Document of The World Bank Report No: ICR2263 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-38330 IDA-45410) ON A CREDIT IN THE AMOUNT OF SDR 25.7 MILLION (US$35.0 MILLION EQUIVALENT) AND AN ADDITIONAL CREDIT IN THE AMOUNT OF SDR 6.7 MILLION (US$10 MILLION EQUIVALENT) TO THE REPUBLIC OF MOLDOVA FOR AN ENERGY II PROJECT October 30, 2012 Sustainable Development Department Ukraine, Belarus and Moldova Country Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective April 30, 2012) Currency Unit = Moldovan Leu (MDL) 1.00 = US$0.09 US$ 1.00 = MDL 11.68 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ANRE National Energy Regulatory Agency CHP Combined Heat and Power CPS Country Partnership Strategy DCA Development Credit Agreement DH District Heating EA Environmental Assessment EBRD European Bank for Reconstruction and Development ECSEE Energy Community of South-East Europe EMP Environmental Management Plan ERR Economic Rate of Return EMS Energy Management System FSU Former Soviet Union GDP Gross Domestic Product GWh Gigawatt hours IAS International Accounting Standards ICR Implementation Completion and Results Report IDA International Development Association IFC International Finance Corporation IFRS International Financial Reporting Standards IMF International Monetary Fund KWh Kilowatt hours ME SE Moldelectrica (National Transmission and Dispatch company) MEPIU Moldova Energy Projects Implementation Unit MoE Ministry of Economy MWh Megawatt hour NDC National Dispatch Center PAD Project Appraisal Document PCB Polychlorinated Biphenyls PLC Power Line Carrier PPF Project Preparation Facility RTU Remote Terminal Units SAC Structural Adjustment Credit SCADA System Control and Data Acquisition SIDA Swedish International Development Agency Vice President: Philippe H. Le Houérou Country Director: Qimiao Fan Sector Manager: Ranjit J. Lamech Project Team Leader: Sandu Ghidirim ICR Team Leader: Jann Masterson ii MOLDOVA Energy II Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design ............................................................... 1 2. Key Factors Affecting Implementation and Outcomes .............................................................. 6 3. Assessment of Outcomes .......................................................................................................... 14 4. Assessment of Risk to Development Outcome ......................................................................... 17 5. Assessment of Bank and Borrower Performance ..................................................................... 18 6. Lessons Learned........................................................................................................................ 20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........................... 21 Annex 1. Project Costs and Financing .......................................................................................... 22 Annex 2. Outputs by Component.................................................................................................. 24 Annex 3. Economic and Financial Analysis ................................................................................. 31 Annex 4. Bank Lending and Implementation Support/Supervision Processes............................. 37 Annex 5. Beneficiary Survey Results ........................................................................................... 39 Annex 6. Stakeholder Workshop Report and Results................................................................... 40 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................................... 41 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................................... 54 Annex 9. List of Supporting Documents ...................................................................................... 55 MAP .............................................................................................................................................. 56 iii A. Basic Information Country: Moldova Project Name: Energy 2 Project Project ID: P040558 L/C/TF Number(s): IDA-38330,IDA-45410 ICR Date: 10/30/2012 ICR Type: Core ICR REPUBLIC OF Lending Instrument: SIL Borrower: MOLDOVA Original Total XDR 25.70M Disbursed Amount: XDR 32.17M Commitment: Revised Amount: XDR 32.17M Environmental Category: B Implementing Agencies: Moldova Energy Projects Implementation Unit (MEPIU) Cofinanciers and Other External Partners: Swedish International Development Agency (SIDA) B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 10/07/1999 Effectiveness: 03/02/2004 03/02/2004 06/29/2004 10/08/2007 Appraisal: 05/13/2002 Restructuring(s): 01/29/2009 10/13/2009 12/26/2011 Approval: 11/25/2003 Mid-term Review: 03/31/2006 04/21/2006 Closing: 04/30/2008 04/30/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance: iv C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project Quality at Entry Yes Satisfactory at any time (Yes/No): (QEA): Problem Project at any time Quality of Supervision Yes None (Yes/No): (QSA): DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 10 10 Energy efficiency in Heat and Power 10 30 General education sector 5 5 Health 5 5 Power 70 50 Theme Code (as % of total Bank financing) Climate change 13 13 Infrastructure services for private sector development 25 25 Pollution management and environmental health 13 13 Regulation and competition policy 24 24 Urban services and housing for the poor 25 25 E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Qimiao Fan Luca Barbone Sector Manager: Ranjit J. Lamech Hossein Razavi Project Team Leader: Sandu Ghidirim Vladislav Vucetic ICR Team Leader: Peggy Janice Masterson ICR Primary Author: Peggy Janice Masterson v F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) Improve the security and reliability of the electricity transmission system and wholesale electricity supply and, therefore, facilitate unimpeded commercial operation of the power system. Improve the availability, quality, and efficiency of heating in selected priority public buildings. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Reduce outage rates of Moldelectrica transmission lines and substations by 35% Value 59% reduction (103 Reduce outage rates quantitative or 253 hours of outages hours of outages in by 35% Qualitative) 2011) Date achieved 12/31/2002 04/30/2012 04/30/2012 Comments Target exceeded. (incl. % Based on data from Moldelectrica's Annual Report for 2011. achievement) Indicator 2 : Reduce non-technical losses in transmission and distribution by 75% Value 100% reduction Non-technical losses in Non-technical losses quantitative or (Non-technical losses 2002 were 11% reduced by 75% Qualitative) for 2011 were 0%) Date achieved 12/31/2002 04/30/2012 04/30/2012 Comments Target exceeded. (incl. % (Information from Moldelectrica's 2011 Annual Report.) achievement) Indicator 3 : Reduce unserved energy by 200 MWh per year Value Reduce unserved Unserved energy of about 101.2 MWh unserved quantitative or energy by 200 MWh 400 MWh energy in 2011. Qualitative) per year. Date achieved 12/31/2002 04/30/2012 04/30/2012 Comments Target partially achieved, with unserved energy substantially reduced. (Information (incl. % from Moldelectrica's 2011 Annual Report.) achievement) Indicator 4 : Reduce technical losses of Moldelectrica by 5% Value 138.9 GWh of technical Reduce technical 5.65% re ductiion quantitative or losses in 2002 losses by 5% (131.04 GWh) Qualitative) Date achieved 12/31/2002 04/30/2012 04/30/2012 Comments Target achieved. (information from Moldelectrica's 2011 Annual Report) (incl. % vi achievement) Indicator 5 : Increase number of buildings with heating throughout the winter season 252 buildings in total (69 institutions and 43 residential buildings) including schools, hospitals, 120 days of Value 80 institutions/buildings 120 days of heating kindergartens and heating quantitative or with heating availability availability in 170 orphanages have availability in Qualitative) from 0-30 days per year buildings heating and domestic 217 buildings hot water (DHW) availability throughout the entire year (more than 120 days/year) Date achieved 12/31/2002 04/30/2012 04/30/2012 04/30/2012 Comments (incl. % Target exceeded. achievement) Number of students and teachers who benefit from educational facilities heated 120 Indicator 6 : days or more during winter. The original indicator measured only the number of 27,485 teachers buildings, not the and students number of (14,547 27,485 teachers and Value 0 (schools heated for 0-30 beneficiaries. achieved under students benefiting quantitative or days per year) During original Credit from heating and Qualitative) implementation plus 12,938 DWH MEPIU began to planned under also monitor the the AF) number of beneficiaries Date achieved 12/31/2002 04/30/2012 04/30/2012 04/30/2012 Comments (incl. % Target achieved. achievement) Number of inpatients, medical staff and outpatients benefitting from facilities heated Indicator 7 : 120 days or more during winter. 1,228,000 inpatients, staff (including the 1,299,993 patients, The original target 0 (hospitals heated from 0- actual number outpatients, and staff Value measured only 30 days per year) or with of beneficiaries benefiting from quantitative or number of buildings space heaters in only certain from the facilities with Qualitative) not number of areas of the hospitals original credit improved heating and beneficiaries and target from hot water the Additional financing) vii Date achieved 12/31/2002 04/30/2012 04/30/2012 04/30/2012 Comments (incl. % Target exceeded. achievement) (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Indicator 1 : Installation of meters and one Metering Management System 400 meters installed Value 580 meters installed plus one Metering (quantitative Obsolete meters and one Metering Management or Qualitative) Management System. System Date achieved 12/31/2002 04/30/2012 04/30/2012 Comments (incl. % Target exceeded and installation was completed in June 2010. achievement) Indicator 2 : Replacement of transmission substation equipment 53 high voltage 47 high voltage Value Equipment obsolete and circuit breakers circuit breakers (quantitative prone to failure replaced at 3 major replaced at 4 major or Qualitative) substations substations Date achieved 12/31/2002 04/30/2012 04/30/2012 Comments Target achieved in June 2010 with IDA and Moldelectrica financing. Only 47 circuit (incl. % breakers were procured under the project because Moldelectrica had already installed achievement) circuit breakers using its own funds. G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 12/12/2003 Satisfactory Satisfactory 0.00 2 01/23/2004 Satisfactory Satisfactory 0.00 3 06/29/2004 Satisfactory Satisfactory 1.38 4 12/13/2004 Unsatisfactory Satisfactory 1.74 5 05/18/2005 Moderately Satisfactory Satisfactory 3.51 6 11/15/2005 Moderately Satisfactory Satisfactory 6.10 7 06/27/2006 Moderately Satisfactory Satisfactory 9.28 8 06/29/2007 Satisfactory Satisfactory 16.57 9 06/30/2008 Satisfactory Satisfactory 23.02 10 06/25/2009 Satisfactory Satisfactory 28.41 11 03/03/2010 Satisfactory Satisfactory 35.59 12 11/17/2010 Satisfactory Moderately Satisfactory 41.83 13 11/17/2010 Satisfactory Moderately Satisfactory 41.83 viii 14 06/27/2011 Moderately Satisfactory Moderately Unsatisfactory 43.81 15 01/11/2012 Moderately Satisfactory Moderately Unsatisfactory 45.92 16 04/25/2012 Satisfactory Moderately Satisfactory 46.15 H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Restructuring Disbursed at Reason for Restructuring & Key Approved PDO Date(s) Restructuring Changes Made Change DO IP in USD millions At the request of the Borrower, modify disbursement percentages to reflect the standard 06/29/2004 N S S 1.38 disbursement percentages for Moldova as stated in the Association's letter of December 19, 2003. To allow completion of SCADA/EMS/Telecommunication 10/08/2007 N S S 19.33 s contract, the Closing Date was extended to December 31, 2009. Additional Financing to scale-up the heating component of the Energy II Project. No change to the Project Development 01/29/2009 N S S 25.05 Objectives. The new closing date was December 31, 2011. Two new monitoring indicators were added to measure the number of beneficiaries To allow completion of the SCADA/EMS/Telecommunication 10/13/2009 N S S 29.35 s contract, the Closing Date of the original Credit was extended to December 31, 2011. To allow completion of final system testing and operational acceptance of 12/26/2011 N MS MU 44.95 SCADA/Telecommunications systems, the Closing Date was extended to April 30, 2012. ix I. Disbursement Profile x 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Country background. At appraisal in 2002, Moldova was (and still is) poorly endowed with commercially exploitable energy resources and had to rely almost entirely on imported oil products, gas, electricity and coal to cover its energy needs. Moldova consumed about 0.8-1.2 billion cubic meters of gas annually, excluding Transnistria 1, all imported from Russia at a net price of US$60 per thousand cubic meters. Annual consumption of oil products was about 350,000-400,000 tons (all imported), and of electricity about 3-3.5 billion kWh, of which only 20-25% was generated by the plants on the right bank of the Nistru River, the rest being imported from Ukraine and Romania and generated in Transnistria. Retail gas tariffs in Moldova were about US$2.1 per billion Joules. Electricity tariffs were among the highest in the Former Soviet Union: 4.5-5 US cents per kWh for the northern parts of the country and 5-5.5 US cents per kWh for the remaining territory served by a private distribution operator 2. Moldova’s strategic choices regarding the mix of energy imports, technological options for electricity generation, heating and energy usage, physical infrastructure for energy delivery and industrial structure of the energy sector were developed during the Soviet era and driven by Soviet political considerations and economic development objectives, in which inexpensive energy and central planning were major elements. This had led to some sub-optimal choices, both in the country’s energy infrastructure – such as poor electricity connections with both FSU and non-FSU countries, development of uneconomic centralized district heating systems, energy intensive technologies and construction standards, inadequate energy metering, etc. – and energy sector governance and organization. Moldova responded slowly to the rapidly increasing prices of energy imports in the post- independence period. The Government, acting simultaneously as policy maker, regulator, owner and utility manager, was slow to pass on the increase to energy consumers and was not able to pay the difference between the supply costs and consumer tariffs. This resulted in a large energy-related quasi-fiscal deficit (estimated to be at about 5% of GDP in 1998 and 1999), largely financed through asset consumption and accumulation of debt (mainly in the form of payment arrears). As a result, Moldova accumulated large external debts, while postponing maintenance of and investments in energy infrastructure. In parallel, financial discipline in the sector weakened, quality of management deteriorated, and corruption became widespread. The energy companies had increasing difficulty to maintain supply, and shortages of electricity and gas supply developed. The sector, forced to subsidize consumers and suffering from theft and mismanagement, was rapidly deteriorating, accelerating the economic decline. Energy Sector Reforms during 1997-2002. To avert the escalating energy crisis in the mid- 1990s, Moldova embarked on an ambitious set of reforms in the energy sector 3, whose main 1 Transnistria (the breakaway region on the left bank of the Nistru River) covers about 12% of Moldova’s territory, with a similar share of population. The Transnistrian authorities declared independence in 1994, but it has neither been recognized internationally, nor by the Moldovan government. The region is of high economic importance, as it straddles routes to Ukraine (and on to Russia) as well as significant energy transport infrastructure – electricity transmission lines and gas transport pipelines. Some of the largest industrial facilities in Moldova, including the largest power plant with an installed capacity of 2.5 GW, are located in Transnistria. 2 About 2/3 of power distribution in Moldova was privatized in 2000. 3 The main elements of the reforms were: (a) development of a new, market- oriented legal framework; (b) establishment of an independent energy regulatory agency (ANRE) in 1997, adjusting the level and the structure of tariffs; (c) sector unbundling and restructuring, and corporatization of the vertically integrated electricity monopoly into 5 distribution companies, 4 generation companies, and creation of S.E. 1 objective was the commercialization of energy supply, accompanied by appropriate social policies implemented through fiscal instruments to protect the most vulnerable groups. These achievements put the energy sector in Moldova at the forefront of energy sector reforms among the FSU countries and started to show important benefits, including: increased payment collections, improved reliability of energy supply, decreased import prices of electricity to the privatized companies, and reduction of the quasi-fiscal deficit. Sectoral Issues. The main sectoral issues at appraisal, as identified also in the government’s Interim Poverty Reduction Strategy Paper (December 2000), were: • Electricity transmission, dispatch and metering. The obsolescence and physical deterioration of the electricity transmission and dispatch equipment represented a risk for domestic consumers and undermined the country’s energy security and its potential role in cross-border energy trade. • High commercial (billing) losses in electricity distribution. Total losses in the electricity distribution network in 2002 were between 25 and 35 percent. • Deterioration of heating services. Municipal district heating services were either defunct or bankrupt, and even if functioning, provided poor quality services. District heating was inefficient and therefore expensive and unaffordable at Moldova’s income level, which also threatened the economic viability of the CHP plants. Moreover, many schools, hospitals and other public buildings had little or no heat during the winter months. • Historic debts of the energy sector. Although most of the historic debt of the electricity sector had been transferred out of the accounts of the operating companies and consolidated on the books of Moldtranselectro 4, the debt could continue to burden the sector with the risk of possible supply interruption or request for assets. • Resistance of vested interests. Sector reforms changed the responsibilities and increased transparency in contractual relationships and accounting, which hurt vested interests and triggered fierce resistance from these groups, particularly against Union Fenosa, which privatized 2/3 of the distribution network. The government’s strategy proposed the following actions to resolve the issues: upgrade electricity transmission, dispatch and metering; reduce commercial (billing) losses in electricity distribution by privatizing state-owned distribution companies; improve heating services by facilitating the development of commercial decentralized heating systems, where economically feasible and justifiable; restructure historic debts of the energy sector; implement measures to reduce corruption, influence of vested interests and enhance energy sector reforms; and implement adequate social protection, aiming at supporting economic and social development and enhancing energy security, but reducing the energy intensity of the economy. The Energy II Project was designed to address the following issues: • The obsolescence and disrepair in electricity transmission and dispatch networks; Moldelectrica, the national transmission and dispatch company; (d) changing electricity trading rules so that distribution companies were solely responsible for contracting directly with importers and domestic generators for sufficient amounts of electricity to supply their customers; (e) debt restructuring of the historic debts of the electricity sector; (g) reducing and re-targeting subsidies for energy consumption; (h) privatization of electricity distribution companies; and (i) divestiture of the gas industry. 4 As a result of the reorganization of the power sector, by the decree no. 1000 of GoM dated October 5, 2000, the former state company Moldtranselectro (MTE) was restructured so that a new transmission and dispatch company, Moldelectrica (ME), was created and all operational assets and functions related to transmission and dispatch - but not historic debts -- were transferred from MTE to ME. MTE remained a 'shell' company, holding the sector’s historic debts (accounts payable and accounts receivable), without any involvement in sector operations. 2 • Improvements in heating of public buildings; and • Technical assistance for debt restructuring, development of decentralized heating and strengthening and continuation of electricity sector reforms, including sector regulation. Rationale for Bank Involvement. The World Bank Group had supported the energy sector reform in Moldova through a combination of investment, adjustment, technical assistance, and guarantee operations, and was well placed to continue the energy sector reform dialogue and take the lead in financing priority investments in the electricity transmission network and assist in the transition to an energy efficient decentralized heating. 1.2 Original Project Development Objectives (PDO) and Key Indicators The objectives of the project were to: (i) improve the security and reliability of the electricity transmission system and wholesale electricity supply, and therefore, facilitate unimpeded commercial operation of the power system, both domestically and internationally; and (ii) Improve the availability, quality, and efficiency of heating in selected priority public buildings (schools, hospitals, and residential buildings for disabled and other vulnerable groups). 5 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDO was not revised. 1.4 Main Beneficiaries • The direct beneficiary of the project was ME. However, the main benefits of the electricity component were system-wide and, therefore, would accrue to all consumers, including the poor. • The main benefits of the heating component would accrue to the public agencies operating the buildings included in the project and to the users of the buildings (schools and hospitals) providing important social public services and, therefore, have an important social impact. 1.5 Original Components The project comprised four components: • Electricity system upgrade; • Heating supply 6 and efficiency improvement; • Technical assistance for project implementation and energy sector reforms; and • Project management and administration (incremental operating costs). 5 The wording in the PAD and in the Development Credit Agreement differ slightly but have the same general meaning. The wording from the DCA referred only to “selected buildings�. For the purposes of the ICR, the wording from the PAD has been used as it is more specific. 6 Throughout the ICR the author has used the terminology from the PAD and the terminology used throughout project implementation “heating component�; however, if the project were being appraised today, this component would most likely have been called “energy efficiency�. 3 Component A: Electricity system upgrade (US$27.79 million) a) Improvement of metering in the electricity transmission network. This component included installation of energy meters at all interconnecting points of the 110-400 kV transmission system network to enable metering and recording of active and reactive electricity flows in the wholesale electricity market. b) Rehabilitation and upgrade of power system dispatch. This component included installation of the necessary hardware and software to enable real time acquisition of operational information from the main facilities (power stations and transmission substations), analysis and monitoring of the system status at the National Dispatch Center, and control and dispatch of the power plants, load centers and the transmission system to maintain a reliable, secure and economic operation and facilitate financial settlements in the wholesale electricity market. The main elements included Remote Terminal Units (RTU) and the corresponding local data acquisition equipment at the power plants and transmission substations, the System Control and Data Acquisition (SCADA) system and the Energy Management System (EMS). c) Rehabilitation and upgrade of system telecommunications. This component included installation of the necessary communications equipment (fiber optics, power line carrier systems-PLC, and radio systems), which would serve the communications needs of metering and dispatch. d) Priority rehabilitation of the transmission network, including environmental upgrades. This component covered the replacement and repair of high voltage transmission line pylons and the most urgently needed rehabilitation measures in selected high-voltage substations 7. Depending on the outcome of the PCB follow-up study (Component C), this component could include physical mitigation measures for appropriate protection of PCB-containing condenser batteries, and for their disposal to be implemented when replacement of the batteries would be required. Actual removal of the capacitors or renewal of the old ones was not envisaged under the project. Component B: Heating Supply and Efficiency Improvement (US$9.16 million) This component included improvements in the supply and distribution of heat and demand-side measures for heat and hot water consumption in selected public buildings (kindergartens, schools, hospitals, and residential buildings for disabled and other vulnerable groups) in 8 municipalities 8 and large health care centers in Chisinau under the central Ministries of Health and Education. The list included approximately 50 schools and kindergartens with more than 15,000 pupils and 25 hospitals and clinics with more than 4,000 beds. The Ministry of Energy expressed strong interest in including in the project some residential apartment buildings located close to the selected public buildings and thereby increasing the social impact. Component C: Technical Assistance for Project Implementation and Energy Sector Reforms (US$1.60 million) 7 Station batteries for 11 substations, 330 kV equipment for the Chisinau, Straseni and Balti substations and a number of 110 kV circuit breakers for various substations 8 The 8 municipalities are Cantemir, Chisinau, Falesti, Floresti, Ialoveni, Soroca, Straseni, and Ungheni) 4 This component included the following activities: (i) project implementation – consultant services for procurement and project management for the electricity and heating components and audit of the project and ME’s financial statements; (ii) PCB follow-up study (electricity system); (iii) assistance for sector reforms to improve the institutional and regulatory framework in the energy sector, energy trade, privatization, and debt restructuring. Component D: Project Management and Administration (US$1.38 million) This component included the incremental costs associated with the establishment and operation of a Project Implementation Unit, created by project beneficiaries specifically for implementation of this project. 1.6 Revised Components The components were not revised. 1.7 Other significant changes There were no significant changes in project design during implementation. An amendment to the Development Credit Agreement (DCA) was approved by the Country Director on June 29, 2004, to modify the disbursement percentages in the DCA to align them with the standard disbursement percentages for Moldova, as stated in the Country Director’s letter of December 19, 2003. The Closing Date was extended from April 30, 2008 to December 31, 2009, to allow completion of the SCADA/EMS/Telecommunications contract. An additional credit (Credit No. 4541-MD) of SDR 6.7 million (US$10 million equivalent) was approved by the Board of Executive Directors on January 29, 2009, to scale up the heating component and to maximize the social impact of the project. The Project Development Objective was not changed. The Closing Date for the additional credit was set for December 31, 2011 9. On October 13, 2009, the Closing Date of the original Credit (Credit 3833-MD) was extended to December 31, 2011, to allow additional time for completion of the SCADA/Telecommunications contract and align the Closing Date with that of additional Credit 4541-MD. On December 20, 2011, the Closing Date of the original Credit was extended for the third time to April 30, 2012 to allow completion of the final system testing and operational acceptance of the SCADA/Telecommunications equipment. The additional Credit No. 4541-MD closed as scheduled on December 31, 2011, and the remaining balance of SDR 24.23 was cancelled on April 30, 2012. The original Credit No. 3833-MD closed on April 30, 2012, and the remaining balance of SDR228,576.65 was cancelled on August 31, 2012. 9 The Swedish International Development Cooperation Agency (SIDA) also provided additional financing to scale-up the technical assistance for the heating component. 5 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry The project had a very long preparation time (about 4 years). A Japan PHRD Grant (TF025294) was used to finance: (a) project preparation, including a feasibility study for the electricity component, establishment of the Project Preparation Unit, and audits of the Grant; (b) institutional strengthening, including development of a business plan and financial analysis of ME and debt restructuring plan of Moldtranselectro, and revaluation of ME’s assets and tariff recalculations based on the revalued assets. A SIDA parallel financing grant for project preparation financed a study on “Strategic Heating Options for Moldova� and a second SIDA grant financed the preparation of technical specifications and bidding documents for the supply and installation of boilers and pipes in a pilot heating activity in the municipality of Ungheni. A Project Preparation Facility advance (Q- 191-0-MD) financed consulting services and goods for project preparation, including technical specifications and bidding documents for the electricity system upgrade, development and installation of a financial management system for the project, operating costs for the PIU and the pilot activity of supply and installation of boilers and pipes in the municipality of Ungheni. Soundness of the Background Analysis. Sufficient background diagnostic work (feasibility studies, social assessments, financial analysis, strategic heating study, etc.) had been done prior and during the design of the project under the various grants for project preparation. Lessons learned in the implementation of other power sector projects in the region, and in the earlier Energy Project (Ln. 4020-MD) in Moldova, were taken into account, namely the two closely inter-related issues of sector governance and financial performance of the electricity companies. Two structural adjustment loans and two structural adjustment credits had supported the government in implementation of energy sector reforms. The project was designed to complement these achievements with the needed investment in the electricity wholesale trading infrastructure and in energy efficiency improvements, combined with sector reform actions. The sequencing of policy and investment actions was designed to maximize their combined effect on the sector’s financial position and sustainability of sector reforms. The synergy between policy dialogue and investments included in the project design has proven adequate especially when the SAC-III operation failed. The required reform actions could have been otherwise protracted or backtracked and thereby this could have undermined the sustainability of the project and the achievement of development objectives 10. Although this had prolonged the preparation and delayed project approval, proper resolution of these issues within the policy dialogue contributed to increased transparency and better governance, as well as to the financial viability of the sector. Assessment of the Project Design. The project was consistent with all three objectives of the Country Assistance Strategy discussed at the Board on June 20, 2002. It would promote macroeconomic sustainability by: (i) helping stem the accumulation of new public debt related 10 During project preparation, the government contested the results of privatization and attempted to block the independence of the energy regulator. 6 to electricity sector enterprises, (ii) promoting economic growth by improving the reliability of electricity supply to the economy, and (iii) helping restructure the outstanding debt in the energy sector. The project would support private sector development through better supply of electricity to private industry and by supporting privatization of major electricity companies. It would also support public sector reform by improving energy efficiency in selected public buildings, reinforcing the autonomy of ANRE, and encouraging the Government to maintain well-targeted and fiscally affordable subsidies for energy consumption and control consumption of budget entities. The project design was simple and well focused, with clear objectives and indicators related to its components. Most of the staff of the Moldova Energy Projects Implementation Unit (MEPIU) had worked on the first Energy Project and had already acquired considerable project implementation experience, which was further enhanced by managing the various grants for project preparation. SIDA parallel financing was instrumental in both preparation and implementation of the heating component. Government Commitment. Government commitment to the project was substantial, as evidenced by the following actions: • Implementation of legal, regulatory and structural reforms that took place in the energy sector for several years prior to the project; • Completion of technical and financial studies for the project; • Unbundling of the sector and creation of a separate transmission and dispatch company; • Separation of historic debts from the transmission and dispatch company and other companies operating the power system, and initiation of efforts to compile a detailed inventory of the debts and to audit and restructure them; • Early establishment of a Project Implementation Unit; • Using a PPF advance from the Credit to finance project preparation activities, including a pilot project for decentralization of heating in public buildings; and • Increasing tariffs for ME. Participatory Approach • Electricity Component. Consultations with ME and national government officials responsible for the energy sector were an integral part of project preparation. Given the nationwide character of the indirect beneficiaries, the participatory approach was handled by conducting a social assessment and information disclosure and a public consultation organized by the Ministry of Energy on May 15, 2001, and attended by 45 representatives of various NGOs, the media, municipalities and ministries. • Heating Component. A nationwide household survey, focus groups and in-depth interviews were conducted to elicit input from various social groups on energy-related problems, focusing on heating and energy efficiency options, their affordability and the potential participation of households and home owners associations in implementing options considered under the heating component. The emerged social factors underscored the conclusions of the poor economic justification and questionable affordability of wide-scale refurbishment of most DH networks in Moldova. These were the fundamental reasons underlying the focus of the heating component on priority energy efficiency improvements in public buildings, which provided services to all members of the 7 population, including some, such as kindergartens and schools that were likely disproportionately used by the poor, and thus maximize the social impact of the project. Risk Assessment. The overall risk was assessed as Substantial; most of the risks rated substantial related to the progress of the overall sector reforms, and the risk of project implementation delays was assessed as Moderate. Adequate risk mitigation measures were proposed for most of the risks. The only risk that was not adequately assessed was the risk of project implementation delays. The project team underestimated the complexity and the time required for installation of a modern SCADA system. However, this situation has been faced in almost every project in the ECA region with a SCADA component, but was not obvious at the time of project preparation. Technical assistance was provided to assist with the preparation of technical specifications and supervision of the contract, but ME was unable to extend the contract when the consulting firm was sanctioned. The Seventh Quality at Entry Assessment 7 (QEA7) for FY 2004-2005 by QAG rated quality of design as Satisfactory. 2.2 Implementation The PPF pilot activity at Ungheni included construction of block boiler plants for heat supply to both public institutions and residential buildings. The Ungheni pilot offered useful experience for preparation and implementation of the heating component subprojects, as well as the potential outcomes. The cost of heating per square meter of residential area, supplied from the new systems during the 2002-2003 heating season was MDL 6.53, compared to MDL 12-14 under the old system supplied by an oversized mazut boiler plant, and the payment level under the new system was about 90 percent, compared to 30 percent in 1999 – the last year when the old plant was operating. The pilot demonstrated that in small towns in Moldova decentralization of old centralized heating systems that are no longer functioning is a viable solution for heating supply, provided that residents are willing to pay for the service. The mid-term review in April 2006 contributed to the successful outcome of the project by recommending additional policy reform actions: a) To improve institutional capacity in the government and ANRE for contingency planning and rapid response to an uncertain evolution of energy prices in the medium-term, including improved targeting and adequate funding for the safety net protecting the poor; b) To develop a comprehensive energy efficiency program and facilitate investments in energy efficiency, energy savings and alternative (renewable) energy resources; c) To return Termocom and CHPs to financial stability; d) To develop and adopt an action plan for legal and regulatory compliance of Moldova’s electricity and gas markets with the ECSEE Treaty by the end of 2006; e) To adopt a metering code and to implement a commercial metering system; f) To use the recently approved Grant for the Persistent Organic Pollutants (POPs) Stockpiles Management and Destruction Project for complete removal and destruction of decommissioned capacitors containing PCBs. The success of the heating component helped leverage additional support to the Energy Sector from SIDA through: (i) TA support for the heating sub-projects under the Energy II Project; (ii) pilot project for individual heating substations and improvement of heat distribution in Termocom, accompanied by TA support for restructuring and reorganization of Termocom; (iii) 8 TA support to ANRE; and (iv) renewable energy (bio-mass) pilot project and heat distribution system in Cornesti. It was also agreed that MEPIU would be the focal point for the preparation and implementation of SIDA’s energy program. The financial situation and performance of ME were reviewed and a new revaluation of ME assets was recommended, with a subsequent adjustment of ME’s tariffs. The Bank team agreed to consider a possible request for additional financing for the heating component in 2007, building on the success of the heating component. Project implementation for most of the electricity component and the entire heating component was completed on schedule, except for the SCADA/Telecommunications contract, which required three closing date extensions. Project at Risk Status. The project was considered at risk in three ISRs. In the ISR of December 2004, the PDO rating was downgraded to Unsatisfactory, due to the decline in reliability of electricity supply as a result of the emergence of a state-owned electricity trader which acted as the single buyer of electricity imports and the monopoly (re)exporter from Moldova to Romania, and privatization of the MGRES power plant in Transnistria, which was the main supplier of electricity to power distribution companies. This created upward pressure on the price of electricity and exposed weaknesses in the energy regulatory agency 11. Due to delays in implementation of SCADA/Telecommunications contract, in June 2011 the achievement of PDO was downgraded to Moderately Satisfactory and the Implementation Progress to Moderately Unsatisfactory. The team agreed with the government and ME on an Action Plan to address the delays and regular bi-monthly progress monitoring meetings were carried out, which contributed to positive progress in the physical completion of the project. A project restructuring to extend the closing date for four additional months to April 30, 2012 allowed the completion of the final testing of the system. The installation was thereby completed in December 2011, and the systems tested and commissioned from January to April 2012, and operating satisfactorily, which allowed upgrading the project ratings to S and MS, respectively. Parallel financing from Sweden (SIDA). The parallel financing from SIDA both for the original credit as well as for the Additional Financing was instrumental in ensuring the success of the heating component. In addition, SIDA financed technical assistance for ME to update its asset revaluation and to prepare the IFRS-based accounting database. IDA Additional Financing helped to maximize the social impact of the Project. The Bank allocated in 2009 the Additional Financing in response to a government request to increase the targets of the heating component and thus to maximize the social impact. The AF not only expanded the geographical coverage and the social benefits of the project to a larger number of people, but it also allowed replication of energy efficiency investments in the residential sector. Thus, by exceeding the original social targets and by producing additional unintended outcomes, the Additional Financing has maximized the social impact of the project. It also helped leverage additional funding from SIDA for the Mother and Child Center in Chisinau 12. Energy Sector Issues. Because of the resistance of vested interests to some of the energy sector reforms and failure of the SAC-III operation described above, a covenant was added to the Development Credit Agreement, i.e.: 11 MGRES has undergone repeated privatizations and is now owned by Inter RAO UES of Russia. 12 A large national health care facility for mothers and children, including newborn. 9 “The Borrower shall maintain a legal, regulatory, policy and institutional framework for the energy sector conducive to efficient commercial operation, attracting private investments and ensuring reliable and affordable energy services.� Compliance with this covenant was closely monitored throughout project implementation and at times the covenant was not complied with or only partially complied with, but in the latter stages of the project the Borrower was in full compliance with this covenant. The covenant enabled the IDA team to monitor developments in the energy sector that were not directly part of the project, such as regulatory agency performance and performance of the district heating sector, and to locate funding from other donors to carry out related studies. Following intensive sector dialogue, a new Energy Law was approved in December 2009, and a national Energy Efficiency Program was approved in November 2011. The Bank issued in 2009 a sector policy note on corporate and financial restructuring of the District Heating sector in Chisinau in response to a request by the Government of Moldova. Following the recommendations provided in the policy note, the government transferred the responsibility to approve the DH tariffs to ANRE. A more detailed report by consultants specifically on financial and corporate restructuring to address the issues of accumulated debt stock and corporate sustainability of Termocom and CHPs was delivered to the government in October 2011. Based on the recommendations provided in the report, the government has issued a cabinet decision in November 2011 on the following restructuring plan: (i) a vertical integration of Termocom and CHP-1 and CHP-2, and (ii) preparation of a debt restructuring plan with Moldovagaz. The team is continuing support through a TA assistance project financed by SIDA and an investment project to address the priority investments in the DH sector and to support the government in preparing a debt restructuring program and finance repayment of debt, as well as through overall sector policy dialogue. Electricity Component. The electricity component provided: • Metering for reliable measurement of energy flows between generating plants and imports and distribution companies, exports and eligible consumers, and allowed commercial transactions to be properly accounted and supported; • A new SCADA system to provide real time data from substations and to facilitate control of the system in order to ensure that dispatch is consistent with commercial contracts. This allows safe, reliable and economic operation of the power transmission network; • The new telecommunication system, which has enough channels to support the SCADA system; • Priority upgrades of the most critically needed equipment in selected high voltage transmission substations. Heating Component. The heating component was implemented in 17 administrative districts (“rayons�) out of 32 and in the municipalities of Chisinau and Balti and provided: • New energy efficient gas fired boiler plants; • Heat transmission from the boiler plants to the buildings to reduce losses; • Building level automated individual heating substations for better control; • Internal heating systems for reduced losses and improved control; 10 • External district heating distribution systems to optimize the heat supplied by the DH system; 13 • Individual district heating substations for connection of the internal heating systems and DHW preparation; and • External and internal domestic cold and hot water and sewerage systems. The key factors that contributed to the successful implementation of the project were: • Consistent government commitment to the project, during both preparation and implementation, despite several changes in the government. • Willingness, insistence and enthusiasm of local authorities in implementing the heating component. • Parallel financing from Sweden (SIDA), beginning during project identification and preparation and continuing throughout project implementation. • An effective, efficient and experienced Project Implementation Unit (MEPIU). • Continuous field-based supervision and presence of TTL in the field later in the project helped the implementing agency to perform well by ensuring a permanent and close contact between the Bank team and the implementing agency, as well as close monitoring, which allowed to undertake prompt corrective measures, where needed. • The use of strict selection criteria for the institutions included in the heating component 14. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Appropriate monitoring indicators were selected that were directly relevant to the achievement of the Project Development Objectives and to the project components. The indicators were quantifiable, relevant and measurable. However, the PAD results framework at appraisal did not include baseline indicators or intermediate outcome indicators. Baselines were added to the ISR during project implementation, and MEPIU hired an M&E Specialist. The original indicator for the heating component monitored only the number of buildings with improved heat and/or hot water. During project implementation the Bank team requested MEPIU to begin to monitor also the number of students and teachers and the number of inpatients, outpatients, and medical staff benefiting from improved heating and hot water. Although these indicators had in fact already been monitored for some time during project implementation, they were formally added to project M&E with the approval of Additional Financing to better quantify the social impact. ME provided annual reports on its operation. MEPIU provided quarterly progress reports that contained the data provided by beneficiaries of the heating component, consultants and ME. ME will continue to monitor its operating statistics now that the project has ended, and MEPIU has acquired considerable knowledge of M&E and recognizes the importance of collecting the baseline data from the local beneficiaries. 13 For the large health care facilities in Chisinau connection to the centralized DH system was maintained, as DH is considered as most economical and environmentally friendly supply of heat in cities of the size of Chisinau, which has been identified by the 2000 Strategic Heating Options Study (funded by SIDA), as well as by the Government’s Energy Sector strategy 2020 and the recent DH restructuring Concept (which is currently being updated). 14 These included: (a) social character (hospitals, schools, kindergartens, orphanages, etc.); (b) expected continued operation of the institutions; (c) form of ownership; (d) number of people who would benefit from improvement of treatment or study conditions; (e) existence of possibilities to correlate actions of the project with other actions planned by the Government or local authorities; (f) geographic location of the institution; (g) willingness of the municipalities to co-finance and be party to an on-lending arrangement between the Ministry of Finance, Rayon and Municipality for the estimated amount of the loan; (h) positive impact of the proposed projects on budgets and ability to assume debt service obligations 11 2.4 Safeguard and Fiduciary Compliance Safeguard Compliance. The project fully complied with (and even exceeded) Bank environmental safeguard requirements. The project triggered only OP/BP 4.01 Environmental Assessment and was rated Category B. The project EA and EMP were received from the Borrower together with the description of the public disclosure and consultation process. EMP implementation and compliance with environmental requirements. Implementation of EMP measures was satisfactory. All subprojects were preliminarily assessed and EIA reports were included in design documents, identifying potential environmental impacts along with the environmental protection and monitoring activities. The State Ecological Expertise (SEE) officially approved the final design documents. The contractors followed strictly the environmental requirements and there were neither outstanding environmental issues nor any complaints registered. The installed systems provided higher energy efficiency and adequate quality of service, with low emissions of greenhouse gases and other harmful substances. This has been proven by an independent energy efficiency audit conducted by a Swedish company, including tests for emission and noise indicators for each boiler. In case of non-compliance the contractors were obliged to implement corrective measures. Energy efficiency and environmental performance of heating subprojects. The project’s environmental benefits were substantial. The level of NOx emissions reached 50-60ppm, which is half of the permitted national standard of 120ppm. Emissions of nitrogen oxides have been reduced by 38 tons annually, emissions of sulfur oxides have reduced from 18.5 tons per year to almost none. There are no emissions of dust compared to 1.3 tons annually before the project. This has significantly improved air quality in the participating communities. Annual emissions of greenhouse gas CO2 have reduced by almost 20 000 tons, benefitting the global climate. Synergy with the associated Community Development Carbon Fund (CDCF) Energy Conservation and Emission Reduction Project and the Carbon Finance Revenues. The CDCF project initiated in 2006 was based on the Energy II project’s energy efficiency measures in public buildings and comprised 19 small – scale geographically and technologically independent CDM project activities based on fuel switching from coal, heavy oil, and electric heating to natural gas. The Emission Reductions (ERs) for July 01, 2007 – June 30, 2008 showed a total of 8,835 tons of ERs compared to 3,725 tons in the 2005-2006 heating season. The Carbon Finance Unit 15 transferred US$50,000 in total to the beneficiaries, who used the carbon payments to cover urgent social needs, as well as to pay for the maintenance of installed boilers. Environmental performance and removal of PCBs in the electricity component. Most of activities were implemented within the GEF Persistent Organic Pollutants Stockpiles Management and Destruction Project (POPs), which scaled up the initially planned environmental upgrades, and included the following: (i) 18,656 PCB contaminated capacitors were dismantled and about 1,266.2 tons of highly polluted soil were excavated from the Vulcanesti 400 kV substation and other 13 lower voltage sub-stations and shipped for final disposal to France; (ii) a regulatory framework for PCB management was developed; 15 CFU – the CDCF project implementing entity under the Ministry of Ecology and Natural Resources. 12 (iii) two workshops to train ME staff on proper handling, packing, loading and labeling of PCB containing or/and contaminated capacitors and on emergency procedures; and (iv) a full PCBs inventory in the energy sector was completed and all transformers containing PCBs were labeled. The other environmental upgrade measures performed by ME during 2008-2010 using own funds related to: designing, manufacturing and repairs of oil collectors and drip-pans under the oil-based equipment; overhaul of oil-based circuit breakers and power transformers; replacement of oil-based bushings by dry ones; replacement of the fire-fighting pipeline at the Straseni 330 kV substation; planting of greenery at Vulcanesti substation and replacement of gravel under the oil-based equipment,; and tamping of the artesian well at the Straseni 330 kV substation, etc, amounting to a total of MDL3.5 million(US$270,000 equivalent). Fiduciary Compliance Financial Management. MEPIU fully complied with the Bank’s fiduciary policies and the financial covenants requiring audits, PMRs, etc. ME routinely complied with the financial covenants in the Project Agreement (audit, debt service requirements, accounts receivable not exceeding 60 days of sales). The only financial covenant that ME did not always fully comply with was the current ratio covenant. Procurement. Procurement under the project was implemented in accordance with the Bank’s Procurement and Consultant Guidelines and the Standard Bidding Documents were used. Procurement plans were regularly updated and submitted to the Bank. 2.5 Post-completion Operation/Next Phase Electricity Component. The sustainability of investments under the electricity component is ensured by ANRE maintaining ME’s tariffs at cost-recovery levels, also considering the revaluation of ME’s fixed assets. Building on the outcomes of the project, ME has recently signed a US$20 million loan with the European Bank for Reconstruction and Development and a Euro 17 million loan with the European Investment Bank to further upgrade the transmission system. The EU Neighborhood Investment Fund provided a grant of Euro 8 million in co- financing to the EBRD and EIB loans. Latest discussions with the Government within the draft CPS scope indicate potential for continuing support by the Bank in the power transmission sector in the form of TA to analyze the optimization of energy supply. Heating Component. The sustainability of the heating component is enhanced by the selection of public buildings which will continue to be used as schools and hospitals and will be financed by the state or local budgets. During implementation careful attention was paid to the ability of the beneficiaries to finance fuel and other operating and maintenance costs for heating systems installed or upgraded by the project, and budgetary provisions were included in the budgets of the respective authorities. The equipment provided by the project is of the latest available design, with high efficiency, and if properly maintained should ensure the beneficiaries with quality power and heat supply at the sites where equipment was replaced for at least the next 15 years. 13 The Bank is currently providing support to the Government for the institutional, corporate and financial restructuring of the DH sector in Chisinau in the form of Technical Assistance through the ongoing SIDA-funded TA. The Bank initiated the preparation of a proposed IDA District Heating Efficiency Improvement Project to finance priority demand-side EE investments in Termocom (or the Newco – the new company after the merger of Termocom and CHPs) and debt restructuring support. MEPIU. The MoE continues to benefit from MEPIU as fiduciary agent for the ongoing technical assistance funded by the Government of Sweden, including the ESREI TF implemented by the Bank. Further support by MEPIU for the new project is subject to the government’s position, which will be discussed with the Bank during the preparation phase of the proposed new IDA operation. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The objectives are extremely relevant to the National Development Strategy “Moldova 2020�, which sets out seven national priorities, one of which is energy efficiency. The project is also consistent with the current Joint IDA/IFC Country Partnership Strategy for the period FY09-FY13, which was discussed at the Board on January 29, 2009. The project objectives and the embedded policy dialogue remain relevant to all three pillars of the CPS: (a) improving economic competitiveness to support sustainable economic growth; (b) minimizing social and environmental risks, building human capital and promoting social inclusion; and (c) improving public sector governance. Investments to improve energy efficiency and heating in schools and hospitals and improve the security and reliability of the electricity transmission system have helped fulfill the CPS objectives 16. 3.2 Achievement of Project Development Objectives The project has successfully achieved its PDO for both the electricity and the heating component. • The project was successful in improving the security and reliability of the electricity transmission system and wholesale electricity supply, thereby facilitating unimpeded commercial operation of the power system. Outage rates in power transmission have been reduced by 59 percent. Non-technical losses have been reduced to 0 through the metering system improvements and the modernization of selected high voltage substations. Unserved energy has been reduced significantly, from 400 MWh in 2002 to 101.2 MWh in 2011. Now that the SCADA and Telecommunications systems are fully operational, it is expected that there will be further improvements in the quality, reliability and efficiency of the transmission system. Project achievements are particularly important in the view of Moldova recently becoming a member of the EU Energy Community Treaty. • The project was also successful in significantly improving the availability, quality and efficiency of heating in selected public priority buildings such as schools and hospitals. Prior to 16 A new CPS is currently under preparation and scheduled for discussion at the Board in March 2013. The new CPS identifies Energy Efficiency as one of the main development challenges under the Climate Change agenda. 14 the project in most small towns in Moldova the district heating system had failed in the 1990s, and schools and hospitals were only partially heated using old coal boilers for about 30 days during winter or not heated at all and were closed, while hot water was available on an extremely limited basis through electric boilers at high energy costs. As a result of the project, heating and domestic hot water is now provided to 252 buildings throughout the year. Students study, patients are treated and staff work in comfortable conditions without having to wear coats and gloves indoors. Energy savings as a result of the heating component are estimated to be about 110 GWh a year. The specific energy demand has gone from 126-905 kWh/m2 (average 352 kWh/m2) to 63-333 kWh/m2 (150 kWh/m2 average). The sites included in the project have reached energy savings ranging from between 39 percent and 67 percent, with an average of 58 percent energy savings for the whole project. The Additional Financing increased the social targets and thus contributed to a greater social impact. 3.3 Efficiency At project appraisal in 2003, the economic rate of return (ERR) was estimated for the electricity component of the project, which at the time accounted for the bulk (61 percent) of the total project cost. For the heating component, the ERR was not estimated in view of the difficulties in estimating the economic benefits for the types of improvements to be secured under the project, which mainly included improvement in the health, well-being and comfort of the population benefiting from the main targeted institutions. Instead, the appraisal relied on a least- cost analysis of the investments under this component. At project completion, the ERR has been re-estimated for the electricity component using the same methodology used at appraisal, updated on the basis of actual experience and information where available. The results are summarized in the table below (further details are given in Annex 3). Electricity Component Indicator At project appraisal At project completion ERR 39.3% 39.8% NPV US$69.2 million US$69.9 million For the heating component, for the reasons indicated earlier, an assessment of the overall economic benefits was not undertaken at project completion. However, a comparison is provided in Annex 3 between the targets set at appraisal and the estimated achievements. With regard to operating and energy efficiency, the technical reviews during implementation and at completion have confirmed that the chosen investments were the least-cost options for the intended objectives. A Financial rate of return (FRR) was not estimated at project appraisal and project completion. As indicated in Annex 3, the financial performance of ME – the beneficiary/implementing agency of the electricity component – was generally satisfactory through the year 2009, with profitable operations. ANRE’s methodology enables ME to operate based on tariffs set at adequate cost- recovery levels, including by permitting ME to revalue its assets to compensate for inflation. However, for 2010 and 2011, ME incurred annual losses due to delays by ANRE to include in the tariff the value of revaluated assets. In disclaiming an opinion on the financial statements, ME’s external auditors further pointed out that ME did not adequately account for the increased depreciation charges resulting from the revaluation. Based on the annual audited financial 15 statements, ME’s financial ratios were generally satisfactory with the exception of the current ratio which declined to below the covenanted levels in 2009 but has since been improving and almost reached the covenanted level in 2011. Details are given in Annex 3. 3.4 Justification of Overall Outcome Rating Rating: Satisfactory Based on the discussion in Sections 3.1-3.3, the overall outcome is rated as Satisfactory because the project is relevant to the current CPS, met or exceeded its development objectives, and well- justified since the efficiency indicators for the electricity component were satisfactory and the investments under the heating component were least-cost. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The electricity investments were system-wide and accrued to all consumers including the poor. The considerably reduced risk of a system-wide power system failure benefits consumers throughout the country, including in disproportionately poor areas such as rural locations. The increased levels of heating and hot water provided to public buildings offering critical social services such as education and health services have positively impacted the lives of over a million people. Improved heating at two buildings of the Center for Mother and Child in Chisinau and improved heating of the maternity wards in several other hospitals have benefited women and infants, who are most at risk in extremely cold temperatures. (b) Institutional Change/Strengthening ME’s technical and financial capacity increased as a result of the project. ME gained experience in implementing donor financed projects, which helped them obtain additional loans for further upgrades of the power transmission infrastructure. (c) Other Unintended Outcomes and Impacts (positive or negative) • Although the project was expected to have environmental benefits due to the replacement of obsolete equipment with newer, more environmentally-friendly equipment, it was not expected that the institutions would receive carbon finance credits as a result of the project investments in the heating component. • Investment funds were leveraged with other donors. When several priority institutions could not be financed from the IDA Credits, SIDA financed additional buildings. • The visible results of the heating component encouraged local authorities to do additional investments with own funding or to obtain grant funding from other donors. In most cases the beneficiaries have made improvements to their buildings. Besides general maintenance such as painting of inside walls, the replacing of windows and in some cases improved roofs have resulted in even lower energy consumption and improved indoor conditions. Some beneficiaries have also included additional buildings into the heating system as a result of the surplus available capacity due to reduced energy consumption. For example, in Ungheni, four boiler plants were financed by the project, and the Municipality financed an additional 10 boiler plants, with a total capacity of 36.6 MW. Another example is the Orhei District Hospital, which after the completion of the project 16 obtained funding from the EU and GIZ to further enhance energy efficiency, including installation of solar panels for heating water during the non-heating period. • ME financed US$10.84 million equivalent of the project costs compared to US$4.33 million equivalent planned at appraisal for environmental upgrades, metering, and replacement of transmission lines. • The Government developed and adopted a new Energy Law in 2009, an Energy Efficiency Program and Action Plan, and a DH financial, institutional and corporate restructuring Concept in 2011, which has as the objective to return Termocom (district heating company in Chisinau) to financial viability and improve its efficiency, as well as to prepare a debt restructuring plan for repayment of debts for gas to Moldovagaz/Gazprom. In 2010, Moldova became a full member of the Energy Community Treaty. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops There was no formal beneficiary survey at the end of the project; however, feedback visits were conducted by the heating consultants. Based on feedback interviews, nearly all beneficiaries were very satisfied with their systems. There have been few, if any problems with operation of the equipment. In 2008, the director of one of the hospitals that had received heating improvements under the project said: “We heated the working rooms with electric heaters for four years, and the specialists had to cram into fewer rooms to save power. The air temperature was as low as 8 C in the corridors, and many patients with certain health problems risked catching a cold. We have been operating in comfortable conditions for two years now, which has resulted in a two-fold drop in the rate of morbidity owing to respiratory conditions among health workers.� 17 4. Assessment of Risk to Development Outcome Rating: Moderate • Technical risk is assessed as negligible to low. All of the technologies introduced are well- established and ME and the heating component beneficiaries have received training from the suppliers, and have maintenance programs in place. • Financial risk is assessed as substantial as ME’s financial position, which was satisfactory through 2009, has deteriorated in 2010 and 2011. The key to ME’s future financial viability is the extent to which ME’s tariffs are set based on full cost recovery and based on revaluated value of its assets. While ANRE has a stated policy of enabling ME to maintain its tariffs at cost-recovery levels, in practice, ME has not been able to fully realize the benefits from the revaluation of its assets as explained in Annex 3. ME’s future viability will depend upon the Government, ANRE and ME acting together to ensure full-cost recovery for ME. Financial risk for the heating component improvements is dependent on the local authorities and/or the national government providing adequate budgetary resources for systems operation and maintenance. • Economic risk is assessed as moderate. Economic returns to the project investments, valued at relevant international prices of energy, continue to be substantial provided that ME’s physical operations continue to operate at satisfactory levels. The main risk to economic 17 From “Keeping People Warm and Lights On�, ECA Results Story. 17 benefits is further deterioration of ME’s financial situation, which could lead to inefficiencies in the electricity supply to distribution companies and to eligible consumers. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory Bank performance in ensuring quality at entry is rated as satisfactory by the Seventh Quality at Entry Assessment 7 (QEA7) for FY 2004-2005 by QAG. Project preparation was put on hold on several occasions in order to ensure that the necessary legal, regulatory, policy and institutional framework was in place before the project investments began, and a specific covenant was incorporated in the DCA to ensure that the framework would remain in place throughout project implementation. The Bank team obtained all necessary grant financing (PHRD, PPF, SIDA trust funds) to ensure that the project was adequately prepared, with the necessary background studies and analysis, and a Project Implementation Unit in place in December 2000. (b) Quality of Supervision Rating: Satisfactory Project supervision was carried out regularly and a detailed mid-term review was conducted. Regular videoconferences and phone calls were organized. During several years of project implementation the TTLs were based in Kiev and in Chisinau, enabling them to maintain close contact with the government, MEPIU and ME, as well as with the SIDA representatives. Beginning in 2010, the task team leader initiated bi-monthly meetings of Bank staff, ME, MoE and MEPIU, and the SCADA contractor in an effort to resolve the delays in implementation of the SCADA/Telecommunications contract. This helped to resolve the poor communications between ME and its contractor and was instrumental in ensuring the successful completion of the project. The Bank team also obtained a significant amount of grant funds to finance technical assistance for key tasks. The Bank team had an appropriate skills mix and budget to effectively monitor project implementation. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory Based on the satisfactory quality at entry and supervision ratings, the overall Bank performance is rated satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory Despite numerous changes in the government, it remained deeply committed to the Project. The Deputy Prime Minister of Moldova headed the MEPIU Supervisory Board, which met regularly on a set schedule during the latter years of project implementation. ANRE made the necessary tariff adjustments to maintain ME’s tariffs at cost-recovery levels, except for delayed approval of tariff to include the new value of assets after the 2010 revaluation. The Ministry of Economy took an active interest in resolving the SCADA contract issues and getting the implementation of 18 this contract back on-track, so that the commissioning and final testing could be completed by April 30, 2012. In 2011, the government allocated about MDL25 million from the national budget for energy efficiency measures for several of the beneficiaries of the heating component. (b) Implementing Agency or Agencies Performance Rating: Satisfactory There were basically three implementing agencies: Moldelectrica for the Electricity Component, the local authorities for the heating component, and MEPIU which managed day-to-day project activities, served as the liaison between the beneficiaries and the Bank, and ensured that all the Bank requirements were met. Each agency is rated separately below. Moldelectrica designated its own technical project implementation team, including an Environmental Management Specialist, to work with the contractors on physical implementation of the electricity component and with MEPIU in administering the project. Except for the SCADA/Telecommunications contract, all other contracts were completed on time. ME used its own resources to finance environmental upgrade measures (see section 2.4). During most of the project ME complied with all of the financial covenants in the Project Agreement (debt service coverage ratio of not less than 1.5, current ratio of not less than 1.2 and accounts receivable not to exceed 60 days of sales revenues), except the current ratio, which was 0.8 in 2009 but had improved to 1.1 in 2010 and to 1.18 in 2011. Because of the lengthy delays in implementation of the SCADA contract, ME’s performance is rated as Moderately Satisfactory. Local Authorities, Municipalities, etc. The heating component was completed on time in December 2011. Despite some initial delays due to lack of funding for building thermal rehabilitation, the local authorities were effective in monitoring and supervising the works at their sites and providing the necessary information to MEPIU and heating consultants. Many local authorities implemented other energy saving measures, either through their own means or other donors. The performance of local authorities is rated as Satisfactory. MEPIU was the main coordinating unit for project implementation and worked diligently on all aspects of project implementation. It strictly followed Bank procedures and the provisions of its Operations Manual. MEPIU staff were experienced, adequately trained, and highly effective and spoke English well, which facilitated contacts with Bank staff in Washington. Hiring of a Monitoring and Evaluation Specialist early in the project was extremely helpful in tracking the progress towards meeting the PDO. MEPIU prepared a comprehensive mid-term review and Borrower’s ICR, and regularly prepared quarterly progress reports. MEPIU worked closely with the government, ME, local authorities under the heating component, the Bank, and other donors. It is in a large part due to MEPIU that the project achieved all of its project development objectives. The performance of MEPIU is rated as Highly Satisfactory. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory Based on the ratings for Government and the 3 implementing agencies, the overall Borrower performance is rated Satisfactory. 19 6. Lessons Learned • The difficulty of introducing modern SCADA/Telecommunications systems should not be underestimated with respect to complexity and time required for implementation. Adequate time should be allowed for development of technical specifications. Implementation of a new SCADA system often requires adjustments to the technical solutions initially identified, which leads to prolonged implementation. A utility unfamiliar with the most advanced technology should therefore have an in-house independent consultant to the utility and a consultant owner’s engineer, who would be present during the design and preparation of technical specifications, through the evaluation of bids, and through implementation of the contract to its completion. Timely and prompt interventions by project teams are critical to remedy contract management issues and implementation delays. • PPFs should be used to finance pilot investments, as well as technical assistance and set-up of implementing agencies. PPF for projects combining investments with sector policy reforms is a critical instrument to provide positive demonstration effects and contribute to increased confidence in success and higher commitment by end- beneficiaries. The use of the PPF in the Ungheni pilot project provided both an early demonstration of the results/impact of heating/energy efficiency improvements and also a test of the proposed solution to connect residential buildings, provided that the residents are willing to pay for the heat. It also introduced an element of competition for participating municipalities and thereby triggered higher commitment to successfully complete the sub-projects and ensure sustainability. • If the institutional framework to ensure the viability of heating investments in the household sector is weak due to ambiguous and often contradictory legal basis of home owner associations, it is better to focus on public buildings, as the social benefits accrue to all. The Additional financing following the government’s request helped to augment the social impact of the project, spreading the benefits of energy efficiency components to a larger number of children, students, in- and outpatients, and staff. Public ownership of beneficiary buildings provides for greater sustainability of investments through proper allocation of resources for O&M and fuel. • Importance of selection criteria. Upfront statement of clear and transparent selection criteria considerably reduces potential political pressures and influence both during the selection of project beneficiaries, as well as during the implementation of investments. Despite the overarching control by one political constituency there was not a single signal or complaint on political influence on the project during preparation and implementation. • Proper sequencing of policy dialogue and investments provides for better sustainability. The project was initiated at times of important changes in the country’s political landscape, which led to a fragile and often unpredictable political economy. The SAC-III program, which included energy reform actions, had failed. The reforms, however, could still be implemented due to the joint approach and the adequate synergy between sector policy dialogue and investments, which were included in the project design. • Including policy reforms in the project, accompanied by priority investments, was instrumental in leveraging additional domestic and donors financing. The reform actions combined with the demonstration effect of priority investments played a catalytic role in attracting additional resources, which, in turn, contributed to achievement of 20 greater outcomes and enhanced sustainability. The Government of Sweden allocated additional funds for energy efficiency and energy conservation; the beneficiaries received extra resources due to carbon finance activities; GEF allocated additional resources which allowed the removal of PCBs at Moldelectrica. The EU and GIZ built on the sub- projects achievements to finance energy conservation measures, including use of renewables (installation of solar panels at Orhei District hospital). • Carefully and diligently prioritized investments contribute to positive unintended outcomes. Moldova is an IDA country and therefore the available funds are rather limited. Selection of investment packages has been based on adequate identification of priority investments – consideration was given to priority energy efficiency investments (replacement of depleted infrastructure to increase efficiency and reduce costs) versus complete packages (energy efficiency and energy conservation), which would have reduced considerably the number of beneficiaries. Priority investments paved the way and helped raise future own and donors funding for energy conservation and additional energy efficiency measures, which increased the impact and the final outcomes of the project, as described above. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies The Borrower/implementing agency prepared a comprehensive ICR, which was very helpful in preparing the Bank’s ICR. The only discrepancy between the two ICRs was the method of calculating unserved energy 18. (b) Cofinanciers Not applicable (c) Other partners and stakeholders Not applicable 18 The MEPIU used the method used by ME until April 2012, which indicated 0% unserved energy since 2005. In April 2012 ME informed the Bank that it was using a new method of calculating unserved energy, which resulted in unserved energy of 101.2 MWh in 2011, and this is the calculation used in the Bank’s ICR. 21 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Appraisal + Actual Percentage Additional Appraisal Additional (USD of Appraisal Financing Components Estimate Financing millions) and AF Estimate (USD millions) Estimate Estimates (USD millions) (USD millions) Electricity Component Metering 3.96 0.00 3.96 3.01 76 SCADA 5.52 0.00 5.52 17.95 167 Included Telecommunications 5.26 0.00 5.26 in SCADA Transmission 9.74 0.00 9.74 15.84 163 Subtotal Electricity 24.49 0.00 24.49 36.80 150 Heating Component 9.16 9.82 18.98 21.91 115 Technical Assistance Project Implementation Heating 0.60 1.00 1.60 1.69 106 Electricity 0.60 0.00 0.60 .78 130 Environmental Management (GEF) 0.10 0.00 0.10 2.03 20 Sector Reforms 0.30 0.00 0.30 0.24 203 Project Management & 1.63 104 1.38 0.18 1.56 Administration Total Baseline Cost 36.62 11.00 47.63 65.08 137 0 Physical Contingencies 1.11 1.11 0.00 0 Price Contingencies 2.19 0.00 2.19 Total Project Costs 39.93 11.00 50.93 65.08 128 Total Financing Required 39.93 11.00 50.93 65.08 128 22 (b) Financing Additional Appraisal Financing + Percentage Appraisal Estimate Additional Type of Actual of Estimate (USD Financing Source of Funds Parallel (USD Appraisal (USD millions) Estimate financing millions) And Add. millions) (USD Fin. millions) Borrower (ME) 4.33 0.00 4.33 10.84 250 Borrower (Municipalities) 1.04 Borrower (Government) 0.10 International Development 10.00 45.00 35.00 49.21 109 Association (IDA) SWEDEN: Swedish Intl. Dev. 0.60 1.86 116 Cooperation Agency (SIDA) 1.00 1.60 GEF 0.00 0.00 0.00 2.03 23 Annex 2. Outputs by Component Planned Output from each Outputs under Planned Outputs Actual Outputs Comment Component Additional Financing 19 Component A: Electricity System Upgrade Improved 400 meters plus one 580 meters and one Completed in June 2010 metering of Metering Metering Management electricity flows Management System System were installed and administration and management of the wholesale electricity market Improved power Installation of SCADA and system dispatch dispatch equipment. telecommunications and control Installation of systems installed and telecommunications operational equipment. Bottlenecks in the 53 high-voltage 47 high-voltage circuit Completed in June 2010. transmission circuit breakers breakers were installed Only 47 high-voltage system reduced installed at three at three 330 kV circuit breakers were major substations substations and one 110 procured under the 330 kV lines: kV substation project, as ME had replacement or repair already procured and of 40 km of installed a number of conductors, 120 circuit breakers with its towers, 240 km of own funds. earthwire 110 kV lines: replacement or repair of 5 km of conductors, 65 towers, 45 km of earthwire. Component B: Heating Supply and Efficiency Improvement Improved heating Number of + 47 209 buildings (incl. 82 of selected public buildings 20 included additional within AF) of 69 buildings in the project: 80 buildings socially important public institutions and 43 residential buildings now have improved heating throughout the winter season Number of 8,399 students and 4,800 students 27,485 students and students and teachers in schools and teachers teachers in schools and teachers and children in in schools and children in kindergartens benefiting from kindergartens children in and 12,938 within the educational kindergartens AF heated throughout 19 Additional financing was for only the heat supply and energy efficiency component. 20 During project preparation, the terms “buildings� and “institutions� were used interchangeably. An institution or “object� might have 5-20 buildings on its campus. 24 facilities heated the winter season (more 120 days or more than 120 days/year) during the winter 21 Number of 1,000,000 inpatients, 228,000 1,299,993 inpatients, patients, medical medical staff and inpatients, medical staff and staff and outpatients medical staff outpatients and 397,517 outpatients and within the AF now benefiting from outpatients benefit from medical medical facilities facilities that are heated heated 120 days throughout the winter or more during the season (more than 120 winter. 22 days/year). Component C: TA for Project Implementation and Energy Sector Reforms Project implementation TA for: electricity component Project implementation Financed under the PPF TA for the electricity and under the IDA credit components (prepared technical specifications and bidding documents and assisted with evaluation). heating component Project implementation Financed from the SIDA TA for the heating parallel financing of the component throughout project the project implementation period (prepared technical specifications and bidding documents, assisted with evaluation, monitored construction, and evaluated performance after new equipment was installed). PCB follow-up study Environmental study for Financed by GEF Grant the electricity for Sustainable component executed, Persistent Organic but not financed by the Pollutants (POPs) Project. Stockpiles Management Program, which also disposed of the old PCB- containing condenser batteries and capacitors. 21 The original project measured only the number of buildings with improved heating, and the PAD foreseen a number of 15,000 pupil in schools and kindergartens and 4,000 beds in hospitals. But during implementation the Bank requested MEPIU to revise the indicators and also track the number of students and teachers in school and children in kindergartens, and 22 inpatients and medical staff and outpatients benefiting from improved heating (the figures for medical staff, inpatients and outpatients were revised by MEPIU to reflect correctly the share of people benefitting of stationary treatment (inpatients and outpatients on day stay) and outpatient visits to the medical facilities rehabilitated under the project.). These were added as two new indicators in the Additional Financing. 25 TA for improving Reports: institutional and High Level regulatory framework Specification of the in the energy sector, Market Rules for the energy trading, Electricity Market of privatization, and Moldova; debt restructuring Legal Audit and Benchmarking of Moldova’s Energy Sector for Compliance with Energy Community Requirements; Balancing and Settlement Regulations for the Electricity Market of Moldova. Annual Audits of Project and ME accounts. Component D: Project Management and Administration Maintain competent Maintain An efficient, effective and adequately competent and and adequately staffed staffed PIU adequately PIU was maintained staffed PIU throughout the project implementation period. 26 Results Framework – dynamic of project monitoring and evaluation indicators: Electricity Component Indicators Measurement Baseline Value Progress to Date End-of-Project Target Value Number or text Date Number or text Date Number Date or text PDO Indicator 1. Reduce 2002: 253 12/31/2002 2002: 253 hours; 03/30/2012 Outage rates 04/30/2012 outage rates hours 2003: 215 hours; reduced by of 2004: 304 hours; 35% Moldelectrica 2005: 249 hours; transmission 2006: 202 hours; lines and 2007: 921 hours, of which 296 hours - “routine� outages, 625 hours were substations conditioned by one force-majeure circumstance– January 3, 2007. Due to sleet and by 35%. ice-crust on the ground and other surfaces, ME had to execute necessary repair works – the total time of outages due to the given conditions was 625 hours); 2008: 203 hours. 2009: 113 hours. 2010: 162 hours. 2011: 103 hours (59 % reduction) 2. Reduce Non technical 12/31/2002 Non technical losses in transmission network: nonexistent Non technical losses 03/30/2012 Non 04/30/2012 non-technical losses in in distribution network: technical losses in 2002 were 2002: 11% losses transmission 11%. 2003: 11%; reduced by and 2004: 8%; 75%. distribution 2005: 5%; by 75% 2006: 2%; 2007: 1.7%; 2008: 1.4 % 2009: 0.6 % 2010: 0.68 % 2011:0.00 % (100 % reduction) 3. Reduce Unserved 12/31/2002 2002: N/A; 03/30/2012 Unserved 04/30/2012 unserved energy of 2004: 298.68 MWh; energy energy by about 602 2005: 244.64 MWh; reduced by 200 MWh per MWh in 2006: 198.46 MWh; 200 MWh year 1999. 2007: 904.90 MWh; per year 2008: 199.45 MWh; 27 2009: 111.02 MWh; 2010: 159.16 MWh; 2011: 101.2 MWh Target achieved, with unserved energy substantially reduced. 200 MWh per year was a rather vague target, with no starting year or ending year. Information from Moldelectrica’s Annual Report. This indicator was calculated differently by Moldelectrica in previous years and the calculation method has been revised in early 2012. 4. Reduce Total 12/31/2002 2002: 138.9 GWh 03/30/2012 Technical 04/30/2012 technical technical 2003: 126.85 GWh losses losses of losses of 2004: 139.6 GWh reduced by Moldelectrica about 200 2005: 124.90 GWh 5% by 5%. GWh in 2006: 127.2 GWh 1999. 2007: 120.0 GWh 2008: 124.7 GWh 2009: 122.60 GWh 2010: 136.96 GWh 2011: 131.04 GWh (5.65 % reduction) 28 Results Framework – dynamic of project monitoring and evaluation indicators: Heating Component Status of agreed outcomes indicators: Indicators Measurement Baseline Value End-of-Project End-of-Project Target Value Number or text Date Number or text Date Number or text Date PDO Indicator 1. Increase no. of 80 institutions/ 12/31/2002 69 institutions & 43 residential 04/30/2012 120 days availability of heating in 04/30/2012 buildings with heating buildings with buildings (252 buildings (incl. the selected buildings. throughout the winter heating available schools, hospitals, kindergartens, and season. from 0-30 days per orphanages) have heating and year (during project Domestic Hot Water (DHW) preparation the term availability throughout the entire year institutions/ (including during the winter heating buildings was used; season, which is more than 120 an institution may days/year). have 20 buildings (252: 170 within the original project on its campus) + 82 within Additional Financing) 2. Number of students 15000 pupils 12/31/2002 27,485 students and teachers in 04/30/2012 8,399 students and teachers in 04/30/2012 and teachers and schools and children in kindergartens schools and children in children who benefit (plus AF – 12,938 persons) benefiting kindergartens; plus 4,800 students from educational from heating and DHW throughout and teachers in schools and children facilities with 120 days the entire year (including during the in kindergartens – the Additional or more availability of winter heating season, which is more Financing, benefiting from quality heating during than 120 days/year. educational facilities with 120 days the heating season. or more availability of quality heating during the heating season. 3. Number of inpatients, 4000 beds 12/31/2002 412,206 inpatients and 876,610 04/30/2012 1 million inpatients, staff and 04/30/2012 medical staff and outpatients and 11,177 medical outpatients plus 228,000 inpatients, outpatients benefiting staff/year –1,299,993 persons total in staff and outpatients (the Additional from health care (plus AF - 51,806 and 3,691 and Financing), benefiting from health facilities with 120 days 342,020, respectively – 397,517 care facilities with 120 days or more or more availability of persons in total)* benefiting from availability of quality heating during quality heating during heating and DHW throughout the the heating season. the heating season. entire year (including during the winter heating season, which is more than 120 days/year. * - the figures for medical staff, inpatients and outpatients were revised by MEPIU to reflect correctly the share of people benefitting of stationary treatment and outpatient visits to the medical facilities rehabilitated under the project. 29 Typical obsolete equipment replaced under the project heating component Typical modern equipment financed under the project heating component 30 Annex 3. Economic and Financial Analysis ECONOMIC ANALYSIS For the Project Appraisal Document (PAD) prepared in 2003, an economic analysis was carried out for the electricity component which accounted, at the time, for the bulk of the project costs. For the heating component, the PAD recognized that, for the reasons mentioned below under the heating component, a quantitative assessment of the economic benefits of the heating component could not be carried out. Instead, for the PAD, a least-cost analysis was carried out for this component. For the ICR, the economic analysis for the electricity component has been updated using the same methodology as in the PAD and utilizing actual results and experience during implementation where relevant information was available. For the heating component, in view of the reasons mentioned in the PAD, no overall assessment of the quantitative benefits has been undertaken for the ICR. However, a qualitative assessment is provided with support from some partial quantitative indicators of the benefits where data are available. Electricity Component Estimates at project appraisal: The component had four main subcomponents: (i) metering, (ii) dispatch, (iii) telecommunications, and (iv) transmission. The main benefits were expected to come in the form of: (i) reduction in unserved energy, (ii) avoided collateral damages, (iii) reduction in transmission losses, (iv) improved telecommunications, (v) reductions in non- technical losses (metering) and (vi) improved security. About 84% of the total economic benefits were expected to come from the projected reduction in unserved energy. The economic valuation of reduction in unserved energy was based on a shadow price determined on an estimated willingness-to-pay. This was calculated as the average of the estimated cost of self- generation (based on diesel fuel based generation) and the end-user tariff, and the average was then adjusted downwards by 20%. Estimation of volume was done on the basis of the degree of load left unserved, utilizing a probability of disruptive events and assumed growth of power demand. Based on the foregoing, the PAD estimated the Economic Rate of Return (ERR) as 39.3% and the Net Present Value (NPV) of US$ 69.2 million at a discount rate of 12%. Re-estimation at project completion: The re-estimation of the ERR and NPV has been carried out using the same methodology as in the PAD utilizing updated information where available. The detailed analysis is in the Project Files, and the main features are summarized below. Indicator At Project Appraisal At Project Completion ERR 39.3% 39.8% NPV US$69.2 million US$69.9 million The main factors that have affected the re-estimated ERR are the following: Positive impact: The shadow price at appraisal was based on a self-generation cost estimated on the basis of the price (0.19 US cents per liter) of diesel fuel prevailing at the time (2003) when 31 international oil prices were relatively low – US$ 25 per barrel. During the period of project implementation (2003-2012), the international oil prices increased very sharply; the inflation- adjusted index of international oil prices (with 2002=100) peaked at 334 in 2008 with an average of about 227 for the entire implementation period. The re-estimation takes into account the effects of the increase in international oil and diesel fuel prices. Negative impact: The main factors are (i) the delay in realization of expected benefits due to the longer implementation period and (ii) lower than anticipated reduction in unserved energy. While unserved energy has been reduced from about 300 MWh in 2004 to about 100 MWh in 2011, the actual rate of reduction has been lower than projected at appraisal 23. The combined effect of the positive and negative impacts is that the re-estimated ERR (39.8%) and NPV (US$ 69.9 million) are slightly higher than the appraisal estimates of 39.3% and US$ 69.2 million respectively. Heating Component Estimates at Project Appraisal: As stated in the PAD, the ERR was not estimated at appraisal as it was judged to be very difficult to evaluate the benefits of improved heating for the type of buildings included (schools, hospitals, etc.) due to the complex methodology and data requirements involved in estimating the project specific and non-specific cases (lost school days and their value; cost of increased incidence of illnesses of staff, students, and patients; cost of poorer educational services and hospital care; inefficiencies and costs of the existing mode of heating; etc.). Rather, the proposed investments were selected on the basis of the least-cost analysis conducted under the Strategic Heating Options Study which concluded that heating provided through stand-alone boilers or through mini-networks for a cluster of buildings would be the least-cost option for Moldova, except perhaps for some areas of the capital city, Chisinau, in the proximity of the Chisinau-2 CHP plant. Assessment at Project Completion: Under the Project, the original allocation for the Heating Component was US$9.1 million equivalent (26%) of the total credit amount of US$35 million equivalent. Under the Additional Financing of US$10 million approved in January 2009, the allocation for the Heating Component was increased to US$19.1 million equivalent, thereby increasing its share to 42 % of the total Credit amount. The difficulties in undertaking any quantitative assessment of economic benefits were recognized at project appraisal as described above; consequently, no quantitative assessment of the overall costs-benefits has been undertaken for the ICR. However, the Heating Component is judged to have resulted in many significant gains through (i) improvements in the general well-being and comfort of the targeted beneficiaries, including schools and hospitals; (ii) increased operating and energy efficiency in the heat supply; and (iii) environmental benefits through reduced emissions. In the following, a qualitative assessment of the benefits is provided and supported, where data are available, by quantitative indicators from the Borrower’s Implementation Completion Report. 23 It is important to notice, however, that the indicator at appraisal of 200 MWh reduction per year was a rather vague target, with no starting year or ending year (Information from Moldelectrica’s Annual Report). This indicator was calculated differently by Moldelectrica in previous years and the calculation method has been revised in 2012 towards project completion. Thus, the target is considered achieved, with unserved energy substantially reduced. 32 A. Targets for number of beneficiaries were exceeded (see the table below) Indicator End of Actual project achievement target (including under Additional Financing) Number of institutions/buildings 80 252 with increased heating through the winter season (target was (69 institutions & availability of heating for 120 days per year; actual achievement was 43 residential availability of heating during the entire heating season which was buildings more than 120 days per year) Number of students, teachers and children 15,000 27,485 benefiting from increased heating through the winter season pupils (incl. AF – 12,938) Number of patients and medical staff benefiting from increased heating through the winter season ------ in-patients 4,000 beds 412,206 (incl. AF - 51,806) ------ medical staff 11,177 (incl. AF - 3,691) ------ out-patients 876,610 (incl. AF- 342,020) The main beneficiaries from the project investments are the population, including students, teachers, hospital and clinic patients and staff who experienced an increase in their levels of comfort, well-being, and health through the improved heating facilities under the project. Periodic feedback visits during project implementation have confirmed the beneficiaries’ satisfaction with the level and quality of improvements provided. 33 B. Increased energy efficiency and lower emissions from newly constructed boilers (see the table below) Indicator Unit Before After Reductions in annual Project Project emissions (including Under Additional Financing) Energy efficiency % 40-45% 92-94% Nitrous oxide tons per year 59.4 9.8 49.6 emissions Sulfur dioxide tons per year 21.4 0.0 21.4 emissions Dust tons per year 1.5 0.0 1.5 Carbon dioxide 000 tons per 41.8 15.8 26.0 year Operating and energy efficiency: The project replaced 47 old and inefficient boiler plants and both external and internal networks by new equipment and facilities. The main gains in operating efficiency were in the form of (i) greater reliability of operation with fewer breakdowns resulting in a more reliable and consistent heat supply to the customers; and (ii) reductions in operating cost through lower expenses for repairs and maintenance. In regard to energy efficiency, the new equipment and networks under the Project enabled significant reductions in specific fuel consumption in the boilers (more detailed description is provided in the main text). Environmental benefits: As indicated in the table above, the new equipment and facilities under the Project are also estimated to have resulted in substantial reductions in the annual emissions of harmful gases and dust. A number of beneficiaries under the Heating Component benefitted of Carbon finance credits. FINANCIAL ANALYSIS Project-level analysis A project-level financial rate of return (FRR) was not estimated at project appraisal and has not been estimated at project completion. Financial sustainability. ME, the principal project implementing entity, had been functioning profitably until 2009. An important feature had been the role of the National Regulatory Agency for Energy (ANRE) in setting tariffs for ME at cost-recovery levels. Among ANRE’s enabling actions was allowing ME to revalue its assets in 2010 to compensate for the effects of inflation. 34 However, for the years 2010 and 2011, in disclaiming an opinion on ME’s financial statements, ME’s external auditors reported that ME did not adequately adjust its annual depreciation charges in line with international standards. If depreciation were to be estimated in line with international standards, the auditors have pointed out that ME would have incurred higher losses than reported by the company. The auditors have also commented that ME’s current liabilities have been understated. Based on the audited financial statements, a summary of key financial indicators is provided in the table below. C. ME – Selected Financial Indicators (2007 to 2011) Unit 2007 2008 2009 2010 2011 INCOME STATEMENTS Revenues US$ million 14.8 21.9 18.9 22.0 25.4 Expenses and tax US$ million 12.7 19.3 14.2 23.5 32.9 Profit after tax US$ million 2.1 2.6 4.7 (1.5) (7.4) BALANCE SHEETS Accounts receivable US$ million 2.4 3.2 2.0 2.9 3.1 Total current assets US$ million 5.8 9.1 4.8 6.4 7.3 Total assets (see footnote) US$ million 65.2 79.1 70.6 194.0 191.9 Total current liabilities US$ million 1.9 4.9 6.1 5.7 6.2 Medium and long term debt US$ million 10.3 12.8 17.4 17.8 16.8 Total liabilities & equity (see footnote) US$ million 65.2 79.1 70.6 194.0 191.9 FINANCIAL RATIOS Current ratio Ratio 3.1 1.9 0.8 1.1 1.18 Debt service coverage ratio Ratio 14.2 11.1 9.1 1.7 3.9 Accounts receivable to sales revenues number of days 59 53 39 48 45 Note: The value for 2010 reflects the effect of the revaluation of fixed assets carried out in 2010. While ANRE’s tariff methodology provides for cost-recovery tariffs, including by permitting a revaluation of ME’s assets for setting the regulatory asset base, in practice, the extent to which ME can benefit from these steps depends upon the proper estimation of annual depreciation charges to be included in setting the tariffs. For 2010 and 2011, as pointed out by the auditors, there have been shortcomings in ME’s estimation of the annual depreciation charges, due to delayed approval of the new transmission tariff to include the assets value after revaluation. Consequently, ME’s annual tariffs, as approved by ANRE, may not adequately reflect cost-recovery levels. Prospects for ME future financial viability, therefore, depend upon an adequate resolution of these issues. Compliance with financial covenants Under the Project Agreement, ME had undertaken to meet the following covenants: (i) A debt service coverage ratio of not less than 1.5 (Section 4.02 (a) of the PA); (ii) A current ratio of not less than 1.2 (section 4.03 (a) of the PA); and (iii) Accounts receivable not to exceed 60 days of sales revenues (Section 4.04). 35 Based on the audited financial statements, ME has been in compliance with these covenants with the exception of the current ratio which was 0.8 in 2009, but this improved to 1.1 in 2010 and 1.18 in 2011 in relation to the minimum specified level of 1.2 in 2011. 36 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Vladislav Vucetic Lead Energy Specialist ECSIE Power Engineer Pentti Aro Heat and Power Engineer ECSIE Pekka Kalevi Salminen Energy Specialist ECSIE Michael Haney Energy Specialist ECSIE Enar Wennerstrom Senior Financial Analyst ECSIE Snezana Mitrovic Senior Procurement Specialist Jann Masterson Operations Officer ECSIE Vakhtang Kvekvetsia Financial Specialist ECSIE Zoe Kolovou Senior Counsel John Ogallo Financial Management Specialist ECOPS David Freese Senior Finance Officer Bogdan Constantinescu Financial Management Specialist Sandu Ghidirim Operations Officer ECSIE Peggy Wilson Consultant ECSIE Ahmet Gokce Senior Procurement Specialist Marina Lysiakova Program Assistant ECSIE Supervision/ICR Irina Babich Financial Management Specialist ECSO3 Andrei Busuioc Financial Management Specialist ECCAT Kashmira Daruwalla Senior Procurement Specialist ECSO2 Oxana Druta Financial Management Analyst ECSO3 Sandu Ghidirim Operations Officer ECSS2 Ahmet Gokce Consultant ECSO2 Peggy Janice Masterson Operations Officer ECSS2 Kishore Nadkarni Consultant ECSS2 Alexandra Livia Onofrei Program Assistant ECCRO Anne N. Ranasinghe Procurement Assistant ECSO2 Pekka Kalevi Salminen Senior Energy Specialist ECSS2 Gurcharan Singh Senior Procurement Specialist TWICT Viorica Dumitri Strah Program Assistant ECCMD Doina Visa Senior Operations Officer ECSS2 Anna L Wielogorska Senior Procurement Specialist EAPPR 37 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY96 1.41 FY97 0.46 FY98 27.09 FY99 FY00 39.73 193.38 FY01 56.13 192.58 FY02 9.58 123.29 FY03 22.46 119.73 FY04 22.15 95.67 FY05 0.00 FY06 0.00 FY07 0.00 Total: 150.05 753.61 Supervision/ICR FY96 0.00 FY97 0.00 FY98 0.00 FY99 0.00 FY00 0.00 FY01 0.00 FY02 0.00 FY03 0.00 FY04 3.45 FY05 25.18 99.96 FY06 30.77 116.55 FY07 23.14 84.99 FY08 25.88 92.08 FY09 23.90 86.03 FY10 30.73 98.58 FY11 30.81 104.32 FY12 32.80 65.03 TOTAL SPN 223.21 750.99 38 Annex 5. Beneficiary Survey Results Not applicable 39 Annex 6. Stakeholder Workshop Report and Results Not applicable 40 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Borrower's Implementation Completion Report for the Moldova Energy II Project March 22nd, 2012 The Moldova Energy II Project had the following objectives, which have been achieved: • For the Electrical Component: improve the security and reliability of the electricity transmission system and wholesale electricity supply and, therefore, facilitate unimpeded commercial operation of the power system, both domestically and internationally; and • For the Heating Component: improve the availability, quality, and efficiency of heating in selected priority public buildings (schools, hospitals, and residential buildings for disabled and other vulnerable groups). For this Project, two IDA credits (3833, equivalent of 38.5 million USD and 4541 equivalent of 10.71 million USD) were used, along with local contribution and funds from other donors. Project’s expenditures Credit 3833-MD Local IDA Other Total Component contribution finaced donors US$ mln US$ mln US$ mln US$ mln Electricity 10.84* 25.96 0.00 36.80 A1. Metering 2.37 0.34 0.00 2.71 A2. Equipment for measurement transformers (ME) 0.30 0.00 0.00 0.30 A3. Dispatch and Telecommunication 0.89 17.06 0.00 17.95 A4. Substation Equipment 5.89 7.32 0.00 13.21 A5. Goods and materials for transmission lines 1.39 1.24 0.00 2.63 Heating 0.69** 10.34 0.00 11.03 B. Pilot Project (Ungheni) 0.02 0.66 0.00 0.68 B1. Heating supply (Floresti, Falesti, Straseni, 0.11 1.33 0.00 1.44 Cantemir) 0.007 0.06 0.00 0.067 B2. Energy Efficiency/building rehabilitation 0.28 2.14 0.00 2.42 (Cantemir, Straseni) total B5-6: 2.14 0.00 total B5- B3. Heating supply (Leova, Nisporeni, Briceni, Falesti 0.27 4.01 0.00 6: 6.42 Ialoveni, MoH) B5. Heating supply (objects of MoH) B6. Heating supply (objects of MoH) Technical Assistance 0.001*** 1.06 3.30 4.36 Electricity (IDA+Sida) 0.00 0.61 0.17 0.78 Heating (Sida) 0.00 0.00 1.10 1.10 Environmental Management (GEF) 0.00 0.00 2.03 2.03 Sector Reforms 0.00 0.24 0.00 0.24 Audits of Project’s and ME’s accounts 0.001 0.21 0.00 0.211 Project Management and Administration 0.10*** 1.14 0.00 1.24 Total credit 3833-MD 11.63 38.50 3.30 53.43 41 Credit 4541-MD – Additional Financing Heating 0.35** 10.53 0.00 10.88 B8. Heating supply (District Hospitals in Ocnita, 0.22 2.50 0.00 2.72 Drochia, Orhei) 0.08 2.34 0.00 2.42 B9. Heating supply (Drochia, Soldanesti, Cimislia 0.02 3.44 0.00 3.46 towns) 0.01 0.82 0.00 0.83 B10. Heating supply (Anenii Noi, Stefan Voda, 0.02 1.43 0.00 1.45 Taraclia towns) B11. Heating supply (Center for Mother and Child) B12 Heating supply (District Hospitals in Cimislia, Soldanesti) Technical Assistance 0.00 0.00 0.59 0.59 Heating (Sida) 0.00 0.00 0.59 0.59 Project Management and Administration - included in 0.18 0.00 0.18 3833 Total credit 4541-MD 0.35 10.71 0.59 11.65 Total Project Costs 11.98 49.21 3.89 65.08 Implemented Similar Activities, complementing the Energy II Project Heating Component Sida Financed: Boarding Schools in Hincesti, Cupcini, 1,43 2.15 Telenesti (Energy Support Progamme); 0.72 Tyrnova Children’s Tuberculosis Rehabilitation Center (EE Project) TF financed (ESREI Project): Pediatric Department of 1.15 1.15 CMC (9 blocks) *ME sources; ** Local authorities’ sources; *** Government contribution Project Impact: By rehabilitating and upgrading the power metering system, dispatch and telecommunication systems within its Electricity Component, as well as by implementing modern, highly efficient and environmentally-friendly thermal energy supply systems within its Heating Component in a range of social institutions throughout the country, the Project improved the reliability of both electricity and heat supply to the consumers, increased energy supply and consumption efficiency and, correspondingly, contributes to strengthening country’s energetic security, which creates a proper infrastructure framework for improvements within such priority areas as public health, educational process, living standards of country’s population. Project Outcomes per Components: (1) Under the Electricity Component, the project contributed to improving the overall performance of the enterprise in the last 6 years. Technical and non-technical losses were reduced, as well as outage rates of ME transmission lines and substations. There were no unserved energy cases since 2005. The transmission system rehabilitation has contributes to more reliable power supply. (2) Under the Heating Component, for 252 buildings - 69 social institutions (mainly medical and educational institutions of local and national levels) and 43 residential buildings – there has been ensured high-quality, secure and reliable heat and domestic hot water availability throughout the entire year, this bringing substantial economic, technical and environmental benefits for the concerned individual and institutional beneficiaries, and social benefits for the concerned regions and country as whole. 42 The project obtained the following major results within its two major components, reported to the planned key performance indicators: Status of agreed outcomes indicators for the Electrical Component: Indicators Measurement Baseline Value Progress To Date End-of-Project Target Value Number or Date Number or text Date Number or text Date text PDO Indicator 1. Reduce 2002: 253 12/31/2 2003: 215 hours; 12/31/20 Reduce outage rates by 4.30.20 outage rates hours 002 2004: 304 hours; 11 59 %, due to the new 12 of ME 2005: 249 hours; installed high voltage transmission 2006: 202 hours; equipment (substation lines and 2007: 921 hours, of equipment, goods and substations by which 296 hours - materials for 35%. “routine� outages, transmission lines), 625 hours were procured under the conditioned by one electrical component force-majeure which improved the circumstance– quality of power supply. January 3, 2007,due The indicator was to sleet and ice- calculated by monitoring crusted ground and the number and duration other surfaces, there of outages at overhead was necessary to power transmission lines perform repair works and respective – the total time of equipment, connecting outages due to the these lines to the given conditions was transformer substations of 625 hours); (switch-yards). 2008: 203 hours. 2009: 113 hours. 2010: 162 hours 2011: 103 hours (59 % reduction) 2. Reduce Non 12/31/2 Non technical losses 12/31/20 Non technical losses 4.30.20 non-technical technical 002 in transmission 11 reduced by 100 % due to 12 losses in losses in network: Non the new installed transmission 2002 were technical losses in equipment, procured and 11%. distribution network: under the electrical distribution 2003: 11%; component (Metering, by 75% 2004: 8%; Dispatch and 2005: 5%; telecommunication) 2006: 2%; which improved the 2007: 1.7%; quality of power supply. 2008: 1.4 % The non-technical losses 2009: 0.6 % represent the difference 2010: 0.68 % between the actual 2011:0.00 % technological 43 (100 % reduction) consumption and the standard allowance calculated and approved by ANRE 3. Reduce Unserved 12/31/2 2003: 118.08 MWh; 12/31/20 Reduced unserved unserved energy of 002 2004: 3674.10 MWh; 11 energy up to 0 by year energy by about 602 2005: 0; 2005. That was attained 200 MWh per MWh in 2006: 0; through ensured power year 1999. 2007: 0 delivery in quantity 2008: 0 covering demand of 2009: 0 internal market (DISCO 2010: 0 responsibility) and by 2011: 0 ensuring fail-safe power supply due to the new installed high voltage equipment. This indicator monitoring was ensured through an adequate metering in all embranchments to external systems and to power distribution systems (Metering, Dispatch and telecommunication sub- systems, which improved the quality of power supply). 4. Reduce Total 12/31/2 2002: 138.9 GWh 12/31/20 Reduce by 5% the 4.30.20 technical technical 002 2003: 126.85 GWh 11 technical losses that 12 losses of ME losses of 2004: 139.6 GWh present the difference by 5%. about 200 2005: 124.90 GWh between the quantum of GWh in 2006: 127.2 GWh power at the entering 1999. 2007: 120.0 GWh and exiting the power 2008: 124.7 GWh transmission system, 2009: 122.60 GWh which improved the 2010: 136.96 GWh quality of power supply. 2011: 131.04 GWh This is obviously due to (5,66% % the results of installation reduction) of new, digital energy meters, and new primary high-voltage equipment at the most important substations in the transmission network. 44 Status of agreed outcomes indicators for the Heating Component: Indicators Measurement Baseline Value Progress To Date End-of-Project Target Value Number or text Date Number or text Date Number or text Date PDO Indicator 5. Increase 80 12/31/2 69 institutions & 43 12/31/20 120 days 4.30.2012 no. of institutions/buil 002 (Ungheni, Stefan Voda, 11 availability of buildings dings with Anenii Noi) residential heating in the with heating heating buildings (total of 252 selected buildings. throughout availability from buildings incl. schools, the winter 0-30 days per hospitals, season. year (during kindergartens, and project orphanages) have preparation the heating and DHW term availability throughout institutions/ the entire year (incl. buildings was during the winter used; an heating season, which institution may is more than 120 have 20 days/year. buildings on its campus) 6. Number of 15000 pupils 12/31/2 27,485 teachers and 09/30/20 14,547 students 12/31/2011 students and 002 students in schools and 11 and teachers in teachers and children in schools and children who kindergartens children in benefit from benefiting from heating kindergartens. Plus educational and DHW throughout 12,938 students facilities with the entire year and teachers in 120 days or (including during the schools and more winter heating season, children in availability of which is more than 120 kindergartens (the quality days/year (incl. AF – Additional heating 12,938 persons). Financing) during the benefiting from heating educational season. facilities with 120 days or more availability of quality heating during the heating season. 7. Number of 4000 beds 12/31/2 412,206 inpatients and 09/30/20 902,476 inpatients, 12/31/2011 inpatients, 002 11,177 medical staff 11 staff and medical staff (incl. AF - 51,806 and outpatients plus and 3,691, respectively) and 397,517 inpatients, outpatients 876,610 (incl. AF- staff and 45 benefiting 342,020)* outpatients (the from health outpatients/year Additional care facilities benefiting from heating Financing), with 120 days and DHW throughout benefiting from or more the entire year health care availability of (including during the facilities with 120 quality winter heating season, days or more heating which is more than 120 availability of during the days/year. quality heating heating during the heating season. season. The general conclusion of the report is that the project was successful; its experience should be studied and replicated at the state level. Project management. The branch Ministry was the chief Government agency responsible for project implementation. Its role was to ensure that the project is implemented in an efficient manner, consistent with project objectives and agreements signed with IDA. The Government, under Decree No 1276 of December 21, 2000, established the Project Implementation Unit (PIU), as an independent legal entity, responsible for the day-to-day management of the project, with particular emphasis on procurement, contract administration, financial management, accounting, and reporting. The Supervisory Board of the PIU was presided over by the branch Minister, and includes also representatives of the Ministry of Finance, Ministry of Environment and Territorial Development, and State Chancellery. Most of the staff of the PIU were involved in implementation of the Energy I project, which was financed by an IBRD loan, and closed in December 2001. The staff acquired significant expertise and experience in implementing World Bank-financed projects. The PIU employed foreign consultants to assist in procurement, upgrade procurement management and supervision system, and provide additional training for the PIU staff. This assistance was especially intensive during the first two years of project implementation, but was available on an as-needed basis throughout the project. ME had its own technical project implementation team, working, on the one side, with contractors on physical implementation and, on the other side, with the PIU in administering the project. ME management and technical personnel was closely involved in all stages: procurement design, preparation of bidding documents (especially technical specifications), evaluation of bids and selection of contractors, engineering design, installation, testing, commissioning, and quality control. The PIU cleared all invoices with ME to ensure their consistency with the project's physical progress. The PIU exchanged all contractual and financial information with ME. The agencies executing the heating component also had their project teams, involved with on- site project activities, and had similar working arrangements with the PIU as ME. 46 Evaluation of Borrower and Bank performance Bank. The overall Bank performance in preparing and supervising the project was Highly Satisfactory. The project's primary objectives were well defined from the beginning and the project's components fit well with those objectives and responded to the needs of the country experiencing difficult transition period. During the project's implementation, the Bank team was very professional and committed, providing continuous assistance in all the issues related to the implementation, and worked very efficiently in close contact with the MEPIU team and with Government officials. The Bank team contributed to obtaining a significant amount of grants additionally to the IDA credits. Borrower. Strong Government commitment and interest was continuously expressed. The valuable endorsement of it is the fact that the Vice Prime Minister of Moldova is heading the MEPIU Supervising Board. During the first years the meeting of the Supervision Board was not always regularly held due to the permanent changes in the Government structure. At the end of the project the sessions of the Supervision Board were held according to the set schedule. The MEPIU was the main coordinating unit for Project implementation, and worked diligently on all the aspects of the project's execution. The fact that MEPIU was established as separate entity made possible avoiding negative impact of frequent changes in the Government/ Branch ministries, as well as in the Beneficiaries’ management. Following strictly the provisions of the Operation Manual allowed the MEPIU to avoid pressures and difficulties during the Project execution. The Operation Manual was created at the Project pilot phase with the joint efforts of the Bank's team and MEPIU staff, and updated to reflect the necessary changes/ improvements the working procedures. The MEPIU team worked enthusiastically on project implementation, was dedicated to ensuring beneficiaries’ participation in the project, and worked well with the Bank and with other donors who also took part in the project. Environment I. Power component transmission network rehabilitation: PCBs. The environmental assessment carried out in the context of the Energy II Project preparation indicated that no appreciable adverse environmental impacts would result from the implementation of the proposed electricity system upgrades. However, the PCB follow-up study concluded that one important environment problem associated with open-air substations is the presence of PCBs in capacitor fluid and there are about 20,000 capacitors at substations in Moldova amounting to a total of 240,000 liters of hazardous substance in the country. Because removal of the capacitors or renewal of the old ones was not envisioned under the project, there were included measures to secure the sites with capacitors, which may contain PCBs, by providing lockable containers for leaking capacitor tins in Vulcanesti and other substations where leaking capacitor tins were found. For this purpose, ME manufactured, from own financial means, a series of containers for storage of old condenser tins. 47 In July 2004, Moldova received a GEF Grant of 0.33 million US Dollars for preparation of Sustainable Persistent Organic Pollutants (POPs) Stockpiles Management Program, that included physical mitigation measures for appropriate disposal of old PCB-containing condenser batteries. From the total value of the grant, US$ 2.46 million were allocated for ME for securing its sites with capacitors which may contain PCBs. All the works related to condenser batteries dismantle, packing and transportation for incineration, as well as excavation of those two pits at Vulcanesti substation, and other 4 contaminated locations (at 2 substations), identified during the performed inventory, were completed. ME performed during the years 2008-2010 works related to environmental upgrade measures, from their own means, as follows: designing, manufacture, where it was necessary, and repair of oil collectors and dripping-pans under the oil-based equipment, overhaul of oil- based circuit-breakers and power transformers, repair and/or replacement of oil-based bushings by dry ones, replacement of the fire-fighting pipeline at the Straseni 330 kV substation, planting of greenery at Vulcanesti 400 kV substation, replacement of gravel under the oil-based equipment, tamping of the artesian well at the Straseni 330 kV substation, etc., amounting to a total of 3.5 million MDL (USD equiv. approx. 270 thousand). The EMP activities with regard to PCBs have been fully implemented and even more, complemented with a series of additional activities including final disposal of all known PCBs containing and contaminated capacitors (about 19 thousand of capacitors with a total weight of 1300 tons), improving PCBs management, regulatory framework and institutional capacity building, - activities not specified in the EMP. II. Heating component: With regard to heating component the proposed subprojects have been largely implemented as were requested in the EMP. In particular all newly constructed boilers provide much higher energy efficiency, resulting also in lower emissions and reduction of fuel consumption (the level of their NOx emissions is about 50-60ppm (only in some, earlier commissioned installations, the level is slightly higher, but that can be fixed through yearly maintenance), which is considerably lower than national standard of 120 ppm; the efficiency of the new installed boilers reaches 92-94 %, while the efficiency of replaced coal boilers used to be at the level of 40-45%). During the commissioning of each object in the Energy II Project, the Consultants have on request from MEPIU performed individual performance tests in order to determine the efficiency and emissions stated in the Contracts. In 2012, by the Project’s end the Consultants performed site visits to several objects to receive feed-back from the Beneficiaries and systems’ operators, to evaluate the performance of the systems after several years of operation, the quality of the systems’ maintenance. All Beneficiaries were pleased by their systems and they encountered very little problems since the commissioning. There have been a few cases where there was necessary to replace or modify the supplied equipment. The main environmental impact of the stand-alone heat boilers were related to emissions of nitrogen oxide (NOx), and carbon dioxide (CO2). NOx is an important input into the formation of ground-level ozone, which also has a major environmental impact. The environmental benefits from this project are 48 evident. Emissions of nitrogen oxides have been reduced by almost 60 tons annually, emissions of sulfur oxides have gone from 21.4 tons per year to almost none. There are no emissions of dust either; previously there was 1.5 tons every year. This has significantly improved air quality in the involved communities. Yearly emissions of the greenhouse gas CO2 has been reduced by over 26000 tons, which will benefit the global climate, and from which benefited the local authorities (money transferred to the owner of the boiler plants, beneficiaries of the Carbon Fund, and used by them for the objects’ maintenance). The environmental benefits from the Project implementation are described in the Project Consultants’ Environmental report. Lessons learnt The most important contract of the electricity component, SCADA and Telecommunication, faced serious problems that affected the timely implementation of the contract. The poor communication on technical issues between ME and its Contractor caused delays, which jeopardized Project completion within the agreed time schedule. This was caused by absence of qualified technical assistance, which was absolutely necessary for implementing such a complex contract. In the future contract that should be avoided and TA shall be available during the entire preparation and implementation period of complex contracts. The Project leverages funds with other donors (SIDA), which enhanced cooperation among the donors, ensured better consistency of policy advice, and enhanced the impact of donor activities. However, the necessity to coordinate actions of the donors results sometimes in the necessity to eliminate negative consequences of uncoordinated donors' actions and delays. There is a strong need in enhancing the Government’s role in coordination of the donors’ activities. The financing of the Project took into account the fact that financial recovery of the sector was still going on, and the ability of the beneficiary organizations to co-finance the Project was limited, especially in the heating sector. Thus, local financing contribution was kept relatively low, which reduced the risk of implementation delays. The Pilot Activity offered useful experience for preparation and implementation of investment projects within the heating component of the Energy II Project. It has shown that in conditions of Moldova, decentralization of old heating systems, which are not functioning in small towns, is a rational solution for heating supply. Using some elements of old centralized systems, like buildings of former central heating substations, the amount of investments can be reduced. Building heating plants with a capacity sufficient for supplying to both public and residential buildings could be the main solution for heating in small towns with the condition that the towns have a natural gas network and that the authorities are able and willing to improve the management of the housing sector and collection of payments for heating services. The willingness, insistence and enthusiasm of local authorities made a real difference in implementation of heating component. One of the striking examples is the activity of the Mayor of Ungheni, which ensured a considerable share of the success of the Ungheni Pilot Project. This Pilot project, which formed a base for reorganizing and reconstruction of the heating systems (decentralized district heating), included construction of block boiler plants for heat supply to 49 residential building and public institutions. Following the Activity, the municipality built other 10 new boiler plants that cover the needs of most of the public institutions and residential consumers. So, a network of 14 boiler plants (including 4 built within the Project), with a total capacity of 36.6 MW (including 12 MW – boiler plants built within the Project) are operated, substantially reducing the cost of thermal energy. According to data from the municipality of Ungheni the cost of heating for a square meter of residential area, supplied from the new systems was in the heating season 2002-2003 (after the systems’ commissioning) 6.53 lei, compared to 12-14 lei in case of the old system supplied from an old oversized mazut boiler plant, and the payment level is about 90% at present, compared to 30% in 1999 – the last year when the old plant was operated. The positive experience in Ungheni has been used in other towns for restructuring their heating systems (for example, in Stefan Voda and Anenii-Noi, where residential buildings were also connected to the new boiler plants). At the Republican Center for Mother and Child (CMC) the heating systems only in two small blocks out of 19 were modernized, due to insufficiency of funds. Later on, due to the success of this contract implementation, the WB agreed to finance out of the SIDA’s Trust Fund means another big department of CMC (9 blocks). We consider that an integral modernization of big institutions would allow a more efficient use of funds through applying a complex approach to solving all engineering issues, and obtaining lower prices for multiple or larger contracts from the contractors. The practice showed that the procedures of coordination, approval of different documents in the implementation process of investment projects require a certain period of time, which cannot be reduced significantly. Thus, the complex contracts’ preparation and implementation cycle cannot be smaller than about 18 months, and that shall be taken into account at the future projects’ planning. Implementation of the contracts within the Heating Component has led to significant economic effect. Initially the heating systems were very inefficient or missing. The main causes were damaged thermal circuit of the buildings, and the condition of the buildings (which led to losses of heating energy during wintertime). In order to enhance the project’s effect, at the stage of project preparation energy efficiency measures were envisaged in several localities. However, the underdeveloped civil construction market was not able to provide a sufficient number of qualified companies. The state could start an advertisement company of such professions, study the possibility to open (or recover the former existing) professional schools but at higher level, develop incentives for increasing the attractiveness of such professions. At the same time, not all local authorities had found sufficient own means for buildings rehabilitation before implementing the modernization of the heating systems. In result, the buildings thermal rehabilitation was performed with delays, upon funds availability in the budget of local authorities. The situation improved in 2011, when a sum of 25 mln lei from the state budget was allocated for energy efficiency measures such as roof repair, replacement of windows, walls insulation for several potential beneficiaries. It should be mentioned that the Energy II project was the only one to largely implement modernization of engineering systems, while measures for energy efficiency are implemented through other internationally financed 50 projects as well. The activity of such related projects should be coordinated thoroughly by the Government, to avoid duplication of activities from one part, and gap of it from another part. The implementation of the heating component has shown that successful realization of the Bank financed projects leads to lowering the risks and increasing attractiveness of the further investments. Besides, good results achieved under these projects urge the Beneficiaries to undertake further steps in the same directions, increasing thereby the Projects sustainability. As example can serve the Orhei District Hospital, that after implementation of contract for the heating and DHW supply under the Energy II Project has obtain further investments from different donors (German Energy Savings Fund, WB FISM Project, Moldova Ecological Fund), and are implementing serious measures directed to enhancing energy efficiency: thermal insulation of buildings, replacing old windows by energy-efficient ones, rehabilitation of the roofs, installation of solar collectors for heating water during the non-heating period). At the monitoring of the heating component implementation difficulties were encountered in determining certainly the reached value of performance indicators, due to the fact that a clear base-line for comparison was missing (relevant data base missing at beneficiaries). Special care shall be taken during eventual projects’ appraisal and design to ensure sound ground for M&E. The institutional framework for ensuring the viability of investments improving heating in the household sector is presently weak in Moldova, particularly as concerns the legal basis of home owner associations and the actual functional capacity of those home owner associations that exist (which was proved by the failure of the attempt implementing rehabilitation of several dwellings, project meant to be financed by SIDA). These are the fundamental reasons confirming the focus of the heating component on public buildings, which provide services to all members of the population, including some, such as kindergartens and schools. The implementation of the Heating Component has revealed a not quite adequate approach to the principles of budgeting fuel costs for heating of public institutions, when the meteorological conditions are not taken into consideration. Due to severe weather conditions of the winter 2011-2012 several public institutions exhausted the funds allocated for the winter before the end of the heating period. It would be reasonable allocating funds in local budgets for heating not according to the number of pupils/visitors, but in dependence of the weather conditions (and review/update annually by mid winter according to the actual needs). Balance between the human factor and project performances should be revised. The project has achieved significant results and impact, recognized by the government, audits, beneficiaries and partners. In the same time it was done with a very low percentage of the operational costs. This was done not only due to the high professionalism and management skills, but also due to right planning. Sustainability The Sustainability of the electrical component of the project is ensured by maintaining ME tariffs at the cost-recovery level (which become possible after the ME fixed assets revaluation, taken into account by ANRE when setting and updating the tariffs’ level) and 51 ensuring continuous, with no risk of supply interruptions, operation of the enterprise (which become possible after the measures implemented within the electrical component of the project). A reduction in power system failure, including in disproportionately poor areas such as rural locations, indicates also a social development. For the heating component, the increased quality of heating and hot water supply provided to public buildings offering critical social services such as education and health services resulted in beneficiaries’ satisfaction with the project as it is being implemented. The Sustainability of the heating component is enhanced by selecting public buildings which will continue to be used as schools and hospitals and financed by the central and/or local budgets. To enhance the sustainability of the Project, special attention was paid to the ability of the agencies involved to finance fuel and other operating and maintenance costs for heating systems installed or upgraded by the project. Special provisions were included in the budget or respective authorities/ beneficiaries. Besides, as described above in “Lessons Learnt�, the successful realization of the Project leads to increasing attractiveness of the further investments in the objects, and creates incentives for the Beneficiaries to undertake further steps in the same directions, increasing thereby the Projects sustainability (as it is the case with the Orhei District Hospital, that after implementation of the contract for the heating and DHW supply under the Energy II Project has obtained investments from different donors for the hospital’s development). At the same time, the successful implementation of the project has ensured its sustainability through the reached synergy of donors, that kindly agreed to finance similar sub-projects for the objects, complementing the effect of the Energy II Project: the Bank agreed to finance modernization of the heating and DHW systems in a big department of CMC (9 blocks), and SIDA financed SI contracts (Heating, DHW systems) for three boarding schools in Hânceşti, Cupcini, Telenesti (initially included in the Energy II Project); along with modernization of similar engineering systems at the Tyrnova Children’s Tuberculosis Rehabilitation Center. The sustainability of the installed under the Project facilities is high. The Plant and equipment are of latest available design, high efficiency technologies and solutions, energy class A (where applicable), include all safety and automation systems. If properly maintained, they shall ensure the beneficiaries with quality power/heat supply at least for the next 15 years. Besides these benefits, due to all measures undertaken, the beneficiaries will continue benefiting from considerable energy savings of around 56% for the whole heating component, according to the report of FVB consultants. Moreover, improved efficiency has, in itself, led to lower emissions simply by less primary energy being used. Improved technology and use of cleaner fuels have reduced emissions further. Reduction in CO2 emissions allow the beneficiaries receiving in the present and in the future financial benefits through bonuses from the Moldova Carbon Fund. 52 Emissions before and after ameliorative actions in the Energy II Project Pollutant Old New Reduction NOx Tons/year 59,4 9,8 49,6 SOx Tons/year 21,4 - 21,4 Dust Tons/year 1.5 - 1,5 CO2 Thousand tons/year 41,8 15,8 26,0 To ensure proper implementation and post-implementing activities the Beneficiaries have been provided appropriate training by the foreign consultants, assisting the project, MEPIU, Contractors. They cooperated with contractors and with the PIU at all stages- preparation of technical specifications, evaluation of bids and selection of contractors, installation, testing, commissioning, and quality control. They obtained sufficient training for successful post-implementing operation, maintenance of Plants/ equipment and book-keeping (through ad-hock special training sessions/ workshops for local authorities and beneficiaries, and through side-by-side common activities with the consultants, Contractors, MEPIU). At the project initial stage, the tendering and implementation of complex WB Supply and Install contracts were facing specific difficulties because of insufficient level of local contractors (lack of experience as main contractor in contracts of similar size and nature, knowledge of relevant standards, languages, etc.). Before the project they had acted, in fact, only as sub- contractors, with no access to international market. By the Project completion we have here, in Moldova, a group of serious contractors, able to perform properly within future complex contracts, with extensive international market connections, showing sufficient qualification, extensive knowledge and experience. Having an operational PIU at the early stage of Project implementation proved to be an efficient measure. In order to ensure the sustainability and coordination of different project/ improvements in the energy sector it is reasonable maintaining a readily available PIU in the sector, to be eventually activated on as-needed basis. The TA component helped to increase the participation in international project assignments of the local experts, which ensured a further capacity building within the relevant professional groups and general capacity within the relevant public institutions. 53 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders 54 Annex 9. List of Supporting Documents • Project Appraisal Document, Moldova Energy II, October 30, 2003. • Development Credit Agreement between IDA and the Republic of Moldova, dated December 4, 2003. • Project Agreement between IDA and ME, dated December 4, 2003. • Financing Agreement for Additional Financing for Energy II Project, between IDA and the Republic of Moldova, dated March 16, 2009. • Amendments to the Legal Documents • Supplemental Letter No. 2 (for Credit No. 3833-MD, Republic of Moldova, dated December 4, 2003), Supplemental Letter No. 5 (for Credit No. 3833-MD, ME, dated December 4, 2003), and Supplemental Letter No. 2 (for Credit No. 4541-MD, Republic of Moldova) on Performance Monitoring Indicators. • Project Paper for Additional Financing. • Restructuring Project Paper. • Mission Aide-Memoires. • Implementation Status and Results Reports (1-16) • MEPIU Quarterly Progress Reports on Moldova Energy II Project (Cr. 3833-MD and Cr. 4541-MD), Moldova Energy Sector Reform and Efficiency Project: SIDA/WB TF 099139. • “Keeping People Warm and Lights On�, Results Brief and video of Moldova Energy II Project, Improving the Lives of People in Europe and Central Asia. • “Technical Final Report for the Energy II Project in Moldova�, FVB, February 8, 2012. • “Environmental Report for the Energy II Project in Moldova�, FVB. February 8, 2012. • “Annual Monitoring Report 2011 of emission reductions of CDM project: Moldova Energy Conservation and Greenhouse Gases Emission Reduction�, Ministry of Environment of the Republic of Moldova, Carbon Finance Unit, Republic of Moldova, 2011. 55 IBRD 39318 27°E 28°E 29°E 30°E UKRAINE MOLDOVA ENERGY II PROJECT AND Dnes To Vinnytsya tr To Chernivtsi Ocnita Moghiliov- Podolski To Vinnytsya ADDITIONAL FINANCING Briceni SIDA TA AND COFINANCING To Donduseni FOR THE HEATING COMPONENT Chernivtsi Edinet Tyrnova Cupcini Soroca Drochia 48°N Camenca 48°N Rîscani Floresti Nist ru Costesti Soldanesti ˘ 330/110 kV Glodeni Balti Rîbnita Rezina Balatina Pr Sîngerei ut To Voznesens'k Falesti ˘ Telenesti Chiperceni 0 10 20 30 40 Kilometers 0 10 20 30 Miles R O MANIA Sculeni Orhei Dubasari ˘ TRANSNISTRIA To Pascani Calarasi ˘˘ Criuleni Ungheni 330/110 kV Straseni ˘ Grigoriopol Nisporeni ˘ Stauceni To Zhmerynka Corjova 47°N ˘ CHISINAU 47°N 330/110 kV 110/35/10 kV ˘ Lapusna Ialoveni Anenii Tiraspol Noi Hîncesti Bender Leuseni (Tighina) Slobozia ˘ Cainari Causeni ˘ To Odesa Plain Cimislia This map was produced by the Map Design Unit of The World Bank. c ˘N Stefan-Voda ist The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank To Birlad ea ru g Group, any judgment on the legal status of any territory, or any Leova Bu endorsement or acceptance of such boundaries. Comrat Basarabeasca 27°E To Birlad Cantemir ˘ ˘ GAGAUZIA UKRAINE ELECTRICITY COMPONENT OF THE PROJECT: MAJOR MOLDELECTRICA HIGH-VOLTAGE SUBSTATIONS Ceadîr- To Artsyz HEATING COMPONENT OF THE PROJECT: Lunga PROJECT SITES 46°N 46°N Prut SELECTED CITIES AND TOWNS Cahul Taraclia AUTONOMOUS TERRITORIAL UNIT CAPITALS ˘ ˘ GAGAUZIA MOLDOVA RAIONS OR MUNICIPALITIES CAPITALS* ˘ Vulcanesti NATIONAL CAPITAL RIVERS MAIN ROADS To Imayil RAILROADS AUTONOMOUS TERRITORIAL UNIT To Bucharest BOUNDARIES and Constanta RAIONS OR MUNICIPALITIES Black BOUNDARIES Sea INTERNATIONAL BOUNDARIES *Names of the raions or municipalities are identical to their capitals. 28°E 29°E 30°E JUNE 2012