LPTAP Project Appraisal Document 2006_09_13

Document o f

The World Bank

FOR OFFICIAL USE ONLY Report No: 35430-XK

PROJECT APPRAISAL DOCUMENT ON A PROPOSED INTERNATIONAL DEVELOPMENT ASSOCIATION GRANT IN THE AMOUNT OF SDR 5.8 MILLION (US$8.5 MILLION EQUIVALENT)

TO THE UNITED NATIONS INTERIM ADMINISTRATION MISSION IN KOSOVO FOR THE BENEFIT OF KOSOVO FOR A LIGNITE POWER TECHNICAL ASSISTANCE PROJECT September 13,2006

Sustainable Development Department South East Europe Country Unit Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World

CURRENCY EQUIVALENTS (Exchange Rate Effective July 3 1,2006) Currency Unit Euro0.7844 US$1.48217

= = =

Euro US$1 SDR1

FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS BeK CLRP DMM EA EAR EC ECSEE EIA EIR ERO ESSF ESTAP EU FDI FMR FPSG GIS ICB ICMM ICR IDA IFC IF1 IPP IPPC ISN KCB KEK KEM KfW KTA LESDP

Compania Boksitet e Kosoves Clean Up and Land Reclamation Project Directorate o f M i n e s and Minerals Environmental Assessment European Agency for Reconstruction European Commission Energy Community o f South East Europe Environmental Impact Assessment Extractive Industries Review Energy Regulatory Office Environmental and Social Safeguards Framework Energy Sector Technical Assistance Project European Union Foreign Direct Investment Financial Management Report Fiscal Policy Adjustment Grant South East Europe Generation Investment Study International Competitive Bidding Independent Commission for Mines and Minerals Implementation Completion Report International Development Association International Finance Corporation International Financial Institution Independent Power Producer Integrated Pollution Prevention and Control Interim Strategy Note Kosovo Consolidated Budget Korporata Energjetike Kosoves Sh.a (Kosovo Electric Company) Kosovo Economic Memorandum Kreditanstalt fir Wiederaufbau Kosovo Trust Agency Letter o f Energy Sector Development Policy

LPTAP MIGA MFE MEM MESP PEMTAG PISG POEs PO PSC RAP RFP RFQ SBD SESA SME SOEs SRSG TA TPP TSMO TSS UCTE UNMIK USAID

Lignite Power Technical Assistance Project Multilateral Investment Guarantee Agency Ministry o f Finance and Economy Ministry o f Energy and Mining Ministry o f Environment and Spatial Planning Economic Policy and Public Expenditure Management Provisional Institutions o f Self-Government Publicly Owned Enterprises Project Office Project Steering Committee Resettlement Action Plan Request for Proposals Request for Qualifications Standard BiddingDocuments Strategic Environmental and Social Assessment Small to Medium Enterprises Socially Owned Enterprises Special Representative o f the Secretary-General o f the United Nations Technical Assistance Thermal Power Plant Transmission System and Market Operator Transitional Support Strategy Union for the Coordination o f Transmission o f Electricity UnitedNations Interim Administration Mission in Kosovo United States Agency for International Development Vice President: Country ManagerDirector: Sector Director: Task Team Leader: Co-Task Team Leader:

Shigeo Katsu Orsalia Kalantzopoulos Peter Thomson Varadaraj an Atur Michael Stanley

FOR OFFICIAL USE ONLY

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

KOSOVO Lignite Power Technical Assistance Project CONTENTS

A

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1.

2.

3.

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B

1.

2.

3.

4.

5.

C

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1.

STRATEGIC CONTEXT AND RATIONALE

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Page

Economic Issues..................................................................................................................

Rationale for IDA involvement ..........................................................................................

Higher level objectives to which the Project contributes ....................................................

.................................................................................................

PROJECT DESCRIPTION

Lending instrument .............................................................................................................

1

1

6 6

7 7

Project development objectives and key indicators ............................................................

7

Project components .............................................................................................................

7

Lessons learned and reflected in the Project design .........................................................

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

IMPLEMENTATION

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Partnership arrangements ..................................................................................................

11 11

12 12

2.

Institutional and implementation arrangements ................................................................

3.

4.

Monitoring and evaluation o f outcomes/results ................................................................

. . . .....................................................................................................................

Sustainability

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5.

Critical risks and possible controversial aspects...............................................................

13

Grant conditions and covenants ........................................................................................

15

6.

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D

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2.

3.

4.

5.

6.

7.

APPRAISAL SUMMARY

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Economic and financial analyses ......................................................................................

12 13

16 16

Technical ...........................................................................................................................

17

Fiduciary ...........................................................................................................................

18

Social.................................................................................................................................

18

Environment ......................................................................................................................

19

Safeguard policies .............................................................................................................

19

Policy Exceptions and Readiness ......................................................................................

20

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Letter of Energy Sector Development Policy ..............................................................................

21

Annex 1: Country and Sector o r Program Background

Annex 2: Major Related Projects Financed by the World Bank and/or other Agencies

.....33

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

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

Annex 6: ImplementationArrangements .................................................................................

Annex 7: Financial Management and Disbursement Arrangements.....................................

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

Annex 9: Economic and FinancialAnalysis .............................................................................

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

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

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

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

Annex 14: Kosovo at a Glance ...................................................................................................

Annex 15: Kosovo Map ..............................................................................................................

Annex 3: Results Framework and Monitoring

Map : IBRD 34916

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43 62 63 66 70 74 80

85

87 88 89 90

KOSOVO LIGNITE POWER TECHNICAL ASSISTANCE PROJECT PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSSD Date: September 13,2006 Country Director: Orsalia Kalantzopoulos Sector Director: Peter D. Thomson

Project ID: PO97635

Team Leader: Varadarajan Atur Co-Task Team Leader: Michael Stanley Sectors: Central government administration (40%);Power (3O%);Mining and other extractive (30%) Themes: Regional integration (P);Infiastructure services for private sector development (S);Export development and competitiveness ( S ) Environmental screening category: Partial Assessment

Lending Instrument: Technical Assistance Loan Project Financing Data [ ]Loan [ 3 Credit [XI Grant [ ]Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m.): 8.50 Pronosed terms: - ._ r---- -

Source BORROWER/RECIPIENT IDA Grant EC: EU - European Agency for Reconstruction (EAR) Total:

Financing Plan (uS%m) Local 0.00 0.77 0.00

Borrower: UN Interim Administration Mission in Kosovo Kosovo Tel: 381-38-504-604 Responsible Agency: Project Office Ministry o f Energy & Mining (PISG) Qyteza Pejton rr, "sejdi Kryeziu" nr. 5

0.77

Foreign 0.00 7.73 2.00

Total 0.00 8.50 2.00

9.73

10.50

Pristina Kosovo 10000 Tel: 381 38 200 213 07 Lorik.Haxhiu@,ks-,gov.net

h u a l

hmulative

1.00 1.00

3.50 4.50

Fax: 318 38 200 213 02

3.00 7.50

1.00 8.50

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 Component 1: Sector Policy, Legal, Regulatory and Safeguards Advice Subcomponent 1: Sector Policy, Legal and Regulatory Advice: To help prepare the key legislation, including any required amendments, to facilitate the proposed transaction through to financial closing by preparing legal and contract documents, legal opinions, etc.

Subcomponent 2: Safeguards Framework: To prepare a Strategic Environmental and Social Assessment (SESA) specific to energy sector development; develop terms o f reference for Environmental Impact Assessment, Social Assessment and the Resettlement Action Plan to be followed by the selected investor for specific mitigation and other measures; prepare an environmental baseline monitoring toolkit and collect field data; outline the needs for institutional strengthening and capacity building to assess, monitor and regulate the environmental impacts o f mining and power generation and provide training to staff in relevant ministries.

Component 2: Mine and Power Plant Analyses Subcomponent 1: Investment Options Review to examine feasible alternatives for combining existing and new mine and power plant assets and assist the government to finalize the investment package to be offered for bidding, and to help define the scope o f work and terms o f reference for the hiring o f the Transaction Advisor based o n the recommendation o f the review and the government's decision.

Subcomponent 2: New Power Plant Development and Technical Analysis. This will complement previous studies on mine and power plants and compile adequate information and analysis for bidders so that they can cany out due diligence in a timely manner; it will also develop a knowledge base for decision makers in Kosovo to economically and efficiently solicit, evaluate, and negotiate proposals for private development o f the Sibovc lignite resource. The consultants will examine the domestic and regional electricity markets, potential off-take opportunities, adequacy o f the transmission system and identify the preferred unit and plant size options, including feasible C 0 2 mitigation alternatives.

Subcomponent 3: Renewable Energy, Cogeneration and Energy Efficiency. TA to help MEM develop policies and strategies to promote renewable energy, cogeneration and energy efficiency in Kosovo.

Component 3: Capacity Building for key ministries and agencies including MEM and MESP, for inter-ministerial coordination and for the Project Office, the implementing entity for the Project, and would also assist MEM, MESP and PISG to develop a communications and outreach strategy to improve public consultations.

Component 4: Transaction Advisor: This TA would support the PISG in carrying out the transaction process to the financial close o f the selected investment package.

Which safeguard policies are triggered, if any? Re$ PAD D. 6, TechnicalAnnex 1 0 Although the LPTAP i s limited to the provision o f technical assistance and i s not expected to result in any negative environmental or social impact, it has been classified as Category By triggering OP/BP/GP 4.01 (Environmental Assessment) because o f the safeguard impacts o f possible follow-on investment projects, the feasibility o f which are studied under the LPTAP. Since locations, timing, technical features, etc. o f follow-on investments are unknown at this time, an Environmental and Social Safeguards Framework (ESSF) (as described in Section D. Appraisal Summary) has been disclosed and consultations have been held to address these environmental and social safeguards during project preparation. The ESSF i s part o f the Project Operational Manual to be followed during project implementation. The Bank's supervision o f both social and environmental aspects will ensure that the advice provided by the consultants to Kosovar authorities i s consistent with the Bank's safeguards policies and with the World Bank Management Response to Extractive Industries Review.

Significant, non-standard conditions, if any, Re$ PAD C.7 Board presentation: None.

Loadcredit effectiveness: Appointment by MEM o f the Project Manager for the Project Office under terms o f reference satisfactory to IDA. Resolution o f the lignite exploration license granted by I C M M to BeK, and any related rights, title and interests, satisfactory to IDA. Covenants applicable to project implementation: Disbursement Condition: Appointment o f the Transaction Advisor (Component 4) will be subject to execution o f a memorandum o f understanding or similar document, addressed to the Project Steering Committee, between the I C M M and the ERO, on terms and conditions satisfactory to IDA, setting forth the arrangements to harmonize the authorization processes o f the I C M M and the ERO in regard to the selection o f investors in the new mine/power plant.

Adoption o f an Operational Manual, acceptable to IDA< by the Project Steering Committee (PSC) by November 15,2006.

UNMIK and PISG shall select the preferred investment package, satisfactory to IDA, by December 15,2006, based on the recommendations o f the Investment Options Review.

PISG will adopt the regulations for the SESA, acceptable to IDA, by M a y 3 1,2007.

MFE will maintain a project financial management system acceptable to the Bank. The project's financial statements will be audited by independent auditors acceptable to the Bank, under terms o f reference acceptable to the Bank, commencing with the accounts for the year ending December 31,2007. The annual audited statements and audit report will be provided to the Bank within six months o f the end o f each fiscal year.

A. STRATEGIC CONTEXT AND RATIONALE

1. Economic Issues During the nineties, the Kosovo' economy was damaged by poor economic policies, broken external trade and financial links, international sanctions, and a lack o f investment in key sectors.

I t suffered further during the ethnic conflict which ended in 1999. The post-conflict reconstruction program has proceeded well, and official aid flows have resulted in recovery o f economic activity and positive growth. However, this growth i s not likely to be sustainable as official aid flows have started declining. Despite post-conflict economic recovery, poverty in Kosovo i s widespread. Out o f a population o f about 2 million, almost 37% live below the poverty line; half o f i t s population is below 24 years o f age; and about 40% o f the population i s unemployed - significantly higher than in any other Balkan coun$.

The 2005 GDP per capita was estimated at 1,217 Euros, which i s one o f the lowest in Central and Southeastern Europe.

The urgency to support the developmental goals o f Kosovo's population i s growing.

After the conflict, Kosovo was placed under the administration o f the United Nations Interim Administration Mission in Kosovo (UNMIK) under the terms o f UN Security Council Resolution 1244 (1999). In 2001, a Constitutional Framework was agreed establishing the Provisional Institutions o f Self-Government (PISG). In June 2002, the Kosovo Trust Agency (KTA) was established by UNMIK and entrusted inter-alia with the responsibility o f business oversight over the energy and mining sector enterprises, restructuring o f the Publicly Owned Enterprises (POEs), and privatizing o f the assets o f Socially Owned Enterprises (SOEs).

Although UNMIK retains certain reserve powers and final legal authority, including over the energy and mining sectors, there i s a continuing transition to self-government, with the PISG assuming significant responsibility o n matters relating to economic policy, trade, and investment.

In the PISG, a new Ministry o f Energy and Mining (MEM) was established in December 2004, with responsibility for defining policies and future development strategies o f the energy and mining sectors. This shared governance arrangement results in a challenging environment for the energy and mining sectors.

The Kosovo Economic Memorandum (KEM) 2004 identified the energy and mining sectors as potential sources o f economic growth, provided existing infrastructure i s rehabilitated, the industry i s restructured in line with the emerging regional electricity market, and private sector investors are brought in to expand power generation and mining business primarily for export purposes. Both energy and mining have the potential in the medium to longer term to revitalize the Kosovo economy, especially given large and increasing energy needs throughout the region and the rebound in global commodity prices. The KEM also concluded that the prospects for economic growth will largely depend upon two overarching and inter-dependent factors: (i) implementation o f a policy program that promotes growth led by the private sector; and (ii) the maintenance o f peace and security for all peoples o f the region and a clarification o f the political and legal arrangements.

'

Kosovo i s currently under the administration o f the United Nations Interim Administration Mission in Kosovo (UNMIK) under the terms o f UN Security Council 1244 (1999).

Kosovo Economic Memorandum, World Bank (May 2004)

1

KOSOVO’S long-term future lies in integrating with the region. Through UNMIK, Kosovo i s a signatory to the Athens Memorandum (2003) and subsequently to the Treaty which established the regional energy market called the Energy Community o f South East Europe (ECSEE)3. This initiative sponsored by the Stability Pact and the European Commission i s fully supported by the World Bank through policy advice, technical assistance and financing o f investments through the ECSEE Horizontal Ada table Program Loan (APL) facility o f US$1 billion (January 2005).

Participation in ECSEE i s expected to create significant opportunities for Kosovo to use its abundant and competitive energy and mining resources to meet growing energy demand in the regional market.

B

The Interim Strategy Note for Kosovo (Report no. IDA/R2006-0036), discussed by the Board on March 29, 2006, aims to support development o f new sources o f economic growth for Kosovo and to ensure macroeconomic stability, particularly in fiscal and external sustainability. The ISN proposes to lay the foundation for: (i) the sustainable development o f Kosovo’s high quality lignite resources and power generation capacity; (ii)associated environmental and social improvements; and (iii) the transparent and fiscally responsible management o f Kosovo’s public finances.

Sector Issues Historically, energy and mining were mainstays o f the Kosovo economy, providing direct and indirect employment, sources o f revenue, export earnings, and inputs to downstream industries.

However, from being a contributor to economic growth, the power sector has become a drain on public resources. In addition, unreliable electricity supply has emerged as one o f the main

obstacles to growth (Investment Climate Assessment, World Bank, 2003). Kosovo continues to suffer fi-om regular electricity black-outs, with average outages o f 4 hours a day in 2005, down from 6 hours a day in 2002. Surveyed companies in Kosovo reported the lack o f reliable electricity supply as the main barrier to their operations, leading to average losses o f around 5 percent o f sales (excluding the cost o f purchasing and operating generators).

KOSOVO’S key energy resource i s its extensive lignite deposits; the Sibovc field alone i s estimated to hold about one billion tomes o f geological reserves. Kosovo has no other fossil fuel resource and only a very modest hydroelectric potential. I t does not import natural gas and has no gas supply infi-astructure. It has no o i l refinery and depends entirely on imported liquid fuels.

KOSOVO’S energy sector i s dominated by Korporata Energjetike Kosoves Sh.a (KEK). KEK i s a POE utility which operates lignite mines, and power generation, transmission and distribution facilities. K E K ’ s losses are high, with commercial losses (theft) accounting for about a third o f 3

The Athens Memorandum o f December 2003 established the ECSEE t o create a regional energy market. In October 2005, the ECSEE Treaty was signed by Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia and Montenegro and UNMIK o n behalf o f Kosovo (collectively called Regional Members); Austria, Greece, Hungary, Italy, and Slovenia (Participants); and Moldova as an Observer. Turkey, though a signatory o f the Athens Memorandum, has opted not to sign the Treaty until some issues related to climate change obligations are sorted out.

4

A detailed description o f ECSEE i s available in the Project Appraisal Document (No. 29993) o f the “Energy Community o f South East Europe (APL) Program” approved by the Bank o n January 27,2005.

2

the energy produced, and technical losses accounting for an additional 18% o f the energy produced. Moreover, KEK collects only 68% o f i t s bills. It i s technically insolvent and depends on budget support and donor assistance not only for the rehabilitation o f assets but also for i t s maintenance needs and to pay for power imports. KEK’s dilapidated electricity network covers almost 100% o f the households. The district heating networks are confined to only about 11,000 consumers in three cities, meeting only 5% o f Kosovo’s total heat demand. Hence, there i s a high heat demand load on the power system.

K E K ’ s available power generation capacities’ at the Kosovo A and B power plants are old and not adequate to meet the demand. At the same time, industrial demand i s growing and a recently privatized mine (Ferronikeli) will need 100 M W o f firm capacity from 2007 onwards. This will place further strain on the demand-supply balance, and more load shedding would further affect economic growth. The two generating u n i t s at the Kosovo B plant have been rehabilitated, and now have an extended operating l i f e o f up to 2025. As for Kosovo A, rehabilitation o f three units (A3, A 4 and A5 each with a 200 MW nominal capacity) to extend operating l i f e by about 12 to 15 years is technically feasible; but since the cost o f environmental compliance with EU standards would be costly, these units are not expected to be cost-effective compared with a new power plant. As an alternative to a full rehabilitation, the overhaul o f these three Kosovo A units for limited life extension, until a new power plant becomes operational, i s deemed feasible.

Further, there i s a looming shortage o f lignite supply from 2009 onwards, since the existing mines (Bardh and Mirash) are nearing exhaustion and the start o f development works at KEK’s next mine (the Sibovc S W Mine) has suffered delays due to lack o f financing. Development o f the Sibovc S W mine is estimated to cost Euro 236 million over 7 years.

A regional review o f the energy sector6 concluded that the development o f lignite mining in Kosovo for power generation and sale to the regional market i s part o f the least--cost solution to close the emerging gap in generation capacity in Southeast Europe. The concern over energy security i s increasing the desire for diversification o f energy supply across Europe, placing greater emphasis on lignite resources. By developing i t s power sector, Kosovo can also meet its own demand and improve stability o f supply, thereby removing a significant barrier to private sector development currently constrained by rolling blackouts. This has the potential to produce a multiplier effect on business investment, and on j o b prospects. By supplying to the regional market, Kosovo has the potential to have: (i) a substantial long-term source o f income to pay for priority development programs and much-needed social services for KOSOVO’S population; and (ii) an opportunity to significantly boost trade links between Kosovo and Southeast Europe, and thus facilitate closer integration with the rest o f Europe.

New generation capacity o f around 600 MW7 would require an investment o f about Euro 1.2 billion, including the investment in a new lignite mine, and would require about 5 to 6 years for

development and construction. Since KEK would not be able to mobilize such financing and

Net available thermal generation capacity i s 780 M W , comprising the 165 M W Kosovo A power plant (between 30 and 45 years old) and the 580 M W Kosovo B power plant (about 20 years old) - both using lignite. In addition Kosovo has a hydro power plant o f 35 M W (HPP Gazivode).

6 See “Regional Balkans Infrastructure Study - Electricity (REBIS) and Generation Investment Study (GIs)”, December 2004, by PWC Consortium.

7 See “Pre-feasibility Studies for New Lignite Fired Power Plant and for Pollution Mitigation Measures at Kosovo B Power Plant”, February 2006, by Elektrowatt-Ekono.

requires expertise in new technologies, the private sector should be invited to build and operate new generation capacities in Kosovo. Private investment o f such scale would be the first in Kosovo and in the energy sector, and the requisite policy, legal and regulatory frameworks have yet to be established. Apart from creating an attractive investment climate, a transparent process for bidding and selection would be necessary to attract qualified strategic investors. Kosovo has significant potential to attract qualified, strategic foreign investors to develop i t s abundant reserves o f high-quality, low-cost lignite. However, such development should conform to high standards o f environmental and social sustainability in order to obtain and sustain community support.

With respect to the social and environmental aspects related to investments in the lignite mining and power sectors, progress has been made, but certain issues remain to be addressed. Recent efforts to develop an effective institutional structure for environmental regulation have defined the most important actors, their roles and supporting legislation, but the structure i s s t i l l very weak. Environmental legislation and standards are partially in place, but need further development to deal with the challenges o f new initiatives. The environmental framework law i s inadequate to address proper development o f mining and power generation projects, and regulation o f existing polluting sources and new projects i s not effective. With respect to social issues, further development o f lignite reserves will require resettlement. There i s presently no existing adequate legal and institutional framework (policies, institutions, and legislation and regulation) to handle resettlement, either in the proposed lignite extraction area or more generally. The applicable laws on expropriation date to the Yugoslav era (1987) and have not been updated. In the recent past, UN executive decisions have provided the legal basis for the process o f resettlement in the proposed lignite extraction area.

The institutional capacity o f the PISG i s weak and the recently established Ministry o f Energy and Mining (MEM) and the Ministry of Environment and Spatial Planning (MESP), already heavily occupied with current and emerging issues, do not have the resources and expertise to handle the enormous challenges involved in attracting large private investment. In addition, several powers affecting key policies and decisions are vested in UNMIK and only partially shared with the PISG; this raises important challenges o f coordination and consensus-building among policy makers.

Government Strategy

UNMIK and PISG have collaborated in developing a comprehensive strategy* for the energy sector, which is intended to address the short- to medium-tern issues and challenges, and put the sector on a path o f long term growth and development in line with EU Directives and standards.

UNMIK and PISG have also declared their policies in a Letter o f Energy Sector Development Policy (see Annex 1). The governmentâ&#x20AC;&#x2122;s basic objective is to make the energy sector selffinancing, and to bring in the private sector as soon as possible. Recognizing that considerable lead time i s required before investors can be selected, whereas there i s urgent need for sustaining coal and electricity supply, the strategy allows for K C B and donor-funded support during 200607. Key elements o f the strategy are summarized below.

* Energy Strategy and Policy o f Kosovo (Wlute Paper) 2005-2015, July 2005 4

9 Strengthen KEK’s finances: To improve billing and collections and reduce theft o f electricity, an UNMIK-PISG Joint Task Force began in November 2005 a major initiative (Action Plan), which includes, inter alia, both media campaign to educate consumers and punitive actions through the courts. The Action Plan stipulates quarterly targets for KEK’s billing, collections and loss reduction, and commits support from the courts and police to stem theft and to increase collections to 78% o f billing by end-2006. The Task Force would continue i t s efforts until KEK’s revenue collection performance reaches standard utility norms (>95%), expected to be over the next 3-4 years. USAlD i s providing technical assistance to improve KEK’s billing and collections.

9 Budgetary support priorities: The K C B funding for 2006-07 has been allocated to priority areas in mining, environmental upgrading, generation capacity overhaul and imports o f power. The K C B and donors (EAR and KfW) have mobilized Euro 25 million

for 2006 to start the SW Sibovc mine development works, and the K C B will provide an additional Euro 32 million from the 2007 budget to continue the works. Environmental upgrades at Kosovo A and B power plants are ongoing to mitigate air and water pollution. The overhaul o f A 3 unit has been completed, and work on the A 4 unit i s underway to complete by end-2006, to provide 130 M W each o f additional capacity. The government will examine the means to gradually address the major environmental legacy issues and undertake land reclamation efforts by removing ash piles and overburden around Kosovo A and B power plants, supported by the Cleanup and Land Reclamation Project (CLRP, 35870-XK) approved by the IDA in June 2006.

9 Private sector investments: The government intends to attract private sector capital and expertise into lignite mining and power generation by offering the Sibovc Lignite Field,

including the Sibovc SW Mine, as a means to supply KEK’s existing power plants as well as a new power plant (Kosovo C) to supply domestic and regional electricity markets evolving under the ECSEE Treaty (the N e w Mineplant). With support from the EAR, an investment options review has begun and consultants will identify feasible packaging o f KEK’s assets with new mine and power plant opportunities, which would then be offered for bidding to qualified private sector investors through an open and competitive bidding process with the help o f a transaction advisor. The government aims to adopt high standards o f environmental and social safeguards governed by EU Directives and accordingly develop its sector policy, legal and regulatory frameworks.

Sector restructuring and reforms will also be pursued in line with ECSEE Treaty provisions, including liberalization, to develop electricity markets.

The government needs significant assistance in developing and adopting appropriate policy, legal and regulatory frameworks that would establish an attractive enabling investment climate for developing the N e w Mineplant in accordance with high standards o f environmental and social sustainability. The government also needs assistance in building capacity in the key ministries notably MEM and MESP - to enable them to monitor and implement the new regulations and establish a transparent process for soliciting private sector investments. PISG would also need assistance to establish an institutional framework responsible for managing these complex undertakings and assist policy-makers in decision making. UNMIK and PISG have requested the support o f bilateral and multilateral institutions, including the World Bank, in this regard.

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2. Rationale for IDA involvement

As part o f the broader efforts o f donors to support the Kosovo energy strategy, the IDA’S proposed $8.5 million equivalent technical assistance project (LPTAP) would help Kosovo establish the enabling framework for qualified strategic investors to invest in future power plants and mines. In this context, the Project would also build local capacity to adopt and implement international guidelines on the social, economic and environmental aspects o f sector development. By supporting the strategy, the World Bank Group (World Bank, I F C and MIGA), would play a catalytic role in helping to attract world-class, private strategic investors to develop and utilize Kosovo’s lignite resources in a transparent, environmentally and socially sustainable, and fiscally responsible manner.

The LPTAP builds upon the previous and ongoing Energy Sector Technical Assistance Projects (ESTAP I, 11, and 111), and EC-funded financial and technical assistance towards rehabilitation o f power plants. This i s complemented by a grant (the Clean-up and Land Reclamation Project CLRP, to be co-financed through bilateral support from other donors), which will support a pilot post-mining reclamation project that would build the capacity o f environmental officials in this area through hands-on experience, and make land available for alternative uses.

In parallel, the proposed LPTAP i s closely linked to, and supported by, the World Bank’s ongoing and future work on the management o f public finances. The recent Fourth Economic

Assistance Grant supported crucial reforms to improve the transparency and accountability o f public spending and the allocation o f resources in l i n e with medium-term priorities. The ongoing Economic Policy and Public Expenditure Management TA Grant (PEMTAG) provides further technical support to improve efficiency and transparency in budget formulation and execution, internal audit, and procurement. The Fiscal Policy Support Grant (FPSG) envisaged under the Interim Strategy Note would support policies to enhance the sustainability and improve the public finances, including reforms to reduce the direct and hidden management o f KOSOVO’S burden which the energy sector currently places on public finances. A possible follow-on project to the P E M T A G could support further institutional strengthening to improve the management and use o f revenues from power exports for the benefit o f the population along the lines o f the World Bank Group Management Response to the Extractive Industries Review.

3. Higher level objectives to which the Project contributes The PISG considers that “Kosovo’s prosperity, standard o f living, and quality o f l i f e will be greatly influenced by how i t extracts, transforms, allocates and consumes i t s energy resources” (“Energy Strategy o f Kosovo, (White Paper) 2006-2015”, Ministry o f Energy and Mining, PISG). The strategy aims to “...transform the sector along EU Directives ...to an exporter o f energy by becoming a part o f the regional energy market system.. ..”

The proposed Project contributes to KOSOVO’S objectives, by developing suitable frameworks that promote international good practice for extracting i t s lignite resources in an environmentally, socially and fiscally responsible manner.

The proposed Project also contributes to the I S N objectives, by building local capacity to address sector issues in a sustainable manner and laying the foundation for attracting private investments.

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B. PROJECT DESCRIPTION

1. Lending instrument Kosovo i s currently not a member o f the World Bank Group, and therefore i s not eligible to borrow from IDA. In accordance with the recently approved ISN, the Project i s proposed to be funded through an IDA Grant which will be provided to UNMIK (the Recipient), on behalf o f Kosovo.

2. Project development objectives and key indicators The objectives o f the LPTAP are: (a) to help the PISG strengthen the enabling policy, legal and regulatory frameworks conducive to new investments in the energy sector; and (b) to assist the PISG to attract qualified private investors to develop lignite mines and build new capacity for lignite thermal power generation guided by high standards o f environmental and social sustainability.

The LPTAP objective will be attained through: (a) developing and strengthening the enabling policy, legal and regulatory frameworks in the energy sector, including mitigating environmental impacts and developing a framework for expropriation and resettlement; (b) developing an institutional structure and capacity to implement the broader sector strategy, including mobilizing financing and dealing with FDI in the energy sector; and (c) technical consultancies to seek qualified strategic investors in the Sibovc SW Mine.g The key performance indicators that would be used to assess the fulfillment o f the Project’s development objectives in terms o f outcomes and outputs are described in Annex 3.

3. Project components The Project components, identified through discussion with the authorities and donors, complement ongoing projects funded by other international donors, and further build upon the recommendations o f ESTAP I,I1and 111. The proposed Project f i t s well with the findings o f the World Bank Group Management Response to the Extractive Industries Review, which examined the World Bank’s oil, gas and mining-related activities and emphasized, inter alia, the need to (i) strengthen governance and transparency; (ii) mitigate environmental and social risks; and (iii) protect the rights o f people affected by extractive industry investments. Detailed Terms o f Reference (TOR) for the Project subcomponents have been prepared by the Recipient in consultation with the IDA. A summary o f the TORo f each sub-component i s included in Annex 4.

The Project consists o f four components, estimated at about US$10.5 million (see Annex 4 for the detailed description and Annex 5 for the Project cost breakdown), which are summarized below: ’The scope o f the investments will be determined based o n the Investment Options Review (see Component 2, Subcomponent 1) and may include, in addition t o the new mine, a n e w power station(s), as w e l l as existing KEK assets a n d o r operations, if cost effective.

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Component 1: Sector Policy, Legal, Regulatory and Safeguards Advice

This component will comprise the following two subcomponents:

-

Subcomponent 1 Sector Policy, Legal and Regulatory Advice: This has two main purposes. First, the consultants will help in preparing the key legislation, including any required amendments that will facilitate the proposed N e w Mineplant transaction, building on the PA-Norton Rose diagnostics report" o n policy, legal and regulatory frameworks. For this, the consultants will work closely with relevant ministries to develop and help adopt the final legislative and regulatory framework that will serve as a practical guide for environmental and social assessment, and for expropriation and involuntary resettlement activities in KOSOVO, and drafting legislation and regulations needed to assure that future infrastructure developments meet international standards. This will include a draft regulation on Strategic Environmental and Social Assessment (SESA), and the preparation o f a Resettlement Policy Framework consistent with World Bank OPBP 4.12 on Involuntary Resettlement as well as draft legislation on land expropriation, and resettlement. Second, the consultants will help support the transaction through to financial closing by preparing legal and contract documents for the bid solicitation package, preparing legal opinions, etc. In regard to the latter activity, the consultants will work closely with the Transaction Advisor (Component 4) and assist in the tendering, evaluation and negotiations with the successful bidder and in financial closings for the N e w Mineplant.

Subcomponent 2 - Safeguards Framework: This has three main purposes. First, the consultants will prepare a Strategic Environmental and Social Assessment (SESA) specific to energy sector development, which would identify environmental and social issues o f projected developments in the power generation and related lignite mining sectors. The SESA would be the overarching environmental and social assessment o f sector developments, and would help in identifying the expected impacts o f specific investments proposed for bidding (such as the proposed New Mineplant) and develop the terms o f reference for the Environmental Impact Assessment, the Social Assessment and the Resettlement Action Plan, to be followed by the selected investor for specific mitigation and other measures. The SESA will provide inputs to legal consultants for the development o f the Resettlement Policy Framework under subcomponent- 1. Second, the consultants will prepare an environmental baseline monitoring toolkit, collect field data and compile the environmental baseline data to facilitate due diligence and preparation o f bids. Third, the consultants will outline the needs for institutional strengthening and capacity building to assess, monitor and regulate the environmental impacts o f mining and power generation, and provide training to staff in relevant ministries. The consultants will also prepare a procedures handbook and other relevant manuals for the MESP in this regard.

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Review o f the Policy, Legal, Regulatory and Institutional Framework for Private Sector participation in the Energy Sector in Kosovo" March 2005 by IPA Energy Consulting and Norton Rose, under ESTAP-11.

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Component 2: Mine and Power Plant Analyses

Various studies have already been completed o n mine and power plants in Kosovo, focusing on technical, environmental, financial and related aspects, with a view to help long-term development o f the sector and facilitate investment considerations. There i s a need to synthesize these analyses and recommendations to help finalize the investment package and the bidding process. Also, Kosovo needs to develop strategies to promote renewable energy and energy efficiency. Accordingly, this component will comprise the following three subcomponents (the first two are financed by the EAR and the third by the IDA): 0

Subcomponent I

- Investment Options Review:

0

Subcomponent 2

- New Power Plant Development

This has two main purposes. First, it will examine feasible alternatives for combining existing and new mine and power plant assets, and help the government finalize the investment package to be offered for bidding. The key objective i s to define options for private investments in the development o f the Sibovc SW M i n e so as to assure continuing supply o f fuel for KEKâ&#x20AC;&#x2122;s existing power plants from 2009-10 onwards when the Mirash and Bar& mines will have been exhausted. The consultants will review the legal, financial and structural (e.g. public-private partnerships) issues o f combining KEKâ&#x20AC;&#x2122;s assets (the Sibovc SW M i n e and the Kosovo A and B power plants) with a new mine and power plant (additional investments in the Sibovc Lignite Field and in a new power plant, Kosovo C), in order to develop alternative N e w Mineplant investment packages. The consultants will also conduct a market test to support their recommendations in regard to the alternative packages. The consultants will conduct a workshop in Pristina to facilitate decision-making by the PISG as to the preferred N e w Mineplant investment package. In addition, the recommendations o f the review, and the governmentâ&#x20AC;&#x2122;s decision in response to the review, will help the Transaction Advisor (component 4) in developing a transaction strategy. and Technical Analysis. This has two main purposes. First, this will complement the various previous studies o n mine and power plants and compile adequate information and analysis for bidders so that they can cany out due diligence in a timely and efficient manner. I t will also help the Transaction Advisor to prepare the bidding documents. Second, this will develop a knowledge base for decisionmakers in Kosovo to solicit, evaluate, and negotiate proposals for private development o f the Sibovc Lignite Field in an economic and efficient manner. The consultants will examine the domestic and regional (ECSEE) electricity markets, the potential off-take opportunities, the adequacy o f the transmission system and the optimal unit and plant size options. The transmission system assessment will determine the requirements for interconnecting the new power plant to the transmission system, including conceptual designs and cost estimates.

Based on the previous studies, the consultants will evaluate necessary siting factors in order to determine the preferred site for the new power plant, taking into account the environmental and social aspects; in this regard, the consultants will work closely with the Safeguards consultants. The consultants will review technologies for the lignite power plant, and optimize the power plant design at the selected site, including supercritical technologies,

circulating fluidized bed combustion (CFB) technologies, and other feasible CO2 mitigation options.

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Subcomponent 3 -Renewable Energy, Cogeneration and Energy Efficiency. The objective o f this subcomponent i s to help MEM develop policies and strategies to promote renewable energy, cogeneration and energy efficiency in Kosovo. This will also examine development options for the two candidate hydropower plants, namely, the Zhur and Ujeman hydropower plants. These hydropower plants offer potential for meeting peak load for Kosovo and the

original design considerations may need to be reviewed to make them economically and financially viable. The use o f carbon credits and similar instruments would also be explored in examining development options.

Component 3: Capacity Building

Sector administration i s currently shared between (i) UNMIK, which has responsibility for the Kosovo Energy Regulatory Office (ERO) and the Kosovo Independent Commission for Mines and Minerals (ICMM), and which signed, on behalf o f Kosovo, the Athens Memorandum o f December 2003 and the ECSEE Treaty o f October 2005; and (ii) PISG, which established the Ministry o f Energy and Mining (MEM) for policy making. Many other PISG ministries are also in their infancy, including the Ministry o f Environment and Spatial Planning (MESP).

This component will support capacity-building for the key ministries and agencies (including MEM and MESP); for inter-ministerial coordination on the Project Steering Committee (the entity coordinating the Project); and for the Project Office (the implementing entity for the Project). In addition, office equipment and vehicles, incremental operating costs would be provided to the Project Office as the implementing entity. The TA would also assist MEM, MESP and the PISG to develop a communications and outreach strategy with the media and the public, and improve public consultations.

Component 4: Transaction Advisor

Building o n the inputs and considerations from the previous components, this component would support the PISG in carrying out the transaction process through to the financial close o f the selected investment package. The Transaction Advisor, working with the legal consultants engaged under Component 1, will prepare the necessary documents to undertake a competitive and transparent bidding and evaluation process, so as to determine a successhl bidder for the development o f the proposed New Mineplant. The Transaction Advisor will examine various evaluation criteria for maximizing the economic benefits to Kosovo from the use o f i t s lignite resources (e.g. taxes and royalties on exported energy), and finalize the bid evaluation criteria and methodology for the investment package in consultation with the government. Accordingly, the Transaction Advisor will develop appropriate criteria and develop a shortlist o f bidders. The Transaction Advisor would then issue a detailed RFP to short-listed bidders and the preferred bidder would be selected through a competitive bidding process. The Transaction Advisor will assist the government to conclude negotiations with the successful bidder and reach financial closings.'

*

''

To address the urgent need for development o f the Sibovc Mine, the Transaction Advisor may help with financial closing o n the Sibovc M i n e prior t o finalization o f all the documents and financing for other components in the investment package. Thus, two financial closings under one transaction process are possible.

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4. Lessons learned and reflected in the Project design

The Project design reflects lessons learned in ESTAP I,I1 and 111. Extensive consultation has been undertaken with UNMIK and PISG officials, managers and administrators o f POE and SOE operations, and the donor community. The lessons learned from various technical assistance projects, i.e., ownership by local institutions, preparation o f comprehensive terms o f reference, selection o f competent consultants, detailed reviews for ensuring quality o f consultantâ&#x20AC;&#x2122;s outputs, realistic timeframe, and wide consultations with local institutions, donors, and other stakeholders, have been taken into account in the Project design.

The design also benefits from the World Bank Group Management Response to the Extractive Industries Review. A series o f policy, regulatory, and guiding framework interventions are proposed to adhere to guiding principles that will strengthen governance and transparency, address community based issues, mitigate environmental and social risk, protect the rights o f people affected by sector investments, and provide for ongoing learning and review on sector performance in Kosovo.

The proposed components o f LPTAP have received political support at the highest levels o f UNMIK and PISG. The Project components are considered high priority by the authorities and the donors (EAR, USAID, and KfW). The scope o f work o f the consultants has been defined to ensure complementarity with the technical assistance being provided by EAR, EU and USAID. In addition, the key institutions o f KTA, MEM, MESP, ERO and I C M M are represented on the Project Steering Committee (PSC) which will coordinate the Project (see Section C.2).

The Project Office, which has responsibility for the day-to-day implementation o f the Project, is a new entity, but it will be responsible to the PSC, which has representatives o f several Ministries (e.g. MEM and MESP) and o f other agencies (e.g., ERO, I C M M , KTA) that have been involved in implementation o f projects funded by the IDA and other donors

5. Alternatives considered and reasons for rejection Because o f the small amount o f grant resources, the option o f financing some physical investments was not considered worthwhile. Among the choices for technical assistance, there were several candidate projects, i.e., institutional development o f KEK, rehabilitation o f mines, power plant efficiency, preparation o f a distribution master plan, etc. However, the discussions with the authorities and the donors led to the choice o f the IDA supporting a focused, strategic technical assistance program to lay the foundation for long-term development o f the energy sector with private sector participation, supporting Kosovoâ&#x20AC;&#x2122;s integration into the region and complementing donor efforts in other high priority areas in the sector. The scope and design o f the Project emerged from a consensus between the donors and UNMIWPISG on how to promote development o f the energy sector. The IDAâ&#x20AC;&#x2122;S assistance fits in a broader strategy for the sector, addressing short-, medium- and long-term challenges, supported by complementary donor assistance.

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C. IMPLEMENTATION 1. Partnership arrangements

The LPTAP builds upon the past and current close coordination among donors and the World Bank for supporting various aspects o f developmental activities in the energy sector. EAR is a parallel co-financier and will finance the technical analyses for the development o f the N e w Mineplant, including an Investment Options Review (see Component 2). U S A I D has proposed to provide assistance to KEK in operational aspects and help define the high priority areas o f transmission and distribution improvements and an associated financing plan. U S A I D i s also proposing to assist KEK in transition management aspects and support to the above-noted Joint Task Force on KEK billings and collections. EAR and KfW are financing the initial investment needs for the development o f the Sibovc S W M i n e during 2006-07. Bilateral funding i s expected for K E K ’ s ash pile removal and land reclamation efforts initiated under the CLRP recently approved by the IDA. DFID, and more recently in collaboration with the World Bank, has begun early dialogue with the government towards adoption and implementation o f the Extractive Industries Transparency Initiative (EITI) to ensure that revenues from mineral industries to the government are publicly reported.

2. Institutionaland implementation arrangements Institutional and implementation arrangements were confirmed in an Executive Decision o f the SRSG dated March 17, 2006, described in Annex 6. This Executive Decision established an inter-ministerial Project Steering Committee (PSC) and a Project Office (PO) under the PSC. The PSC i s chaired by the Minister o f Energy and Mining, and consists o f representatives from the SRSG’s Office, the Prime Minister’s Office, the Head o f UNMIK-Pillar IVYthe Ministry o f Finance and Economy, MEM, MESP, the Ministry o f Labor and Social Welfare, ERO, I C M M , and the Kosovo Trust Agency. The PSC will coordinate the activities o f various agencies involved in implementation o f sub-components, and also provide guidance and advice on implementation o f the Project, review terms o f reference o f the consultants, selection o f consultants, and review o f the consultants’ reports and recommendations. The PSC will reinforce ownership within local institutions, review consultant’s outputs for quality and internal consistency among the components, and ensure consultation with local institutions, donors, and other stakeholders.

The Project Office (PO) will provide day-to-day assistance in managing and coordinating all grant financed activities and function directly under the MEM, but will be responsible to the PSC. The technical staff o f the PO will also be the direct counterparts o f the consultants working on the various studies. The PO, in consultation with the PSC, will manage procurement, negotiate contracts, supervise progress, and process payments through the Ministry o f Finance and Economy (MFE) and MEM. The PO will prepare withdrawal applications for joint signatures by the MFE and UNMIK, and submission to IDA by UNMIK. The contracts will be signed by the Project Manager. The Grant Agreement will be signed by the Recipient. Project implementation will begin in September 2006, and the closing date is December 3 1,2009.

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3. Monitoring and evaluation of outcomeshesults

The PSC, through the PO, will be responsible for monitoring the progress against agreed performance indicators described in Section B.2 and in Annex 3 - Arrangements for Results Monitoring. The PSC, through the PO, will monitor the performance o f the consultants in accordance with their respective contracts, including the review and approval o f inception reports, draft reports, and final reports issued by the consultants. A quarterly report o n Project implementation will be submitted by PSC through UNMIK to the IDA. Based o n the IDA’S review o f the quarterly reports and outcomes o f the supervision missions, measures will be taken to ensure that the Project’s components and subcomponents are completed without delay and achieve their planned outcomes.

4. Sustainability

The authorities have demonstrated ownership and commitment to the sustainability o f the Project by creating the Project working group, the PSC and PO, launching community consultation mechanisms, implementing measures to fulfill commitments under the ECSEE Treaty, etc.

UNMIK and PISG have also signed a joint Letter o f Energy Sector Development Policy, indicating their commitment to undertake the needed reforms in the energy sector.

The long-term sustainability o f the Project’s benefits depends on the timely and successful implementation o f the Action Plan to improve billing and collections, and o n continuation o f KOSOVO~S energy strategy based on regional integration, guided by community consultations.

Kosovo is not likely to change this strategy, since i t s political future, economic development, and hlfillment o f i t s strong desire to integrate with Europe depend, among other actions, on i t s active participation in the regional institutions. All its laws, policies, and institutions are being gradually aligned with the directives o f the European Union. An indicator o f this strong desire i s the recent reconnection o f the power system o f the South East Europe Region, including Kosovo, to the main European power system operated by UCTE. Kosovo’s fiscal sustainability will depend on responsible use o f i t s mining resources and energy generating capacity. If realized, the proposed strategy would poise Kosovo to enjoy a long-term sourc’e o f income to pay for priority development programs and much-needed social services for i t s citizens; significantly boost intra-regional trade; and facilitate closer integration with the EU by assisting Kosovo to meet EU standards in the energy sector. By building local capacity, the PISG will be able to attract qualified strategic investors, through a transparent process, to invest in new capacity for lignite thermal power generation in conformity with EU environmental and social standards.

5. Critical risks and possible controversial aspects The project i s rated high risk overall. The critical risks are summarized below.

Institutional capacity constraints (High): Institutional capacity within PISG i s imited, anc systematic inter-ministerial coordination is lacking. In fact, there has been no FDI under the PISG in the energy sector. The Project Office has been established for Project implementation,

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and adequate staffing o f the PO will help to build the skill mix. Further, the PSC for interministerial coordination has also been established to bring about timely decisions on key policy matters. Strong commitment f i o m PISG and key ministries i s also key to timely actions in implementation. The Letter o f Energy Sector Development Policy signed jointly by UNMIK and PISG i s evidence o f this commitment.

Limited investor interest (High): The private sector may be unwilling to invest in the energy sector owing to a general risk aversion to conducting business in a post-conflict setting, concern about the readiness o f KOSOVO~S business and regulatory environment or a specific lack o f interest in investing in the global power sector. Concerns o f transparency, inter alia, arising f i o m perceived and real risks o f unsolicited proposals from prospective investors, would affect the interest o f quality investors. I t i s anticipated that four factors would bolster investor interest and confidence: (i)the final resolution o f KOSOVOâ&#x20AC;&#x2122;S political status; (ii)the development and implementation o f social and environmental institutional and regulatory frameworks that meet EU standards; (iii)World Bank Group and donor support for a transparent, professionally organized and competitive bidding process; and (iv) early informed dialogue between potential investors, including the I F C and other IFIS, and the PISG. Unfavorable macroeconomic conditions and/or an unwillingness to invest in Kosovo due to i t s unresolved status or an outbreak o f political violence cannot be mitigated.

Due process bwass (High): There is a strong desire among several officials to get a private sector investment deal finalized as soon as possible, partly driven by the urgency o f fimding required for continuing the development o f the Sibovc SW Mine in order to ensure uninterrupted lignite supply, and partly by the desire not to lag behind neighboring countries in attracting private sector investments. I t i s anticipated that three factors would significantly mitigate the risk o f due-process bypassing: (i) hiring o f the Transaction Advisors as soon as possible to expedite the process and also advise the authorities in a timely manner; (ii) the willingness o f donors and ability o f K C B to continue funding support for lignite mines until such time as the private investors are selected; and (iii)exploring alternative sources o f financing, including preprivatization financing from IFIs, should unforeseen delays be encountered.

Payment discipline risk (High): Investor willingness to supply the domestic market depends upon the availability o f creditworthy customers. K E K â&#x20AC;&#x2122; s viability is also key, especially for erihancing prospects for early financial closing on the mine investments. Rigorous implementation o f the Action Plan to improve performance in billings and collections and reduce non-technical losses would mitigate this risk. interconnection to Albania has limited Transmissioflarket access risks (Low): KOSOVO~S capacity, and power exchanges toward Greece, Italy, Romania and Bulgaria depend on the availability o f regional transmission capacity, congestion management and cross-border tariffs.

The New Power Plant Development and Technical Analysis subcomponent under component 2 will assess the local and regional transmission networks and their ability to transmit the power generated by the new power plant to potential local and regional electricity markets.

Legacy Issues (Medium to Low): There are substantial legacy problems in mining and power generation in Kosovo. Some o f these legacy problems involve previous resettlements. In this

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regard, the Project will provide a mechanism for civil society input, will include a communications program to address stakeholder concerns, and will support the capacity o f PISG to prioritize legacy issues and lay the groundwork to address social and environmental issues properly. In addition, the Project will be implemented in line with the World Bank Group Management Response to the Extractive Industries Review, to guide the PISG in channeling resources from the proposed N e w Mineplant to priority developmental programs in Kosovo. A further legacy problem concerns a lignite exploration license issued by I C M M to Compania Boksitet e Kosoves (BeK), an SOE, in respect o f a separate lignite resource in the K l i n a Lignite Field. This license was issued pursuant to an application made by B e K prior to the coming into force o f KOSOVO'S current mining legislation. Because the issuance o f this exploration license conflicts with the sector development policy that has now been adopted by UNMIK and PISG, I C M M has recently denied BeK's application for a mining license (a mining license i s the next step, after the issuance o f an exploration license, in the process o f obtaining o f the approvals necessary to commence mining operations). UNMIK has agreed to take suitable further measures to mitigate any residual risks arising as a result o f the B e K exploration license (including the possibility o f an appeal o f the recent I C M M decision), before the proposed Grant becomes effective.

Donor Coordination (Low): Due to the relatively large number o f donors involved in supporting the various parts o f the broad strategy, there i s a r i s k o f disconnect and lack o f donor coordination, especially with EAR, which i s financing complementary parts o f the Project components. Early understandings on the scope, terms o f reference and timing o f deliverables have already helped reach consensus; in addition, regular high level discussions between the IDA and the E C would fhrther minimize this risk.

There are no controversial aspects to this TA Project. The Project would support a standard approach to building enabling frameworks and local capacity, and encourage investors to adopt more climate-fiiendly technologies for the power plant options.

6. Grant conditions and covenants Effectiveness Conditions: (a) MEM should appoint the Project Manager for the Project Office, under terms o f reference satisfactory to IDA; and (b) the lignite exploration license granted by I C M M to BeK, and any related rights, title and interests, should be resolved to IDA'S satisfaction.

Other Conditions

(a) A disbursement condition for the appointment o f the Transaction Advisor (Component 4) i s the execution o f a memorandum o f understanding or similar document, addressed to the Project Steering Committee, between the I C M M and the ERO to harmonize the processes for selection o f investors in the N e w Mineplant.

(b) The Project Steering Committee (PSC) shall adopt an Operational Manual, satisfactory to the IDA, by November 15,2006.

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(c) UNMIK and PISG shall select the preferred investment package, satisfactory to the IDA, by December 15,2006, based on the recommendations o f the Investment Options Review.

(d) PISG will adopt the regulations for the SESA, acceptable to the IDA, by M a y 3 1,2007. (e) MFE will maintain a project financial management system acceptable to the IDA. The Project’s financial statements will be audited by independent auditors acceptable to the IDA under terms o f reference acceptable to the IDA, commencing with the accounts for the year ending December 3 1, 2007. The annual audited statements and audit report will be provided to the IDA within six months o f the end o f each fiscal year.

D. APPRAISAL SUMMARY

1. Economic and financial analyses Economic Aspects Costhenefit analyses o f technical assistance activities are not normally carried out. However, economic analysis o f the development and exploitation o f the lignite resources in the Sibovc field has been carried out (see Annex 9).

The proposed Project can be expected to yield a number o f direct benefits to Kosovo. First, the mine will provide royalties to the government, o f about €1.8 million in 2013, the first year o f operations o f the mine and the new power plant (based o n the current lignite royalty fee o f eurocent 25 per ton). Second, the new power plant would generate significant profits tax, which could be as much as €1 1 million in the first year o f operation. Third, Kosovo will benefit from savings in imports o f power, which cost more than the power generated from the Project. These savings will initially be around €10 million, but will increase over time as the Project provides more domestic power.

In addition to these direct fiscal benefits, the Project will create employment o f about 3,0004,000 jobs in 2013 and afterwards, with some fewer jobs in the preceding three years. Valuing these jobs with a shadow wage o f 0.7 would imply benefits o f around €8 million in 2013. The increased investment in the economy will also generate higher growth. Based on a simple I C O R model, the Project would boost growth in the period 2008-2013 by 0.3 percent per annum, resulting in GDP that i s about €150 million higher in 2013 than i t would be without the Project.

There will be some environmental consequences o f the operations o f the lignite mine and the new power plant. Due to dispersion, nearly 90% o f the impacts would arise outside o f Kosovo.

However, considering that Kosovo’s lignite plants would displace similar fossil fuel power plants in the ECSEE region (see technical section below), the net impact in the region from the proposed Project would not be additional.

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Financial Aspects The GIS objective was to assist the European Commission, IFIs, and donors to identify an indicative priority l i s t o f least-cost investments in power generation and related infrastructure from a regional perspective, Le., in line with the objectives o f ECSEE. This study identified a new lignite-based plant in Kosovo as part o f the least cost plan in terms o f new capacity additions.

This result has been further corroborated by Electrowatt-Ekono in its Pre-feasibility studies for the new lignitefired power plant and for pollution mitigation measures at Kosovo B power plant.

This study concludes that the current market supports the construction o f additional capacity and that the competitive position o f lignite-fired units in SEE looks favorable. The capital investment in a 500 MW new lignite-fired plant is approximately 1,054 E u r o s k W and the operational costs are approximately 14.77 E u r o s M W h (excluding capital). The total cost, including the cost o f capital, i s expected to be in the 33 - 35 E u r o s M W h range, which i s quite competitive with other sources o f generation within the SEE market.

2. Technical No technical issues are anticipated in the TA activities. Technical aspects pertain to the new mine, power plant and transmission interconnections. For the new mine, no technical issues are anticipated.

For the power plant, the pre-feasibility study recommends a pulverized flow (PF) technology for the base case with two 500 MW units. The REGIS-GIS12study has identified potential savings o f Euro 2.6 billion in avoided capacity additions o f 4500 MW, if the ECSEE countries pursue a regional optimization model through power exchange and trading. Compared to the scenario o f each country in the region developing i t s own system independently, about 6800 M W o f o i l and gas-based capacities would be avoided by adding only 2000 M W more o f lignite power capacity.

Further options for the power plant include supercritical technology to gain an additional 10-15% increase in plant efficiency, thereby hrther reducing the environmental impacts, from the base case; this will be examined in detail in the development and technical analysis for the new power plant. Investors would be encouraged to adopt more climate-friendly technologies with the potential benefits o f COz emissions trading.13 The new power plant will also contribute to hrther environmental benefits by replacing the output from Kosovo A, which consumes an average o f 1.85 tons o f lignite per MWh, about 80% more than a new plant.

For transmission interconnection, recent studies have confirmed the availability o f capacity to transmit about 600 MW o f additional power from Kosovo to the southern parts o f the ECSEE network. Ongoing and proposed new additions to the high voltage transmission network, including the proposed Kosovo-Albania 400 kV line, would offer more options for routing power in the ECSEE network.

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See â&#x20AC;&#x153;Regional Balkans Infrastructure Study - Electricity (REBIS) and Generation Investment Study (GIs)â&#x20AC;?, December 2004 by P w C Consortium. l3 See Annex 9 Economic and Financial Analysis.

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3. Fiduciary Procurement. Procurement would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, and the provisions stipulated in the Financing Agreement. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, need for prequalification, estimated costs, prior review requirements, and time frame will be agreed between the Borrower and IDA in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity. Details o f the procurement arrangements are in Annex 8.

The financial manapement arranpements o f the Project are acceptable to the IDA.

As o f the date o f this report, the Recipient is in compliance with its audit covenants o f the existing IDA-financed projects. Current Project financial statements and auditing arrangements for the previous grants managed by MFE as well as MEM are acceptable, and it has been agreed that these arrangements will be replicated for the proposed LPTAP. The annual audited Project financial statements will be provided to the IDA within six months o f the end o f each fiscal year.

An Operational Financial Accountability Report was finalized in May 2005. Despite significant progress since 2001, public financial management in Kosovo suffers f i o m fundamental weaknesses, and basic structures for financial accountability are s t i l l in their infancy. The overall legal framework for budgeting and budget management is largely compatible with internationally recognized standards, but for some aspects it appears to be too advanced for the current administration’s capacity. Carry-over practices and weaknesses in capacity, organization and coordination hamper budget preparation and undermine the credibility o f the budget as a policy management instrument. W h i l e treasury and cash management are well-regulated areas o f public financial management, they suffer from inefficiencies. The system through which Commitment and Payment Orders flow to ensure authorization o f payments i s well regulated.

The Treasury authorizes commitments and payments based on proposals and supporting documentation by budget organizations and municipalities. The Treasury pays from a single account in the central Banking and Payment Authority o f Kosovo (BPK).

As with most public financial management functions, accounting i s constrained by limited capacity, and financial reporting needs more realistic requirements and statutory deadlines, improved procedures, and trained personnel. Internal control and internal audit at all levels o f government are in their infancy. Considerable time and effort will be required to make them fully operational. External audit i s undeveloped and, as with internal audit, it will need sustained external support for its development. Specific procedures have been developed by MFE and MEM to secure proper financial accountability o f this Project.

4. Social

The LPTAP i s limited to the provision o f technical assistance for the preparation o f follow-on investments and no negative impact on society is expected from the implementation o f the

18

LPTAP itself. Indeed, it will assist the government to manage social impacts o f power generation and mining activities, especially land acquisition, expropriation and any necessary resettlement. The technical assistance under the Project includes development o f a Resettlement Policy Framework that will apply to new investments in lignite mining and power generation, and preparation o f a Strategic Environmental and Social Assessment (SESA) which will identify social issues o f projected developments in the power generation and related lignite mining sectors.

Commitment from the government has been obtained to adopt a Resettlement Policy Framework that reflects the principles o f the World Bank Policy on Involuntary Resettlement to deal with expropriations o f land for infrastructure investments. This Policy Framework i s included in the integrated Environmental and Social Safeguards Framework (ESSF) that has been prepared as a condition o f Appraisal, and the IDA will also monitor the adherence to the ESSF as part o f i t s supervision activities. (See Annexes 4 and 10 for additional information.)

5. Environment

As stated under social impact, no negative impact on the environment i s expected from the implementation o f the LPTAP itself. However, since the follow-on investments being prepared under the umbrella o f the LPTAP include components that could have environmental impact, the a Strategic Environmental and technical assistance under the LPTAP includes preparation o f (i) Social Assessment (SESA); (ii) Terms o f Reference for Environmental Impact Assessment; and (iii)draft legislation and regulatory instruments related to environmental safeguards in the energy and lignite mining sector.

6. Safeguard policies

Although the LPTAP i s limited to the provision o f technical assistance, it has been classified as Category Bytriggering OP 4.01 (Environmental Assessment) because o f the safeguard impacts o f possible follow-on investment projects. Since locations, timing, technical features, etc. o f followon investments are unknown at this stage, an Environmental and Social Safeguards Framework (ESSF), as described in the sections above and in more detail at Annex 10, has been disclosed and consultations have been held to address these environmental and social safeguards during Project preparation. The IDAâ&#x20AC;&#x2122;Ssupervision o f both social and environmental aspects will ensure that the advice provided by the consultants to Kosovar authorities i s consistent with the World Bankâ&#x20AC;&#x2122;s safeguards policies and with the World Bank Management Response to the Extractive Industries Review.

Safeguard Policies Triggered by the Project Environmental Assessment (OP/BP/GP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.1 1)

Involuntary Resettlement (OPBP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) 19

Yes [XI [I [I

[I [I [I [I

No

[I

[XI [XI [XI

1x1 [XI [XI

Safety o f Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60)* Projects on International Waterways (OP/BP/GP 7.50)

[I [I [I

[XI [XI [XI

The Project will provide technical assistance to the Kosovo government to enable development o f energy resources in an environmentally and socially sustainable manner. The Project will provide technical assistance to: a) prepare a Strategic Environmental and Social Assessment, b) prepare terms o f reference for Environmental Impact Assessment, Social Assessment and Resettlement Action Plan, c) identify gaps in existing legislation and institutional framework related to the environmental and social issues safeguards in the energy and mining sector and develop draft legislation and regulations to address gaps and to develop a resettlement framework to apply to the proposed New Mine/Plant, and d) build the capacity o f the Kosovo government to manage environmental and social dimensions o f power generation and related lignite mining sector. The specific consultant contracts will include requirements that assistance be guided by World Bank Safeguard policies and procedures. Compliance will be supervised closely. See Annex 10 for the Safeguards Framework and a more detailed account.

7. Policy Exceptions and Readiness There are no policy exceptions, and the Project i s ready for implementation.

20

Annex 1: Country and Sector or Program Background

KOSOVO: Lignite Power Technical Assistance Project Energy Sector

KOSOVO~S key energy resource i s i t s extensive lignite deposits. The Sibovc field alone i s estimated to hold over one billion tonnes o f geological reserves. Kosovo has no other fossil fuel resources and has only a very modest hydroelectric potential. I t does not import natural gas and has no gas supply infrastructure. I t has no o i l refinery and depends entirely on imported liquid fuels. KOSOVO~S energy sector is dominated by Korporata Energjetike Kosoves Sh.a (KEK).

KEK i s a POE utility which operates lignite mines, power generation, transmission and distribution. I t i s technically insolvent, depending on budget support and donor assistance not only for the rehabilitation o f assets but also for i t s maintenance needs and to pay for power imports. KEK’s dilapidated electricity network covers almost 100% o f the households.

Donor and Kosovo Authorities Support to Energy Sector since 1999

The infrastructure o f the power sector was severely damaged during the war and subsequently by natural events (landslides and a lightning s e e in 2002). T h e Kosovo power industry survived mamly through massive financial support from the international community and the Kosovo Consolidated Budget (KCB). Over €700 million was provided to the lignite mining and power sectors during 1999-2005, o f which KCB’s support was around €250 million. The European Agency for Reconstruction (EAR) has been the main contributor with a total support o f about €350 million, representing 73 percent o f the total external aid provided to the power sector. These funds were used to cover: (i) capital expenditures (€470 million), largely for basic reconstruction (war damages) and emergency measures (after the natural catastrophes); (ii) imports o f power (€124 million); and (iii) operational and institutional support (€113 million). KEK i s a major provider o f employment in Kosovo employing about 8,000 people, o f which nearly one half are in lignite mine operations.

On the mining side, the investments helped nearly double the throughput to 7 million tons by 2004, from 3.6 million tons in 1999. In the power sector, generation increased from a mere 500 GWh in 1999 to 3,800 GWh in 2004.

However, technical and non-technical losses have remained high, at around 48 percent, and continue to be a major challenge to KEK’s financial viability. Unless these losses are reduced, the financial recovery plan for KEK14 foresees a continued need for financial support from the K C B andor donors for investments and operations for the foreseeable future. In the absence o f these measures, the energy supply situation could worsen over the mediumterm. KEK i s facing a looming shortage o f lignite from the f K s t quarter o f 2009 unless investments in a new mine start as soon as possible.

EAR, KfW, U S A I D and the World Bank have been the main players in the sector among the donor community.

EAR i s currently funding two important feasibility studies on the development o f the Sibovc Southwest (SW) mine (the likely lignite field for any new power capacity) and the rehabilitation o f an existing power plant (Kosovo A) units, together with helping repair an excavator for the Sibovc SW mine. EAR i s also financing environmental studies, institutional measures (establishment o f the Transmission System Operator and support for the Ministry o f Environment and Spatial Planning) and a feasibility study for the rehabilitation o f another existing power plant Kosovo B 1’s electrostatic precipitator. The World Bank has been involved in technical assistance through the three energy sector technical assistance grants (ESTAP-I, I1 and 111). K f W intends to support priority repairs and refurbishment o f excavators for mining. U S A I D intends to help KEK improve i t s revenue collection rates, and intends to provide assistance in distribution as well as post-ESBI management transition. DFID are considering financing an Extractive Industries Transparency Initiative to address the link between natural resource abundance and poor governance, corruption and the misuse o f government revenue. l4 Prepared by ESBI,

the foreign fm currently managing KEK under a performance-based contract

21

Historically, energy and mining were the mainstays o f the Kosovo economy, providing direct and indirect employment, sources o f revenue, export earnings, and inputs to downstream industries. However, the power sector has gone from being a contributor to economic growth, to becoming a drain on public resources. In addition, unreliable electricity supply has emerged as one o f the main obstacles to growth (Investment Climate Assessment, World Bank, 2003).

Kosovo continues to suffer from regular electricity black-outs, with average outages o f 4 hours a day in 2005, down from 6 hours a day in 2002. Surveyed companies in Kosovo reported the lack o f reliable electricity supply as the main barrier to their operations, leading to average losses o f around 5 percent o f sales (excluding the cost o f purchasing and operating generators). In 2005, KEK produced 3387 GWh, imported 612 GWh and delivered 3 119 GWh to customers.

The l o w reliability and poor quality o f electricity supply is due to several reasons.

9 Unreliable generation capacity: The net available generation capacity o f about 780 MW i s able to generate only about 700 M W (against winter peak demand o f over 900 MW) on account o f old age o f the units, decades o f inadequate maintenance and physical damage

caused during the ~ 0 n f l i c t . l Generation ~ i s severely strained when either one o f the 300 M W units in Kosovo B plant i s not available due to breakdown. This gap cannot be filled by the only two operating units in Kosovo A plant, which are even more inefficient and unreliable. Kosovo B plants have been rehabilitated with extended operating l i f e o f up to 2025. As for Kosovo A, rehabilitation o f three units (A3, A 4 and A 5 -- each with a 200 M W nominal capacity) to extend operating life by about 12 to 15 years i s technically feasible, but since these units consume nearly twice the amount o f coal compared with latest technologies and since the cost o f environmental compliance with EU standards would be costly, these units would likely not be cost effective compared with a new power plant. Instead, overhaul o f these units for limited l i f e extension until the new power plant becomes operational i s deemed feasible. Accordingly, A 3 is now in service after an overhaul, and overhaul o f A 4 i s expected to be completed by end-2006.

>

During 2005, KEK had to import nearly 220 GWh o f emergency power and total imports were about Euro 30 million, paid from the KCB. Also, KEK has to depend on neighbors for peak load supply because i t does not have peaking capacity (it has only a very small 35 M W hydro power capacity). KEK i s also not able to obtain better prices through long-term contracts to meet planned peak load requirements due to its poor financial situation. KEK was able to swap16 only limited amounts o f power (exporting surplus electricity generation during off-peak hours and importing from the neighboring power systems during peak hours) as i t cannot offer reliable supply.

Unplanned Energy Import:

l 5 N e t available thermal generation capacity i s 780 MW, comprising 165 MW o f Kosovo A (between 30 and 45 years old) and 580 MW o f Kosovo B (about 20 years old) - both using lignite. In addition Kosovo has a hydro power plant o f 35 M W (HPP Gazivode). l6KEK has mostly relied o n Albaniaâ&#x20AC;&#x2122;s K E S H for power needs; but K E S H itself i s having supply difficulties.

KESHâ&#x20AC;&#x2122;s largely hydro system and K E K â&#x20AC;&#x2122; s largely thermal system offer a potentially good opportunity for better and coordinated operation o f both systems for mutual advantage and benefits.

22

Unconstrained demand wowth: There has been an unconstrained growth in demand - o f about 8.6% p.a. in energy and about 10.2% p.a. for capacity - because consumers have been able to get electricity at little or no cost by by-passing their meters, making illegal connections and not paying their electricity bills. In 2005, nearly 36% o f total energy delivered to the system (about 1109 GWh out o f 3119 GWh) was reported lost due to theft, valued at around Euro 70 million. If these were paying customers, their consumption would have been about one h a l f or even less and the demand growth rate would be around 4-5% p.a. Additionally, KEK collected only 68% o f billed energy in 2005, leaving about Euro 41 million in uncollected bills.

High svstem losses: The technical losses in the system are high at about 18% o f gross production (or about 629 GWh in 2005). If the network functioned efficiently, at least 200 GWh additional could have been available to consumers. A large part o f these losses are in the distributionnetworks which are in very poor condition.

The short-term outlook for electricity supply may be even worse. First, industrial demand i s growing and a recently privatized mine (Ferronikeli) would need 100 M W o f firm capacity from 2007 onwards. This would place further strain o n the demand-supply balance and more load shedding would further affect economic growth. Second, there i s a looming shortage o f lignite supply from 2009 onwards since the existing mines (Bardh and Mirash) are nearing exhaustion and the start o f development works at KEKâ&#x20AC;&#x2122;s Sibovc S W M i n e has suffered delays due to lack o f financing. Development o f the Sibovc S W mine i s estimated to cost Euro 236 million over 7 years. The combined effect o f these on the electricity supply situation would be disastrous unless remedial measures are taken.

Lignite M i n i n g Aspects

All the lignite that i s currently mined in Kosovo and used in power generation comes from two open-cut mines: Bardh and Mirash. The two mines have been in operation since 1958 and are nearly exhausted. At the projected rate o f consumption o f around 6.8 million tons per year, lignite production from the mines will begin to drop in the year 2008, as illustrated below.

I

Projected future production from Bardh and Mirash mines Mirash and Bardh lignite production (million tons)

a mil

7 mil 6 mil 5 mil 4 mil 3 mil 2 mil

I

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: KEK, MEM.

Development o f the Sibovc SW mine i s essential to sustain fuel supplies to Kosovo A and B, after 2008 when the existing Mirash and Bardh mines begin to exhaust remaining reserve^'^. â&#x20AC;? Complementary Mining Plan for

the Sibovc South West Mine, STEAG AG, April 2006

23

Failure to have the Sibcsvc S W Mine

ion in fuel supply thercfxc be needed in in Kosovo and to current

by 2009 will lead to i

~~~~~~~~~~

11

rnent o f tho Sibovc SW

Overburden

24

2012

fat

Fortuitously, ECSEE i s offering a window o f opportunity for KOSOVO’S energy sector to become an engine o f growth. A regional review o f the energy sectorI8 concluded that the development o f lignite mining in Kosovo for power generation and sale to the regional market i s a least-cost solution to close the emerging gap in generation capacity in Southeast Europe. The concern over energy security i s increasing the desire for diversification o f energy supply across Europe, placing greater emphasis o n lignite resources. By developing its power sector, Kosovo can also meet its own demand and improve stability o f supply, thereby removing a significant barrier to private sector development currently constrained by rolling blackouts. This has the potential to produce a multiplier effect o n business investment, and on j o b prospects. By supplying to the a substantial long-term source o f income to regional market, Kosovo has the potential to have: (i) pay for priority development programs and much-needed social services for KOSOVO’S population; and (ii)an opportunity to significantly boost trade links between Kosovo and Southeast Europe and thus facilitate closer integration with the rest o f Europe.

New generation capacity o f around 600 MW” would require about Euro 1.2 billion, including mining investments, and requires about 7 to 8 years for development and construction. Since KEK would not be able to mobilize such financing and requires expertise in new technologies, the private sector should be attracted to build and operate new generation capacities in Kosovo.

Private investment o f such scale would be the first in Kosovo and in the energy sector, and the requisite policy, legal and regulatory frameworks have yet to be established. Apart from creating an attractive investment climate, a transparent process for bidding and selection would be necessary to attract qualified strategic investors. Kosovo has significant potential to attract qualified, strategic foreign investors to develop i t s abundant reserves o f high-quality, low-cost lignite. However, such development should conform to high standards o f environmental and social sustainability in order to obtain and sustain community support.

With respect to the social and environmental aspects o f investments in the lignite mining and power sectors, progress has been made, but certain issues remain to be addressed. Recent efforts to develop an effective institutional structure for environmental regulation have defined the most important actors, their roles and supporting legislation, but the structure is still very weak.

Environmental legislation and standards are partially in place, but need further development to deal with the challenges o f new initiatives. The environmental framework law is inadequate to address proper development o f mining and power generation projects, and regulation o f existing polluting sources and new projects is not effective. With respect to social issues, further development o f lignite reserves will require resettlement. There is presently no existing adequate legal and institutional framework (policies, institutions, and legislation and regulation) to handle resettlement, either in the proposed lignite extraction area or more generally. The applicable laws on expropriation date to the Yugoslav era (1987) and have not been updated; UN executive decisions have provided the legal basis for the process o f resettlement in the proposed lignite extraction area.

18

See “Regional Balkans Infrastructure Study December 2004 by PwC Consortium. l9

- Electricity (REBIS) and Generation Investment Study (GIs)”,

See “Pre-feasibility Study o f Kosovo C power plant”, February 2006, by Elektrowatt-Ekono.

25

26

To the International Donor Community and Private Sector Y W O -Medium term Enetnv Sector DeveloDment Policig

Kosovo is prsParingto enter a decisive phase io its cumnt development Out moot important economic policy objective i s lo embark in a sustainable development proccs by reducing the unacceptably high level of unemployment and poverty. An even more urgent task is the need to provide jobs for our young and rapidly expanding labor force Given declining donor contributions, a vibrant private sector is essential to m e t this challenge.

Energy Sector Status

Energy i s a key sector of the economy with high wwth and job creation potential.

The energy sector also holds tbe potential of being a substantial long-term source of income to pay for priority development programs, booaing trade with Southeast Eumpe and contributing to closer integration with the rest o f Europe.

Based on the Kosovo Energy Strategy, approved by the Assembly in late 2005, as well as m a number of mlevant atudics supported by the donor community, IJNMK and PISG outline below tht key policies and strategic actions over the short- to medium-term for development of the energy sector, which will assist also in mating a favorable investment climate to enable transparent selection of qualified strategic investors who would participate in the development of Kosovo's lignin mining and power generationin a manner conforming to EU standards of enviromental and social sustainabilii. Our policies will be informed by community invohrerndh through consultations09 approVriaDt to ensure broad support for thest developmental activities. Our policies will also be guided by the medium-term macroeconomic framework that we have developed recently with the assistance of the International Monetary Fund.

The support of, and assistance from, the donor community is sought to help develop, adopt and implement these policies SI soon as poosible.

Page 2 o f 7

27

c

Korovo -Mediirn term Energy Sector OewbpmentPolicies L ,

Policies to SIrengtkn Energy Sector Finances I t is the foremost objective to enable the energy sector to finance its investment and operational needs from its own revenues as soon as possible SQ that the government can increasingly channe1 its limited resources to social and other sectors. We also recognize that a viable energy sectot is a critical requisite for creating a favorable

investment clirnatt.

UNMIK, in coordination with the PISO, have therefore adopted and begun to implement a major initiative (the Action P h ) to improve the billing and collection performance o f Korpotata Energjetike Kosovt!s (KEK) h u g h a wide range o f . actions supported by a UNMIK -PISG Joint Task Farce. In order to address the problem o f widespread commercial losses of electxicity, suitable amendments to the governing law and regulations will be adopted during 2006 for enabling strict legal actions and penalties against persons and entities engaged in such illegal activities and Stteamhe P d U f e S for CXFditd handlingQ f such CaSeS thmagh the Courts. A one-time mchcdding of past mars to KEK will be considered by the Joint Task Force and disconnection of delinquent residential, commercial and public sector customers will be strictly enforced. For this pwpose, the appropriate fhding in the Kosovo Consolidated Budget WCB) for the courts and the police will be assessed.

Duiqg the course o f 2006 and 2007, the Ministry o f Labor and Social Welfare in coordination with thc Ministry o f Energy and Mining will cnsure that social welfare assistance to needy members of the population also covm energy consumption.

Applicable procedures will be modified so that budgetary organizations use adequately budgeted designated funds only for paying their energy bills.

We have initiated a campaign to educate customers and the general public in this regard and this initiative will continue until KEK’s collections reach levels comparable to standard utility norms. We are committed to achieving targets of 60% for billed to delivered energy and 78% for coUections of billed energy for 2006.

These targets will be monitored monthly and any comctive measures and actions deemed necessary will be taken promptly. During late 2006, when results for the current yew arc available, we will review with the donors our proposed targets for 2007 and subsequent years. The aim is to ensure that all power plant operators will be in a position and indeed eager to supply Kosovo‘s domestic electricity needs preferably without recourse to extraordinary guarantees.

-

-

Enhancedsecurity of power supply at reasonable Cost is critical to Kosovo’s high rate economic growth and sustainable development in the medium turn. For this reason Kosovo will be cageriy seeking investments for the rehabilitationof the larger units of the TPP Kwova A. The feasibility study for this activity has already been prepared.

Private sector participationwill be in the focus o f our effort, not excluding publicprivate partnership.

With regard to power imports and expo*, our aim is for KEK to participate in regional power and capacity trading in as economic a manner as is possible. As a long-term solution to Kosovo’s needs, we will work with the other parties to the ’Treaty establishing the Energy Community (the ECSEE Treaty) to establish efficient and transparent markct platforms for trading power and capacity throughout the Page 3 o f 7

28

Kosow -Medium term Energy Sector Devekpmant P o l i i s

region. Fwthm, as indicated above, we Wirl work to improve KEL's financial performance so that it:is a creditworthy partfcipant in those markets.

In addition, to meet immediate needs, we h v e reviewedthe existing procurement laws and submitted to the Assembly for its approval the umssary amendments to facilitate short-term regional electricity trades. We expect this legislationwill be adopted by the end of this year.

Budgetaty Supporr Policies

Budgetary support will be made available through social programs to help the identified eligible low-income households psy their energy needs. For KEK, our aim is to mabk KEK to fully finance its operating and maintenancen q u i m e n t s through their cash collection from 2008 onwards, with the exception of the capital requirements for the development of the Sibovc Southwest Mine, as discussed below.

Budgetary support for KEK's operations Will be provided during 2006-2007 while for capital investments during 200668 only for high priority items.

Southwest Sibovc Mine: In view of the imminent coal supply shortages StaEting 200809, developing the Sibovc Soutbwcst Mine (Sibovc SW Mine) is a top priority. Using mostly donor funds, as well a i funds From the 2006 KCB, work has already begun for the development o f the Sibovc S W Mine, and the allocation of adequate funds @om the KCB will be ensured for continuing the works during 2007 and beyond, if necessary. In parallel, action will be taken to restructure the lignite mining business so as to ensure its operation on a commercial basis by the end o f 2007. We will be actively seeking, concessionid, commercial, and/or private sector financing into the Sibovc SW Mine development With the assistance of expert advisors.

Power Plant Camcitv Enhancement; The reliability o f the domesticdiy produced power supply needs to bc improved significantly, and efforts are already underway to restore 50MW of disabled capacity at Kosovo B. Capacity enhancement at Kosovo A is also required to improve energy supply and system reliability. For operational reasons, overhaul of one unit (A4) will be undertaken using funds from KCB and KEK during 20062007. In view of the large investments necded for Kosovo A, options will be expiored to help mobilize commercial andor private sector financing.

The capacity enhancement will be defined in procurementlproposaldocuments, having regard to EU standards. The private sector investor/opcrator would then be selected through a transparent competitive process, in accordance with the applicable laws.

OZIS Ener : In the context of the privatization of selected mines and Socially Owned Entaprises, apart from offering third party access 'to the transmission system for eligible customers, it may be necessary for KEK to negotiate long-tern energy supply contracts on terms and conditions that arc appropriate for large consumers. These terms and conditions will be transparent and will minimize the risk of operational losses or negative cash flows to KEK, as well as minimize the risk of contingent liabilities for the government, arising from these transactions. These contracts shall not have adverse implicationsan non-eligible customers.

Page 4 of 7

29

Kosovo -Medium term Energy Sector Development Pdlcles

Air and Water Pollution: Due to its ageing technology and p r l y functioning equipment, the Kosovo A power plant emits unhealthy amvutlts of particulates into the air and pollutes surface water. In view of the health implicationsto the inhabitants, it i s aimed to bring the plantInto complianCe with apPticab1e EU regulations as won as possible. I t Will be ensund that, by the end of 2007, all units in opemion at this ptant will haw electrostatic precipitatatars which control air pollution.

Further, in 2006 and 2007 the ash handling and disposal system and the wastewater treatment system for the entire Kosovo A plam will be repaired i dmade functianal.

An environmental monitoring system Will also be installed. From the 2006 and 2007 KCB and donors f'unds will be otlocated as appropriate f b the ~ ash handling and wastewater treatment system repairs and from the 2007 budget the funds neecss(yy will be allocated â&#x201A;Źor a new electrostaticprecipitator for one of the larger units of TPP Kosova A. Social and Environmental &>guar&

Policies

Social and Resettlement A s ~ ~ c t Mine s : development invariably involves social issues and there is a strong commitment to addressing them in a manner consistent with internationalbest practice. Social policies on camunity consultation and resettlementare M n g formulated to bring them in line with EUregulations, and to ensure that the impacts upon people impacted by sector development aze adequately rcdrc&ed. By the end of 2007 a social policy h e w o r k to govem all aspects of

resettlementwill be developed and adopted. Further, in 2007, land reclamation efforts will be commenced by removing large ash heaps generated from Kosovo A operations and by reshaping and re-cultivating overburden material from the existing lignite mines. The freed land could then be utilized for productive pqmses, to be agreed. Suitable policies will be developed to ensure transparent and equitable distributionof any reclaimed land, including policies for the resettlement o f affected households and communities.

EnvironmentalAsDects: With regard to environmental safeguards, Kosovo is committed to adopting and implementing EU standards for all new investments in the energy sector. The MESP is currently developing environmental legislation and institutional capabilities in permitting, monitoring and enforcement. The PISG and UNMK, within their respective areas o f responsibility, will adopt a strategic environmental and social assessment (SESA) framework, including a public consultationelement that will help the government to analyze strategic options and inform development plans for future mining and power projects. Finally. legislation and institutional structures for regulatingthe environmental impacts of these projects will be strengthened.

r

-

New Investments und Ttzchnologfes in Lignite Mlning and Power Plants Policies will be adopted that encourage investors to adopt the most eftioient, clean and climate-ftiendly technology for power plants so as to benefit, amongst other matters,

from any potential trade in emissions reduction credits. In this respect institutional arrangements have becn undertaken by establishing The Institute for Research of new Technologies for Lignite Utilization.

Page 5 of 7

30

c

Kosovo -Medium term Energy Sector Oevelopment Policies

Sector Structure: Investors would be allowedto supply both domestic and ~ g i ~ markets idaccordance with the principles enshrined in the ECSEE Treaty, to which Kosomadheres. KEK has already been reorganized cmder a hotding stntctun and the electricity sectOt i s being restructured in gccordance with the ECSEE Treaty provisions, the process for which has already bagun with the separation of the KER transmission and system operation functions.

Transuarent Bidding and SelectionProcess: Kosovo is committed to ensuring a transparent and competitive bidding process for selecting investors into both existing and new lignite mines and power plants.

New Power Plants and Associatad &as; w i f i e dadvisors will IX hired to m i s t with the bidding and negotiation process for the development of the proposed Independent Power Plant and the associated mine. Aa inter-ministtrial steering conimittee was established by Executive Decision No. 2 W 6 ofthe SRSG dated 17 March 2006. wtth appropriate representation to review and approve the process and facilitate key policy decisions and their implementation.

g l -R

Following up on the recommendations of experts hired under previous World Bank Technical Assistance Project ESTAP-2, the legal and regulatory frameworks for the energy and Lignite mining sectors will be strengthened and proper separation o f policy and regulatory functions will be ensured in line with the ECSEE Treaty requirements and applicable EU Directives. By June 2007, with regard to the transparent and competitive selection o f investon in both existing and new lignite mines and power plants, harmonized and coordinated procedures will be put in place, applicable to the Energy Regulatory oftice (ERO) and the Independent Commission for Mines and Minerals (ICIâ&#x20AC;&#x2122;viM), which will be reflected in a memorandum of understanding (or similar document) agreed between these two entities and addressed to the above-noted inter-ministerial steering committee.

Revenue Management: The inhabitants of Kosovo should benefit from the use of natural resources such as lignite. Therefore, approjtriate policies and mechanismswill be adopted during 2007 to ensure that revenues from the use o f lignite resources for export of power will be managed properly and contribute to broader social development issues and to reduce poverty in Kosovo. Steps are currently being undertakento improve efficiency and transparency in budget formulation and execution, internalaudit and proeurement. Development of the sector will be in conformity with Extractive Industry Transparency Initiative (EITI) principles, which will help establish transparency in revenue management, strengthen sector governanee and adopt anti-comption measures.

Energy Eficiency and Rmewwbic Energy Developmenl Policirs

.

.-

The PISG and W IK.within their respective areas of responsibility, will develop and adopt policies that encourage energy efficiency and conservation in tbe entire energy chain. The heat market in Kosovo, which accounts for a large part o f the energy consumption of the population,will be carefully examined, and a strategy for the heat sector will be defined during 2006 and adopted by mid-2007. The potential for rcnewable cncrgy will also be studied and policies and financial instruments that support renewable energy development will be adopted. The hydro potential, amongst other options, will be examined closely in this regard. Across the energy

Page 6 of 7

31

~

l

Kasow -Medium berm Energy Sector Development Palldes

sector, a suitable portfolio standard (compatible with EU standards) will be developed and adapted, to gradually incresse the proportion o f renewable energy sources in

Kosovpâ&#x20AC;&#x2122;s elecmcity generation.

Special Representative of the Secretary-General United Nations Interim Administration Mission inKosovo

C.C.

Prime Minister Provisional Instihltiansof Self-Government

UNMIK, EUPillar

Oflice o f the Prime Minister

LrNMK Oflice o f the Legal Adviser Kosovo Trust Agency

Ministry o f Finance and Economy Ministry o f Energy and Mining M i n i s t r y of Environment and Spatial Planning Ministry o f Labor and Social Welfare Ministry of Intetior Ministry o f Justice Independent Commission for Mines and Minerals Energy Rekqlarory Ofice

.

Page 7 o f 3

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Annex 2: Major Related Projects Financed by the World Bank and/or other Agencies

KOSOVO: Lignite Power Technical Assistance Project

Major related projects financed by the Association within the energy sector include: Energy Sector Technical Assistance I(ESTAP I), April 2001- December 2002, rated Satisfactory at ICR. Energy Sector Technical Assistance I1 (ESTAP 11) M a y 2003-September 2005 (closed), rated Highly Satisfactory by Q A G for quality at entry, and Satisfactory for both IP and D O in the final ISR and ICR. Energy Sector Technical Assistance I11 (ESTAP 111), March 2005 (ongoing), rated Satisfactory for both IP and DO. Donor activity in the sectors has fallen significantly since 2002. The more recent completed donor assistance related to energy sector i s listed below:20 Management development and technical assistance to KEK - March 2002 to August 2004.

KEK skills development - August 2004 to January 2006.

Supply o f electrical equipment - Lot 1 Zabel, September 2004 to December 2004.

Scoping, installation, and supervision o f the computerized maintenance and management system - July 2004 to August 2005.

Kosovo B substation work - July 2004 to November 2004.

Pre-feasibility for new power plant and pollution mitigation at Kosovo B - November 2004 - February 2005.

Institutional support to PMO Energy Office and Regulatory Office - September 2004 to December 2004.

Rehabilitation o f Mitrovica district heating - August 2004 to November 2004.

In the mining sector, donor activities are restricted to corresponding assistance to lignite mining: Repair o f bucket-wheel excavators - KEK mining, December 2002 to July 2004, Mine roads and de-watering channels - KEK mining, July 2004.

Environmental actions in mines - KEK mining September 2004 - ongoing.

In addition to the completed studies, the following consultancies are ongoing or planned: Mining plan for SW Sibovc Lignite M i n e (EAR), May 2006.

SW Mine Development Strategy for Commercial and/or private financing, ongoing and expected to be completed by early-October 2006.

Financial Advisor to the MEM ( U S A I D ) , ongoing.

Legal Advisor to the MEM, under consideration.

Pre-feasibility studies for Kosovo C Power Plant, April 2006.

Technical Analysis o f Kosovo C Power Plant, proposed, expected to start in late 2006.

Task Force for improving billing and collections, ongoing (funded by KCB); additional funding envisaged by USAID. 2o

Projects with a total value in excess o f $0.5 million.

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Assistance for Acquis implementation in environment, renewable energy, energy efficiency, ongoing (funded by EAR).

T A for institution building, secondary legislation drafting, training o f ERO (funded by EAR), ongoing.

Heat Market Study, ongoing, (funded by Italian Trust Fund Grant).

Partnership with NARUC, proposed.

Institutional development o f TSMO, proposed.

T A for operational support o f TSMO, to start soon (EU funded).

T&D interface metering, to start in 2006 (funded by KCB) SW Mine development initial works in 2006-2007, started.

Environmental upgrades at Kosovo A and B power plants, 2006-2007, started.

Peya SS (110 kV), to start in late-2006.

Distribution Operation Twinning, under consideration.

KEK Transition Management assistance, under consideration.

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Annex 3: Results Framework and Monitoring

KOSOVO: Lignite Power Technical Assistance Project Results Framework

PDO (i) Help the PISG strengthen the enabling policy, legal and regulatory frameworks conducive t o n e w investments in the energy sector.

regulatory instruments, consistent with international good practice, at the disposal o f the PISG.

Regulatory instruments have been adopted by the P I S G in accordance with the Project Implementation Timetable (see Annex 4).

Determine if n e w Legal and Regulatory tools are being used by the P I S G in accordance with the Project Implementation Timetable (see Annex 4).

(ii) Assist the PISG t o attract qualified private investors t o develop lignite mines and build new capacity for power generation, guided by high standards o f environmental and social sustainability .

(iiBidding ) and Negotiation leading t o financial close o n n e w sector investment .

Determine if the bidding and negotiation processes necessary for the selection o f a private investor are talung place in accordance with the Project Implementation Timetable (see Annex 4).

es Component One: Subcomponent 1 Sector Policy, Legal and Regulatory Framework

Component One: Subcomponent 1 (i) SESA draft regulation

(ii) Draft Resettlement Policy Framework (iiiDraft ) land acquisition legislation (iv) Other required draft legislation

Component One: Subcomponent 1 Determine if the n e w SESA regulation, Resettlement Policy Framework, land acquisition legislation and other items o f required legislation have been adopted by the P I S G in accordance with the Project Implementation Timetable (see Annex 4)

(v) Draft regulatory instruments

Determine if the required regulatory instruments have been adopted by the regulators

(vi) Draft contractual agreements and

Determine if the required legal inputs for the proposed transactions are in place

legal opinions

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Intermediate Outcomes

IntermediateOutcomes

Use o f Intermediate Outcomes Monitoring

Component One: Subcomponent 2

Component One: Subcomponent 2

Component One: Subcomponent 2

Safeguards Framework:

(i) Development o f the SESA and a Sector Specific E M Handbook; Prepare Terms o f Reference for the Environmental Impact Assessment, the Social Assessment and the Resettlement Action Plan

Determine if the SESA i s prepared in accordance with the SESA regulation, Determine if the Terms o f Reference for the Environmental Impact Assessment, the Social Assessment and the Resettlement Action Plan are prepared in accordance with the relevant legislation

(iiBaseline ) Environmental Monitoring Data Collection and implementation o f an environmental monitoring data registration and reporting system

Determine if baseline data i s being collected as required for the E M

(iii) Training o f M E S P s t a f f in involuntary resettlement and environmental protection

Determine if n e w involuntary resettlement and environmental protection are being used in accordance with relevant legislation

Component Two:

Component Two:

Component Two:

Mine and Power Plant Analyses

(i) Investment Options Review

Determine if the Investment Options Review i s satisfactorily completed

(ii) N e w Power Plant Development and Technical Analysis

Determine if the required analyses are satisfactorily completed.

....

111)

Support for Renewable Energy, Cogeneration and Energy Efficiency

Ensure that documentation i s prepared in accordance with the Project Implementation Timetable

Component Three: Subcomponent 1

Component Three: Subcomponent 1

Component Three: Subcomponent 1

Capacity Building

(i) Establishment o f the L P T A P Project Office and inter-ministerial Project Steering Committee

Ensure that the L P T A P Project Office and Project Steering Committee i s functioning effectively, o n a n ongoing basis

(ii) Training o f MEM, MESP, ERO and ICMM staff in major project development procedures

Ensure that MEM, MESP, ERO and ICMM staff are familiar with, and applying, the n e w legal and regulatory instruments and policies

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Component Three: Subcomponent 2

Component Three: Subcomponent 2

Component Three: Subcomponent 2

Communications Advice

Development o f a communications and outreach strategy for MEM to facilitate consultations

Ensure that effective public consultations are taking place

Intermediate Outcomes

Intermediate Outcomes

Use o f Intermediate Outcomes Monitoring

Component Four:

Component Four:

Transaction Advisor

Ensure that the transaction process Assistance to the Project Office in preparing for a biddingprocess and in i s proceeding in accordance with the Project Implementation negotiations with strategic investor(s) Timetable

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Annex 4: Detailed Project Description

KOSOVO: Lignite Power Technical Assistance Project Project Component 1: Sector Policy, Legal, Regulatory and Safeguards Advice Subcomponent 1 - Sector Policy, Legal and Regulatory Advice

The overall objective o f the assignment i s to provide the Kosovo authorities with the policy, legal and regulatory advisory services necessary to complete the proposed transaction and similar infrastructure transactions.

The assignment i s divided into two tracks: framework and transaction.

Framework: The objective is to build upon previous work undertaken so as to strengthen the policy, legal and institutional framework in Kosovo for the purpose o f increasing private investment and to assist Kosovo to manage the social, economic and environmental impacts o f such transactions.

The key tasks during the Diagnostic Phase are as follows: (a) Providing a diagnostic survey (building upon work previously undertaken) o f the legal issues likely to be raised by potential private investors in the proposed P P transaction and similar infrastructure transactions, including, amongst other matters: 0 constitutional or other general legal restrictions o n this type o f private investment; foreign investment regulation; 0 financial sector regulation; 0 anti-trust regulation; 0 general taxation, accounting and valuation issues; 0 labor regulation and related issues; 0 land law and environmental law; 0 dispute resolution arrangements; and (b) Providing a diagnostic survey o f the policy and legal issues associated with the management o f the social, economic and environmental impacts o f such transactions in a manner consistent with international best practices, including amongst other matters: 0 issues associated with adherence to the guiding principles provided in the W o r l d Bank Group's Management Response to the Extractive Industries Review and increased transparency through conformity with the proposed Extractive Industries Transparency Initiative.

0 issues in regard to the resettlement o f persons whose residences or sources o f livelihood, are directly affected by such transactions, including legal issues associated with expropriations and the compensation for expropriations; issues in regard to the management and disposition o f the revenues obtained by the PISG, or i t s successor, arising from such transactions; and 0 issues in regard to the environmental consequences o f such transactions.

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Transaction: The objective i s to achieve a successful N e w Mineplant transaction by: (a) Providing through the Project Office, UNMIK and the PISG, or their successors, complete drafts o f any new primary or secondary policy, legislation, or legislative amendments, necessary to facilitate the proposed transaction and similar infrastructure transactions, and manage the social economic and environmental impacts o f such transactions, including the draft o f a Resettlement Policy Framework consistent with World Bank O P B P 4.12 o n Involuntary Resettlement; (b) Providing though the LPTAP Project Office, the Energy Regulatory Office and the Independent Commission for Mines and Minerals or their successors, complete drafts o f any regulatory instruments, such as mining and power plant generation licenses, necessary to facilitate the proposed transaction and manage the social, economic and environmental impacts o f that transaction; (c) Providing the LPTAP Project Office with complete drafts o f all contractual agreements to be entered into by the PISG and/or KEK, with private investors, lenders or other parties, necessary to facilitate the proposed IPP transaction and manage the social, economic and environmental impacts o f that transaction; (d) Providing the LPTAP Project Office, and the transaction advisors to the LPTAP Project Office, all required legal assistance prior to and during negotiations with private investors.

Subcomponent 2 - Safeguards Framework

The LPTAP will assist the PISG o f Kosovo to strengthen i t s regulatory (or Safeguards) capabilities to deal with environmental and resettlement issues related to lignite mining and power generation. This technical assistance will be complementary to development efforts currently undertaken by the Kosovar authorities and support programs from other donors in this field. The following Safeguards components are identified: Environmental Baseline Data Monitoring Program and Environmental Data Register. A field sampling and testing program will be launched to collect environmental baseline data in the Obiliq - Sibovc area. The program will monitor environmental emissions and pollution levels in air, surface waters and groundwater over a period o f six months which will be used in simple models to create insight into the distribution o f pollutants caused by lignite mining and power generation and other activities in the area and their migration in time. The collected data will be used to set up an environmental data registration system in MESP to be used for monitoring, reporting and statistical purposes.

Strategic Environmental and Social Assessment. Through a consultant assignment the LPTAP will assist MEM and MESP in the preparation o f a Strategic Environmental and Social Assessment (SESA) for the Sibovc Development Plan. This SESA will consider social and environmental impacts from the implementation o f the plan and will help to design the plan with the inclusion o f feasible measures to minimize these impacts. The SESA includes public consultation rounds and will set procedures for the environmental assessment, social assessment, resettlement action plan and consultations for follow-up investments.

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Environmental Assessment Procedures and Training. The LPTAP will support MESP through a consultant assignment in the development o f environmental assessment procedures in general and in more detail for the lignite mining and power generation sector. This component includes a review o f the EIA by-law and drafting o f a revised by-law, training and the preparation o f a dedicated environmental assessment handbook for the lignite mining and power sector.

The execution o f the EnvironmentalBaseline Data Monitoring Program and preparation o f the EnvironmentalData Register will include the following tasks:

1- Review existing sources o f environmental monitoring data and other (such as meteorological) relevant background data collected in dedicated studies and existing monitoring data and monitoring capabilities within KEK-INKOS and the Institute o f Hydrometeorology to assess the extent and quality o f existing monitoring data and environmental monitoring capabilities. The program covers both emission data and ambient concentrations; 2- Based on the present literature, a field visit and consultations with relevant parties in Kosovo, prepare an assessment o f polluting sources in the lignite mining and power generation area o f Obiliq and areas likely to be affected by pollution originating from the sources in the Obiliq area; 3- Design an environmental sampling program for groundwater, surface water and air pollution to verify existing data and fill in data gaps. The sampling program must consider irregularities in emission levels and seasonal influences, and hence should cover at least a six month sampling period. The sampling program includes both point source emissions and ambient concentrations;

4- Sampling must take place according to I S 0 standards and testing i s executed in an ISOcertified laboratory; 5- The testing results combined with verified monitoring data from existing references will be used as input to basic dispersion models. The consultant will present both the testing results and the interpreted results from the modeling to relate emissions and concentrations and to create insight into the distribution and migration o f pollutants in the Obiliq area and other areas affected by the polluting sources.

6- The testing results will be fed into an environmental register. The register i s a dedicated tool for MESP for environmental monitoring. The software basis o f the register will be a database application extended with statistical and reporting hnctionalities. Monitoring data can be entered by indexed source (emission), location (concentration) and time.

The Strategic Environmental and Social Assessment consultancy services include the following tasks:

1- Review legislation, regulations and administrative procedures in the domain o f environmental regulation, expropriation and resettlement issues and spatial planning.

45

2- Review sector development strategies, policies, related studies and liaise with the team in M E W E S P working on the Sibovc Development Plan.

3- Perform a scoping study for the SESA and present the draft report in a public hearing in the Obiliq area to be organized by the consultant and hosted by MEM. In the public hearing, the proposed preparation procedure for the Sibovc Development Plan and the SESA scoping report will be presented, and the public and other stakeholders will be given the opportunity to make comments, ask questions and raise concerns. The scoping report for the SESA will be finalized, taking into account the issues raised in the public hearing.

4- With input from the drafting o f the Sibovc Development Plan (SDP) and related (feasibility) studies, review development scenarios and options. Select, together with the SDP team, two or three main development scenarios. The SDP team will liaise with MESP and the Institute o f Spatial Planning to incorporate spatial planning issues and streamline the SDP development with national spatial planning procedures. The SESA consultant will contribute to this work.

5- For the development scenarios, perform a regional social assessment. The regional social assessment will review existing social data on the settlements in the Sibovc field, update and expand as necessary so as to assess and outline the expected resettlement and socioeconomic impacts for both displaced communities and those which will be socially impacted by the proposed developments. The regional social assessment will also serve as a form o f preliminary social screening to identify issues to be addressed in the Terms o f Reference for the follow-on SA and RAP. 6- For the development scenarios perform a regional environmental impact assessment according to the SESA regulation adopted by the government o f Kosovo and the scoping report.

7- From the environmental and social assessment, make recommendations for mitigating options to the development scenarios and the most preferred development scenario to be adopted by the SDP. Additionally, the SESA will make recommendations for SA, EA and RAP procedures for the development o f investments in mining and power generation activities in the area.

8- The results o f the assessments, the draft recommendations on development scenarios and safeguard procedures and the draft SDP will be subject o f a second round o f public hearings. The comments received will be assessed and incorporated in the final SPD and SESA report.

9- The SESA consultant will prepare TORSfor investment SA, EA and RAP. 10-The SESA consultant will closely liaise with the consultant working on the Environmental Assessment Procedures & Training, consultant working on the Environmental Baseline Monitoring and the consultant working on the Resettlement Framework component.

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EnvironmentalAssessment Procedures and Training will include the following tasks:

1- The consultant for this assignment will work closely together with the consultants working on EARâ&#x20AC;&#x2122;SInstitutional Support technical assistance project to MESP. 2- Review o f the EIA by-law and drafting o f a revised by-law in line with EU Directives.

3- Review and development o f environmental assessment procedures in general and, in more detail, for the lignite mining and power generation sector. The procedures should clearly distinguish actors and roles in the procedure, linkage to permitting procedures, scoping and reporting requirements, timing and maximum duration and validity o f approval, consultation requirements and appeal procedures.

4- The assignment includes a training component with case studies, field trips in the region and local and international tutors.

5- The work will be completed with the preparation o f a dedicated environmental assessment handbook for the lignite mining and power sector. The handbook will give guidance to all actors in the assessment process and will explain on a step-by-step basis required actions. The handbook will discuss typical environmental issues and mitigation measures in the lignite mining and power sector, environmental standards and a detailed table o f contents for an EL4 report o f a typical power project and a typical mining project.

Component 2: Mine and Power Plant Analyses Subcomponent 1 - Investment Options Review Cfunded by EAR; already contracted) (extract from terms o f reference)

The purpose o f this component is to inform the decision makers in Kosovo on the possible options, including public and private partnership, for the investment required for opening the SW Sibovc mine and rehabilitation o f existing generation units, for private participation for the N e w Mineplant and the market reaction to these options.

These Terms o f Reference relate to tasks to be undertaken to assist in examining options for attracting private sector into the Sibovc Mine development, rehabilitation o f Kosovo A units and new generation units. As time i s o f the essence, KEK, the Kosovo Consolidated Budget (KCB), and the international donor community have taken steps to pre-finance certain immediate mine development actions until such time as private investors can enter. Thus, two parallel strategies are being undertaken: 0

Commencement o f Immediate Development Activities (2006 - 2007): mobilization o f finds through KEK, the KCB, and donor community to undertake initial mine development actions including land acquisition, engineering analysis and equipment rehabilitation.

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Mine Completion and rehabilitation o f existing generation units (beyond 2007, by private sector): actions to create investment alternatives for publidprivate partnerships with KEKâ&#x20AC;&#x2122;s Coal Production Division, market testing o f investment alternatives, and transaction advisory services to conclude the integration o f private sector participation in the Sibovc SW Mine and the rehabilitation o f the units o f the Kosovo A power plant.

The lignite fields near Kosovo A and B

The services to be provided in this Project include: Task 1 Review o f existing documentation relevant to this Project

The consultant has to be aware o f the following studiedreports:

Mid term plan for existing coal mines, EC funded project, 2005 Main mining plan for Sibovc mine, EC funded project, 2005 Preparation o f the complementary mining plan for SW Sibovc lignite mine, EC funded project 2006 KEK Incorporation Report, EC funded project, 2005 Economic and Technical feasibility o f the rehabilitation o f the units o f Kosovo A power plant, EC funded project, 2005 Pre-feasibility study for the lignite fired power plant, EC funded project, 2006 Energy Strategy o f Kosovo 2005-201 5, Ministry o f Energy and Mining, 2005 Strategy Implementation Programme 2006-2008, Ministry o f Energy and Mining, 2006 Financial Recovery Plan o f KEK, KEK 2005 48

9 L a w on Energy, Law on Electricity and L a w o n Energy Regulator, UNMIK Regulation 2005/2 and 2005/3 9 Kosovoâ&#x20AC;&#x2122;s Letter o f Energy Sector Development Policy, dated June 19,2006, signed by the SRSG, UNMIK, and the Prime Minister, PISG O f the above reports, the complementary mining plan for Sibovc SW mine (2006) i s the most important and relevant, and should be carefully read by the consultant.

Task 2 Develop alternative asset packages and investment structures for the New Mine/Plant

Task 2.1 Develop alternative asset packages The consultant should develop alternative asset packages that include the Sibovc S W Mine and may include, in various combinations, existing and proposed new investments in the Sibovc Lignite Field and generation stations; development o f the final alternative packages will be based upon the ability to finance these alternatives (as described in Task 2.2 below). The output o f this sub-task provides input to task 2.2 below.

Task 2.2 Analyze alternative investment structures The consultant should analyze different alternative structures for investment in developing the Sibovc lignite field such as e.g. management contract, lease, privatization, etc.

In developing these alternative investment structure options the consultant will need to examine, amongst others, the following issues:

9 What would be the likely contractual structure for lignite sales? H o w does this allocate risks among the parties? What are the tax and accounting implications?

9 What undertakings by the Client would be necessary, both ongoing and in the event o f an 9 9 P 9

extended force majeure and/or early termination?

What contingent liabilities might the Client have to assume?

What credit enhancements need to be offered by the Client to the potential investors?

What would be the term o f the contract?

Who will be responsible for safety and environmental compliance? A r e investors likely to need indemnification on legacy social and environmental matters?

P What are the key milestones and how long would they take to be achieved?

9 What would be the role o f KEK and the investorâ&#x20AC;&#x2122;s relationship to KEK?In relation to this

question the consultants should review the corporate restructuring work already done and examine whether further work (e.g. further legal unbundling) needs to be done prior to any transaction relating to Sibovc SW. 9 What mechanism might b e included to redirect donor grants already disbursed for the Sibovc SW M i n e to other productive purposes (e.g., payment by the successful bidder to the K C B in the aggregate amount o f donor grants for the new mine)?

9 Would the structure be likely to attract financing?

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Task 3: Develop a financial analysis model The consultant should develop a financial analysis model with capabilities to perform sensitivity analysis for the purpose o f quantifying the financial and economic impacts o f different possible structuring options. This model will be used for analysis o f the options based on the results o f the market test (market reaction to the proposed options).

Task 4 Market test

The consultant should conduct a market test and assess the market for interested prospective investors to ascertain their level o f interest in investing in the Sibovc field (andor existing or new generation capacity).

As part o f the market test o f potential investors the consultant should identify areas o f concern to potential private sector investors and financiers; Using the financial analysis model (developed under Task 3) and the results o f the market test, the consultant should perform analysis o f the options.

When the options report i s finalized, the consultant should organize a workshop with key stakeholders in Pristina.

Required outputs

1) Report setting out the proposed options/altematives for investment structures. Options to be considered (which will be the subject o f the market test in the following task) could include the various combinations o f the existing KEK power generation units, new generation capacity, and related new mining capacity.

2) The options report will be considered by the Steering Committee and based o n acceptance by the European Agency for Reconstruction o f this report, the consultant should proceed to the market test below.

3) Financial analysis model 4) A draft and final Options Report; the Options Report should be in a form suitable for public dissemination. This report should be reviewed by the Steering Committee, and revised based on comments received from the Steering Committee and the European Agency for Reconstruction.

5) Workshops for the key stakeholders Subcomponent 2 - New Power Plant Technical Analyses Cfunded by EAR) (extract from terms o f reference)

The specific objectives o f this Project are as follows: 0

0

0

T o develop a knowledge base for decision-makers in Kosovo to economically and efficiently solicit, evaluate, and negotiate proposals for private development o f the Sibovc lignite field; To enable a Transaction Advisor (engaged under separate terms o f reference) to carry out preparatory work and to prepare necessary documents for bidding; To assess market opportunities for the development o f new thermal power plants in 50

0

0

Kosovo; To evaluate potential off-take opportunities that may be available for the new power plant and the adequacy o f the transmission system to transport the power generated by the plant to the identified potential local and regional demand centers; and To determine the technically, environmentally and economically preferred solution for the development o f a new lignite-fired Thermal Power Plant (TPP) by utilizing the high quality lignite reserves in Kosovo thereby contributing to the overall security o f power supply in the South Eastern Europe (SEE) region;.

The results that should be achieved by the consultant in the course o f the execution o f the studies (three tasks) are the following:

Result 1: Power market analysis based on regional and domestic demand and supply forecasts and assessment o f the potential off-take opportunities o f the power generated by the new plant and to review the structure o f the evolving regional electricity markets; Result 2: Transmission System Impact Assessment including regional transmission system assessment and its development plans up to 2020, and analysis o f the impact o f the new power plant on the local and regional transmission networks Result 3:

N e w Power Plant Siting, Technical Analysis, Economic and Financial Analysis, and Work Plan, including technology and unit size assessment, site selection, environmental and social impact, economic and financial analysis and Project development work plan.

SCOPE OF THE WORK

The new TPP is anticipated to be commercially operational by 2012 or 2013 coincident with the development and opening o f the Sibovc lignite mine. This new TPP i s the top priority o f KOSOVO~S energy policy as specified in the Energy Strategy (see Section 4.2, b). The commissioning o f the new TPP will bring about lasting improvement and stabilization to the power supply o f Kosovo and opportunity for exporting o f power. The new TPP will need to provide reliable power for local consumption and allow for bulk electricity exports to the regional market.

The new TPP shall

9 B e operated with more than 7,500 full load hours per year(to be confirmed by market and transmission study);

9 Be controlled in the load range between 50 % to 100 % (minimum load i s also to be confirmed in consideration o f grid services); 9 Have a high availability by using proven equipment for all major components; > Have a high degree o f automation; 9 Have a high operative efficiency according to the state o f the art; 9 Have a l o w environmental impact (particularly COz) and fulfill all requirements o f relevant EU directives; and 9 B e designed for 40 operational years.

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The new plant will be supplied with lignite from the Sibovc M i n e and should incorporate proven commercial clean coal technologies (CCT) applicable to the specified lignite meeting all EU environmental standards.

The direct beneficiary i s the Ministry o f Energy and Mining. Other target groups are the Ministry o f Environment and Spatial Planning, Energy Regulatory Office, I C M M , KTA and TSMO. SPECIFIC ACTIVITIES

The consultant should undertake the following tasks in preparing the studies to support the development o f new generation capacities and related transmission: Task 1: Power market review

Sub-task 1.1 Market analysis:

A. Consider the existing reports on domestic (ESTAP I)and regional (GIS) demand and supply to determine the expected growth o f the Kosovo power demand and availability o f the power supply resources; B. Review and update ESTAP Iforecasts for demand and supply for Kosovo (domestic market) and analyse it in context o f the SEE regional market based on the forecasts contained in the GIS study (including any update o f the GIS study that may be prepared during the period o f implementation o f this Project);

C. Pricing o f electricity (actual level in SEE countries and long-term forecast level). Based on the consultantâ&#x20AC;&#x2122;s market intelligence, published reports, assumptions and calculations, the consultant should develop an indicative forecast for the electricity prices in Kosovo and South East Europe region for the information o f decision-makers in Kosovo.

Sub-task 1.2 Potential off-take opportunities:

A. Assess market expansion opportunities o f existing and new industrial plants eligible to participate in the domestic and regional markets; B. Develop a l i s t o f potential off-takers o f regional utilities and industries who may be interested in the power generated by the new plant and judge whether long-term contracts with them will be credible; examine the prospective price that the potential off-takers may be willing to pay given their alternative sources o f supply that may be available to them Sub-task 1.3 Workshops:

The consultant shall organize a workshop and presentation o f the results o f the Task 1 for the stakeholders in Pristina.

Task 2: Transmission System Impact Assessment In this task the consultant should verify the feasibility o f transmission system evacuating (interconnection) the maximum power plant capacity, and identify potential constraints o f large unit size from the grid operational stability.

Sub-task 2.1 Transmission system assessment:

A. Assess transmission expansion plans and new interconnection projects in the region and determine their impact o n the market accessibility o f the new power plant; 52

B. Review the transmission capacity and stability constraints in both the local and regional transmission networks and the procedures o f transmission reservation and scheduling and assess their impacts on the new power plant size; C. Assess the availability o f transmission capacity and associated cost necessary to transport power from the new power plant to the potential off-takers;

D. Perform all necessary transmission calculations and review existing transmission planning criteria and historical performance reports to evaluate the adequacy o f the local and regional transmission systems and their ability to transport the power o f the proposed power plant to potential load centers and off-takers identified in sub-task 1.2.

The outputs o f this sub-task will be a sub-task report setting out the findings o f the above assessments, review, and calculations.

Sub-task 2.2 Power Plant and Unit Maximum Size Assessment

A. Based on the findings o f Task 1, and the work already undertaken as part o f the PreFeasibility study, assess the maximum size o f a new lignite-fired power plant developed in Kosovo expected to be in operation at the beginning o f next decade; B. Based on the results o f the transmission assessment study outlined in Subtask 2.1 assess any limitations the transmission system constraints, including system stability requirements, will have on the plant size and unit size and determine the maximum size o f the power plant that can be connected to the Kosovo 400 kV system at potential considered sites without requiring any upgrades to the transmission system; and

C. Perform transmission system analysis and recommend transmission system upgrades and their associated cost estimate to connect to the Kosovo transmission system a new power plant o f the size determined under point A, above.

The outputs o f this sub-task will be a sub-task report setting out the consultantâ&#x20AC;&#x2122;s findings, with the recommendations for the maximum size o f power plant, identified transmission constraints, and transmission system upgrades required.

Sub-task 2.3 Transmission connection analysis:

A. Transmission calculations to evaluate the impact o f the interconnection o f the power plant on the transmission system. Recommend upgrades, and their associated costs, to the local transmission system and i t s interconnections with the regional grid necessary for the interconnecting o f the new power plant and for effective transmission o f the power to identified load centers; B. Develop conceptual design including one-line diagrams and cost estimates for the new plantâ&#x20AC;&#x2122;s interconnection;

C. Consider the interconnection procedures and agreements developed by T S M O and identify any issue related to the interconnection process that may impact or delay the development o f the new power plant. Recommend mitigation measures for such identified issues.

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Sub-task 2.4 Workshop The consultant shall organise a workshop and presentation o f the results o f the Task 2 for the stakeholders in Pristina.

Task 3: New Power Plant Siting and Technical Analysis

The consultant should perform the following subtasks: Sub-task 3.1 Power plant technology and desim assessment:

A. Lignite quality data collection: The consultant shall collect chemical composition o f the lignite to be fired. The lignite quality from different seams o f mines should be analyzed and the design coal and range o f chemical composition variations should be defined including h a r m h l elements in lignite such as C1, F, Nay K, Hg, V, Pb, Zn, C d (hot corrosion risk, etc.) and other analyses needed for design requirements o f the new power plant. The equipment required for such analysis should be provided by the consultant.

B. Characterisation o f the ash composition, possibilities for industrial utilization, development o f strategy for ash utilization, concept and cost estimate for ash utilisation;

C. Review the maintenance requirements, inspection intervals, and spare parts stocks required for the power plant technologies considered in the pre-feasibility study.

D. Based o n the findings o f A) B), and C) above the consultant should revisit the prefeasibility study on the new power plant and update the technology assessment report o f lignite-fired power plant considering the world wide power plant fleet experiences.

The outputs o f this task should be presented in a sub-task report Sub-task 3.2.Plant and Unit Size Configuration Options:

A. Review the carbon market and examine the potential o f creating and trading carbon emission credits by applying supercritical technology. Develop alternative case when the revenue o f selling carbon credit will affect the power plant economic feasibility.

B. Develop GHG base line methodology (under consideration o f the new TPP replacing the existing Kosovo A TPP) including calculation o f the reduction o f GHG emission, propose monitoring and verification o f GHG emission, estimate GHG credits and resultingbenefits and costs to be considered in the economic and financial analysis C. Based on the findings o f the subtasks above, and power market review (task 1) and transmission system assessment (sub-task 2.1) and power plant and unit maximum size assessment (subtask 2.2), the consultant should revisit the options assessed in the prefeasibility study for the new power plant, should identify and rank the three preferred options for plant size and unit size configurations and the technologies at the selected sites to be evaluated further as described in the economic and financial analysis subtask 3.5.

The outputs o f this task should be presented in a sub-task report. The consultant should be prepared to present and discuss the results o f this sub-task to stakeholders at a workshop (which the consultant should organise) if required.

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Task 4: Site selection

Sub-task 4.1 Environmental/ social impact assessment The Pre-Feasibility Study identified and made a preliminary analysis o f four potential sites, Bivolak (site 2), Grabovc (site 3), and Palaj (site 4). The Palaj site was Kosovo B (site l), rejected on the grounds o f serious toxic contamination. For the other three sites examined the pre-feasibility study concluded that the most favorable site was Kosovo Bywith one important proviso, relating to the fly ash dump. The ash dump at Kosovo B contains around 15 million tons o f ash, o f which at least half would have to be removed to accommodate the lignite yard with sufficient stocks for 15 days o f operation.

The viability o f this site i s dependent on the assumption by the government o f the liability for potential environmental pollution caused by the existing operations. The consultant should base the site review on these three sites, but initial discussions should be held with the authorities and key decision makers concerning the assumption o f liability for the Kosovo B site, since if no such liability can or will be assumed by the government for this site, then the site can be eliminated from further consideration.

O n this basis, and based upon the mine site assessment already undertaken (Sibovc mining development plan) and the potential power plant sites referred to above from the pre-feasibility study, the consultant should undertake the following: a) Conduct a preliminary analysis o f the environmental and social impact for each o f the three sites considered in the pre-feasibility study for the new power plant (Kosovo By Bivolak, and Grabovc). Such a preliminary analysis will provide input to the Project design in terms o f acceptable emission levels in accordance with EU Directives (as required in the Energy Community Treaty) and shall include as minimum the following: 1. survey o f applicable law, guidelines and requirements (both Kosovo and EU); 2. the implications o f the plant o n air, noise, water, land as well as biological environment and habitat; 3. all relevant emissions o f the plant (stack emission, vibration, noise, effluent, solid residues) and a comparison with KOSOVO, EU and World Bank standards; 4. the annual COz emissions released by the plant; 5. adequate space to install suitable carbon capture facility in future when such technology i s proven to be technically and economically feasible 6. required stack (or cooling tower) height.

b) The preliminary social impact assessment analysis shall include: 1. assessment o f resettlement; 2. projection o f anticipated socio-economic and health impacts due to the Project and related activities including traffic congestion and delineation o f measures to minimise adverse impacts; and 3. assessment o f impact on historical, cultural and archaeological sites/places in the area. c) Analyze soil and geological conditions, site reconnaissance (check for hazardous substanceddumps) .

55

Analyze fuel supply quality, quantity and supply risks from existing lignite mines and from the Sibovc Lignite Field and existing fuel storage facilities (including lignite yard, fuel o i l and fuel handling facilities), and compare these with the fuel and fuel storage requirements o f the new power plant.

Assess water supply for the new power plant (quantity and quality); ash utilization possibilities/disposal area, flue gas desulphurization (FGD) residues, utilization possibilities/disposal area, access to the 400 kV transmission system; traffic conditions including transport o f large plant and equipment, and climatic conditions.

Based on the findings above, update information o n the sites identified in the prefeasibility study for the power plant and complete the information needed for the Kosovo institutions to make a decision on the site selection for developing the new power plant and i t s interconnection point to the transmission grid.

The outputs o f this sub-task should be a sub-task report setting out the findings o f the sub-task relating to site selection and the environmental assessment. The consultant should be prepared to present and discuss the results o f the sub-task to stakeholders at a workshop (which the consultant should organize) if required.

Sub-task 4.2 Preparation o f drawinns/dianrams: The consultant should prepare the following drawings/ diagrams:

A. a topographical overview o f the region around the site with infrastructure, including (a) the site itself, showing the overall layout with emphasis on all common systems and interconnections; (b) a plot plan o f the development stages; and (c) the layout o f the new buildings, structures, facilities, buried pipes and cable ducts, channels, roads, rail tracks and high voltage lines; B. a diagram illustrating the site geology; C. a diagram showing the general layout o f the units (two unit sizes) with 2 longitudinal and 2 sectional drawings; D. a diagram showing the general arrangement o f the coal storage yard and the ash handling system; and E. a map showing the site and the closest 400 kV transmission line/substation; Task 5: Economic and FinancialAnalysis

A. The consultant should estimate itemised investment cost including process and project contingencies for the entire Project implementation, including, design, engineering, project management, plant and equipment cost, transportation and installation cost, supporting infrastructure cost, preparation o f site, access to the site, power evacuation, spare parts, start-up fuel and required tools, commissioning and acceptance test, training o f staff, insurance, etc.

The investment cost estimate will be divided into local and foreign supplies, including project implementation costs, land acquisition costs, resettlement costs, local taxes and import duties, project development costs, engineering fees, fees for legal and financial advisors, fees for approvals, and interest during construction. A detailed sources and uses o f funds during the construction period should be developed at least on a quarterly basis.

The analysis will calculate net present value (NPV), internal rate o f return (IRR), and other measures useful to decision-makers in Kosovo.

56

B. Operating cost will include lignite and fuel o i l cost, other operating and maintenance cost, insurance premiums; and major overhauls cost. The frequency o f rehabilitation over the plant l i f e should be forecast and the NPV o f the operating cost and o f the generated electricity should be derived for the recommended three options which might take place in the future in a changing market environment for electricity in South Eastern Europe.

C. The economic analysis should integrate the forgoing and show the range o f results for the recommended three options and assumptions (sensitivity analysis) compared to the alternatives including gas and renewable sources and electricity import.

D. Long-term Green House Gas (GHG) reduction, description o f Clean Development Mechanism (CDM) mechanism and benefit o f C D M projects, cost o f validation, monitoring, verification & reporting especially for the application o f supercritical and ultra-supercritical technology.

E. A comprehensive financial model has to be developed, which will answer all relevant questions concerning the financial viability o f the Project, the revenues, operating cost, cash flows, disbursement schedule o f possible loan(s), the band width o f local and foreign currency requirements and liquidity. I t will provide typical financing plan. The model will be flexible enough for decision-makers in Kosovo to understand the sensitivities to variables. At the end o f this assignment, the model will be delivered to the Contracting Authority.

The output o f this Task should be the Economic and Financial Analysis. The financial analysis should show the levelized cost in EurocentsMWh for each o f the recommended three options and the assumptions used to develop the levelized cost, and the outputs o f the Financial Model as set out above.

Task 6: Work Plan for development o f the new power plant

Sub-task 6.1 Work Plan The consultant should draft a work plan for the development o f a new lignite-fired TPP for Kosovo setting out all tasks to be undertaken for the development, including: 0 0

0

0 0

procurement and evaluation, preparation activities and construction schedule (basic and detailed engineering, fabrication, transportation and import clearances, the civil construction, the assembly o f the equipment and systems, the commissioning and testing, the trial run, performance tests, preliminary take over and the final take over, the licensing and permitting procedures), commercial operation date until development o f full capacity o f the plant and operational l i f e time, organization chart and identification o f the risks associated to its development, and recommend measures to mitigate the identified risks.

The output o f this sub-task will be a Work Plan which should provide a clear route map for the further development o f the lignite fired TPP which clearly indicates responsibilities and timings.

57

Sub-task 6.2 Workshops The consultant shall organize a workshop and presentation o f the results o f the Tasks 3-6 for the stakeholders in Pristina.

Subcomponent 3 - Renewable Energy, cogeneration and energy efficiency

The objective o f this subcomponent i s to help MEM develop policies and strategies to promote renewable energy, cogeneration and energy efficiency in Kosovo. The task will also examine development options for the two candidate hydropower plants, namely, the Zhur and Ujeman hydropower plants. These hydropower plants offer potential for meeting peak load for Kosovo and the original design considerations may need to be reviewed to make them economically and financially viable. The use o f carbon credits and similar instruments would also be explored in exploring development options.

Component 3: Capacity Building

This T A Component would support capacity building for the k e y ministries and agencies (including MEM and MESP), for inter-ministerial coordination and for the Project Office - the implementing agency for the Project. The TA would also assist MEM, MESP and PISG to develop a communications and outreach strategy and to improve public consultations.

Subcomponent 1 -Project Office

This subcomponent would finance the salaries o f the full time staff o f the Project Office (Project Manager, Mining Specialist, Power Specialist, Environment and Social Specialist, Financial Specialist and Assistant, plus assistance fi-om the accountant and the procurement specialist o f the ESTAP I11Project. The grant would also finance vehicles, office equipment and incremental operating costs (consultant fees not financed under consultantsâ&#x20AC;&#x2122; services, consumable office supplies, office equipment maintenance and repair, vehicle operation (including fuel) and repair, communication, translation and interpretation, production o f documents, publication o f advertisements and procurement notices, travel costs, including air fare, local transport, study tours, workshops, conferences, hotel and per diem charges, and other miscellaneous costs as m a y be agreed with IDA, but excluding salaries or honoraria o f officials and employees o f UNMIK and PISG). The cost o f annual audits o f the grant would also be financed. More details are included in Annex 6.

Subcomponent 2 - Communications and Outreach

This component would assist MEM, MESP and PISG to develop a communications and outreach strategy and to improve public consultations.

Communications Strategy for LPTAP

The LPTAP includes a small communications team that has developed a communications strategy that i s four-pronged: 1) consult with local stakeholders on their perspectives and views energy sector and gauge public opinion, 2) enable the PISG to communicate the on KOSOVOâ&#x20AC;&#x2122;S initiative at home and abroad in an open and transparent way through capacity building, 3) 58

educate and inform key audiences about energy issues and the lignite initiative, 4) identify k e y actions and signals that underpin good communications about the initiative.

Consultations. The first communications mission in the summer o f 2005 was undertaken at the request o f MEM, which asked for the World Bankâ&#x20AC;&#x2122;s assistance in developing a communication program around the lignite initiative. By meeting with a broad range o f stakeholders, the team carried out a brief diagnostic on the communication needs. The team built on these recommendations with further missions that analyzed experience in public information campaigns in KOSOVO, and deeper consultations with a set o f stakeholders, including local NGOs and think-tanks. Lastly, the strategy has included a public opinion survey and focus group research that will gauge local attitudes about the lignite initiative.

Building Communications Capacity in the PISG. One o f the main goals o f the communications team i s to enable the PISG to develop the capacity to communicate the initiative in an open and transparent manner. The long-term aim i s to help the government develop a detailed communications strategy for the lignite initiative. But in the short term, the work i s focused on immediate needs o f capacity building. One consultant i s working directly with MEM to organize a focal point for communications on the initiative, advise staff on media training, messaging, website development, and outreach efforts. The consultant has also developed plans to boost intra-ministry cooperation by training public information officers in other PISG ministries on the initiative.

Informing Key Audiences. W h i l e building the PISGâ&#x20AC;&#x2122;s capacity to communicate the initiative, the communications strategy i s focusing o n educating the Kosovo media on energy issues and the lignite initiative in particular so that the media coverage can be more informative and substantive. The communications team i s also organizing outreach outside o f Kosovo to NGOs, international media, and interested think-tanks so the PISG can explain i t s aspirations for the energy sector and i t s rationale for the initiative and seek feedback.

Identifying Key Actions, Signals. Through i t s support and interaction with the TTL and team, the communications team advises on public perceptions and how critical actions and signals can contribute to successhl communications o f the initiative.

Component 4: Transaction Advisor

The objective o f the assignment i s for a Transaction Advisor (including f i r m s in consortium) to attract and conclude negotiations for private sector investment in the proposed N e w Mineplant.

The work program i s in three phases, as summarized below: Phase 1 - Preparatory Work and Market Testing This phase consists o f background preparatory work leading up to a market test o f alternative investment structures. Taking onboard the work products o f the other components, and the Investment Options Review funded by the EAR, the Transaction Advisor will define a transaction strategy for the agreed investment package. Phase Iwill include prequalification o f potential bidders and recommendation o f a short l i s t to the PSC. Phase Ialso includes a market test in which the Transaction Advisor presents alternative investment structures to potential

59

investors for comment. The Transaction Advisor will take on-board feedback from the market test and prepare a final investment package for consideration by the PSC. Phase 2 - Prepare RFP and Bidding Subject to a determination by the PSC to continue and a decision by the PSC on the investment package, using forms o f contract developed by the PSCâ&#x20AC;&#x2122;s legal advisers, the consultant shall prepare all the necessary documents to undertake a competitive, transparent process to determine a successful bidder for the development o f the proposed Transaction. This will include the issuance o f a Request for Proposals (FWP) to be issued to the approved short l i s t o f qualified bidders. The investment package may be phased.

Phase 3 - Negotiations and Closing Subject to a determination by the PSC to continue, the Transaction Advisor, working with the legal advisers engaged under Component 1, shall assist the PSC to conduct negotiations with a successful bidder on terms and conditions appropriate for a private investor to develop the New Mineplant.

60

-r -r

Y

V

0)

E

e4

T-

l-r

1

Annex 5: Project Costs

KOSOVO: Lignite Power Technical Assistance Project

Project Cost By Component andor Activity Component 1: Policy, Legal and Regulatory Advice Sector Policy, Legal, Regulatory Advice Framework Legal support for Transaction Safeguards Prepare SESA Prepare Environmental Baseline Monitoring Toolkit and Collect Field Data Develop Environmental Assessment procedures & conduct Training Subtotal Component 1

Local Foreign Total U S $million U S $million U S $million

0.40 1.20

0.40 1.20

0.40 0.60

0.40 0.60

0.40

0.40

3.00

3.00

0.25 1S O

0.25 1S O

Component 2: M i n e and Power Plants Analyses Investment Options Review (EAR) N e w Power Plant - Development and Technical Analysis (EAR) Renewable Energy, Cogeneration and Energy Efficiency Subtotal Component 2

0.50

0.50

2.25

2.25

Component 3 : Capacity Building Project Office Office Equipment and Vehicles Annual Audits Project Office Staff Incremental Operating Costs Communications & Outreach Strategy Subtotal Component 3

0.10 0.03 0.20 0 0.25 0.58

0.10 0.03 0.70 0.17 0.25 1.25

0.50 0.17 0.67

Component 4: Transaction Advisor 3 .OO 3.00 Contingencies 1.oo 0.10 0.90 " Total Project Costs 0.77 9.73 10.50 Note: The Investment Options Review and the New Power Plant - Development and Technical Analysis will be funded by the EAR.

62

Annex 6: ImplementationArrangements

KOSOVO: Lignite Power Technical Assistance Project Institutionaland implementation arrangements

The LPTAP will be implemented over about three years, from September 2006 to December 2009. This TA Project, unlike other such projects, will require a considerable amount o f time and attention from policy- and decision-makers, not the least because the LPTAP is designed to prepare the necessary legal and regulatory framework for the first large-scale investment (nearly Euro 1 billion) in the energy sector. The investments in the N e w MineElant will have to conform to EU standards and applicable provisions o f the Athens Treaty o f 2005 o n Regional Energy Market. Consultants and advisors will be hired to help with implementation also.

In order to support smooth’ implementation o f this complex, but extremely important project for KOSOVO, a two tier mechanism is proposed. For the day-to-day management o f the Project, including hiring and supervising consultants, a Project Office (PO) will be established in the MEM. The operating expenses o f the Project Office will be financed by the grant under component 3. For policy level intervention, an inter-ministerial body - Project Steering Committee (PSC) - will be established to coordinate the various parts o f the PISG and be responsible for ensuring timely decision-making.

The PSC will be chaired by the Minister o f Energy and Mining or his designate and would include representatives from the SRSG’s Office, the Head o f UNMIK, the Ministry o f Environment and Spatial Planning (MESP), the Energy Regulatory Office (ERO), the Independent Commission o f Mines and Minerals (ICMM), the Kosovo Trust Agency, the Prime Minister’s Office, the Ministry o f Economy and Finance and the Ministry o f Labor and Social Welfare, KEK and TSO. The representation in the PSC i s defined to ensure participation from all key ministries and agencies that have responsibility for one or more o f the aspects o f implementation. The representatives will ensure that suitable staff from their ministry/agency will participate in PSC meetings.

The Chair o f the PSC would convene meetings o f the PSC as required, and the PSC would meet at least once a month. The Chair would invite specific attendance at the meetings, depending on the topic (s) to be discussed. The Chair would indicate the mandatory attendance and the optional attendance for each meeting. Attendance by representatives o f the MEM, MESP, the ERO and the I C M M would be mandatory. Decisions would be taken by the PSC on the basis o f a consensus amongst the mandatory attendees. The detailed functions and responsibilities o f the PSC and the PO will be defined in an Operations Manual, which will be adopted as a condition o f effectiveness.

The key responsibilities o f the PSC would be: 0

0

Oversee the Project Office functions and review their quarterly progress reports; Review terms o f reference o f the key consultants and advisors to be hired under the LPTAP and provide input to PO;

63

Review the consultantsâ&#x20AC;&#x2122; reports and recommendations, especially those requiring government actions and decisions; Ensure that policy decisions and actions as appropriate are taken in a timely fashion and facilitate their adoption and implementation; Coordinate the activities o f the various agencies involved in the implementation o f subcomponents, especially those related to environmental and social aspects; Ensure consultation with local institutions, donors and other stakeholders as appropriate, based on recommendations from the PO; and Ensure the overall satisfactory implementation o f the energy sector strategy articulated in the Letter o f Energy Sector Development Policy jointly addressed by UNMIK and the PISG to the International Donor Community.

The Project Office (PO) will serve as the Secretariat for the PSC and prepare and distribute the MinutedAgenda for each PSC Meeting. The proposed organization chart for the PSC and PO i s attached below.

Chair: Mlnister of Energy and Mining SRSGâ&#x20AC;&#x2122;s office Head of UNMIK Pillar I V (EU Pillar) Minister of Environment and Spatial Planning Chair, Energy Regulatory Office

Project

t

MEM

Prime Ministefs Office Minister of Economy and Finance Minister of Labor and Social Welfare Chair, Independent Commission of Mines and Minerals Board

I

I

DSRSG

I I

Project Manager Technical Assistance to the LPPO

I

I

I

,

I

Power Task Manager

Administration and Accounting Task Manager

I

Kosovo Lignite Power Technical Assistance Project

The responsibilities o f the Project Office will be as follows:

0

0

Ensure the day-to-day Project implementation and management, including, but not limited to, procurement and project monitoring and evaluation, as well as financial management, progress and financial reporting in close cooperation with the Grant Unit o f the Ministry o f Finance and Economy; Prepare quarterly progress reports for the IDA and the PSC; Draft Terms o f Reference for the consultant assignments; Function as the counterparts o f the technical assistance provided by the grant;

64

Review consultants’ reports and arrange for presentations o f the recommendations o f the reports to relevant ministries and the PSC, and monitor the Performance o f the consultants; Serve as the Secretariat o f the Project Steering Committee and assist in follow up o f activities approved by the PSC; Arrange for public consultations as required; Ensure that Project subcomponents are completed o n schedule and achieve their planned outcomes; Ensure that procurement and financial management are carried out in accordance with IDA procedures and that the annual financial audit is submitted to IDA within 6 months o f the close o f the financial year; Maintain records o f grant implementation; and Serve as the contact point for information concerning the grant.

The PO will report to the Minister o f Energy and Mining and be responsible to the PSC. The Project Office would consist o f the following key staff Project Manager, a Mining Specialist, a Power Engineer, an Environmental and Social Specialist, an Administration and Accounting Specialist, and a Procurement Specialist. The Procurement Specialist and the Financial Management Specialist from ESTAP3 project, both o f whom already have extensive experience in World Bank guidelines and procedures would assist the Project Office. Staff in the Project Office would be recruited as local consultants and paid from the capacity building component o f the grant. Office equipment, a vehicle and incremental operating costs would also be financed by the grant. Consultants would be recruited competitively, and civil servants would be required to resign from the civil service before accepting a position in the Project Office.

The Project Office will also be responsible for monitoring progress against agreed performance indicators described in Section B.2 and Annex 3. The Project Office will monitor the performance o f the consultants in accordance with the contracts, review and approve the consultants’ inception reports, mid-term reports, and final reports. A quarterly report o n project implementation will be submitted by the Project Office through UNMIK to IDA as per the formats agreed during Negotiations. Based on IDA’S review o f the quarterly reports and outcomes o f the supervision missions, measures will be taken to ensure that the Project’s subcomponents are completed without delay and achieve their planned outcomes.

The financial management arrangements for the Project were assessed and found to be satisfactory. The Ministry o f Energy and Mining will be responsible for the approval o f payments, while the execution o f payments and financial reporting will be made through the treasury system. The grant unit in the Ministry o f Finance and Economy will assist in the reporting as well as in the disbursement procedures. An external auditor will be appointed to audit the financial statements o f the Project. The cost o f the annual audits will be paid from the Grant. More details on financial management arrangements are in Annex 7.

Procurement activities will be carried out in accordance with the World Bank’s Guidelines by the Ministry o f Energy and Mining through its “Project Office”. More details o n procurement are in Annex 8.

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Annex 7: Financial Management and DisbursementArrangements

KOSOVO: Lignite Power Technical Assistance Project Country Issues

An Operational Financial Accountability Report was finalized in M a y 2005. Despite significant progress since 2001, public financial management in Kosovo suffers from fundamental weaknesses, and basic structures for financial accountability are still in their infancy. The overall legal framework for budgeting and budget management i s largely compatible with internationally recognized standards, but for some aspects it appears to be too advanced for the current administrationâ&#x20AC;&#x2122;s capacity. Carry-over practices and weaknesses in capacity, organization and coordination hamper budget preparation and undermine the credibility o f the budget as a policy management instrument. W h i l e treasury and cash management are well-regulated areas o f public financial management, they suffer from inefficiencies. The system through which Commitment and Payment Orders flow to ensure authorization o f payments i s well regulated.

The Treasury authorizes commitments and payments based o n proposals and supporting documentation by budget organizations and municipalities. The Treasury pays from a single account in the central Banking and Payment Authority o f Kosovo (BPK).

As with most public financial management functions, accounting is constrained by limited capacity, and financial reporting needs more realistic requirements and statutory deadlines, improved procedures, and trained personnel. Internal control and internal audit at all levels o f government are in their infancy. Considerable time and effort will be required to make them fully operational. External audit i s undeveloped and, as with internal audit, it will need sustained external support for i t s development.

A financial management assessment was conducted for the Project. The assessment found that the MFE and MEM have developed satisfactory specific procedures to ensure proper financial accountability o f this Project.

Strengths and Weaknesses: The significant strengths that provide a basis o f reliance on the Project financial management system include: (i) the experience o f MFE, MEM and UNMIK o f implementing previous projects and satisfying World Bank financial management requirements; and (ii) the audit reports and management letters issued by the auditors. There are no significant weaknesses o f the Project financial management system.

Implementing Entity: A Project Steering Committee (PSC) has been established to coordinate Project implementation. Day-to-day Project implementation will be the responsibility o f the Project Office, under the Ministry o f Energy and Mining. The Project Office will be staffed by four experts who will carry out day-to-day Project implementation activities and also play a lead role in the monitoring and evaluation progress. (Specific roles and responsibilities are described in Annex 6.)

The Grant Unit o f the MFE will be responsible for disbursement, financial reporting and auditing o f the Project, while the Project Office will ensure that payments are approved by appropriate staff only after services have been delivered before payment requests are forwarded to the MFE. The Grant Unit will work in close cooperation with the MEM to secure proper financial

66

management. The MEM will be responsible for the implementation o f the Project through the Project Office. The PPA will oversee the procurement o f all goods and services for the Project in compliance with IDA procurement guidelines and procedures.

Funds FZow: All payments will be made by the MFE from its own sources o f funds or by direct payment by the IDA, and no designated account will be needed. Based on the documents prepared by the Project Office, all relevant documents will be processed by the Grant Unit in the MFE, either to be paid by the Treasury or by direct payments. The MFE will prepare all relevant documents in support o f applications for withdrawal, sign the applications, and forward them to the IDA through UNMIK. StafJins: All Commitment and Payment Orders (CPOs) produced by the MEM will be submitted to the MFE. The MEM has a duly established finance unit with adequate staffing, and the processing o f the Project invoices will follow the normal procedures this unit i s already using.

The Grant Unit o f the MFE will assign a staff member in the Grant Unit to be the focal point for processing and control o f payments, production o f withdrawal applications, as well as producing quarterly and annual financial statements for the Project. The Project Office in MEM will work closely with the MEM and MFE to ensure that quarterly interim un-audited financial reports (previously called Financial Monitoring Reports or FMRs), annual financial statements and other progress reports are submitted timely to the IDA reflecting the implementation status o f the Project.

Accounting Policies and Procedures: The accounting books and records are maintained o n a cash basis by MFE based on the documentation provided by the MEM, including additional commitment information for signed contracts. Quarterly and yearly Project financial statements are presented in EUR. MFE has instituted a set o f appropriate accounting procedures and internal controls including authorization and segregation o f duties for this Project based o n previous similar projects. Additional information on the policies and procedures are described in the above paragraph. The FM policies and procedures are already described for the ESTAP I11 project.

Internal Audit: No functioning internal audit is established for MEM. External Audit: As o f the date o f this report, the grant receiver i s in compliance with i t s audit covenants o f the existing IDA-financed projects. Current project financial statements and auditing arrangements for the previous projects managed by MFE and MEM are acceptable and it has been agreed that these arrangements will be replicated for the proposed Project. The audit will only cover the Project activities. The auditor will be appointed by the MFE. Specific terms o f reference will be agreed during negotiations. The audits are conducted in accordance with International Standards on Auditing. The annual cost o f the audits will be covered by the grant.

Reporting and Monitoring: MFE will produce all financial reports and Summary Reports (previously known as Statement o f Expenditures or SOEs) for the IDA. The formats o f the quarterly interim un-audited financial reports similar to the ESTAP I11 FMRs will be agreed upon for Project monitoring and supervision and the formats o f these will be included in the FM

67

manual. The MFE will produce a full set o f interim un-audited financial reports every three months throughout the life o f the Project.

Information Systems: The chart o f accounts is based on the government’s Financial Management Information System. This system was assessed in the Operational Financial Accountability Report and found to be acceptable for the purpose o f registering the necessary financial information. As the participants under the Project fall under the umbrella o f the Kosovo Consolidated Budget, all Project-related payments would be made via the Single Treasury Account (STA) unless direct payments on an exceptional basis are chosen, and the accounts would be maintained as part o f the MFE’s accounting system. Based on monthly reports from this system (Freebalance), MFE will, in cooperation with the Project Office in MEM, produce the quarterly and annual financial reports required mainly through reports from the Freebalance system. The consolidated reports on Statements o f Sources and Uses o f Funds, o n uses o f funds according to organizational code, the uses o f funds according to sub-component, and the commitment obligation analysis report with commitment and actual data will all be produced by the Freebalance system on request o f the Grant Unit. The contract monitoring information will be produced by the Project Office, based on the commitment/obligation analysis report and the information on each contract. The narrative report and the consolidation o f the other reports will be done by the Project Office.

Disbursement Arrangements: Disbursements from the grant will be made based on the transactional disbursement method, reimbursing the Recipient based on Summary Reports, as well as using direct payments from the Grant, although only in exceptional cases as initiated by the MFE. N o designatedspecial account will be opened. Reimbursement will be made monthly throughout the Project period. There is no plan to move to report-based disbursement.

I

Category (1) Goods, consultants’ services and Incremental Operating Costs for Parts A, B and C o f the Project.

(2) Consultant’s services for Part D TOTAL AMOUNT

I I

Allocation o f Grant Proceeds Amount o f the Financing Allocated (expressed in SDR) 3,800,000

2,000,000

1

Percentage o f Expenditures t o b e Financed 100%

100%

5,800,000

Disbursement Conditions: Appointment o f the Transaction Advisor is subject to the execution

o f a memorandum o f understanding or similar document addressed to the Project Steering Committee, between the I C M M and the ERO to harmonize the processes for selection o f investors in the new mine/power plant. There shall be no withdrawals for payments made prior to the date o f signature o f the Financing Agreement, except that withdrawals up to an aggregate amount not to exceed SDR 33,700 may be made for payments made prior to this date but o n or after June 15,2006 for eligible expenditures under Category (1).

Supervision Plan: During project implementation, the IDA will supervise the Project’s financial management arrangements in two main ways: (i)review the Project’s quarterly interim unaudited financial reports as well as the Project’s annual audited financial statements and auditor’s

68

I

management letter; and (ii) during the IDAâ&#x20AC;&#x2122;Ssupervision missions, review the Projectâ&#x20AC;&#x2122;s financial management and disbursement arrangements to confirm that satisfactory financial management arrangements have been maintained. As required, an IDA-accredited Financial Management Specialist will assist in the supervision process.

69

Annex 8: Procurement Arrangements

KOSOVO: Lignite Power Technical Assistance Project

A. General Procurement for the proposed Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, and the provisions stipulated in the Financing Agreement. The general description o f various items under different expenditure categories i s described below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame have been agreed between the Borrower and the IDA Project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement o f Works: N/A Procurement o f Goods: Goods procured under this Project would include: office equipment and vehicles. The procurement will be done through shopping procedures and using E C A sample format for inviting price quotations for shopping o f goods agreed with the IDA. Procurement o f non-consultant services: The non-consultant services procured under this Project would include: environmental sampling and analysis program. The procurement will be done using World Bank’s I C B Sample Bidding Documents for Procurement o f Non-Consultant Services agreed with the IDA.

All contracts in the amount o f U S $ 100,000 equivalent or more and the first two contracts in the amount o f less than U S $ 100,000 equivalent per contract will be subject to IDA’Sprior review.

All other contracts will be subject to post review.

Selection of Consultants: Consultants will be selected to provide: sector policy, legal and regulatory framework analysis including drafting legislation and regulations, develop resettlement framework, legal implementation including legal support for transaction advisor;

environmental data register and reporting system; SESA; develop environmental assessment procedures and training in procedures; renewable energy options study; transaction advisor; financial audit; PO staff; international procurement advisor; other consultants’ services; and opinion research. Short lists o f consultants for services estimated to cost less than U S $ 100,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

The following methods for selection o f consultants would be followed:

(i)

Quality and Cost-based Selection (QCBS) procedures will be used for sector policy, legal and regulatory framework analysis including drafting legislation and regulations, develop resettlement framework, legal implementation including

70

legal support for transaction advisor; environmental data register and reporting system; SESA; develop environmental assessment procedures and training in procedures; renewable energy options study; and transaction advisor.

Least Cost Selection (LCS) procedures will be used for selection o f auditing firm for annual audits throughout the life o f the Project.

Selection Based on Consultants’ Qualifications (CQ) procedures would be used for very small consulting assignments at the amount o f less than U S $ 100,000.

Individual Consultants (local and international) would be hired in accordance with Section V o f the Consultants’ Guidelines.

Single Source Selection (SSS) would be used, subject to the IDA’s prior approval, for very specialized low value contracts which meet requirements for SSS o f the Consultants’ Guidelines.

The selections will be done using the World Bank’s Standard Request for Proposal (RFP) and other regional sample documents agreed with the IDA. Requests for Proposals (RFPs), short lists, terms and conditions o f contracts, as well as evaluation reports and recommendations for award for the first two individual contracts and all individual contracts in the amount o f more than U S $ 25,000 equivalent and contracts with firms in the amount o f more than U S $ 50,000 equivalent and all SSS contracts will be subject to the IDA’s prior review.

Operating Costs: The Project will finance incremental operating costs for the Project Office (PO) for communications, office supplies and utilities operation and maintenance costs and other costs incurred as a result o f project implementation. These costs will be procured using the PO’S administrative procedures which will be reviewed and agreed with the Association. Retroactive financing o f up to US$50,000 is provided for eligible expenditures incurred after June 15,2006.

Others: Training: Training and study tours will be carried out according to a training plan, which the PO will revise semi-annually and submit to the IDA for approval prior to implementation. The expenses will be disbursed based on SOE.

B. Assessment of the agency’s capacity to implement procurement

Procurement activities will be carried out by the Project Office which will be established at the Ministry o f Energy and Mining (MEM). The procurement in the MEM i s led by a person with a previous experience in procurement under World Bank-financed projects. An assessment o f the capacity o f the ministry and the implementing agency (Project Office) to implement the procurement actions under the Project has been carried out by Plamen K i r o v (ECSPS) in January 2006. The assessment reviewed the organizational structure and capacity o f the implementing agency (Project Office) and i t s interaction with the MEM. The Project Office (PO) will be supervised by the Project Steering Committee (PSC), chaired by the Minister o f Energy and

71

Mining. The PO will include: (i) a Project Manager, (ii)four technical specialists; (iii) a procurement specialist; (iii) a financial specialist. The PO will be responsible for the day-to-day project management, including procurement, financial management, progress and financial reporting, staff appointment and management and project monitoring and evaluation.

The procurement specialist who will be dealing with the procurement under LPTAP has received some on the j o b training during the implementation o f Kosovo Water Supply Project and ESTAP3.

Kosovo Operational Procurement Review (June 2004) has assessed the risks (legal and regulatory framework, control environment, corruption, etc.) that may negatively affect the ability o f the implementing agencies to carry out the procurement process and has rated it a high risk. Therefore the prior review thresholds are those peculiar to a high risk. The corrective measures which have been agreed are: (i) provide additional training to the PO procurement staff on the application o f the current procurement and consultants guidelines and the respective documents; (ii)provide training to the PO staff on the preparation o f the technical parts o f the bidding documents (technical specifications, and particularly in the procurement o f I T and office equipment, vehicles, etc.) and requests for proposals and TOR’S;(iii) conduct a comprehensive procurement training for all Project-related staff, as part o f the Project launch workshop; (iv) the World Bank’s Standard Bidding Documents and Requests for Proposals and ECA’s sample formats for small procurement will be used; (v) an international procurement adviser will be hired for mentoring and on-the-job training during the initial stage o f the Project.

The IDA will monitor procurement activities. The World Bank procurement specialist will conduct prior and post reviews and will provide guidance in all procurement related activities.

C. Procurement Plan The Recipient, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurementhelection methods. This plan has been agreed between the Borrower and the Project Team on June 22,2006 and is available at the PO at the MEM. I t will also be available in the Project’s database and in the World Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision In addition to the prior review supervisions to be carried out from World Bank offices, the capacity assessment o f the PO has recommended one supervision mission per six months to visit the field and to carry out post review o f procurement actions. The PO procurement staff will properly collect and maintain the procurement documentation.

72

Kosovo Lignite Power Technical Assistance Project

Procurement Plan 1

Ref No

2

3

Descrlptlon of Assignment I

tCOMPONENT 1 Policy, Legal L Rogulstw IA. Sector PoIIcy/Regula:ory Advlce

Category I

ofs: $

4

I

I

!

REI 07/18/06; RFP issuing 09/15/06;

Diagnosis, Leglslatlve Advlce (Inc. draftlng leglslatlon and regulations), Develop Resettlement Framework, Legal Implementatlon(incl. legal support for Transactlon Adviser)

1 le. Safeguards

2

I

Environmental Sampling and Analysls Program

I

NCS

1

Prior

ICB

Bidding Sep -0ct 2006, Contr. Signing Nov 2006, Compl. Sep 2007 REI 08/04/06; RFP issuing 09/15/06,

Envlronmental Data Register and Reporting System

QCBS

-

REI 08/04/06; RFP issuing 09/15/06

QCBS

11/15/06;Cornpl. Oec. 2007

REI 08/04/06, RFP issuing 09/15/06,

Develop Environmental Assessment Procedures, and Conduct Training in Procedures

NBF

I I

I

NBF

ISep 2006 March 2007

prior

REI 06/01/07; RFP issuing 07/15/07; Prop.opening 08/15/2007; Fin. Prop.

Opening, Eval., Negot. and Contr. Signing 10/15/07;

8

IRenewable Energy Optlons Study

13

llncremental Operating costs

14

Tralnlng

TR

Multiple

Armualy agreed budget

15

lnternatlonal Procurement Advisor

CS

1

Pbr

QCBS

I

oc

I

~

Throughout the project selection J U I AUg ~ ZUM. contract signing and compi. Sep 2006 - March

----

RFP issuing 09/15/06, 10/15/2006, Fin Prop Negot and Contr Signing

CS - Consulting Services; G - Goods; NCS - Non-consulting services; NBF - Non-World Bank financing; ICB - International Competitive Bidding; QCBS - Quality and Cost Based Selection; IC - Individual Consultants; CQ - Selection based on Consultantsâ&#x20AC;&#x2122; Qualification

73

Annex 9: Economic and Financial Analysis'

KOSOVO: Lignite Power Technical Assistance Project

The economic analysis i s based on development o f a proposed new lignite mine to fuel a proposed 600 M W lignite fired power plant to be built in Kosovo at an estimated investment o f approximately €1 billion. The power plant i s expected to serve electricity needs within Kosovo as well as o f the ECSEE region. The proposed N e w Mineplant will generate substantial direct and indirect benefits to Kosovo. The benefits would be as follows: 0

0

0

0

0

0

Royalties payable to the government for mining and selling lignite to the owners o f the power plant for generating electricity. The present value o f these royalties are estimated at approximately €7 million2; Economic rents payable to the government for the use o f lignite by the owners o f the power plant for exporting electricity. The present value o f the economic rent to the government is estimated at approximately €4 1 million; The tax revenues to the government are estimated at around €5-6 million from the mine and €78 million from the power plant in present value terms; The new power plant will substantially reduce the need to import power f i o m neighboring countries and also improve the overall reliability o f supply for domestic consumption. The present value o f these benefits to the government i s estimated at €228 million; Kosovo will benefit from increased employment o f approximately 2,000 jobs during the construction o f the N e w Mineplant from 2008 through 2012 and 1,300 jobs during the operations period from 2012 through 2038. A multiplier o f 2.2 thus would result in approximately 4,000 jobs in Kosovo. The present value o f the employment increase i s estimated at approximately €57 million.

The New Minemlant will result in approximately €1 billion o f foreign direct investment into Kosovo.

Direct Benefits Royalties: The development o f the proposed New Mineplant would generate royalties to the government as well as taxes on profits. The Project would generate estimated royalties o f approximately €1.8 million in 2013, based on current royalty rate o f 25 eurocent per ton.

Export o f power: Kosovo will also benefit from an economic rent payable by the TPP for the use o f lignite to export electricity. These are assumed at 5 Euros/Ton for 2.3 M i l l i o n Tonnes o f lignite per year for exporting electricity equivalent to 300MW o f generation and this translates to approximately €1 1.5 million in annual economic rent to Kosovo. The present value o f the estimated economic rent i s approximately €9 1 million.

Profits tax: Kosovo C, which would operate as an IPP, will produce electricity both for export and domestic consumption and would pay tax on any profits generated. Government revenues in A fuller version o f the economic and financial analysis including a l l annexes i s available from the project files.

* All present values are calculated as o f 2006.

74

2013 from taxes on the new private power company amount to an estimated €1 1.4 million with the lower royalty rate and estimated €1 1.1 million with the higher royalty rate. The present value o f the estimated tax revenues i s approximately €78 million.

Supply gap: The electricity production o f the new power plant would substantially improve the electricity supply in Kosovo and thus reduce load shedding and imports o f power for domestic consumption. Since the plant has lower production costs than the imports it replaces or the load shedding that it avoids, there will be benefits to domestic consumers and to the authorities.

These are estimated at approximately €10 million in the first year and approximately €228 million in present value terms.

Employment: Both the mine and the power plant would create employment in the country. Since there i s considerable unemployment (only 49 percent o f the working age population i s active), the Project will generate employment benefits to the country. Estimates indicate that the mine will create about 1,000 jobs and the TPP will create about 300 ‘permanent’ jobs (i.e. for the duration o f the Project). In addition the TPP will create some 1,000 local jobs for the actual construction o f the plant (2008-20 12). A multiplier i s applied to the permanent jobs to reflect the additional employment created by the impulse generated from the initial demand. Typical multipliers for mining projects are around 2.2, implying an additional 2.2 jobs for every initial job. With this factor, we have additional employment o f around 4,000 jobs in 2013 and afterwards, with some fewer jobs prior to that.

One way to include the benefits o f j o b creation i s to take a portion o f the salaries paid to the individuals. Taking this portion to be 30 percent (i.e. implying a shadow wage o f 0.7) implies employment benefits o f €5.8 million in 2008, rising to €1 1 in 2013 and further thereafter. The present value o f such benefits i s about €57 million.

Figure 1: Benefits from LPDP: Royalty 2 W o n E 7.25 E 56.54

E 119.54

I P Royaky on Roduction

,

Tax Rev. from Mne Rofits

Tax Rev. & Royalty from Fbw er Rant rn Reduced Losses from lnports tirployrnent Benefits

75

In summary, about 55 percent o f the direct benefits come from the savings in costs o f imports, and about 29 percent come from taxes and royalties paid by the TPP. Employment generation benefits account for around 14 percent and only 2 percent are attributed to mining royalties (with the l o w royalty rate) and about 4 percent to the taxation o f the mining activities. See Figure 1.

Indirect Benefits

In addition to the direct benefits, there are substantial indirect benefits to Kosovo as a result o f the proposed New MinePlant. There i s an investment made by the private sector (approximately €300 million for the mine and approximately €770 million over a six-year period: 2008-2013.

This i s a substantial increase in overall investment compared to the recent figures and will undoubtedly provide some impetus to economic growth in Kosovo. Based on a simple accelerator macro model, it i s estimated that by 2013 the GDP i s approximately €150 million or 4.8 percent higher than without the Project. The average annual rate o f growth o f GDP without the Project over the period 2008-2013 i s 3.2 percent and with the Project it i s 3.6 percent.

Environmental Analysis and L i f e Cycle Cost Analysis In order to estimate the environmental effects o f the Project the emissions from the Project have to be compared with those arising from the alternative sources o f power. The physical and monetary estimates o f the environmental damages o f the plant were carried out for the main configuration o f the plant, with 600 M W generated. Two comparator plants were considered - a fuel oil-fired steam power plant and a natural gas-fired combined cycle gas turbine (CCGT) plant.

The model used here is the latest dispersion modeling (ECOSENSE) developed and maintained by the University o f Stuttgart, along with epidemiological studies to make the estimates in physical terms. The results o f this model have been combined with the latest values o f health damages to calculate the damages in monetary terms3.

The results show that the lignite plant has environmental costs (principally health) o f around 0.8 eurocents per kWh, with a lower bound o f 0.2 eurocents and an upper bound o f 1.5 eurocents.

This can be compared to the environmental costs o f the f u e l o i l plant of, around 0.5 eurocents per kWh with a range from 0.1 to 1.0 eurocents per kWh and those o f a CCGT o f around 0.24 eurocents per kWh with a range from 0.1 to 0.5 eurocents per kWh. In addition the lignite plant has higher costs than the others in terms o f C02 emissions. Valuing such emissions at €5/ton o f C02 (approximately, the current price o f C D M certified emissions) the carbon costs o f the lignite plant are about 0.41-0.45 eurocents per kWh, while the f u e l o i l plant has a climate cost o f 0.37 eurocents and the CCGT plant has a cost o f 0.18 eurocents.

The environmental costs, however, have to be added to the direct levelized costs o f generation to obtain the marginal social cost o f each option. The next section provides the levelized cost o f the alternatives as a life-cycle cost analysis.

Complete dispersion analysis i s included in the detailed report, available f r o m the project files.

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Life-cycle Cost Analysis

A l i f e cycle cost analysis was carried out to compute the levelized generation costs in eurocentskWh over a 20-year period for several generation alternatives to provide 600 M W for Kosovo. The l i f e cycle costs include the following: (a) fixed charges to cover debt servicing and return o n equity on the total capital costs; (b) fixed and variable operations and maintenance (O&M) expenses; (c) fuel expenses; and (d) environmental costs including COZcosts. The major assumptions used in the development o f the life-cycle costs are provided in the table below.

Table 1: M a j o r assumptions o f the life-cycle analysis PLANT CHARACTERISTICS

COAL Sub-critical

Supercritical

Ultrasupercritical

GAS

The resulting levelized costs for the various generation alternatives are as follows.

Table 2: Levelized generation costs (EurocentlkWh) Generation Alternatives

Lignite - Sub Critical Lignite - Super Critical Lignite - Ultra Critical Combined Cycle (CCGT) Fuel Oil

Levelized Levelized costs costs (eurocenVkWh) (eurocenVkWh) without with Envionmental cost Environmental Cost 3.60 4.92 3.55 4.84 3.58 4.83 5.47 5.95 6.84 7.82

77

OIL Fuel Oil

lysis was done on the lcvelizcd costs based on different e ~ ~ r ~ r orelated ~ ~ ~ ~ ~ ~ t a l cd in a graph bclow.

-

Comparison of Levelistad Generation Costs ~c~~~~ 10.00

#! a

8,OO

l3

4.00

8

P t

E

A

lli Base Env Costs

6.00

2.00 *

e csf the iritpact o f changc for e ng so, the Tornado anal

s thc input variables

Table 3

Tomacfo fripiit Variables

Lignite

Low

Base

Fuel Price fEuroiTon)

6 52 913 0 R 43 1452 0 16

7.512 1,050 5.00 05 187 0.72

Variable O&M Expenses fer Fixed O&M Expenses (Euro ~ ~ ~ i r # nCosts ~ e ~ ~~ a~ t ~ h)~ c / k W

78

High 8.63 1,208 10.00 0.53 11J.2 1.44

value is plotted on a horizontal bar diagram for that input variable. This calculation i s repeated for each o f the input variables chosen.

The positions o f the bars in the diagram are arranged so that the input variable that i s the most critical, or impacts output most significantly, is placed in the topmost position. Thus the most critical input variables for the model can be found. The Tornado chart for the Lignite SubCritical generation alternative is presented.

-

Tornado Analysis Lignite Sub-critical EnUronrnental Costs (EurdkWh)

-61.0

1.44 T

0.00

C02 Credit (Eurnon)

10.00

Capital Cost (Eur/kW)

1,208

Fuel Price (Eurnon) Variable O&M Expenses (Eurc/kWh) Fixed O&M Expenses (Eur/kW/yr)

I

4.00

I

4.50

5.00

-

5.50

6.00

Levelized (with environ) EurdkWh

The levelized costs for the Lignite Sub-critical configuration as the input variables are changed from the l o w case to the high case i s presented in Table 4.

Table 4- Output values Tornado Analysis Input Variable Environmental Costs (EurdkWh) C02 Credit (EuriTon) Capital Cost (EurlkW) Fuel Price (EuriTon) Variable O&M Expenses (EurdkWh) Fixed O&M Expenses (Eur/kW/yr)

Input Values Low Base High 0.16 0.72 1.44 0.00 5.00 10.00 913 1,050 1,208 6.52 8.63 7.50 0.43 0.5 0.58 14.52 16.7 19.2

Output Values (EurclkWh) Low Base High 4.29 4.92 5.74 4.41 4.92 5.43 4.69 4.92 5.19 4.79 4.92 5.07 4.85 4.92 5.01 4.89 4.92 4.96

The environmental cost is the most critical variable in that i t has the maximum impact o n the levelized costs, whereas the fixed O&M expense i s the least critical variable in the analysis. The Tornado analysis was conducted for all the generation alternatives and the levelized costs for the lignite-fired power plant are lower than that for natural gas and o i l fired power plants.

The Project proposes to address the CO2 impacts in the following manner. First, the power plant development and technical analysis will examine the super-critical technology option and explore mechanisms for encouraging the investors to consider such climate-friendly options.

Second, adequate space would be provided in the plant site for the IPP to install suitable carbon capture facility in h t u r e when such technology i s proven to be technically and economically feasible.

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Annex 10: Safeguard Policy Issues

KOSOVO: Lignite Power Technical Assistance Project The Lignite Power Technical Assistance Project (LPTAP) will provide technical assistance to strengthen the policy and institutional framework to address environmental and social issues associated with potential investments in lignite development and power generation in Kosovo. I t will not finance any investments in power generation or associated lignite mining. Therefore, no negative environmental or social impacts are expected from the implementation o f the proposed technical assistance operation. Potential power plant and mine sites will only be determined during project implementation (under the Project’s technical consultancies) and built/developed outside the scope o f this Project. Even though the Project itself will not have any negative environmental or social impacts, it i s classified as an environmental category B project according to the World Bank’s Environmental Assessment policy since the potential follow o n investments are likely to entail significant environmental and social issues.

Since the LPTAP does not entail any direct environmental and social impacts, there is no need to conduct an environmental or social assessment prior to Project approval. What has been prepared by the government, instead, is an Environmental and Social Safeguards Framework (ESSF) that describes the different assessments that will be conducted and safeguards-related documents that will be prepared during different stages o f elaboration o f sector development plans, and in advance o f specific investments in the lignite and power sectors. The preparation o f the ESSF demonstrates the commitment o f the UNMIK and PISG to develop the energy sector according to internationally acceptable standards, and to consult with a cross-section o f stakeholders as part o f the decision making process. The ESSF was reviewed by the IDA and found to be consistent with the requirements o f the World Bank’s environmental and social safeguard policies.

The activities proposed in the ESSF closely follow the sector development process - from the preparation o f the regional development strategy to the proposed specific investments in lignite and power sectors - and describes the different safeguards-related assessments and documents that would be prepared at each stage. The ESSF has been discussed at a stakeholder consultation in Pristina in February 2006, and has been disclosed in-country in English, Albanian and Serbian languages, and also at the World Bank’s InfoShop. The different safeguards-related assessments and planning documents that will be prepared as part o f LPTAP implementation, are briefly described below.

Technical Assistance for addressing environmental and social issues

As part o f the Project’s proposed work on developing legal and institutional frameworks to address environmental and social issues in lignite development, the Project will provide various types o f technical assistance to the PISG. K e y areas o f technical assistance include: (a) assistance in the preparation o f a Strategic Environmental and Social Assessment (SESA) that will identify key strategic issues associated with lignite development in accordance with the proposed Sibovc Development Plan (SDP) that would be developed as a part o f the TA Project;

80

(b) identification o f gaps, if any, in the existing legislation and institutional framework to address environmental and social issues in the energy and mining sector, and propose necessary policy and institutional changes to address these gaps. This will also include development o f a Resettlement Framework to guide land expropriation and resettlement required for IPP investments in the lignite sector in the short run, since the new land expropriation legislation currently under preparation may not be ready by the time these investments are anticipated; (c) development o f terms o f reference for environmental impact assessment, social assessment and resettlement action plan that would need to be carried ouuprepared for specific investments; and

(d) capacity building among relevant government agencies to manage environmental and social aspects o f lignite development and associated power generation.

The above mentioned technical assistance and associated assessments are necessary to help develop an adequate policy and institutional framework to identify and address environmental and social issues in lignite development and power generation. Many o f the above activities can be conducted in parallel in order to enable the government o f Kosovo to attract investments in the lignite sector as soon as possible. Close involvement o f relevant Kosovo government agencies in the technical assistance process will be an important element o f building their capacity to manage the development o f the lignite sector in an environmentally and socially sustainable manner.

The following paragraphs briefly describe the work that will be carried out under the various types o f technical assistance mentioned above. The process o f consulting the various stakeholders at different stages o f project development i s also described. (a) A Strategic Environmental and Social Assessment (SESA) will be carried out in response to and parallel with, the Sibovc Development Plan, a regional energy sector development plan, and in accordance with a new regulation for the conduct o f SESA which will be promulgated by the PISG. The SESA will identify and discuss the broad range o f environmental and social issues associated with the development o f lignite mining and power generation in the Sibovc-Obiliq area. The SESA report and the SDP will be presented jointly to stakeholders to provide them an early opportunity to express their views and provide comments prior to the adoption o f the SDP. The SESA would be the first-stage overarching environmental and social assessment o f lignite sector development, prior to further, more detailed analyses such as the Environmental Assessments and Social Assessments that will be prepared by investors for individual investments (discussed in (c) below). The EU SEA Directive (2001/42/EC) will serve as the point o f reference for scoping and conducting the SESA. The SESA will also outline the need for policy, institutional and capacity building requirements to identify, assess, mitigate and monitor environmental and social impacts o f mining development and power generation. The draft SESA can be completed within six months o f initiation o f project implementation, in tandem with the preparation o f the Sibovc Development Plan (SDP). The task will be carried out under Component 1, subcomponent 2 o f the Project.

81

(b) Based on key environmental and social issues identified in the early stages o f the SESA, a diagnostic survey o f the legal, policy and institutional issues relating to the management o f environmental and social issues associated with the proposed transaction will be conducted. The diagnostic survey, to be conducted concurrently with the SESA, will assess gaps in existing legislation, policies and institutional arrangements. Since the current law on land expropriation dates back to 1978, and i s widely acknowledged as inadequate, a Resettlement Framework that would apply to land acquisition and resettlement required for investments in the lignite and power sectors will be prepared, consistent with the World Bankâ&#x20AC;&#x2122;s OP 4.12 on Involuntary Resettlement. Government endorsement o f this framework would be a pre-requisite for engaging the Transaction Advisor (under Component 4). A new draft legislation dealing with expropriation and resettlement issues will also be prepared to assure that future resettlement programs meet international standards. Similarly, an analysis o f possible gaps between international good practice and existing legislation and institutional framework related to environmental assessment and compliance will be carried out, complementing the ongoing technical assistance being provided by the European Agency for Reconstruction (EAR) to the Ministry o f Environment and Spatial Planning (MESP). The LPTAP will help prepare draft legislation for sector specific regulations such as the implementation o f the EU Directive for Large Combustion Plants. All o f the above work can be completed within six months o f initiation o f project implementation. (c) Based on the findings and the recommendations o f the SESA, the gap analysis that will be conducted under (b) above, and the Resettlement Framework, the mine-site assessment and power plant study carried out under the LPTAP, terms o f reference (TOR) for investment-specific Environmental Assessment, Social Assessment and Resettlement Action Plan will be prepared. The TORwill also be informed by the feasibility studies financed by EAR on mine development and power generation. The TORScan be completed within seven months o f initiation o f project implementation. The task will be carried out under Component 1, subcomponent 2 o f the Project.

(d) To build the capacity o f MESP and other national agencies to design and implement activities related to environmental management and social development/mitigation, capacity building and institutional strengthening activities in the field o f environmental assessment and involuntary resettlement will be undertaken as part o f the LPTAP. The Project will assist MESP and subordinate institutes such as Kosovo Environmental Protection Agency and the Environmental Protection Inspectorate in the development and implementation o f EA procedures and the preparation o f a sector specific EL4 handbook.

The LPTAP will support collection o f baseline environmental data related to lignite mining and power generation and implementation o f an environmental monitoring data registration and reporting system. The capacity building component will also support inter-ministerial co-ordination between the Ministry o f Environment and Spatial Planning, the Ministry o f Energy and Mining and other relevant agencies. Since a new agencyhnction for land expropriation and resettlement i s likely to be established as part o f the formulation o f the new expropriation law, this component will also provide support to the institutional unit responsible for coordinating land expropriation and resettlement, in addition to supporting existing units that play a role in resettlement planning,

82

implementation and monitoring. This task will be carried out under Component 3 o f the Project.

What i s a strategic environmental assessment (SEA) and how does it relate to SESA? The definition o f Strategic Environmental Assessment (SEA) is frequently quoted as: ‘the formal, systematic and comprehensive process o f evaluating the effects o f a proposed policy, plan or program or its alternatives, including the written report o n the findings o f that evaluation, and using the findings in publicly accountable decision making.’

SEA extends the aims and principles o f environmental impact assessment (EM) which is carried out at the level o f the individual project to decision-making at ‘strategic’ levels, where alternative approaches and their implications for the environment can more easily and appropriately be considered.

For sectoral development strategies and plans, S E A can make valuable contributions to: Identification o f environmentally preferred options; Early identification o f areas with presumptions fodagainst development; Production o f development guidelines for project design, siting construction and operational management practices in relation to a preferred option and/or specific areas, thus assisting the development process for both industry and the government; Providing information which can be used in subsequent project level EMS, which are also helped by the earlier identification o f environmentally preferred options; Assessment o f cumulative impacts o f possible individual projects or actions; Identification on any significant individual or cumulative impacts which may affect other countries (‘trans-boundary impacts’) The preparation o f the S E A i s and should be closely related to the preparation o f the plan or program t o which the S E A relates. The following steps in the planning process are therefore also key to the SEA process: During initiation o f plan/program preparation: identify key stakeholders and announce initiation o f the plardprograrn preparation; specify o f confirm the plan/program’s objectives, the relevant development scenarios and relevant alternatives and most important impact issues; coordinate planiprogram preparation w i t h the involved local and national authorities; During planiprogram preparation: assess environmental and social impacts o f alternatives; most important issues and report these; apply quality assurance; Plan / program decision-making: consult stakeholders based o n the assessment o f the preferred alternatives; ratify plan/program incorporating results o f consultation process.

After plan/program ratification: monitoring and evaluation o f effects o f implementation.

Strategic Environmental and Social Assessment (SESA) differs f r o m S E A through the inclusion o f a full social assessment as an integrated part o f the SEA process. In this manner, social issues are assessed more comprehensively than in a standard SEA. SEA i s implemented in legislation o f EU Member Stated following European Directive 2001/42/EC ‘on the assessment o f the effects o f certain plans and programmes o n the environment,’ k n o w n as the ‘strategic environmental assessment’ o f SEA Directive.

Sources: UK Department of Trade and Industry (www.omiti.~ov.ukNew and Renewable Energy Programme) and the Netherlands Environmental Impact Assessment Commission

Consultations with directly affected communities and other stakeholders are built into the various assessments and reports that will be prepared to identify and address environmental and social issues. Consultations are scheduled to be conducted in accordance with the EU Directive and the World Bank’s OP 4.01 (Environmental Assessment) during the scoping o f the SESA and for the presentation and discussion o f the SESA results and the draft Sibovc Development Plan. ESTAP 111, currently under implementation, i s also providing technical assistance to the government to develop a framework for consultation and participation with local communities and other stakeholders in the energy and mining sector. Requirements related to consultations will also be included in the terns o f reference for EA, SA and RAP o f specific investments.

83

I

'

_,

, il I

1

.

_.. .

1

Annex 11: Project Preparation and Supervision

KOSOVO: Lignite Power Technical Assistance Project

PCN review Initial PID to PIC Initial ISDS to PIC Appraisal Negotiations Board/RVP approval Planned date o f effectiveness Planned date o f mid-term review Planned closing date

Planned September 2005 December 2005 December 2005 March 20,2006 August8, 2006 October 12,2006 October 31,2006 M a y 3 1,2008 December 3 1, 2009

Actual September 27,2005 December 13,2005 December 13,2005 June 19,2006 August 30,2006

Key institutions responsible for preparation o f the Project: UNMIK, PISG (MEM, MESP, MFE), ERO, KTA, ICMM.

A grant from the Spanish Consultant Trust Fund has been used during project preparation and w i l l be used during the first few months o f project implementation to develop a communications strategy for the Project.

World Bank staff and consultants who worked on the Project included: Title Name Task Team Leader Varadaraj an Atur Michael Stanley Co-Task Team Leader Husam Mohamed Beides Sr. Power Engineer Sr. Environmental Engineer Frank Van Woerden Paula F. L y t l e Sr. Social Development Specialist Procurement Specialist Plamen Kirov Financial Management Analyst Elona Gjika Sr. Finance Officer Nicholay Chistyakov Lead Financial Officer Scott Sinclair Lead Counsel Mark Walker Sr. Counsel Mark M. Moseley Sr. Power Engineer Masaki Takahashi Consultant N e i l Richard Bush Andrew Kircher Unit Chief Operations Officer Jann Masterson Consultant Ani1 Markandya Consultant Aman Sachdeva Consultant Erika Casajoana-Daunert Consultant Despina Pascal Program Team Assistant Yolanda Gedse Program Team Assistant Rozena Serrano Program Team Assistant Juderica Dias

85

Unit ECSSD COCPO ECSSD ECSSD ECSSD ECSPS ECSPS LOAGl IEF LEGEC LEGPS EWDEN ECCKO EXTCC ECSSD ECSSD ECSSD ECSSD ECSSD ECSSD ECSSD ECSSD

IDA funds expended to date on Project preparation: 1. World Bank resources: US$892,731 US$ 48,569 2. Trust funds: US$941,300 3. Total: Estimated Approval and Supervision costs: 1. Remaining costs to approval: approx. US$50,000 2. Estimated annual supervision cost: FY07: US$750,000 FY08: US$750,000 FY09: US$450,000 FY10: US$200,000

86

Annex 12: Documents in the Project File

KOSOVO: Lignite Power Technical Assistance Project A. World Bank Staff Assessments and Documents Financial Management Assessment Report.

Procurement Assessment Report.

Environmental and Social Safeguards Framework (ESSF), February 2006.

B. Other Documents Energy Strategy and Policy o f Kosovo (White Paper), 2006-2015, Ministry o f Energy and Mining.

Program for the Implementation o f the Kosovo Energy Strategy for the Period 20062008, Strategy Ltd., December 2005.

Pre-feasibility Studies for the New Lignite Fired Power Plant and Pollution Mitigation Measures at Kosovo B Power Plant, Electrowatt-Ekono, draft final report, February 6,2006 (on CD Rom).

The Complementary Mining Plan for SW Sibovc Lignite Mine, STEAG AG, April 2006.

Opportunities in Kosovo for Independent Power Producers: Pre-feasibility Study for a Lignite Fired Power Plant, USAID. Review o f the Policy, Legal, Regulatory and Institutional Framework for Private Sector Participation in the Energy Sector in KOSOVO, P A Energy Consulting and Norton Rose, March 2005.

Preparation o f a Mid-Term Plan for the Development o f Existing Coal Mines and a Main Mining Plan for the New Sibovc Mine, Vattenfall Europe Mining AG, June 2005.

87

Annex 13: Statement o f Loans and Credits

KOSOVO: Lignite Power Technical Assistance Project As o f Date Q8lQ7I2OQ6 Difference between expected and actual disbursements

Original Amount in US$Millions Project ID

FY

PO96181 PO88045

2006 2005

PO78674 PO88865 PO79259 PO79260

2005 2005 2004 2003

Purpose

IBRD

IDA

SF

GEF

Cancel.

Undisb.

Orig.

Fllll.

Rev’d

CLEAN UP & LAND RECLAMATION BUS ENV TA ECON POUPUB EXP MGMT ENERGY SECTTA3 COMM DEVTFUND2 EDUCATION

0.00

5.50

0.00

0.00

0.00

5.59

0.00

0.00

0.00 0.00

7.00 5.50

0.00 0.00

0.00 0.00

0.00 0.00

6.91 5.44

0.80 3.10

0.00 0.00

0.00 0.00 0.00

2.50 4.00 4.50

0.00 0.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00

2.50 1.09 1.10

0.80 -0.44 0.73

0.00 0.00 0.73

Overall Result

KOSOVO STATEMENT OF IFC’s Held and Disbursed Portfolio InMillions o f U S Dollars Committed

Disbursed

IFC FY Approval

Loan

Company

IFC

Equity

Quasi

Partic.

Loan

Equity

Total portfolio:

I I

Approvals Pending Commitment FY Approval

Company

Loan

Total pending commitment:

88

Equity

Quasi

Partic.

Quasi

Partic.

Annex 14: Kosovo at a Glance

KOSOVO: Lignite Power Technical Assistance Project

Kosovo at a d a n c e POVERTY and SOCIAL 2004 Population, mid-year (millions) GNI per capita (Atlas method) 1/ GNI (US$ billions)

Kosovo estimates

Europe & Central Asia

Lowermiddleincome

1.9 1,460 2.9

472 3,290 1,553

2,430 1,580 3,647

-0.1 -0.5

1 .o 0.7

54 68 29

Average annual growth, 1997-03 Population (%) Labor force (%) Most recent estimate (latest year available, 1997-04) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1.000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Illiteracy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population) Male Female

37 37 74 35 54 7

91 3 101 103 101

49 70 33 11 81 10 114 115 113

1993

2003

2004

2.5 22.9 9.6 -5.7 -3.6

2.5 26.3 10.0 -4.2 0.0

-26.6 0.0 n/a n/a n/a n/a

-26.3 0.0 nla n/a n/a n/a

2003

2004

2004-08

-0.5 -2.2

2.0 0.3

1988

1998

2003

2004

20.4 47.4

26.6 33.8

32.2

37.4 14.6

17.9

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983

GDP (US$ millions) InvestmentlGDP Exports of goods and services/GDP Domestic savingslGDP National savings/GDP Current account baiance/GDP interest paymentsiGDP Total debt/GDP Total debt service/exports Present value of debt/GDP Present value of debtlexports (average annual growth) GDP GDP per capita Exports of goods and services

1983-93

1993-03

STRUCTURE of the ECONOMY

(?A of GDP) Agriculture Industry Manufacturing Services Private consumption General government consumption Imports of goods and services

Note: All data are estimates.

1/ Data for Kosovo are not Atlas Method

89

2117/05

Annex 15: Kosovo M a p Kosovo: Lignite Power Technical Assistance Project

MAP NO. IBRD 34916

IBRD 34916 20°00' E

20°30' E

21°00' E

To Kraljevo

SERBIA

This map was produced by the Map Design Unit of The World Bank.

The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

21°30' E

To Kraljevo

KOSOVO LIGNITE POWER TECHNICAL ASSISTANCE PROJECT

ˆ

To Nis lica Top

r Iba

Leposavic´ (Leposaviq)

ˆ

To Nis

S

43°00' N

Gazivodsko Jezero

43°00' N

E

R

ˆ

MO NTENEGRO MONTENEGRO

Zvecan (Zvecan)

Zubin Potok

B Podujevo

Mitrovica (Mitrovicë) ˆ

Istok (Istog) Drim Djurakovac

Kli na

To Ivangrad

La

Srbica

Gracanicko ˘ ˘ Jezero

Kosovo Polje (Fushë Kosovë)

ˆ

a nic Sit

ˆ

Radonjicko Jezero

42°30' N

ˆ

ˆ

rim

Vitina (Viti)

FYR MACEDONIA

c na

Liqeni i Fierzës

Gora (Dragashi)

MAIN ROADS

ava or

Kacanik (Kacaniku)

Strpce (Shterpce)

Prizren

D

M

a

Gabrica

Lepe

li Be

ck Bina

Urosevac (Ferizaj)

Suva Reka (Suhareke)

ALBANIA

Gnjilane (Gjilani)

˘ Stimlje (Shtime) ˆ

ik

en

Er

Orahovac (Rahovec)

Djakovica (Gjakove)

SKOPJE

To Sofia

21°30' E

20°

AUSTRIA

To Durrës

HUNGARY SLOVENIA

NATIONAL CAPITAL

ROMANIA

CROATIA

PROVINCE BOUNDARY

To Bitola

BOSNIA AND HERZEGOVINA

dr ia

BULGARIA KOSOVO

tic

To Bitola *When two city names are shown, Serbian spellings are shown first, followed by Albanian spellings in parentheses.

When only one name is shown, the spelling is the same in both languages.

0

20°30' E

20

30 Kilometers

10

20 Miles 21°00' E

Black Sea

MONTENEGRO

Se

FYR MACEDONIA

a

ALBANIA 40°

40°

Tyrrhenian

0 20°00' E

10

ITALY

30°

SERBIA

A

INTERNATIONAL BOUNDARIES

42°00' N

A LDOV MO

RAILROADS SELECTED CITIES*

To Leskovac

Lipljan (Lipjan)

Malisevo

To Durrës

Kosovska Kamenica

Novo Brdo (Novo Berde)

ˆ

42°30' N

PRISTINA (PRISHTINË)

Glogovac (Gilogoc)

Klina (Kline)

Decani (Decan)

b

Obilic´ (Obiliq)

Pec´ (Peje)

a anc

ˆ

Beli

l Jab

Batlavsko Jezero

Vucitrn (Vushtrri)

To Ivangrad

A

I

To Leskovac

GREECE

Sea

Aegean Sea

TURKEY

20°

AUGUST 2006