Report No. PID6734 Project Name Ukraine-Sevastopol Heat Supply (+) Improvement Project Region Europe and Central Asia Sector Energy Project ID UAPA55738 Borrower Republic of Ukraine Implementing Agencies Sevteploserviss 3, L. Pavlitchenko St.. Sevastopol 335000, Ukraine Contact Person :Mr. Sergey Doral, Director Telephone No.: (0690) 52 58 96 Facsimile No.: (0690) 52 07 20 Date This PID Prepared April 14, 1998 Projected Appraisal Date August 1998 Projected Board Date December 1998 Sector Background 1. District heating (DH) systems provide the majority of heat and hot water supply in Ukraine's urban areas as well as steam for industry. These systems utilize primarily gas and some mazut, which during the period of the Soviet regime were provided primarily from Russia at very low prices and at virtually unlimited supply. As the cost of these fuels have increased over the past four years while incomes have not kept pace, this has created a situation where the DH service has become difficult to afford and service levels have had to be reduced. In addition, many of the DH systems are in excess of 40 years old and have not been subject to the normal process of upgrading and modernization which takes place in Western systems. 2. A DH system of significant size and importance is in southern Ukraine in the Crimea in Sevastopol, a city of about 400,000 people. The DH service in Sevastopol is provided by Sevteploenergo, a municipal enterprise. Sevteploenergo's heating networks are in bad condition due to corrosion. It has been estimated that 909 of the networks should be replaced within the next five years. This would represent an investment of approximately US$ 80 million, which is out of reach of the City's economic capacity. Therefore, it is likely that Sevteploenergo's centralized heating system will gradually cease to function during the next 5-10 years. Given the conditions prevailing in Sevastopol (e.g., short heating season, warm climate, constrained heating and hot water services), it is likely that DH would never be the least-cost option for provision of heating and hot water services, even if the networks would perform as in Western systems. Therefore, a new enterprise, Sevteploserviss, has been established to start heating services in Sevastopol through utilization of small gas-fired boilers in individual buildings in the areas of worst DH conditions. Objectives 3. Against this background, the objectives of the proposed project would be to: (a) increase the efficiency of, enhance conservation of, and improve the reliability and service levels in the heating system in Sevastopol through introduction of decentralized mini-boilers in the areas of worst heating conditions and in key public buildings; and (b) promote sound cost recovery policies and practices and the development of a new heating enterprise, Sevteploserviss, which would operate on a commercial basis. Description 4. The proposed project would consist of the following components: (a) heat supply improvement program, including introduction of gas-fired mini-boilers in buildings in areas of worst heating conditions; and (d) institutional support program, including training, equipment and technical services to support project implementation, commercialization and further development of the new heating enterprise, Sevteploserviss. 5. The amount of the loan would be about US$ 30 million. It is recommended that the loan finance about 80t of total project cost (net), as the project agency and Sevastopol Municipality have limited capability to contribute to the capital cost of the project. Donor support is expected to be sought for implementation support and for the institutional support component of the project. Implementation 6. Implementation of the project would be the responsibility of Sevteploserviss and Sevastopol Municipality. Project coordination responsibilities have been assigned to the State Committee for Housing and Communal Services. Performance indicators for each project objective will be defined during project preparation and appraisal. Supervision requirements will be identified during project appraisal. Sustainability 7. The institutional and financial sustainability of the project would be analyzed and supported through: measures to improve the financial performance of Sevteploserviss, capacity building of Sevteploserviss to evaluate technical options and prioritize investments based on economic considerations, and other measures to be identified for inclusion under the institutional support program for the project agencies. Lessons Learned from Past Operations in the Country/Sector 8. [Note: Lessons learned from completed and ongoing projects financed by the Bank and other development agencies.]The proposed Sevastopol Heat Supply Improvement Project is the first project of its nature to be financed by the Bank. Past experience in implementing other energy projects in Ukraine has shown that strong commitment of both the implementing agencies and the sector ministries is crucial to ensuring approval by the Government. Past experience - 2- in implementing other DH projects in the former Soviet Union is available from projects in Estonia and Latvia, all on-going. Some lessons learned to-date include: (a) strong project ownership and advanced preparation of project components is necessary for timely implementation; (b) the relationship between prices and incomes changes rapidly in countries in transition and the heating service which appears largely unaffordable will become easier to afford in a relatively short period of time; and (c) strong support from municipalities is needed to resolve collections and payment issues. These lessons are being considered during the preparation period of the proposed project. Poverty Category 9. Not applicable. Environmental Aspects Environmental Data Specify environmental category; indicate whether an indigenous peoples plan or resettlement plan will possibly be developed. For category B projects, an environmental analysis is to be summarized in an annex to this PID. If this analysis has yet to be undertaken, a reference should be made accordingly. 10. Implementation of the project is anticipated to have positive environmental benefits through improved efficiency in the use of gas in the Sevastopol heating system. It is proposed that the project be placed in environmental screening category "B," under which an environmental review and mitigation plan would be prepared. Program Objective Category 11. The project is classified under the category of EN/GX - environmentally sustainable development/other energy (100%). Contact Point: Carolyn Gochenour, ECSEG The World Bank 1818 H Street, N.W. Washington, D.C. 20433 (202) 473-9681 (tel) (202) 477-8518 (fax) Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending August 14, 1998. - 3 - Annex The heating system rehabilitation would focus on improving energy efficiency; environmental issues are principally restricted to the selection of materials for insulation and the disposal of waste, possibly asbestos. The heat production plants support the use of natural gas. Further investments would focus on improvements to increase fuel use efficiency, reduce water losses in networks. An environmental review would be prepared for the Sevastopol heat supply improvement program, and it would include preparation of an environmental mitigation plan. The potential impacts from the installation of gas-fired boilers in individual buildings are generally positive; potential adverse impacts would be highly localized and could be effectively addressed through an environmental mitigation plan. - 4 -