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Implementation Completion Report (ICR) Review - Lignite Power Technical Assistance Project


  
1. Project Data:   
ICR Review Date Posted:
06/12/2014   
Country:
Kosovo
PROJ ID:
P097635
Appraisal
Actual
Project Name:
Lignite Power Technical Assistance Project
Project Costs(US $M)
 10.5  16.4
L/C Number:
CH254, CH318
Loan/Credit (US $M)
 8.5  8.9
Sector Board:
Energy and Mining
Cofinancing (US $M)
 2.0  2.0
Cofinanciers:
European Agency for Reconstruction
Board Approval Date
  10/12/2006
 
 
Closing Date
12/31/2009 12/31/2011
Sector(s):
Central government administration (68%), Mining and other extractive (16%), Power (16%)
Theme(s):
Infrastructure services for private sector development (33% - P) Other social development (17% - S) Regional integration (17% - S) Regulation and competition policy (17% - S) Environmental policies and institutions (16% - S)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Ramachandra Jammi
Roy Gilbert Christopher David Nelson IEGPS1

2. Project Objectives and Components:

a. Objectives:
The objectives of the project are identically stated in the Financing Agreement (Schedule 1, page 5) and the Project Appraisal Document (page 7) as to:

(i) help the Provisional Institutions of Self-Government (PISG) to strengthen the enabling policy, legal and regulatory frameworks conducive to new investments in the energy sector; and
(ii) assist PISG to attract qualified private investors to develop lignite mines and build new capacity for lignite thermal power generation guided by high standards of environmental and social sustainability.”

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

c. Components:
Component 1: Sector Policy, Legal, Regulatory and Safeguards Advice. (Planned: US$3.0 million, Actual: US$6.9 million)
Subcomponent 1 - Sector Policy, Legal and Regulatory Advice:. First, the consultants would help in preparing the key legislation, including any required amendments that would facilitate the proposed new mine/plant transaction, building on the “Review of 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) Second, the consultants would help support the transaction through to financial closing by preparing legal and contract documents for procurement under the project..
Subcomponent 2 - Safeguards Framework: The consultants would prepare (i) a Strategic Environmental and Social Assessment (SESA) specific to energy sector development, which would identify environmental and social issues of projected developments in the power generation and related lignite mining sectors; (ii) an environmental baseline monitoring toolkit, collect field data and compile the environmental baseline data to facilitate due diligence and preparation of bids; (iii) the outline of needs for institutional strengthening and capacity building to assess, monitor and regulate the environmental impacts of mining and power generation, and provide training to staff in relevant ministries; and (iv) a procedures handbook and other relevant manuals for Ministry of Environment and Spatial Planning (MESP) in this regard.

Component 2: Mine and Power Plant Analyses (Planned: US$2.25 million, Actual: US$2.27 million)
Subcomponent I - Investment Options Review: This subcomponent would 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 consultants would also conduct a market test to support their recommendations in regard to the alternative packages. The consultants would review the legal, financial and structural (e.g. public-private partnerships) issues of combining the Kosovo Electric Power Company (KEK)'s assets and the Sibovc SW Mine 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 New Mine/Plant investment packages.
Subcomponent 2 - New Power Plant Development and Technical Analysis: Would complement the various previous studies on mine and power plants and compile adequate information and analysis for bidders so that they can carry out due diligence in a timely and efficient manner. It would also help the Transaction Advisor (external specialists engaged to assist in the tendering, evaluation and negotiations with the successful bidder and in financial arrangements for the New Mine/Plant.) to prepare the bidding documents. Second, this would develop a knowledge base for decision makers in Kosovo to solicit, evaluate, and negotiate proposals for private development of the Sibovc Lignite Field in an economic and efficient manner.
Subcomponent 3 - Renewable Energy, Cogeneration and Energy Efficiency: Would help Ministry of Energy and Mines develop policies and strategies to promote renewable energy, cogeneration and energy efficiency in Kosovo. This would also examine development options for the two candidate hydropower plants. The use of carbon credits and similar instruments would also be explored in examining development options.

Component 3: Capacity Building (Planned: $1.25 million, Actual: $1.89 million)
This component would cover Capacity Building and Communications - Establishment of the Project Office and Project Steering Committee, training for the Ministry of Energy and Mining, Energy Regulatory Office & the Independent Commission for Mines and Minerals in major project development. In addition, office equipment and vehicles, incremental operating costs would be provided to the Project Office as the implementing entity. The Transaction Advisor would also assist the Ministry of Energy and Mining, Ministry of Environment and Spatial Planning and the Provisional Institutions of Self-Government to develop a communications and outreach strategy with the media and the public, and improve public consultations.

Component 4: Transaction Advisor (Planned: $3.0 million, Actual: $5.34 million) Building on the inputs and considerations from the other components, this component would support the PISG in carrying out the transaction process through to the financial close of the selected investment package for the Sibovc mine and other investment package components. This would involve preparation of documents for the bidding and evaluation process; finalizing evaluation criteria and methodology for the investment package; issuing Request for Proposals and short-listing bidders; Negotiations with successful bidder.

In December 2009 the Government decided to add the Kosovo B thermal power plant, which required major rehabilitation, to the KRPP or Kosovo e Re (New Kosovo) Power Project package.

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates
Project cost was 56% higher at completion (US$16.4 million) compared to the US$ 10.5 million estimated at appraisal. The increase in cost was partly due to the bids of the legal and transaction advisors being higher than expected and risk perceptions related to Kosovo. Operating expenses of the Project Office were higher than originally anticipated though no numbers are specified int he ICR. Frequent changes in project design as well as delays in project implementation also impacted project costs. A US$2.0 million additional financing grant was approved by the Board in June 2007. While there was no Borrower contribution planned at appraisal, by project completion, the increased cost was met by the Borrower (US$ 5.5 million) and an additional (US$ 0.4 million) by the Bank, indicating that US$1.6 of the additional financing was not used.

The project closing date was extended by two years from December 31, 2009 to December 31, 2011, in part due to the addition of a major component (Kosovo B), to the project package in December 2009; and partly due to a lack of direction and decision-making on the part of the Government during 2008-2009. Towards the end of 2011 it became clear that more funds would be needed for completing the remaining project activities. However, the Additional Financing rules would not allow a long enough closing date extension to complete the transaction. Therefore the project was closed on the revised closing date of December 31, 2011.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:
Kosovo depends on domestic lignite as its main source of electric power. Renewable energy (hydropower) provides only 2 percent of electric power generation. The state-owned Kosovo Electric Power Corporation (Korporata Energjetike e Kosovės - KEK) operates two heavily polluting power generating units, Kosovo A (800 MW) and Kosovo B (678 MW). The system had technical problems, poor management, and high technical and commercial losses. Highly unreliable electricity supply was consistently cited as one of the main obstacles to Kosovo’s economic growth.
Against this background, the project objectives were well aligned with the country’s priorities and the Bank’s partnership strategy. The Bank’s first Interim Strategy Note (ISN) for Kosovo for FY06-07, focused on supporting development of new sources of economic growth for Kosovo and or ensuring macroeconomic stability. The Interim Strategy aimed to lay the foundation for: (i) sustainable development of Kosovo’s high quality lignite resources and power generation capacity; (ii) associated environmental and social improvements; and (iii) transparent and fiscally responsible management of Kosovo’s public finances. The Bank’s first Country Partnership Strategy (CPS), which was approved in May 2012 seeks to strengthen infrastructure, with a focus on energy. One of the key elements in this area is to develop, through private participation, a state-of-the art lignite thermal power plant (New Kosovo Power Plant) and the associated Sibovc SW lignite mine.

A European Union (EU) sponsoredRegional Balkans Infrastructure Study - Electricity and Generation Investment Study’ (2004) concluded that the development of lignite mining in Kosovo for power generation was part of the least-cost solution to close the emerging generation capacity gap in Southeast Europe as a whole. The Government’s "Energy Strategy Of The Republic Of Kosovo For The Period 2009–2018” set two priority goals of restructuring of the energy sector to attract private investment and developing new power generation capacity – based on rational utilization of abundant lignite resources while promoting environmental protection awareness in energy activities.

Relevance of project objectives is rated High..

b. Relevance of Design:
There was a clear and logical causal chain between the activities that the project was designed to carry out and the project outcomes. Technical assistance and capacity building would serve the objective of strengthening sector policy, legal and regulatory framework, bidding processes and safeguards. Mine and power plant analyses, capacity building, and appointment of a transaction advisor would allow the Government to attract qualified private investors to develop lignite mines and build new capacity for lignite thermal power generation. In addition, both the EU and USAID would provide support to the energy regulator to develop secondary legislation as well as tariff/loss models.

Together, these measures would enable Kosovo to complete a private sector transition involving strategic investors for an enclave electricity export project (then called Kosovo C or New Mine/Plant), covering both the power plant as well as development of a new lignite mine. During the project, there continued to be debate about the size and structure of the Kosovo C project, and the share of electricity generation to be sold on the domestic market. However, Kosovo C was to remain a private sector owned and operated enterprise, completely separate from Kosovo Electric Power Corporation and its many problems.

Relevance of project design is rated High.


4. Achievement of Objectives (Efficacy) :

(i) Help the Provisional Institutions of Self-Government (PISG) strengthen the enabling policy, legal and regulatory frameworks conducive to new investments in the energy sector. Rated Substantial.

Outputs
Most of the planned activities that served this objective were completed as summarized below.

Law on Public Private Partnerships and Concessions was promulgated by the President on July 15, 200; Law on Environmental Strategic Assessment was promulgated by the President on March 19, 2009; A Resettlement Policy Framework was adopted by the Government; A set of draft Project Agreements accompanying Draft Resettlement Policy Framework were prepared ; Terms of Reference for Environmental Assessment, Resettlement Action Plans and Social Assessments were finalized.
Final draft of the New Mining field development plan; and New regulation on tariff (generation, transmission, distribution, retail) ; and a Kosovo Market Model was developed for the Government by consultants.

In respect of renewable energy and energy efficiency, the Bank-supported Hydropower Plant's Pre-Feasibility Study, including the preparation of pre-environment and social impact assessments was completed. Other complementary activities were completed by the European Agency for Reconstruction (EAR).

Outcome
The project’s policy, legal and regulatory frameworks/instruments that have been adopted by the Government will be of long-term benefit to Kosovo because they align decision-making in the energy sector with international standards, including specifically those of the European Union, the World Bank Group and other international financial institutions. The frameworks developed for, and experience gained by Kosovo officials with, a privatization project of this magnitude is likely to benefit privatization efforts in other sectors of the economy.


Objective 2. Assist PISG to attract qualified private investors to develop lignite mines and build new capacity for lignite thermal power generation guided by high standards of environmental and social sustainability. Rated Modest.

Outputs
Training and on-the job capacity building on matters relating to privatization transactions were conducted for staff of the Project Office, Project Steering Committee , Ministry of Energy and Mines and the Ministry of Environment and Spatial Planning. The ICR states that a large number of Government officials benefited from learning-by-doing while participating in intense deliberations on the preparation of the transaction, though no numbers are specified.. The project completed various studies on mine and power plants in Kosovo, focusing on technical, environmental, financial, water supply and related aspects, with a view to help long-term development of the sector and facilitate investment considerations. This included a study on “Development and Evaluation of Power Supply Options for Kosovo” followed by an Expert Panel assessment of the study’s compatibility with the Bank’s Strategic Framework for Development and Climate Change. The environmental studies included a strategic environmental and social assessment and a resettlement action plan.

At the beginning of the project, four investors were short-listed for the Kosovo C or New Mine/Plant, but in the summer of 2009, two of them withdrew citing (a) the international economic/financial crisis and a resulting shortage of reasonably-priced funding from bankers and investors for what was perceived as a higher risk country; and (b) the enduring uncertainty concerning the timing and structure of the transaction and the future operation of the project within the context of the Kosovo market. The transaction advisor believed that the other bidders might also withdraw. This led to approximately six months of consultations between Government, transaction advisor and the Bank and other donors, and reviews of different options, including an option of including Kosovo B in the privatization package of the Kosovo Electricity Distribution System (KEDS) in order to make the latter more attractive. Following this, the Government decided on December 17, 2009 to include Kosovo B in what was then renamed as the Kosovo e Re (New Kosovo) Power Project or KRPP investment package, including not only Kosovo B plant rehabilitation but also construction of a co-generation capability at the plant. The new bidder pre-qualification process was started on December 18, 2009 and a new group of investors was short-listed on March 5, 2010. The draft RFP (Request for Proposal was issued to the new short-listed investors on August 10, 2010. However, the final RFP was issued to bidders on March 7, 2012, only two months after the project was closed. Also, as a result of bidder feedback, Kosovo B was dropped from the KRPP package in July 2012, thus validating the Bank LPTAP team’s opposition to inclusion of Kosovo B. Much time had been lost needlessly in 2009-11, and additional time may yet be lost due to the need to incorporate changes in the KRPP package bidding documents and draft legal agreements on sharing space, resources, and transmission.

The planned baseline environmental monitoring and data collection and development of an environmental monitoring and data registration and reporting system was not completed because the necessary monitoring equipment could not be procured before the grant closing date. There is no evidence that any work was done on creating the environmental baseline monitoring toolkit referred to in Component 1, subcomponent 2. The ICR states that a satisfactory explanation of why this was not done could not be obtained. Meanwhile, data from mobile air monitoring units set up with USAID's help may provide some of the required data and reduce delays.

Outcome
The objective was only partially met, of assisting the government in attracting qualified private investors to develop lignite mines and build new capacity for lignite-fired thermal power generation, guided by high standards of environmental and social sustainability.

Capacity was strengthened in the Project Office, Project Steering Committee (PSC), Ministry of Energy and Mines and the Ministry of Environment and Spatial Planning. The Project Office managed the solicitation of private investors, and coordinated various Government institutions in the decision-making process (through the Project Steering Committee) to approve a very complex set of legal documents and the draft RFP.

The preparation of the draft RFP reflected broad consensus on all parameters of the KRPP package and the market model underlying it. It was a significant step forward in getting the private sector involved in the transaction. The project succeeded in maintaining the interest of investors by reconfiguring the bidding process. The project was not able to complete the transaction for on mine and power plant investment. After project completion, the search continues for attracting qualified private investors to develop lignite mines and thermal power plants. Finally, the absence of environmental baseline data may delay financial close of relevant transactions transaction until sufficient data is obtained.

5. Efficiency:

The project appraisal document attempted to estimate the economic benefits of the 600 MW new capacity power and mine project to Kosovo on the assumption that the new power plant would be operational by 2013. However, this analysis will need to be reworked once the new dates for commissioning the plant are known.

In terms of the technical assistance itself, the ICR states that the high level of international expertise necessary for this transaction inevitably required a correspondingly high level of advisory service fees. The ICR further states that these fees were “not exorbitant” by international standards. However, frequent changes in project design and the resulting delay in the project implementation schedule led to significant increase in the advisory fee. While the project cost was estimated at $10.50 million at appraisal, it turned out to be $16.40 million at project closing, which does not include fees for future negotiation with bidders until financial closing.

The project had to be extended by two years owing to in part due to the addition of a major component (Kosovo B), to the KRPP package in December 2009; and partly due to a lack of direction and decision-making on the part of the Government during 2008-2009. The run-up to the parliamentary elections of October 2007, the time involved in the formation of the first new Government, the subsequent Declaration of Independence in February 2008 and the associated political exuberance, all caused major unforeseen delays in project implementation within months of project effectiveness. The project was substantially delayed and advisory costs were greater than planned due to changing requests from the governments as discussed below in the sections on Borrower and Bank performance.

Efficiency is rated Modest.

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:
No
%
%
ICR estimate:
No
%
%

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

6. Outcome:

Relevance of objectives as well as project design is rated high. The project substantially achieved its first objective of helping the Government strengthen the enabling policy, legal and regulatory frameworks, while the achievement for the second objective of assisting the Government in attracting qualified private investors was modest. With efficiency rated modest, from cost and time overruns undermining efficiency, the overall outcome is assessed as moderately unsatisfactory.

a. Outcome Rating: Moderately Unsatisfactory

7. Rationale for Risk to Development Outcome Rating:

The risk to project development outcomes was recognized during appraisal, and recognized during implementation. The very first Implementation and Supervision Results Report of May 2007 rated both the project development outcome and Implementation Progress as unsatisfactory because of the Ministry of Energy and Mines' attempt to bypass due process for transparent tendering.


At project completion there appeared to be a reasonable prospect that a winning bidder would be identified in the short term (2013). However, there is no indication that this has materialized. .

The World Bank Group has responded positively to the Government’s request for a Partial Risk Guarantee for the KRPP. For this purpose, IFC and MIGA have offered financial and investment guarantee support in principle, respectively, and the Government has indicated its desire to have the European Bank for Reconstruction and Development (EBRD) provide additional support and financing if and when Kosovo becomes a member of EBRD.

However, unless the Government stays focused on rapidly implementing KRPP, the planned project development outcomes - and therefore Kosovo’s future energy supply and its economic development - are at serious risk given Kosovo’s aging power generation and distribution assets and regional electricity supply constraints.

a. Risk to Development Outcome Rating: High

8. Assessment of Bank Performance:

a. Quality at entry:
The Bank defined the project’s objectives to be consistent with the country’s needs and priorities, and with the Bank’s overall country partnership strategy. The project design incorporated findings from the earlier technical assistance projects in the region, particularly in terms of existing gaps in legal, regulatory, and environmental/social safeguards frameworks for major private sector involvement in the energy sector; as well as the need for ownership by local institutions, donors, and other stakeholders. The M&E framework was clear and simple and straightforward to track.

The ICR notes that the new lignite-fired power plant proposed under this project was identified as part of the regional least-cost solution for new capacity additions. The World Bank-appointed External Expert Panel, in its January 2012 report, unanimously agreed that lignite-fired generation (preferably through two 300 MW units rather than a single 600 MW unit) of the “highest possible efficiency” would be the most appropriate option to fill Kosovo’s supply-demand gap in the medium term, even considering all renewable energy and energy efficiency options available and taking into consideration environmental costs of lignite-fired generation.

The scope of work of the consultants had been carefully defined by the Bank to ensure complementarity with the technical assistance being provided by other donors notably the European Agency for Construction (EAR), USAID and Kreditanstalt für Wiederaufbau (KfW). The Bank worked for representation on the Project Steering Committee.of key stakeholders like the Kosovo Trust Agency, Ministry of Energy and Mines, Ministry of Environment and Spatial Planning, Energy Regulatory Office and Independent Commission for Mines and Minerals. The Bank carried out A Quality at Entry Review on February 17, 2006, which found the quality of the project to be satisfactory.

In hindsight, the Bank could have given more attention to assessing some of the key risks associated with the project. The Bank rated risk of Donor Coordination as “Low” at appraisal, while this turned out to be more complicated than anticipated due to different views among donors about the impact of Kosovo B on the project. The Bank did not give enough weight to the political risk of Kosovo at appraisal—later to prove a cause of significant delay to the project. Therefore, a three-year project implementation schedule turned out to be too optimistic, given the political and social conditions surrounding Kosovo and the country’s lack of experience in completing a private sector transaction of the size contemplated in the project.

Quality-at-Entry Rating: Moderately Satisfactory

b. Quality of supervision:
The ICR states that the project team conducted very extensive and intensive supervision efforts, including numerous major high-level donor coordination meetings. The project team was consistently well-staffed on the guarantee, legal, and safeguards aspects.

During its supervision missions of December 2006 and January 2007, the Bank found mounting evidence that Ministry of Energy and Mines was planning to bypass competitive bidding procedures to negotiate directly with four prospective bidders, apparently in a rush to finalize the Kosovo C deal before parliamentary elections in October 2007. The Bank management appropriately held out the prospect of suspending the project, until the list of bidders was validated by the Transaction Advisor. Subsequently, two of the bidders withdrew, and the bidding process was started again alongside changes in project scope and design.

When the new Government after the October 2007 elections included rehabilitation of Kosovo B in the project, and limited the size of Kosovo C to 600MW, the Bank’s project team argued that the project should remain green-field in order not to further complicate and delay the New Mine/Plant project. This would also help to start addressing the looming lignite gap and lack of reliable generation capacity as soon as possible. (This stand appeared to be vindicated later when Kosovo B was dropped from the final RFP issued in July 2012)

However, this view about the Kosovo C greenfield site was not shared by USAID, which was then dealing with the Kosovo Electric Power Company’s generation and distribution issues. Following a series of meetings in Washington between the US Government and World Bank teams in June 2009, the Bank's Europe and Central Asia Department and the US Government sent a joint letter dated July 6, 2009 to the Kosovo Government. The letter, inter alia, stated that the timely privatization and rehabilitation of Kosovo B was a priority for the Bank and USAID, and that the two organizations would draft together the terms of reference of the necessary feasibility study and environmental and social impact assessment. The Bank and USAID would also support a Transaction Advisor to guide GoK through the process of offering Kosovo B to qualified private investors “including, but not limited to, the prequalified (KRPP) bidders”. Finally, the letter stated that the Bank would support, in principle, a Partial Risk Guarantee (PRG) for Kosovo B if so requested by the GoK and subject to the Bank’s qualification criteria for such a PRG. Also, although two of the four originally shortlisted investors withdrew citing the international financial crisis, the project team stayed the course and this enabled the Project Steering committee to select a new group of four qualified investors for the reconfigured KRPP package.

During 2009-2011 the Bank’s project team was preoccupied with getting the project moving again despite frequent changes in the Government’s position and the difficulty of developing a common donor strategy for the project. At the same time, the World Bank Group was reviewing its approach towards coal-based electricity generation. The team had to devote part of their time to preparing management briefings on how the proposed new power plant would meet the criteria of the Strategic Framework for Development and Climate Change (SDFCC), culminating in the appointment of an External Expert Panel. The External Expert Panel eventually confirmed in early 2012 that the project met the SFDCC criteria and that lignite fired generation was part of the least-cost plan for Kosovo. The ICR states that these activities led to the project team not paying sufficient attention to the management of the contracts of the transaction and legal advisors.

The Bank’s follow-up was instrumental in the Government putting in place an appropriate Resettlement Policy Framework and Resettlement Action Plan (RAP) for the population of the areas affected by development of the new mine by end-2011.

During project implementation, the Transaction Advisor not only provided “out of scope” services (to re-launch the process of shortlisting the investors) but also worked beyond the contract closing dates, exceeding the ceiling of the contract. It took almost one year to retroactively amend the contracts. This situation could have been avoided if the Bank had not changed the internal disbursement control systems and stopped monitoring disbursements against contracts. This systemic problem in contract and disbursements monitoring due to a change in financial management procedures introduced in 2008, is now being reviewed by the Bank. Overall, the ICR reports that the delays were due to (i) confusion caused by the language of the Bank’s no objection to the out of scope work, (ii) the Bank’s change in its internal control system from monitoring disbursement against “contracts” to monitoring against “category of expenditure”, and (iii) the weaknesses in contract administration by the Project Office and supervision by the Bank.

Total Bank staff/consultant costs were US$3.7 million for a US$16.4 million project yielding a high overhead of 23 percent which can be partly attributed to the intense supervision and coordination with the Borrower, USAID and other entities over the extended project period.

On balance, the Bank’s supervision effort is rated moderately satisfactory.

Quality of Supervision Rating: Moderately Satisfactory

Overall Bank Performance Rating: Moderately Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:
Initially, the three-way shared governance arrangement - between the United Nations Interim Administration Mission in Kosovo (UNMIK), PISG and the new Ministry of Energy and Mining (MEM) resulted in a challenging environment for the project., and especially so for a new government in a post conflict situation. During the project implementation, Kosovo had three different governments each with a different vision for the project. This led to significant delay in project execution with additional advisory costs. The ICR divides the project implementation period into three phases:

First phase: Under the Provisional Institutions of Self-Government (PISG), the newly established Ministry of Energy and Mining (MEM) tried to increase the project size to 2000MW and also sought to bypass the “due process” of open and transparent tender. Even before project effectiveness, and before the Transaction Advisor could be contracted, MEM with the assistance of USAID consultants, selected four pre-qualified bidders. Nevertheless, the project Transaction Advisors were able to confirm soon after they started work that the selection process had been conducted fairly and that the shortlist was satisfactory. Subsequently, MEM attempted to negotiate directly with the prospective bidders (apparently in a rush to finalize the Kosovo C deal before parliamentary elections in October 2007), but desisted when faced with the Bank’s objection and the possibility of the project being suspended.

Second phase: The new Government after the October 2007 elections questioned all aspects of the project that the former government promoted, and project implementation stalled. The Government changed the project name from “Kosovo C project” to “Kosovo e Re (New Kosovo) Power Project” (KRPP), but also included rehabilitation of Kosovo B in the project, limiting the size of Kosovo C to 600MW. The new Minister of Mining and Energy appeared to want to cancel the privatization process and retain full Kosovar control over lignite mining and electricity production. However, it ignored Kosovo’s financial and expertise constraints, and the Ministry’s proposal to construct a third unit at Kosovo B (Kosovo B3) did not gain traction. Proposals to refurbish the 50 year old A1 and A2 units of Kosovo A also went nowhere, in part because of their clear conflict with the EU’s Large Combustion Plant Directive.

Third phase: The second new Government after the November 2010 elections had a clear agenda to ensure completion of KRPP without further delay. The final RFP was issued to bidders on March 7, 2012, only two months after the project was closed.

The Ministry of Economic Development (which is now responsible for the energy sector) has developed a significantly improved external communications capacity. These achievements will be of great benefit to the Government as it seeks to bring KRPP to a successful close, as well as for other future energy sector investment projects such as the Zhur hydropower plant and other renewable or thermal energy projects.

The additional time necessary to prepare the Kosovo B subcomponent for bidding subject to standards satisfactory to the Bank; the examination of different market options on how the New Mine/Plant and Kosovo B; and the frequent changes in the Government’s position, led to four contract revisions for the Transaction and Legal Advisors and extra payments for the Transaction Advisor until January 2011. In parallel, a Kosovo Electricity Market Model was being designed, which needed exceptions to the Energy Community Treaty regarding long-term Power Purchase Agreements (PPAs) for KRPP and Kosovo B, requiring additional inputs from the advisors. The Government’s simultaneous privatization of Kosovo Electricity Distribution System (KEDS) added to the complexities to the decision of who would negotiate the PPAs -- the government or the new private sector investor in the yet-to-be-privatized KEDS.

Government Performance Rating: Unsatisfactory

b. Implementing Agency Performance:
The Project Office had a good level of technical competence and satisfactorily implemented all project components as agreed with the Bank team. It was adequately staffed and received training in Bank procurement and disbursement procedures, Overall, the Project Office developed major technical expertise in handling critical aspects of a large and complex privatization process, including selection of qualified bidders, contracting sophisticated international advisors, and monitoring their performance. The ICR reports that the members of the PSC, through their long-term involvement in analysis and review of the many multi-faceted issues related to these investments as above, have also become much more knowledgeable in these matters. .

The PO was preoccupied with the ever-changing project scenarios and, it appears that in meeting Government demands for information related to these changes, the PO did not adequately monitor disbursement requests by the advisors against contracts or warn the Bank’s task team leader of pending problems in that regard, and was late in submitting invoices to the Bank.

The procurement of three on-line air quality monitoring stations repeatedly ran into obstacles, such as: (i) the PO not being able during 2009 to find a suitable consultant to prepare specifications and bidding documents; (ii) USAID prepared a monitoring plan and the specifications for the bidding documents, eventually leading to the tendering process being put on a temporary hold in 2010 because of accusations that the specifications favored one particular supplier; and (iii) redrafting of the specifications and re-tendering in 2011 that had to be suspended because of the overruns on the contracts of the legal/regulatory and transaction advisors. The bids were finally issued, and the Bank provided its no-objection to the bid evaluation and contract award in December 2011. There were further delays while new funding mechanisms were being identified to pay for the equipment. Eventually it was agreed in principle that the Government would fund the cost of this equipment, possibly with retroactive financing to be provided through the CLRP (Clean-Up and Land Reclamation Project). No instance of misprocurement was reported.

Implementing Agency Performance Rating: Moderately Unsatisfactory

Overall Borrower Performance Rating: Unsatisfactory

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

a. M&E Design:
The project defined performance indicators corresponding to the project objectives as well as outputs. It also specified baseline, frequency of data collection/reporting, data collection instruments, and responsibility for data collection for each performance indicator.

b. M&E Implementation:
The ICR states that the Project Office monitored the progress against agreed performance indicators corresponding to the project objectives. The project team could verify progress of each outcome/output indicator through regular supervision missions and coordination with the Project Office. The Project Steering Committee (PSC) was, through the Project Office (PO), responsible for monitoring the project’s progress against agreed performance indicators. The PO monitored the performance of the consultants based on their respective contracts. This included the review and approval of inception reports, draft reports, and final reports issued by the consultants. Through regular supervision missions and continuous coordination with the PO, the project team was able to verify progress on the project outcome indicators and substantive completion of project components and subcomponents. However, less attention was paid to administrative issues, including financial management reporting by the PO. There was a delay in collecting baseline environmental monitoring data as also discussed in section.

a. M&E Utilization:
It is not clear from the ICR as to how the project used the monitoring and evaluation as a feedback mechanism.

M&E Quality Rating: Modest

11. Other Issues:

a. Safeguards:
The project was classified as Category B under the Bank’s environmental and social safeguards policies, and only triggered the OP 4.01 (Environmental Assessment) policy. The project was limited to the provision of technical assistance, and there was no need to conduct an environmental or social assessment prior to the project appraisal.

Because the project entailed subsequent follow-on investment projects, it provided 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 including (i) preparation of a Strategic Environmental and Social Assessment (SESA), (ii) preparation of Terms of Reference for the Environmental Impact Assessment, the Social Assessment, and the Resettlement Action Plan, (iii) preparation of draft legislation and regulatory instruments related to environmental safeguards in the energy and lignite mining sector, and (iv) baseline environmental monitoring data collection.

A Resettlement Policy Framework and a Resettlement Action Plan, satisfactory to the Bank, were adopted by the Government and are now being implemented (ICR Section 3.5, para 2). Many other associated legislative proposals and regulatory instruments related to safeguards in the energy and mining sector were adopted as well. However, baseline environmental monitoring data was not collected during the project implementation, as the equipment necessary for the data collection was not procured.

b. Fiduciary Compliance:
As discussed in section 9a above on government performance, the government initially tried to bypass the “due process” of open and transparent tender, by selecting four pre-qualified bidders before project effectiveness. This selection was later validated by the Transaction Advisors.

As also discussed in section 8b (Bank supervision), expenses for transaction and legal advisors were greater than expected due to additional out-of-scope services and delays in government decision-making. However, the relevant contracts for these services were not amended in a timely manner. There for some length of time, there was no contract in place for future works with the Advisors, which hindered the ability to make progress on announcing the RFP. Also, the Project Office did not adequately monitor disbursement requests by the advisors against contracts or warn the Bank’s task team leader of pending problems in that regard, and was late in submitting invoices to the Bank.

The Government subsequently decided to announce a public tender for hiring a Transaction Advisor and after receiving three proposals signed a contract with the new Transaction Advisor in December 2011. Until the Bank gave its no objection, it was not possible for the RFP and Project Agreements to be prepared and announced due to a non-payment of the previous advisors and their property rights.

c. Unintended Impacts (positive or negative):

d. Other:



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Moderately Satisfactory
Moderately Unsatisfactory
While both aspects of relevance are rated high, and the achievement of the first objective substantial, the second objective of assisting the Government in attracting qualified private investors was modest. Efficiency is rated modest from cost and time overruns.  
Risk to Development Outcome:
High
High
 
Bank Performance:
Moderately Satisfactory
Moderately Satisfactory
 
Borrower Performance:
Moderately Unsatisfactory
Unsatisfactory
Frequent changes in strategy and content of the project, resulting in avoidable delays in conducting the transaction, and cost overruns 
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 ICR has made a commendable effort at deriving lessons from this project experience. The lessons relate to project design and implementation in a politically complex and economically challenging situation; coordination with donors with their own agendas; effective supervision with strong sector expertise; rethinking on the Bank’s own sector policies; and mid-stream changes in Bank procurement rules. Based on the ICR, and this review, the following lessons are drawn:

Flexibility, and commitment to the project’s long term objectives, are key for the Bank in a politically complex and dynamic situation in which the other principal actors - the government, donors – are not able to chart a consistent path towards the project’s outputs and outcomes. In this project, the Bank worked with the Government and donors in matters relating to changes in project design and procurement, while providing objective advice and adhering to procurement norms.

Again in a complex project situation, the Bank should supplement its team with the best available sectoral and transaction-related expertise to improve the credibility and acceptability of its advice. In this project, other major donors, like European Agency for Reconstruction and KfW, had a substantial energy sector presence on the ground, and USAID had contracted for technical advisors in the Ministry of Energy and Mining and the Ministry of Economy and Finance while fielding a seasoned energy professional on its own staff. A similar World Bank presence could have ensured earlier and stronger agreement between the donor institutions and alerted the Bank on a continuous basis to any emerging obstacles during project implementation.

14. Assessment Recommended?

No

15. Comments on Quality of ICR:

The ICR provides a candid and detailed analysis how and the project unfolded including delays, fiduciary issues and the impact of the political economy of Kosovo. The ICR's discussion devotes adequate attention to the project outcomes, alongside the discussion of outputs. Some ratings were optimistic, but the lessons drawn are balanced and objective.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6INV-Jun-2011)
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