The World Bank The District Heating Energy Efficiency Project (P132741) REPORT NO.: RES52274 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE DISTRICT HEATING ENERGY EFFICIENCY PROJECT APPROVED ON MAY 22, 2014 TO UKRAINE 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): Sandu Ghidirim The World Bank The District Heating Energy Efficiency Project (P132741) I. BASIC DATA Product Information Project ID Financing Instrument P132741 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 22-May-2014 31-Dec-2022 Organizations Borrower Responsible Agency Ukraine Ministry of Communities and Territories of Ukraine Project Development Objective (PDO) Original PDO The project development objective is to improve the energy efficiency and quality of service of selected Ukrainian district heating(DH) companies, improve their financial viability and decrease their CO2 emissions. The global objective is to reduce greenhouse gas (GHG) emissions through avoided heat generation by improving heat generation efficiency, reducing heat losses in DH transmission and distribution systems, and reducing residential heat consumption. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-83870 22-May-2014 26-May-2014 21-Nov-2014 30-Jun-2022 151.59 128.57 23.02 TF-16327 22-May-2014 26-May-2014 21-Nov-2014 31-Dec-2022 50.00 22.10 27.90 The World Bank The District Heating Energy Efficiency Project (P132741) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES 1. Project Status: Since the last project extension in October 2021, project implementation has significantly improved in three (Kharkiv, Ternopil, and Mykolaiv) of the five participating utilities representing more than about 80 percent of total project investments. (Activities in Kamyanets were already very advanced, while activities in Kherson continued to experience major delays.) This substantial improvement is attributable to motivated and strengthened PIUs benefitting from the support of utility management and their municipal authorities. The municipal authorities provided budget support that enabled the financially-struggling DHCs in Kharkiv, Ternopil, and Mykolaiv to meet their debt obligations to the Ministry of Finance (MoF) under their Subsidiary Loan Agreements (SLAs), thus allowing MoF to process the applications for outstanding payments to contractors and replenish the three municipalities' designated accounts. On this basis, the major contracts in these three cities showed steady implementation progress. Another positive development is the significant improvement in contract management by the DHCs especially in Kharkiv, the largest participating DHC and beneficiary of half of the investments under the project. The new management of Kharkiv’s DHC appointed in January 2021 continued to streamline decision-making processes improving dramatically the responsiveness and proactivity of the regional project management unit (RPMU) in managing contractors. The RPMUs in Mykolaiv and Ternopil continued to implement project activities diligently and competently. Despite intensified project implementation in Kherson after the last extension, the project there has stopped due to the war that started on February 24, 2022. 2. The Russian invasion of Ukraine on February 24th has had a major impact on project activities. In addition to general disruptions created by the armed conflict, three participating cities were directly impacted by military operations: Kherson (now under control by the Russian military administration), Kharkiv, and Mykolaiv experienced shelling. The utilities in Ternopil and Kamianets have not been directly impacted by military operations and were able to continue to operate. Despite shelling and proximity to the active war zone, the Kharkiv and Mykolaiv DHCs continued to operate their systems and intervened to repair any damage to the DH infrastructure. As reported by DHCs, none of Project-financed facilities suffered major damage to date nor was any of the project workers harmed as a result of conflict-related activities. Following due safety protocols under the Martial law, the DHCs are required to rapidly recover the DH infrastructure and complete the project facilities to ensure sustainable heat supply to the war- affected residents in the areas under the control of the Ukrainian government in the upcoming 2022/2023 heating season. These tasks have to be completed under a severe financing deficit because of a moratorium on payments granted to consumers by the Government of Ukraine, which has led to a drop in collection rates by about sixty percent. It has therefore become an urgent imperative to fully use the Project funds and complete the critical infrastructure before the start of the heating season on October 15. 3. Proposed changes: The proposed change is to extend the closing date of the IBRD loan by 3 months 28 days from June 30, 2022 (current closing date) to October 28, 2022. The Project is co-financed by the Clean Technology Fund (CTF) loan (TF016237). The current closing date of the CTF is December 31st, 2022. The CTF closing date and overall Project closing date will remain unchanged. Such an extension of the IBRD loan closing date to make possible the completion of ongoing works before the next heating season has been requested by the participating utilities, their municipal authorities, and Minregion and confirmed by the Ministry of Finance in a formal extension request to the Bank received on June 28, 2022. The World Bank The District Heating Energy Efficiency Project (P132741) 4. Rationale: Based on the updated implementation action plans and available estimates, the outstanding works are expected to be completed under the proposed extension and will directly secure heat supply this winter to the war-affected residents of Kharkiv, Mykolaiv, and Ternopil. Completing the Project in these three cities would positively impact over a million beneficiaries. A total of eighty thousand consumers in Mykolaiv, one hundred and ten thousand consumers in Ternopil, and one million consumers in Kharkiv along with 20 social facilities remain dependent on the completion of critical DH infrastructure funded by the Project to cope with the upcoming heating season. The extension would also help avoid significant contractual problems caused by the termination of ongoing contracts which have been delayed due to the armed conflict. The extension would not significantly increase the level of commitment under the IBRD loans: all significant contracts under IBRD financing have been signed and are under implementation. 5. Kharkiv, Mykolaiv, and Ternopil have communicated summary action plans for the completion of all major IBRD- supported contracts under the proposed extension. 6. There are no outstanding financial audits for the Project. III. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications 30-Oct-2021, 30-Jun- IBRD-83870 Effective 30-Oct-2020 28-Oct-2022 28-Feb-2023 2022 30-Oct-2021, 31-Dec- TF-16327 Effective 30-Oct-2020 2022