Moldova - Energy Project

Report No. PIC3059 Project Name Moldova-Energy Project Region Europe and Central Asia Sector Energy/Environment Project ID MDPA8555 Borrower Republic of Moldova Implementing Agencies The Department of Energy and Energy Resources Mr. Mihai Cebotari, General Director Eminescu Street, No. 50 277012 Chisinau, Moldova Tel. (3732) 22-10-10/22-22-70/22-40-30 Fax 22-22-64/23-40-64 Moldovagas Mr. Valeriu Semion Miron Vice Director-General str. Albisoara, 38 277005, Chisinau, Moldova Tel. 3732-21-22-31 or -62-59 The State Company "Moldenergo" Mr. Guenady M. Verin, Chief Engineer Hynchesht Str. 78 277012 Chisinau, Moldova Tel. 3732-22-93-24, Fax -31-42 Date the Initial PID Prepared February 15, 1994 Date this PID prepared April 16, 1996 Project Appraisal Date February 7, 1995; October 1995 (redesign) Projected Board Date May 21, 1996 1. Background. The Moldovan economy has achieved a macroeconomic stabilization. Structural reforms continue to move in a positive direction, though at a more measured pace. With high intensity of energy use and 99t import dependence, Moldova's costs of importing energy exceeded 75t of its estimated export earnings for 1994. Tariff distortions and difficulties in collecting payments have placed Moldova's energy agencies under severe financial pressure. As a result, maintenance of key facilities has been deferred. The sector is at present characterized by poorly-maintained and unsafe, infrastructure and prompt intervention is needed to address these problems. 2. Project Description. The proposed project includes: (i) Overhaul of the Chisinau No. 2 combined heat and power (CHP) plant. The project will reduce fuel consumption and restore operating efficiency, which has deteriorated due to deferred maintenance. The work will include repair of air preheaters,  boiler tubing replacement, condenser cleaning, repair of the water demineralizing system, maintenance of the circulating and main feeding pumps, fitting and piping for the district heating system and miscellaneous parts for the plant; (ii) Repair of approximately 180 leaky gas distribution points. Gas leakage, operating inefficiencies, and unscheduled outages will be reduced by replacing obsolete pressure transmitters and indicators, installing safety devices, and replacing leaking distribution lines at roughly 180 of the 800 points (consumer stations) where imported gas enters the domestic distribution network. The component could be easily expanded to repair more distribution points in the event that grant funding is available for technical assistance components, allowing loan proceeds to be reallocated; (iii) Gas Meter Installation. A pilot program of gas meter installation will be carried out for all consumer groups in order to begin the process of universal metering, improve the accuracy where meters already exist, and reduce losses. The program will include the installation of about 30,000 household meters and 7,000 apartment riser meters (multiple households) for consumers who do not currently have any meters. In addition, meters will be replaced or introduced for 60 large industrial customers and 2,100 commercial consumers; (iv) Upgrade of Accounting and Billing Systems and Financial Management. Moldenergo and Moldovagas will receive computer- system upgrades, consultant services and training in administrative procedures in order to improve internal collection and handling of operational data, to improve billing and financial management. These upgrades are needed in order to reduce non-technical energy losses, facilitate better financial decision-making and to support implementation of subsequent sector reforms; (v) Project Management and Implementation Services. As this is the first investment project in the Moldovan energy sector, technical services will be provided to Moldovagas and Moldenergo in project management and in preparing bidding documents and carrying out World Bank procurement procedures. Technical services will also be required in order to finalize the metering designs and specifications. 3. Project Costs and Financing. The total project cost including physical and price contingencies is estimated at US$20.5 million of which US$10.0 million, or about 74w, is the foreign exchange cost. Most energy equipment imported under the project is not subject to import duties according to existing legislation. Moldovagas and Moldenergo will pay any applicable import taxes from their own revenues. The total cost of the Project (before value added taxes and import taxes) is US$17.5 million. Physical contingencies were estimated at 10t of the base cost on all items except the technical services component of accounting/billing systems and implementation services where no physical -2 -  or price contingencies have been applied. Price contingencies were estimated using the standard MUV index and the average price contingency is about 10%. Value Added Tax and import duties have been excluded from the project costs to be financed by the Bank and will be covered by the energy agencies as part of their contribution. Schedule A presents the project cost table. 4. Project Implementation. The project would be implemented over a period of 4 years and is expected to be completed by December 31, 1999. Implementation of the energy components will be the responsibility of Moldovagas and Moldenergo and the Department of Energy and Energy Resources (DOE), to which they report. A Project Management Unit (PMU) will be formed in the DOE, with a Project Manager responsible for coordinating implementation activities and related technical services and supervising two Deputy Project Managers appointed by Moldovagas and Moldenergo. Installation of equipment will be the responsibility of the energy agencies, who will use their force account and specialized in-house construction and installation divisions, under the guidance of the suppliers with additional assistance from the project implementation consultants. 5. Retroactive Financing. In order to begin project implementation during the 1996 construction season, retroactive financing of up to US$1.0 million (10% of the Bank loan), for expenditures incurred after March 31, 1996, would be permitted to cover the cost of early procurement of spare parts for Chisinau No. 2 and materials needed for repair of gas distribution points. 6. Project Sustainability. The conditionality of the project will be centered on an Action Plan for Financial Rehabilitation of the Energy Sector which will reduce energy price distortions by bringing tariffs to a full-cost recovery level, eliminate special discounts and phase out cross-subsidies. Under this Plan, actions are underway to improve payment discipline prospectively, and to reschedule and otherwise settle, over a period of several years, the massive energy debts that accumulated during 1991-1995. The Plan includes a program to reduce energy theft, which will be bolstered by several project components: (i) installation of gas meters; (ii) upgrade of the energy agencies' accounting and billing systems; and (iii) technical assistance to refine long-term theft- and loss-reduction programs for Moldovagas and Moldenergo. Accounting upgrades will also pave the way for improved tariff administration and implementation of life-line tariff structures as a future alternative to cross subsidies, and they will create a framework for rational restructuring and sound financial management of sector assets. Industrial environmental and energy audits to be performed under the environmental component will provide, for the first time, a comprehensive base of data for use in rationalizing Moldova's industrial energy consumption. 7. Lessons Learned from Past Bank Experience. A review of several decades of the Bank's worldwide lending in the power sector recommended focusing on countries with a clear commitment to improve sector performance through commercialization, corporatization and the establishment of a transparent regulatory framework. The proposed project, takes only the first step to set the stage for more -3 -  comprehensive reforms. This pre-reform effort is necessary in view of the fact that Moldova's energy agencies lack strong headquarters administrative functions, due to their former consolidation in all-Union structures. Earlier this year, the Bank began implementing a Power Loss Reduction Project in Albania (Ln. 2677-AL) that addresses energy theft and excessive volumetric losses on a scale comparable to what is encountered in Moldova. Though premature to assess ultimate results, several approaches developed in this project were incorporated in Moldova's Action Plan. 8. Poverty Category. The proposed operation is not part of the Bank's Program of Targeted Interventions. However, the project establishes minimum lifeline tariffs which will benefit vulnerable segments of the population. 9. Environmental Aspects. The project is classified as Category B, requiring limited analysis under the Bank's Operational Directive 4.01: Environmental Assessment. Project components are expected to offer concrete environmental and safety benefits as described below: - Moldovagas. The program of consumer station rehabilitation will help substantially reduce gas leaks and improve safety for operating personnel and for the nearby communities. The metering subcomponent is also expected to promote conservation of gas, thus lowering the overall impact of energy use on the environment. No negative environmental impacts have been identified in connection with the Moldovagas components. - Moldenergo. It is projected that the rehabilitation of boilers at Chisinau #2 will reduce consumption of imported fuel oil and gas, by replacing deteriorated equipment that has lost its efficiency. Heat rates would be improved, thus reducing emissions per kWh of produced electricity. The reduced air emissions would also reduce the ground level concentrations of these pollutants around the plant. Worker safety will be improved by reducing the risk of ruptures in pipes carrying lethal, high-pressure steam. Accidents involving such pipes in Moldova have been responsible for worker injuries and death during the past two years. 10. Program Objective Categories. The project meets two program objectives: environmentally sustainable development and economic management. By improving efficiency and safety and reducing waste at facilities consuming non-renewable fuel resources, this project is consistent with the objective of environmentally sustainable development. The financial management and accounting upgrade component, including the Financial Action Plan, will pave the way for improved tariff administration and implementation of life-line tariff structures as an alternative to cross subsidies, thus creating a framework for national restructuring and sound financial management of sector assets. 11. Project Benefits. Quantified project benefits are derived from the following investment components: (i) gas distribution points: reduced consumption of gas for operation of stations and increased availability (lower downtime); (ii) industrial, commercial and - 4 -  residential gas metering (three subprojects): installation and replacement of inaccurate gas meters to reduce unmetered gas consumption; and (iii) Chisinau #2 rehabilitation: reduced consumption of fuel at the power plant. Other benefits expected to be derived from the project which are not easily quantified for the purpose of economic and financial analysis include: - Critical maintenance work at the gas distribution points and at Chisinau #2 would reduce noxious emissions through reduced fuel use; the maintenance would also improve worker safety and reduce noise pollution from the facilities; - The metering of gas consumption would: (i) facilitate the commercialization of the gas sub-sector; (ii) enable demand and consumption efficiency to respond to price changes as cross-subsidies are eliminated, and tariffs raised to their full cost-recovery levels for each consumer segment; (iii) reduce external debt through improved means to enforce payment discipline; and (iv) reduce economic losses through more timely and accurate detection of gas leaks; - The accounting and financial management services will increase Moldovagas and Moldenergo's ability to monitor financial performance, improve internal controls, and provide critical information for management decision-making; accounting upgrades are also expected to be a critical element in improving tariff design and collection systems, thus moving Moldova toward better economic use of energy resources - Given that this is the first Bank-financed project in Moldova's energy sector, project management and implementation services will help the companies to expedite project completion and early realization of project benefits, and to complete the metering design for large users according to accepted international standards. 12. Risks. Successful implementation of the Government's Financial Action Plan for the Energy Sector will require substantial commitment by Government and the energy companies over a period of several years, and this is subject to political risk. Formalization of a dated implementation schedule, and a requirement that initial steps be completed as conditions of negotiations, have reduced this risk but not eliminated it. Should implementation falter, the energy agencies face continuing financial difficulties that could jeopardize project implementation. In order for Moldenergo and Moldovagas to be viable borrowers, refinancing of these agencies will be required. Should Moldova fail to develop a plan for debt repayment, this could jeopardize energy supplies to the entire country. This risk is mitigated by the requirement under the project that such a plan is developed during the first year of project implementation. A related concern is that the December 1994 reduction in the border price of gas from US$80 per tcm to US$58 is not under a long-term contractual arrangement but under year- to-year arrangements. Moldova's gas, heat and power tariffs need to provide for periodic adjustments to reflect changes in input prices, and the general tariff reforms undertaken in connection with the Financial - 5 -  Action Plan will provide for such adjustments. The beneficiaries' inexperience in implementation of Bank projects poses an additional risk. This risk has been addressed through careful planning of activities that are on the critical path, and by providing technical services to the PMU. The technical risks associated with this project are minimal, given the nature of the components, which primarily involve repair and rehabilitation of assets currently in use. Based on feasibility studies conducted by qualified international consultants provided under bilateral trust-funding arrangements, commercial risks associated with the existence of excess capacity in Moldova's energy sector have been minimized by narrowly restricting the project to a select group of assets deemed to have ongoing commercial usefulness even under a scenario of major asset rescaling. Contact Point: Public Information Center (PIC) The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Acting Task Manager: Jann Masterson, EC4IN Telephone No: (202) 473 5005 Fax No: (202) 522 0078 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 6 -