The World Bank Belarus Biomass District Heating Project (P146194) REPORT NO.: RES48751 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF BELARUS BIOMASS DISTRICT HEATING PROJECT APPROVED ON MARCH 31, 2014 TO THE REPUBLIC OF BELARUS ENERGY & EXTRACTIVES EUROPE AND CENTRAL ASIA Regional Vice President: Anna M. Bjerde Country Director: Arup Banerji Regional Director: Charles Joseph Cormier Practice Manager/Manager: Sudeshna Ghosh Banerjee Task Team Leader(s): Irina Voitekhovitch The World Bank Belarus Biomass District Heating Project (P146194) I. BASIC DATA Product Information Project ID Financing Instrument P146194 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 31-Mar-2014 31-Oct-2021 Organizations Borrower Responsible Agency Belinvestenergosberezhenie (PMU),Energy Efficiency The Republic of Belarus Department, State Standardization Committee Project Development Objective (PDO) Original PDO The Project Development Objective is to scale up the efficient use of renewable biomass in heat and electricity generation in selected towns of Belarus. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-83510 31-Mar-2014 08-Apr-2014 31-Jul-2014 31-Oct-2021 90.00 86.11 3.90 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Belarus Biomass District Heating Project (P146194) II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES A. Progress towards Achieving Development Objectives 1. The Belarus Biomass District Heating Project (BDHP) was approved by the Board of Directors on March 31, 2014 and became effective on July 31, 2014. The first extension of the closing date was for a period of twenty-two months from December 31, 2019 to October 31, 2021. The proposed restructuring will be the second and final extension of the Project extending the Closing Date from October 31, 2021 to April 30, 2022. The cumulative extension period would be twenty-eight months. 2. The Project Development Objective (PDO) is to scale up the efficient use of renewable biomass in heat and electricity generation in selected towns of Belarus. The Project supports investments in replacing gas-fired boilers with biomass-fired boilers and improvements in energy efficiency through the modernization of heat transmission and distribution systems in twenty cities located in different regions of Belarus. The Project is important for the country as it contributes to its national targets to decrease the dependency on Russian natural gas, introduce more sustainable district heating systems working on renewable fuel, reduce the cost of heat generation to the final consumers and substantially increase the quality of heat provision to the population in small and medium-sized cities. The PDO remains relevant and currently nineteen out of twenty sites are operational. However, there is one medium-sized site (Baranovichi city), which will require an additional six months to be completed and fully operational. 3. The overall implementation progress has been assessed as satisfactory since December 2016. The progress toward achieving the PDO has been assessed as moderately satisfactory since December 2020 (satisfactory within October 2014 - December 2020) and the PDO indicators are expected to be substantially achieved by the end of the current Project closing date: (i) projected lifetime energy savings (MWh) - 116 percent; (ii) heat and electricity generated from renewable biomass (MWh) - 83 percent; and (iii) projected lifetime reduction in CO2 emissions (tCO2e) - 83 percent. Without completion of the Baranovichi biomass-fired boiler house, the overall PDO would be met, by and large, however about ten thousand inhabitants would not benefit from biomass-based heat and hot water service and the following projected lifetime benefits would not be reached: (a) about 9,500 MWh energy savings; (b) about 650,000 MWh heat generated from renewable biomass; and (c) about 140,000 tons of CO2 emissions reduced. In addition, the sunk costs of the local utility company would amount to around US$2.5 million, as the building of the biomass boiler house, including the boiler and the fuel supply system, has already been constructed, but is not yet operational due to the absence of the remaining equipment to be delivered and installed. 4. The Project is in compliance with financial management requirements, including quarterly reporting and audit requirements, and does not have any overdue audits. As of October 20, 2021, total disbursement is US$86.1 million or 95.67 percent of the loan amount, while commitment is US$88.6 million or 98.44 percent of the loan amount. B. Rationale for Restructuring 5. The Government requested an extension of the Loan’s Closing Date until April 30, 2022 (request by the Energy Efficiency Department dated October 19, 2021) to complete the activities on the Baranovichi biomass-fired boiler house. 6. The construction of the biomass-based CHP and a gas-fired boiler house was delayed due to the following reasons: The World Bank Belarus Biomass District Heating Project (P146194) a. signing of a contract between Communal Unitary Production Enterprise “Baranovichi Kommunteploset” (Employer), the Consortium of “Armakom” LLC (Consortium Leader) and ATTSU TERMICA SL (Partner of the consortium) (Contractor) and RUE “Belinvestenergosberezhenie” (PMU) on August 25, 2015, that was terminated by the Employer on June 7, 2017. The contract included the construction of a biomass-based, small size combined heat and power plant (CHP) (6 MWth, 1.3 MWel) and a gas-fired boiler house (8 MWth) and was in the amount of US$6 million. Before the contract was terminated, the Partner had already manufactured and delivered the first installment of the biomass equipment (biomass-fired boiler) and two gas-fired boilers to the site. The gas-fired boilers were installed and put into operation in November 2017. b. initiation of a new International Competitive Bidding by the Project Management Unit (PMU) in September 2018 due to unsuccessful negotiations with consortium Partners to deliver the second installment of the biomass equipment. A new contract for biomass equipment supply was signed with EXERGY SPA (Italian company) in April 2019. c. bankruptcy of EXERGY SPA in November 2019; the failure to fulfill its obligations under the contract; and termination of the contract by the Employer in July 2020. d. change in the technological solution (conversion of biomass CHP to heat only boiler plant) by the Employer and delay in obtaining the required state construction expertise approval until July 2021. e. failure of the potential contractor to get the required bank guarantee in August 2021 for supply of the second part of biomass equipment and installation works to finalize the biomass boiler plant and connect it to the gas fired boiler plant. Local banks refused to provide the guarantee, because they considered that the remaining period prior to the сlosing date is too short for proper contract implementation. 7. Considering that the delays described above were beyond the control of the Employer and the importance of completing the works on the site to ensure that the biomass boiler plant is operational to cover the heat demand of the district of Baranovichi city in a sustainable manner, the team recommends approval of the Borrower’s request to extend the Closing Date until April 30, 2022. The team agrees with the Employer’s estimate that the work can still be completed in about five months due to the following factors: (i) the Employer and PMU have started consideration of the new company for the Direct Contract with estimated cost of around US$1.5 million, that has a good track record in implementing similar projects; (ii) the building of the biomass boiler house, including the boiler and the fuel supply system, has already been constructed; (iii) preparatory works have been completed; (iv) the equipment will be ordered locally and produced in 2.5 months; and (v) additional shifts can be arranged, if needed, to complete the work on time. In addition, there is a Guarantee Letter from the Energy Efficiency Department #02-09/452 as of October 21, 2021 confirming the possibility to co-finance Baranovichi site from the National Program on Energy Efficiency in case any works remain unfinished after the new Closing Date of April 30, 2022. C. DESCRIPTION OF PROPOSED CHANGES 8. A Level 2 restructuring is proposed to extend the Closing Date from October 31, 2021 to April 30, 2022. The proposed changes are in line with the Project restructuring request by the Government. The restructuring will not affect the PDO and the safeguard category will not be changed. III. DETAILED CHANGES LOAN CLOSING DATE(S) The World Bank Belarus Biomass District Heating Project (P146194) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-83510 Effective 31-Dec-2019 31-Oct-2021 30-Apr-2022 30-Aug-2022