energy consumption; Preparation and execution o f initiatives stimulating increased use o f new and renewable energy sources at the local market, in accordance with national objectives; Information o n the measures for rational use o f energy carriers and increase o f energy efficiency and promotion o f results achieved in implemented programs and projects; Energy-related education and informing o f the public and energy customers on potentials for the increase o f energy efficiency, promotion o f measures for rational use o f energy carriers in the production and consumption sectors and vocational trainings o f expert teams; Init iating and stimulating implementation o f demonstration projects and dissemination o f positive experiences f rom the countries that successfully implemented energy efficiency programs; Rendering financial and technical support in the preparation and implementation o f pr ior i t ized energy efficiency projects; Exchange o f experiences and promot ion o f domestic results in the fields o f rational use o f energy carriers and efficient use o f energy at the international level; Performing other activities in compliance w i th the existing laws and regulations.

lFrom unof f ic ia l translation, draft Energy Law, February 2003

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

3. Benefits and target population:

> The project w i l l benefit: (i) students and education staff across Serbia by improving heating quality and in relevant cases improving air quality in renovated buildings. The students, in particular, wil l benefit from the replacement o f poorly designed and inadequate lighting wi th improved energy efficient lighting systems; (ii) health care professionals and patients b y improving heating quality and in relevant cases improving air quality in selected buildings across Serbia, as well as Belgrade residents in neighborhoods surrounding the CCS; (iii) the municipalities which w i l l save heating expenses for renovated school buildings and increase the l i fe o f the buildings; (iv) the health insurance fimd which wil l save funds required to pay for heating expenses o f the participating hospitals.

> B y replacing coal and heavy f ie1 o i l fired heat plants wi th natural gas fired heating plants and reducing the heat distribution losses, the CCS w i l l reduce annual emissions o f SOX from i t s present level o f about 780 tons to about 20 tons, that o f N O x from about 100 tons to about 40 tons, and totally eliminate emission o f ash from the present level o f about 130 tonsiyear. The CCS will also not need to transport and store, in the hospital complex, large quantities o f coal, oil, and ash. In addition, the elimination o f the use o f coal w i l l reduce C02 emissions by about 25 mil l ion cubic meters annually, contributing to the reduction o f Green House Gases. Extension o f the gas pipeline to the CCS w i l l also enable increasing access to gas supply for the residents o f the CCS area, thereby enabling them to shift away from use o f electricity and dirty fuels for their heat requirements.

- 1 5 -

P By increasing energy efficiency in selected schools and hospitals, the project w i l l reduce their energy bills. In addition, the project w i l l extend the life o f the buildings by making investments critical to the preservation o f the building envelope.

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

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

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

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

4. Institutional and implementation arrangements:

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

Clinical Center: The Clinical Center has staff wi th adequate qualifications and experience to manage the present infrastructure facilities. However, they w i l l need assistance in managing the implementation o f new investments. Therefore, implementation o f the CCS investments w i l l be managed by this group with the assistance o f design and supervision consultants (CCS D&S consultants) to be engaged under the project.

- 1 6 -

An Expression o f Interest has been issued in November 2003 to prepare a short-list o f qualified consulting f i rms. The consultants w i l l prepare the design, technical specifications, procurement documents, and assist in contract management and supervision o f implementation. The scope o f work o f the consultants i s attached at Annex 11. The contracts w i l l be signed joint ly by MOH and CCS. NIS-Energogas, the local gas supplier, wil l finance and construct the extension o f gas pipeline to the CCS. However, it has been agreed that they will coordinate wi th the CCS design and supervision consultants to ensure compatibility o f technical specifications and synchronization o f schedules. The procurement activities o f the heat plant and the gas pipeline w i l l be synchronized and contracts for their construction awarded simultaneously. A gas supply agreement has been signed between the CCS and the NIS-Energogas.

Social Service Buildings: The energy audit for the selected schools and hospitals have been completed and investment proposals are currently under preparation. SEEA w i l l act as technical advisor to the Ministries o f Health and Education for implementation o f social service building component. The consultants w i l l be hired by S E E N M O M E to design, prepare technical specifications and bidding documents, and assist in procurement, contract administration, quality control, supervision o f execution o f work, and monitoring and evaluation o f retrofitting o f al l schools and hospitals financed under the project. For hospitals, the Ministry o f Health w i l l sign the contracts for supply and installation o f equipment and execution o f works for a l l hospitals, and make necessary provision o f funds in i t s budget. An officer o f the M o H and the Director o f each o f the participating hospitals w i l l be the jo int contract administrators. The consultant engaged by SEEA w i l l submit their supervision reports to the respective Director o f the hospital and to the M o H and PSC through SEEA. Similar arrangements wil l be made by the Ministry o f Education for implementation o f the project in the schools.

Technical Assistance: For the public building component, the consultants w i l l be engaged for technical design, procurement packaging, procurement o f contractors, contract administration, quality control, and supervision o f execution o f works. The SEEA would be responsible for ensuring the performance o f public building consultants and w i l l designate a small team o f staff for the purpose. Incremental operating costs of this unit w i l l be met through the proceeds o f the Credit. MOMEBEEA w i l l engage consultants for communications, monitoring and evaluation, as wel l as preparation o f energy audits and investment proposals. The selected TA activities complement the institutional development initiatives supported by other donors, in particular the U S A I D and the EAR.

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

Funds Flow

The IDA Credit w i l l be made available to Serbia and Montenegro (SaM) under a Credit Agreement, governing the terms and conditions o f the Credit. The Government o f SaM would on-lend the funds on IDA terms to the Republic o f Serbia based on a Sub-credit Agreement w i th terms and conditions satisfactory to IDA. The project expenditure wil l be accounted for by the Republic o f Serbia as a part o f i t s budgetary expenditure on capital improvements in schools and hospitals and for technical assistance.

- 17 -

Counterpart funds will be drawn down in accordance with the regular budgetary mechanisms o f the Republic o f Serbia and w i l l be subject to the control and oversight o f the Treasury department o f the Ministry o f Finance.

The following legal agreements w i l l define the f low o f funds and the respective parties' roles and responsibilities:

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

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

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

D. Project Rationale 1. Project alternatives considered and reasons for rejection:

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

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

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

- 1 8 -

o f the local communities, the benefits achieved in these public service buildings w i l l help increase awareness. This wil l also help the utilities and the government obtain cooperation o f consumers when they try to implement energy efficiency measures that seek to change consumers attitude towards energy use.

Bank-financed Energy Sector / Pricing Reform

Emergency Rehabilitation / Energy Strategy / Energy Sector Reform

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Structural Adjustment Credit

Electric Power Emergency Reconstruction Project

Sector Issue Project I

Health Sector 3ther development agencies Energy Efficiency in Public Buildings; Local Government Capacity

Energy Efficiency in Residential Buildings National Energy Efficiency Program

Emergency Fuel and Electricity Imports

District Heat Rehabilitation

Serbia Health Project

Community Revitalization through Democratic Action / Local Government Initiatives / Serbia Emergency Energy Efficiency Programme (USAID Demonstration projects (KfW); Heat Pricing Study (KfW) Energy Priority Programme

Energy for Democracy (EAR); Serbian Assistance Fund for Energy (USAID, EAR) Belgrade District Heating Rehabilitation (EBRD)

(EAR)

Education Sector Serbia Education Improvement Project

Latest Supervision (PSR) Ratings

(Ban k-Rnancet Implementation

Progress (IP)

S

S

S

S

projects only) Development

Objective (DO)

S

S

S

S

(Highly U nsatistactory)

3. Lessons learned and reflected in the project design:

The construction o f gas-fired heat generation plant i s technically a relatively simple investment but i t s success depends on good technical specifications, procurement, and contract administration. The Bank procurement guidelines wil l be followed. Qualified technical consultants are being hired for al l aspects o f design, procurement, contracting, and supervision o f implementation. The scope o f work o f the Design and Supervision consultants i s attached at Annexure 11.

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

- 19 -

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

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

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

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

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

4. Indications of borrower commitment and ownership:

After the conflict ended, the Government o f Serbia and Montenegro accorded the energy sector i t s highest priority for immediate attention by the donor community. Price reform in electricity i s on schedule, and despite many difficulties EPS has started to disconnect delinquent customers since March 2002. Significant tari f f adjustments have been implemented for electricity and heat utilities. Electricity imports have been supported by the donor community, but donor priorities are being re-directed to other needs. The Government i s aware o f this and, therefore, despite i t s budget constraints has set up a new agency, SEEA, to deal wi th energy efficiency issues.

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

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

5. Value added o f Bank support in this project:

The major role the Bank plays in the Serbian energy sector reform agenda helps it leverage rather small

- 20 -

amounts o f IDA resources and weigh in on important demand-side policy reforms identified during project preparation and implementation. Likewise, the results o f this project shall provide practical inputs to better inform evolution o f Serbia's energy strategy, which the Bank i s supporting through SAC I and the Electric Power Emergency Reconstruction Project. The additional input from the demand-side would strengthen the value added the Bank i s providing mainly through supply side reforms and help the Government develop a comprehensive energy policy agenda.

EBRD has approved a loan o f US$ 20 mil l ion for rehabilitation and modemization o f the district heating network in Belgrade, while KfW i s financing similar investments in Novi-Beograd and other urban areas. The proposed project will help enhance the benefits o f supply side improvements through simultaneous financing o f energy efficiency investments.

The proposed project wil l help Serbia go beyond the technology demonstration pilots and help overcome several barriers to the development o f the energy efficiency market- in particular the lack o f information, lack o f coordinated policies, absence o f practical examples o f bringing together different government agencies that need to come together for realizing the untapped potential o f energy efficiency in Serbia.

This project w i l l help set the stage for improving end-use efficiency in the residential sector by providing the necessary practical experience to the public officials which they need before taking the necessary policy and tariff decisions, develop methodologies for energy audits and contractual arrangements for energy efficiency investments, and trigger development o f a market for energy efficiency services.

The Bank would leverage i t s experience in facilitating public and private initiatives to undertake energy efficiency improvements. The Bank would also help mobilize other donor assistance for energy efficiency.

Change Gas price Electricity price Base case 32.4% 32.4% Increase by 20% 18.1% 36.2% Increase by 10% 25.7% 34.2% Decrease by 10% 38.4% 30.7%

E. Summary Project Analysis (Detailed assessments are in the project fi le, see Annex 8)

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

Investment cost 32.4% 26.9% 29.4% 36.0%

Table 2: Sensitivity Analysis o f Economic Rate o f Return

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

- 2 1 -

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

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

Fiscal Impact:

NA

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

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

- 22 -

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

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

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

Participation o f hospital and school administrators in contract management w i l l ensure that the retrofitting measures meet their needs and the contractors perform quality work. The PSC proposes to invite the administrators o f the participating schools and hospitals, and the municipal officials o f relevant municipalities to a workshop to explain to them the details o f energy audit, investment packages, procurement, contract management and approval o f contractor’s invoices, and quality control.

4.1 Executing agencies:

The Government of Serbia’s Ministries o f Mining and Energy, Health, and Education w i l l be the executing agencies. The M O M E has the responsibility for defining and implementing the policies for the energy sector and for promoting energy efficiency. The assets o f all hospitals, including the CCS, are owned by the Government of Serbia (Ministry o f Health) but i t s recurring costs, including maintenance expenditure, are paid by the Health Insurance Fund which buys the services o f the hospitals for public benefit. The CCS, being a large national hospital and a medical college, has the capacity and authority to manage large contracts. The assets o f schools are mostly owned by the Government o f Serbia (Ministry o f Education) but their recurring costs are paid by the municipalities. Therefore, though technically the executing agencies w i l l be the Min is t r ies o f Energy, Health, and Education, the participation o f provincial government and municipalities i s necessary to achieve the development and implementation objectives o f the project.

4.2 Project management:

The PSC w i l l be responsible for coordinating and providing direction on al l the activities o f the project to al l the agencies involved. I t w i l l be assisted by a small P I U at the Ministry o f Mining and Energy, and w i l l benefit from the already existing PIUs at the Ministry o f Health and Education. The contracts w i l l be signed jointly by the MOH and CCS for implementation o f the CHP plant and retrofitting o f the matemity

- 23 -

hospital, by the Ministry o f Education for al l the schools, by the Ministry o f Health for al l the hospitals, and joint ly by the MOME and SEEA for technical assistance. The CCS w i l l engage design and supervision consultants for the CCS component, who w i l l also coordinate wi th NIS-Energogas the gas supplier for extension o f the gas pipeline. The M O M E and SEEA w i l l procure public building consultants for design and supervision o f schools and hospitals. (Annexure 6(B) provides a diagrammatic presentation o f the arrangements, described in more details in the PIP). MOH and MOES will, by a Government decision, authorize SEEA to manage the quality and output o f the design and supervision consultants for the public buildings.

4.3 Procurement issues:

Procurement o f CHP plant, reconfiguration and replacement o f heat distribution network, and retrofitting o f public buildings w i l l be done through international competitive bidding. For evaluation o f bids the evaluation team will include representatives o f the Ministries o f Energy, Finance, representatives o f other Ministries and agencies as appropriate for their respective components. Procurement o f communication consultants w i l l be done by SEEA through Quality and Cost Based Selection procedure. Procurement capacity assessment of the MOH, MOES, MOME, and SEEA has been done by the Bank team and i s considered satisfactory.

4.4 Financial management issues:

A financial management review was undertaken during project appraisal, to determine whether the financial management arrangements for the Project are acceptable to the Bank. I t has been concluded that the Project does not currently satisfy the Bank’s financial management requirements, however, subject to the completion o f the agreed action plan, the project i s expected to satisfy these requirements prior to the negotiations.

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

Disbursements from the IDA credit w i l l follow the transaction-based method, Le., the traditional IDA procedures including direct payments, special commitments and reimbursements, either wi th full documentation or certified statements o f expenditures. I t i s not anticipated that the project w i l l migrate to report based disbursement.

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and E M P preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

An Environmental Assessment report has been prepared for the Clinical Center component. Significant environmental benefits are expected from the proposed works, which include replacement o f the present fue l (coal, mazut and light fue l oil) by natural gas, closure o f a l l existing, o ld and dilapidated boiler plants, and construction o f a new centralized boiler plant including a combined heat and power (CHP) generating facility, Ash w i l l be practically eliminated, whereas sulfur dioxide and nitrogen oxide emissions w i l l be greatly reduced. Noise and dust associated w i th coal and fue l o i l transportation and ash removal w i l l also

Environmental Category: B (Partial Assessment)

- 24 -

be eliminated. However, connecting the Clinical Center to the gas pipeline and construction o f gas-fired boilers w i l l require appropriate environmental and safety measures, and these have been addressed as part o f the environmental management plan (EMP). Compliance with the environmental safeguards enumerated in the E M P for construction and operation o f the CHP plant, i s included as a covenant in the Credit Agreement.

The energy efficiency retrofitting projects will involve improvements to heating systems, insulation, thermostatic valves and other installations in buildings, as wel l as heat substations and networks. The SEEA w i l l ensure that the sub-projects meet al l occupational health and safety regulations, and comply wi th the Serbian environmental regulations as well as the Bank's safeguards policies. Any large scale new construction wi th significant environmental impacts i s unlikely to be financed under this component.

5.2 What are the main features o f the E M P and are they adcquatc?

The EMP addresses the issues related to design, construction and operation o f the centralized boiler plant and connecting the gas pipeline. Measures have been outlined for noise abatement from the CHP plant, and NOx and SO2 emissions reduction f rom the boilers, assuring safety o f the gas pipeline connection, as wel l as mitigation o f the minor adverse impacts during construction. Necessary technical specifications w i th respect to these w i l l be prepared as part o f the technical design, and their implementation included in the installation and construction contract as wel l as in operational and management practices o f CCS's engineering staff. For the energy efficiency component, other than handling o f asbestos and minor construction related disturbances, major safeguards issues are not expected. The SEEA w i l l ensure that the construction contracts include clauses that would require contractors to comply w i th the safeguards standards.

5.3 For Category A and B projects, timeline and status o f EA:

For the Clinic Center: EA start-up date: Date o f first EA draft: Date o f final draft:

Date o f receipt o f f inal draft:

15 December 2002 08 September 2003 17 October 2003

5.4 H o w have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

The EMP has been disclosed in the country and at the Bank's Infoshop. Consultations have been held with the local community while deciding the route o f the gas pipeline. Further, the local communities are planned to be consulted for retrofit projects in schools. A public consultation meeting was organized in the Clinical Center in September, 2003 to discuss the environmental aspects o f the project with the relevant stakeholders, including NGOs and the public. More than 150 people from the community, public officials, and representatives o f the donors participated. Three presentations were made about the project which were followed by discussions. The participants appreciated the process o f consultation, potential benefit o f reduction in air pollution, improvement in the maternity hospital, and in other hospitals and schools.

5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? Do thc indicators reflect the objectivcs and results o f thc EMP?

The EMP includes a monitoring plan for air emissions from the boilers during operation in accordance w i th the Serbian environmental regulations. Provisions are also made for monitoring the implementation of environmental measures during construction activities. While direct environmental benefits are not expected to be monitored, foregone use o f dirty fuels due to project inputs has been calculated to estimate positive environmental benefits.

- 25 -

6. Social: 6.1 Summarize key social issues relevant to the project objcctives, and spccify the project's social development outcomes.

The project i s designed to address the high cost o f heating public buildings and the environmental impact o f use o f dirty fuels for heating.

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

To create incentives for the local communities to continue to maintain the energy efficiency measures the provincial government o f Vojvodina has indicated i ts willingness to pi lot a program o f sharing the benefits o f energy savings with the school, to be used for predefined purposes such as purchase o f sports equipment, additional pedagogical tools etc. at the discretion o f the local community and the school administration.

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

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

A detailed feasibility report conducted for the construction o f the CHP plant and the gas pipeline has confirmed that there w i l l be no acquisition o f land and displacement o f people. A highly publicized public consultation meeting was held in Belgrade, where the details o f the project, route o f the gas pipeline, and replacement o f existing coal and oil-fired heat plant wi th that a gas-fired plant were shared with the public, media, and NGOs.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The project design i s intended for continuous leaming throughout implementation so as to better understand the functioning o f a demand-side program that i s based on public-private initiative in Serbia. During the initial selection o f social sector buildings, the ministries o f health and education have been exposed to many local initiatives to involve parents, teachers, medical staff, and health NGO groups into monitoring and evaluation o f project implementation. The school children in the participating schools can become very important agents to reach a wider population wi th information about energy efficiency beyond the direct beneficiaries. This would help prepare the ground work for other demand-driven projects, such as the associated GEF project, which w i l l focus on the residential sector where beneficiaries w i l l be asked to make

- 26 -

collective decisions about energy efficiency improvements. Thus, when the selection process i s completed, appropriate participatory approaches, such as advisory groups, information dissemination and feedback, and a continuous public consultation w i l l be initiated with the assistance o f communication consultants in some localities and then replicated in others.

6.3 H o w does the project involve consultations or collaboration wi th NGOs or other c iv i l society organizations?

The project team has been working closely wi th a locally-established intemational NGO, Alliance to Save Energy, working as consultants to SEEA under a U S A I D grant. A subcommittee on energy efficiency has been established under the auspices o f the Standing Committee o f Local Authorities. U S A I D i s funding a program to strengthen local capacity through this Committee. A local network o f journalists interested in energy issues has been recently established and i s increasingly spreading information about energy and this project in close cooperation wi th the ASE. The PRSP National Strategy was approved in September, 2003. A special PRSP Energy Team has made its contributions, and a substantive consultations were conducted between M a y and September 2003. A second phase o f the social assessment, undertaken by ASE in April 2003, was a very specific consultation process in which a number o f municipal officials, tenant associations, hospital and schools' professional groups were consulted. In the context o f public consultation for environmental assessment for a CHP plant at the CCS, held in Belgrade, the broader details o f the project, the implementation plans, and the l ikely benefits were shared with the civic society. A communication program w i l l be launched and discussions w i l l be held with the local communities to mobilize citizens to (i) learn more about energy savings/efficiency and (ii) to lay the ground work for the GEF project, i.e. to mobilize homeowner associations and encourage local self-help groups and NGOs to promote collective decision making by the homeowners and learn about the commercial banks' operations and procedures.

6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomcs?

The SEEA has incorporated specific selection and appraisal criteria for energy efficiency investment that substantially include social and demographic elements. The selected social sector buildings w i l l cover the whole country and be focused on some poor regions or poor urban and rural areas or areas with substantive numbers o f refugees and IDPs. When project implementation starts, SEEA wil l implement communications activities designed to involve the many beneficiaries, i.e. parents, teachers, and NGOs. This communication plan could include town-hall type meetings, press briefings, and radioiTV contact programs. A social sector specialist o f the Bank w i l l be involved in the supervision o f the project.

6.5 H o w w i l l the project monitor performance in terms o f social development outcomes?

SEEA w i l l outline a draft scheme o f monitoring and evaluation, which would go beyond pure technical and financial elements and include social elements. This plan w i l l include monitoring o f the perception and attitudes o f direct beneficiaries wi th regard to the levels o f comfort, air quality, quality o f lighting, and observed energy savings. In addition, progress in implementation and the information on the benefits realized through the project w i l l be shared with the local communities. This especially refers to sharing o f evaluation report o f achieved energy savings.

Policy Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) Natural Habitats (OP 4.04, BP 4.04, G P 4.04) Forestrv (OP 4.36. G P 4.36)

Triggered 0 Yes 0 N o 0 Yes 0 N o 0 Yes 0 N o

I I I

- 27 -

Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)"

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

An environmental assessment, including environmental management plan, has been prepared in compliance with OP 4.01 on Environmental Assessment. Bank supervision missions w i l l include, when appropriate, an environmental specialist who will review activities undertaken to comply w i th the Bank's environmental policies, Periodic progress reports o f implementation w i l l include compliance w i th safeguards.

0 Yes 0 NO

0 Yes 0 N o 0 Yes 0 N o 0 Yes 0 No 0 Yes 0 NO

0 Yes 0 NO

0 Yes 0 No

F. Sustainability and Risks

S

1, Sustainability:

Energy reforms and social issues arising f rom them are dealt w i th primarily through a series o f SACS. Poverty and l iv ing standards surveys

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

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

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

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

2, Cri t ical Risks (rcflecting thc failure o f critical assumptions found in the fourth column o f Annex 1): ~~

Risk I Risk Rating I Risk Mitigation Measure From Outputs to Objective

- 28 -

Energy strategy, including heat strategy, i s not adopted and its implementation not started.

SEEA i s not part o f energy policy-making process.

Co-financing for the gas pipeline i s not available and adequate gas i s not made available

For design, supervision, supply and erection o f equipment, technically competent consultants and qualified contractors are not selected. From Components to Outputs Sufficient Counterpart financing for the CCS, schools and hospitals i s not available.

Weak implementation capacity o f SEEA and the CCS affects the pace o f implementation

OGrall Risk Rating

i isk Rating - H (High Risk), S (Substantial Ris

M

S

M

M

M

, M (Modest Risk), 1

(conducted through other Bank operations) and the poverty reduction strategy, currently under preparation, will help improve criteria for supporting the poor. A draft energy strategy has been prepared and i s currently under discussion. A draft energy law has been approved by the government and submitted for approval o f the Parliament. Technical Assistance from EAR i s being provided for SEEA’s institutional development. Outputs from this and the proposed GEF project shall provide SEEA the experience needed to underpin policy advice. NIS-Energogas i s commited to finance and construct the gas pipeline. Contract award for the heat plant wil l be subject to the award o f contract for construction o f gas pipeline. Bank’s procurement procedures w i l l be used and Bank team w i l l be closely involved in review o f procurement, and supervision o f implementation.

The budget proposals for FY 2004 are considered adequate for the project’s first year expenditure. Assurances from the Ministry o f Finance shall be sought to ensure counterpart financing i s provided for future years. The City administration has promised to contribute U S $ 500,000 equivalent to fund the CCS component. Through the project, competent and qualified consultants w i l l be engaged for providing assistance to both the agencies in technical designs and specifications, preparation o f bidding documents, procurement, quality control, and contract administration. Macroeconomic and political stability remain key risk drivers that would significantly affect the demand-side measures proposed under the project. However, electricity and heat tariffs have been substantially increased, and are expected to be increased s t i l l further. The commitment o f the Government and the various local governments to this project i s very high. :Negligible or Low Risk)

3. Possible Controversial Aspects:

- 29 -

G. Main Credit Conditions 1. Effectiveness Condition

(i) execution o f a sub-credit agreement between SaM and the Republic o f Serbia, satisfactory to the Association;

(ii) receipt by the Association o f a satisfactory legal opinion from SaM regarding the execution and binding nature o f the DCA, following D C A ratification by SaM parliament, and regarding the execution and binding nature o f the sub-credit agreement between SaM and the Republic o f Serbia; and

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

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

Safeguards Covenants

(i) The project construction w i l l comply w i th the environmental safeguards described in the Environmental Management Plan.

Financial Covenants

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

(iii) The P I U shall prepare quarterly Financial Monitoring Reports (FMRs) which wil l include, at a minimum:

a statement o f sources and uses o f funds for the Project that shows year to date and cumulative amounts, and explains variances between the actual and planned uses o f such funds;

0 describes physical progress in Project implementation, both cumulatively and for the period covered by the said report, and explains variances between the actual and planned Project implementation; and sets forth the status o f procurement under the Project The first FMR w i l l be furnished to the Association not later than forty-five (45) days after the end o f the first calendar quarter after the Effective Date

0

H. Readiness for Implementation H 1. a) The engineering design documents for the first year's activities are complete and ready for the start

o f project implementation. 0 1. b) No t applicable.

0 2. The procurement documents for the first year's activities are complete and ready for the start o f

H 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory project implementation.

- 30 -

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

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

al l other applicable Bank policies.

- Nancy Cooke

Sector ManagerlDirector Acting Country Director

- 31 -

Annex 1: Project Design Summary SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

Hierarchv of Obiectives Sector-related CAS Goal: TSS Goal: Reduce nacroeconomic imbalances in :nergy. TSS Goal: Stimulating iear-term growth and xeating a basis for ustainable supply response.

Jroject Development 3 bjective: To improve end-use energy :fficiency in heating buildings o make heating more iffordable as well as improve unctional and health mvironment o f the users. A n mportant associated objective s to reduce the local and global environmental impact )f the use o f dirty h e l s for ieating buildings in Serbia.

lutput from each Zomponent: Zomponent 1 : Snvironmental mprovement,rehabilitation If heat supply system, and 'nergy efficiency

Key Performance Indicators

Sector Indicators: Adequate increase in power tariffs to cover cost of supply.

New energy policy, and new energy law adopted.

Outcome / Impact Indicators: Reduction in emission o f local air pollutants (sulfur dioxide, nitrogen oxide, and particulates) and greenhouse gases (carbon dioxide) produced by the boilers used by the Clinical Center for meeting i t s heat demand

Quantified energy savings o f the retrofitted public buildings, and cost o f heat per square meter.

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

3utput Indicators:

Data Collection Strategy

Sector1 country reports: 3ank supervision and country rogress reports.

'reject reports:

Zonsolidated quarterly reports ~y the Project Steering Zommittee.

kfonitoring reports on :missions and on heat losses n the distribution system, +om the CCS.

3ank supervision missions.

Zonsultations with MOME, 3EEA, Ministry o f Health, ainistry o f Education, and he municipalities.

'reject reports:

2uarterly reports by PIUs, Supervision missions, and :onsultations with GOS.

Critical Assumptions from Goal to Bank Mission) 'olitical commitment to eform i s strong.

3xternal financing equirements met through levelopment agency financing .nd fiscally responsible budgets.

from Objective to Goal)

20s committed and mplementing energy reform igenda in a timely way.

'ublic officials use energy :fficiency as one o f the :riteria in their capital :xpenditure and operation and naintenance expenditure for he public buildings.

~~ ~

from Outputs to Objective)

- 32 -

improvement in the CCS. (1) Significantly lower emission o f air pollution and GHG from the CCS complex within Belgrade's heavily polluted urban center and (2) lower cost o f energy consumption for CCS. 1.1 The Clinical Center connected to gas supply and gas-fired heat and power production plant installed.

1.2. Retrofitting o f the maternity hospital completed according to specifications.

1.3 Technical assistance for project implementation at CCS delivered.

Component 2 : Energy Efficiency improvements in Social Services Facilities (Schools and Hospitals) across Serbia Lower cost o f energy consumption and improved user comfort within participating hospitals and schools. 2.1 Energy efficiency equipment installed and rehabilitated in social services facilities.

Component 3. Technical Assistance Relevant TA activities professionally implemented, on time, and within budget. 3.1 Technical assistance for project implementation in social service buildings provided

The Clinical Center uses gas or meeting i t s needs o f heat, lot water, and steam.

mprovement in patient and )ther end-user comfort, air pality, and indoor air emperature, and reduction in :nergy consumption jatisfactory progress in lesigning, procurement and mplementation of sub xojects and quality o f works :xecuted according to the :ontracts

(umber o f buildings etrofitted.

;atisfactory progress in lesigning, procurement and mplementation o f sub lrojects and quality o f works

A&E reports

'rogress reports, including eport on quality o f work xecuted

luarterly reports by SEEA. hpervision missions :onsultations with GOS and ;EEA.

'rogress reports, including eport on quality o f work xecuted

The gas pipeline i s extended o the Clinical Center, idequate gas i s made wailable, and the CCS staf f )perates and maintains the )lant well. lospital technical staff )perates and maintains the acilities well.

Zompetent technical :onsultants are engaged; :ounterparts are available at X S for contract idministration.

3nergy pricing reforms :ontinue; Energy strategy idopted and i t s mplementation started; SEEP s part o f energy )olicy-making process.

'ublic buildings selected iccording to an agreed :riteria; Satisfactory mplementation arrangements nade for execution of works; Subprojects are completed uithin the cost estimates, and ;avings are realized.

Zompetent technical :onsultants are engaged; :ounterparts are available at 3EEA for contract

- 33 -

3.2 External Communications technical assistance provided to SEEA.

3.4 Monitoring and Evaluation program implemented

Project Components / Su b-components: Component 1:

3.3 Energy Audits

Satisfactory M&E program designed; data collected, analyzed, and used for feedback to the policy makers, and for refining communication plans for promoting energy efficiency measures.

Inputs: (budget for each component) US$ 8.4 million

executed according to contracts Communication plan and budget completed annually.

Number o f local communities consulted; other outreach programs performed.

Number o f Energy Audits and Investment Proposals completed.

'rogress reports, including vl&E report.

Jroject reports:

'roject progress and Iisbursement reports quarterly and annual).

teview o f technical pecifications, and mngagement o f consultants hrough Bank procurement irocedures

administration.

SEEA Communications Strategy prepared, Project x"unication plan prepared md consistent with Strategy, Zonsultants engaged to implement the plan. Feedback mechanisms put in place for making outreach program effective. Adequate number o f technically qualified professionals interested in this business, and ready to invest in training for future business opportunities. Competent consultants zngaged to design and implement the M&E program. M&E integrated in SEEA's business process.

(from Components to Outputs) Sufficient counterpart financing.

Competent supplier and contractor are engaged for supply o f equipment and Zxecution o f works; For the gas pipeline satisfactory implementation arrangements are made.

- 34 -

Subcomponent (d) Energy efficiency improvements in the maternity hospital at the CCS

Component 2 : Energy Efficiency improvements in Schools and Hospitals across Serbia

Installation o f energy efficiency equipment and renovations in selected social service facilities (init ial investment program consists o f 17 schools and 12 hospitals,).

Component 3: Technical Assistance Technical assistance for design and supervision o f implementation o f public buildings retrofitt ing (Component 2) ; Energy Aud i t ing and preparation o f investment proposals; Communication, Mon i to r ing and Evaluation;

Component 4: Incremental Operating Costs

I S $ 14.12 mi l l ion

JS$0.47 mi l l ion

JSO.50 mi l l ion

Ceview o f technical ipecifications, and ngagement o f consultants hrough Bank procurement wocedures

2omponent 2 : Energy 3fficiency improvements in Social Service buildings

nstallation o f energy :fficiency equipment and enovations in social service acilities (schools and iospitals).

)reject progress reports, iupervision missions

)reject progress reports, iupervision missions

Competent contractors and suppliers are engaged for execution o f works

Energy efficiency measures realize expected savings.

Satisfactory implementation arrangements are made between the Ministries o f Education and Health and SEEA.

GOS and the municipalit ies to provide incentives for the schools and hospitals to continue to maintain energy efficiency measures. Qual i f ied consultants are engaged fo r various activities included in the sub-component; SEEA i s able to provide counterpart staff to work w i t h the consultants.

M O H , MOES, M O E and SEEA are able to execute implementation responsibilities cost-effectively

- 35 -

Annex 2: Detailed Project Description SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

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

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

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

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

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

The medium pressure gas pipeline (about 4 km) from the existing gas network w i l l be extended to the CCS. A gas pressure reduction station w i l l be located in the CCS area. N I S Enrgogas (a national gas company)

- 36 -

w i l l supply the gas, own the gas pipeline and the pressure reduction station. The low pressure gas pipeline at the hospital area wil l belong the CCS. N I S Energogas wil l also prepare the technical specification for the gas pipeline and be responsible for obtaining al l necessary licenses and permits. The gas pipeline w i l l be constructed along the main highway and i s not crossing privately owned land thus N I S Energogas should not have any difficulties wi th right-of-way issues.

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

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

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

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

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

Project Component 3 - US$ 0.46 million Technical Assistance

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

- 37 -

component w i l l also help in creating local capacity in the market for providing energy audit services, supply o f equipment, and contractual arrangements for providing high quality o f workmanship in execution o f works. In particular, this component will include engagement o f consultants for:

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

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

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

(iv) selected public buildings.

Energy Auditing. The project w i l l finance the energy audit and project preparation costs for

(v) Accounting software w i l l be purchased and a local accounting consultant w i l l be hired to design and implement proper accounting and internal controls for the project as wel l as generate project management reports in a format acceptable to the Bank.

Project financial management assistance.

(vi) o f the IDA credit.

Auditing. The cost o f audits o f the project financial statements w i l l be financed out o f the proceeds

- 38 -

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

0.46 0.50 0.75

13.42 0.76 1.47

Project Cost By Component Environmental Improvement, heating system renovation, and energy efficiency improvement at the CCS Energy Efficiency Improvcmcnts in Social Service buildings (Schools and Hospitals) across Serbia Technical Assistance Incremental Operating Costs Unallocated Total Baseline Cost

Physical Contingencies Price Contingencies

0.00 0.00 0.75 8.87 0.16 0.32

Local Foreign

7.88 4.48

Total US $million

7.47

12.36

0.46 0.50 1.50

22.29 0.92 1.79

I Total Financing Required 1 15.65 1 9.35 1 25.00

Project Cost By Category Goods Works Services Incremental Operating Costs Unallocated

Total Project Costs' Total Financing Required

Local ' Foreign US $million US $million

6.00 8.00 7.00 0.00 1.40 0.60 0.50 0.00 0.75 0.75

15.65 15.65

Total US $million

14.00

25.00

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

project cost net o f taxes.

- 39 -

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

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

1 If the difference between the present value o f financial and economic f lows i s large and cannot be explained by

taxes and subsidies, a b r ie f explanation o f the difference i s warranted, e.g. "The value o f financial benefits i s less than that o f economic benefits because o f controls o n electricity tariffs."

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

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

(a) Conversion and rehabilitation o f a number o f the boiler units and replacement o f the rest older units by new gas fired ones; as wel l as wi th repairs or replacement o f certain sections o f the steam or water distribution network;

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

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

(d) Replacement o f a l l the existing boiler plants by one or more new centralized gas fired ones at selected site(s), as well as wi th reconstruction or replacement o f certain sections o f the steam or water distribution network;

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

- 40 -

CCS. The alternative i s described in detail in Annex 2.

Item

Cost Benefit Analvsis Heating Svstem

Unit Unit price I Notes

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

Coal

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

US$/ton 80

Cost Benefit Analvsis for the Heating Svstem including the CHP plant

Mazut Light f ie1 o i l Natural gas

Based on the above-mentioned assumptions the cost benefit analysis for the whole proposed investment program for the heating system including the CHP plant shows the economic rate o f return o f 32.4% for the CCS component wi th the total investment o f US$ 7.21 million.

US$/ton 227 US$/ton 680

US$/lOOO m3 175

Price assumptions:

Electricity purchase price Electricity sales price

US$/MWh 40 US$/MWh 32

I I I I I

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

- 4 1 -

ECONOMIC ANALYSIS OF CENTRALIZED HEATING ALTERNATIVE AT CCS

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

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

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

Light fuel oi l 443 443 443 443 443 443 443 Coal 541 54 1 54 1 541 541 54 1 54 1 Fuel storage costs 360 360 360 360 360 360 360

Operation and maintenance 398 402 406 410 414 418 422 ITotal heat energy costs 4,355 4,359 4,363 4,367 4,371 4,375 4,379 ICost benefit analysis (1000 US$) Investment 5,873 Total savings 2,135 2,139 2,143 2,146 2,150 2,154 Net benefits (5,873) 2,135 2,139 2,143 2,146 2,150 2,154 Economic Rate of Return (20 years) % Net Present Value (20 years, 10%) 1000 US$

Natural gas 0 0 0 0 0 0 0

36.5% 11,381

~ ~~~

WITHOUT PROJECT 2004 2005 2006 2007 2008 2009 2010

Heat energy balance (MWh) Space heating 76,000 76,000 76,000 76,000 76,000 76,000 76,000 Hot sanitary water 18,000 18,000 18,000 18,000 18,000 18,000 18,000 Steam 9,000 9,000 9,000 9,000 9,000 9,000 9,000 Total heat demand 103,000 103,000 103,000 103,000 103,000 103,000 103,000

Boiler losses 41,000 41,000 41,000 41,000 41,000 41,000 41,000 Total fuel requirement for heat 164,000 164,000 164,000 164,000 164,000 164,000 164,000 Used fuels Mazut (tons) 11,500 11,500 11,500 11,500 11,500 11,500 11,500 Light fuel o i l (tons) 650 650 650 650 650 650 650 Coal (tons) 6,800 6,800 6,800 6,800 6,800 6,800 6,800

Heat losses and own consumption 20,000 20,000 20,000 20,000 20,000 20,000 20,000

Natural eas (1000 m3) 0 0 0 0 0 0 0 Annual heating costs (1000 US$) Mazut 2,614 2,614 2,614 ' 2,614 2,614 2,614 2,6141

- 42 -

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

- 43 -

ECONOMIC ANALYSIS OF CENTRALIZED HEATING SYSTEM INCLUDING CHP

W I T H PROJECT 2004 2005 2006 2001 2008 2009 2010

Heat energy balance (MWh) Total fuel requirement for heat 164,000 109,400 109,400 109,400 109,400 109,400 109,400 Electricitv halance (MWh) Electricity demand Electricity production Electricity sales

19000 19000 19000 19000 19000 19000 19000 0 16000 16000 16000 16000 16000 16000 0 3000 3000 3000 3000 3000 3000

Electricity purchase 19000 6000 6000 6000 6000 6000 6000 Used fuels Mazut (tons) 11,500 530 530 530 530 530 530 Light fuel o i l (tons) 650 0 0 0 0 0 C Coal (tons) 6,800 0 0 0 0 0 C Natural gas (1000 m3) 0 10,450 10,450 10,450 10,450 10,450 10,45C Additional gas needed for CHP (1000 MWh) 0 1950 1950 1950 1950 1950 195c Annual heating costs (1000 US$) Mazut 2,614 0 0 0 0 0 C Light fuel o i l 443 0 0 0 0 0 c Coal 54 I 0 0 0 0 0 (

Fuel storage costs 360 0 0 0 0 0 C Natural gas 0 2,270 2,270 2,270 2,270 2,270 2,27C Operation and maintenance 398 373 373 373 373 373 373 Electrict purchase costs 760 144 I 4 4 144 144 144 144 Total energy costs 5,115 2,787 2,181 2,787 2,781 2,781 2,185

WITHOUT PROJECT 2004 2005 2006 2001 2008 2009 2010

Heat energy balance (MWh) Total fuel requirement for heat 164,000 164,000 164,000 164,000 164,000 164,000 164,000 Electricity balance (MWh) Electricity purchase 19000 19000 19000 19000 19000 19000 19000 Used fuels Mazut (tons) 11,500 11,500 11,500 11,500 11,500 11,500 11,500 Light fuel oil (tons) Coal (tons)

650 650 650 650 650 650 6,800 6,800 6,800 6,800 6,800 6,800 6,800

INatural gas (1000 m’) 0 0 0 0 0 0 0 Annual energy costs (1000 US$)

Light fuel oi l Coal Fuel storage costs Natural gas Operation and maintenance Electricity purchase cost

443 443 443 541 541 541 360 360 360

0 0 0 398 402 406 760 760 760

443 443 54 1 541 360 3 60

0 0 410 414 760 160

I Mazut 2,614 2,614 2,614 2,614 2,614 2,614 2,614 443 443 541 541 360 360

0 0 418 422 760 760

Total heat energy costs ,115 5,119 5,123 ,121 5,131 ,135 5,139 Cost benefit analysis (1000 US$) Investment 7,2 13 Total savings 2,332 2,336 2,340 2,344 2,348 2,352 Net benefits (7,213) 2,332 2,336 2,340 2,344 2,348 2,352 Economic Rate of Return (20 years) % Net Present Value (20 years, 10%) 1000 US$

32.4% 11,692

- 44 -

M a i n Assumptions: Please see the previous section

C h a n g e

Sensitivity analysis / Switching values o f cri t ical items:

Gas pr ice 1 Electr ic i ty pr ice 1 Investment cost

Economic Rate o f Return

Base case 32.4% 32.4% 32.4% Increase by 20% Increase by 10% Decrease by 10%

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

18.1% 36.2% 26.9% 25.7% 34.2% 29.4% 38.4% 30.7% 36.0%

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

- 45 -

Annex 5: Financial Summary SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

Years Ending US$ million

j Year1 1 year2 1 Year3 I year4 I Year5 1 Year6 1 Year 7 Total Financing Required

Project Costs Investment Costs 4.0 8.0 7.6 4.8 0.6 0.0 0.0

Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Costs 4.0 8.0 7.6 4.8 0.6 0.0 0.0 Total Financing 4.0 8.0 7.6 4.8 0.6 0.0 0.0

Financing IBRDllDA 3.4 6.7 6.4 4.0 0.5 0.0 0.0 Government 0.6 1.3 1.2 0.8 0.1 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial ' 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 4.0 8.0 7.6 4.8 0.6 0.0 0.0

OPERATIONAL PERIOD Year 1 year2 I year3 1 year4 I Year5 I Year6 ' Year 7

Total Financing Required Project Costs

Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recurrent Costs 4.1 4.1 4.1 4.1 4.1 4.1 4.1

Total Project Costs 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Total Financing 4.1 4.1 4.1 4.1 4.1 4.1 4.1

Financing IBRDllDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Centra I 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBenefi iaries 4.1 4.1 4.1 4.1 4.1 4.1 4.1 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 4.1 4.1 4.1 4.1 4.1 4.1 4.1

Main assumptions:

- 46 -

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

Procurement

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

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

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

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

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

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

- 47 -

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

Expenditure Category I. Works

2. Goods

3. Services

Procurement wi l l be the responsibility o f MOES for the schools and M O H for the hospitals, with the assistance o f Design and Supervision Consultant / SEEA. Contracts shall be signed by MOES for the schools and M O H for the hospitals.

Procurement Method' ICB NCB Othe: N.B.F. Total Cost 0.00 7.00 0.00 0.00 7.00

(0.00) (5.60) (0.00) (0.00) (5.60) 13.98 0.00 0.02 0.00 14.00

(11.84) (0.00) (0.02) (0.00) (11.86) 0.00 0.00 2.50 0.00 2.50

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

including incremental operating costs

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

(0.00) (0.00) (2.04) (0.00) (2.04)

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

4. Miscellaneous

5. Unallocated

0.00 0.00 0.00 0.00 0.00

0.00 0.00 1 S O 0.00 1 S O (0.00) (0.00) (0.00) (0.00) (0.00)

- 48 -

Total

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

(0.00) (0.00) (1.50) (0.00) (1.50) 13.98 7.00 4.02 0.00 25.00

(11.84) (5.60) (3.56) (0.00) (2 1 .OO)

- 49 -

Consultant Services Expenditure Category

A. Firms

B. Individuals

Selection Method

QCBS QBS SFB LCS CQ Other N.B.F. Total cos( 1.56 0.00 0.00 0.07 0.37 0.00 0.00 2.00

(1.24) (0.00) (0.00) (0.06) (0.30) (0.00) (0.00) (1.60) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

I (1.24) I (0.00) I (0.00) I (0.06) I (0.30) 1 (0.00) I (0.00) I (1.60) I Total

' ' Including contingencies

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) 1.56 0.00 0.00 0.07 0.37 0.00 0.00 2.00

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Credit.

- 50 -

Prior review thresholds (Table B) Contracts subject to prior review:

(i) first two NCB Works, and f i rst two NCB Goods contracts; (ii) al l ICB contracts for Goods (including Supply Installation) and first contract for shopping for goods; (iii) (iv) all contracts with consulting f i rms estimated to cost US$lOO,OOO or more; (v) all contracts with individual consultants estimated to US$50,000 or more; and (vi) the Terms o f Reference for all consultant contracts with consulting f i r m s and the terms of Reference and CVs’ o f individuals irrespective of their costs.

first two Minor Work (MW) contracts;

Expenditure Category I. Works

Contract Value Contracts Subject to Threshold Procurement Prior Review

(US$ thousands) Method (US$ millions) less than 1000; NCB; 2.00;

2. Goods

Installation Including Supply and

less than 100 Minor Works 0.20 above 500; ICB; 13.98;

between 20 and 500; NCB; 1 .oo; below 20 Shaming 0.02

CQ; LCWFBS;

QCBS

3. Services(loca1 and foreign firms)

0.37; 0.07; 1.56

below 50; between 50 andl50;

above 150

Total value of contracts subject to prior review: US$19.2

Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-reviewlaudits)

Overall Procurement Risk Assessment: High

- 5 1 -

Table B1: Procurement Plan

I I

1 S&l 7.06 m 24sepw Z3Nx-M 7&K6 27&K6 31 ikC6

1 a= 0.56 M8s 1MG-4 12-ppr-04 1 1 & - & 4 l l J t K 4 31 ikC6

1 w 0.85 Nc8 13AgC4 12mG-4 1 1 w lW 1 i k a 1 W 0.85 Nc8 1 1 w loJan05 9FW lMa 143.46 1 W 0.85 N=8 BAugo5 7 m 4 3 WkLa 2wicVc6 l+k?& 1 G 270 IC8 1240.46 11-krE 1WeM)G 24krC6 1 W 1 W 0.85 Nc8 M 7 m 7 e-%-o7 w&07 1NOv.07 1 W 0.30 Nc8 w 7 ah-&% 7 - F w 27Fw 1Nwo8

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

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

da ch- 1.50 25.m

November 2003 and the report i s available separately as project document.

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

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

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

- 52 -

Are the bidding documents for the procurement actions for the f i rst year ready by negotiations: Draft Request for Proposal Documents for Design and Consultancy contracts shall be ready by negotiations

Training Information and Development on Procurement

Estimated Date of Project Launch Workshop: M a y 2004

Date of publication of General Procurement Notice: September 2003

Indicate if there is procurement subject to mandatory SPN/EOI in Development Business: All I C B and consultancy above $200,000 Retroactive Financing: approximately US$ 200,000 Advance Procurement: US$50,000

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

Action Plan to Build Procurement Capacity o f Implementing Agencies

--MOH P I U w i l l hire a part time procurement specialist to run the procurement process o f D&S consultant for Clinic Center f rom the stage o f short listing to the issuing o f RFP and thereafter assist the evaluation committee in the selection process.

--SEEA w i l l identify a procurement staff wi th adequate experience to carry out selection o f D&S consultant for Public Buildings. Later a procurement counterpart to D&S consultant should be placed in position, who w i l l be a procurement coordinator.

--MOH P I U would need to hire a staff for taking care o f procurement activities for Energy Efficiency project as existing staff are working on a full time basis for health project. This staff should be a counterpart staff for D&S consultant and do al l procurement coordination.

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

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

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

Explain briefly the expected role of the Field Office in Procurement: N o procurement service support i s currently envisioned f r o m the Resident Mission.

' Thresholds generally differ by country and project. Consult "Assessment o f Agency's Capacity to Implement __ __ . --- .- . -

Procurement" and contact the Regional Procurement Adviser for guidance.

- 53 -

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

Financial ManaPement

1. Summary of the Financial Management Assessment Country Issues

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

Strengths and Weaknesses

Technical implementation, including procurement and f inancial management functions, i s spread across several agenciedministr ies and smooth implementation wi l l depend upon the maintenance o f good l ines o f communica t ion between the various units. The risk o f interrupt ion to Project processing as a result o f th is decentralised mode o f implementation i s mit igated by (i) the use o f one central PIU (within MoME) t o retain or ig inal documentation, t o faci l i tate audi t ing and the preparation o f reports t o the Bank, the Project Steering Committee, the MoF and the part ic ipat ing l ine ministries; and (ii) the procurement packaging wh ich results in a smal l number o f h igher value contracts/transactions.

Implementing Entities

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

- 54 -

Funds Flow

The IDA Credit wi l l be made available to Serbia and Montenegro (SaM) under a Credit Agreement, goveming the terms and conditions o f the Credit. The Government o f SaM would on-lend the funds on IDA terms to the Republic o f Serbia based on a Sub-credit Agreement with terms and conditions satisfactory to IDA. The project expenditure wi l l be accounted for by the Republic o f Serbia as a part o f i ts budgetary expenditure on capital improvements in schools and hospitals and for technical assistance. Counterpart funds wi l l be drawn down in accordance with the regular budgetary mechanisms o f the Republic o f Serbia and wi l l be subject to the control and oversight o f the Treasury department o f the Ministry o f Finance.

The following legal agreements wi l l confirm the flow o f finds and the respective parties' roles and responsibilities:

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

Most disbursements under component one o f the project (USD 8.4 million) are expected to take place as direct payments from the Credit Account. For the remaining payments, a special account (SA) wi l l be opened by the GOS in one o f the Serbian commercial banks pre-qualified to hold Special Accounts. M O M E w i l l operate the Special Account. A detailed procedure for M O H and MOES to access the Special Account i s described in the project implementation plan.

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

Staffing of the AccountingIFinance Function

The majority o f procurement and invoice processing w i l l be performed by the existing PIU's within the M o H and the MoES. Each PIU wi l l engage additional procurement/disbursement staff, funded from the credit, who w i l l work under the supervision o f the existing P IU Directors. The MoME has appointed a finance officer to prepare documentation for the Bank, to control the Special Account and to consolidate the financial information provided by the M o H and the MoES.

Accounting Policies and Procedures

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

- 55 -

Reporting and Monitoring

The M o M E P I U w i l l prepare financial monitoring reports (FMRs) on a quarterly basis. The FMRs include:

a

a Project Sources and Uses o f Funds Uses o f Funds by Project Activi ty

a Special Account Statement a Project progress report a Procurement report

The first Financial Monitoring Report wil l be furnished to the IDA not later than 45 days after the end o f the first calendar quarter after the Effective Date, and w i l l cover the period from the Effective Date to the end o f the first calendar quarter. FMR formats were agreed with the P I U and were confirmed during negotiations.

Information Systems

The PIU wil l maintain i ts accounting records o n a smal l off-the-shelf commercial accounting package that i s capable o f direct ly producing the f inancial reports required by the Bank. Procurement plans wil l b e maintained on spreadsheets and wil l be reconci led to the budget data in Quickbooks.

Supervision Plan

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

2. Audit Arrangements The project steering committee w i l l be responsible for ensuring that the P I U within the M o M E has the project financial statements audited by an independent auditor acceptable to the IDA, in accordance w i th standards on auditing that are acceptable to the IDA. I t w i l l be agreed during negotiations that auditing standards acceptable to the IDA are International Standards on Auditing promulgated by the International Federation o f Accountants (IFAC). I t wil l be agreed during negotiations that auditors acceptable to the IDA are those auditors that have been unconditionally pre-qualified to audit IDA funded projects in SaM. The cost o f the audit w i l l be financed from the proceeds o f the credit.

An audit opinion o n the project's f inancial statements, statements o f expenditures, and Special Account will be required within f i ve months o f the end o f the fiscal year and also o f the closing o f the project

TORS for the audit o f the project financial statements were confirmed during negotiations.

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

- 56 -

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

Goods Works Consulting Services

Incremental Operating Costs Unallocated

Table C: Allocation of Credit Proceeds

11.87 87 5.60 80 1.60 Firms - 80

0.43 87 1.50

Individual - 70

Expenditure Category I Amount in US$million I Financing Percentage

Total 21.00

Use of statements of expenditures (SOEs):

Category Threshold Limit (US$ '000)

Works-- N C B Minor Works Goods -- N C B Shopping (International and National)

1,000 (except first two contracts) 100 (except first two contracts) 500 (except first two contracts)

20 (except the f i rst contract) Consultancy- Firms 100

- Individuals 50

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

- 57 -

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

I Project Schedule Planned Actual ITime taken to prepare the project (months) I 16 I 27 I IFirst Bank mission (identification) I I 09/17/2001 I IAppraisal mission departure I 11/10/2003 I 11/10/2003 I 1 Negotiations I 0 111 212004 I 02/06/2004 I Fanned Date of Effectiveness I 05/01/2004 I I Prepared by: Mohinder Gulati

Preparation assistance: Juderica Dias

Bank staff who worked on the project included: . - Name

Mohinder Gulati Gailius J. Draugelis Pekka K. Salminen Miroslav Ruzica Nirmala Saraswat D.C. Mishra Michael Gascoyne Miroslav Frick Marc Bellanger Juderica Dias Vesna Kostic Gennady Pilch Joseph Paul Formoso

Speciality Team Leader Energy Efficiency, Municipal Finance District Heating and Power Engineer Social Scientist Environment Engineer Procurement Financial Management and Financial Analysis Operations Consultant, Energy Efficiency Expert Program Assistant External Affairs Legal Counsel Disbursement

- 58 -

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

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

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

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

- 59 -

Annex 9: Statement of Loans and Credits SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

06-Aug-2003 Difference between expected

and actual disbursements' Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA SF Cancel. Undisb. Orig Frm Rev'd PO74666 2003 PFSACZ 0.00 60.00 0.00 0.00 40.96 -22.17 0.00

PO74464 2003 EXP FIN FAC 0.00 11.50 0.00 0.00 12.76 14.53 0.00

PO76764 2003 SAC (MONTENEGRO) 0.00 15.00 0.00 0.00 8.34 4.53 0.00

PO77473 2003 EMG POWER LIC (MONTENEGRO) 0.00 5.00 0.00 0.00 5.33 0.62 0.00

PO69374 2003 LABOR LIC 0.00 2.75 0.00 0.00 2.60 0.24 0.00

PO76390 2003 SOSAC 0.00 60.00 0.00 0.00 42.15 -29.23 0.00

PO77675 2003 HEALTH 0.00 20.00 0.00 0.00 20.61 1.07 0.00 PO75189 2002 EDUC IMPRVMT 0.00 10.00 0.00 0.00 9.79 0.84 0.00

PO74090 2002 TRADE &TRANSPORT FACILITATION IN SEE 0.00 6.76 0.00 0.00 7.71 0.59 0.00

PO74124 2002 SOCASST 0.00 0.00 10.00 0.00 0.41 0.41 0.00

PO74136 2002 EMG ELEC POWER RECN 0.00 0.00 6.00 0.00 2.43 2.43 0.67

PO74616 2002 MONTENEGRO ENV INFRA 0.00 0.00 2.00 0.00 1.33 -0.67 0.00

PO74127 2001 FIN SEC DEVT TA GRANT 0.00 0.00 6.00 0.00 2.06 1.63 0.00

PO74145 2001 PRlV SECT DEVT TA 0.00 0.00 6.00 0.00 2.01 1.68 0.00

PO77732 2003 PRlV & REST,OF BANKSiENTPRS TA 0.00 11.00 0.00 0.00 11.76 0.92 0.00

Total: 0.00 242.01 30.00 0.00 170.46 -22.00 0.67

- 60 -

SERBIA AND MONTENEGRO STATEMENT OF IFC's

Held and Disbursed Portfolio June 30 - 2003

In Mill ions US Dollars

Committed Disbursed IFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2002 Fresh&Co 8.82 0.00 0.00 0.00 8.82 0.00 0.00 0.00 1982187 Igalo 3.17 0.00 0.00 0.00 3.17 0.00 0.00 0.00 1985 Jugobanka 0.00 0.00 0.00 1.07 0.00 0.00 0.00 1.07

MFB Yugoslavia 8.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1980 Radoje 1.17 0.00 0.00 0.00 1.17 0.00 0.00 0.00 1980 Raiffeisen Yug 0.00 1.43 0.00 0.00 0.00 1.43 0.00 0.00

2002 Tigar Tyre 18.33 0.00 4.11 0.00 13.74 0.00 4.11 0.00 1980 Vojvodjanska 25.52 0.00 0.00 7.25 25.52 0.00 0.00 7.25 2002 1987189

2002 MEB Kosovo 0.00 1.11 0.00 0.00 0.00 1.11 0.00 0.00

2002103 Monte Hotels 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00

SMSIE Yugo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 67.01 2.54 4.11 8.32 54.42 2.54 4.11 8.32

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

- 61 -

Annex I O : Country at a Glance SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

Serbia and Montenegro at a glance 2/4/04

POVERTY and SOCIAL Serbia and Montenegro

2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US5 billions)

Average annual growth, 1996-02

Population 1%) Labor force 1%) Most recent estimate (latest year available, 1996-02) Poverty (% of population below national povertv line) Urban population 1% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Chiid malnutrition (% of children under 5) Access to an improved water source 1% of population) Illiteracy (% of population ape IS+) Gross primary enrollment I% of school-age population)

Maie Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982

GDP (US5 billions) Gross domestic investmentiGDP Exports of goods and serviceslGDP Gross domestic savingsiGDP Gross national savings/GDP

Current account balanceiGDP Interest paymentsiGDP Total debt/GDP Total debt service/exports Present value of dabtiGDP Present value of debtlexports

1982-92 1992-02 (average annual growth) GDP GDP per capita Exports of goods and services

6.3 1,400

11.6

0.1 0.4

10 53 72 12

2

69 69 70

1992

2001

5.5 5.7 7.7

Europe 8 Central

Asla

475 1,960

930

0.1 0.6

63 69 20

90 3

102 103 101

2001

11.6 13.6 23.7 -7.2 9.1

-4.6

101.4 2.4

2002

4.0 4.3

18.2

Lower- mlddle- Income

2,164 1,240 2,677

1 .o 1.2

46 69 33 11 80 15

107 107 107

2002

15.7 16.1 20.7 -7.0 7.2

-8.6 0.6

76.0 3.5

2002-06

3.6 3.8

16.6

Development dlamond'

Life expectancy

T .

GNI Gross per primary capita enrollment

I

Access to Improved water source

----Serbia and Montenegro Lower-middie-Income aroun

I Economic ratlos'

Trade

, 4 Investment Domestic c-i- savings li'

Indebtedness

----Serbia and Montenegro Lower-middie-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growth) Agriculture industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

Manufacturing

1982 I 9 9 2

1982-92 1992-02

2001 2002

69.6 60.7 17.4 16.3 44.6 43.8

2001 2002

14.9 6.3 6.1 11.6 9.2 34.4

30.0 26.3

1 Growth o f Investment and GDP [Oh) 1

Growth of exports and Imports [%) L

iit Note: 2002 data are preiiminary estimates. Group data are through 2001

*The diamonds show four key indicators in the country [in bold) compared with its income-group average. If data are missing, the diamond will be incomdete.

- 62 -

Serbia and Montenegro

5,000 4,000 3,000 2,000 1,000

0

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Food Other fuel Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995=100J Terms of trade (1995=100J

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Chanaes in net reserves

Memo: Reserves including gold (US$ mllll0nS) Conversion rate (DEC, ioca//US$J

EXTERNAL DEBT and RESOURCE FLOWS

(US$ mllllons) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreiqn direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest pavments Net transfers

~

1982

1982

1982

1982

~

1992

1992

1992

1992

2001

91.1 91.7

38.9 0.2

-1.4

2001

2,003

4,837

2001

2,743 5,160

-2,417

-26 1,915

-520

923 -395

1,169 66.7

2001

11,740 1,840

0

107

___

2002

21.2 25.5

42.8 -1.1 -4.5

2002

2,412

6,320

2002

3,241 6,857

-3,616

-111 2,343

-1,384

2,200 -816

2,280 64.2

2002

11,912 2,175

167

188 75

0

242

0

75

io:6 97 $8 $9 00 0, "1 *--GDP deflator - 0 - C P I

I Export and Import levels (US$ mill.)

7000 T

O2 I 96 97 98 99 00 01

Exports lmpolts i i Current account balance to GDP (Oh)

0 1 2 3 4 5 6 7 8 9

10

Composition of 2002 debt (US$ mill.)

A - IBRD E . Bilateral B. IDA D - Other multilateral F . Private C - IMF G .Short-term

_ _ _ ~ ~

Development Economics 2/4/04

- 63 -

Additional Annex 1 I Draft Terms of Reference of Design and Supervision Consultants for (A) CCS, and (B) Public

Buildings (C) Monitoring, Evaluation and Communications SERBIA AND MONTENEGRO: Serbia Energy Efficiency Project

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

1. OBJECTIVES

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

1.2 The objective o f the Consultancy i s to assist the CCS to manage the investment program, procurement, and implementation supervision o f the proposed investment.

2. SCOPE OF WORK

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

I. Preparation of project design documentation, bidding documents and technical specifications The consultant shall:

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

- 64 -

feasibility study and includes: CHP plant based on a gas engine with the capacity o f about 2 MW electricity and 2 MW heat

including connection to the power grid; Gas fired boiler plant with boiler including 3 x 14 MW hot-water boilers and 2 x 6 t/h steam

boilers, which will be located in the same building as the CHP and necessary auxiliary equipment. Heavy fuel oil wil l be used as reserve fuel for the hot water and steam boiler;

Gas fired steam boilers 2 x 2.5 MW, which will be located in a separate existing building; Heat and steam distribution pipelines within CCS area estimated length for hot water network

approx. 5 km (trench) and steam and condensate pipeline approx. 1 km, Heat distribution system with substations for approx 70 buildings at CCS; Balancing valves on the risers in order to improve the network efficiency as a complement to the

temperature control in the new substations; Dispatch center for energy supply system with in CCS including monitoring and management of

heat, hot sanitary water, steam and electricity supply and production and gas and electricity purchase, The bidding documents for the supply and installation contract wil l require that the Contractor will be responsible to prepare the detailed technical design, and obtain necessary approvals and as-built drawings of the heating plants and networks based on the suppliers equipment.

g. Provide advise on the appropriate bidding packaging for the above mentioned components to be procured in accordance with the Bank’s Standard Bidding Document (SBD) for Supply and Installation of equipment and update the procurement plan. The draft procurement plan includes one supply and bidding package for all tasks mentioned in Paragraph f above. The draft procurement plan i s in [Annex

h. Coordinate with N I S Energogas the schedule and technical requirements for construction of a gas pipeline to the CCS for gas supply. NIS Energogas i s responsible for design and implementation o f the gas transmission pipe to the CCS and the gas measuring and reduction station (MRS) at CCS and the low pressure gas pipeline from the MRS to the above-mentioned boiler plants; i. Coordinate with the consultant who will be employed under separate terms for design and supervision of energy efficiency improvements at the maternity hospital in CCS. This project will demonstrate demand side energy efficiency measures in one building (maternity hospital) in CCS; j. Review and streamline the CSS procurement routines and organization to facilitate a project implementation according to the implementation plan approved by the CCS. k. Assess training needs of the CCS energy management staff for operation, maintenance, and environmental management of the heat plant, and incorporate these requirements into the relevant bidding documents; 1. Assess environmental and safety issues arising from the investment program and recommend necessary mitigating measures to be implemented during construction and subsequent operation of the plant to ensure compliance with national and World Bank standards. The requirements o f satisfactory implementation of mitigation measures should be incorporated into the bidding documents and contracts; m. n.

21.

Define the quality assurance requirements in the bidding documents; Identify precise criteria to enable objective evaluation of bids;

11. Procurement

The Consultant shall assist the CCS in completing al l aspects related to the bidding process, communication with the Bank, preparation o f bidding documents, evaluation of bids and contract negotiations ensuring al l steps are in l ine with the World Bank’s procurement guidelines. Specifically,

- 65 -

the Consultant shall:

a. procurement notices, pre-bid meetings and site visits, issuing the bidding document, b. evaluation reports, c. d.

Plan and assist the CCS to conduct al l steps o f the procurement process including publishing o f

Assist the CCS in the bid openings, clarifications during bidding process and preparation o f bid

Assist the CCS in preparation o f contract documents, possible amendments etc. Coordination wi th gas supply pipeline construction and connection to the CCS’s heating plant.

111. Project Implementation Supervision

The Consultant shall:

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

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

j. demonstrate the benefits o f the investments for the CCS.

Assist the CCS in preparing an evaluation and monitoring plan how to identify, measure and

Public Buildings: Terms of Reference of Design and Supervision Consultants B.

1. OBJECTIVES.

O n behalf o f the Ministr ies o f Health and Education, the Serbian Energy Efficiency Agency (SEEA) intends to hire a Consultant who w i l l perform the engineering services, i.e. preparation o f layout and technical specifications and drawings to be integral part o f the biddings documents, assistance to the Client wi th the evaluation o f bids, supervision and commissioning o f works, quality control and contract administration for public building (schools and hospitals) retrofit that include but are not limited to:

- 66 -

B

B

Reconstruction o f building heat substations Reconstruction o f boiler houses including conversion o f boilers to local solid fuels Rehabilitation o f lighting systems Installation o f thermostatic valves on radiators, Installation o f balancing valves on raisers Refurbishment or replacement o f windows Insulation and renovation o f roo f Insulation o f walls and radiator niches If needed, insulation o f selected piping inside the buildings Renovation o f selected piping o f district heating network

The expected results o f the Energy Efficiency Project can be summarized as follows:

m Saving o f heat energy m

savings

Improvement o f comfort and working conditions in the social public buildings Raising o f awareness o f social sector employees and demonstration o f the feasibility o f such energy

2. SCOPE OF WORK

2.1- General definition of services

The services to be provided b y the Consultant include the following: Task 1. Design: preparation o f the lay-out, drawings, technical specifications,

bidding documents and procurement packaging for the various procurement categories, i.e. works for reconstruction andor building retrofit, supply and installation o f equipment;

Task 2. Assistance in the evaluation o f the bids and contract award; Task 3. Supervision o f works installation, assistance in quality control, timely

completion o f sub-projects, acceptance o f the works commissioned o n the sites. Task 4. Technical monitoring and evaluation: definition o f monitoring plan,

assistance for purchasing equipment, installation o f equipment,

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

2.2- Coordination

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

- 67 -

separate consultancy service (CCS Consultant).

Therefore the Public Building Consultants are required to coordinate with the CCS Consultant who wi l l be hired through a separate cal l for tender, in particular concerning the following points: 8 Design o f the heat substation. The materials and equipments that wi l l be designed for the

Matemity hospital heat substation wil l have to be compatible with the newly retrofitted building: heat losses and heat demand wi l l be different from the existing situation. The heat exchanger capacity wil l differ.

8 Connection o f pipes from the new substation to the existing internal heating system. Selection and adjustment o f the automatic temperature control. Due to the reduction o f the 8

heat losses while the internal heating system wi l l remain, the temperature curve and the automatic temperature control wi l l differ from the other CCS building, and wi l l have to be specifically adjusted in the Maternity hospital.

The Public Building Consultant wi l l refer to the Client to be informed about the CCS consultant after designation, and wi l l initiate coordination meetings with the CCS consultant.

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

As mentioned throughout the present document, the Consultant wi l l coordinate with the schools and hospitals administrator mainly for: . Collecting information on the existing operation o f the building for what concerns the heating

system, the ventilation (air infiltration through windows, periodic window opening), existing comfort and temperature; . 8

8

purpose o f meeting facility standards.

Being informed on the main problems inherent to building heating and ventilating Understanding which are the retrofitting priorities from the administrator and users point o f view Regarding Hospitals, the Consultant i s required to consult with the Ministry o f Health for the

The Client wi l l be informed about any information that could influence or change the definition o f the investment package.

2.3- Detailed sco-~e of work

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

The preliminary l i s t o f buildings and the selected energy saving measures to be implemented are given in Annex 2 for the information of the bidders.

The Consultant shall:

- 68 -

0 Prepare in cooperation wi th the local administration (of schools and hospitals) and central administration (Ministries o f Health and Education) as well as wi th the final users, o f the project sites standard technical conditions and approved order necessary for design according to the local regulations; 0 Based on (i)the existing energy audits, (ii)visit o f schools, @)and coordination w i th schools and hospitals administrators and local authorities, recommend acceptance or revisions, if necessary, o f the energy saving measures originally proposed by the Client for the selected objects; recommend, based on the audit conducted, exclusion o f any object f rom the original l is t if the Consultant considers measures planned for implementation to be not cost effective; 0 Obtain approval from the Client (schools/hospitals administrators, local authorities (Municipalities for schoo1s)and Ministries) on the updated l is t o f sites andor measures to be implemented; 0 Prepare the layout design and the technical specifications including the components that are given in Annex 1; The Consultant shall take into consideration national and local (if necessary) regulations on environmental protection, any environmental management plans for govemment facilities such as hospitals, and shall stipulate in the bidding documents the use o f environmentally friendly materials, equipment and technologies; the drawings w i l l include the details that are usually produced in Serbia and w i l l be issued at the scales required by the national norms and standards. For the technical requirements that w i l l be linked to new equipment or are not included in the National Norms, the Consultant shall fol low the DIN standards or other recognized intemational standards. 0 Transmit the bidding documents in the format that meets the Wor ld Bank and the SEEA requirements, In that sense, the Consultant shall work in close co-operation with the Client represented by SEEA in order to incorporate the Client’s recommendations on the quality o f materials, applicable technologies; 0 Include requirements for training in the operation and maintenance o f new equipment and installations in the bidding document for contractors; 0 Obtain approval (if necessary) o f final technical design from the appropriate authorities; 0 Prepare the procurement packages, the l i s t o f goods to be supplied and installed, and a cost estimate o f goods and other related Contractor Services for installation. 0 Produced the technical documentation in Serbian. For the first 3 projects o f each kind the technical documentation w i l l be fully translated in English. 0 At the Client’s request, assist the Client w i th preparation o f clarifications to bidders’ inquiries concerning the technical documentation in both languages, Serbian and English.

2.3.2- Assistance with evaluation of bids

The consultant shall:

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

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

- 69 -

The Consultant shall: verify and approve final technical designs developed by a successful bidder coordinate wi th the schools and hospital administration and the local authorities (on behalf o f the

Ministries o f Health and Education) for preparing with the contractor the works plan and schedule; carry out the supervision o f rehabilitation and construction works, and for the supply and

installation o f goods; visit the sites every two weeks and report on the work progress and on the work compliance with

the work plan and the final technical design, taking into account al l national standards and norms that could be affected by the energy efficiency works.

verify payment certificates presented by Contractors or Suppliers, address problems faced b y the contractor as delays o f delivery and installation, and recommend their solutions,

ensure the quality o f al l materials and equipments that w i l l be delivered on the work site, in particular for their compliance with the norms, and the environmental requirements; 0 ensure the quality o f the installation o f al l materials and equipments;

organise and lead the acceptance and official agreement on the implemented installation works at the fill works completion.

report to the client about al l defects in goods and works and al l facts o f usage o f unsound materials and equipment;

prepare requests to the supplier and/or the Contractor to eliminate and preclude al l defects, to replace the non conforming equipment, and to install the goods in accordance with requirements o f the contracts;

assist the Client to organise and lead the final commissioning o f the work site, certify final payment certificates including report to the Client on payment o f retention;

assist the Client to take over the project sites from Contractors; 0 introduce and obtain (if necessary) approval o f appropriate Serbian authorities o f al l modifications agreed upon the Client during contract implementation into detailed technical design. 0 Be responsible for (i)supervising the training from the contractor to the final Client (Schools and Hospitals,) if stipulated and the maintenance staff, (ii)ensure the issuance by the contractor o f a documentation on the installed products and equipment, providing the Client with the technical specification o f the products and equipments, the operation procedures and the maintenance procedures and schedule; (iii)bring to the Client a l l complementary information on the new equipment and materials that are to be installed o n the building.

2.3.4- Technical monitoring The technical monitoring o f the retrofitted buildings wil l pursue the fol lowing objectives: Determine the real energy saving before and after building retrofitting Quantify the difference o f the indoor temperature before and after building retrofitting, and

together wi th the climatic variation, adjust the gross energy saving in order to establish the savings for normative heating seasons and inside air temperatures

Assess the comfort improvement in term o f temperature and functional improvement, Assess the effectiveness o f the implemented energy saving measures such as room temperature

control, reduction o f air infiltration through windows, control o f the humidity level through the natural ventilation, satisfaction o f users.

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

- 70 -

humidity, fuel consumption, lighting efficiency and illumination level (lux on the tables and on the black board), particularly in the schools o Establish the l i s t o f equipment that have to be purchased, taking into account the existing equipment: heat meter (about one per building), fue l meter (about one per building), temperature (between 100 and 200 sensors) and humidity sensors (between 10 and 20) o Recommend a metering protocol, in general, and specifically for each site such as frequency o f data collection, units, calibration o f equipment, organization o f manual readings (if any) o Recommend the organization o f data collection, in coordination wi th the schools and hospitals administrators o Define the methodology o f analysing the collected data, o Define the reporting format 0 Assist the Client (SEEA) in purchasing the equipment

Calibrate the equipment and install them in the schools and hospitals Collect the data Analyse the data and prepare the report

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

2.4-Description of uotential e n e r n efficiency measures

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

2.4.1- Radiators niche insulation

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

2.4.2- Retroj?tting of windows

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

- 71 -

Full replacement of windows with no reduction o f glazing area. Window repair and fitting o f mountings Window replacement

2.4.3- Roof insulation and renovation

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

on the attic floor. 1

1

1 Other options o f reconstruction.

Repair and insulation o f a pitched roof. Replacement and insulation o f a pitched roof.

2.4.4- Wall insulation

The consultant wi l l design the wall renovation including both the insulation material and plaster board.. The Consultant wi l l define the technology on the basis o f the existing energy audit and through discussion with the SEEA. The insulation types wi l l be selected from the following options: Inside insulation including a plaster board, allowing the implementation of rendering and painting. Outside insulation with a normalized technology including a good quality glue mortar, insulation

Eventually, other options o f insulation.

1

1

material, an extemal coating o f glue mortar with mesh, a finishing coat an rendering. 1

2.4.5- Thermostatic and balancing valves

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

2.4.6- Heat substation

The Consultant wi l l define the technical specifications for the parts o f the substations that are to be replaced or modemized.

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

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

- 72 -

2.4.8- Rehabilitation of Lighting systems

The Consultant w i l l execute the design o f the lighting system in the room and in the buildings that w i l l be selected together wi th SEEA. As a rule, in the schools the rehabilitation o f lighting w i l l include the full replacement o f existing lighting by efficient luminaires and bulbs to ensure adequate and proper lighting in the classroom, and to improve the learning environment.

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

1. OBJECTIVES

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

2. SCOPE OF WORK

The Consultant wi l l :

o Design, execute and analyze surveys designed to systematically measure the social impact o f project activities. As part o f this assignment the Consultant wil l (a) identify key officials at the Republic and local level as well as independent and authoritative persons who could become spokespeople and “champions” for the Project; (b) develop a quantified and measurable baseline o f perceptions regarding energy efficiency o f key stakeholders identified in (a) above. The baseline should represent the existing social attitudes and perceptions that are barriers that are to be overcome if the Government i s to meet the objectives o f the Project; (c) develop and execute a plan to measure changes in perceptions at key milestones during the project, which are expected to fol low closely the project’s physical investment plan (i.e. baseline data collected and analyzed prior to physical investment and after physical investment); (d) prepare a baseline report and monitoring and evaluation reports after each milestone survey result; (e) prepare a final report on the social impact o f the project. The surveys should cover but not be limited to monitoring requirements agreed by the GOS with the Bank for the project, and be fully consistent wi th and complementary to the communications strategy and activities of the SEEA which i s supported by funding from the European Agency for Reconstruction. (information on requirements and strategy to be provided by SEEA). A suggested methodology on survey development and analysis i s attached in Annex 1 that i s to be used as a only as broad guideline o f the Employer’s requirements. The Consultant i s encouraged to revise and propose a methodology in the inception report.

o Prepare reports on a semi-annual basis on project impacts, incorporating results o f social impacts o f the project as wel l as results o f technical monitoring and evaluation activities that are to be executed by other Consultants (for the Design and Supervision o f Public Buildings works) to be engaged under separate Terms o f Reference. The Consultant i s expected to initiate coordination w i th the Public Building Consultant responsible for technical monitoring o f the project to ensure timely inputs and clarifications. The report w i l l also evaluate the effectiveness o f communications activities related to the project and recommend key messages which resonate wi th stakeholders, correcting them for results o f the feedback collected from technical and social monitoring.

- 73 -

o Building o n the information about the technical and social benefits o f the Project, the consultant wil l develop a annual external project communications plan, including detailed tactical plans and budget, to reach beneficiaries o f the investments financed through the project, stakeholders and public at large and disseminate information about the benefits o f the Project and i t s technical and social impact.

- 74 -