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Implementation Completion Report (ICR) Review - Energy 2 Project


  
1. Project Data:   
ICR Review Date Posted:
02/24/2014   
Country:
Moldova
PROJ ID:
P040558
Appraisal
Actual
Project Name:
Energy 2 Project
Project Costs(US $M)
   
L/C Number:
C3833, C4541
Loan/Credit (US $M)
 27.70  31.17
Sector Board:
Energy and Mining
Cofinancing (US $M)
 0.6 0.0  1.86; 2.0
Cofinanciers:
SIDA, GEF
Board Approval Date
  11/25/2003
 
 
Closing Date
04/30/2008 04/30/2012
Sector(s):
Power (70%), Central government administration (10%), Energy efficiency in power sector (10%), Health (5%), General education sector (5%)
Theme(s):
Urban services and housing for the poor (25% - P) Infrastructure services for private sector development (25% - P) Regulation and competition policy (24% - P) Pollution management and environmental health (13% - S) Climate change (13% - S)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Richard L. Berney
Kristin Hallberg Soniya Carvalho IEGPS1

2. Project Objectives and Components:

a. Objectives:
The Project Development Objectives in the Development Credit Agreement (page 13) are to:

(a) improve the security and reliability of the electricity transmission system and the wholesale electricity supply and facilitate unimpeded commercial operation of the power system; and
(b) improve the availability, quality, and efficiency of heating in selected buildings.

b. Were the project objectives/key associated outcome targets revised during implementation?
No

c. Components:
Component A: Electricity system upgrade (Appraisal US$24.5 million, Actual US$36.8 million). This component includes the following subcomponents:

  • Improvement of metering in the electricity transmission network. Installation of energy meters at all interconnecting points of the 110-400-kV transmission network, which would enable metering and recording of active and reactive electricity flows in the wholesale electricity market. The meters would record at 15-minute intervals, be able to transmit information to the National Dispatch Center, and have remote and on-site data downloading and reading capabilities.
  • Rehabilitation and upgrade of power system dispatch. Installation of the necessary hardware and software to enable real time acquisition of operational information from the main facilities (power stations and transmission system substations), analysis and monitoring of the system status at the National Dispatch Center, and control and dispatch of the power plants, load centers, and the transmission system, to maintain a reliable, secure and economic operation, and facilitate financial settlements in the wholesale electricity market. The main elements of the system include Remote Terminal Units (RTU) and the corresponding local data acquisition equipment at the power plants and transmission substations, the System Control and Data Acquisition (SCADA) system, and the Energy Management System (EMS).
  • Rehabilitation and upgrade of system telecommunications. Installation of the necessary communications equipment (fiber optics, power line carrier systems and radio systems), which would serve the communication needs of metering and dispatch.
  • Priority rehabilitation of the transmission network, including environmental upgrades. Replacement and repair of high voltage transmission line pylons and the most urgently needed rehabilitation measures in selected high-voltage substations (station batteries for 11 substations, 330-kV equipment for the Chisinau, Straseni and Balti substations and a number of 110-kV circuit breakers for various substations). Depending on the outcome of the PCB follow-up study (see below under Component C), this component could include physical mitigation measures for appropriate protection of PCB containing condenser batteries, and for their disposal to be implemented when replacement of the batteries is required.

Component B: Heating Supply and Efficiency Improvement (Appraisal US$9.2 million, Additional Financing US$ 9.8 million, Actual US$21.91 million). This component includes improvements in supply and distribution of heat and demand side measures for heat and hot water consumption in selected public buildings (schools, hospitals, and residential buildings for disabled and other vulnerable groups). About 20 subprojects, comprising the first investment batch, have been identified and technically appraised. An indicative list of additional buildings has been prepared, and includes about 95 objects in 8 municipalities. The list includes approximately 50 schools and kindergartens with more than 15,000 pupils and 25 hospitals and clinics with more than 4,000 beds.

Component C: Technical Assistance for Project Implementation and Energy Sector Reforms (Appraisal US$1.60 million, Actual US$4.74 million). This includes technical assistance for the following activities;
  • Project implementation consultant services for procurement and project management for the electricity and heating components, and audit of the project and Moldelectrica's financial statements;
  • PCB follow-up study: The environmental assessment carried out in the context of project preparation indicated that no appreciable adverse environmental impacts would result from the implementation of the proposed electricity system upgrades. However, in order to strengthen its capacity to deal with the potential problem of condenser batteries containing PCBs located at substations throughout the country, the Government has requested the inclusion in the technical assistance to carry out a follow-up study on this issue, including the development of recommendations for appropriate protection of the sites and disposal of old PCB-containing condenser batteries, to be implemented when replacement of the batteries is required. Actual removal of the capacitors or renewal of old ones is not foreseen under the project. The study was financed by GEF Grant for Sustainable Persistent Organic Pollutants Stockpiles Management Program (the POPs project). POPs also financed the disposal of the old PCB containing condenser batteries and capacitors.
  • Consulting services to support improving institutional and regulatory framework in the energy sector, energy trading, privatization, and debt restructuring.

Component D: Project Management and Administration (Appraisal US$1.38 million, Actual US$1.63 million). This component included the incremental costs associated with the establishment and operation of a Project Implementation Unit created by the project beneficiaries specifically for implementation of this project.

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates
Cost: Total project cost increased from US$40 million at Appraisal to US$65.1 million at completion. The IDA contribution SDR25.7 million was equivalent to US$35 million, but its average value (in terms of US$) increased substantially, from approximately US$1.36 per SDR at appraisal, to an average of SDR1.54 over the lifetime of the project. This increased the availability of US$ by approximately US$4.5 million over the project's life(of which US$0.4 million was cancelled at project closing). The US$ value of Swedish Kronen also increased from US$1.6 million equivalent to US$1.86 million over the project life.

Financing: The original project financing was SDR25.7 million (US$35 million equivalent). The Government requested an Additional Financing Credit to extend the project’s work on rehabilitating central heating companies. An additional credit (CR4541) for SDR6.7 million (US$10 million equivalent) was approved by the Board of Directors on January 29, 2009 for this activity. SIDA contributed US$0.6 million equivalent for the initial project and added another US$1.0 million equivalent for the Additional Financing project. Due to the appreciation of the Swedish Krona relate to the dollar over the life of the project, SIDA's total actual contribution was US$1.86 million. GEF provided US$2.0 million for disposal of PCB from the POPs Project, which was not included in the original appraisal cost estimate.

Borrower Contribution: At appraisal, the contribution of Moldelectrica, the National Electricity company was estimated at US$4.3 million. Its actual contribution was US$10.8 million. Municipalities contributed US$1.0 million and the Government contributed US$0.1 million, none of which were anticipated at appraisal.

Dates: The closing date was extended 21 months, from April 30, 2008 to December 31, 2009 to allow completion of the SCADA contract. The closing date was extended again by two more years, to December 31, 2011 at the time of the approval of the additional credit, to harmonize the closing dates of these two credits and ensure that the additional funds would be fully utilized. The additional credit was closed on its original closing date of December 31, 2011. The original Credit was extended a third time, by three months, until April 30, 2012 to allow for final testing and operational acceptance of the SCADA system.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:
High: The project was consistent with the objectives of the 2002 Country Assistance Strategy. It promoted macroeconomic sustainability by (i) helping stem the accumulation of new public debt related to electricity sector enterprises, (ii) promoting economic growth by improving the reliability of electricity supply to the economy, and (iii) supporting the restructuring of the energy sector’s outstanding debt. It also supported the specific objectives of two of the three pillars of the 2008 CAS: improving the competitiveness of Moldova’s enterprise sector by increasing the reliability of energy supply, and supporting the promotion of social inclusion by increasing the quality of and access to education and health services.To ensure that the objective to facilitate unimpeded commercial operation of the power system, the loan agreement included a specific covenant that “The Borrower shall maintain a legal, regulatory, policy and institutional framework for the energy sector conducive to efficient commercial operation, attracting private investments and ensuring reliable and affordable energy services.”

b. Relevance of Design:
Substantial: The project was designed to support the following activities:

  • Upgrade the country's electricity transmission and dispatch networks in order to improve its reliability;
  • Upgrading of the heating systems of public buildings in order to improve the availability, quality, and efficiency of heating.
  • Strengthen electricity sector reforms, including sector regulation in order to facilitate unimpeded commercial operation of the power system.
All of these components were directly relevant to the project’s development objectives, with clear indicators related to the targets of each component.


4. Achievement of Objectives (Efficacy) :

1. Improving the security and reliability of the electricity transmission system and the wholesale electricity supply. Substantial


Outputs:

  • The target of installing 400 meters plus one Metering Management System was exceeded. Installation of the Metering Management System and 580 meters was completed by June 2010.
  • The target of replacing 53 obsolete and failure prone high-voltage circuit breakers was achieved by June 2010. Forty seven were procured under the project. Moldelectrica had already installed the other circuit breakers using its own funds.
  • SCADA and telecommunications systems for improved power system dispatch and control was installed and working by project closing.

Outcomes:
All Development targets of this component were met or exceeded.
  • target 1 was to reduce outage rates of transmission lines and substations by 35% In 2011, outages were reduced by 59% from baseline level.
  • target 2 was to reduce non-technical losses in transmission and distribution by 75%: As a result of the installation of meters at all substations, non-technical losses went from 11% in 2002 to zero in 2011.
  • target 3 was to reduce unserved energy by 200 MWh per year: Unserved energy declined from about 400 MWh in 2002 to about 100 MWh in 2011.
  • target 4 was to reduce Moldelectrica’s technical losses by 5%. Technical losses were reduced by 5.7% reduction, from 139 GWh losses in 2002 to 131 GWh in 2011.
2. Facilitating the unimpeded commercial operation of the power system. Substantial

Outputs:
Technical Assistance was provided for improving institutional and regulatory framework in the energy sector which resulted in:
  • Specification for the Market Rules for the Electricity Market were developed.
  • A system for bench marking of Moldova’s Energy Sector for Compliance with the European Energy Community’s requirements was established
  • A metering code was established for the commercial metering system;
  • Balancing and Settlement Regulations were established for Moldova’s Electricity Market.
  • Following intensive sector dialogue, a new Energy Law was approved in December 2009,
  • An action plan for legal and regulatory compliance of Moldova’s electricity markets with the ECSEE Treaty was developed and adopted, including legal Audits and Benchmarking in compliance with Energy Community Requirements.
Outcomes:
  • The metering system provided reliable measurements of energy flows between generating plants and imports and distribution companies, exports and eligible consumers, which provided the basis for commercial transactions to be properly accounted and supported;
  • The SCADA system provides real time data from substations, facilitating safe, reliable and economic operation of the power transmission network, and ensuring that dispatch is consistent with commercial contracts. This improvement in the security and reliability of the electricity transmission system and wholesale electricity supply facilitate unimpeded commercial operation of the power system, both domestically and internationally;
  • These achievements in efficiency, regulation, and commercial operation of Moldova’s electricity system has enabled it to become a full member of the Energy Community Treaty in 2010.
  • In order to ensure that the Project Development Objective of facilitating the unimpeded commercial operation of the power system, the legal agreement included the covenant that: "The Borrower shall maintain a legal, regulatory, policy and institutional framework for the energy sector conducive to efficient commercial operation, attracting private investments and ensuring reliable and affordable energy services.” The ICR states that by the latter stages of the project the Borrower was in full compliance with this covenant. However, it must be noted that while the Government complied with the covenant in most of its actions, it has not fully complied with it on the setting of tariffs. Although the Government's official policy is to set tariffs at cost-recovery levels, for the past several years the National Energy Regulating Agency has restricted Moldelectrica from fully adjusting the value of its assets for inflation. As a result, Moldelectrica’s financial position has deteriorated.

3. Improving the availability, quality, and efficiency of heating in selected building: High

Outputs:
  • A Project Preparation Fund (PPF) was used to implement a successful pilot heating upgrade system in the municipality of Ungheni. It included construction of modern block boiler plants for heat supply to both public institutions and residential buildings.
  • The initial target was for 80 buildings to be provided with 120 days of winter heating. With the Additional Financing IDA Credit, the target was increased to 170 buildings. At project completion, 252 buildings, including schools, hospital, kindergartens and orphanages and 43 residential buildings were being provided with 120 of winter heating.

Outcomes:
  • Following the completion of the four PPF financed boiler plants at Ungheni, the municipality used their own funds to built ten additional boiler plants to cover the requirements of most of the municipality’s public institutions and residential consumers.
  • The target of improving heating system efficiency by at least 30%, exemplified by a lower specific heat consumption (W/m3) in the design conditions was met.
  • In schools and kindergartens 27 thousand students and teachers benefited from heated facilities throughout the winter season, while in medical buildings 1.3 million inpatients, medical staff and outpatients benefited from heat facilities throughout the winter season.

5. Efficiency:

High: The ICR estimates the economic rate of return for the entire electricity rehabilitation component to be 39.8 percent, slightly higher than the ERR estimate of the PAD. The new metering system has increased the level of payments received by Moldelectrica from 30% in 1999, the last year when the old equipment was operated, to 90% by mid 2012.
For the new heating systems, the ICR attempted to analyze cost effectiveness but instead discussed the costs of obtaining equivalent amounts of heat under the old and the new systems. The new boiler systems demonstrated energy savings ranging from between 39 percent and 67 percent, with an average of 58 percent (reduction in specific energy demand ranging from 126-905 kWh/m2 – with an average of 352 kWh/m2, to a range of between 63 and 333 kWh/m2, with an average of 150 kWh/m2). As a result, for the residential areas where new boiler systems were financed under the project, the cost of heating during the 2002-2003 heating season declined from an average of Moldovan Leu (MDL) 6.53/m2, compared to MDL 12-14/m2 under the old systems that were supplied by the older, oversized Mazut boiler plants.

According to the ICR, an efficient, effective and adequately staffed PIU was maintained throughout the project implementation period.

Although the completion of the SCADA system took considerably longer than was estimated at the time of appraisal, and necessitated twice extending the project closing date, the other electricity rehabilitation activities were implemented on schedule.

a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return at appraisal and the re-estimated value at evaluation:


Rate Available?
Point Value
Coverage/Scope*
Appraisal:
Yes
39.3%
61%
ICR estimate:
Yes
39.8%
54%

* Refers to percent of total project cost for which ERR/FRR was calculated

6. Outcome:

The project objectives were, and still are, highly relevant to Moldova’s development objectives, and for the most part the project design is Substantially relevant to the project objectives. All the investment targets were met or exceeded and the resulting benefits exceeded the project's development indicator targets . Efficacy for the investment objectives is therefore High. The outcome of the sector policy component is Substantial. It would have been High if there had not been an issue of full inflation adjustment of assets which, if the issue remains unresolved could have along term negative impact on the objective of unimpeded commercial operation of the power system, for both Moldelectrica and for electricity generation investments. The efficiency for both investment objectives is High. The economic rate of return for the electricity component was almost 40 percent.

a. Outcome Rating: Satisfactory

7. Rationale for Risk to Development Outcome Rating:

The technical risk is assessed as negligible to low. All of the technologies introduced are well established. Moldelectrica and the heating systems operators have received training from the suppliers, and have maintenance programs in place, which should ensure a quality heat supply will be available for at least the next 15 years.

The financial risk is assessed as significant. Moldelectrica’s financial position has deteriorated since 2009. According to its external auditors, the primary reason for this decline is the failure of ANRE to include adequate inflation adjustments of assets in its tariff calculations. Moldelectrica’s future financial viability will depend upon its ability to ensure full-cost depreciation of its assets. The financial risk for the heating component is also substantial since it dependent on the local authorities and/or the national government providing adequate budgetary resources for systems operation and maintenance..

a. Risk to Development Outcome Rating: Significant

8. Assessment of Bank Performance:

a. Quality at entry:
Bank performance in ensuring quality at entry was rated as satisfactory by the Seventh Quality at Entry Assessment for FY04-05. Project preparation took almost four years. During that time background diagnostic work, including social assessments, feasibility studies, and financial analysis had been implemented under several project preparation grants. Project preparation was put on hold on several occasions in order to ensure that the necessary legal, regulatory, policy and institutional framework was in place before the project investments began, and a specific covenant was incorporated in the Development Credit Agreement to ensure that an appropriate institutional framework would remain in place throughout project implementation (see section 11.d)

A Japanese PHRD Grant was used to prepare a business plan for Moldelectrica, including a revaluation of its assets and new tariff calculations based on the revalued assets. A PHRD grant also financed the feasibility study for the project’s electricity component. A parallel SIDA grant supported an analysis of the “Strategic Heating Options for Moldova”. SIDA also financed the preparation of technical specifications and bidding documents for the heating system rehabilitation at Ungheni.

A nationwide household survey, focus groups and in-depth interviews were conducted to elicit input from various social groups on energy related problems, focusing on heating and energy efficiency options, their affordability and the potential participation of households and home owners associations in implementing options considered under the heating component. The results indicated that priority should be placed on energy efficiency improvements in public buildings, which provided services to all members of the population, including some, such as kindergartens and schools that were likely disproportionately used by the poor, thereby maximizing the project’s potential social impact.

The project team underestimated the complexity and the time required for installation of a modern SCADA system. This problem has been faced in almost every project in the ECA region with a SCADA component, but it was not evident at the time of project preparation.

Quality-at-Entry Rating: Satisfactory

b. Quality of supervision:
Project supervision was carried out regularly and a detailed mid-term review was conducted. During several years of project implementation the task team leaders were based in Kiev and in Chisinau, enabling them to maintain close contact with the Government, the PIU and ME, as well as with the SIDA representatives.
Beginning in 2010, bimonthly meetings of Bank staff, Moldelectrica, the Ministry of Energy, the PIU, and the SCADA contractor were implemented to resolve the delays in implementation of the SCADA/Telecommunications contract. This helped to resolve the poor communications between ME and its contractor and was instrumental in ensuring the successful completion of this project component.

Quality of Supervision Rating: Satisfactory

Overall Bank Performance Rating: Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:
Government's ownership and commitment to achieving the project's development objectives was highly satisfactory throughout the project cycle, as demonstrated by its actions.

In the five years before project appraisal, the Government embarked on an ambitious set of reforms in the energy sector, whose main objective was the commercialization of energy supply, accompanied by social policies to protect the most vulnerable groups. These included:

  • It implemented energy sector legal, regulatory and structural reforms during project preparation;
  • It developed a new, market oriented legal framework for the sector; established an independent energy regulatory agency (ANRE), whose mandate was to adjust the level and the structure of tariffs the sector, It corporatize the previously vertically integrated electricity state monopoly and unbundled and restructured it into five distribution companies, and four independent generation companies.
  • It separated historic debts from the transmission and dispatch company and the other companies operating the power system, and started the process of compiling a detailed inventory of the debts, and restructuring them;
  • It established a Project Implementation Unit early in the project preparation process (in 2001);
  • The Deputy Prime Minister was designated as head of the PIU Supervisory Board. The Board met regularly on a set schedule during the latter years of project implementation.

During project implementation the Government established an effective enabling environment including supportive macro, sectoral, and institutional policies through legislation, regulatory reform and pricing reforms.

The Government also provided timely resolution of implementation issues. As an example, the Ministry of Economy took an active interest in resolving the SCADA contract issues and getting the implementation of this contract back on-track, so that the commissioning and final testing could be completed by project closing.

Government Performance Rating: Highly Satisfactory

b. Implementing Agency Performance:
The PIU was the main coordinating unit for project implementation and worked diligently on all aspects of project implementation. It strictly followed Bank procedures and the provisions of its Operations Manual. All of its staff were experienced, adequately trained, and highly effective. It hired a Monitoring and Evaluation Specialist early in the project, which was extremely helpful in tracking the progress towards meeting the project's development objectives. It prepared a comprehensive mid-term review and Borrower’s ICR, and regularly prepared quarterly progress reports. It also provided a comprehensive project completion report .The ICR states that it is in a large part due to PIU that the project achieved all of its project development targets.

Moldelectrica designated its own technical project implementation team, including an Environmental Management Specialist, to work with the contractors on physical implementation of the electricity component and with the PIU in administering the project. It used its own resources to finance environmental upgrade measures (see section 2.4). There were, however, lengthy delays in implementation of the SCADA contract, due, at least in part, to poor communications with the contractor, which intervention by the Bank's supervision team helped to overcome.

Local Authorities and Municipalities: Despite some initial delays due to lack of funding for building thermal rehabilitation, the local authorities were effective in monitoring and supervising the works at their sites and providing the necessary information to the PIU and heating consultants. Many local authorities implemented other energy saving measures, either through their own means or with other donors.

Implementing Agency Performance Rating: Satisfactory

Overall Borrower Performance Rating: Satisfactory

10. M&E Design, Implementation, & Utilization:

a. M&E Design:
Modest: The selected monitoring target indicators were directly relevant to the achievement of the Project Development Objectives and to the project component. They were quantifiable and measurable and, for the project's power objectives, were adequate to measure the achievement of the project's objectives. However, at the time of Appraisal, the PAD results framework did not include baseline values or intermediate outcome values. The PIU hired an M&E Specialist and added baseline date during project implementation.


The original indicator for the heating component monitored only the number of buildings with improved heat and/or hot water. During project implementation the Bank team requested the PIU also monitored the number of persons (students and teachers and the number of inpatients, outpatients, and medical staff) who benefiting from improved heating and hot water. These indicators were formally added to project M&E at the time of the approval of the Additional Financing Project. After this addition, the target indicators were adequate to measure the achievements of the project's district heating objectives.

b. M&E Implementation:
High: The PIU hired an M&E specialist, collected the baseline data and all the agreed upon project indicator values. In addition, it collected the information on the persons benefiting from the heating component. It provided the Bank with quarterly progress reports that included the data related to all of these indicators.

a. M&E Utilization:
High: Moldelectrica used its operational indicators in its day to day operations will continue to monitor them as indicator of how well they are doing and where improvements need to be made. The data related to the results of the heating component were used to encourage other communities to seek financing for similar projects.

M&E Quality Rating: Substantial

11. Other Issues:

a. Safeguards:
The project fully complied with Bank environmental safeguard requirements. The project triggered OP/BP 4.01 Environmental Assessment rating was Category B. An Environmental Management Plan (EMP) was prepared. The Borrower submitted to the Bank, and the Bank approved the project EA and EMP together with the description of the public disclosure and consultation process. These were satisfactory to the Bank. Subsequently, a social assessment was implemented during project preparation, including full information disclosures and a public consultation was organized by the Ministry of Energy. The consultations were attended by 45 representatives of various NGOs, municipalities, ministries, and the media.

Environmental Assessment reports were included in design documents for all subprojects, identifying potential environmental impacts along with the environmental protection and monitoring activities. The State Ecological Expertise officially approved the final design documents. The contractors followed strictly the environmental requirements and there were neither outstanding environmental issues nor any complaints registered.

Removal of PCBs in the electricity component was implemented within the GEF POPs program, which scaled up the initially planned environmental upgrades, and included the following:

  • 18,656 PCB contaminated capacitors were dismantled and about 1,266.2 tons of highly polluted soil were excavated from the Vulcanesti 400 kV substation and other lower voltage sub-stations and shipped for final disposal to France;
  • a regulatory framework for PCB management was developed;
  • two workshops to train ME staff on proper handling, packing, loading and labeling of PCB containing or/and contaminated capacitors and on emergency procedures;
  • a full PCBs inventory in the energy sector was completed and all transformers containing PCBs were labeled.

The other environmental upgrade measures performed by ME during 2008-2010 using own funds (about US$270,000 equivalent), including:
  • designing, manufacturing and repairs of oil collectors and drip pans under the oil based equipment; overhaul of oil based circuit breakers and power transformers;
  • replacement of oil based bushings by dry ones;
  • replacement of the fire-fighting pipeline at the Straseni 330 kV substation;
  • replacement of gravel under the oil based equipment.

b. Fiduciary Compliance:
The PIU fully complied with the Bank’s fiduciary policies. Procurement was implemented in accordance with the Bank’s Procurement and Consultant Guidelines. The Bank’s Standard Bidding Documents were used, and procurement plans were regularly updated and submitted to the Bank.
The accounts of both the project and Moldelectrica were audited annually by an independent auditing firm acceptable to the Bank. The PIU’s project account audits were clean (no exceptions). Moldelectica’s financial ratios were generally satisfactory. The Audits showed that Moldelectrica had complied with all of the financial covenants in the Project Agreement, except for the current ratio, which was supposed to be at least 1.2. It fell to 0.8 in 2009, but then improved to 1.1 in 2010 and to 1.18 in 2011. However, for the years 2010 and 2011 the external auditors reported that annual depreciation charges had not been adequately adjust in line with international standards. If depreciation had been estimated in line with international standards, the company would have incurred higher losses than reported. The auditors have also commented that current liabilities were understated.

c. Unintended Impacts (positive or negative):
The positive experience in the town of Ungheni has had a strong demonstration effect, which has resulting in other communities following suit and renovating their heating systems.

  • As a result of the improved efficiency of the new boilers, CO2 emissions were reduced from 42,000 tons per year to 16 tons per year while Nitrous Oxide emissions were reduced from 59 tons per year to 10 tons per year, and Sulfur Dioxide emissions were reduced from 21 tons per year to zero.
  • Following intensive sector dialogue, a new Energy Law was approved in December 2009, and a national Energy Efficiency Program was approved in November 2011.

d. Other:
Sector Issues: The Credit Agreement included a special covenant on sector policy:“The Borrower shall maintain a legal, regulatory, policy and institutional framework for the energy sector conducive to efficient commercial operation, attracting private investments and ensuring reliable and affordable energy services.” This covenant enabled the IDA team to monitor developments in the energy sector that were not directly part of the project, such as regulatory agency performance and performance of the district heating sector, and to locate funding from other donors to carry out related studies. Compliance with this covenant was closely monitored throughout project implementation. While at times the covenant was only partially complied with, by the end of the project the Borrower was in full compliance with all but tariffs levels, which did not include full return to appropriately revalued assets.



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Satisfactory
Satisfactory
 
Risk to Development Outcome:
Moderate
Significant
The risk of tariffs not be sufficient to cover full cost recovery of revalued assets is considered significant. 
Bank Performance:
Satisfactory
Satisfactory
 
Borrower Performance:
Satisfactory
Satisfactory
 
Quality of ICR:
 
Satisfactory
 
NOTES:
- When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
- The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

13. Lessons:
The following lessons are summarized from the ICR:
  • The difficulty of introducing modern SCADA/Telecommunications systems should not be underestimated with respect to complexity and time required for implementation. Adequate time needs to be allowed for development of technical specifications. A utility unfamiliar with this advanced technology should therefore have an in-house independent engineering consultant actively engaged in all aspects of project design and implementation.
  • PPFs can be effective instruments for undertaking pilot investments, and can assist in the early creation of a Project Implementation agency (PIU). The use of the PPF in the Ungheni pilot project provided both an early demonstration of the results/impact of heating/energy efficiency improvements and a test of the proposed solution to connect residential buildings, provided that the residents are willing to pay for the heat. It also introduced an element of competition for participating municipalities and thereby triggered higher commitment to successfully complete the sub-projects and ensure sustainability.
  • Project Design: If the institutional framework to ensure the viability of heating investments in the household sector is weak due to ambiguous and often contradictory legal basis of home owner associations, it is better to focus on public buildings where the social benefits accrue to all.
  • Importance of selection criteria. Up front statement of clear and transparent selection criteria for choice of investment locations can considerably reduces potential political pressures and influence both during the selection of project beneficiaries, as well as during the implementation of investments.
  • Including policy reforms in the project, accompanied by priority investments, was instrumental in leveraging additional domestic and donors financing. The reform actions combined with the demonstration effect of priority investments played a catalytic role in attracting additional resources, which, in turn, contributed to achievement of improved outcomes and enhanced sustainability.

14. Assessment Recommended?

Yes
Why?
Significant lessons could be learned about how to effectively implement improvements in district heating, especially if the assessment was combined with other Eastern European district heat projects.

15. Comments on Quality of ICR:

The ICR was well written and thorough. However, it should have noted that the lack of full recover pricing was inconsistent with the financial covenant.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6INV-Jun-2011)
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