PROPOSAL FOR REVIEW
PROJECT TITLE: BELARUS: PHASEOUT OF OZONE DEPLETING SUBSTANCES
GEF FOCAL AREA: Ozone Depletion
COUNTRY ELIGIBILITY: Ratified the Montreal Protocol in 1988; GEF eligibility on basis of IBRD membership.
TOTAL PROJECT COST: US$14.7 million
GEF FINANCING: US$7.4 million
COUNTERPART FINANCING: US$7.3 million
CO-/PARALLEL FINANCING: None
ASSOCIATED PROJECT: None
GEF IMPLEMENTING AGENCY: World Bank
EXECUTING AGENCY: World Bank
LOCAL COUNTERPART AGENCY: Belarus Ministry of Natural Resources and Environmental Protection
ESTIMATED STARTING DATE: January, 1997
PROJECT DURATION: 3 Years (maximum length for an enterprise sub-project)
GEF PREPARATION COSTS: The Danish Government provided US$200,000 for assistance with sub-project and Country Program Preparation
PHASEOUT OF OZONE DEPLETING SUBSTANCES
BACKGROUND INFORMATION ON BELARUS
1. General recognition of upper atmosphere ozone depletion has led to a substantial international effort to phase out Ozone Depleting Substances (ODS). The ozone layer forms a thin shield in the stratosphere protecting biological systems from the sun's harmful rays. Ozone layer thinning can cause impacts such as increased skin cancer, eye cataracts, decreased plant productivity, and deterioration of the marine food chain. In the mid-1980's it was found that CFCs and other chemicals used in refrigeration, foams, aerosol sprays, fire protection, and solvent cleaning is destroying the ozone layer.
2. ODS includes chlorofluorocarbons (CFCs), halons, several halogenated solvents, the agricultural fumigant methyl bromide and a class of transitional chemicals known as hydrochlorofluorocarbons (HCFCs). The basis of this effort is the 1987 Montreal Protocol, ratified by all developed and most developing countries. Further recognition that ozone depletion is occurring more rapidly than first anticipated has led to two protocol amendments which added materials and accelerated phaseout. The first in June, 1990 (London Amendment) added methyl chloroform (MCF) and carbon tetrachloride (CTC), as well as tightening the phaseout schedule. The Copenhagen Amendment in November, 1992 added HCFCs and methyl bromide as regulated substances, as well as further accelerating phaseout. For developed countries, the phaseout dates are:
4. The phaseout strategy adopted by the Government calls for the complete phaseout of ODS consumption by the end of 1997, based on receiving international financial assistance in mid-1995. Assuming such assistance will now be committed by mid-1996, phaseout will still be achieved ahead of the London Amendment schedule (January 2000), but slower than the Copenhagen Amendment schedule (January 1996). On this basis, realistic phaseout dates by principal consuming sectors are as follows: refrigeration manufacturing - July 1998; refrigeration servicing - December 1998, solvents - December 1997, and fire protection - December 1997.
ODS SECTOR BACKGROUND
5. No ODS material is produced in Belarus. It is dependent on supplies from major producers in Russia, currently scheduled to discontinue production by year 2000 or earlier by virtue of Russia's commitments under the Montreal Protocol. GEF assistance to ODS consuming enterprises in Belarus would allow them to make the transition to non-ODS materials in a gradual, planned manner and avoid a later crisis when supplies are cut off. Early reduction of ODS consumption will also reduce demand for ODS materials from a black market supplier. In 1994, Belarus consumed 1,043 metric tons (MT) of ODS, as compared with 2,773 MT in 1986. Earlier reductions during this period can be attributed to the conversion of aerosol manufacturers to hydrocarbon propellants, while more recent declines reflect difficult economic conditions and limited phaseout investments in the refrigeration sector. The refrigeration sector remains the dominant consumer of ODS, accounting for approximately 80% of use. The solvent sector accounts for 13% of consumption, while fire protection accounts for 2%. Residual aerosol sector use, largely for medical applications, account for the remainder. Fifty four enterprises, service organizations, and agencies spanning all four sectors have been identified as ODS consumers in Belarus. Six consumers, dominant in their respective sectors, have proposed seven sub-projects for GEF assistance. Atlant, which has proposed two sub-projects, is the largest manufacturer of domestic refrigeration equipment (750,000 units per year) in Belarus and the largest single consumer of ODS (373 MT in 1994).
PROJECT OBJECTIVES
6. The project's main objective is to assist Belarus with the rapid phaseout of ODS consumption in a manner consistent with international efforts. Assistance to high consumption enterprises in Belarus would enable them to make the transition to non-ODS materials before legal supplies diminish, and will thus reduce the demand for ODS from black market suppliers. The project would also allow Belarus to meet its consumption phaseout obligations under the Montreal Protocol within a realistic time frame and provide needed technical assistance and institutional strengthening.
PROJECT DESCRIPTION
7. The project targets priority consumption phaseout activities in the refrigeration and solvent sectors. It also provides modest technical assistance at both the institutional and enterprise levels to facilitate implementation of the ODS Country Program, and technology transfer for phaseout in the fire protection sector. It is structured as a framework project consisting of a series of seven enterprise specific technology conversion investment sub-projects and two technical assistance sub-components. The project has been designed consistent with relevant GEF policies, particularly those on cost effectiveness, exports, ownership, retroactive financing, operational costs and financial viability as included in chapter five of the GEF Operational Strategy. The overall project is summarized by sub-project and sub-component in Annex 1 and a summary of each investment sub-project is provided in Annex 2. The Danish Government has provided resources to assist Belarus in preparing the project to a level acceptable for GEF review. Preparation to date includes detailed technology and institutional strengthening proposals and associated cost analyses.
Technology Conversion Investment Sub-projects
8. The technology conversion component consists of two sub-projects in the refrigeration manufacturing sector, one sub-project in the industrial/commercial refrigeration servicing sector, and four sub-projects in the solvent sector . Several sub-projects were pre-appraised prior to the approval of the GEF ODS Operational Strategy. Consequently, the choice of technologies will be subject to reconsideration in line with relevant provisions of the Strategy, particularly those on synergism during appraisal.
(b) Refrigeration Servicing: (US$2.0 million): It is proposed to initiate training and infrastructure investments to recover and recycle refrigerants from the industrial, commercial and transportation refrigeration servicing sector, and to provide funds for handling and retrofitting requirements associated with the substitute materials. The sub-project would be undertaken by a local technical institute involved in ODS Country Program implementation (BSRC "Ecology") and a major industrial refrigeration servicing organization (Minsk PMK). The sub-project is projected to eliminate 226 MT/year of new ODS consumption for refrigeration servicing by 1999.
(c) Solvents: (US$0.6 million): Four sub-projects involving major solvent users in the electronics industry are proposed. Three sub-projects (Belvar, Minsk Computer, Kamerton) would replace CFC-113 solvent used for cleaning of electronic components, with various proven technologies including "no-clean" high purity water and acid-alkaline techniques. The fourth sub-project (Tvsetotron) would replace methylchloroform with an alkaline process for circuit board manufacturing. The four solvent sub-projects would eliminate 15 MT/year or 33% of the sector's consumption.
9. The technical assistance component consists of two sub-components addressing transfer of technology and training for conversion in the fire protection sector and institutional strengthening as follows:
(b) Institutional Strengthening: (US$170,000): This sub-component would provide resources to MNREP for operation of the Ozone Office to be established with the Ministry to administer the project and other aspects of the ODS Country Program's implementation. It would provide computing and communications equipment, accounting support, staff training, and consulting support for key technical issues.
10. Belarus is a significant consumer of ODS material, but lacks the financial capacity to undertake comprehensive phaseout in accordance with its obligations under the Montreal Protocol. As a developed country signatory to the Montreal Protocol, it is not eligible for support from the Montreal Protocol Multilateral Fund but is eligible for GEF funding as defined in the GEF Operational Strategy. The proposed project is consistent with GEF Guidelines for ODS phaseout which have been carefully developed to reflect Montreal Protocol policies and procedures, thus ensuring consistency of approach between GEF and Montreal Protocol projects. These guidelines endorse working with a range of enterprise specific subprojects that offer substantive ODS phaseout gains, and for which the beneficiary enterprise would not be able to obtain sufficient financing from commercial sources. Within these subprojects, grant funding is limited to eligible incremental investment costs, while the enterprises are responsible for financing the balance from their own resources or loans.
SUSTAINABILITY AND PARTICIPATION
Project Sustainability
11. The project will help the Government of Belarus to phase out ODS substances by compensating enterprises for incremental costs incurred during the process of technology conversion. Technology conversion will allow beneficiary enterprises to be competitive both in the domestic and export markets. Sustainability will be ensured by conducting a financial viability analysis for the enterprises to consider income statements, balance sheets, presence of well defined markets, credibility of their business plan, prospects for maintaining a positive cash flow, organizational structure, and technical capabilities. The analysis of financial viability for project enterprises will be completed for appraisal, and beneficiary enterprises have been informed that support for project proposals will be dependent on positive results. Sustainability of specific sub-projects will be assured through the evaluation of proposed technologies and their cost effectiveness in relation to other alternatives, during the project preparation work and its review by STAP. Assistance under the project for the Ozone Office will enable the Government to provide a sound institutional and policy framework for its ODS phaseout program.
Participation
12. As part of the Country Program development, MNREP undertook consultations with a broad spectrum of enterprises and interested parties: other ministries, including industry, economics, finance, NGOs, industry associations and others. Enterprises were given the opportunity to participate in the Project as long as they could provide the necessary data for project staff to evaluate their financial viability, technological capabilities and eligibility for financial assistance.
LESSONS FROM PREVIOUS BANK INVOLVEMENT AND TECHNICAL REVIEW
Lessons from Previous Bank Experience
13. The proposed project will be the seventh GEF funded ODS phaseout project to be initiated in the transitional economics of Central and Eastern Europe and, therefore, little direct World Bank experience and associated lessons are available at this time. However, as one of the Multilateral Fund Implementing Agencies, the World Bank is now implementing ODS phaseout projects in fifteen countries. A number of lessons have been learned from experience with these projects, including: i) the importance of a national phaseout policy or ODS Country Program as a basis for assuring commitment and ownership by the client country; ii) the value of strong enterprise/government linkages to achieve phaseout objectives; and iii) the need for institutional strengthening and training for local implementation units and financial intermediaries. Additional lessons have been learned from World Bank and GEF projects in Belarus and other FSU countries, including the importance of: i) identifying a consistent committed counterpart team with sufficient authority and implementation experience to move the project forward; ii) coordination among key interested parties at the federal, regional and enterprise levels; iii) early detailed attention to procurement and other implementation issues; and iv) involvement of local consultants and institutes in the process.
Technical Review
14. The technology conversion investment sub-projects have been reviewed and approved by outside specialists selected from a roster prepared and cleared by the GEF's Scientific and Technical Advisory Panel (STAP). These specialists are also approved reviewers under the parallel Ozone Operations Research Group (OORG) review system established by the World Bank to provide technical advice on technology selection under the Multilateral Fund. Sub-projects have been revised and updated based on the recommendations of the technical review panel.
PROJECT FINANCING, BUDGET AND INCREMENTAL COSTS.
Project Cost and Financing
15. The estimated total cost of the project is US$14.7 million which includes goods and services, technical assistance, training, physical and price contingencies, sub-grant processing charges for local implementation and financial intermediaries, and net present value of incremental operating cost increases. The project would be financed by a US$7.4 million GEF grant and US$ 7.3 million in contributions from the beneficiary enterprises, including US$13.6 million in enterprise incremental investment costs. All costs are incremental in nature and calculated in accordance with the "Indicative List of Eligible Incremental Costs" adopted by the Parties to the Montreal Protocol and accepted under the GEF ODS Operational Strategy. Consistent with GEF guidelines, the grant amount limits eligible assistance for enterprises with export markets to OECD countries. To retain markets, some enterprises have already begun the conversion process, and it is expected that these costs would be retroactively financed. Retroactive financing will be subject to review during appraisal and expenditures will be required to comply with the GEF ODS policy on retroactive financing. Cost-effectiveness ratios are at or below the thresholds recommended under the Montreal Protocol, with the exception of two solvent enterprise sub-projects. Although solvent enterprises are generally lower consumers of ODS than other sectors; the inclusion of two solvent sub-projects with higher cost-effectiveness ratios represents Belarus' effort to comprehensively phase-out ODS consumption in all sectors under a one-time project.
ISSUES, ACTIONS, BENEFITS, RISKS.
Issues and Actions
16. The following outstanding issues and actions are to be addressed during appraisal and the documents revised if necessary, to conform with GEF ODS Operational Strategy:
(b) Finalization and documentation of local implementation arrangements including establishment of the Ozone Office, appointment of local financial and procurement agents, and development of performance indicators;
(c) Confirmation of eligible incremental investment costs included for retroactive financing in the Atlant refrigerant conversion sub-project;
(d) Completion of sub-project environmental assessments and initiation of local approvals as required.
17. The project will contribute to global efforts by eliminating the use of 652 MT/year of ODS. The provision of a GEF grant allows Belarus to substantially meet its national obligations under the Montreal Protocol within a three year period, which, in its absence, would not be achievable. This will serve to enhance the country's credibility with the international community. In the longer term, it allows the country to avoid the economic and social disruption that would occur when imported ODS is no longer available for industrial, commercial and other consumer applications. The technology conversion provided under the project will contribute to industrial modernization of key industries and allow them to maintain domestic and export markets. The institutional capacity for monitoring and regulatory enforcement of ODS phaseout will also be strengthened under the project.
Project Risks
18. Risks of the project can be divided as follows: i) implementation risks; ii) risks associated with the seven enterprise sub-projects; and iii) risks associated with the two technical assistance subprojects.
IDENTIFIED RISKS MEASURES TO MINIMIZE RISK
PROJECT IMPLEMENTATION
A. Overall project Project implementation will be a key focus of
implementation subsequent missions to identify opportunities for
arrangements and strengthening this aspect of the project.
management of the MNREP
Ozone Office are
critical to the success
of the project.
B. MNREP's lack of The project will encourage outsourcing key activities
familiarity with Bank to a procurement and financial agents with
procedures, and project established World Bank experience. Institutional
management. strengthening included in the project will address
project management and training in Bank
procurement/disbursement procedures.
ENTERPRISE SUB-PROJECTS
A. Risk of supporting A financial viability analysis will be a condition of
a potentially appraisal and the basis for eliminating enterprises
non-viable enterprise. from eligibility if necessary.
B. Risk of an Ability to meet counterpart funding requirements will
enterprise not meeting be part of the enterprise viability analysis. The
its counterpart grant generally meets costs an enterprise would
funding. eventually incur to remain competitive and retain
markets, and therefore provides a strong incentive
for cooperation.
C. Potential for The STAP review required by the GEF project cycle
supporting a focuses specifically on technical issues to minimize
technically unsound this risk.
project proposal.
TECHNICAL ASSISTANCE
SUB-PROJECTS
A. Risk of the Measures to minimize this risk will be discussed
Government not meeting further with the Government during subsequent
its counterpart missions.
funding/contribution.
B. Fragmented An inter-agency commission for the fulfillment of the
decision-making on Montreal Protocol, formally established in 1993, will
environmental and be used as a mechanism for better coordination. The
investment matters at role of the ODS office will be further clarified
the national and during subsequent missions.
regional levels.
INSTITUTIONAL FRAMEWORK AND PROJECT IMPLEMENTATION
Project Implementation
19. The Government has assigned MNREP as the executing agency for the project. Within MNREP, project of the grant by the GEF Council and which will be supported through the grant for a two year implementation responsibility will be assigned to the Ozone Office to be established upon approval period. It will be staffed on a full and part time basis by qualified personnel recruited from, and with salaries paid for by, MNREP and BSRC "Ecology" (consistent with GEF policy, no salaries of government employees in the coordinating unit will be financed by GEF funds). It is anticipated that these individuals will have previously been involved with development of the ODS Country Program. As a permanent structure within the Ministry, the Ozone Office will have overall responsibility for ODS matters including: i) acting as secretariat to the Interagency Commission; ii) coordinating implementation and updating of the ODS Country Program; iii) communicating with the Executive Committee of the Montreal Protocol; iv) collecting and reporting consumption, trade and recycling information to the Government and international bodies; and v) preparing legislative and regulatory initiatives such as ODS import licensing, sector specific bans, and sanctions for noncompliance with phaseout schedules. Project specific responsibilities will be handled by a project implementation unit including: i) appointment and supervision of a Local Financial Agent (LFA) to administer disbursements for the project; ii) appointment and supervision of a project procurement agent; iii) making arrangements for annual audits of the LFA; iv) coordination of environmental approvals required for sub-project implementation; and iv) submission of progress reports to the Bank. A detailed project implementation plan will be developed and agreed at appraisal, including performance indicators to be monitored.
20. Prior to appraisal, the Ozone Office will identify and appoint an LFA and procurement agent acceptable to the Bank. The duties of the LFA in regards to the management and disbursement of funds would cover: i) monitoring of beneficiary enterprise financial performance on a quarterly basis; ii) holding and managing a Special Account for project funds on behalf of the Ozone Office; iii) administering project disbursements through the World Bank and Special Account including payments under approved contracts, eligible claims for retroactive financing, and funding allocations to technical assistance components; and iv) monitoring all sub-project expenditures. The duties of the procurement agent are to: i) provide advice and assistance on World Bank procurement procedures; ii) prepare bid packages; and iii) administer bid evaluation, contractor selection, and contract negotiations. Sub-project procurement plans will be developed and agreed upon at appraisal.
21. The Project will be covered under an Umbrella Grant Agreement between the Bank as GEF Implementing Agency and MNREP which defines the overall framework by which GEF grant funds can be disbursed to enterprise specific sub-projects. Individual sub-projects will be covered by Sub-grant Agreements between the MNREP and the participating enterprises. Both the Grant Agreement and Sub-grant Agreements will to be patterned after those utilized for the Ozone Project's Trust Fund (OTF). Sub-projects will be approved in accordance with the Bank's trustee obligations to GEF and individual sub-project funding will be subject to prior approval by GEF. Sub-grant Agreements will be drafted for appraisal and their execution will be a condition of negotiations.
Timing of Preparatory Activity
22. The following steps are planned for project processing:
Step Estimated Date
IPID Review Meeting January 1996
Pre-Appraisal April 1996
GEF Council Approval April 1996
Appraisal June 1996
Negotiations October 1996
Board Approval November 1996
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