PROPOSAL FOR REVIEW
PROJECT TITLE: UKRAINE: OZONE DEPLETING SUBSTANCE PHASE-OUT PROJECT
GEF FOCAL AREA: Ozone Depletion
COUNTRY ELIGIBILITY: Ratified the Montreal Protocol in 1988; GEF eligibility on basis of IBRD membership and
pending London Amendment Ratification
TOTAL PROJECT COST: US$ 55 million
GEF FINANCING: US$ 23 million
COUNTERPART FINANCING: US$ 32 million
CO-/PARALLEL FINANCING: None
ASSOCIATED PROJECT: None
GEF IMPLEMENTING AGENCY: World Bank
EXECUTING AGENCY: World Bank
LOCAL COUNTERPART AGENCY: Ministry of Environmental Protection and Nuclear Safety
ESTIMATED STARTING DATE: May 1997
PROJECT DURATION: 3 years (Maximum length for enterprise sub-project)
GEF PREPARATION COSTS: PPA: US$ 340,000
UKRAINE: OZONE DEPLETING SUBSTANCE PHASE-OUT PROJECT BACKGROUND
INFORMATION ON UKRAINE
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. ODS include chlorofluorocarbons (CFCs), halons, several halogenated solvents, the agricultural fumigant methyl bromide, and a class of transitional chemicals known as hydrochlorofluorocarbons (HCFCs). They are used in refrigeration, foams, aerosol sprays, fire protection, and solvent cleaning. In the mid-1980s, it was confirmed that CFCs and the other chemicals mentioned above were destroying the ozone layer.
2. The basis of international efforts to eliminate ODS is the 1987 Montreal Protocol, ratified by most developed and developing countries. Recognition that ozone depletion is occurring more rapidly than first anticipated led to two subsequent amendments to the Protocol, which restricted additional materials and accelerated phase-out. The London Amendment in June, 1990, added methyl chloroform (MCF) and carbon tetrachloride (CTC), and tightened the phase-out schedule. The Copenhagen Amendment in November, 1992 added HCFCs and methyl bromide as regulated substances, as well as further accelerating ODS phase-out. For developed countries, the phase-out dates are:
(a) January 1994 for Halons
(b) January 1996 for CFCs, MCF, and CTC
(c) Year 2010 for Methyl Bromide (critical agricultural use exemption)
(d) Year 2030 for all HCFCs.
3. Ukraine (as the Socialist Republic of Ukraine) ratified the Montreal Protocol in September 1988 and signed the London and Copenhagan Amendments in June 1990 and November 1992 respectively. Ratification of the London Amendment is expected before Council consideration of the project by September 1996. Ratification of the Copenhagen Amendment has not been acted on. Based on its anticipated ratification status as a developed country under the Montreal Protocol, Ukraine's obligations for ODS phase-out are in accordance with the accelerated developed country schedule shown above. Upon ratification of the London Amendment, it will also assume obligations to contribute to the Multilateral Fund of the Montreal Protocol.
4. Ukraine completed a formal Country Program for the phase-out of ODS in October 1995, with bilateral assistance from the Danish Government. The ODS Country Program and the national phase-out strategy it recommends have been approved by the Ministry of Environmental Protection and Nuclear Safety (MEP), and have been accepted by the Parties to the Montreal Protocol as evidence of the country's commitment. The Country Program is expected to be adopted formally by the Government by the end of September, 1996. Ukraine has acknowledged that it will be unable to meet the required phase-out schedule due to the current economic situation, and it has therefore requested the financial assistance of the Global Environmental Facility (GEF).
ODS SECTOR BACKGROUND
5. Ukraine is a significant consumer of ODS in the aerosol, refrigeration, foam and solvent industries, where ODS are used in the production of consumer and industrial products. Consumption of ODS in 1994 was 3,310 tons which represents a decline from 7,061 tons in 1991, largely due to economic conditions. The refrigeration sector accounts for approximately 51% of this consumption, followed by the aerosol (22%), solvent (14%), and foam (13%) industries. Thirty-one enterprises, service organizations and agencies have been identified as ODS consumers in these sectors. Seventeen enterprises and organizations, representing the major consumers, have proposed nineteen investment sub-projects for GEF assistance.
6. ODS used in Ukraine are supplied exclusively by Russian producers. Russia has established specific quotas for Ukrainian needs in the near term, but it has committed to discontinue production by the year 2000. Therefore, Ukrainian ODS consumers need to initiate the transition to non-ODS materials immediately if this is to be done in a gradual, planned manner, avoiding a later crisis when supplies are cut off. In addition, continued demand for ODS in Ukraine would encourage a potential market for illegally traded ODS.
PROJECT OBJECTIVES
7. The project's objective is to assist Ukraine with the rapid phase-out of ODS consumption in a manner consistent with international efforts, enabling the country to meet its consumption phase-out obligations under the Montreal Protocol within a realistic time frame. Assistance to enterprises would enable them to make the transition to non-ODS materials before supplies diminish.
PROJECT DESCRIPTION
8. The project would be structured as a framework project, consisting of an investment and a technical assistance component. Under the investment component, nineteen investment sub-projects involving seventeen enterprises in the aerosol, domestic refrigeration, commercial refrigeration, refrigeration servicing, foam, and solvent sectors were prepared and approved by the OORG. The technical assistance (TA) component would provide support at both the national level and to enterprises to facilitate implementation of the ODS Country Program. A total of 2,273 tons/year of ODS consumption would be phased out under the project, based on 1994 consumption.
9. The project has been designed consistent with relevant GEF policies, particularly those on cost effectiveness, exports, 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 Ukraine in preparing the project to a level acceptable for GEF review, including detailed technology proposals and associated cost effectiveness analyses. The development and experience with substitute refrigerant technologies has evolved rapidly during the project preparation period making it difficult for the project proposals to remain current with the latest developments. The current refrigerant project proposals all propose using HFC-134a, a technology that has been considered one of the best available internationally accepted substitute technologies, with the exception of its global warming potential. The GEF has subsequently adopted a policy (October, 1995) giving preference to technologies with no global warming potential. Consequently, all the refrigeration sub-projects will be re-evaluated and revised as necessary before appraisal for the suitability of technology consistent with the GEF policies. Cost estimates for refrigeration sub-projects are therefore likely to be revised before the project is submitted for final GEF Council approval.
Technology Conversion Investment Sub-Projects
10. The nineteen investment sub-projects proposed as currently prepared are described below. The GEF Grant requested for each cluster of sub-projects is presented in parentheses (excludes an overall 3% financial agent servicing fee).
(a) Aerosols: (US$ 3.2 million): The two sub-projects would complete Ukrainian consumer aerosol producers (Simferopol Household Chemicals Plant (SHCP) and Donetsk Chemical Plant (DCP)) conversion from CFC's to hydrocarbon aerosol propellants (HAP). Based on 1994 consumption, these two enterprises account for 571 tons/year of current consumption. Three remaining aerosol producers are small consumers involved in scientific or medical applications.
(b) Domestic Refrigeration : (US$ 9.4 million): Four sub-projects would complete conversion from CFC-12 refrigerants to a non-ODS refrigerant and phase out the use of CFC-113 solvents in two domestic refrigerator manufactures (NORD, DMZ) and one compressor manufacturer (Orion). Technology conversion at Orion is presented as two sub-projects: one for compressors used in domestic refrigeration and the other for mobile air conditioners. Two additional sub-projects (Vasilkov Holod Mash, NORD) replace CFC-11 with cyclopentane as a blowing agent for cabinet insulation. Based on 1994 consumption, 735 tons/year of ODS would be phased out under these four sub-projects accounting for all of consumption in the sector.
(c) Commercial Refrigeration: (US$ 3.4 million): Four sub-projects would support conversion from the CFC-12 refrigerant to a non-ODS refrigerant in three enterprises (REFMA, Kharkov Holod Mash, Odessa Holod Mash) which manufacture large commercial refrigeration appliances, and one institute (Institute Saturn), which produces speciality low temperature equipment. Kharkov Holod Mash and Odessa Holod Mash would also phase out the use of CFC-113 as a solvent. Based on 1994 consumption, 269 tons/year of ODS would be phased out, accounting for all consumption in the sector.
(d) Refrigeration Servicing: (US$ 3.5 million): This sub-project supports infrastructure investments and related training to recover and recycle refrigerants from commercial and industrial refrigeration equipment; it also provides funds for handling and retrofitting equipment associated with substitute refrigerants. It would be undertaken by the Institute Vesta, which would offer technical support and coordinate participation of various service organizations, and the Odessa State Academy of Refrigeration, which would manage the training. Based on 1994 consumption, it is estimated that 75% of the total ODS consumption (538 tons/year) in the servicing sector will be eliminated by 1999 as a result of the sub-project, and that the country would become self-sufficient for supplies of recovered refrigerant materials.
(e) Foam: (US$ 1.2 million): The sub-project is directed at replacing CFC-11 with cyclopentane, phasing out 128 tons per year of ODS based on 1994 consumption at Module, a major manufacturer of insulation panels. Module is the only consumer identified in the sector.
(f) Solvents: (US$ 1.2 million): Four sub-projects for electronic products manufacturers (Radio Rele, Majak, Electronmash, Vesna) and one sub-project for an instrument and consumer goods manufacturer (Lorta) are proposed. The sub-projects would eliminate the use of CFC-113 solvents in parts cleaning applications with an aqueous cleaning technology. Based on 1994 consumption, 60 tons/ year would be eliminated by implementing the project, which accounts for 47% of consumption in the sector.
Technical Assistance and Training
11. The technical assistance component provides resources (US$225,000) for expansion of MEP's Ozone Office and longer term operation during project implementation. The Office would be responsible for overall implementation of the Country Program as well as direct management of this project. Resources to be directed to the Ozone Office would support operating costs, staff training, consulting assistance, and purchase of computer and communications equipment. MEP would provide salaries and office space for the Ozone Office.
RATIONALE FOR FUNDING UNDER THE GLOBAL ENVIRONMENT FACILITY
12. Ukraine is a significant consumer of ODS, 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 Multilateral Fund policies and procedures, thus ensuring consistency of approach between GEF and Multilateral Fund projects. These guidelines endorse working with a range of enterprise-specific sub-projects that offer substantive ODS phaseout gains, and for which the beneficiary enterprises would not be able to obtain sufficient financing from commercial sources. Within these sub-projects, 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
13. The technology conversion supported under this project will allow beneficiary enterprises to remain competitive, from a technical standpoint, in domestic and export markets. The technical sustainability of specific sub-projects has been assured through the evaluation of proposed technologies and their cost effectiveness in relation to other alternatives, both during project preparation and through the Ozone Operations Resource Group (OORG) review. Further technical evaluations to be conducted for the refrigeration sub-projects, considering alternative refrigerant technologies with no global warming potential, will be completed before project appraisal and cleared through a final OORG review. Sustainability will also be ensured by conducting a financial viability assessment for the enterprises, considering 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. A financial screening will be completed for pre-appraisal to determine which enterprises are likely to be viable, and more detailed financial assessments of the more viable enterprises will be conducted for appraisal. The beneficiary enterprises have been informed that support for project proposals will be dependent on positive results. Assistance to the Ozone Office will enable the Government to conduct the ODS phase-out program in an organized and efficient way. A monitoring and evaluation system will be established to help track ODS phase-out activities and will be used as a mechanism to supplement standard supervision activities to flag issues which arise in the course of project implementation.
Participation
14. As part of the Country Program development, MEP undertook consultations with a broad spectrum of enterprises and interested parties, including other Ministries through the Interagency Commission, NGOs, industry associations, and others. Enterprises were given the opportunity to participate in the project if they could provide the necessary data for evaluation of their financial viability, technological capabilities, and eligibility for financial assistance.
LESSONS FROM PREVIOUS BANK EXPERIENCE AND TECHNICAL REVIEW
Lessons from Bank Experience
15. Ten GEF-funded ODS phase-out projects have been initiated in the transitional economies of Central and Eastern Europe, and all projects are just underway; therefore, direct experience with implementation in Central and Eastern Europe is still limited at this time. However, as one of the Multilateral Fund Implementing Agencies, the World Bank is now implementing ODS phase-out projects in twenty countries worldwide. A number of lessons have been learned from experience with these projects, including: (i) the importance of a national phase-out 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 phase-out objectives; (iii) maintenance of strong communication and information exchange with organizations representing the Parties to the Montreal Protocol; and (iv) the need for institutional strengthening and training for local implementation units and financial intermediaries.
16. Additional lessons have been learned from World Bank and GEF projects in Ukraine, Belarus, and other FSU countries, including the importance of: (i) identifying a consistent, committed counterpart team with sufficient authority and motivation to move the project forward; (ii) coordination among key interested parties at the federal, regional and enterprise levels; (iii) early and detailed attention to procurement and other implementation issues; and (iv) involvement of local consultants and institutes in the process.
Technical Review
17. The technology conversion 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, and all enterprise sub-projects included in the project have been approved by the OORG. The refrigeration sub-projects which are being re-evaluated for technology choice giving a first preference to technologies with no global warming impacts, will undergo a final OORG review before appraisal. Twenty individual STAP review documents covering all sub-projects are available upon request.
PROJECT FINANCING, BUDGET, AND INCREMENTAL COSTS
Project Cost and Financing
18. The estimated total cost of the project is US$ 55 million, which includes goods and services, technical assistance, training, physical and price contingencies, and the net present value of incremental operating cost increases and savings over 4 years. The project would be financed by a US $23 million GEF grant and US $32 million in contributions from the beneficiary enterprises. 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 limits assistance to enterprises with export markets to OECD countries, reducing their funding by a specified percentage. No retroactive financing is proposed. Cost-effectiveness ratios are at or below the thresholds now in effect under the Multilateral Fund. For a few sub-projects, the grant amount was limited by the cost-effectiveness thresholds. The inclusion of these projects at threshold levels represents Ukraine's effort to comprehensively phase-out ODS consumption under a one-time project.
19. The initial development of sub-project documents was funded by the Danish government (US $250,000). A GEF PPA in the amount of US $340,000 is supporting financial viability assessments for beneficiary enterprises, continued project preparation through project appraisal including re-evaluation of refrigeration technology choice; and establishment of the Ozone Office in the Ministry of Environmental Protection and Nuclear Safety so that it can participate in project appraisal. The financial viability assessment would include an evaluation of the beneficiary enterprises' ability to meet counterpart funding requirements.
ISSUES, ACTIONS, BENEFITS, RISKS
Issues and Actions
20. 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:
(a) Undertake a preliminary financial screening of beneficiary enterprises, including an evaluation of the ability to meet counterpart funding requirements, followed by a more detailed financial viability assessment for retained enterprises.
(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) Completion of sub-project environmental assessments and initiation of local approvals as required.
(d) Reconsider technology choices for the refrigeration sub-projects giving preference for those with no potential global warming impacts where feasible, and revise project documents accordingly.
Project Benefits
21. The project would contribute to global efforts by eliminating the use of 2,273 tons/year of ODS. The GEF grant would help Ukraine make significant progress in meeting its national obligations under the Montreal Protocol within a three year period. In the absence of the grant, this would not be achievable. In the longer term, it would allow the country to avoid the economic disruption that would occur when imported ODS from Russia is no longer available for industrial, commercial and other consumer applications (after 2000). Technology conversion under the project would contribute to modernization of beneficiary enterprises and would allow them to maintain domestic and export markets. The institutional capacity for monitoring and regulatory enforcement of ODS phase-out would also be strengthened under the project.
Project Risks
22. Risks of the project can be categorized as follows: (i) implementation risks; (ii) risks associated with the nineteen investment sub-projects; and (iii) risks associated with the technical assistance component. Measures to reduce these risks are outlined in the table below.
IDENTIFIED RISKS MEASURES TO MINIMIZE RISK
PROJECT IMPLEMENTATION
A. Overall project Developing sound project implementation arrangements
implementation has been and will continue to be one of the prime
arrangements and objectives of Bank missions (preparation,
management of the MEP pre-appraisal and appraisal).
Ozone Office are
critical to success of
the project.
C. Lack of familiarity MEP already has some familiarity with Bank procedures
with Bank procedures as a result of two ongoing GEF biodiversity projects;
and project management. procurement has been handled by a local agent.
Although this project is more complicated (funding
larger investments and involving more beneficiaries),
it should be possible to build on earlier GEF
experience. The Ozone Office will be encouraged to
hire an experienced procurement agent as was done in
the earlier GEF projects. In addition, training in
project management and Bank procurement/ disbursement
procedures will be provided under the PPA.
ENTERPRISE SUB-PROJECTS
A. Risk of funding a For each enterprise, analyses of business and
potentially non-viable financial viability will be conducted. Those
enterprise. analyses will form the basis for eliminating
enterprises from eligibility if necessary.
B. Risk of an Ability to meet counterpart funding requirements will
enterprise not meeting be part of the financial analyses mentioned above.
its counterpart The grant provides a strong incentive for
funding. cooperation, as it will cover many of the costs an
enterprise would eventually incur to remain
competitive and retain markets. During supervision,
disbursements would be withheld if an enterprise
cannot meet its local funding commitment.
C. Potential for The OORG review required by the GEF project cycle
supporting a focused 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 upcoming missions.
its counterpart
funding/contribution.
B. Fragmented An Interagency Commission for the implementation of
decision-making on the Country Program has been formally constituted and
environmental and will be used as a mechanism for better coordination.
investment matters at The Ozone Office will act as a secretariat for this
national and regional commission and be a focal point for coordinating
levels. activities and communication.
INSTITUTIONAL FRAMEWORK AND PROJECT IMPLEMENTATION
Project Implementation
23. The Government has assigned MEP as the executing agency for the project. However, the specific institutional arrangements for project implementation and financial arrangements require additional clarification. A GEF PPA grant totalling US$ 340,000 has been approved to assist in further project preparation, establish pilot scale organizational arrangements and undertake the required financial analyses. A detailed project implementation plan will be developed and agreed at appraisal, including performance indicators to be monitored.
24. Additional responsibilities of the Ozone Office will include: (i) acting as secretariat to an Interagency Commission, which will have broad representation of all government interests; (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 non-compliance with phase-out schedules.
25. Prior to appraisal, the Ozone Office will identify and appoint an Financial Agent and a procurement agent acceptable to the Bank. The duties of the Financial Agent with regard to the management and disbursement of funds would include: 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 would include: i) providing advice and assistance on World Bank procurement procedures; ii) preparing bid packages; and iii) adminstering bid evaluation, contractor selection, and contract negotiations. Sub-project procurement plans would be developed and agreed upon at appraisal.
26. The Project will be covered under an Umbrella Grant Agreement between the Bank as GEF Implementing Agency and the MEP which defines the overall framework by which the GEF grant funds can be disbursed to enterprise specific sub-projects. Individual sub-projects will be covered by Sub-grant agreements between the MEP and the participating enterprises. Both the Grant Agreement and Sub-grant Agreements will 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
27. The following steps are planned for project processing:
Step Estimated Date
IPID Review Meeting May, 1996
Pre-Appraisal October, 1996
GEF Council Approval October, 1996
Appraisal January, 1997
Final GEF Council Approval April, 1997
Negotiations April, 1997
Board Approval May, 1997