Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12864-EE STAFF APPRAISAL REPORT ESTONIA DISTRICT HEATING REHABILITATION PROJECT NAY 5, 1994 Infrastructure Operations Division Country Department IV Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Estonia Kroon (EEK) 1 US$ = 13.5 EEK I EEK = US$ 0.074 WEIGHTS AND MEASURES 1 gigacalorie (Gcal) = 1 million kilocalories (kcal) 1 gigacalorie (Gcal) = 1.16 megawatt-hour (MWh) 1 gigawatt (GW) = 1 million kilowatts (kW) 1 gigawatt-hour (GWh) = 1 million kilowatt-hours (kWh) 1 megawatt (MW) = 1,000 kilowatts (kW) 1 joule = 0.24 calories (cal) 1 metric ton = 1.000 kilograms = 2,205 pounds (Ibs) 1 kilometer (kmn) = 1,000 meters (m) = 3,281 feet (ft) 1 meter (m) = 3.281 feet (ft) 1 centimeter (cm) = 10 millimeters (mm) I milimeter (mm) = 0.1 centimeter (cm) 1 cubic meter (r3) = 35.3 cubic feet (c ft) 1 ton of coal equivalent (tce) = 7 x 106 kilacalories (kcal) I petajoule (PJ) = 34,129 tons of coal equivalent (tce) 1 petajoule (PJ) = 0.275 terawatt-hour (TWh) 1 terawatt (TW) = 1 billion kilowatts (kW) ACRONYMS CHP = Combined-Heat-and-Power CPAR = Country Procurement Assessment Report DH = District Heating EBRD = European Bank for Reconstruction and Development EIB = European Investment Bank EU = European Union FSU Former Soviet Union GDP = Gross Domestic Product GPN = General Procurement Notice GOE = Government of Estonia G24 = Group of 24 HFO = Heavy Fuel Oil ICB = International Competitive Bidding IERR = Internal Economic Rate of Return LCB = Local Competitive Bidding LIB = Limited International Bidding NGO = Nongovernmental Organization PIU = Project Implementation Unit SOE = Statements of Expenditure UNDP = United Nations Development Program USEPA = United States Environmental Protection Agency ESTONIAN FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY ESTONIA DISTRICT HEATING REHABILITATION PROJECT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ................................. i I. SECTOR BACKGROUND ..................1..................... A. Country Context ......................................... 1 B. Overview of the Energy Sector ................................ 2 C. Energy Sector Policy and Strategy .............................. 7 D. District Heating (DH) Conditions and Priority Needs .................. 8 E. Bank Energy Strategy, Past Experience and Project Rationale ............. 9 U. THE PROJECT .....................11........................ 1 A. Project Origin and Formulation ............................... 11 B. Project Objectives ........................................ 12 C. Project Components and Description ............................ 12 D. Cost Estimates .......................................... 19 E. Project Financing Arrangements ............................... 21 F. Implementation Arrangements ................................ 23 G. Procurement Arrangements .................................. 24 H. Disbursement ........................................ ; 26 I. Accounts and Audits ....................................... 27 J. Environmental Aspects . .................................... 29 K. Supervision ............................................ 31 M. IMPLEMENTING AGENCIES ................ .................... 32 A. Estonian State Energy Department .............................. 32 B. The District Heating Companies ............................... 32 C. Estonian State Power Company and its Iru Power Plant ................ 35 IV. FINANCIAL ASPECTS ................. .. ...................... 36 A. Past Financial Performance of Project Agencies ..................... 36 B. Heat Tariffs . ........................................... 36 C. Billing and Collection Performance of Project Agencies ................ 37 D. Future Financial Performance of Project Agencies .................... 37 V. PROJECT BENEFITS AND RISKS ..................... 40 A. Project Benefits . ........................................ 40 B. Project Risks ............................................ 43 VI. AGREEMENTS REACHED AND RECOMMENDATION ..... .............. 44 This document has a restricted distribution and may be used by recipients only in the performance of their I official duties. Its contents may not otherwise be disclosed without World Bank authorization. | ANNEXES 1 - Statement of Energy Policy and Strategy 2 - Criteria for the Small Boiler Conversion/Replacement Program 3 - Tallinn, Tartu and Parnu DH Rehabilitation Components 4 - Iru Power Plant Improvement Component 5 - Detailed Cost Estimates 6 - Project Implementation Schedule and List of Procurement Packages 7 - Estimated Schedule of Disbursements 8 - Environmental Aspects 9 - Tartu DH Financial Analysis 10 - Parnu DH Financial Analysis 11 - Tallinn DH Financial Analysis 12 - Iru Power Plant Financial Analysis 13 - Economic Analysis 14 - Supervision Plan SCHEMATIC DRAWINGS I - Tallinn DH System 2 - Tartu DH System 3 - Parnu DH System CHARTS I - Organization of Estonian State Energy Department 2 - Organization of Parnu DH Company MAP IBRD 25690 - Map of Estonia -i- ESTONIA DISTRICT HEATING REHABILITATION PROJECT Loan and Project Summary Borrower: Republic of Estonia. Beneficiaries: Estonian Power Company and its Iru Power Plant, Municipalities of Tallinn and Tartu and their district heating (DH) companies, and small municipal boiler owners. Loan Amount: US$ 38.4 million equivalent. Loan Terms: Standard variable interest rate with a maturity of 15 years including 5 years grace. On-Lending Terms: As loans to: (a) Tallinn and Tartu Municipalities and Estonian Power Company in US$ at the IBRD interest rate plus a mark-up, for cross-currency risk and administration, not to exceed 10% to be repaid over 15 years including 5 years grace; and (b) to small municipal boiler owners in Estonian kroons at 10% interest rate to be repaid over 7-12 years including 1-2 years grace. Project Description: The project would reduce fuel costs and import requirements, bring about energy efficiency and economy in major DH systems; improve environmental conditions in affected areas; and support the strengthening and restructuring of DH institutions and development of the energy sector. The Project would include support for: (a) conversion and replacement of small boilers in small towns and counties to use local fuels; (b) rehabilitation of DH systems in Tallinn, Tartu and Parnu; (c) improvement of Iru (CHP, Tallinn) Power Plant; and (d) institutional support program for project agencies to support project management and implementation, for restructuring energy agencies and for further development of the energy sector. Project Risks: Project risks include an untested implementation capacity of project agencies, insufficient local fuel supplies, uncertainty regarding heat tariff increases and the timetable for restructuring of Tallinn and Tartu DH companies, and the effectiveness of the new subsidy scheme for households. To minimize these risks, implementation arrangements would be in place prior to project start-up, contracts for the supply of local fuels would be entered into for the first two years, requirements for heat tariff increases would be closely monitored, support for restructuring is being sought to be put in place as soon as possible, and the effectiveness of the new subsidy scheme and the performance of Government in providing the necessary budgetary allocations would be monitored. -ii- Estimated Co: Local Foreig Total -------(US$ million)--------- Small boiler conversions 0.98 4.73 5.72 Small boiler replacements 0.71 3.35 4.06 DH rehabilitation components 6.22 26.09 32.31 Iru power plant component 0.48 4.24 4.71 Institutional support 0.04 3.54 3.57 Design/supervision 0.75 2.41 3.16 Base Cost 9. 44.35 53 Physical contingencies 0.92 4.44 5.35 Price contingencies 2.80 2.82 5.61 Total Project Cost_/ 12.89 51.61 64.50 Financing Plan: World Bank 6.04 32.36 38.40 Swedish Government 1.87 8.13 10.00 European Investment Bank 0.93 3.47 4.40 Other Donors (grants) 0,00 3.80 3.80 Project Agencies 4.05 3.85 7.90 IQial 12.89 51.61 64.50 Estimated Disbursements: Bank FY 1995 1929 1997 1998 1999 2000 ---------(US$ million)------ ------- - Annual 3.0 9.0 10.0 10.0 3.0 3.4 Cumulative 3.0 12.0 22.0 32.0 35.0 38.4 Economic Rate of Return: 24% W Includes taxes and duties estimated at US$ 2.2 million equivalent. ESTONIA DISTRICT HEATING REHABILITATION PROJECT I. SECTOR BACKGROUND A. Country Context 1.1 In the past three years since Independence, Estonia, a country of 1.6 million people with a per capita income level of US$ 2,750 in 1992 ', has made enormous strides in the transformation from a centrally-planned republic to an independent market-oriented economy. Its small economy had been severely distorted by a half century of central planning and heavy dependence on the former Soviet Union (FSU), which accounted for about 90% of its trade. To overcome major structural problems of the economy, far-reaching economic reforms have been introduced. After initial and expected difficulties experienced in 1991 and 1992 which led to high inflation and sharp contraction of real GDP, Estonia's reform program has already begun to show major improvements. The economic decline appears to have been halted in 1993, and GDP is expected to reach a positive growth rate of about 5-6% in 1994. The annual inflation rate was substantially curbed to about 36% during 1993, while the unemployment rate was kept below 5% of the labor force. The currency introduced in mid-1992, the kroon, has remained convertible, while foreign exchange reserves have more than tripled. A major transformation was accomplished in foreign trade, with an export increase of 30% in 1993, while the share of foreign trade with the FSU fell to about 32%. Estonia still faces, however, a difficult reform agenda to complete the transition process to a sustainable and growing market-based economy. It will be particularly important for the Government to stimulate the development process by completing the transition in a manner that will make the country even more attractive to both local and foreign investors. 1.2 The Bank's overall objective is to support Estonia's efforts to accelerate structural reforms and to undertake efficient investments in high priority sectors. This objective will be pursued through a combination of lending operations, analytical sector work and aid coordination. It is now appropriate for the Bank to support Estonia's energy infrastructure, since the economy is at a stage in the transition process where substantial public investment will be required to overcome the backlog of deferred maintenance and to reorient the energy sector to address energy conservation and environment-related issues. Analytical work as well as lending operations would assist the Government in formulating and implementing a sound public investment program and in coordinating assistance from other sources. The energy sector is a very high priority area, given the dramatic price changes which have occurred over the past two years, the dependence on energy imports and the resulting need for energy conservation and improvements in efficiency of energy facilities. The proposed project would support the objectives of promoting energy conservation and efficiency improvements in the district heating (DH) subsector. 1/ At purchasing power parity exchange rates -2- B. Overview of the Energy Sector Economic Significance 1.3 The energy sector is important in the economy for a variety of reasons. It is significant partly due to the vital role it plays as an input to the industrial sector which contributed 47% of Gross Domestic Product (GDP) in 1990. The sharp increase in energy prices during the past two years, however, has been a contributing factor to the drastic decline in industrial activity (estimated at about 30% between 1991 and 1992) and thus overall economic activity. Additionally, Estonia's energy intensity was estimated in 1990 at about 6-7 times that which would be expected on the basis of its GDP level as compared to Scandinavian countries, since it had an energy consumption in 1990 of about 2 tons of oil equivalent per thousand US$ of GDP. Industrial restructuring and energy conservation measures could assist in reducing Estonia's energy intensity further. For the first 7 months of 1993, fuel imports were valued at about EEK 925 million (US$ 77 million), representing 17% of the country's total imports or 8% of GDP. Although the percentage of fuel imports as a share of total fuels for the energy sector has decreased in recent years, significant reductions in the import bill could be achieved through fuel switching to domestic fuels and greater efficiency in the sector. Subsidies to the energy sector are also significant and are a burden on the constrained budget of the Government. Direct subsidies paid to heat producers and consumers were about EEK 159 million (US$ 12 million), representing about 5% of total government expenditures in the first half of 1993. Other subsidies are provided to the oil shale industry and translate into subsidies in electricity prices; although reliable data of the magnitude of these subsidies is not available, they are thought to be significant. Investments targeted at reducing energy production and operating costs would have a positive impact on the need for subsidies to the sector. Characteristics of the Energy Sector 1.4 Estonia's energy sector is comprised of three subsectors: one energy producing subsector (oil shale) and two energy conversion subsectors (electric power and district heating). The key characteristics of the energy sector are: (a) significant domestic primary energy resources, partially unexploited; (b) a heavy dependence on imported energy resources, primarily oil and gas; (c) an explosive rise in energy prices since Independence: (d) unaffordable heat services requiring subsidies to the sector; (e) low technical standards and low efficiency of energy facilities; and (f) negligence of environmental protection measures. 1.5 Domestic primary energy resources. Although not huge in area, Estonia is relatively rich in natural resources which can be used for energy production. The world's largest deposits of oil shale, located in the northeast of Estonia, form the basis for power production and to a lesser extent heat production. The amount of registered deposits is about 4 billion tons, of which about 1.7 billion tons are suitable for mining, and annual oil shale production is currently about 20 million tons. 1.6 Peat resources are also large with peatlands covering approximately 1 million hectares or 22% of the territory of Estonia. On the basis of detailed surveys, it is estimated that 470,000 hectares, distributed over 539 sites, have commercial potential. Peat reserves are estimated at 1.5 billion tons of which 85% are technically suitable for harvesting for use as fuel or fertilizer. A substantial amount of commercial peatlands have already been drained to facilitate peat production for the requirements of the FSU. Currently, a total of 156,600 hectares of peatlands are in various types of protected areas in which peat harvesting is not allowed. -3- 1.7 Forest resources are substantial as well, covering approximately 1.9 million hectares or about 42% of the country and constituting 264 million solid cubic meters with an average standing volume of 144 solid cubic meters per hectare. In 1991, 3.3 million solid cubic meters of timber were produced, accounting for only about 1 % of the total standing volume. The potential use of forests for biomass production has been estimated, following adjustments for technical reasons, at about 9.5 million m3 (solid over bark) per year, of which about 1.6 million m3 is judged to be the potential annual quantity of biomass available as fuel wood. The amounts of biomass, however, could be easily increased, for example, by salvage harvesting of dead and dying trees commonly standing in the forests today. Significant areas of forests in Estonia are in protected areas of various types in which no harvesting or only restricted harvesting is allowed. As peatlands and forests are evenly distributed over the country and have only been minimally used as fuel resources to-date, a great potential exists for increased use of these resources in heat production. 1.8 Imported energy resources. Estonia is heavily dependent on imported fuels largely due to the design of heating production and industrial plant which have been constructed to operate only on certain types of fuels, mainly natural gas and heavy fuel oil. Prior to the breakup of the Soviet Union, these imported fuels were very inexpensive but have sharply increased in price over the past two years, contributing to a serious energy crisis in Estonia. Estonia purchases heavy fuel oil and gas primarily from Russia. While Estonia traditionally exported surplus electricity to Russia and Latvia enabling it to pay for a large share of its energy imports, the economic depression throughout the FSU has resulted in a dramatic decline in the demand for electricity exports from Estonia (by 60% since 1990). The shares of various imported fuels as a ratio of total fuels utilized during the recent period 1990-93 are shown in Table 1.1 below. During 1992 and the first half of 1993, imported fuels averaged about 30% of total fuels utilized for all purposes. While the share of imported fuels of total fuels utilized has been declining in recent years, it still remains a substantial financial burden on the Government's budget, since prices for energy imports have been increasing towards world market prices. Investments which allow the use of lower-cost domestic fuels would help alleviate this substantial burden. -4- Table 1.1: FUELS UTILIZED IN ESTONIA, 1990-93 Jan-June 1990 1991 1992 1993 Total petajoules a/ 452.0 416.0 303.9 118.6 Tons of coal equivalent 15.4 14.2 10.4 4.1 % 100.0 100.0 100.0 10Q.0 Domestic Fuel (%): Oil shale 52.8 52.6 63.8 63.5 Firewood 1.6 1.6 1.0 1.4 Peat 1.0 1.5 1.5 1.1 Peat Briquettes 0.8 0.8 1.1 0.6 Other fuel 1.9 1.1 2.7 3.0 Total 58 1 57.6 70.1 696| Imported Fuel (%): Heavy fuel oil 14.2 13.5 9.9 13.7 Light fuel oil 1.1 0.9 0.3 0.2 Diesel oil 7.2 6.0 5.1 4.8 Petrol (gasoline) 5.1 5.0 2.6 2.4 Coal 2.0 2.1 1.7 1.5 Natural gas 11.3 12.4 9.9 7.6 Liquified gas 0.4 0.3 0.2 0.2 l Other fuels 0.6 2.2 0.2 - Total 41.9 424 29.9 30.4 n/ Assumes 1 petajoule = 0.275 terawatt-hour Source: Estonian Institute of Energy Rescamh 1.9 Energy Prices. Since 1991, energy prices have skyrocketed as summarized in Table 1.2 below and contributed to a severe fuel crisis in the winter of 1991/92 due to the limited ability of Estonia to pay for energy imports along with supply disruptions from the FSU. Most notable are the prices of natural gas and heavy fuel oil imports, utilized primarily in heat and electricity production, which increased more than 700 and 450-fold, respectively, during this period. The current domestic price levels for these fuels approximate world market levels. Since a large number of heat producing boilers utilize heavy fuel oil and gas, the continued affordability of these imports has become a very serious issue for the Government. Domestic fuel prices increased dramatically as well although at a lower rate. For example, prices of oil shale, utilized primarily in electricity production, rose about 85-fold during this period; however, this fuel remains relatively inexpensive when used in energy production as compared to imported fuels, although the correct pricing of this fuel needs review. Table 1.2: FUEL PRICES IN ESTONIA DURING 1991-93 Fuels Units Before January April April 1991 1991 1992 1993 Oil shale EEK/t 0.42 1.67 24.70 36.00 Coal EEK/t 4.25 6.70 411.00 405.20 Heavy fuel oil EEK/t 3.05 8.00 825.00 1381.00 Natural gas EEK/thous. m3 1.85 6.10 539.00 1321.60 Diesel oil EEK/t 13.90 n.a 1590.80 3309.00 Petrol (gasoline) EEK/t 26.00 n.a 3144.80 3927.00 Heat from HFO EEK/Gcal 1.00 2.00 120.00 220.00 Electricity EEK/MWh 2.30 5.00 90.00 150.00 Source: Estonian Institute of Energy Resean:h 1.10 Growth of heat prices and subsidies. The price increases of energy inputs were translated into higher prices for heat and electricity services, which escalated 220 and 65-fold, respectively, during the period 1990-93 as shown above in Table 1.2. Particularly striking was the growth in heat prices which increased about 60-fold alone during 1992. Household incomes, on the other hand, did not grow at a rate commensurate with the growth in heat prices. Based on average household salary information available from the Estonian Department of Statistics, incomes grew at only about 5-fold during the same period. It was not uncommon for heat bills to represent 60-90% of total monthly household income and in some cases even exceed monthly household income during the 1992/93 heating season. As a result, consumers were not able to pay their heat bills in a timely manner. However, by January 1994, the affordability of heat services improved, and only about 20% of households are estimated to be in need of subsidies for housing and utilities, including heat. 1.11 The Government introduced subsidy schemes to heat producers and to some consumers in 1992, but the level of subsidies was inadequate to cover all costs of production and provide a sufficient level of assistance for those households requiring support. Consequently, consumer debts to heat producers grew substantially, from about EEK 140 million to EEK 290 million during July 1992-October 1993. Direct subsidies to heat producers were eliminated in August 1993 and a program for increased subsidies to qualifying households was introduced but was ineffective. While the past subsidy schemes were inadequate, a new subsidy scheme, addressing the problems of past schemes, was introduced by Government Decree in January 1994 which targets subsidies to households who will be required to pay no more than 30% of total household income on rent and most services, including heat, hot water, gas, electricity for cooking and water. Heat producers are now permitted by municipalities to raise tariffs to levels necessary to cover all costs plus provide for some profit. Although energy prices are stabilizing to reflect world market prices of energy imports, the requirements for subsidies to households are expected to continue over the near -6- term, until household incomes grow commensurately with the rise in service prices. The estimate of subsidies under the new scheme during 1994 to households for all services, including heat, is about EEK 300-350 million. 1.12 Technical standards. The technical standards in the energy sector are low compared to Western standards. In the power sector, two condensing power stations (Estonian, Baltic) in the northeast in the Narva region constitute the~ basis for production of electricity in the country, but one plant is near the end of its expected lifetime, inefficient and a major source of pollutants in the region. The other plant is relatively new but urgently needs environmnental improvements. Production of oil shale, the fuel supply for the power stations, has been limited by an inadequate supply of explosives, chemicals and spare parts for mining equipment, and maintenance and monitoring have also been neglected over the years. In addition, the technical standards in the heating sector are particularly low. Production and consumption of heat are, as a rule, not even metered. Inefficiencies in the production of heat, large heat losses (about 25% as compared to about 8-12% in Western systems) and water losses in the systems (about 5-10 times higher than Western systems) are common. There is a substantial potential for improving the technical standards and efficiency of the sector. 1.13 Environmental Conditions. Estonian energy production and consumption is responsible for the majority of the air pollution in the country. Air quality problems of regional significance are caused by the oil shale-fired power plants near Narva. In urban areas and towns, locally significant air quality problems occur during the winter heating season from the use of coal, shale oil and heavy fuel oil in low-efficiency boilers used for DH and building heating. Estonian health authorities report human health effects associated with air pollution (nitrogen oxides, sulfur dioxide and dust) including heart and respiratory diseases, especially bronchial asthma, for which pregnant women and children have higher rates of problems. While levels of air pollution have declined during the last several years due to the economic restructuring process, the levels should be expected to increase in the near future when economic recovery occurs unless energy conservation measures and environmental improvements are introduced. 1.14 In the northeastern oil shale region, energy production is the most important cause of degradation of surface and groundwater resources, due to impacts from mining and the disposal of massive amounts of solid wastes generated by the power plants. On a local scale, the operation of old and poorly maintained DH networks results in the wastage of large amounts of freshwater and, in some situations, may contribute to pollution of groundwater. Improper storage of heavy fuel oil and wastes at some DH stations is thought to have resulted in the contamination of groundwater and soil. Energy Sector Institutions 1.15 Organized under the Ministry of Economy is the Ministry of Energy, whose main duties are to follow the development in the energy sector, facilitate investments and establish energy policy. Since the Ministry of Energy's staff is very limited, it is assisted in this effort by a separate state-owned agency, the Estonian State Energy Department, which reports to the Minister of Energy. An Energy Committee, chaired by the Minister of Energy and comprising all senior energy managers, also meets regularly to discuss and resolve policy matters. In addition, four state energy enterprises are also active in the energy field: Eesti Energia, Eesti Polekivi, Eesti Kutus and Eesti Gaas. Thermest Ltd., previously a state enterprise, is now owned by DH companies providing services in the DH sector. -7- 1.16 Eesti Energia, including 16 daughter companies, has absolute monopoly on electricity production, transmission and distribution. Eesti Energia also accounts for 40% of the total heat production and supplies approximately 40% of the households in the four largest cities as well as industry with heat. 1.17 Eesti Polekivi, including 16 daughter offices, has absolute monopoly on oil shale mining in Estonia, producing coarse and crushed oil shale. Coarse oil shale is processed into shale oil which is used as raw material in the chemical industry and as fuel for different purposes. Crushed oil shale is utilized in the production of electricity. 1.18 Eesti Kutus is responsible for the purchase, transport, storage, marketing and selling of oil products and solid fuels, except oil shale and natural gas. With daughter companies, Eesti Kutus controls about 10% of Estonia's oil products and solid fuel markets. In addition, Eesti Kutus owns stocks in several limited companies and is part of a joint venture with a company in Finland ("Neste") selling oil products in Estonia. 1.19 Eesti Gaas is responsible for the purchase, transport, storage, marketing, distribution and selling of natural and liquid gas. Eesti Gaas recently formed a joint venture with a Russian company, which now owns 30% of the stocks. Through daughter companies, Eesti Gaas controls all of Estonia's natural and liquid gas markets. All main gas pipelines and storage are the property of Eesti Gaas. 1.20 Thermest Ltd, until 1992, was primarily responsible for producing, distributing and selling district heat, amounting to about 30% of all district heat supplied in urban areas, and also repaired energy equipment. Since that time, its DH companies have been transferred to municipal ownership, and therefore it's role in the energy sector in the future is unclear. At present, Thermest is responsible mainly for provision of maintenance and related services to the municipal DH companies, and also provides advice on legal issues related to the DH sector. C. Energy Sector Policy and Strategy 1.21 The Government recently issued an energy policy and strategy statement, presented in Annex 1, which gives high priority to the energy sector as a pivotal component in its economic reform program. The basic objective of the energy policy is to provide reliable energy at the lowest possible cost, which will be attained through greater efficiency, reliability, diversity, environmental protection (including conservation), attraction of capital, and competition in sector activities. To attain these objectives, the Government's institutional structure will be modified in line with the new political and economic framework of the country applying the following key principles: separation of the policy making and regulating roles from those of ownership and management of enterprises, clear allocation of responsibilities and accountability among its agencies, decentralization of energy activities to the municipal level where possible, and sale to the private sector of those enterprises whose activities are not considered of strategic importance. In order to protect the consumer, the regulatory function of the Government will be carried out by autonomous agencies with transparent procedures in those cases where monopoly conditions still exist. 1.22 In line with its policy, Estonia's energy strategy has established the following priorities, in sequence of implementation: (i) to improve efficiency and reliability of existing systems -8- through reduction of losses; (ii) to improve the diversity of energy fuels through the exploitation of indigenous resources in order to reduce high-cost fuel imports and dependence on only one main fuel supplier (Russia); (iii) to rehabilitate existing facilities in order to improve efficiency and reliability; and (iv) to promote investment in new plants only when other priorities have been addressed. Within this strategy, the highest priority is for investments in the DH sector which is inefficient and most heavily dependent on imported oil and gas. To support this strategy, a National Energy Conservation Programme was initiated during 1992 with the aim of converting small heat-only-boilers (<2 MW) in towns and counties throughout the country to use lower-cost, indigenous fuels and to promote end- user efficiency improvements in buildings. 'his program is currently being supported by a number of donors (EBRD, Swedish Government, Danish Government, G24) as well as through budgetary allocations of the Government. The proposed project represents further support for rehabilitation of DH systems in Estonia's major cities. 1.23 The Government has taken a number of steps in the direction of establishing a legal and regulatory framework for the sector and to restructure its energy institutions. On the enterprise side, the Govermnent has transferred DH companies to municipal ownership, although the legal status of the municipal enterprises has yet to be formally established, and has given support to the formation of joint-stock DH companies. The Government has also decentralized the responsibility for heat tariff regulation to municipalities. The prices of gasoline, diesel oil and liquid gas have also recently been decontrolled, while the Cabinet, considering the review by the Ministry of Finance's Competition Board, determines other energy prices on the basis of proposals prepared by the energy producers. Some privatization steps have been taken, for example, by Eesti Gaas which has entered into a joint- venture partnership with a Russian company owning 30% of its stocks. The Government has also allowed private suppliers of liquid fuels, peat and wood chips to enter the sector. 1.24 The recently issued energy policy and strategy statement will serve as the document of reference for future actions in the sector, including the proposed project. It is the Government's intention to use the statement also as a reference document for the development of the legal and regulatory framework of the sector, which is expected to be supported under the project. D. District Heating Conditions and Priority Needs 1.25 District heating systems supply about 46% of the total heat production in Estonia, primarily in urban areas, as well as hot water and steam to industry. Heat is produced either in combined-heat-and-power (CHP) or in heat-only-boiler plant and transported through about 2,200 kilometers of a double pipeline system to substations in buildings. The use of CHP is limited to a few large plants (in the Narva, Kohtla-Jarve, Ahtme and Tallinn areas) whereas much of the rest of the country is being provided with heat through approximately 5,000 boilerhouses, 90% of which have a capacity of less than 2 MW. The DH systems are owned primarily by Eesti Energia, the various municipalities and industrial companies. 1.26 Boilerhouses are mostly operated manually without any control systems, and metering of fuel supplies and delivered heat is rarely seen. Generally, boiler designs are of an outdated technology and of low efficiency, typically around 60-65% with some more modern, gas-fired boilers around 80-85% (as compared to around 80-85% in Western countries up to about 92-94% for gas- fired boilers). About 40% of the boilers utilize heavy fuel oil, 25% natural gas, 15% shale oil, 7% coal, and the remaining 13% other fuels, i.e., wood, wood chips and peat. About 80-90% of the cost -9- of production of heat in oil or gas-fired boilers is attributable to the fuel cost alone. Therefore, investments which would convert boilers from use of high-cost imported fuels to lower-cost domestic fuels, where technically possible, are of the highest priority in reducing the cost of heat production. 1.27 The DH networks have pipe dimensions between 40 and 1,200 mm, and 90% are encased in concrete channels. The pipes are poorly insulated with mineral wool and bitumen board. In a number of channels, insulation is made of bitumen perlite, which, when exposed to water through leakage, acts as a corrosive agent; this leads to excessive corrosion and premature degradation of the pipes requiring replacement in about 5 years, a time that is much shorter than that required in well-designed systems. The remaining 10% of pipes, which are mounted in open air, are generally poorly insulated with mineral wood and covered with metal sheets, and distribution branches and valves are mostly uninsulated. As water losses are high (often as high as 3-4% of flow as compared with less than 0.5% in well-designed and operated DH systems), the water treatment systems have difficulty coping with the high make-up water flow; treatment has also been aggravated by the current shortage of chemicals. The high leakage rate does not allow for proper water treatment leading to internal corrosion in the pipes and other equipment. Improvements in insulation, water treatment and to address leakages are needed to reduce energy and water losses in the systems. 1.28 Normally, the operating temperature of the hot water from the heat sources is 150 to 95°C for the outgoing water and about 70°C for the returning. Since the onset of the energy crisis in Estonia, temperatures have been forced down to 60/400C, which is inadequate to provide satisfactory service. Temperatures in homes during the last heating season averaged around 10-130C and hot water was not available in all areas. Consumer connections in substations do not have any controls and operate with constant flow ard pressure conditions, requiring the DH system to operate on the same flow rate around the year. This mode of operation does not allow the flow to vary according to energy demand. The present systems also do not have the capability of economic dispatch to allow the operator to use the least expensive source of heat at any given time. 1.29 Maintenance in all parts of the DH system is poor due primarily to the limited availability of funds for repairs and spare parts. Traditionally, the Soviet process for investment was characterized by a heavy emphasis on the initial investment, and less attention was paid to maintaining the investment. E. Bank Energy Strategy. Past Experience and Project Rationale 1.30 Since Estonia is now importing energy products at near world market prices, the Bank's strategy is to assist the Government to develop policies that help align domestic relative prices of energy services with world prices and to support investments that improve energy efficiency and the conservation of energy. The priority investments to be supported by the Bank would be expected to lower energy import requirements and production and operating costs and thus make energy services more affordable and reduce the need for Government subsidies. The selected investments should focus on increasing operational efficiency, plant rehabilitation rather than construction of new facilities where existing capacity is sufficient, conversion of plant to use domestic fuels, and environmental improvements, and should be supported by institutional development programs. High priority should be given to investments in the DH and power sectors and the associated institutional and financial strengthening of the responsible agencies. For large energy investments, a regional approach would be required to prevent duplication of capacity and resource misallocation. Energy -10- investments should also address environmental problems, in view of the prevailing environmental degradation in several areas. 1.31 The proposed Loan represents the first Bank investment loan in the energy sector to Estonia. A Bank Rehabilitation Loan (Ln. 3522-EE) of US$ 30 million was approved in October 1992 and provided financing for imported goods in priority sectors during a transition period of about 18 months in support of an economic reform program. About US$ 15 million under this Loan was allocated for the purchase of heavy fuel oil, spare parts and other materials for heat and electricity production and another US$ 5 million is being provided for purchase of gas for similar purposes under co-financing arrangements with the Japan Export-Import Bank. Implementation of the Loan is proceeding satisfactorily, and energy imports were procured quickly to improve the availability of energy supplies during the past two winters. 1.32 Past experience in implementation of other Bank-supported DH projects is limited to a project in Poland and a component of an environmental project in China, both ongoing. Some lessons learned to-date include: (a) the need to firm up counterpart funding arrangements at the onset to avoid funding difficulties later; (b) decentralized project management arrangements work far better than centralized arrangements; (c) given the rapidly changing circumstances in countries in transition, subsidy schemes may be phased out more quickly than initially envisioned and therefore it is important to track DH prices during project implementation; and (d) it is important to ensure that future investments in expanding the DH systems are properly justified and therefore heat planning for the long-term development of major DH systems should be undertaken during the project period. These lessons have been considered in the design of the proposed project. 1.33 The proposed project is consistent with the Bank's overall country assistance strategy in Estonia, which was discussed by the Board in October 1992 and which assigns emphasis to the energy sector and seeks to support Estonia's efforts to improve energy efficiency by replacing or rehabilitating old production facilities. The strategy also calls for greater efforts in energy conservation, pricing and ownership. The project is also fully consistent with the Government's energy strategy, would support energy conservation, improvement of the efficiency of energy facilities and environmental conditions, expansion of the use of indigenous fuels, and rehabilitation of existing plants. The efficiency gains and reduced import bill would lead to lower costs of heat production and operation thereby resulting in more affordable heat tariffs and lower requirements for heat subsidies. Most importantly, the quality and reliability of heating services would be improved. At the same time, institutional development programs for concerned energy agencies would help strengthen their management and operations. -11- II. THE PROJECT A. Project Origin and Formulation 2.1 A Bank exploratory mission visited Estonia during June 1992 to initiate discussions with the Government on priority infrastructure investment requirements and possible areas for Bank support. Based on an official request in September 1992 from the Government for support in the DH sector and for gas metering stations to control the cross-border trade of gas, the Bank sent an identification mission during December 1992. At that time, agreement was reached on a possible project focussed on DH improvements in three of the five largest cities of Tallinn, Tartu and Parnu and in small boilers in other areas as well as for the need for consultancy studies to carefully review the priority requirements and establish the feasibility of affordable investment programs in these areas. The other two largest cities of Narva and Kohtla-Jarve were excluded from the project, since their DH systems already utilized lower cost, indigenous fuels and further investments were not expected to result in the same level of energy and efficiency savings. As the present capacity of heat producing facilities was judged to be adequate for the near term given the drastic decline in heat supply between 1990-93, it was further agreed that the rehabilitation and efficiency improvements would take precedence over the construction of new plant. Since EBRD had already approved a loan for an Energy Sector Emergency Investment Project which had the possibility of providing funding for imported equipment for the gas sector, it was also mutually agreed that the EBRD loan would be utilized to address the Government's requirements in the gas sector. 2.2 The Government assigned the Estonian State Energy Department as the lead agency for communications and coordination of the proposed project which involved a large number of project agencies. With Bank support, terms of reference for the required feasibility, engineering and environmental studies were prepared. The Government subsequently sought financial support for the feasibility studies from a number of bilateral sources which agreed to provide the necessary funding on a grant basis. In the end, the Government of Finland was selected to provide support for the two studies for the Tallinn DH rehabilitation and Iru Power Plant improvement components which were carried out by EKONO Energy and IVO International Ltd., respectively. The Government of Sweden similarly provided support for the study for the Tartu DH rehabilitation component which was carried out by Fjarrvarmebyran ab/Stockholm Energi ab. For the Parnu DH rehabilitation component, consultancy services had already been arranged for a DH Master Plan Study for Parnu City to begin January 1993 and which was to be carried out by Carl Bro International a/s with Danish Goverrunent funding. Agreement was reached that the consultants would extend this study into a full-fledged feasibility and engineering study and further funding was secured to carry out the additional tasks. 2.3 For the small boiler conversion component, terms of reference were prepared, with Bank assistance, for a study to address the key concerns related to the long-term environmental impacts of utilizing peat and wood resources as fuels for the production of heat, and funding was secured from the Swedish Government through BITS utilizing special trust funds administered by the Bank. The consortium of IVL - Swedish Environmental Research Institute, Inc., Jaakko Poyry Consulting AB, Swedish Development Consulting Partners AB and the Institute of Ecology of the Estonian Academy of Sciences - was selected to carry out the study. As experience was being gained from a number of pilot boiler conversion projects that had commnenced under the Government's National Energy Conservation Programme, the Estonian State Energy Department prepared a proposal for the remaining aspects related to the technical, financial, economic and institutional arrangements -12- for the component and identified a number of boilers for conversion or replacement. These boiler projects have been judged suitable for inclusion under the project. 2.4 From the onset of discussions with the Government, it was apparent that the financial situation of DH companies and institutional arrangements for the DH sector required special attention, and agreement was reached that a separate consultancy would be undertaken to properly address the concerns. Terms of reference for a DH Financial and Institutional Study were therefore prepared with Bank assistance, funding on a grant basis was obtained from the Danish Government, and the firms of CowiConsult/Ernst & Young were selected to carry out the work. 2.5 In accordance with the agreed timetable, appraisal of the project took place during February 1994. Technical specifications and draft bidding documents were prepared for a number of goods and works contracts at that time so that bidding would be able to commence shortly after appraisal. It is expected that a number contracts will be ready for award by the time of Loan signing. B. Project Objectives 2.6 The project, which would be the first energy sector investment project in Estonia, would have the following main objectives: (a) to reduce fuel costs and import requirements through efficiency improvements and by increasing the use of indigenous fuels in heat production, in compatibility with environmental and nature protection principles; (b) to bring about energy efficiency and economy in major DH systems through rehabilitation and introduction of modern technologies and equipment; (c) to improve environmental conditions in affected areas by improving the efficiency of fuel use, facilitating the conversion or replacement of boilers from the use of heavy fuel oil to peat and wood fuels, reducing wastage of water in DH systems, and promoting the environmentally sound use of peat and wood as DH fuels; and (d) to support the strengthening and restructuring of DH institutions, to facilitate their eventual privatization, and development of the energy sector through consultancy and advisory services, training and provision of equipment and software. C. Project Components and Description 2;7 The project would consist of the following components listed below and described iollowing: -13- (a) small boiler conversion/replacement program in municipalities, including equipment, grates or preovens, and related works, along with engineering services, to allow boilers to use local fuels; (b) DH rehabilitation program in Tallinn, Tartu and Parnu, including equipment and works for seven boiler conversions (in Tartu and Parnu), boiler improvements; installation of new substations with regulators and heat meters, water treatment equipment, pipeline replacements, improved drainage and ventilation of concrete ducts, variable speed pumps and related equipment along with engineering services; (c) Iru (CHP. Tallinn) Power Plant improvement comnonent, including preheater repairs, water treatment equipment, variable speed pumps, and automation and measurement equipment, along with engineering services; and (d) institutional support program for project agencies, including consultancy and advisory services, training, equipment and software for project management and implementation, for restructuring energy agencies and for further development of the energy sector. Small Boiler Conversion/Replacement Program 2.8 The small boiler conversion/replacement program would complement the three major towns' DH rehabilitation components by extending coverage of the DH rehabilitation program to a nationwide level. A number of small and medium-size heat-only-boilers or steam/hot water boilers dispersed in towns and the countryside of Estonia would be replaced or converted from heavy fuel oil to local fuels, mainly peat and wood chips, produced in nearby areas, thereby substantially lowering the cost of heat production. Available data indicate that more than 1,500 such boilers exist in the country. A portion of these boilers, representing an aggregate capacity of about 145 MW, are proposed for conversion or replacement. Participation in the program would be focussed on publicly- owned (municipal and state) boiler houses, rather than privately-owned boiler houses. Demonstration of commitment by the local authority would also be required. Proposals are being requested by the Estonian State Energy Department from boiler owners in all 15 counties in the country, with selection of boilers to be improved based on sound technical, financial and economic criteria already agreed with the Bank (see Annex 2). During negotiations agreement was obtained that the Estonian State Energy Department would submit the first four applications for boiler conversion projects to the Bank for review and approval prior to granting approval for sub-loans. Subsequent sub-loans would be approved by the Estonian State Energy Department in accordance with the appraisal criteria already agreed with the Bank and would be selectively reviewed by the Bank. (Para. 6. 1(a)). 2.9 Preference would be given to boiler conversions which are lower in cost, but replacement of boilers would also be considered for inclusion in cases where boilers are in a technical condition threatening secured heat supplies. About 60% of the allocation for this component would be earmarked for small boiler conversions and about 40% for replacement of boilers. The program would include boiler types which have already been demonstrated to be technically capable of conversion under other programs (Swedish, EBRD, G24, local) currently being implemented. Boilers ranging in size up to about 10 MW would be converted and from about 0.5-3.0 MW would be replaced. Boilerhouse building and site conditions would need to be shown to be in reasonably good -14- condition, but if the water treatment systems are not in good working condition, other related equipment requirements would be identified and included under the program. 2.10 The conversion and replacement of small boilers is feasible only if adequate supplies of indigenous fuels are available at reasonable cost, which implies the availability of peat fields and sources of wood chips at reasonable distances. Therefore, in order for individual proposals to be approved, they would need to be accompanied by a plan for the supply of local fuels which demonstrate the financial viability of the investment. 2.11 Forty proposals from boiler owners were received during October 1993; 34 proposals have passed the initial screening and are currently being evaluated. Local consultants have been employed to further follow-up on the feasibility of each individual proposal. If the budget for this component is not fully allocated after the review and approval of these proposals, then a second round of proposals would be invited. A technical assistance component is also included for the preparation of technical specifications, bidding documents and for project support and supervision of installation of equipment, and international consultants are already assisting in the preparation of technical specifications and bidding documents. DH Rehabilitation Program in Tallinn, Tartu and Parnu 2.12 Tallinn DH Rehabilitation Component. The DH system in Tallinn consists of three major networks and a number of small networks with oil-fired boilers for heat production. The eastern network is supplied with heat from the Iru CHP plant where gas and heavy fuel oil are the main fuels. The central network is supplied with heat from an old heat-only-boiler in central Tallinn utilizing heavy fuel oil as fuel. The western network is supplied with heat from new heat-only- boilers, also using heavy fuel oil as fuel. A schematic drawing of the Tallinn DH system is included as Schematic Drawing 1. 2.13 The DH rehabilitation component for Tallinn includes efficiency improvements of oil-fired boilers, replacement of old pipelines and ventilation of concrete culverts, 1,051 substation improvements including heat meters, control equipment for large substations, water treatment improvements, variable speed pumps and remote control, and maintenance equipment and spare parts. An additional component to connect the eastern and central networks was also included after presentation of the justification which was to increase the use of lower-cost heat from Iru CHP plant. Conversion of boilers in Tallinn were not considered for inclusion at this time mainly because of uncertainties about the availability of local fuel supplies, but this may be possible under future projects. A technical assistance component is also included for the detailed design of the substations and for overall supervision of the project as well as office equipment for the project implementation team. A detailed description of the component is included in Annex 3. 2.14 The largest component for the Tallinn system concerns improvement of substations. Improvement of substations has already started with financing from EBRD whereby 427 substations in the western network will be replaced beginning in the Fall. The remaining 1,051 substations in the western network would be included in the project, allowing for this network to be converted to variable flow instead of today's constant flow regime. -15- 2.15 Tallinn Municipality requested that all new substations be built with heat exchangers for the heating system rather than the simpler option without heat exchangers being applied in other towns. It was agreed to include heat exchangers for a number of reasons which are special to the Tallinn DH system: (a) the size of the network and poor regulation of the water flow has often caused "water hammers" which in today's open DH system has been causing malfunctioning of radiators in buildings; (b) today's open DH system permits illegal tapping of hot water from the network which could be eliminated with heat exchangers, allowing for the system to be closed in the western network; and (c) load dispatching could be improved by better pressure control. The component would also include heat meters for all substations in the western network which will permit the charging of heat bills per building on a metered basis instead of today's estimated consumption rates. The utility would also be expected to use the meters to improve their measurement of heat and water losses. 2.16 Tartu DH Rehabilitation Component. The DH system in Tartu consists of one major network and a number of small networks with oil-fired boilers for heat production. A schematic drawing of the Tartu DH system is included as Schematic Drawing 2. 2.17 The DH rehabilitation component includes five boiler conversions from heavy fuel oil to wood chips and peat, wood chipping equipment, replacement of old pipelines, 640 substation improvements including heat meters, water treatment improvements, boiler efficiency improvements, and maintenance equipment and spare parts for boilers and the distribution system. The connection of two networks was also added to allow the increased use of wood fuels, to permit a number of customers, currently served by inefficient oil-fired boilers, to have the option to connect to the DH network and to improve the security of heat supplies. A technical assistance component was included for the detailed design of substation improvements and for overall supervision of the project along with office equipment for the project implementation team. A detailed description of the component is included in Annex 3. 2.18 The boiler conversion component includes conversion of two new, 30 MW oil-fired boilers at the Luunja boilerhouse to milled peat as the main fuel and conversion of three old, 15 MW oil and gas-fired boilers at the Ropka boilerhouse to sod peat and wood chips. Peat bogs near Tartu large enough for supplying the boiler with fuels for 20 years have been identified, and sources of wood fuels have also been identified. Since the conversion of boilers is feasible only if adequate supplies of indigenous fuels are available at reasonable cost, as a condition for negotiations, Tartu Municipality's DH Companies were required to enter into contracts for the majority (about 60%) of the required local fuel supplies for the first two years for converted boilers. 2.19 Improvement of substations has recently started with financing from EBRD whereby 241 substations, which currently allow for the direct tapping of hot water from the main network, will be replaced beginning in the Fall. Improvement of the remaining 640 old substations would be included in the project. Heat meters are also included in this component and, together with the EBRD project, would result in a meter in every building, thereby providing a better basis for future planning and billing. 2.20 Parnu DH Rehabilitation Component. There are four DH systems in Parnu city: Parnu, Tervis, Niidu and Ental, three of which belong to Parnu DH Company and the fourth, Ental, -16- is privately-owned. All municipal boilers are fuelled with heavy fuel oil. A schematic drawing of the Parnu DH system is included as Schematic Drawing 3. 2.21 The Parnu DH rehabilitation component includes two boiler conversions from heavy fuel oil to peat and wood fuels, wood chipping equipment, 160 substation improvements including heat meters, new variable speed pumps, a control and regulation system, water treatment improvements and replacement of old pipelines. A technical assistance component was also included for the detailed design of substations and for overall supervision of the project as well as office equipment for the project implementation team. A detailed description of the component is included in Annex 3. 2.22 After evaluation of several alternatives, the boiler conversion component would include conversion of two old, oil-fired boilers to sod peat and wood chips as the main fuels. Sources of local fuels at about the required amounts have been identified. Since the conversion of boilers is feasible only if adequate supplies of indigenous fuels are available at reasonable cost, as a condition for negotiations, Parnu Municipality's DH Company was required to enter into contracts for the majority (about 60%) of the required local fuel supplies for the first two years for converted boilers. 2.23 Improvement of substations has already started with financing from EBRD whereby 42 substations will be replaced beginning in the Fall. The remaining 160 substations of the main network south of the river would be included in the project. This would allow the network to be converted to variable flow instead of today's constant flow regime. For this purpose, variable speed pumps with new control and regulation equipment would also be included in the project. A result of this project is that all substations in the main network would be provided with heat meters, and all buildings in this area would thus be able to be charged on a metered basis instead of today's flat rates. The utility can also use the meters to improve the measurement of heat and water losses. Iru (CHP. Tallinn) Power Plant Improvement Component 2.24 The Iru CHP Plant is located in the eastern part of Tallinn and is owned by the national power company, Eesti Energia. It supplies annually approximately 1,000 GWh of heat for the Lasnamae city area in the eastern network and can also, provided there is a demand, produce 700 GWh of electricity. The plant was built during the period 1978-1989. The two steam boilers and turbines have been taken into operation in 1980 and 1982. The boilers have a steam capacity of 500 t/hour (130 bar, 5500C). There are also three heat-only-boilers in the plant, the capacity of each being 116 MW of heat. Today the main fuel of the plant is heavy fuel oil, but natural gas can be used in one steam boiler and in one hot water boiler. 2.25 A number of investment alternatives, based on different scenarios for fuel and electricity costs, were evaluated for this component of the project. Two alternatives included rehabilitation of installations in the whole plant, while three alternatives were focused mainly on improvements in the heat-only part of the plant. Since the domestic and export demand for electricity over the next 5-7 years is expected to be met from production from the two power stations in the northeast, the component would include one of the investment alternatives that was focussed mainly on heat-only improvements. -17- 2.26 The Iru Power Plant improvement component would therefore consist of improvements to an air preheater for one of the steam boilers, water treatment improvements, and automation and measurement equipment. New pumps with variable speed drives at Iru were also included, as they would improve the load dispatch and are needed for pumping water through the new pipeline connection in the Tallinn DH system. Since the power station is operated in minimal capacity three months every winter in order to prevent it from freezing, repairs to at least one preheater is justified on this basis. A technical assistance component for the overall supervision of the project would also be included. A detailed description of the component is included in Annex 4. Institutional Support Program 2.27 A package of support which is necessary to better ensure the successful implementation of the project and the restructuring of DH companies to facilitate their commercial operations and eventual privatization as well as for further development of the sector would also be included in the project. Terms of reference for about 190 man-months of consultancy and advisory services were discussed during negotiations. The component consists of the following items summarized below: Estonian State Energy Department (a) Procurement and Disbursement Advisory Services. Procurement and disbursement advisors would provide guidance to all project agencies in the procurement, accounting and disbursement requirements of the project. The advisors would report to the Project Coordinator in the Energy Department. (b) Long-term Heat Planning. Advisory services to assist major DH agencies to develop the capability to undertake heat planning for the future development of DH systems and to provide a basis for decisions on future investments. The advisors would report to the Energy Department but would work with municipalities owning major DH systems. (c) Legal and Regulatory Framework for the Energy Sector. Advisory services to assist in the development of a legal and regulatory framework for the energy sector as a whole and for each subsector (DH, electricity, gas, oil, others) and to assist in the development of specific documents or studies which are given priority under the sector strategy. (d) Training and Equipment. Training of the management and staff and provision of office equipment, computers and software. Tallinn Municipality (a) Restructuring of the Tallinn DH Companies. Consultancy services to assist with the restructuring of the Tallinn DH companies to ensure that the new merged company will be established and operational in a timely manner, to identify-the requirements for effective management and operations systems, and to provide support for implementing the recommended requirements. -18- (b) Training and Eguipment. Training of the management and staff and provision of office equipment, computers and software. Tartu Municipaitv (a) Restructuring of the Tartu DH Companies. Consultancy services to assist with the restructuring of the Tartu DH companies to ensure that the new companies will be established and operational in a timely manner, to identify the requirements for effective management and operations systems, and to provide support for implementing the recommended requirements. (b) Training and EquiDment. Training of the management and staff and provision of office equipment, computers and software. Parnu Municipaliy (a) Institutional Development of the Parnu DH Company. Consultancy services to identify the requirements for the strengthening and development of the DH company and for support for implementing the recommended requirements. (b) Training and Equipment. Training of the management and staff and provision of office equipment, computers and software. Eesti Energia (a) Training and Eguipment. Training of the management and staff and provision of office equipment, computers and software. Ministry of Environment. Local Environrental Departments and other Environmental Grous (a) Advisory Services. Training and Materials. Advisory services to develop a training program and to train local teams, including the provision of related materials, for an in-country training program in environmental management and a limited number of study tours to review environmental management practices in neighboring countries. During negotiations agreement was obtained that the advisory services for long-term heat planning and development of a legal and regulatory framework would be carried out by consultants in accordance with terms of reference and a timetable satisfactory to the Bank. (Para. 6.1(b)). -19- D. Cost Estimates 2.28 The total project cost is estimated at EEK 870.7 million (US$ 64.5 million equivalent) of which EEK 696.7 million (US$ 51.6 million equivalent) or about 80% is the foreign exchange component. Local taxes and import duties are estimated at about EEK 29.6 million (US$ 2.2 million equivalent) and are included in the cost estimates. The taxes and duties represent about 3.5% of the total project cost. Base cost estimates are expressed in February 1994 prices. Summary project costs are shown in Table 3.1 and detailed cost estimates are given in Annex 5. 2.29 Project costs were estimated by project agencies and their consultants, based on similar works recently implemented in Estonia and recent quotations for equipment. Cost estimates for technical assistance are based on recent actual costs for similar activities. The remaining detailed designs (primarily for substation improvements) and supervision costs are estimated at about 6% of base costs. 2.30 Physical contingencies are estimated at 10% of base costs. Price contingencies for local costs are based on expected price increases of 15% in 1994, 11 % in 1995, 9% in 1996 and 8% thereafter. Price contingencies for foreign costs are based on an expected price increase of 2.5% per year during the project period. In total, physical contingencies are estimated at 10% of base cost, and price contingencies are estimated at about 9.5% of base cost plus physical contingencies. -20- Table 3.1: SUMMARY OF PROJECT COSTS -----(EEK millon)----- -----(USS million)----- % % Of Component Local Foreign Total Local Foreign Total Foreign Base Cost Small Boiler Converslon/ Replacement Program Boiler conversions 13.29 63.87 77.16 0.98 4.73 5.72 83 11 Boiler replacements 9.62 45.23 54.85 0.71 3.35 4.06 82 8 Design/supervision 2.39 8.10 10.49 0.18 0.60 0.78 77 1 Sub-total 25.30 117.20 142.50 1.87 8.68 10.56 82 20 DH Rehabilitation Components Boiler Improvements 20.92 89.91 110.83 1.55 6.66 8.21 81 15 Network rebuilding 20.08 45.19 65.27 1.49 3.35 4.83 69 9 Substation rebuilding 25.48 169.56 195.04 1.89 12.56 14.45 87 27 Water treatment 7.91 16.74 24.65 0.59 1.24 1.83 68 3 Pumps 2.90 15.86 18.76 0.21 1.17 1.39 85 3 Control and regulation 0.42 5.04 5.46 0.03 0.37 0.40 92 1 Spare parts 4.04 9.94 13.98 0.30 0.74 1.04 71 2 Project office equipment 2.12 0.00 2.12 0.16 0.00 0.16 0 0 Design/supervklon 7.07 21.46 28.53 0.52 1.59 2.11 75 4 Sub-total 90.95 373.70 464.65 6.74 27.68 34.42 80 64 IRU Power Plant Component Air preheaters 0.50 4.32 4.82 0.04 0.32 0.36 90 1 Water treatment 1.69 19.58 21.27 0.13 1.45 1.58 92 3 Automation & measurement 1.74 14.45 16.19 0.13 1.07 1.20 89 2 Pumps 2.56 18.83 21.39 0.19 1.39 1.58 88 3 SupervMslon 0.65 2.97 3.62 0.05 0.22 0.27 82 1 Sub-total 7.14 60.15 67.29 0.53 4.46 4.98 89 9 Institutional Support State Energy Dept. 0.00 17.15 17.15 0.00 1.27 1.27 100 2 Tallnn Municipality 0.00 12.42 12.42 0.00 0.92 0.92 100 2 Tartu Municipality 0.00 8.41 8.41 0.00 0.62 0.62 100 1 Parnu Municipality 0.00 6.21 6.21 0.00 0.46 0.46 100 1 Eesti Energila 0.00 1.35 1.35 0.00 0.10 0.10 100 0 Ministry of Environment 0.50 2.19 2.69 0.04 0.16 0.20 81 0 Sub-total 0.50 47.73 48.23 0.04 3.54 3.57 99 7 Total Base Cost 123.88 598.78 722.66 9.18 44.35 53.53 83 100 (February 1994 prices) Physlcal contingencies 12.39 59.88 72.27 0.92 4.44 5.35 83 10 Price contingencles 37.78 38.02 75.80 2.80 2.82 5.61 50 10 Total Project Cost 174.05 696.68 870.72 12.89 51.61 64.50 80 120 …_____ ______ __ ___ _ _ _______ ____ ____ _ --------- Note: Identifiable taxes and duties are about EEK 29.6 million (USS 2.2 million equivalent) and the total project cost net of taxes Is EEK 841.2 million (USS 62.3 million equivalent). -21- E. Project Flnandne Arrangements Financing Plan 2.31 The proposed Bank Loan of US$ 38.4 million (EEK 518.7 million) would finance about 60% of total project costs (or 62% of total project costs net of taxes and duties). The Swedish Government through its aid agency BITS would co-finance the project by providing a loan of USS 10 million (EEK 135 million) amounting to about 15% of total project costs (or 16% of total project costs net of taxes and duties). In addition, the European Investment Bank (EEB) would co- finance the project by providing a loan of US$ 4.4 million (EEK 59.6 million), amounting to about 7% of total project costs. Submission of satisfactory evidence from both the Swedish Government and EIB that their loans have been signed would be a condition of effectiveness of the Bank Loan. (Para. 6.2(a)). Another US$ 3.8 million (EEK 51 million) is being sought from other grant funding sources (primarily the Swedish, Finnish and Danish Governments and the European Union) for the institutional support program. During negotiations, the Government confirmed that adequate grant funding was being secured. The remaining 12% of total project cost (EEK 106 million) would be provided by project agencies from own funds or local borrowings. As a condition for negotiations, project agencies were required to identify how their local counterpart contributions would be provided. The financing plan for the project is summarized below in Table 3.2. Table 2.2: PROJECT FINANCING PLAN % Total EEK million US$ million Cost Total Project Cost at 870.7 64.5 100 of which: World Bank 518.7 38.4 60 Swedish Government (BITS) 135.0 10.0 15 EIB 59.5 4.4 7 Other Donors (grants) 51.0 3.8 6 Project Agencies 106.5 7.9 12 a/ Excluding interest during construction estimated at EEK 136.1 million (US$ 10.1 million) to be financed by project agencies. Flow of Funds and On-Lending Terms 2.32 The World Bank, Swedish Government and EIB loans would be made to the Republic of Estonia and on-lent to project agencies. The World Bank Loan would be made at the standard variable interest rate (currently 7.27%) for a period of 15 years, including 5 years grace. The loan from the Swedish Government is expected to be made at an interest rate of about 8% with a maturity of 15 years including a 5-year grace period. The EIB loan is expected to be made at an interest rate of about 6.2% also with a maturity of 15 years including a 5-year grace period. The processing of the Swedish Government and EIB loans are on a parallel track to that of the World Bank loan. It is expected that the World Bank would administer the loan from the Swedish Government. The foreign -22- exchange risk of the three loans would be borne directly by project agencies with the exception of the small boiler conversionlreplacement program under which the foreign exchange risk would be borne directly by the Govermnent (and indirectly by the small boiler owners through the differential between the interest rates to GOE and the on-lending interest rate), in accordance with the practice established under the on-going National Energy Conservation Program. In order to on-lend to municipalities, the Government would need to amend the Local Government Act which currently does not permit municipalities to borrow and guarantee repayment of loans on behalf of their DH enterprises. The timetable for processing the amendment was discussed during negotiations. During negotiations agreement was obtained regarding the on-lending arrangements, described below, for the project. (Para. 6.1(c)). 2.33 About US$ 19.6 million equivalent of the proceeds of the World Bank Loan would be passed on to Tallinn Municipality as a loan, denominated in US$, to support the financing of the Tallinn DH rehabilitation component. The loan to Tallinn Municipality would be made at the IBRD interest rate plus a mark-up not to exceed 10% to be repaid over 15 years, including 5 years grace on repayment of principal. The maturity of 15 years allows for a 5 year grace period corresponding to the implementation period of the project and a repayment period of 10 years corresponding to the expected life of the investments. 2.34 About US$ 4.4 million equivalent of the proceeds of the EIB loan would be passed on to Parnu Municipality as a loan, denominated in US$, to support the financing of the Parnu DH rehabilitation component. The loan to Parnu Municipality would be made at the IBRD interest rate plus a mark-up not to exceed 10% to be repaid over 15 years, including 5 years grace on repayment of principal. The maturity of 15 years allows for a 5 year grace period corresponding to the implementation period of the project and a repayment period of 10 years corresponding to the expected life of the investments. 2.35 About US$ 6.8 million equivalent of the proceeds of the Swedish Government loan and about US$ 5.7 million equivalent of the proceeds of the World Bank loan would be passed on to Tartu Municipality as loans, denominated in US$, to support the financing of the Tartu DH rehabilitation component. The loans to Tartu Municipality would be made at the IBRD interest rate plus a mark-up not to exceed 10% to be repaid over 15 years, including 5 years grace on repayment of principal. The maturity of 15 years allows for a 5 year grace period corresponding to the implementation period of the project and a repayment period of 10 years corresponding to the expected life of the investments. 2.36 About US$ 5.2 million equivalent of the proceeds of the World Bank Loan would be passed on to Eesti Energia as a loan, denominated in US$, to support the financing of the Iru Power Plant improvement component. The loan to Eesti Energia would be made at the IBRD interest rate plus a mark-up not to exceed 10% to be repaid over 15 years, including 5 years grace on repayment of principal. The maturity of 15 years allows for a 5 year grace period corresponding to the implementation period of the project and a repayment period of 10 years corresponding to the expected life of the investments. Execution of subsidiary loan agreements between the Government and Tallinn and Tartu Municipalities and between the Government and Eesti Energia would be a condition of Loan effectiveness. (Para. 6.1 (b)). Execution of a subsidiary loan agreement between the Government and Parnu Municipality would be a condition of effectiveness of the EIB loan. -23- municipal and state boiler owners as loans, denominated in Estonian kroons, to support the financing of the small boiler conversion/replacement component. The loans to boiler owners for boiler conversions would be made at an interest rate of 10% to be repaid over 7 years, including 1 year grace on the repayment of principal, and for replacement of boilers, at an interest rate of 10% to be repaid over 12 years, including 1-2 years' grace on the repayment of principal. The Government would enter into individual repayment agreements with boiler owners prior to granting sub-loans for boiler conversion or replacement. Retroactive Financing 2.38 A provision for retroactive financing up to about US$ 3.8 million has been made for expenditures incurred after April 15, 1994, primarily for boiler conversions and for other DH improvements which need to be undertaken in the non-heating season. These activities are necessary to bring about a reduction of heat production costs prior to the next heating season. Inflation and Interest Rates 2.39 Inflation rates in Estonia, as measured by chaniges in the Consumer Price Index, were about 211% in 1991, 1,069 % in 1992 and 36% in 1993 and are estimated at about 15% in 1994, 11% in 1995, 9% in 1996 and 8% thereafter, reflecting gradual stabilization of the economy. Short- term credit is now available through the commercial banking system; interest rates on commercial bank loans are administered by the Central Bank of Estonia and have generally kept ahead of inflation in recent months. Long-term investment loans, however, are not available in Estonia today through the commercial banking system. The interest rates on long-term investment loans to be provided for the project by the Bank, the Swedish Government and the European Investment Bank are therefore the only proxies for appropriate interest rates to be charged to project agencies. The proposed on-lending interest rate of the IBRD interest rate plus a margin for a total interest rate not to exceed 10% is considered reasonable, since it would provide a significant spread (2.5-4%) on loans borrowed for the project. The proposed on-lending interest rate is also in line with on-lending interest rates under the ongoing Rehabilitation Loan and the EBRD Emergency Energy Loan. F. Implementation Arrangements 2.40 The lead agency for the project would be the Estonian State Energy Department which would monitor the overall progress of the project, coordinate with other implementing agencies and communicate with the Bank, utilizing its staff already in place. The Estonian State Energy Department would also have primary responsibility, through its Energy Efficiency Division, for implementation of the small boiler conversion/replacement program with assistance from local and international consultants which have been retained to evaluate the feasibility of individual proposals and for the preparation of technical specifications, bidding documents, tendering, bid evaluation, contract awards, supervision of equipment installation and follow-up. The Estonian State Energy Department has demonstrated its ability to coordinate and implement similar, small boiler conversion projects under the National Energy Conservation Programme, for which 180 small boilers have been converted, including 50 conversions which are similar in type to those proposed for conversion under the project. Its staffing arrangements are judged to be satisfactory for carrying out the proposed project. -24- 2.41 Tallinn, Tartu and Parnu Municipalities' DH companies would be responsible for implementation of their respective DH rehabilitation components in conjunction with municipality staff. All municipal DH companies would be assisted by international consultants for the tendering process, bid evaluation, contract awards, supervision of equipment installation and follow-up. In all three towns, agreement has been reached that Project Implementation Units (PIUs) would be formed, comprised of technical and accounting staff from the municipality and the DH Companies, to oversee the project. As a condition for negotiations, Tallinn, Tartu and Parnu Municipalities and their DH companies were required to nominate the personnel for carrying out the project, and these staff are judged to be adequately qualified for the task. 2.42 Eesti Energia would be responsible for implementation of the Iru Power Plant improvement component, which would be managed through Eesti Energia's existing departmental structure. All staff have been assigned and are judged to be qualified for managing this component. As for other project agencies, Iru Power Plant would be assisted by international consultants for the tendering process, bid evaluation, contract awards, supervision of equipment installation and follow- up. During negotiations, agreement was reached with all project agencies regarding the maintenance of project management arrangements satisfactory to the Bank. (Para 6.1(d)). 2.43 The Ministry of Environment, acting through the State Environment Inspectorate and its local Environmental Departments, would support, in accordance with their normal procedures, the monitoring of implementation of the environmental mitigation and monitoring plans adopted for each investment component of the project. These arrangements are judged to be satisfactory for the purposes of the project. 2.44 In order to resolve project and policy issues that may arise during implementation, the high-level, Energy Committee, already in place, would be utilized. The Energy Committee is chaired by the Minister of Energy and is comprised, among others, of all the key managers of energy institutions. 2.45 Project implementation would be expected to begin in mid-1994 and would be carried out over a five-year period. The project implementation schedule is included in Annex 6. G. Procurement Arrangements 2.46 A summary of procurement arrangements is given in Table 2.3 following. 2.47 Procurement of supply and installation, works and goods, totaling about 20-25 packages ranging in value from US$ 0.3-6.0 million, would follow ICB procedures using standard bidding documents according to Bank guidelines except that: (a) limited international bidding (LIB) procedures would be used for approximately 20 packages of supply and installation of goods for small boiler conversions, small in value but of more than $50,000 per contract, scattered geographically, and spread over time, estimated at a total cost of US$2.8 million (about 4% of total procurement); (b) local shopping procedures would be used for small turnkey contracts for boiler conversions, each below US$50,000, for an aggregrate amount of up to US$480,000; (c) international shopping procedures would be used for small contracts for works and goods under US$ 300,000 for a total of about US$2 million (about 3% of total procurement); and (d) local shopping procedures would be used for the remaining small works and goods contracts under US$50,000 for a total of about US$0.6 million (about 1% of total procurement). Works and goods would be grouped to -25- Table 2.3: PROJECT PROCUREMENT ARRANGEMENTS a/ (in million US dollars) Pocurement Method Project Elemnt ICB LCB OTHER N.B.F Totel cost 1. Supply and Installation: 1. 1 Small boiler replacement 4.61 0.31 4.92 (4.61) (0) (4.61) 1.2 LArge boiler converstona 6.09 1.31 7.4 in Trtu and Parnu (5.55) (0) (5.58) 1.3 Small boiler conversiona 3.48N 3.41 6.39 (3.26) (3.26) 2. Worka: 2.1 Repair of air preheater 0.36 0.05k 0.41 (0.36) (0) (0.36) 2.2 Intallation of IRU 0 .61 0.61 equipment (0.27) (0.27) 2.3 Installation of Tallinn 2.34 2.00 4.34 DH equipmed (1.95) (0.92)y (2.57) 2.4 Installation of Tartu 1.63 1.63 DH equipment (0) (0.) 2.5 Intallation of Parnu 0.92 0.92 DH equipmed (0) (0) 3. Goods: 3.1 IRU equipment including 4.50 4.50 auto. & measurement, water (4.50) (4.50) tratment, pumps 3.2 Tallinn DH equipment 15.53 1.08W 0.46 17.07 including pipes, pumps, (15.53) (1.08) O (16.61) meters, regulators, heat exchangers, water treatment equipment, boiler equipment 3.3 Other equipment/machinery 0.34v 0.34 including office equipmeat (0.34) (0.34) computers and software 3.4 Tartu DH equipment 5.44 5.44 (0) (0) 3.5 Pamu DH equipment 2.40 2.40 (0) (0) 4. Consultancy services, trining and related materials: 4.1 Design and upervision 3.55 3.35 (0) (0) 4.2 Technical asaistance and 3.78 3.75 training (0) (0) Total 33.43 0 7.56 23.51 64.50 (32.53) (0) (5.57) (0) (38.40) Note: Figures in parmnthees are the amount financed by the lank lon. N.B.F.: Not Bank-Financed. a? Co-finaced in parllel with the Swedish Government through its aid ageney, BrIS, and the European Invegmait Bank (EIB); procured in conformity with World Bank Guidelines for Procurement under IBRD Lons an IDA Credits (May 1992) with minor modifications for components financed by the EIB. bt By local shopping. c/ By intertionrl shopping. d/ By limited intermational bidding (LID): US$2.78 million an by local shopping US$0.48 million. -26- the extent practical to encourage competitive bidding. Procurement under co-financing arrangements with the Swedish Government would be administered by the World Bank and would follow the World Bank's procurement procedures. The part of the project being financed by EIB would also, with small amendments, follow World Bank procurement procedures. Both the Swedish Government and EIB would finance separate contracts on a parallel basis. 2.48 When ICB procedures are used, qualified domestic manufacturers may be allowed a preferential margin of 15%, or the existing rate of import duties, whichever is lower, in the evaluation of bids, provided the manufacturing costs include a value added in Estonia equal to at least 20% of the ex-factory bid price of such goods. 2.49 All consultants will be financed by grant funds from other donors. Consultants would be hired on terms and conditions acceptable to the Bank, including review of their qualifications. Draft terms of reference for consultancy and advisory services were discussed and agreed during negotiations. 2.50 Prior review of draft tender documents, including review of bid evaluation reports and recommendations for awards of contracts, would be carried out for all ICB procurement. Contracts to be awarded under LIB procedures would require review of standardized tender documents in a sufficient number to ensure compliance with the Bank's procurement guidelines. Included would be the review of bid evaluation reports and recommendations for awards of all LIB contracts. The list of goods to be procured using international shopping procedures would be submitted for prior review by the Bank. For international shopping, quotations from a minimum of three suppliers from at least three World Bank member countries would be required. Some minor installation works would be procured using local shopping procedures for which quotations from at least three contractors would be required. 2.51 The General Procurement Notice (GPN) was published in the Development Business Forum on November 30, 1993, which allows for more than the required 60 days prior to the issuance of the bidding documents. The GPN will be updated and published annually. At least 30 days prior to the issuance of bidding documents, individual bidding opportunities will be advertised in a major local newspaper, and embassies of World Bank member countries located in the country will be notified. The project agencies would also be expected to advise known eligible and qualified traditional suppliers. 2.52 Like many other Eastern European and FSU countries, Estonia does not have a tradition of competitive bidding for the procurement of public goods and services. Therefore, a Country Procurement Assessment Report (CPAR) is not required at this stage. The Government, however, recognizes the importance of establishing public procurement regulations as part of its comprehensive program to transform its economy from a centrally planned to a market-oriented system based on the development of a competitive private sector. The Government has requested the Bank to provide assistance in this area, and work began in mid-February 1994. H. Disbursement 2.53 The proceeds of the Bank Loan would be disbursed against: (a) 100% of foreign expenditures of all goods contracts; -27- (b) 100% of foreign and 85% of local expenditures of the contracts for the supply and installation of equipment for the small boiler conversion and replacement projects; (c) 100% of foreign expenditures and 45% of local expenditures of the contract for the supply and installation of equipment for the Luunja boiler conversions; (d) 70% of local expenditures of the contracts for installation of DH equipment; (e) 100% of foreign expenditures of the air preheater repair contract; and (f) 45% of local expenditures of the contracts for the installation of equipment for Iru Power Plant. 2.54 The Swedish Government loan would be managed by the World Bank under a co- lender's agreement whereby disbursement requests would be reviewed by the Bank but release of funds would be managed by the Swedish Government. The Swedish Government loan would be disbursed against the Tartu DH rehabilitation component (excluding the Luunja boiler conversions) and part of the small boiler conversion component of the project. The EIB loan would be disbursed against the Parnu DH rehabilitation component of the project in accordance with EIB disbursement procedures. 2.55 The disbursement schedule is given in Annex 7. It is expected that disbursements would be completed by December 31, 1999, about 6 months after completion of equipment supply and installation. A comparison cannot be made to standard disbursement profiles for district heating projects, as only one Bank loan has been made to-date for a project of this nature and it is still under implementation. The disbursement schedule is considered realistic, given that most of the design work and preparation of technical specifications and tender documents have already been completed. 2.56 Disbursements would be made against standard Bank documentation. Disbursement under all categories for contracts and purchase orders with a total value less than US$ 50,000 would be made on the basis of statements of expenditure (SOE). In order to ensure the timely provision of funds available to finance the costs of the project, four Special Accounts would be established for Tallinn and Tartu Municipalities, Eesti Energia and the Ministry of Finance in the amounts of US$ 1 million, US$ 0.4 million, US$ 0.4 million, and US$ 0.4 million, respectively. Funds in the Special Accounts would be available to finance only eligible expenditures under the project. During negotiations agreement was reached regarding the arrangements for establishing and operating the Special Accounts. (Para. 6.1(e)). I. Accounts and Audits Accounting Policies and Revaluation of Assets 2.57 During 1990, the Government required the introduction of a Western accrual accounting system, which has been implemented, to replace the former Soviet cash-basis of accounting. Under the Soviet system, all depreciation funds and any profits were remitted to -28- Moscow, with the result that little maintenance or rehabilitation of facilities was undertaken. Based on the new government guidelines after Independence, assets were to be revalued by at least 10-fold for major plant and from 1-8-fold for smaller assets and depreciation funds established. During the past three years, project agencies have revalued their assets in accordance with the requirements, but usually at higher rates (e.g., 12-14-fold by Parnu DH Company during 1991-92 and by 22.5-fold by Eesti Energia during 1992-93). 2.58 While assets of DH enterprises are still thought to be undervalued, the current assessment is that it would be inappropriate to proceed with a full asset revaluation, since the availability of existing facilities and the actual value that can be given to them, in view of their poor operational efficiency and outdated technology, are uncertain. In addition, existing heat production facilities have excess capacity due to the large drop in demand over the past several years. Furthermore, raising tariffs to reflect revaluation of assets would require additional subsidies. However, once project investments, which are large relative to current asset levels, are commissioned, the value of assets would be greatly increased and the cost of heat services would reflect a larger depreciation charge and return on investment as the operational efficiency of assets is improved. Project Accounting and Auditing Requirements 2.59 In order to properly record project expenditures, project accounts would be required to be prepared by each implementing agency, including Tallinn, Tartu and Parnu Municipal DH Companies, Eesti Energia and the State Energy Department, for their respective parts of the project. The project accounts would identify all sources and uses of funds in carrying out the project, including a detailed accounting of the use of the proceeds of the World Bank, Swedish Government and EIB loans. For all project agencies except Parnu Municipality, the project accounts would be audited by an independent auditor acceptable to the Bank, and the audit report would be submitted to the Bank within six months of the end of the fiscal year. The project accounts' audit reports would also contain a separate opinion on the statement of expenditure (SOE) procedure, when utilized, and on the operation of the Special Accounts. For Parnu Municipality, the project account would be audited by an independent auditor acceptable to EIB, and the audit report would be submitted to EIB within six months of the end of the fiscal year. 2.60 In order to monitor the financial performance of Tallinn and Tartu DH Companies and Eesti Energia's Iru Power Plant, the revenue-generating implementing agencies, their financial statements, in addition to their project accounts, would be audited by an auditor acceptable to the Bank, and the audit reports would be submitted to the Bank within six months of the end of the fiscal year. The audit reports would contain a separate opinion on compliance by implementing agencies with all financial covenants under the Bank Loan. The financial statements of Parnu DH Company, in addition to its project account, would similarly be audited by an auditor acceptable to EIB, and the audit report would be submitted to EIB within six months of the end of the fiscal year. It is expected that a local branch of a private, international, commercial auditor, in association with a local auditing firm if available, would carry out the audits, and this arrangement is considered acceptable. During negotiations agreement was reached regarding the auditing requirements of the project. (Para. 6.1(f)). -29- J. Environmental Aspects Environmental Review Process 2.61 Preparation of the proposed project has included environmental studies consistent with the requirements of the Estonian "Order of Carrying out Environmental Impact Assessment" (Government Regulation 13.11.1992) and the provisions of World Bank Operational Directive 4.01, "Environmental Assessment." In accordance with these procedures, a sectoral environmental assessment, consistent with the requirements for a category "A" project, was prepared for the small boiler conversion/replacement program. Environmental reviews were prepared, consistent with the requirements for a category "B" project for the DH rehabilitation program in Tallinn, Tartu and Parnu and for the Iru (CHP, Tallinn) power plant improvement component. The institutional support program was placed in category "C" and did not require environmental analysis. The findings of these environmental studies have been used to support the design of the specific component, and mitigation and monitoring activities have been identified. The findings of these studies, proposed mitigation and monitoring activities, and recommended institutional strengthening actions are presented in Annex 8. Potential Environmental Impacts and Mitigation Measures 2.62 Implementation of the proposed project is anticipated to have positive environmental benefits through improved efficiency in the use of indigenous and imported fuels, by contributing to a reduced level of air pollution in Tallinn, Tartu and Parnu, by reducing the wastage of water used in DH systems, and by promoting the environmentally sound development of local peat and wood as fuel resources for district heating. The specific potential impacts and mitigation measures for each proposed project program are as follows: 2.63 Small Boiler Conversion/Replacement Prozram. The sector environmental assessment prepared for the program concluded that sufficient indigenous peat and wood resources exist in Estonia, including within a 50 km radius of Tallinn, Tartu and Parnu, for these fuel resources to be used for DH, provided that proper environmental policies and guidelines are used and monitored by the Government of Estonia. The selection of areas for fuel harvesting and the methods used need to be controlled to minimize adverse impacts to biological resources and hydrology. 2.64 The proposed program would allow for the use of indigenous peat and wood fuels in the place of heavy fuel oil which would result in a reduction of the level of air pollution with a reduction in the emissions of S02, NOx but with a slight increase in the level of dust when peat is used. The program would improve health by increasing the availability of winter heat supplies and hot water by providing a more affordable and reliable source of fuel. The program would create a need to transport peat and/or wood to the boilers which will increase the level of traffic on rural roads and city streets. Additional storage space will be required to be developed at the boilerhouses for the storage of adequate supplies of fuel, and measures will be required to cover the peat to avoid dust blowing into residential and commercial areas. Ash disposal will require transport and disposal in authorized sites in the case of peat ash and transport to locations where it can be used as a fertilizer in forests, if desirable, following proper preparation in the case of wood ash. 2.65 Environmental mitigation and monitoring plans have been prepared which would be implemented by the Ministry of Environment and cooperating implementation organizations. The -30- plans includes policy actions: (a) to concentrate most of the harvesting of peat in locations which are presently developed or have been previously drained to allow for harvesting; (b) to require that fuel wood is harvested with regular forestry operations as part of a management plan; and (c) that regular reviews would be conducted to assess appropriate user fees for public and private harvesting of peat and wood resources including their management and site rehabilitation costs. At the operational level, the Government of Estonia would adopt environmental guidelines for the harvesting and management of peat and wood fuel resources, developed on the basis of those proposed in the sectoral environmental assessment. The plan also includes a number of measures for adoption in wood and peat harvesting and environmental training. The Bank has reviewed the mitigation and monitoring plans and judges that they can be implemented in Estonia. During negotiations, agreement was reached with the Government, acting through the Ministry of Environment, to implement environmental mitigation and monitoring plans for the project satisfactory to the Bank. (Para. 6. 1(g). 2.66 As per the requirements of the Bank, a consultative process was used for the preparation of the sectoral environmental assessment for the proposed small boiler conversion/ replacement program, involving concerned ministries and representatives of nongovernmental organizations (NGOs), including the Estonian Green Movement/Coalition Clean Baltic, Estonian Fund for Nature and other local NGOs. A meeting with the Estonian State Energy Department, Ministry of Environment, Estonian Green Movement/Coalition Clean Baltic and the Bank was held to review the findings of the sectoral environmental assessment and proposed mitigation and monitoring plans. 2.67 Tallinn. Tartu and Parnu DH Rehabilitation Program. Environmental reviews prepared for each element of the program have been reviewed to assess the potential impacts associated with selection of fuel harvesting sites, the fuel harvesting process, harvest site rehabilitation, fuel transportation, storage, combustion and ash disposal. In the older parts of all three systems, especially the boilers and distribution network, asbestos has been used as an insulating material; therefore measures need to be taken to minimize the risks to workers involved in the removal of this material. In addition, proper steps need to be taken to assure that it is properly and safely disposed of in consultation with local environmental authorities. The major environmental aspects of the three elements of this program are: 2.68 Tallinn DH Rehabilitation Component. In Tallinn it is estimated that energy production is responsible for 90% of the S02 emissions and 15-20% of the NOx emissions and contributes to the dust levels. It is anticipated that the improvements of the oil-fired burners and substations should increase fuel efficiency and reduce air emissions, especially S02. The improvements to the distribution system and the water treatment component would also significantly decrease the use of chemicals and the wastage of water. 2.69 Tartu DH Rehabilitation Com2onent. The converted boilers at the Luunja plant will be equipped with electrostatic precipitators, and the Ropka plant will be equipped with cyclone dust cleaning equipment. In order to reduce excessive fuel costs and to increase fuel security, a local strategy has recently been adopted to use either heavy fuel oil or, as an alternative, a combination of fuels including wood fuels and peat. The proposed project would support this alternative approach which would result in reduced S02 and NOx emissions when compared with the heavy fuel oil alternative. The investments in emissions control equipment would also limit particulates associated with the use of peat. The proposed peat harvesting sites are fully developed locations with large reserves. The sources of wood fuels have been identified; significant wood fuel resources exist locally outside protected areas. -31- 2.70 Parnu DH Rehabilitation Component. The proposed program would result in positive environmental impacts by reducing emissions from the use of heavy fuel oil through the substitution of peat and wood fuels. The water treatment component and rehabilitation of the distribution system would significantly decrease the use of chemicals and the wastage of water. The improvement of substations would also contribute to greater energy efficiency. The proposed peat harvesting sites are fully developed locations with large reserves. The sources of wood fuels have been identified; significant wood fuel resources exist locally outside protected areas. The Parnu Environment Office has approved the conversion of the boilers from heavy fuel oil to the use of peat and wood chips and has also approved the use of peat from presently operating harvesting areas to the northwest and northeast of Parnu. In addition, it has authorized the disposal of the ash from the boiler at the present solid waste disposal site. 2.71 Iru (CHP. Tallinn) Power Plant Improvement Component. Improvements to the preheater and automation system would allow for improved efficiency in the use of fuel and slightly reduce flue gases. The decrease in flue gas emissions would reduce the environmental emission fees which are paid by Eesti Energia to the Estonian Environmental Fund. Improvements to the water treatment system would allow for significant improvements in the water chemistry at the plant, resulting in reduced corrosion and scaling problems while decreasing the use of treatment chemicals by approximately 40%. In addition, these improvements and rehabilitation activities to be included under the project would reduce the need for make-up water in the system. The alternative of installing air quality monitoring equipment in the stack of the plant was reviewed, and it was decided that periodic measurements using the alternative of mobile equipment would be more cost effective. The emissions from the plant will be monitored and evaluated in the context of the existing air quality monitoring system for Tallinn. 2.72 Institutional Support Program. It is proposed that this program include an activity to support training of parties involved in planning, conduct and regulation of peat and wood fuels harvesting in the application of environmental guidelines prepared as an element of the sectoral environmental assessment discussed above. The EU, through its PHARE program, has proposed that a training program for environmental aspects of wood fuels and peat management be included as part of its future activities in Estonia. In addition, the EU PHARE program and the United States Environmental Protection Agency (USEPA) will conduct a comprehensive review of the environmental monitoring needs of Estonia in the near future. K. Supervision 2.73 As this is the first Bank-supported, energy sector investment loan to Estonia and given the number of project agencies, the project is expected to require a significant supervision effort, particularly during the first two years when a large portion of the procurement actions will be undertaken. Therefore, it is planned that about 25 staff-weeks of effort for the first two years and about 15 staff-weeks thereafter would be required for supervision. A detailed supervision plan was discussed during negotiations and is attached as Annex 14. A schedule of performance indicators will be discussed during project launch. -32- III. IMPLEMENTING AGENCIES A. Estonian State Energy Department 3.1 The Estonian State Energy Department was established in April 1992 as a separate state-owned, energy agency reporting to the Minister of Energy. Its primary responsibility to-date has been to implement the Government's National Energy Conservation Programme, which is now in progress. It's staffing and operational costs are funded by the Government, and it does not generate revenues of its own. Loans to boiler owners for conversion or replacement of small boilers under the National Energy Conservation Program are provided by the Ministry of Finance, based on recommendations of the Department, and repaid directly to the Ministry of Finance. 3.2 The Estonian State Energy Department is headed by a Director and is organized into three divisions of economics, energy efficiency and information. Its Energy Efficiency Division has been responsible for implementation of the boiler conversion projects and is also responsible for DH heat metering standards and norms. Its Economics Division has been responsible for collecting and analyzing information on energy prices and collecting statistics on fuels. The Department has also been coordinating and guiding a number of studies being supported by various donors and has organized and participated in Steering Committees for the feasibility studies for the proposed project. Its organization chart is shown as Chart 1. 3.3 The Department has a relatively small staff of 13 persons, and about half of these will be assigned to implementation of the small boiler conversion/replacement program. Its staff are well- qualified and have demonstrated their ability to manage a large number of boiler projects during the last year. As mentioned previously, its staff would be supported by about 10 local consulting companies as well as international consultants for the boiler projects. The staffing arrangements for the boiler program are judged to satisfactory for the purposes of carrying out the project. B. The District Heatine Companies 3.4 In April 1992, the Government initiated the process of restructuring its DH sector through a program of "municipalization" or transfer of responsibilities for DH services from the state to local authorities. In October 1992 the Government decreed that this process should be completed by November 1, 1992. Until this time, the state-owned companies Eesti Energia and Thermest owned and operated the majority of the DH systems in the major towns in the country; Eesti Energia owned the major power plants and generally the larger networks and Thermest owned the smaller boilers and networks up to the substations. Substations, located in buildings, were already owned by municipalities by their house maintenance companies. The municipalization of DH systems is essentially complete, but a few DH enterprises have yet to be transferred due to the reluctance of some municipalities to accept the enterprises which have been experiencing financial difficulties since the onset of the energy price shocks during 1991-93. All DH enterprises in the project cities of Tallinn, Tartu and Parnu have been transferred as required, with the exception of Tallinn Soojus Vork which is still owned by Eesti Energia, discussed below. -33- Tallinn DH Companies 3.5 The Tallinn DH system is owned and operated by three companies: (a) Eesti Energia which owns and operates the Iru CHP plant that supplies heat to eastern Tallinn; (b) Tallinn Soojus Vork (Tallinn DH Network Company), a subsidiary of Eesti Energia, which owns and operates the primary networks and 5 major heat-only boiler plants and buys heat from Iru and supplies it, along with part of its own heat produced, to (c) Tallinna Kommunaal Soojus Vorgud (Tallinn Municipal DH Company) which owns and operates the secondary networks as well as 50 small, separate networks and large substations. The Iru Power Plant will continue to be owned by Eesti Energia and is discussed in more detail in the following section. 3.6 While only part of the Tallinn DH system has been municipalized to-date, the Government is planning to merge the two DH companies into a joint-stock company by July 1, 1995. This arrangement is judged as the best alternative both for the operation of the system in an efficient manner and for the most adequate handling of the proposed project. However, the merger and corresponding restructuring will require technical assistance to carry out the process in a smooth and orderly way. To assist in this effort, draft terms of reference have been prepared for consultancy assistance and which are now under review by the members of the working group created to implement the merger and restructuring. This technical assistance program is to be carried out in two phases, and the first phase includes the key steps necessary to legally create the proposed new DH company and the minimum conditions to make it operational. These first steps include completion of (a) corporate by-laws; (b) corporate structure; (c) opening balance sheet with a satisfactory financial condition; (d) key contracts to govern main relations, particularly those related to (i) service license with the Municipality, (ii) bulk supply from heat producers, and (iii) standard and special retail supply with consumers; and (e) minimum management and organizational systems in operations and with responsible staff assigned to them. The second phase includes assistance for the detailed development of operational systems including training of staff. During negotiations, agreement was reached that these first phase conditions would be completed by no later than July 1, 1995, when the project will be in the full process of implementation, and that the second phase conditions would be completed by no later than July 1, 1997, As it was not yet clear which agency, Eesti Energia or Tallinn Municipality, would be the majority shareholder in the joint-stock company and which agency would be responsible for borrowing and repaying the sub-loan provided from the proceeds of the Bank loan, as a condition for negotiations, the Government identified Tallinn Municipality as the agency responsible for borrowing and repaying the sub-loan for the Tallinn DH rehabilitation component. Tartu DH Companies 3.7 The Tartu DH system is now owned and operated by three companies as well: (a) Tartu Soojus which owns and operates 3 separate and distinct networks and heat-only-boilers; (3) Tartu Keskkatlamaja Soojus which owns and operates the largest current heat-only-boiler plant and a network which is now shared with (c) Anne Soojus recently formed (September 30, 1993) as a joint- stock company, with the municipality as majority shareholder, to operate the Luunja heat-only-boiler plant proposed for conversion under the project. 3.8 The Municipality of Tartu has established a uniform tariff for the city's residents and thus for each of the two DH companies which sell heat to consumers. In order to achieve the uniform tariff, the Municipality proposed to utilize the average of the tariffs required by the two -34- companies, which implies that one company would earn profits while the other is forced to operate with losses, which is clearly not a commercial basis of operation. A third complication concerns the newly-established joint-stock company, Anne Soojus, for which it is not clear as to how it will sell heat to the network. Clear rules of operation, both on a financial and technical basis, must be established to permit commercial operations which must be in place in a timely manner for the proposed project. 3.9 The Municipality of Tartu has recently decided to create, out of these companies, one network company which will have all transmission and distribution facilities under its responsibility. The reasoning behind this decision rests on the following basic factors: (i) to unite all the natural monopoly functions; (ii) to have a uniform tariff system for all DH clients within the Municipality; (iii) to better accompany the expected development of the city; (iv) to achieve economies of scale and competition in the purchasing of bulk heat; and (v) to reduce costs through interconnection of the small systems. On the production side, the Municipality has decided to create five companies, one for each heat-only-boiler plant in order to increase the opportunities for competition which is more viable if several producers are involved in this activity which is not a monopoly and to encourage a larger number of potential bidders in the eventual privatization process, a medium-term goal of the Municipality. This restructuring of the DH enterprises of Tartu is in line with the Government's policy and strategy. To implement this restructuring, a similar restructuring assistance program has been recommended and draft terms of reference have been prepared and which, under the first phase, would also include the same key steps as for the case of Tallinn to legally create the enterprise and ensure its operational viability. During negotiations, agreement was reached with Tartu Municipality that these first phase steps would be completed by no later than December 31, 1994, and that the second phase steps would be completed by no later than July 1, 1997. (Para. 6.1(h)). Parnu DH Company 3.10 The DH enterprise previously owned by Eesti Energia was transferred to Parnu Municipality in September 1992. The facilities, consisting of 3 heat-only boilers serving 2 separate networks and some small boilers connected to a few buildings, serve most of the city's residents. Other independent producers of heat (e.g., Visnurk Furniture Factory) also serve selected areas of the city. As only one municipal company operates the main DH system, institutional restructuring is not required at this time in Parnu as in Tallinn and Tartu. 3.11 The Board of the Parnu DH Company consists of representatives from the Municipality and the Managing Director of the DH Company. The personnel of the Company comprise about 170 technical staff, primarily engineers, and 12 administrative staff. Recruitment of technical personnel is carried out by a private external recruitment agency, which ensures that the personnel have the necessary educational and practical background. The personnel of the DH Company are judged to be generally well-qualified. An organization chart for the Parnu DH Company is included as Chart 2. -35- C. Estonian State Power Company and its Iru Power Plant 3.12 Since Independence, the Estonian State Power Company (Eesti Energia) has been reestablished as a state enterprise responsible for the production and supply of electric power and also for the production and supply of heat through co-generation in selected areas. It owns and operates the two main power plants in the northeast as well as the newer, Iru CHP plant built in 1980 in Tallinn. 3.13 Its Iru Power Plant is treated as a separate expenditure center and takes direction from Eesti Energia's management. All heat produced by Iru, less own use and losses, is sold to Tallinn's DH Network Company. Its staff are judged to be well-qualified, both in the technical and financial areas. -36- IV. FINANCIAL ASPECTS A. Past Financial Performance of Project Agencies 4.1 DH Companies. The past financial performance and present position of DH enterprises are typically the same for the period 1992-93. DH companies have been experiencing serious cash flow problems resulting from the inability of consumers to pay their bills on time due to the explosive increases in heat charges and thus were able to show surpluses on operations in 1992 only as a result of receipt of government operating subsidies. With the recent discontinuance of government operating subsidies during August 1993 along with an ineffective subsidy program for households introduced about the same time, performance deteriorated further during the latter part of 1993. While Estonian households have had a history of good payment performance, the heat charges for minimal levels of service were largely unaffordable during the 1992/93 heating season and further tariff increases alone would not have solved the problem. This performance demonstrates the need to reduce heat production and operating costs through efficient investments and for more effective subsidy schemes for households to permit them to better pay for heat services. The past and present financial performance of Tartu, Parnu and Tallinn DH companies are shown in Annexes 9-11. 4.2 Iru Power Plant. The past financial performance and present position of the Iru Power Plant appears to be similar to the DH companies in that it experienced losses on combined heat and electricity operations. Iru's electricity-producing units are underutilized due to the dramatic decline in electricity demand, which is now fully met by Eesti Energia's power plants in the northeast. For Iru's heat-only operations, income statements for 1992 and 1993 have been prepared, but do not show all transactions, particularly assistance provided by Eesti Energia to make up for the difficulties which Tallinn Network Company is experiencing in paying for heat purchased from Iru. Thus, the reported surplus on Iru's heat-only operations at December 31, 1993 is not representative of the true financial situation. Income statements for its heat-only operations and balance sheets for combined-heat-and-power operations for 1992 and 1993 are shown in Annex 12. B. Heat Tariffs 4.3 Since the onset of the energy price shocks in early 1992, the Government has made heroic efforts to raise heat tariffs to keep pace with the rapid rise in heat production and operating costs. For example, between January and March 1992 alone, residential and industrial tariffs increased by 7-fold and 25-fold, respectively, and residential tariffs increased by 60-fold for the year. Since then, tariffs continued to rise to a level of about EEK 200 per MWh in September 1993. 4.4 Up until August 1993, tariffs were established by the Government, and the difference between the tariff needed to cover the costs of production and operation and the established tariff was provided as a subsidy to the heat production enterprise. After this time, municipalities have been designated as the responsible authorities for regulating tariffs of municipal district heating companies and the Ministry of Economy for regulating tariffs of Eesti Energia, and direct subsidies to heat production enterprises by the Government have been eliminated and replaced with targeted programs of assistance to households. The current formula adopted by project municipalities for establishing the tariff is appropriate, allowing the heating enterprises to charge for all costs of production, operation and maintenance, depreciation, interest charges and a profit element. During negotiations, -37- agreement was obtained that project municipalities and the Ministry of Economy would continue to approve regular tariff increases sufficient to allow their respective DH companies and Iru Power Plant to cover the costs of production, operations and maintenance, depreciation, interest and make a contribution to reserves. (Para. 6.1(i)). The analysis of tariff increases would be carried out at the end of each fiscal year to determine the rate of the next increase. C. Billing and Collection Performance of Project Agencies 4.5 DH enterprises contract with municipal house maintenance companies to prepare bills and collect payments for heat services from consumers. Due to the limited metering of heat production plants and consumption, the costs of heat production and operation are attributed to each building according to estimated consumption in the building, and in the case of apartment buildings, divided among households. Billing is up-to-date, carried out on a monthly basis, and added to household charges for rent and other utilities. While this system of billing provides an incentive for consumers to install heat meters since heat losses are paid by the non-metered consumers, few consumers have the ability to pay for the installation of meters. Metering of production plants and consumer substations would be improved under the project. 4.6 Collection performance of heat bills by DH companies deteriorated during 1992 but has generally improved as of end-1993. Due to the large rise in heat tariffs relative to the growth of incomes, during 1992 many consumers were not able to pay their bills on time, causing a large build- up of arrears during the heating season but which was reduced during the summer months. However, by end-1993, this performance improved. Collection performance in Parnu and Tartu at end- December 1993 was reasonable with arrears amounting to at'about 66 and 47 days, respectively. Collection performance in Tallinn, however, has been much more problematic, with arrears from consumers at end-December 1993 amounting to about 113 days for the two DH companies on a consolidated basis. This is thought to be due to the higher service levels provided in the capital during the past winter season than in Parnu and Tartu. The consultancy services to assist with the restructuring of the Tallinn DH Companies would be expected to provide advice on measures for reducing the arrears in Tallinn. Collection performance in 1994 and thereafter is expected to improve as a result of the new household subsidy scheme, administered by the house maintenance companies, introduced in January 1994. D. Future Financial Performance of Project Agencies 4.7 Projections of financial performance of DH companies and Iru Power Plant over the period 1994-99 are shown in Annexes 9-12. Projections of Tallinn's and Tartu's DH companies have been prepared on a consolidated basis. The projections have been prepared on a conservative basis assuming that: (a) heat demand would increase over the next few years to reflect normal year temperatures and better service levels and thereafter to reflect planned development and efficiency gains under the project; (b) fuel prices would increase with inflation; and (c) long-term investment loans to project agencies under the project would be at an interest rate of 10%, with a maturity of 15 years, including a 5-year grace period. In addition, Tartu Municipality would borrow its contributions to the project cost from domestic commercial banks at an interest rate of 15%, with a maturity of 5 years. Tallinn Municipality, on the other hand, is expected to provide its counterpart contribution as an equity injection to its new Joint-Stock DH Company. -38- 4.8 TatEM. The financial projections, including income statements and sources and applications of funds statements along with financial performance indicators, for consolidated operations of Tartu's three DH companies show that the project investments would have a significant positive impact on heat tariffs, since tariffs would be reduced as a result of cost savings brought about by the boiler conversions and other efficiency improvements. In 1994, before key investments are commissioned, tariffs would be required to increase substantially with the phasing out of subsidies to the DH companies. However, in 1995, tariffs would decrease in nominal terms, and future tariff increases would not be expected to increase above domestic inflation. With these tariff levels, the Tartu DH companies would be expected to maintain satisfactory financial performance, with an improved operating ratio largely related to the fuel mix (reducing from over 100% in 1993 to about 74% by 1999), and adequate working capital and debt service coverage (minimum 1.3). Tartu DH companies have recently borrowed a number of loans which, together with the project loans, are significant compared to their ability to repay these loans. Therefore, in order to protect their financial position, during negotiations agreement was obtained that Tartu Municipality would require its DH companies to maintain a debt service coverage ratio of at least 1.3 during the project period. (Para. 6.1 0)). To properly monitor financial performance, during negotiations agreement was obtained that Tartu Municipality would require its DH companies to prepare a report annually, containing 5-year financial projections beginning FY95 to be reviewed by the Bank on an annual basis. (Para. 6.1(ck)). The financial projections for the combined operations of Tartu's DH companies are presented in Annex 9. 4.9 Par. The financial projections, including income statements, sources and applications of funds statements and balance sheets along with financial performance indicators, for Parnu's DH company show similarly that project investments would have a significant positive impact on heat tariffs. As with Tartu, heat tariffs would increase in 1994 but would decrease in nominal terms in 1995 with future tariff increases at or below the rate of domestic inflation. However, even with a substantial tariff increase in 1994, Parnu DH Company is expected to experience a serious cash flow problem during that year due primarily to the repayment obligation in full of a loan due June 1994 for purchases of heavy fuel oil advanced from the World Bank Rehabilitation Loan. Given that subsidies have been abolished, the heavy fuel oil loan has to be paid back and investments are about to be undertaken, Parnu DH Company will require a prolongation of the repayment period of the heavy fuel oil loan for at least an additional three years, which was agreed with the Ministry of Finance. Therefore, in order for Parnu's DH Company to maintain its creditworthiness, as a condition for negotiations of the EIB loan, the Government would prolong the repayment terms of Parnu's DH Company's loan for heavy fuel oil by at least three years. 4.10 Based on the projected tariff levels, the Parnu DH Company would be expected to maintain satisfactory financial performance, with an improved operating ratio (from over 100% in 1993 to 67% by 1999), and adequate working capital and debt service coverage (minimum 1.3). Since Parnu's DH Company has large debt obligations, including an EBRD loan commencing in 1994, in order to protect its financial position, during negotiations of the EIB loan, agreement would be sought that Parnu Municipality would require its DH Company to maintain a debt service coverage ratio of at least 1.3 during the project period. To properly monitor financial performance, during negotiations of the EIB loan, agreement would be sought that Parnu Municipality would require its DH Company to prepare a report annually, containing 5-year financial projections beginning in FY95 to be reviewed by the EEB on an annual basis. The financial projections for the Parnu DH Company are presented in Annex 10. -39- 4.11 Tallinn. Projections of financial performance, including income statements and sources and applications of funds statements along with financial performance indicators, for consolidated operations of Tallinn's two DH companies show that the project investments would have a positive impact on the required tariff increases, but not to the same extent as Tartu and Parnu which would benefit from significant savings from conversion of boilers to local fuels. Tariffs are estimated to grow at rates less than domestic inflation over the project period. With these tariff levels, Tallinn's new Joint-Stock Company would be expected to maintain satisfactory financial performance, with an improved operating ratio (from over 100% in 1993 to about 96% by 1999), and adequate working capital and debt service coverage (above 1.3). Unlike other towns, Tallinn's DH companies currently do not have any prior long-term debt. However, project loans are large relative to the consolidated company's ability to repay and thus in order to protect the new company's financial position, during negotiations agreement was obtained that Tallinn Municipality would require its DH Company to maintain a debt service coverage ratio of at least 1.3 during the project period. To properly monitor financial performance, during negotiations agreement was obtained that Tallinn Municipality would require its DH company to prepare a report annually, containing 5-year financial projections beginning FY95 to be reviewed by the Bank on an annual basis. The financial projections for the combined operations of Tallinn's DH companies are presented in Annex 11. 4.12 Iru Power PIn. Projections of Iru's financial performance, including income statements and sources and applications of funds statements along with financial performance indicators, of its heat-only operations have been carried out assuming that production levels remain relatively constant over the project period, after adjusting for normal year temperatures, since it supplies heat to only one customer, the Tallinn DH Network Company, and its demand for heat from Iru is expected to remain the same. As both Iru and the Network Company are owned by Eesti Energia, payment of heat bills to Iru has been assured by Eesti Energia's management, and therefore it has essentially no outstanding heat bills in arrears. The projections show that, since tariffs have been set at levels to cover its costs of production and operation, no major tariff increases, above the level of domestic inflation, would be required. With modest tariff increases, Iru is expected to maintain a satisfactory financial performance, with adequate working capital and debt service coverage (minimum 1.3). In order to maintain a sound financial position, during negotiations agreement was obtained that Eesti Energia would require Iru Power Plant to maintain a debt service coverage ratio of at least 1.3 during the project period. To properly monitor financial performance, during negotiations agreement was obtained that Eesti Energia would require Iru Power Plant to prepare a report annually, containing 5-year financial projections beginning in FY95 to be reviewed by the Bank on an annual basis. The financial projections for Iru Power Plant are presented in Annex 12. 10- V. PROJECT BENEFITS AND RISKS A. Project Benefits 5.1 The proposed project would have significant economic benefits related to reduced fuel costs and import requirements, improved efficiency in DH systems and improvement of environmental conditions in affected areas. The assumptions for calculating the economic rates of return for the various components are described in detail following and summarized in Annex 13. The weighted average internal economic rate of return ([ERR) for the project, for components for which benefits could be quantified and which amount to about 94% of the total project cost, is 24%. 5.2 A sensitivity analysis was undertaken to evaluate the impact on the 1ERRs should investment costs increase by 10% or benefits resulting from efficiency gains and fuel cost savings reduce by 10%. In addition, the sensitivity of the IERRs for components including boiler conversions was tested for the assumption that local fuel costs would increase in real terms. In this case, it was conservatively assumed that local fuel prices would increase within five years to price levels observed in economies with high labor costs such as Sweden or Finland. A summary of the JERRs for each component, along with the results of the sensitivity analysis, is presented below in Table 5. 1. Table 5.1: SUMMARY OF IERRs AND SENSITIVrlY ANALYSIS (%) Component EERR Costs Beneits Costs +10% Lal Fua + 10% -10% Bemerits Prie -10% inorem Boiler Conversions 29 25 24 20 19 Boiler Replacements 10 8 8 7 3 Tallinn DH Rehabilitation 23 20 20 18 Tartu DH Rehabilitation 29 25 25 22 24 Parnu DH Rehabilitation 28 25 24 21 20 Iru Improvements 18 16 16 14 Weighted Average IERR 24 21 21 is 19 5.3 A further sensitivity analysis was undertaken to test the robustness of the economic profiles of each project component to changes in the key variables in the cost and benefit streams, such as investment costs and fuel cost savings, which are subject to risk and uncertainty. This analysis shows that the economic performance of the project components is quite robust and economically attractive, as only with very large increases in the investment costs or large decreases in the benefit streams would the IERRs fall to levels below the opportunity cost of capital of about 10%. The graphs of this analysis for each project component are shown in Annex 13. 5.4 For components utilizing local fuels (peat and wood), the costs of local fuels were based on the prices paid by owners of heat production plant and are considered a good proxy for economic costs, since the quantities required of local fuels are not constrained by the availability of 41- these resources and there is adequate competition in the production and transportation of these fuels. Local fuel costs were found to vary across project towns due primarily to the differences in production and local transportation costs. Some differences in imported fuel costs in project towns were also found, related to the differences in transportation costs. 5.5 Shadow prices for foreign exchange and labor costs are not required for the economic analysis. Since Estonia is a highly open economy, an exchange rate conversion factor to compensate for price distortions related to trade barriers is not needed. Similarly, since the Government has allowed a massive erosion of real wage rates in line with declining national product, a non-unitary conversion factor for labor costs is not required. Small Boiler Conversion/Replacement Program 5.6 The estimated fuel cost savings from use of lower-cost indigenous fuels is used as the measure of the economic benefit of the small boiler conversion program. All equipment and installation costs, including physical contingencies, were considered in the analysis for typical I MW boilers being converted. The costs were adjusted to exclude taxes, duties and estimated inflation costs. The incremental recurrent costs associated with the maintenance of converted boilers and handling of ash from the burning of local fuels were also included. Costs and benefits were considered over the average life of the investments of 7 years for the boiler conversion program. On this basis, the IERR for typical 1 MW boiler conversion projects is estimated at about 29%. 5.7 The estimated total cost savings derived primarily from use of lower-cost indigenous fuels is used as the measure of the economic benefit of the small boiler replacement program. Small boilers would be replaced with new boilers using local fuels when they have reached the end of their useful life. The economic analysis compares the costs of installing a new boiler using local solid fuels with the cost of installing a new oil-fired boiler. All equipment and installation costs, including physical contingencies, were considered in the analysis for typical 1 MW boilers being replaced. The costs were adjusted to exclude taxes, duties and estimated inflation costs. The incremental recurrent costs associated with the maintenance of local fuel boilers and handling of ash from the burning of local fuels were also included. Costs and benefits were considered over the average life of the investments of 20 years for the boiler replacement program. On this basis, the [ERR for typical 1 MW boiler replacement projects is estimated at about 10%. 5.8 Further unquantifiable benefits would result from the generation of professional and technical employment required for the design and fabrication of peat harvesting equipment, redesign and conversion of the boilers, and the planning and supervision of the wood fuels and peat harvesting operations. At the semi-skilled and unskilled level, the project would generate employment in rural areas where fuel supplies are harvested and would also create opportunities in the transportation sector for the hauling of local fuels to the boiler houses and the removal of ashes to authorized disposal sites. The component would also create opportunities in urban and rural areas for private sector initiatives in the provision of fuel supplies for the converted boilers. Tallinn. Tartu and Parnu District Heating Rehabilitation Components 5.9 Economic benefits for the Tallinn DH rehabilitation component are based on a number of items including estimates of: (a) fuel savings from improved boiler efficiency resulting from the investments in combustion controls; (b) reductions in heat demand resulting from efficiency -42- improvements in substations permitting better regulation and controls; (c) savings in operating and maintenance costs after improvements of the water treatment system and longer lifetime; (d) electricity savings with installation of variable speed pumps; and (e) reduction of heat and water losses in the network through the replacement of a section of the pipeline and ventilation of concrete culverts. 5.10 The main economic benefits for the Tartu DH rehabilitation component were derived from estimated fuel costs savings as a result of the conversion of various baseload boilers to use of lower-cost indigenous fuels. In addition, economic benefits are based on other items similar to the Tallinn component, namely estimates of: (a) fuel savings from improved boiler efficiency resulting from the investments in combustion controls; (b) reductions in heat demand resulting from efficiency improvements in substations permitting better regulation and controls; (c) savings in operating and maintenance costs after improvements of the water treatment system and longer lifetime; and (d) reduction of heat and water losses in the network through the replacement of sections of the pipeline, at times which are under groundwater level, and ventilation of concrete culverts. 5.11 The economic benefits for the Parnu DH rehabilitation component are comparable to those of Tartu and largely based on estimates of fuel costs savings as a result of the conversion of various baseload boilers to use of lower-cost indigenous fuels. Other benefits are derived from estimates of: (a) reductions in heat demand resulting from efficiency improvements in substations permitting better regulation and controls; (b) savings in operating and maintenance costs after improvements of the water treatment system and longer lifetime; (c) reduction of heat and water losses in the network through the replacement of sections of the pipeline and ventilation of concrete culverts; and (d) electricity savings with installation of variable speed pumps and new control and regulation system. 5.12 All equipment and installation costs, including physical contingencies, were considered in the analysis of the three towns' DH rehabilitation components and adjusted to exclude taxes, duties and estimated inflation costs. The incremental recurrent costs associated with the maintenance of converted boilers and handling of local fuels and ash from the burning of local fuels were also included as was an estimate of the further design and supervision costs. Costs and benefits were considered over the average life of the investments of 20 years for each of the three town's components. On this basis, the EERRs for the Tallinn, Tartu and Parnu DH rehabilitation components are estimated at about 23%, 29% and 28%, respectively. Iru Power Plant Improvement Component 5.13 The main benefits of the improvement program at Iru Power Plant are derived from estimates of: (a) fuel savings from better efficiency in the steam boiler due to the improved air prebeater and better efficiency of the steam and hot water boilers due to better combustion control and automation; (b) reductions in operating and maintenance costs due to better operation control and improved water quality; (c) lower costs of chemicals and other consumables reswting from the introduction of a modern water treatment system; and (d) longer lifetime of power plant equipment and the DH system. All equipment and installation costs, including physical contingencies, were considered in the analysis and adjusted to exclude taxes, duties and estimated inflation costs. Also included is an estimate of the supervision costs. Costs and benefits were considered over the average life of the investments of 15 years. On this basis, the IERR for the Iru Power Plant improvement component is estimated at about 18%. . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ------ B. Project Risks 5.14 Being the first project of its kind in Estonia, the project has a number of risks. The implementation capacity of most project agencies in carrying out an investment project of this order of magnitude to-date is untested, and may result in a longer implementation period than expected. To reduce this risk, the detailed implementation arrangements have been fully identified and agreed with all concerned project agencies prior to project start-up, adequate staffing arrangements would be in place and a high level Energy Committee, already in place, would be utilized to resolve difficulties which may arise, thereby helping to ensure smooth project performance. In addition, international and local engineering consultants would assist project agencies with the technical implementation of the project. 5.15 The risk of insufficient local fuel supplies for converted boilers could arise as a result of problems related to: (a) fuel availability which is dependent on forest owners' willingness to allow the harvesting of wood for this purpose, condition of transport routes, transportation capacity and demands from other sectors; (b) fuel prices which are affected by the above-mentioned factors as well as by the lack of Government regulations regarding the pricing of these resources and overall supply and demand conditions; and (c) fuel quality which is mainly dependent on weather conditions (this particularly affects peat). In order to minimize this risk, prior to project start-up, Parnu and Tartu Municipalities, which own the larger boilers being converted, would be required to enter into contracts for the supply of at least 60% of the local fuel requirements for the next two years. Boiler owners in other municipalities that would be receiving equipment for converting or replacing small boilers to use local fuels would also need to prepare plans for the supply of local fuels as a condition for receiving support under the project. 5.16 There is a risk of heat tariff increases not being implemented for political or other reasons. Given the strong demonstration of commitment by the Government and DH companies to adjusting heat tariffs frequently during the recent period of energy price shocks, this risk is expected to be relatively small. Monitoring performance in this area would be a major focus of attention during Bank supervision. 5.17 There is also the possibility that the timetable for the restructuring of the Tallinn DH Companies (by July 1, 1995) and the Tartu DH Companies (by December 31, 1994) may not be met. A working group comprised of local officials and representatives of the DH companies for the Tallinn restructuring has been formed and is already advancing the arrangements for the merger of the two companies. Tartu Municipality is similarly advancing the arrangements for the restructuring of its DH companies. Further assistance under the project for restructuring has been included in the package of institutional support. The restructuring, however, need not be complete in order to implement the project investments in Tallinn and Tartu as long as appropriate project management arrangements are in place, which was a condition for negotiations. 5.18 Further uncertainty exists about how effective the new subsidy scheme for households will be, and this has the potential to negatively impact the financial position of DH companies. If the new scheme is not working properly, arrears of consumers' heat bills will increase. While the experience of the subsidy scheme was limited at the time of appraisal, the Government is judged to be committed to providing the necessary funds in the budget as required by Parliamentary Decree. Monitoring performance in this area would also be a key focus of attention during supervision of the project. -44- VI. AGREEMENT REACHED AND RECOMMENDATION Agreements Reached During Nefotiations 6.1 During negotiations, agreements were obtained regarding: (a) Estonian State Energy Department to submit the first four applications for boiler conversion projects to the Bank for review and approval prior to granting approval for sub-loans with subsequent sub-loans to be approved in accordance with the appraisal criteria already agreed with the Bank (para 2.8); (b) the advisory services for long-term heat planning and for development of a legal and regulatory framework to be carried out by consultants in accordance with terms of reference and a timetable satisfactory to the Bank (para 2.27); (c) on-lending arrangements for the project (paras 2.32-2.37); (d) maintenance of project management arrangements satisfactory to the Bank (para 2.42); (e) arrangements for establishing and operating the Special Accounts for project agencies (para 2.56); (f) auditing requirements of the project (paras 2.59 and 2.60); (g) Government, acting through the Ministry of Environment, to implement environmental mitigation and monitoring plans for the project satisfactory to the Bank (para 2.65); (h) Tallinn Municipality to complete the first phase conditions for restructuring its DH companies by no later than July 1, 1995 and Tartu Municipality to complete the first phase conditions for restructuring its DH companies by no later than December 31, 1994, and both Municipalities to complete the second phase conditions by no later than July 1, 1997 (paras 3.6 and 3.9); (i) Tartu and Tallinn Municipalities and the Ministry of Economy to continue to approve regular tariff increases sufficient to allow their respective DH companies and Iru Power Plant to cover the costs of production, operations and maintenance, depreciation, interest and make a contribution to reserves (para 4.4); () Tartu and Tallinn Municipalities and Eesti Energia to require their respective DH companies and Iru Power Plant to maintain a debt service coverage ratio of at least 1.3 during the project period (paras 4.8, 4.11 and 4.12); and (k) Tartu and Tallinn Municipalities and Eesti Energia to require their respective DH companies and Iru Power Plant to prepare a report annually, containing 5-year -45- financial projections beginning FY95 to be reviewed by the Bank on an annual basis (paras 4.8, 4.11 and 4.12). Conditions of Effectiveness 6.2 Conditions of effectiveness would include: (a) submission of satisfactory evidence that the loans from co-financiers have been signed (para 2.31); and (b) subsidiary loan agreements have been executed between the Government and Tallinn and Tartu Municipalities and between the Government and Eesti Energia (para 2.36). Recommendation 6.3 Subject to the above, the Project is suitable for a Bank Loan of USS 38.4 million equivalent at the standard variable interest rate with a maturity of 15 years including 5 years grace. The Borrower would be the Republic of Estonia. ANNEX 1 Page 1 of 10 ESTONIA DISTRICT HEATING REHABILITATION PROJECT Statement of Energy Policy and Stratef Baak ind Energy and the Economy The import of heavy fuel oil and natural gas at world market prices puts a heavy burden on the Estonian economy and balance of trade. Furthermore, the security of fuel supplies in the heating sector does not meet reasonable criteria. Consequently, the Government of Estonia has given a high priority to the energy sector. Structural reforms as well as investments are deemed necessary to support and sustain a sound economic development of the country and to improve the environment. Structural Changes in the Energy Sector The Government's economic policy is focusing on market riberalization and increasing participation of the private sector. This is also true for the energy sector. However, the Government will retain (i) its inherent primary role as policy maker and regulator and (ii) in some key areas of the energy sector, ownership of facilities which, however, in the future may be transferred to the private sector. Many functions will be transferred to municipal governments (the act of municipalization) including at present local planning, regulation and ownership in the heating sector, and in the future maybe also in municipal electricity and gas distribution. In order to ensure that the institutional structure of the energy sector is coherent with the new political and economic framework of the country, the Government now issues this Statement of Energy Policy and Strategy which sets the general principles and objectives for the sector and the proposed structuring. Energy Sector Overview Fuel Resources Estonia has substantial domestic primary fuel resources in oil shale, peat and waste products from forestry as well as secondary fuel resources in shale oil and gas from oil shale. Oil shale reserves are estimated about 1.7 billion tons. Peat reserves are estimated 1.5 billion tons and forest resources are about 264 million solid cubic meters. Electricity Market Before: Electricity production and transmission was integrated into the former U.S.S.R. North-West energy system with a regional dispatch center located in Riga. Major power plants are ANNEX I Page 2 of 10 located in the Narva region close to the oil shale mines. Current: The actors in the market are the state-owned companies Eesti Polekivi (Estonian Oil Shale) with mining of oil shale and Eesti Energia (Estonian Power) with power generation transmission and electricity distribution. Policy Issues: Mining of oil shale and generation and transmission of electricity are expected to continue for the time being with the state as a majority owner. More efficient oil shale mining technologies will be used. As new electric generating capacity will be required, private or municipal ownership in full or part may be considered. This is, however, not likely to be the case for the immediate future, since generating capacity at present grossly exceeds current demand. Local distribution of electricity as well as retail sales may, in the future, be transferred to the municipalities. Measures for increasing the amount of electricity exported to neighboring counties should be considered. A study of electric interconnection under the EU PHARE program in being planned. Prices Current: The current average price of electricity for consumers is 0.19 EEK/kWh excluding 18% VAT (November 1993). The price of electricity is controlled by Ministry of Economy. Further price increases (above general inflation) are inevitable, because of general cost increases, and since capital costs are not fully accounted for in current tariffs. Security of supplies Oil shale is a domestic resource, which at the current production rate will not be depleted until approximately 60 years. Municipal plans may be developed, for example, to give adequate security to sensitive customer categories, and which may allow a greater flexibility in the tariff. Municipal Heating Sector Market Before: The supply of district was a state obligation, which was fulfilled through the state- owned companies: Eesti Energia, EKSE and through the Ministry of Agriculture. Even before independence, the structure started to change. Current: As a part of the local government reform in 1992, responsibility and ownership has been transferred to municipalities, with some exceptions. Policy issues: Private participation in production of heat may be encouraged. The model for regulating distribution and final sale of energy by municipal enterprises should be developed further. ANNEX 1 Page 3 of 10 Prices Current: Due to the sharp price increases immediately after independence, when many families were not able to pay their heating bills, a state subsidy scheme was developed. As of January 1, 1994, state subsidies will be given to municipalities only to compensate low income families. Subsidies are given only if the cost of heating, electricity and rent exceeds 30% of the family income and only up to a level of 180 EEK/MWh for heating. Price is currently regulated in the following way. 'Me district heating company must present its calculation of heat price to the municipality for approval. Policy issues: The sensitive situation of many consumers must be considered. Improving the efficiency of and eventually phasing out of the subsidy system should be considered. District heating utilities have been forced to reduce the quality of heat supply to a minimum, and as a consequence, customers leave the systems and new customers are difficult to attract. This may lead to lower efficiency, higher costs and an additional burden for the municipal district heating systems. Compulsory metering of heat sold by district heating utilities will be introduced. Sale of heat under commercial contracts defining supply quality and the required technical standard at the customer may be considered. Security of supplies Current: Investment funds have been made available to municipalities from the Government's energy conservation program and from international institutions (EU, EBRD) for boiler conversions and efficiency improvements, and a continuation program is currently planned with World Bank financing. Policy issues: Active Government support may continue to allow municipalities to invest in facilities to reduce the use of fossil fuels, and to increase use of domestic fuels in their district heating systems which will give increased supply security as well as expected cost reductions. The support may be in the form of soft loans, to be guaranteed by the municipality. Mandatory municipal heat planning may be considered. Petroleum products Market Before: Only one key supplier. 100% of market under total state company Eesti Kutus (Estonian Fuel). Supplies from Russia only by railroads. Current: Completely open market in 1994 with 35 major actors. The supplies mainly from Russia (45%) and Lithuania (35%). Policy issues: Regulation to protect the consumers. Licensing of enterprises to meet technical and safety standards in ongoing. ANNEX-I Page 4 of 10 Prices Before: Price decided by Ministry. No review of procurement procedures. Current: Market prices. In 1994 no direct subsidies to any actor. Security of supplies Policy issues: Additional measures may be considered that allow adequate quantities of petroleum products to be stored as well as unloading and transport facilities to be used in the case of an emergedcy situation. Estonia is supporting transit from Russia to Europe. Shale oil Market Current: Retorted from oil shale, Shale oil production is increased from 319,000 tons in 1991 to 365,000 tons in 1993. Open market, three producing enterprises. Prices Current: Shale oil as fuel oil for medium and large boilerhouses is competitive with imported fuel. Security of supplies Production is based on local raw material and local labor. Policy issues: Important as local basic fuel oil resource in country. Natural Gas Market Current: Eesti Gaas has been transferred into a joint-stock company, with the state owning 39%, Gazprom 30% and other private owners 31%. Policy issues: Reducing state ownership to 34% is foreseen by selling 5% shares to Estonian households. The control of the transmission network may remain under Government control, while allowing for private participation, or may be regulated by the Government. Transferring distribution (locally) to municipalities may be considered. Prices Price based on one year agreement with Gazprom and contracted quantities up to 1 billion cubic meters. Price to households is 1,200 EEK/1,000 m3 and for industry 1,120 EEK/1,000 m3 excluding 18% VAT. Market prices. Security of supplies At present only one supply country (Russia). Policy issues. Linking in the future with European network and joint investment for renovation in gas storage in Latvia may be considered. ANNEX-1 Page 5 of 10 Building subsector Ownership Before: Housing stock was mainly state owned, except cooperative houses. Current: Privatization process is ongoing. Policy issues: Guaranteeing the formation of building cooperatives to provide a partner for the collective supply of heat may be an important issue. Energy conservation Before: Low pricing of fossil fuels. No metering of heat sales. No incentives for energy conservation. Current: Energy Conservation Program administered by Estonian State Energy Department. Metering of heat actively supported in program. Policy issues: Energy conservation criteria may be introduced in new building code. Ponlicy Statement General Objectives The basic objective of the energy sector in Estonia is to provide reliable energy of desired quality at the lowest possible cost. To achieve this basic objective, the Government sets the following strategic objectives. (i) Security of Supplies: to ensure that the supply does not rely heavily on one single country, region or contract; to ensure on state as well as local level, a reasonable amount of domestic energy sources; and to avoid unreasonable interruptions in the supply. (ii) Efficiency: to increase competition in all forms and where viable in production through competition wherever possible or through regulation based on efficient enterprises, and in the use through conservation and other measures. ANNEX I Page 6 of 10 (iii) Financing investments to attract capital: (a) in the immediate future in the form of loans from international institutions with Government guarantees, and through third party financing schemes: and (b) in the medium and long term, local and foreign, after establishing clear and stable rules of the game, also in any of the following forms: loans, preferably without the Government guarantee; bonds, preferably convertible to shares; and equity, partial or total. (iv) Environmental Protection: in the construction of new installations, by ensuring that safeguards have been included and required permits obtained before they are commissioned, and that anti- pollution equipment is installed, as required to adequately meet current standard; in the development of fuel resources, by ensuring that adequate care to the environment is taken, and that current legislation is followed; and in the quality control of imported fuels. Government roles The roles of the Government which are inherent to its functions such as those of policy and strategy making, regulation and supervision will be separated from its subsidiary roles such as ownership and management of enterprises (which may be transferred to other institutions and the private sector). Policy on Ownership (i) Encourage private participation in production facilities for electricity and heat, and in the fuel sector (petroleum products as well as domestic fuels); (ii) Retain state control in oil shale mining and electricity production (for the time being) and in transmission grids; (iii) Encourage municipal ownership in district heating operations and in the future consider municipal ownership in local distribution of electricity and gas and encourage private participation in new heat production facilities; and (iv) In the areas where the Government still exerts its subsidiary role, particularly in enterprise ownership and management, the intention under the present policy is to increase the participation of the private sector wherever possible. In the case of the energy sector, the private sector should have an increasing participation in the new production projects, and could also participate in the distribution of energy either through any form of service contract or through full ownership of the system. ANNEX I Page 7 of 10 Policy on Prices (i) Avoid direct payment subsidies to energy sector, allow prices to reflect actual costs and allow energy enterprises to operate on commercial conditions. Policy on Financing (i) Attract capital for rehabilitation of energy facilities from international financing institutions with state guarantees until enterprises are able to finance investments through the normal financial market; (ii) The Government will also seek any other form of participation of private capital such as joint ventures, bonds, equity participation and trading arrangements. (iii) The Government will continue financing energy conservation programs from the state budget. Policy on Regulation (i) Introduce regulation as necessary in order to protect customers by ensuring the fairness of the pricing system and to apply desirable technical and safety standards; (ii) The principle should be to regulate as little as possible and, when exerted, under an arms length approach. Wherever competition is viable, prices will be set by market forces. Regulation of prices will apply only in those areas where natural monopolies exist; (iii) The Government will, as needed, establish a modern system supervising the adequate enforcing of the regulatory law. The regulatory system should be insulated from the day-to-day politics in order to ensure the stability and continuity of policy implementation. While promoting the participation of the private sector, the Government should regulate any monopolistic situation which may develop and which may impair the proper play of market forces; and (iv) The Government will ensure that the regulatory system of the sector is fully transparent by establishing an open and comprehensive information system which will include, but will not be limited to, the following purposes: (a) to let consumers know in detail the process for setting tariffs: (b) to let investors know sector statistics which will make his decision better informed: (c) let the regulatory entities know the basic data for tariff setting and to follow up the corresponding results: and (d) let the Government know the implementation of its policy and strategy, and the corrections the may be needed. ANNEX I Page 8 of 10 Policy on Fuel Resources (i) The indigenous fuel resources of Estonia (oil shale, shale oil, peat and wood) should be used to the extent that is technically possible and economically advantageous, but with proper regard to the environment. Policy on Taxes (i) Taxes (on, for example, gasoline and heavy fuel oil) shall be considered to provide correct signals to consumers, but introduced as to reflect the payment capability. In future, taxes shall be used as a regulatory mechanism of energy system; and (ii) Consider harmonization with, for example, EU requirements on environmental taxes. Policy on Environment (i) Focus on improved combustion efficiency, control equipment and monitoring of emissions for plants fired with low grade fuels (oil shale, mazut heavy fuel oil, coal). Determine which areas will give maximum return on investments; and (ii) Further development of domestic fuels (peat and wood chips) for heating purposes should be done with due consideration to environmental protection. Policy on Regional Cooperation (i) Promote actively the economic export of electricity to neighboring countries and the development of necessary infrastructure; (ii) Promote open trading agreements for gas and electricity, based on GATT rules and international agreements; (iii) Participate in European Energy Charter work; (iv) Develop jointly with neighboring countries facilities to obtain increased supply security in the most economical way, e.g. central gas storage, oil terminals; and (v) Promote actively the cooperation with Latvia and Lithuania in the energy sector, e.g. harmonization of policies. Policy on Open Access Schemes For the foreseeable future, electricity generation and transmission will be under state monopoly and wholesale prices regulated by Government. When economic progress makes it feasible to invest in new electric generating capacity with possible private participation, an open access scheme may be desirable. Current development in neighboring countries (Norway, Sweden and Finland) should give a better basis for deciding on and implementing such a scheme. ANNEX-1 Page 9 of 10 For the natural gas sector, an open access scheme with proper regulation may be desirable if private ownership increases above 50%. For the district heating sector, the distribution and final sale of heat is assumed to remain a municipal monopoly, with prices regulated by the municipality. Strategy The Government realizes that in order to achieve the goals of its policy will take time and it has set the following priorities under its strategy for the sector: Technical and Economic Strategy (i) To encourage energy conservation and the efficient use of energy through cost effective measures; (ii) To improve the diversity of energy supplies through exploitation of indigenous resources; (iii) To improve the efficiency and reliability of existing supply systems through rehabilitation; and (iv) To invest in new plants. Organizational Strategy The roles of the Government in the energy sector will be clearly assigned to specific organizational units which will be accountable for their functions through performance results: (i) The Ministry of Economy will be responsible for the sector policy and strategy, while separate regulatory entities (some of which are yet to be defined) will be responsible for regulation and supervision of sector activities; (ii) The ownership of state enterprises will be in the hands of the Ministry of Economy, while their management will be direct responsibility of each enterprise; (iii) Following the principles set under the Law on Local Government Agreement, the Government will transfer some of its roles, both inherent and subsidiary, to the municipal governments. In the case of the energy sector, we see a greater participation of the municipalities in the areas of district heating, and in the future in electricity and gas distribution; and (iv) The State Energy Department will be responsible for implementing the Governments energy sector policy as assigned by the Ministry in such areas as energy efficiency programs, municipal energy planning, government initiated investment programs and other duties as assigned to it under its current statute. ANNEX 1 Page 10 of 10 Plan of Action The Government plans to implement its sector policy and strategy according to the following plan of action. The outline of the plan of action is shown in the following paragraphs. It should be noted, however, that in many cases these type actions on the enterprise side are already anticipated; for example, privatization of LPG distribution companies which belonged to Eesti Gaas. 1. Energy Policy The Government after consultation with relevant parties formally issues its Statement of Energy Policy and Strategy. 2. Municipal Energy Planning Each munipicality will be encouraged to prepare a heating plan, which may include mapping of resources, reduction plans for imported fuels, emergency planning, rehabilitation, service areas and investment plans for its energy utilities. Each municipal district heating utility will be encouraged to prepare their individual restructuring plans in line with the new sector policy and strategy. 3. Energy Legislation The Ministry of Economy, with advisory assistance prepares draft energy legislation 4. State Enterprises Each energy enterprise prepares their individual restructuring plans in line with the new sector policy and strategy. 5. Regulation The Government approves new sector legislation and organizes regulatory entities which prepare, with the assistance of consultants, necessary sector regulations. 6. Enterprises The Government and the Municipalities complete all the steps necessary to ensure the individual legal status of all enterprises resulting from the restructuring process. 7. Regulation The regulatory entities approves tariffs on the basis of cost recovery. ANNEX 2 Page I of 3 ESTONLA DISTRICT HEATING REHABILITATION PROJECT Criteria for Small Boiler Conversion/Replacement Program Strategy and Organization 1. Organization of Work and Time Schedule 1.1 County and town (excluding Tallinn, Tartu and Parnu) energy managers during September/October 1993 preselected locations for boiler conversions or replacements in cooperation with municipal authorities responsible for district heating. They focussed on selection of municipal- owned boilerhouses, not private boilerhouses. 1.2 Project proposals were delivered by mid-October and were required to be in compliance with the following criteria and conditions established by the Estonian State Energy Department and in accordance with the required information in the application forms. 1.3 Preselection and preappraisal of a number of project was completed during November 1993. Local consultants are now further evaluating the feasibility of each individual project. Further consultancy assistance, to be financed from bilateral sources, is expected to support the implementation phase of the program. 2. Criteria for Preselection of Boilerhouses 2.1 The program will be divided into two components: (a) boiler conversions and (b) boiler replacements. It is intended to standardize the conversion/new boiler projects in equal and similar sizes concerning capacity, fuel type etc. This will enable the tendering process to be carried out in two packages according to the above division, with the expectation of gaining the lowest prices. The program amounts to about US$ 10 million. Conversion of Existing Boilers 2.2 Section one will comprise preselected boilers to be converted by reconstructing existing boilers by installing preovens or new grates for solid fuel in the furnace. The project will also include equipment needed for storing and handling the fuel; automatic fuel feeding system; equipment for automatic control and regulation of the combustion; fluegas cleaning; ash handling and removal system. ANNEX 2 Page 2 of 3 2.3 Main criteria for selection. The type of boilers proposed for conversion should be according to the following (isted in prioritized order) which have been shown to be technically capable of being converted: 1. DKVR 10; DKVR 6.5; DKVR 4, DE is considered risky 2. Kivioli 80 3. E 1/9 4. Others T4.5 Proposals for Replacement of Boilers 2.4 Section two will comprise preselected boilerhouses proposed to be installed with a new boiler. The projects will include storing and handling facilities for the fuel; automatic fuel feeding system; new solid fuel boiler for wood or peat; equipment for automatic control and regulation of the combustion; fluegas cleaning; ash handling and removal system. 2.5 Main criteria for selection. The key considerations in selecting boilers for replacement are as follows: 1. Boiler size ranging from about 0.5 - 3.0 MW 2. Existing boiler is technically and economically depreciated 3. Remaining lifetime estimated less than five years 4. New boiler should not cover more than 60% of total required production capacity 5. Boiler must operate at least 4,500 full-load hours/year 6. Existing boiler's capacity too high compared to heat demand to justify conversion 7. Well-educated and committed boiler staff 8. If the water treatment system and other items in the boiler house are not in good working condition, other related equipment requirements should be identified 9. Building and site in normal maintained condition 10. Wood chipper equipment would be considered where needed. 2.6 Generalcondjitns. Besides the above-mentioned special criteria for conversions and new boilers, respectively, the following conditions should be applied for all project proposals: 1. Availability of stable woodchip or peat supplies e.g. by conditioned amreements with local wood chip suppliers or peat producers on required deliveries 2. Proposals must be approved by municipal authority 3. Application Form 3.1 The proposals for the preselected locations/boilerhouses must be presented in accordance with the conditions set out by the State Energy Department using the application form prescribed. 3.2 The deadline for sending the first proposals was October 22, 1993, and later incoming proposals will not be taken into consideration unless the number of timely received proposals are inadequate. ANNEX-2 Page 3 gf 4. Evaluation of Proposals 4.1 Evaluation of proposals will be made by Estonian State Energy Department. The evaluation will be divided in a technical and an economic part. 4.2 The technical evaluation will be based on the criteria set out above and on the information received through the application form. 4.3 The economic evaluation will be based on among the following criteria: Conversion projects: 1. Simple payback period (DPP); maximum 7 years 2. Net present value (NPV); assuming a 10% discount factor over 20 years 3. Economic calculation indicating minimum 10% decrease in present cost of heat production (EEK/Mwh) 4. Economic ROR > 10% (NPV/Cost) New Boilers: 1. Simple payback period (DPP): maximum 12 years 2. Net Present value (NPV): assuming a 10% discount factor over 20 years 3. Economical calculation indicating minimum 10% decrease in present cost of heat production 4. Economic ROR > 10% On the above basis State Energy Departnent will choose the best proposals, which will be presented and recommended to the World Bank. 5. Further Proceedings and Imnlementation 5.1 The best proposals will be investigated more thoroughly by carrying out detailed feasibility-studies. For projects chosen for financing, technical specifications will be prepared the Estonian State Energy Department with the assistance of an experienced consultant. The technical specifications will form the basis for the documents to be prepared for the international tendering procedure. The above actions will take place during Winter/Spring 1993/94 and the implementation of the appraised projects is expected to take place Summer/Autumn 1994. ANNE 3 Page 1 of 10 ESTONIA DISTRICT HEATING REHABILITATION PROJECT Tallinn. Tartu and Parno DH Rehabilitation Components 1.1 The proposed project consists of rehabilitation components of the district heating (DH) systems in three cities (Parnu, Tartu and Tallinn). The components are designed to enhance network life, improve system operation, produce savings in the use of fuels, and improve environmental performance. A description of the components is presented below: A. Tartu 2.1 The Tartu component includes the following major components: (a) conversion of five oil and gas fired boilers to domestic fuels (milled peat, sod peat and wood fuels); (b) replacement of selected sections of the heating network; (c) Installation of 640 substations including meters and regulators; (d) improvement of the water treatment system; and (e) a technical assistance component for design of substations, supervision of installation of equipment and for overall project monitoring. 3.1 The boiler conversions will take place in the Luunja and the Ropka boilerhouses. Boiler conversions are justified for a number of reasons: (a) the cost of operation will be reduced compared to imported fossil fuels; (b) new jobs are created; and (c) the emissions of SOx and C02 from the boilerhouses will be reduced. 4.1 Luunia boiler house. The Luunja hot water boilers, which are of PTVM-30 type, were erected and almost completed during 1987, but have never been taken into operation. The boilers are supported by steel pillars, and their pressure vessel consists of the walls of the combustion chamber and of the vertical rear back pass with screen tubes in between. The walls are not of the gas tight membrane type. There are two convective surfaces in the back pass to cool the flue gases before passing through the fan and chimney. The design pressure of the boilers is 25 bar. Important dimensions of the boiler conversion are the plan area of the combustion chamber, W*D = 4.16*2.24 m, and its volume 77 m3. 4.2 Fuels for conversion. The fuels to be fired are milled and sod peat and wood chips, including mixtures of these. As milled peat is not an easy fuel to burn, special consideration was given to the chosen combustion technology. 4.3 Combustion system. The original boiler capacity is expected to be derated to about 50%, i.e., to 16 MW for each boiler after conversion. One possible type of combustion system is fluidized bed, which is flexible concerning fuel qualities. 4.4 Main auxiliary systems. Beside the combustion system, the main auxiliary systems for the fuel conversion of the boilers include: ANNEXE3 Page 2 of 10 (a) Fuel handling system: To handle the indigenous fuels, a system will be installed comprising fuel reception and storage designed for unloading vehicles of about 100 m3 from the side and 25 m3 from the rear. The storage will contain fuel for at least 48 hours of operation or 3,000 m3. The storage can be placed between the road and the boiler house or at the other side of the road. A rejection system to remove wood stumps, roots, stones, metallic pieces etc. from the fuel before it is transported to the boiler fuel bin will be put in place. Disturbances of the conveying system or combustion is then avoided. A conveying system of covered type from the storage facility to the boiler fuel bin (including one fuel bin for each boiler for enough fuel for about 2 hours of operation) will be equipped with explosion doors to avoid damage if explosions occur and will be placed either partly outside or wholly outside the building. A fuel feeding system for each boiler will be provided to feed fuel from the bin to the furnace. An air lock and an emergency shut off valve will be installed in the system. One man will be available 24 hours a day to operate and maintain the system. (b) Ash removal and cooling system for ash from combustion chamber: The' system will be air tight and of automatic type and will transport the ash outside the boiler house to ash containers. In general, a design with ash collecting gas passes will be avoided and arrangements for ash removal will be included, if needed. Electrostatic precipitators with two or more sections will be installed including a fly ash removal system. The precipitators will be insulated and the hoppers heated through electricity, if needed. 4.5 Other improvements. In addition to the systems needed to complete the conversion, the following equipment will be installed: (a) economizer, to cool the flue gases to about 100 degree C by district heating water of at least 90 degrees C, achieved through a bypass arrangement. To protect the economizer surface from corrosion when oil is fired, a flue gas bypass will be installed. (b) heat exchangers, one for each boiler or one common, to separate the boiler water system from the district heating system to protect it from corrosion. (c) system to keep the pressure before the pumps constant to about 4 bar g, comprising a 200 m3 cistern, two pumps of 100 % capacity each and valves. 5.1 Ropka boiler house. The Ropka saturated steam boilers, which are of DKVR-20 type, were erected during 1976 and have been in operation since then. The boilers are standing on the floor. Their pressure vessel consists of the walls of the combustion chamber with a screen tube surface at the outlet and the horizontal gas pass through a bundle of vertical tubes between one lower water drum and one upper steam drum. The walls are not of the gas tight membrane type. There is one cast iron economizer with fin tubes in the flue gas pass to cool the flue gases before passing through the fan and chimney. Design and operating pressures are 16 and 13 bar, respectively. ANNEX-3 Page 3 of 10 Important dimensions at the boiler are the plan area of the combustion chamber, W*D = 2.73*4.91 m, and its volume, 52 m3. 5.2 Fuels for Conversion. The fuels to be fired are sod peat and wood chips, including mixtures of these. A little part of milled peat, say 15% of the mixture at full load operation, is expected to be acceptable for the combustion technology. 5.3 Combustion system. The combustion system for solid fuels for this boiler type is a sloping grate. The original boiler capacity is expected to be derated to about 50%, i.e., to 7 MW for each boiler after conversion. 5.4 New 2onomizer. The existing economizers are of a very compact type with finned tubes and can stick together when the flue gases have a high dust content as when solid fuels are fired. A new economizer must therefore be installed. The feedwater inlet temperature is 105 degrees C. The economizer will have a soot cleaning system. 5.5 Main auxiliary systems. In addition to the combustion and economizer systems, the main auxiliary systems for the fuel conversion of the boilers include: (a) Fuel handling system. To handle the indigenous fuels, a system will be installed comprising fuel reception and storage designed for unloading vehicles of about 25 m3 from the rear. The storage will contain fuel for at least 48 hours of operation or 1,200 m3. The storage can be placed near the stackl behind the boiler house. A rejection system to remove wood stumps, roots, stones, metallic pieces, etc. from the fuel before it is transported to the boiler fuel bin will be put in place. Disturbances of the conveying system or combustion is then avoided. A conveying system of covered type from the storage to the boiler fuel bin (including one fuel bin for each boiler for at least 1 hour of operation) will be placed outside the building. The bins will be weather sheltered and equipped with mechanical bottoms for automatic filling up of the feeding system. A fuel feeding system for each boiler will be provided to feed fuel from the bin to the furnace. An air lock and an emergency shut off valve will be installed in the system. The milled peat part of the fuel mixture must be limited in a safe way during all possible operation situations to assure the necessary protection from overheating of the combustion system. One man will be available 24 hours a day to operate and maintain the system. (b) Ash removal and cooling system for ash from combustion chamber. The system will be air tight and of automatic type and transport the ash outside the boiler house to ash containers. In general, a design with ash collecting gas passes will be avoided, and arrangements for ash removal will be included, if needed. Multi-cyclone precipitators will be installed including a fly ash removal system. The precipitators will be insulated and the hoppers heated with electricity, if needed. ANNEX 3 Page 4 of 10 5.6 Other improvements. In addition to systems needed to complete the conversion, a system to keep the pressure before the district heating pumps constant at about 4 bar will be installed and will comprise a 40 m3 cistern, two pumps of 100% capacity each and valves. 6.1 Substations. In Tartu, three different types of substations which will be equipped with new components. The direct connection from the district heating system to domestic hot water (hot domestic water is the same water as district heating water) will be changed under an EBRD-financed project. After the changes, domestic hot water will be produced through heat exchangers. The heating system of buildings is directly connected to the district heating system and will also remain directly connected. The heating system will be equipped with proper control and safety equipment. Each building will be equipped with a heat meter. 6.2 Design temperatures for substations are as follows: District heating supply temperature 120 C District heating return temperature 65 OC Secondary heating supply temperature 80 C Secondary heating return temperature 60 ^C Domestic cold water 5 C Domestic hot water 55 *C 6.3 The three principle types of substations are described below: (a) Type A: Substations for buildings which have no domestic hot water will be equipped with new pump and shunt group for heating system including a pressure difference regulator and balancing valves for the secondary heating pipelines. (b) Type B: Substations which have domestic hot water heat exchangers will be equipped with similar devices for the heating system as described for type A substations. (c) Type C: Similar substations as type B but for which there is no need for pressure difference regulator. 6.4 Substations can be divided by type and size as shown in the following table: Size [kW] 30 60 100 140 280 320 560 920 1400 2400 4000 5000 Type A 17 6 14 11 40 7 14 5 0 0 0 0 Type B 7 3 10 23 40 13 34 11 8 1 2 2 Type C 96 18 41 48 80 9 39 15 7 11 6 2 = ===--==--==-=-= ANNEX3 Page 5 of 10 6.5 A typical substation includes the foflowing components to the primary side: heat meter, control valve and controller for the supply temporature of heating system (according to the ambient temperature), stainer, shut off valves, drain and air release valves, pressure difference regulator, thermometers and pressure gauge kit. To the secondary side, the needed components are circulating pump, strainer, shut off valves, drain valve, check valve, main balancing valve, balancing valves and pressre gauge lit. 7.1 District heating gigelines. Replacement of district heating pipelines which are in bad condition will take place in the areas where the ground water level is high and the concrete duct type is not reasonable to use. Most of the renovated pipelines will be of preinsulated type. The design parumeters for the pipelines will be 120 C and 16 bar. All insulation material will be of non CFC-type. The total length of straight pipes is about 7,800 meters. The preliminary designed dimensions and pipe lengths, number of bends, T-fittings, ball valves air release and drain arrangements and shrink sleeve and insulation kits (joints) are shown in the following table: Size DN 500 400 300 250 200 1750 125 100 90 65 50 32 Length [ml 600 1560 0 2720 480 160 720 500 70 300 520 200 Bends [pcs] 6 16 0 14 18 6 22 14 10 18 24 10 Air/drain [pcs] 0 0 0 0 0 0 0 10 10 4 4 10 T-fittings [pcs] 4 4 0 18 16 0 8 12 8 0 - - Valves [pcs] 0 0 0 4 2 2 2 2 2 2 2 2 Joints [pcsJ 56 130 0 230 74 20 88 74 12 60 100 46 The needed amounts of different pipe components will be specified during detailed design. 8.1 Water treatrt. All boiler plants will be equipped with by-pass filters to clean the district heating water from particles. Each unit will be comprised of catridge filter, pump, pipes and valves. The filters in Luunja and Turu plant will be designed for the capacity of 20 m3/h and filters for Ropka, Aardla, Tulbi and Tuglase plants will be designed for the capacity of 10 ml/h. For each plant, a dosing system of NaOH will be installed including tank, pump, pipes and valves. 8.2 Q2fanalzers. Two transportable 02 analyzers will be included for adjusting the burners and fuel/air-ratio to proper level. 9.1 Spar prt. A common storage of spare parts for all heating plant and a repair and service work shop for mechanical, electrical and control and rogulating equipment as well as heat meters will be established in Tartu. B. Paun 10.1 The Parnu DH rehabilitation component includes two boiler conversions from heavy fuel oil to peat and wood fuels. After evaluation of several alternatives, the boiler conversion component would include conversion of two old (15 years) DKVR oil-fired boilers to peat and wood chips as the main fuels. The ANNEX 3 Page 6 of 10 rehabilitation program will aim at the following objectives: (a) to reduce the cost of operation as compared to fosil fuels; (b) to creat new jobs; and (c) to reduce the emissions of SO. and CO2 from the boilerhouses. 10.2 Cost reduction will be achieved by the following measures: (a) water leakage will be reduced by repairing or replacing corroded pipelines; (b) corrosion of pipelines will be reduced by improving ventilation and daina of ducts and by insang improved water treatment equipment; (c) energy consumption will be reduced by insallation of new substations with outdoor temperature regulators; and (d) fuel costs will be reduced by convesions and boiler regulation improvements. 11.1 Thnu boiler . 'Me Pirnu saturaed steam boilers, which are of DKVR-20 type, were takn into opeation during 1980 and have been in operation since then. An evaluation made by Tallinn Technical University dated October 29, 1993, concluded that the metal condition of the boiler is relatively good. TM boies are tandig on the floor. Their pressure vessel consists of vertical walltubes of the combustion chambr with a scrm tube surface at the outlet and a bundle of vertical tubes in a horizontal gas pass betweon one lower war drum and one upper steam drum. The walls are not of the gas tight membrane type with fins in betwon. Water circulation in the boiler circuit is natural, i.e., without pumps. The boilers are designed for an opeating presos of 13 bar. Thore is one cast iron economizer with finned tubes in the flue gas pass to cool the flue game before passing through the fan and further through the chimney. Important dimensions of the boiler conveasion are the plan area of the combustion chamber, W*D = 2.73*4.91 m, and its volume,. 52 m3. 11.2 Fuels for converio. The fuels to be fired are sod peat and wood chips, including mixtures of ;;h. 11.3 usbThe combustion technology is for solid fuels for this boiler type in a sloping grte. The original boiler capacity is expected to be derated to about 70%, i.e., to 8-10 MW for each boiler after conversion. 11.4 Now economizos. The existing economizors are of a very compact type with finned tubes and can stick together when the flue gases have a high dust content as when solid fuels are fired. A new economizwr must therefore be installed. Tbe feedwater inlet temperature is 102 degrees C. The economizer will have a sysAtm for soot cleaning including automatic ash removal. 1 1.S Main auxilia systems. In addition to the combustion and economizer systems, the main auxiliary systems for the fuel conversion of the boilers include: (a) Fuel handline system: To handle the indigenous fuels, a system will be installed comprising fuel reception and storage designed for unloading sidetipped lorries, with possibilities to tip the fuel outside the storage. Tractors will also be used for the fuel transportation to the storage. The storage will be fully mechanized and automated. Fuel storago for at lest 60 hours of operation or about 2,000 m3 is needed, and fuel trnsportaton to the plant will take place during the daytime. Available area for the storage is between existing buildings and masts, which means roughly 60 m from the plant. The distance to an existing oil storage must be a minimum 30 m. A rejection system to remove wood stumps, roots, stones, metallic pieces, etc., from the fuel before it s transported to the boiler fuel bin will be put in place. Disturbances of the convoying system or combustion is then avoided. A conveying system, partly placed outside the boilerhouse roof, from the storage to the boiler fuel bins (including one fuel bin for each boiler for at least 1 hour of operation) will be placed inside the building. The bins will be equipped with automatic controls. A fuel feeding system for each boiler will be provided to feed fuel from the bin to the furnace. The ANNEX 3 Page 7 of 10 equipment wil be designed to avoid backfire in the fuel bins and flue Vsa from coming into the boiler houw. (b) Ash r_oal sstem for ash fiom comb on : The system will be of automatic type and will trnt the sh outside the boiler house to ash contaer. In general, a design with ah collcting gas posse. wil be avoided end arrangements for ash rmoval will be included, if needed. Tho gas passes betwen drms as wel U the installation of an economizer was considered. (c) Flue gms cloaninf systems: These will be either multi-cyclone or electric procipitator including a fly ash removal system. The precipitators will be insulated. 12.1 O.br hvomeos In addition to systgem needed to complete the conversion, a pkae of equipment will be proposed for later evaluation during detailed design. Some of the possible items are: (a) new afety valves; (b) now water level indicators for the steam dnms; (c) now control valve to keep the boiler feed water tank under constant pressure; (d) now feed water pumps for the boilers; (6) new make up water pumps; and (f) heat exchager system between boilrs and the distict heating network. The press, on the DHside should be controlled, especially the undercooling paut of it, before design of new district heating pumps. 13.1 Substations. In Panu, thre different types of substations which wil be equipped with now compononts and with proper control and safety equipment. Each will be equipped with a heat meter. 13.2 Design tmpertus for substations are as foUlows: District heating supply temperture 120 OC District heating return tmature 65 eC Seondry hoating supply temprature 80 OC Seowndy heating retun temperature 60 eC Domestic cold water 5 QC Domstic hot water 55 °C 13.3 The throe principle types of substations are described below: (a) Type A: Mixing stations for space heating with pump connection. Domestic hot water is heated by heat exchanger. (b) Type B: Injector pump connection to the space heating system and heat exchanger connection to hot domestic water system. (c) Type C: Direct connection to space heating system (no mixing with no temperature reduction) and heat exchanger connection to hot domestic water system. 13.4 Substations cannot be divided by type and size as for Tartu, but similar tables will be prepared by the condltant when preparing bidding documents. 13.5 A typical substation includes the following components to the prmry side: heat meter, control valve and controller for the supply tempeture of heating system (according the ambient tmperatr), filter, shut off valvs, drain and air releas valvs, pressure difference regulator, thrmometers and pressure gauge ldt. To the secondary side, the needed components are circulating pump, filter, shut off valves, drain ANNEX 3 Page 8 of 10 valve, check valve and circulation pumps for hot domestic water for those cases when the pumps are missing or are in bad condition. 14.1 District heating ginelines. New thermal insulation of aerial pipelines will be provided. After pressure testing next summer, replacement a small number of pipelines in bad condition will be done. The design parameters for the pipelines will be 120 °C and 16 bar. All insulation material will be of non CFC-type. Ball valves, included in the project, are shown in the following table: Size DN 500 400I 300 25 2001 150125| 100| 80i 65n 50 32 l Valves [Pcsl 0 0 2 2 2 14 6 24 72 4 46 0 14.2 District heating numvs and control system. At Parnu boiler plant, new district heating pumps are needed since the existing ones are in bad condition and unreliable. There will be two new pumps with the design values of flow rate 600 m3/h and head of the pump 8,5 bar. The final values will be decided between the client and the consultant after the consultant has revised the preliminary design. 14.3 The pumps will be equipped with a control system so that the plant can operate at variable flow mode after the substations are renovated and also in parallel in the interconnected network with the Tervis plant. An alternative of controlling the flow in the beginning with throttling valve and later on with frequency converters was selected instead of the rather expensive alternative of frequency converters installed in the beginning of the project. The consultant will prepare a simple feasibility calculation of this item. 14.4 The Tervis boiler plant also needs two new district heating pumps. A similar feasibility study will be prepared concerning frequency converters in Tervis. The preliminary design values for district heating pumps at Tervis plant are: flow rate 210 m3/h, head of the pumps 6 bar. 15.1 Water treatment. The boiler plants Parnu and Tervis will be operated in the same interconnected network and the make-up water will be prepared at Parnu plant. The new equipment for filtering the circulating water will consist of two full flow filters to both boiler plants. The full flow filters at Parnu will be designed for the flow 1,000 m3/h and at Tervis 300 m3/h. To reduce the amount of small solid particles and the iron content in the circulating water, a by-pass filter will be installed to both of the boiler plants. The design values (5 % of the flow) for the by-pass filters are 50 m3/h in Pamu and 15 m3/h in Tervis. Each unit is comprised of cartridge filter, pump, pipes and valves. For the Parnu plant, a dosing system of NaOH will be installed to take care of proper pH-value in the network. 15.2 A new dearation control for the make-up water to the district heating system is needed to ensure a proper temperature level in the dearator. The equipment needed are a new control valve and controller of the steam flow to the dearator. 16.1 Office technolozv. Parnu project agency will have an office at Parnu boiler plant office building, where one big room for that purpose has been renovated. For this office, the following office technology is needed: 2 computers with software, plotter, printer, digitizer, fax and copy machines (normal and transportable). C. Tallinn 17.1 The Tallinn component will include similar improvements as for the other two towns, excluding the conversion of boilers. The key improvements are as follows: ANNEX 3 Page 9 of 10 18.1 Boiler controls and 02-analyzers. The boiler control improvement of one Kadaka boiler (type KVGM 100) will include fuel-air ratio control for existing burners and furnace draft control system. 02- analyzers (in total, 18 pieces) will also be included for the heat-only-boilers at the following boiler plants: Kadaka, Kaijam aa, Mustamae, Keslcinna and Ulemiste. 19.1 YWater reatment. The water treatment subcomponent includes by-pass cartridge filters and by- bass softener for Kadaka, Koajamaa, Mustamae, Kesldinna and Ulemiste boiler plants. The preliminary design flow values for the different by-pass filters are: Plant Capacity of by-pass filters [kg/sI Kadaka 65 Mustamae 60 Karjamaa 10 Ulemiste 55 Kesklinn 50 19.2 New equipment for make-up water treatment for district heating systems in interconnected westem network (Kanaka, Kajamaa, Mustamae) will also be included. The make-up water treatment plant will be installed at Mustamae plant and produce make-up water for the whole westem system. In the design parameters, the estimated lower make-up water consumption in the future (smaller water losses) has been taken into account. 19.3 Two alternative technologies which can be used for producing demineralized make-up water to the DH-system have boen discussed. The two options are the membrane technology (reverse osmosis) and traditional ion exchanger technology. The final decision of the technology will be taken shortly. In the cost estimates, the investment cost is based on the more expensive ion exchanger technology which has lower operation costs. 20.1 Rebuilding ubstati. Control imnrovements and heat meters for large substations. In LAsnamae area (eastern network) there are 33 large substations with a capacity over 1 MW. These substations will be equipped with new control equipment and heat meters. The substations can be divided by size as follows: Substation capacity Number of substations I...5 MW S 5... 10 MW 7 10 ...20 MW 18 20 ...30 MW 1 30-40 MW 1 40 ...50 MW 1 TOTAL 33 ANNEX 3 Page 10 of 10 20.2 Substation imDrovements in Kadaka - Kariamasa - Mustamae area. Improvement of small substations in the western network (Kadaka, Mustamae, Karjamaa) will include complete substations with heat exchangers, controls, valves, filters and pumps. All substations will also be equipped with heat meters. The small substations can be divided as follows: Number of Kadjamaa Kadaka Mustamae 6ismae TOTAL substations < 300 kW 81 279 367 32 759 300-500 kW 40 52 107 0 199 500-800 kW 9 22 39 2 72 800-1000kW 0 1 4 1 6 > 1000 kW 0 9 5 1 15 TOTAL 130 363 522 36 1051 20.3 The client's proposal to equip the substations with beat exchangers was accepted as the best option because of the following reasons: (a) water losses will be remarkably reduced after the primary and secondary networks are separated by heat exchangers; (b) pressure differences in the primary network will not disturb the inside networks in buildings; (c) during pressure tests (every year), significant manual maintenance work can be saved (no need to close valves at all substations); (d) there is the possibility to extend the system and increase the pressure level in the network; (e) safety reasons; and (f) the DH system in Tallinn is much larger than in Tartu or Parnu. 21.1 Variable speed pumps and controls for Kadaka - Karjamaa - Mustamae as well as Kesklinn and Ulemiste area. Variable speed pumps for all boiler plant supplying heat to the western network will be included along with the needed additional measurements and controls for operation of these pumps and for monitoring. New pumps will be installed to the following boiler plants Mustamae, Kadaka Kaijamaa, Tallinn City (Kesklinn) and Ulemiste. 22.1 Overation and Maintenance Support. New tools and equipment were also identified for supporting operation and maintenance of boiler plants as well as the networks. In this component is also included equipment with which flow meters can be checked every second or third year. This equipment can also be used to check the flow meters from Tartu and Parnu. ANNEXA4 Page 1 of 2 ESTONIA DISTRICT HEATING REHABILITATION PROJECT IRU Power Plant Improvement Component 1.1 The key components for IRU Power Plant include repairs of an air preheater, improvements to the water treatment system and automation improvements which are described below: 2.1 Air preheaters. The air preheaters of the CHP units are in bad condition due to heavy corrosion and are therefore leaking air into the flue gas stream which decreases the efficiency of the boilers. They are also limiting the available capacity of the boilers. The air preheaters are located outside the boiler house without proper cover against rain and snow. The improvements for one air preheater are as follows: (a) installation of rain and snow shelter around the preheater using prefabricated metal sheet modules with necessary thermal insulation; (b) renovation of sectoral sealing plates on the rotor; (c) renovation of radial and axial sealings; and (d) renovation of the thermal insulation. 3.1 Water Treatnent. The water treatment system at IRU CHP plant was designed during the Soviet era. The system is operated manually. The operation and maintenance costs of the existing system are high and the consumption of chemicals is also high. It is now impossible to obtain spare parts for some of the equipment. The rehabilitation of the water treatment system at IRU power plant will therefore consist of the following parts: (a) installation of storage and dosing system for solid and concentrated chemicals used at the water treatmnent plant; (b) repairs of existing water treatment plant; (c) installation of water softening plant for preparing make-up water for the district heating and by-pass filtration system for the district heating circulation water; and (d) installation of chemical dosing system (NH3, N2HA and Na3PO4). 4.1 Automation Improvements. In general, the instrumentation and automation of the plant needs renovation and modernization. The proposed investments are based on the estimation that the hot water boilers are producing the major share of the heat demand and the CHP unit 2 is used during the winter months. The proposed improvements of the automation of the plant are as follows: (a) Replacement of automation of the steam boiler no 2; (b) Replacement of automation of the hot water boiler no 1; (c) Replacement of automation of the hot water boiler no 2; (d) Replacement of automation of the hot water boiler no 3; and (e) Installation of new UPS-system and process equipment. ANNEX 4 Page 2 of 2 5.1 Variable Speed Pumps. New main pumps for district heating water will be installed in IRU Power Plant. The new pumps will have higher capacity than the existing pumps, and they will also be equipped with variable speed drive. The pumps will be replaced in order to improve dispatching in the system (IRU Power Plant can by means of the new pump deliver heat to the city center, when production costs are lower in IRU than in Tallinn Central boiler). The variable speed will initially be used to adjust pump capacity to exactly the requested constant flow, but will allow for variable flow later on when new substations are installed. DETAILED COST ESTIMATES ESTONA ENER3Y PRtlECT MUUARY Of PfAWXECT COSTS NSD 000) 1994 1996 19906 997 lo6 Totl Cost (USM 000) (USDO000) (US 000) (USD000) USC'000) (U 000) Local Fotagn Todal Local Foelgn Tol Lcl Foreign Total Lool Foreip Totl Locl Foreign Total LOoa Fore9gn Total TARTU 371 2,643 3,614 1.660 6,260 6,916 301 1,327 1,718 166 676 1.076 209 894 1,103 3,318 11,011 14,320 PAU 492 1.432 1,924 486 1.371 1,6 266 444 700 66 426 492 0 0 0 1.311 3.674 4,066 TALLINN 60W 1.42 Z'431 1,901 0,66 8,4309 1.442 5,266 6,707 612 2,706 3.316 304 1,263 1,6"7 4,660 17.634 22,463 mU 171 1,240 1,412 646 3,876 4,421 0 0 0 0 0 0 0 0 0 717 6,116 6,.33 SMALL SOLERCONVERSIOIPS 324 1.202 1,616 1,12t 4,362 6,473 1,201 4.466 6,66 0 0 0 0 0 0 2,66 10,099 12746 IEPLACEMENT PAOGAA NSTITftuONALSUWPORr 7 1,071 1.079 3' t031 2,70 6 971 976 0 0 0 0 0 0 62 4,073 4,126 TOTALPROJECTCOST(USD 000) Z466 9,621 11,976 6,766 2',436 29,100 3,266 12,442 15.766 876 4,012 4.U87 613 2,177 2,660 12,894 61.60 04,600 4WCL TAXES AND DUTIES) ....... ....... .......U.......T....... ....... ....... ....... ....... ....... ....... ....... . . .... ....... .......)....... ....... ....... TALLINN DIXT1tCT HEATINIG 1I4 195 1966 19W7 19W6 Total Om COO (USD '000 9US D l000 (USD '0009 IUSD '000MM (USD '00 IUSD '000 Local FoqaIF Tota LOOa Fmlg TOa Lora p Total LOOa Foap Tota LOCl Folgn Tota Loca FoIn TOl kW*SL6aS CoW abAnwDMHNawk(6tT-V Poaba 14 SS 71 63 346 426 42 173 214 0 0 0 0 0 a 130 576 715 soNC 4 __b.atn ap ao 27 163 10 1 2 70 52 0 0 0 0 0 0 0 0 0 36 223 272 *4(ook-l4aConnucton 0 0 0 215 56 7S3 215 5 7 0 0 0 0 0 0 42o 1,136 1.566 Rob._" IgL&W,a itb 16 3 Ill 54 260 334 54 260 334 36 157 23 I 93 III 176 934 1.114 Robo- _g6.A6Sa*atalca 142 673 1,015 426 2.620 3,045 426 2,620 3,045 264 1.746 2,030 142 6n 1,015 1,419 6,732 10,151 Vwrtb apadPiI 0 0 0 47 326 372 47 32 372 23 163 116 0 0 0 116 814 930 RAaCo.41o1 0 0 0 13 146 161 0 0 0 0 0 0 0 0 0 13 146 lei WmI _T 104 203 3W 311 607 616 104 203 306 0 0 0 0 0 0 51 1,013 1.531 opa, |and MakswanasB d 60 in 216 1$ 3S3 1lo 0 0 0 0 0 0 0 0 0 11l 550 726 D_.lp sul 6wmvbtn 24 77 101 65 304 366 *5 2S 36 46 140 167 23 70 93 274 7m 1.146 Pr*StO4lhalT _taolaw S7 a 67 0 0 0 0 0 0 0 0 0 0 0 0 67 0 67 mbat_aws, COoA fir.tIams 46 I.S33 2.066 1.372 5,661 7.033 671 4,452 5,424 m 22236 226 13 1037 1.330 3.361 1l5020 16,401 Pk/SW C Ub. ala 47 163 210 137 sss 703 67 445 542 31 224 263 16 104 122 33 1,502 1640 P _lan a, aS 77 45 122 312 311 704 374 367 741 164 246 430 lo 143 246 1,130 1,112 2.342 SBTOTLPOECTCO rTFORTTLINN 560 1.42 2,431 1.101 6.536 ,436 1.442 s.2a5 6.707 612 2.706 3.318 304 1,283 1.S7 4,60 17.634 22413 NW- CHPLANT 1064 1tn lo" 1t67 11 TOWaacSctd /USD 0ooo (USC '000 (USD '009 (USD '009 (UD '0009 (USD '000 LOOM Fmai TOl Loca p T1 LocaI Foen T e Lcl OW F p Totl Local FoP Totl Local ForIgn Totel 1h~u6 Ce_ AirP,hltaaa 37 320 357 0 0 0 0 0 0 0 0 0 0 0 0 37 320 357 A_oaoWAaM ab__ am 62 530 962 a 540 o6s 0 0 0 0 0 0 0 0 0 126 1.070 1.166 VNlb Spad P 0 0 0 190 1.365 1,55 0 0 0 0 0 0 0 0 0 190 1,305 1,555 WaIarTraae 1i 170 lo 107 1.260 1.367 0 0 0 0 0 0 0 0 0 125 1.450 15m 6oaqvblalo to so 6 30 140 170 0 0 0 0 0 0 0 0 0 45 220 26 _b*olaa.Co_D IohL a9 136 1.100 1,231 364 3.665 3,740 0 0 0 0 0 0 0 0 6 92 4.463 4.94 PoWlo C. tacl 14 110 124 3 SM 375 0 0 0 0 0 0 0 0 0 53 446 466 Pdr Con _laoa 22 30 53 113 166 267 0 0 0 0 0 0 0 0 0 135 215 350 SUBTOTALPRJECTCO0T FORRU 171 1.240 1,412 546 3,875 4,421 0 0 0 0 0 0 0 0 0 717 5.115 5sa33 SMALL 6OLR COWdERIIONS 1I84 IN5 1966 107 166 Total BlameComt (USD 0309 (USC '030 9USD '009 (USO '0009 (UD '0009 (USD 0009 Loca Foreli Tdol Local foe1 Tot LOa Foag TOt Local Frao TOtl Local F _rap TOWl LOcal Forei Total COO SoIC19 17 46 1,143 304 1,S0 22 304 IM2 2.26 0 0 0 0 0 0 964 4,731 5.715 sbrR _uA0 0 0 356 1,675 X031 3655 1.67 2,0n1 0 0 0 0 0 0 712 3,350 4,063 n ap m d.rloa 5 200 256 s 200 266 5s o M 20 6 0 0 0 0 0 0 17 m00 m SU. smaComm (b*. ua 256 1,146 1.402 an 3.7as 4,577 m 3766 4,577 0 0 0 0 0 0 1,674 6.3 10,555 P1 al C _a 26 iiI 140 S1 277 456 In 377 46 0 0 0 0 0 0 167 m 1.056 PrimCoris 42 32 74 231 207 436 311 311 an 0 0 0 0 0 0 565 550 1,135 5*TOTAL-PROJECT COST FOR SMALL 324 1,202 1,616 1.121 4.362 5.473 1201 4,W45 5.s 0 0 0 0 0 0 2.645 1 10.6 12.745 SOLER COW4!RSONS TOTALPROJCTCOTrUSD '0009 2,446 8.440 10.67 5,716 21,404 27.120 3,200 11,491 14,71 675 4,012 4,A17 513 2t177 2 12,642 47.533 60,375 Iao l ESfTOffA DOTR4 CT 16TI0 114AI&TATION4 PROJECt DOalb Cod bodhs (UIO M TAMU ODIVCT HEATIS 1004 t_ 166 137 TOW "s. oost (USW la" (UC la" (MUS flOm (UD 'Og (USC UDOg (USg ClOg LOd SOWn TOW Lloo Psw TOW L_ls Foln TOW Legal for_ Troo Los Po.4 TOlW LoM Fsn Total Commli LAM_ C_ _b no 1.2J1 1.3' 767 SOff 3.04 0 0 0 0 0 0 0 0 0 1.07 4.3,3 3.430 1_s,1&2Calonia 6 4W 7 27 12 163 0 0 0 0 0 0 0 0 0 125 615 740 Reho,2me Cow a 0 0 22 O0 11 45 217 200 0 0 0 0 0 a 30771r COinbW.Noe -TWUt0 0 0 143 30 go 3 so 1O 2 0 0 0 0 0 0 176 460 m kIu C _m- 1owsIu04 22 44 67 0 0 0 0 0 0 0 0 0 0 0 0 22 44 67 RamDaldb4 N olma k *2 170 o 1 2? 7 30 71 237 so3 71 2n7 3 n 237 30 346 1,110 1.40 R1 _ _mu m 0 0 0 46 444 460 46 444 450 46 444 40 46 444 460 164 1.776 1.661 Wood-CaP_ 1 ¶00 101 0 0 0 0 0 0 0 0 0 0 0 0 I 100 101 wg6gT1',mg4 44 37 el 0 a 0 0 0 6 o 0 0 0 0 0 44 37 SI _mPam 44 11u 105 44 e 106 44 5 lO 0 0 0 0 0 0 132 176 310 Damagemm _ 44 146 1>2 70 07 27 22 74 *4 * 44 2 * 41 44 15 5115 Po jO4_Tod.Wh 44 0 44 0 0 0 0 0 0 O 0 0 0 0 0 44 0 44 40bb1 smosC,O_b (_o. 3a 2,344 3O3 1.11 4911 4.,72 26 I 1,12 2 30 In 726 13,6 723 g4 722 3 2,47 11M PigOwiS " a0 264 O116 30 Fos 2 112 1n 13 73 10 1 3 12 a 56 1nI.ID Pik Cu _mmlS 114 44 175 s0 251 111 101 03 194 of 50 I3n 7n s 170 *56 1 272 STOTALPJECCTCO RTAMrU on 26o 3.514 1.6 SI0 46.19 1 1.227 1.716 in6 g7 I.m a54 1.103 3.316 11.011 14.30 (haL aw.m" oobw ob PFAR DTWCT HEATW 1¶64 t6 low 1a7 10 TOWl Be Cot f3sw loom (U{D' Og (UjD'OgM (UlD 0O (U'D'Og '0t Cloom Local F_rn TOWl LOos Pome TOl LGal Fami TOl LOOa Po,oi TOl LOod_ Fwoi TOW Lout FPo Totl Pumeow 136 4so 7100 so 2m 37 0 0 0 0 0 0 0 0 0 ¶n n7 1,124 Aob ig046IiH I40 _ 131 22 193 131 22 151 ¶31 22 ¶63 0 0 0 0 0 0 264 67 460 __AMMSWMUVNW 1I1 112 122 31 m336 31 -35 0 0 0 105 1.116 1¶221 Val tNodP 0 70 71 9n 20 O 0 0 0 0 0 0 0 0 0 O 36 465 CwIkoluIdNAb.Spub. 0 45 45 16 110 ¶n 0 0 0 0 0 0 0 0 0 19 225 244 W _stTI1 25 110 215 0 0 0 0 0 0 0 0 0 0 0 0 25 190 215 wood-cI*po, I 100 101 0 0 0 0 0 0 0 0 0 0 0 0 1 100 101 nCla wbd p-vic 57 61 ¶i 21 61 ¶03 10a 1 25 10 16 25 0 0 0 97 200 27 p OblToIouT w a 0 as 0 0 0 0 0 0 0 0 0 0 0 0 a6 0 26 __6hW nowCoo (bCL 1a"0 Ir2I'7 M 360 1,67m .54" 172 3m 546 41 S 3 04 0 0 0 162 3.16 4,147 Fivlal C . "a 6 ¶27 166 10 11 165 17 36 5 4 a 66 a 0 0 6 316 415 Prilm Cm ke_ 4 S 0 of 103 As la as 31 67 16 36 a 0 0 0 3 170 423 WIOTALPfOJCTCooMI ORPAW4 462 1.422 1.30 46 1.37 1.3m 256 444 700 OS 420 462 0 0 0 1.311 3.674 4.3 P (haL _ _a_ mId i4SUSflIbs 'r 3i p'31 ig 8i prlg ix i3 ur 4r ~ ~~ u11 - - I I '11 ti a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i . o coo coo o 0o o 0o0 ooo o 00 0 00o00 Y-A , So g s o 2."#gN i { 3 l I I I I o JO o o ow2 o o o o g xaNw SI~ Alta JU ~A | *^ :1 _ t 8± # N Y 3UsB 0 00 o fi 00 000 000 000 0 CCC 00000 O O o~~~~ oN o o*~ o oa ooo llo ~e~O ~ N a5 R 8~~~~~~~~~~ o o, o o o S~~~~~~~~~~ XHNNoooV ooo PARNMU MWNSCWAUTfY hWIseuI P40 1la P.. DH C _.*Wr Co.w.o S.wb_o 0 106.000 10,o000 0 110.000 10,o000 0 nooo 72.900 0 0 0 0 0 0 0 o 60.000 260,o0 T n .6 Mg0 11.000 16,000 0 20,000 30.000 0 12,000 12.000 0 0 0 0 0 0 0 60.000 00.000 Eq&40mi 0 20,000 20.000 0 20.000 20.000 0 0 a 0 a 0 0 0 0 0 40,000 40,000 S.. lCom 0 14i.000 146.0M0 0 220,000 230.000 0 54,000 64,000 0 0 0 0 0 0 0 40,000 460,000 PlqImIC _W.w4.. 0 14,000 14,100 0 22,000 22.000 0 8.400 6.400 0 0 0 0 0 0 0 4000 44.000 Nr. C"Wre5. 0 4.015 4.015 0 12,50 123.60 0 0 0 0 0 0 0 0 0 0 10,410 1.6105 SUBTOTAL 0 164,015 154.415 0 21tS,00 266,600 0 62400 62.400 0 0 0 0 0 0 0 57t005 522.05 SEEn ENER4A ,_Mnb a 20,000 Um 0 25000 2W000 0 0 0 0 0 0 0 0 0 0 60.000 50,00 Ewipmem 0 25.000 25.000 0 25.000 25.000 0 0 0 0 C 0 0 0 0 0 so0C00 10,000 _F_C_@ so"Ocm 0 50.000 0.000 0 60,000 5O.OC 0 0 0 0 0 0 0 a 0 0 100.00 100,000 PI'v io.IAbohw 0 6.000 1.000 0 5.000 G.000 0 a a 0 0 0 0 0 0 0 10.000 10.000 rrbc_~ - 0 1.371 1.315 0 2.750 2.7SO 0 o 0 0 0 0 0 0 0 0 4.125 4.125 NSTOTAL 0 5.376 6.375 0 6.750 57.750 0 0 0 0 0 0 0 0 0 0 114o125 114.125 (544 smh(on MINIY OF _ TVROIET. LOCAL EM 0AON TAL DEPARTMETS AND OTHER EJVll00WEOOTAL QaRUPS T mS4 my Sw._ 0 15,600 15,000 0 75.000 75.000 0 10,000 10,000 0 0 0 0 0 0 0 100.000 100.000 Tra. m.rbo 6.6in25 50.62 11,250 25.125 26.125 5e.250 3,750 3,750 7.500 0 0 0 0 0 0 37,500 37,500 75.000 a, T. 0 3.750 3.M70 0 10.750 16.750 0 2.500 2.500 0 0 0 0 0 0 0 25.000 25,000 S. _ogam.C_w C,a 24,375 30.000 25.126 121.615 150.000 3.750 16,250 20,000 0 0 0 0 0 0 37,500 162,500 250,000 Pr n.c_-l. 56a 2t426 3,000 23.13 12.Ia 15.000 375 1,025 2,000 0 0 0 0 0 0 3,750 10.250 20.00 Pa.. C_e._ n m 070 1' 3,044 4,703 14,747 1.444 1,341 2.t74 0 0 0 0 0 0 10,416 0,714 10,130 "USTOTAL 7,110 27.46 24,506 U.101 140.706 170.747 5S,S 10,216 24,754 0 0 0 0 0 0 51.664 107.464 25,130 TOTAL OTITUTION4AL SUVPORT (iSD1 7.110 1,071,435 1,0705.m1 0."61 t00,0 2,0 04 5,56 0711,00 676,6 0 0 0 0 0 0 *1.06 4.0n717 4.124,644 TOTAL 4TfUOm. SUPPORT (EEMO 6,001 14,464.373 14,60.44 526,247 27,417,462 27,74.760 75,175 I,103.072 13.16150 0 0 0 0 0 0 67,46 64.167.1107 *k,393 10 0 Ln ^ - ~~- Pwqe 6 of 8 -J a e 0 e 0 I1 g ! 8 ° ° e ~~~~~1 5~~ ~~~ 0 X f §- |g rt * 2 ES ~~~ I d! 2 a.!a WSTONIA DOTRICT HEATINO R1E4ILTATION PROJECT DetaSad Co E6tNG166 (EEK O00 TARTU DSTrCT HEATI 194 196 1966 167 low Total Be" Cod (EEK O00 (EE o'o00 (EEK 000 (EEK000 (EEK '000 (EEK 0001 LoouI FoniU, Tol Locl F eown TG.. Locl Foc Tol LOWal Foi4n Total LOl Forei Totkl Loomi Foreign Totl I1 Co Luurab 60. Comesn 4,454 17,500 2164 10.363 41.000 51353 0 0 0 0 0 0 0 0 0 14,607 SE.500 73,307 RoP0_ mIa2C1.331 6.600 7.931 363 1,700 2.063 0 0 0 0 0 0 0 0 0 1,s4 6.300 0.04 Ropk6e6B_3Cosw er30 0 0 31 1,220 1.5 oos 2, 30 3.536 0 0 0 0 0 0 960 4.150 s506O CoW.iu Ppba-TwraNdW tk 0 0 0 1.636 4,1eo0 6,73 470 1.220 I,6 0 0 0 0 0 0 2,414 6.060 6,404 Daft Combugstion I6 26 660 o 0 0 0 0 0 0 0 0 0 0 0 0 o 206 0oo on RFW ldfIIIablt wlg me 2.300 3,136 660 3.200 4,160 960 3.200 4.160 goo 3,200 4,160 6o 3,200 4,160 41.676 15,100 16,77 rA.9I 6s*taiN,, 0 0 0 o20 6.000 6,20 0 6.000 6.20 620 6.000 6,620 620 6.000 *.620 2.460 24,000 26,460 WOO*-CWOiP 7 1,30 1,357 0 0 0 0 0 0 0 0 0 0 0 0 7 1,350 1,357 Wa6. Tregsoi6 500 1.093 0 0 0 0 0 0 0 0 0 0 0 0 593 S00 1.063 SpwarPat 564 o0 1.34 5604 600 1.364 564 00 1,364 0 0 0 0 0 0 1.762 2.400 4.102 DeegNW ss in 560 2.000 2.560 944 2,600 3.744 266 1,000 1.286 116 600 716 116 550 6n 2,015 6 ,60 6,015 pl O( O Teolaio 560 0 560 0 0 0 0 0 0 0 0 0 0 0 0 560 0 560 _cm e_so"COtra(lN *.02 31,660 40.643 16.071 61.51s 77,051 3.552 15,150 16.702 1,66 6.o00 11,496 1,6" 6,750 11,446 32.312 127,930 160.242 Pty. _ COeMnuls. on 3.1s 6 4.064 I,N07 .156 770 355 1,515 1e70 170 960 1,150 170 975 1,145 3.231 12,793 16,024 Fla CovUI uoh I.S33 570 2.404 4.56 S ,367 7,603 1.367 1,250 2.617 663 1.076 1,61 953 1.341 2.23 9.253 7,926 17.178 SwTOTAL PROJECT COST FOR TARTU 11.756 35.60 47,441 22274 71.125 63.356 5,274 17,915 23,150 2,671 11.656 14,529 2,620 12066 14,666 44.795 14,649 163.444 PAPAF STRICTHEATINT 1604 165 ¶96 19 g97 199e Total BUD Cost tEEK '000 (EEK '000 (ECK 'O0 (CEK '0005 (EEK 000 (EEK '000 LoCl Foregn Toal Lol Foi Totl LoCal Foren TOt Loca Foign Total Locl Foreign Total Local Foreign Total hwom COSt Pww NlmCowaiu 1.673 6,760 10,633 796 3,750 4,546 o 0 0 0 0 0 0 0 2,670 12,10 15.160 F.tId --- N lDh* b SNsook 1.772 300 Z072 1.772 300 2.07 1.772 300 2Z072 0 0 0 0 0 0 5.315 900 6.215 A"d ls*pone 146 1.507 1.03 424 4.520 4.644 424 4,520 4.944 424 4.520 4,944 0 0 0 1.417 15,067 16,464 Vltb Sp6d PUN" 5 *50 15 ,326 3,20 ,246 0 0 0 0 0 0 0 0 0 1,331 4.6e70 6,201 Con roNWPedhn S3 3 610 613 246 2430 2.M7 0 0 0 0 0 0 0 0 0 251 3.040 3,291 WOW TtIsdueu 331 2,505 2en 0 a 0 0 0 0 0 0 0 0 0 0 331 2565 2.66 Wood-clsIgpw 7 1,350 1.357 0 0 0 0 0 0 0 0 0 0 0 0 7 1,360 1,357 Do6sopanShw6rsI6Vn 766 1.100 1.66S 267 1.100 1367 130 250 360 130 250 360 0 0 0 1,311 2.700 4.011 PFojd O WfI T.oluw 354 0 364 0 0 0 0 0 0 0 0 0 0 0 0 354 0 354 Ss*b611Cta01(ot Was9 5,255 17,142 22397 4.654 16.020 20,874 2325 5,070 7.365 554 4,770 5.324 0 0 0 2,67 43.002 5s.s96 PlyNllCe" s g . s 52 1,714 2240 40 1,002 o067 233 S50 740 5S 477 532 0 0 0 1,299 4,300 5,550 Fb. C on W67 471 1,336 1,36 63 2211 65 416 1,313 262 525 767 0 a 0 3,412 2,205 5.706 SUIBTOTAL PROJECT COST FOR PARWU 6,647 19.326 26,975 6,727 16,503 26,230 3,453 s.665 0,446 671 5,772 6,43 0 0 0 17,66 46,1566 67.2s5 (kwt b.e and TAdLtM DITrICT HFATVn 164 1O5 196 1367 136 TOtall. Coot (EEK'4000 (EtK'00 (EE5'0009 (EEK'Ooc ( E l'oom (EEK10 t Loa Foalp TOWtl LOW Fat oTal Ltl Fon TOtl Loal FoeI TOWa Locl Fo TGgn tl i Paso TOtW kw_m06 Cow RdPD DM *&(hiiTLT-VPO* 1V7 773 ttS 1,123 4,lSS 5.711 562 2m 2.05 0 0 0 0 0 0 1,071 7.M 93.646 sow Coc a I I t 34 2,203 2,572 1in 946 1.104 0 0 0 0 0 0 0 0 0 527 314 3676 cmoo_n 0 0 0 2,_ 7,06i 10,567 2.511 71 .t ¶0.167 0 0 0 0 0 0 5.797 15.336 21,133 R.bdWLao &htaa 242 1200 1.502 727 3.7 4,512 727 3.705 4.512 45 2.520 3,006 242 1,260 1.502 2,423 12010 15.033 A II _ _bktAM 1j1 11,7t70 13.706 5,746 35,364 41,110 5,746 i5.364 41.110 3.60 2.56 27.411 1,316 11,70 1¶3706 19,130 117.14 137.044 VotabSgPednpea 0 0 0 Mlo 4.3,5 3.00 50 4,35 5.025 312 2200 2.512 0 0 0 1,571 10,t60 125,61 RImolsCouit 0 0 a In 1.m 2.167 0 0 0 0 0 0 O 0 0 lOt 1.S 217 WataT 1.36 2.737 4.136 4,11 3.200 1236 1.6 2737 4,136 0 0 0 0 0 0 6,00 13574 20.664 MOP uW._ _MaWurno.6wt 612 2.240 2,912 1,50 5.300 6O 0 0 0 0 0 0 0 0 0 2.252 7,540 9.603 Dca_ &W 6mvhlobn 32 1.042 1.370 1.2 4.0 , .361 1,152 3,825 4.677 624 1,4 2,516 312 947 1.250 3.7 11,06 15,.#4 Po OtOlWT _Ol,lO 1.10 0 1.100 0 0 0 0 0 a 0 0 0 0 0 0 l,liO 0 1.10 _a man codto 161 WmI*62 22.050 2t3.42 13.516 7t.420 "4,15 ¶3.113 60,107 7. SAS6 30.190 36,446 2.470 13,1t7 16.46T 456S0 202,764 24k,414 Pt _ ml 490we at 2.X6 2., 4 1,ti 7.6l2 3.464 l.tl 6.011 7.w on 3013 ,545 247 1.400 1.647 4.6 20.7 24.41 Pd.. clt5omA. 1. 05 1.6, 5.237 4,6 1.300 5.046 4, l0.7 2.466 3.321 5607 1,75 1.5 3.310 I15, 15.014 30*6 3IDTOTAL PaDJECT COWF POiTALLIN 7.71 24.061 33,60 23.75 611,76 113,693 13,472 71,077 -.54 37 36J,SS 44,737 4,10J 17.31 21,424 S,.466 23S,04 JOJ,i42 NW-CHP PABWT rtl34 1w 1M 19" li_ TOW asoC"co /EEK -54 INEW0009 (EEK1 009 (EC 0009 (UK 0009 lEEK 00 Locl poem Tol LAW FM TOt Lotl Fo_ig Tta Loa ForgP TeW LOl Foeg Total Loca Feo TOtal _ t~u Coot AN Pcb _Ao so 4,7 4,520 0 0 0 0 0 0 0 0 0 0 0 0 SO0 4.20 4.,20 AlAa* Om d M _ASMW 332 7.1tl 7.te7 t3s 7,i 0.203 0 0 0 0 0 0 0 0 0 1,745 14.445 16,160 Vim _PwdPup 0 0 0 2.50 16.15 1.365 0 0 0 0 0 0 0 0 0 2.5Z6 1¶8* 21. WalarTmsllmt 250 2,205 2.545 1.440 17.,20 16720 0 0 0 0 0 0 0 0 0 1I'M 10,575 2t12 ScVltaa 34 I.m 1.33 41 I.M 2.231 0 0 0 0 0 0 0 0 0 64 OOO70 3.013 6.*Oota"U C"(hd. "m 1,00 4614,0 6 1G.0 5.316 45,366 0,O610 0 0 0 0 0 0 0 0 0 7,146 60.146 7.00 Ph C l 1S 1.46 1.15 us1 4.560 SO.S 0 0 0 0 0 0 0 0 714 6.015 n6,720 p,loC 0 32 406 710 I,53 2.46t 4,011 0 0 0 0 0 0 0 0 0 1,U2 2.t0 4.722 6tlOTOUL T P090407OT FOR I6U 2.315 16.74 lO,OSO 7,36i 52.s16 S1,S62 0 0 0 0 0 0 0 0 0 3.6 101. 78,740 tU t 065 06V04 1364 116 ¶36 ¶07 ICCO ToitalB.Coot (EElt'O0 (EEK00" (USC6OO (EEK 00 (ElK 0009 (EEK't000 Locl e oow Tal LOl rNeIg TOW Loca FoeI TOta Lt For%p TOWd Local Fd TOta LOOM Fhr.p TOt SoarC.w 2.,5 12,774 15,432 5316 26.547 30,663 5.31 2 3,547 30,6 0 0 0 0 0 0 13.o0 $ 77,150 selw R.ptas 0 0 0 4,6M 23.1S V7.42 4, 23,615 27.42Z 0 0 0 0 0 0 9.t17 460 54.47 0DlMibPUW mvbn 77 2.700 3467 737 Z700 k467 707 2,7C0 %467 0 0 0 0 0 0 2,s30 .100 10,400 _ba S8c Costam" tL @4 3.454 15.474 13.75 10,521 0,652 61,763 10.021 50,652 1.,75 0 0 0 0 0 0 20*1 117.196 142.464 PkidetmConoiud_ 345 1.547 1,' 1, 02 5,066 5.173 1.62 5,06 3.17 0 0 0 0 0 0 2.930 11,720 14, h70 426 t 3.12 2,737 5.561 4.3 4.1i8 3.401 0 0 0 0 0 0 7,63 7.413 15,317 UUTOTUL P09.5 COOT FORl SMALL 4,336 17,447 2t,116 1t.1O 16746 73,652 16.2113 .144 76.35 0 0 0 0 0 0 36.72 130.337 172.060 MOLER COVROM MO TOTAL P09.JCTCOST( (MW" 33,046 ¶14,74 147,111 77171 20,054 36313 44.417 1,131 ¶i1 ,50 11,O0S 54.1t0 tO m 6.92_ 23.397 0tO.1 173.37 641sr7 615.010 0 Ilh I ANNEX 6 ESTONIA Page 1 of 2 District Heating Rehablltttlon Project Implementation Schedule Estimated Annual Contractual and Other Payments (US$ million equivalent) Project Element Pre- Project year Total Remarks Project 1 2 3 4 5 6 Payment Loan Timine Sign/Effec/Close ** ** SUDDIy and Installation SmaU boiler replacements 1.64 1.64 1.64 4.92 ICB Large boiler conversions 4.1 3.3 7.4 ICB Small boiler conversions 2.23 2.32 2.34 6.89 LIB, other (local shopping) WVorks Installation of DH equipment 0.6 2 2 2 0.9 7.5 ICB, other (local shopping) Repair of preheater 0.41 0.41 ICB (3c0od Equipment for DH rehabilitation 2.64 8 8 8 3.11 29.75 ICB, Other (intemational and local shopping) Consultancies Supervision 0.85 0.85 0.85 0.85 0.45 3.85 Other Tech. Assist. 0.78 1.5 1.5 3.78 Other TOTALS 11.61 19.61 16.33 12.49 4.46 64.5 (Bank-Financed) (5.50) (12.30) (9.74) (9.05) (1.81) (38.4) ANNEX 6 Page 2 of 2 ESTONIA Distnct Heating Rehabilitation Project List of Procurement Packages Cost Procurement Implementation PackaRe (US$ million) Method Date Turn-key boiler replacements 4.92 ICB 11/97 Turn-key boiler conversions 6.39 LIB 11/97 Small works, boiler conversions 0.5 Local shopping 11/97 Tum-key boiler conversions Tartu and Parnu 7.4 ICB 04/95 Works, repair of air preheators 0.36 ICB 06/95 Small works, air preheators 0.05 Local shopping 10/95 Equipment for water treatment and automatization, IRU 4.5 ICB 10/95 Installation of IRU equipment 0.61 Local shopping 10/95 Tallinn DH equipment (packaging method is still under discussion) pumps, meters, heat exchangers, water treatment equipment) 15.99 ICB 9/98 Small equipment Tallinn DH 1.08 Local shopping 9/98 Installation of Tallinn equipment 4.34 International shopping 9/98 Parnu and Tartu DH equipment 7.84 ICB 9/98 Installation of Tartu and Parnu equipment 2.55 Local shopping 9/98 Office equipment 0.34 Local shopping 12/94 Design and supervision 3.85 1/ 9/98 Training 3.78 1/ 12/96 1/ Following Bank guidelines or from grant agencies. ANNEX 7 ESTvONIA DISTRICT HEATING REHABILITATION PROJECT Estimated Schedule of Disbursements (U(USS million)-- Bank FY and Disbursed Cumulative Disbursements Semester Ending in Semester Amount as 6 of Total 1995: December 31, 1994 1.0 1.0 2.6 June 30, 1995 2.0 3.0 7.8 1996: December 31, 1995 4.0 7.0 18.2 June 30, 1996 5.0 12.0 31.3 1997: December 31, 1996 5.5 17.5 45.6 June 30, 1997 4.5 22.0 57.3 1998: December 31, 1997 5.5 27.5 71.6 June 30, 1998 4.5 32.0 83.3 1999: December 31, 1998 1.5 33.5 87.2 June 30, 1999 1.5 35.0 91.1 2000: December 31, 1999 3.4 38.4 100.0 Loan Closing Date: December 31. 1999 Annex 8 Page 1 of 6 ESTONIA DISTRICT HEATING REHABIL1TATION PROJECT ENVIRONMENTAL ASPECTS A. Overview 1. Introduction. Implementation of the proposed project is anticipated to have positive environmental benefits through improved efficiency in the use of domestic and imported fuels and to contribute to a reduced level of air pollution in Tallinn, Tartu and Parnu. Preparation of the proposed project has included environmental studies consistent with the requirements of the Estonian 'Order of Carrying out Environmental Impact Assessment" (Government Regulation 13.11.1992) and the provisions of World Bank Operational Directive 4.01, "Environmental Assessment." In accordance with these procedures, a sectoral environmental assessment, consistent with the requirements for a category "A" project, was prepared for the Small Boiler Conversion/Replacement Program. Environmental reviews were prepared, consistent with the requirements for a category "B" project, for the DH Rehabilitation Program in Tallinn, Tartu and Parnu and for the Iru (Tallinn) Power Plant Rehabilitation Program. The Institutional Support Program was placed in category "C" and did not require environmental analysis; however, an environmental training activity has been included in this element of the proposed project design. 2. Present Conditions. Estonian energy production and consumption is responsible for the majority of the air pollution in the country. Air quality problems of regional significance are a result of the oil shale fired Baltic and Estonian power plants near Narva. In urban areas and towns locally significant air quality problems occur during the winter heating season due to the use of coal, oil shale oil and heavy fuel oil in low-efficiency boilers used for DH and building heating. Estonian health authorities report human health effects associated with air pollution (sulfur dioxide, nitrogen oxides and dust), principally heart and respiratory diseases, especially bronchial asthma, with pregnant women and children having higher rates of problems. While levels of air pollution have declined during the last several years due to the economic restructuring process, they should be expected to increase in the medium future when economic recovery occurs, unless energy conservation and environmental protection measures are adopted. 3. In the northeastern oil shale region energy production is the most important cause of degradation of surface and groundwater resources due to impacts from mining and the disposal of massive amounts of solid wastes generated by the Baltic and Estonian power plants. On a local scale, the operation of old and poorly maintained DH networks results in the waste of large amounts of freshwater and in some situations may contribute to pollution of groundwater. Improper storage of heavy fuel oil and wastes at some DH stations is anticipated to have resulted in the contamination of groundwater and soil. 4. Review of Experience in Nordic Countries. In order to support development and review of environmental studies for the proposed project, a series of field visits were made by Bank environmental staff to review the practices and experience with the use of peat and wood fuels in district heating systems in Denmark, Finland and Sweden. Meetings were held with representatives of environmental authorities, peat and wood fuel suppliers, district heating utilities, research institutions and consulting firms. Visits Anex 8 Page 2 of 6 were designed to allow for review of all stages of the fuel cycle under physical conditions comparable to those found in Estonia. In addition, a number of Estonian energy and environmental specialists have had the opportunity to make site visits to review practices in these countries. 5. Estonian Participation and Consultation Process. The environmental studies for the proposed project were prepared with the full cooperation of the Department of Ecological Expertise of the Ministry of Environment and the participation of Estonian experts. Representatives of the Ministry of Environrment have been involved in all stages of the development of the proposed project and have participated in a series of site visits to all proposed program sites. Consultations have also been conducted with representatives of the concerned local environmental offices. As per the requirements of the Bank, a consultative process was used for the preparation of the sector environmental assessment for the proposed Small Boiler Conversion/Replacement Program, involving concerned ministries and representatives of nongovernmental organizations, including the Estonian Green Movement/Coalition Clean Baltic, the Estonian Fund for Nature and other local NGOs. A meeting was held to review the findings of the sectoral environmental assessment and proposed mitigation and monitoring plan between the Estonian State Energy Department, Ministry of Environment, the Estonian Green Movement/Coalition Clean Baltic and the World Bank. B. Proposed Project Components 6. Introduction. Implementation of the proposed project is anticipated to have positive environmental benefits through improved efficiency in the use of indigenous and imported fuels, contribute to a reduced level of air pollution in Tallinn, Tartu and Parnu, reduce the waste of water used in district heating systems, and promote the enviromnentally sound development of local peat and wood as fuel resources for district heating. It would also improve health by increasing the availability of winter heat supplies and hot water through providing an affordable and reliable source of fuel. 7. Small Boiler Conversion/Replacement Program. The proposed project component was the subject of a sectoral environmental assessment (SEA) prepared by a consortium of firms under the leadership of IVL-Swedish Environmental Research Institute with the participation of Jaakko Poyry Consulting ab, Swedish Development Consulting Partners ab, all from Sweden, and the Institute of Ecology of the Estonian Academy of Sciences. The objective of the investigation was to evaluate the potential environmental impacts from implementation of the National Energy Savings Programme and other initiatives of the Government of Estonia to increase the use of indigenous peat and wood as fuels for district heating systems. These activities would be implemented by the Estonian public and private sectors with support from domestic sources and well as foreign funding (EBRD, Government of Denmark, Government of Sweden, G-24, and under the proposed Bank project). Given the national nature of this long-term program and the potentially large number of highly dispersed sites at which boiler conversions and replacements would occur, the study was conducted using a sector rather than a site- specific approach. 8. Major Flndings. The sector environmental assessment prepared for the program concluded that sufficient indigenous peat and wood resources existed in Estonia, including within a 50 km radius of Tallinn, Tartu and Parnu, for these fuel resources to be used for district heating provided that proper environmental policies and guidelines were used and monitored by the Government of Estonia. It noted that the selection of areas for fuel harvesting and the methods used needed to be controlled to minimize adverse impacts to biological resources and hydrology. Annex 8 Page 3 of 6 9. The proposed program would allow for the use of indigenous peat and wood fuels in place of heavy fuel oil; this would result in a reduction of air pollution levels, with a decrease in the emissions of SO2, NO,, and a slight increase in the level of dust when peat is used. The peat and/or wood would need to be transported to the boilers which would increase the level of traffic on rural roads and city streets. Additional storage space would be required at the boiler houses for the storage of adequate supplies of fuel and measures would need to be taken to cover the peat to avoid dust blowing into residential and commercial areas. With regard to ash disposal, peat ash would require transport to and disposal in authorized sites and wood ash would be transported to locations where it can be used as fertilizer in forests following proper treatment. 10. Proposed Mitigation Plan. Preparation of the sectoral environmental assessment included the development of a mitigation plan to be used for boiler conversion activities to be undertaken in Estonia with support from public and/or private sources of funding including the proposed Bank program. The elements of the mitigation plan are presented in Attachment 1. The environmental mitigation plan will be jointly adopted and implemented by the Ministry of Environment and cooperating implementation organizations. 11. The proposed mitigation plan includes policy actions to: (a) concentrate the harvesting of peat, other than on a well-justified basis, to locations which are already developed or have been previously drained to allow for harvesting in the future; (b) require that the harvest of fuel wood be conducted only in connection with regular forestry operations as part of a management plan; and (c) conduct regular reviews to assess appropriate user fees for public and private harvesting of peat and wood resources to include their management and site rehabilitation costs. At the operational level, the Government of Estonia would adopt environmental guidelines for the harvesting and management of peat and wood fuels resources developed on the basis of those proposed in the sectoral environmental assessment. The plan also includes a number of recommended operational technical measures, a monitoring plan and proposals for environmental training. 12. Environmental Monitoring Program. The mitigation plan would include development and implementation of environmental monitoring programs to support implementation of the policies, guidelines and technical measures described in the preceding paragraphs. The implementation of the monitoring program would be part of the routine responsibilities of the Ministry of Environment and its local environmental offices. It may be appropriate to include the results of the monitoring program as an element of the present reporting procedures for forest, peat and mineral resources management. Special provisions should also be made for this issue to be covered in the regular reporting structure for protected areas and wildlife management. 13. Consultation Process. See paragraph 4 above. 14. Tallinn District Heating System Rehabilitation Program. The proposed project component was subject to an environmental review prepared by Ekono Energy of Finland with the cooperation of ESP Engineering of Estonia. 15. Major Findings. The proposed program includes operational and environmental improvements of the oil-fired burners through installation of combustion controls, one pipeline replacement, integration of two networks, substation improvements and a water treatment component. Activities under the proposed project are complemented by an on-going EBRD financed program to improve substations. In Annex 8 Page 4 of 6 Tallinn, it is estimated that energy production is responsible for 90% of the SO2 emissions, 15-20% of the NO, emissions and contributes to the dust levels. Although, with the exception of the winter heating season, air quality in Tallinn is generally within acceptable limits, the forests around Tallinn are reported to have been damaged by air pollution. It is anticipated that the improvements in the oil fired burners and substations should increase fuel efficiency and reduce air emissions, especially SO,. 16. The improvements to the distribution system and the water treatment component would also significantly decrease the use of chemicals and the waste of water by supporting a water treatment component and rehabilitation of the distribution system. The improvement of substations would also contribute to greater energy efficiency. In the older parts of the system, especially the boilers and distribution network, asbestos has been used as an insulating material, therefore measures would be needed to minimize the risks to workers involved in the removal of this material. In addition, proper steps need to be taken, in consultation with local environmental authorities, to ensure its proper and safe disposal. It is also reported that on some occasions oil has leaked from the boiler plants to the groundwater and actions should be taken to prevent this problem from recurring. 17. Mitigation Plan. The proposed plan has been designed to address environmental concerns at the plant and distribution level in the context of a rehabilitation phase of investment. Proposed mitigation activities would focus on addressing issues related to the safe removal and disposal of asbestos waste materials during the rehabilitation of the boilers and network of the DH system. 18. Monitoring Plan. Environmental performance of the boilers would be conducted by the Environmental Office in Tallinn in conjunction with the existing air quality monitoring program of the Estonian Institute for Meteorology and Hydrology. Issues related to the use of water by the DH system would be monitored by the local water authority. 19. Tartu District Heating System Rehabilitation Program. The proposed project component was subject to an environmental review prepared by the joint venture of Fjarrvarmebyran ab and Stockholm Energi ab, both of Sweden, with the support of a local consultant team. 20. Major Findings. The proposed program includes the conversion of four existing boilers from use of a mixture of heavy fuel oil and natural gas to peat and wood fuels (two 30 MW boilers to peat and two 15 MW boilers to wood chips), one pipeline section replacement, substation improvements, water treatment and rehabilitation of the distribution system. The converted boilers at the Luunja plant would be equipped with electrostatic precipitators and the Ropka plant would be equipped with cyclone dust cleaning equipment. Activities under the proposed project are complemented by an ongoing EBRD financed program to improve substations and install heat meters. In order to reduce excessive fuel costs and to increase fuel security, a local strategy has been adopted to use either heavy fuel oil or as an alternative a combination of fuels including wood fuels and peat. The proposed project would support this alternative approach which would result in reduced S02 and NOx emissions when compared with the heavy fuel oil alternative and include investments in emissions control equipment to effectively limit particulates associated with the use of peat. 21. The proposed peat harvesting sites are fully developed locations with large reserves. The source(s) of wood fuels is currently not decided; however, significant wood fuel resources exist outside protected areas. Local authorities have approved use of an ash disposal site. In the older parts of the system, especially the boilers and distribution network, asbestos has been used as an insulating material, Annex8 Page 5 of 6 therefore measures are needed to minimize the risks to workers involved in the removal of this material. In addition, proper steps need to be taken, in consultation with local environmental authorities, to ensure its proper and safe disposal. 22. Mitigation Plan. Proposed mitigation actions include local implementation, by the Environmental Office in Tartu, of the mitigation plan presented for the Small Boiler Conversion/Replacement Program, with regard to the harvesting of peat and wood fuels to support operation of the boilers following conversion. On the local level, proposed mitigation activities would focus on addressing issues related to the safe removal and disposal of asbestos waste materials during the rehabilitation of the DH system. 23. Monitoring Plan. Environmental performance monitoring of the boilers would be conducted by the Environmental Office in Tartu in conjunction with its existing program for monitoring air quality and the use of local solid waste disposal sites. Monitoring of the harvesting of peat and wood fuels would also be done by this office as part of its routine responsibility and as an element of the national monitoring program described above in paragraph 12 concerning the harvesting of indigenous fuels. Issues related to the use of water by the DH system would be monitored by the local water authority. 24. Parnu District Heating System Rehabilitation Program. The proposed project component was subject to an environmental review prepared by Carl Bro International a/s of Denmark supported by supplemental studies. 25. Major Findings. The proposed program includes the conversion of two existing boilers from use of heavy fuel oil to peat and wood fuels, substation improvements, new main pumps and a water treatmnent component. Activities under the proposed project are complemented by an on-going EBRD financed program to improve substations. The proposed program would result in positive environmental impact by reducing emissions from the use of heavy fuel oil through the substitution of peat and wood fuels. It would also significantly decrease the use of chemicals and the waste of water by supporting a water treatment component and rehabilitation of the distribution system. The improvement of substations would also contribute to greater energy efficiency. In the older parts of the system, especially the boilers and distribution network, asbestos has been used as an insulating material, therefore measures are needed to minimize the risks to workers involved in the removal of this material. In addition, proper steps need to be taken, in consultation with local environmental authorities, to ensure its proper and safe disposal. 26. The proposed peat harvesting sites are fully developed locations with large reserves. The source(s) of wood fuels is currently not decided; however, significant wood fuel resources exist outside protected areas. The Parnu Environment Office has approved the conversion of the boilers from heavy oil to the use of peat and wood chips. It has also approved the use of peat from presently operating harvesting areas to the northwest and northeast of Parnu. In addition, it has authorized the disposal of the ash from the boiler in the present solid waste disposal site. 27. Mitigation Plan. Proposed mitigation actions would include local implementation, by the Environmental Office in Parnu, of the mitigation plan presented for the Small Boiler Conversion/Replacement Program, with regard to the harvesting of peat and wood fuels to support operation of the boilers following conversion. On the local level, proposed mitigation activities would focus on addressing issues related to the safe removal and disposal of asbestos waste materials during the rehabilitation of the DH system. Given the congestion in Parnu from north-south international traffic and Annex 8 Page 6 of 6 the heavy use of the port, a plan would be developed and implemented to minimize traffic impacts from the transport of peat and wood fuels to the converted boiler house. 28. Monitoring Plan. Environmental performance of the boilers would be conducted by the Environmental Office in Parnu in conjunction with its existing program for monitoring air quality and the use of local solid waste disposal sites. Monitoring of the harvesting of peat and wood fuels would also be done by this office as part of its routine responsibility and as an element of the national monitoring program described above in paragraph 12 concerning the harvesting of indigenous fuels. Issues related to the use of water by the DH system would be monitored by the local water authority. 29. Iru (Tallinn) Power Plant Improvement Program. The proposed project component was subject to an environmental review prepared by IVO International Ltd. of Finland. 30. Major Findings. The proposed program would support improvements to air preheaters for one combined-heat-and-power unit, water treatment facilities and modern automation and measurement equipment in the power plant. Improvements to the preheater and automation system would allow for improved efficiency in the use of fuel and slightly reduce flue gases. The decrease in flue gas emissions would lower the environmental emission fees paid by Eesti Energia to the Estonian Environmental Fund. Improvements to the water treatment system would allow for significant improvements in the water chemistry at the plant, thus reducing corrosion and scaling problems while decreasing the use of treatment chemicals by approximately 40%. In addition, these improvements and rehabilitation activities to be included under the program would reduce the need for make-up water in the system. The alternative of installing air quality monitoring equipment in the stack of the plant was reviewed and it was decided that periodic measurements with mobile equipment would be more cost effective. 31. Environmental Mitigation Plan. The proposed program has been designed to address environmental concerns at the plant in the context of a limited rehabilitation phase of investment. It does not require a mitigation plan given the positive environmental impacts from the proposed interventions. 32. Monitoring Plan. Environmental performance of the partially rehabilitated power plant would be conducted by the Environmental Office in Tallinn in conjunction with the existing air quality monitoring program of the Estonian Institute for Meteorology and Hydrology. Issues related to the use of water by the plant would be monitored by the local water authority. 33. Institutional Support Program. An environmental training plan would be implemented for local environmental offices, peat producers and wood harvesters concerning the objectives and implementation of the policies, guidelines, technical measures and monitoring programs described in the preceding paragraphs. The training plan would be supported as an element of the Institutional Support Program of the proposed project. It should be noted that the EU PHARE program has proposed that a training program for environmental aspects of wood fuels and peat management be included as part of its future activities in Estonia. In addition, the EU PHARE program and the United States Environmental Protection Agency (SEPA) will conduct a comprehensive review of the environmental monitoring needs of Estonia in the near future. Anex 8 Attachment I Page I of 3 ESTONIA DISTRICT HEATING REHABILITATION PROJECT SMALL BOILER CONVERSION/REPLACEMENT PROGRAM PROPOSED MIGATION AND MONITORING PLAN 1. Introduction. On the basis of the findings of the Sectoral Environmental Assessment prepared for the proposed program, a mitigation and monitoring plan was prepared for implementation by the Ministry of Environment and cooperating project implementation organizations. 2. Policies. The plan would include adoption of the following policies: (a) Peat Harvesting. Peat harvesting, other than on a well justified basis, would be concentrated at locations which are presently developed or have been previously drained to allow for harvesting in the future; (b) Wood Fuel Harvesting. The harvesting of fuel wood for use in district heating systems would be conducted in connection with regular forestry operations as part of a management plan; and (c) User Fees. Regular reviews would be conducted to assess appropriate user fees for public and private harvesting of peat and wood resources to ensure they reflect the current value of the resources and that the fees for public owned resources are adequate to cover their management and site rehabilitation costs. 3. Inventory of Areas Closed to Harvesting or Which Should Have Restrictions. In order to minimize adverse ecological impacts, the Ministry of Environment would prepare and disseminate an inventory of areas that should not be subject to development for either peat or wood fuel harvesting or which have specific types of restrictions limiting the type or intensity of harvesting. This inventory would provide specific guidance on measures required for the conservation of ecologically sensitive "wet forests." The inventory would be prepared and issued within one year of the date of project effectiveness. 4. Environmental Guidelines. The plan would include adoption and implementation of environmental guidelines for the harvesting and management of peat and wood fuel resources. These guidelines would be used by the Ministry of Environment in its role as the responsible government organization for the management of forest, peat and mineral resources and by the public and private sector interests involved in the harvesting and sale of these resources. These guidelines would be prepared and issued within one year of the date of project effectiveness. 5. Development of a Demand Analysis. The Ministry of Environment, in coordination with the Estonian State Energy Department, would review the potential supply and demand for wood fuels and peat and develop an estimate of the sustainable level of substitution by these fuels. This analysis would provide a basic guideline for management decisions by both organizations concerning policies, planning and technical measures for the medium and long-term use of these resources. The analysis would be prepared within one year of the date of effectiveness of the proposed project. 6. Technical Measures. The following technical measures would be adopted to improve environmental management practices: Annex-8 Attachment I Page 2 of 3 (a) Peat Related Actions Develop and implement procedures for control of impacts to water resources, including: - Load retention designs for field ditches; - Required use of sedimentation basins; - Use of surface drainage methods; and - Adoption of peat filtration methods; and * Develop and implement guidelines for fire protection at peat harvesting sites; * Develop and implement procedures for the effective reclamation of peat harvesting sites; and * Evaluate which areas would be best used, following completion of harvesting activities, as wetland areas or for other nature conservation or hydrological purposes. (b) Wood Fuels Related Actions 3 Adoption of a guideline that allows for a total harvest of branches and tops at. any site only once per rotation; * Support use of modern logging and transportation systems to limit disruption of soils; - Support an active reforestation program; e Improve programs to locate and control forest fires; * Restrict harvesting in areas where pressure from soil acidity is high; * Promote harvesting techniques which permit the even spreading of harvesting residue; and * Develop guidelines concerning limitations on harvest for certain types of sites, including Arctostaphylos-alvar, Cladonia and Calluna sites. (c) Transportation, Storage, Combustion and Ash Disposal * Adopt better practices for the transport of peat and wood fuels, including the development of designated routes and driver safety instruction; * Adopt guidelines for on-site storage facilities, especially for peat, which would include fire protection plans; * Develop guidelines for boilers concerning applicable air emissions standards to be issued to all concerned parties; these should include information on techniques which can be used for minimization of emissions on a cost effective basis; and Annex 8 Attachment 1 Page 3 of 3 Develop guidelines for dissemination to boiler operators, municipal governments and local environmental agencies concerning procedures for the disposal of peat and wood ash. Priority should be given to the redeposition of wood fuel ash in forests following proper treatment to prevent nutrient deficiency. 7. Monitoring. On the basis of current Ministry of Environment practices and the recommendations for monitoring activities included in the Sectoral Environmental Assessment, a monitoring program would be conducted by the Ministry of Environment at both the national and local level. The environmental monitoring programs currently in place in Estonia are sufficient to provide the basic monitoring data for the proposed program. The Environmental Information Center, of the Ministry of Environment, is responsible for data collection concerning the state of the environment. A basic Nature Management Geographical Information system (GIS) has been developed which includes data layers on water and air pollution sources and forests. Costs for financing the monitoring programs associated with the proposed project should be supported by both the basic budget of the Ministry and by environmental fees collected for fuel harvesting, combustion and ash disposal from parties engaged in these activities. 8. The monitoring required for the control of wood and peat harvesting activities as well as air quality and ash disposal is the responsibility of regional environmental offices. The content and extent of the monitoring in forest and peatland areas where harvesting activities are conducted, and emission monitoring at boiler plants, must be approved by regional environmental offices, and in certain occasions also by national environmental authorities. Monitoring activities are a routine element of their current work programs. However, due to the increased utilization of peat and wood fuels, the scope of these activities would need to be expanded. In order to accomplish this objective, the proposed program would support the training of personnel from the regional environmental offices in environmental monitoring and enforcement activities related to the proposed program. Given that many of the routine environmental monitoring actions require the collection of data and cooperation of those responsible for fuel harvesting, combustion and ash disposal, the project would also support training of representatives from these interests in environmental management and monitoring. Measures would also be taken to strengthen local air quality monitoring capacities. 9. This plan may be modified following completion of the planned review of the Estonian environmental monitoring system to be conducted with support from the EU PHARE Program and the United States Environmental Protection Agency (USEPA) in the near future. ANNEX9 Page I of 7 ESTONIA DISTRICT HEATING REHABILfTATION PROJECT Tartu District Heating Financial Analysis KEY ASSUMPTIONS FOR FINANCIAL PROJECTIONS 1. Heat Demand - The beat supplied to the end-user. 2. Heat Losses - Estimated at 20% as of 1994 and thereafter. 3. Heat Production - The level of heat production required to meet the heat demand and the losses in the DH network system. The increasing production levels in 1994-96 are due to the expected better level of service to be provided to customers and to adjust for normal temperatures. Decreasing production levels in 1997-98 result from efficiency improvements in the system. In 1999, new development is expected thus the level of production increases. 4. Energy Prices - Assumed to increase by the rate of domestic or foreign inflation, depending on the type of fuel. INCOME STATEMENT 1. Operating Revenue - Heat demand x the tariff (calculated both including the VAT on fuels, goods and materials, which is the current regulation, as well as excluding VAT to illustrate the impact of the VAT on the tariff). 2. Operating Expenses 2.1 Fuel - Calculated as quantity x price of fuels. 2.3 Salaries and Benefits - Assumed to increase each year by the estimated rate of domestic inflation. In addition, in 1994, an increase of EEK 500,000 is added to reflect the increase of employees in the Anne Soojus DH Company. 2.4 Goods and Materials - Assumed to increase each year in proportion with the level of production and the estimated rate of domestic inflation. 2.5 Maintenance - Estimated to increase by the 3-4% each year as of 1994. 2.6 Other Expenses - Expected to increase by the rate of domestic inflation each year. 2.7 Value Added Tax (VAT) - 18% on fuels, goods and materials, no longer reimbursed as of January 1, 1994. ANNEX-9 Pagye 2 of 7 2.8 Depreciation - Estimated at 7% of fixed assets (revalued) during 1994. As of 1995, depreciation is estimated at 5% of average fixed assets. The project fixed assets are estimated to have a life of 20 years. 2.9 Government Operating Subsidy - Discontinued in August 1993. 2.10 Profit Tax - 35% through 1993 and 26% from 1994 and thereafter. SOURCE AND APPLICATIONS OF FUNDS STATEMENT 1. Debt Service Terms 1.1 EBRD Interest: 10.25%, Maturity: 10 years, Grace: 3 years (first principal payment in 1997) 1.2 World Bank Rehabilitation Loan - Interest: 12%, Maturity: 3 years, No grace period 1.3 BITS Energy Project - Assumed to cover 90% of project cost (excl. VAT/duties) Interest: 10%, Maturity: 15 years, Grace: 5 years (first principal payment in 1999) 1.4 Domestic Loan - Interest: 30%, Maturity: 1.5 years, Grace: 1.5 years 1.5 Vattenfall Loan - Interest: 0%, Maturity: 5 years, No grace period 1.6 Project Loan - (Energy Project) Interest: 15%, Maturity: 5 years, Grace: 1 year BALANCE SHEET 1. Fixed Assets - for 1992-94, amounts are based on revalued assets. In 1995 and thereafter (until 1998), amounts also reflect the project assets as they are commissioned. 2. Work-in-Progress - As of 1995, amounts reflect project costs including design and supervision during the project and VAT. 3. Accounts Receivable - Estimated at 45 days. 4. Advances - Estimated at 4% of fuels utilized in production. 5. Inventories - Represents 6 months of goods and materials as of 1994 and thereafter. 6. Retained Earnings and Reserves - Prior year balances increased by the annual surpluses. 7. Accounts Payable - Estimated at 3 months of goods and materials. Page 8of? TARTU DSTIT blEATN COMPANY COMBINE OPER^ATION KEY ASSUMPTIONS FOR FINANCIAL PR WJECTON Aclual~-- - Ea1lImalied- tee2 assa 1es04 IeNS is In? loee lowe HEAT: Heat Dand (GWb) 353 627 *17 S17 oe SW. U System Loe(%) 1s 1 s 0 3 20 20 20 etem Los (GM) 3 a0 16t 156 1O 160 171 Total Heat Produoton (GM) 407 422 eo 7m m 7S9 7S0 04 Supplbd by bobrhous (OV%): Turu 300 210 406 364 U. 313 313 3S7 Luunja 0 0 *0 20t 22m 22a 228 22 Tuge 2mt 22 26 t1 31 st e0 me AudIm 34 26 0o 02 02 a so e TubI 41 41 24 J0 o 9a 2m so Ropka go 49 as U3 o3 7 7s 92 Total Supply (GM) 497 422 020 773 773 736 731 a4 Suppted by Fuele (OVA): am 487 422 380 806 164 17n 173 830 Heay Fuel Ol 0 0 e16 280 164 178 17n 230 Ufllbd Pet 0 0 203 22a 22m 228 m Sod Pea 0 0 10 63 U3 79 7r so WoodChips 0 0 21 75 76 76 7t 75 TOW Supply (Ga) 487 422 6n 773 773 730 736 4 Quanthes of Fuel hr Heat Production: a" (o000 iS) a) 36.080 50,941 47,424 24069 23.400 1.548 21.53 V8725 Hey Fuol 06 (tone) bJ soS 1e,e1 20,100 21,116 1ass 12sa4 U11,214 MG,668 MiUbd Peat (on) oI 0 0 6 50,413 s 1,S341 93,36 99,646 30,346 Sod Pe (tons) di 0 0 3410 2.347 2e.47 87,4056 VA406 31,760 Wood Chips (ks nmS) *e a 0 32.812 117,1J7 117.187 117.1S7 117,137 117.187 ENERGY PRICES AND TAFFFt (bed. VAT * transportatio to bolte houes) HeavyFuel01 (EEK/metrcton) 1,60o 1,120 1.14f 1.17 180=6 1,236M 1,267 Gm (EEK/touand nm3) 1.325 1,120 1.141 1,177 1.206 1.23 1,267 Milled Pot(EEK/ton) 130 100 111 121 13t 141 152 Sd Pe (EBt(ton) 263 210 233 86t 274 2U. 320 Wood Chip" (EamCn) 0 42 47 61 U es 64 Avg. Heat Taff (EEK/MV) as. 22tt 210 242 26 260 285 Industrial *t 1J3 RIential 60 137 al Aumn 6.2 IVA we produoed by 1,000 mS d lga x .9 ffbiency fator. b/ Assumne M11 MVA Is produced by a ton of heavy fuel ol x .U0 eIency fatoro. ot Asumes L.7 MM I produoed by a ton of melNd pet (60% motstuto oonent x . efficlency feotor. di Aemee 34 bVA Is produced by 1 ton of od peat (35% woolture content x.U efficienoy fator. el Assume 0.6 OVWh Is produced by IS (km.oo volume) of wood chipe (60% moistuto oonant) x . effcency fmot. ANNEX O Pape 4 of?7 TARTU DI8Ti-CT HEATING COMPANY COMBINED OPERATION8 INCOME STATEMENT8 FOR YEARS ENDING DECEMBER 31 (EEK '000) -MtueJ- - EsthWated 1902 1993 lw 1996 1906 1997 199 1999 Heat Demand (CWh) 359 627 t17 617 6U9 589 t83 Heat Tariff CEEKV) ntoL VAT) 168 228 210 242 2U 260 296 Heat Triff (EEK/MdWh) (9xof VAT) 196 187 216 237 237 266 Forelgn nflaon (%) 2.6 25 2.5 2.6 2. 2.6 Domtiolnflatlon(%) 1,069.0 S.0 15.0 11.0 9.0 6.0 6.0 6.0 Exchange Rate (EEto ) 13.6 13.5 13.5 13.5 136 OPERATIN REVENUES Nat Hot Rvenuo 33,044 75,160 120,16t 129,570 149.314 161,962 163.140 201,D544 Total Operating nom 33,044 75,160 120,166 129,670 149,314 161,962 163,140 201,644 OPERATING EXPENSES Fuel 27,163 656,17 77,731 74,772 76.103 74,04t 76,303 97,731 Sal8bles nd Benefit 3,141 7,019 8,672 10,016 11,416 12.,29 14.356 16,004 Goods and MaterIal 625 2,574 4,349 6.62 6,161 tt,362 6s,6 8,694 Mabntenano 2,418 61,349 6,300 6,500 6,760 7,000 7,260 7,600 Other 113 370 426 472 516 566 600 60 VAT 14,774 14,476 14,607 14,t34 16,329 19,139 TotalOperatingExpnees 33,360 81,629 112,162 111,U87 116,762 116,319 122,00 149,616 Nat Operatng ome before (30 (6,669) 8,004 17,663 33,662 36,643 30,441 61,926 Depteiation & hntrnet Depredation 217 1,t6t 2,964 4,718 6,176 9,48 10,520 11.266 Nat Operating Inown beltor hntert (623) (,626) 6,040 lZ26 26t384 26,165 19,912 40.663 Itnrnet aon Bomrlge + other 1t9 2,046 1,533 8,976 13,313 17,179 1S,206 It,624 Not Operating inoom (a9 (10,671) 3,607 3,960 12,071 8,976 1,707 22,139 Govt HotOperatingBubeldy 872 9,161 0 0 0 0 0 0 Nat Incom before Tax 160 (1,410) 3,607 3,960 12,071 8,976 1,707 22,139 Profi Tax (35%, 26%) 293 0 912 1,027 3,138 2,334 444 5,766 Extraordinary Gains (Lo)es) 6) Nai nmcnme aft Tax (39) (1,410) 2,696 2023 8,933 6,642 1,263 16,383 _....... .......... ....... .......... ....... .......... ....... ............... .............._. ANNEX 9 Page Saof 7 TARTU DISTRICT HEATIN COMPANY OOMBINED OPERATIONS SOURCES AND APPLICATIONS OF FUNDS STATEMENTS FOR YEARS ENDING DECEMBER 31 (EE '000) Eatlehd - 1904 196 19W 1997 1sse 1999 SOURCES Inlem Source Net OpatIng Ice bebicelInst 6,040 12,s2e 25,364 26,165 19,912 40,662 Dgprcstan. 2,964 4.766 8.176 9,4 10,629 11,266 Totel Intn Scure 6,004 17.683 33,602 36,643 30,4I 61,6 ERC Emeeiy Eberwy Loon 10ooo 13,000 mr* Eng, Pro9 lt Loon 40,940 80o,6 20,086 12,654 12,962 Lam cr Oce"ron of Tug&aeAedk 1,000 Veflenlal LOn 4,000 Oew Pceaot Laws ,601 12,709 3,123 1,875 1,934 Totel BorowIngs 64,441 106,3s0 23.189 14,629 14,866 0 TOTAL SOURCES n44s 124,082 6,761 0,17n 46,327 51,926 APPLUcATON Conemadon Requbement pi 45,489 89,686 22,290 14,080 14,391 OO,rOnMgonPojt 17,000 13,000 P,ar Pie 3,000 4,000 4,000 Tota Conesnucdon Prjcts 62,489 102,866 215,29 16,060 18,391 0 VATAOutis on Pret 1,962 8,743 693 489 496 PrcdTex 912 1,027 3,136 2,334 444 6,786 E-RD - Inteet - - - 2.308 2.0O0 1,794 - -ci - - - 2,600 2,600 2,600 V*uldmW k Rehab Lo - nteet 116 73 30 0 0 a - pitno 367 367 367 MM Eerwy Loan - Intere 1,024 6,129 13,166 14,602 16,083 16,730 - pipal 16,730 Domwell oLam- ntnree 160 300 0 - -pw* 1,000 Vsnentl Lan - Inter. 0 0 0 0 0 -- 6pd00 g 00 600 600 800 Proe Low - In 244 477 117 70 73 0 - prIncipa 3,260 9,606 7,916 2,499 1,906 Tol Debt SevbI 16&90 13,385 26,075 26,396 24,004 40,459 Increse (Dre) In Wwkn g CaIsa 6,292 2,401 2,617 264 322 7,112 TOTAL APPLICATION 73,634 123,302 86,919 49,622 43,656 63,327 ....... .......... .__...... ........ .. __ ........____ .. .. ___...... _ Surplu Fund. (1,069) 780. (166) 660 1,671 (1,399) OptI_h Cubhblec 1,99 068 1,66 1,6t1 2,1t8 3,840 Cosing Ctsh Balnce 906 1,686 1,651 2,166 3,840 2,441 ANNEXOS Pap s o 07 TARTU DSRICT HEATING COMPANY COIBINED OPERATIONS BALANCE SHEETS AT YEWA ENDING DECEMBER 31 cE '000) -Actual---- Eilnmated t1g2 tos 1004 l906 1 1907 lmS 1900 ASBETS Fbxed Assets oss Fbxd Asts, 6,306 30,274 3a,207 160,908 176,201 20D,326 217.64 232.740 Less: A nculeasd Dspron 1,61 3,747 6,711 11.406 10.644 29,132 39,611 60,926 Not Fbod Assets 3,504 36.627 32,666 130,42 166.557 174,193 176,193 161,614 Work-4n-Progress 36 23 64,441 69,229 60,126 61.60 66,567 41,001 Totl FbIed Assts 3.640 36.660 97,027 198,671 216.882 226,723 234,080 223.615 Long-Trmt Investments 36 0 0 0 0 0 0 0 Currnt Assets Cmh and Bonk Nofte 4,446 1,996 906 1,666 1,516 2,1U 3,640 2,441 Acoounts Reosvable 13,220 9,062 16,020 16,196 16.664 16,996 19.143 26,193 Advanes 5 2.670 3,026 2,113 2,036 1,021 1,'0 2,607 Irventorls 4,44 6.636 2,175 2.626 3.060 3,176 3.430 4,207 Othr 2,176 4 1.000 1,200 1.400 1,600 1.600 2000 Total Currsnt Assts 24.314 20.266 22,126 24,022 26.60 27,60 30.161 36627 TOTAL ASSETS 27.02 66,606 119.162 222,03 243,360 263,53 26420 260.s42 EUlRY AND UABUILES EOUNTY Cap=t 4,047 33.790 33,790 33,790 33,,700 3,790 33,790 33,790 Capital RPAsve 0,711 1.2 1,626 1.626 1.2 1,626 1,626 1,6 Retained EwnIngs and Rservo. (340) 6,668 6,263 11,206 20,13V 26,781 28.044 U.427 Total Equky 13.416 41,116 43,710 48.633 66.66 62206 63.471 79,664 Long-Tnrm Debt iaJ Bank 1 1,070 713 367 0 0 0 0 EBIR 0 12,000 26,000 26,000 22,600 20,000 17,500 Word Bank MIITS 40,940 121,U61 141,067 164,361 167,30 160.576 Vafal Loan 4.000 3,200 2,400 1,e00 500 0 DmestIc Loans 0 7,601 16,969 9.477 3,436 2,672 967 Tota Long-Term Loan 0 1.070 66,164 167,146 176.574 161,847 190,974 169,040 Current LinbISa Accounts Payable to Suppilbs 7.713 3,317 1,087 1,413 1.640 1,6m 1.716 2,148 Advances 426 4,296 4,600 4,600 4,700 4,600 4,900 6.000 Short-Term Loans 3,260 1.900 Otdor 6,336 2,726 2,800 2,900 3,000 3,100 3,200 3,300 Total Current UebWnl 14,474 13,621 10,287 5,913 9,240 9,486 9,16 10.44 TOTAL EQUITY AND UABILITIES 27,52 66,606 119,162 222,693 243,U30 263,63 264,260 269,342 ....... .......... ....... .......... ....... .......... ....... ........... ... ...... ... ...... ... ........... ANNEX 9 Pago 7 of 7 TARTU DSRFCT HEATING COMPANY CONS)OLIDATED OPERATIONS RATIOS OF FINANCIAL PERFORMAANCE -Aotuel---- - Eetimatted 1992 1903 19"4 1996 19o 1997 19" 1999 OVERALL GROWTH Gowth In Hea Produation (%) - (15) 47 26 0 (4) 0 16 Oowthhn HotDemand (%) - - 47 17 0 (5) 0 le LXUOIDITY Current Abes/Curlmnt Liabitles 1.7 1.6 2.2 2.7 2.9 2.9 3.1 3.6 Quick AmataCurrent Lilebe 0.3 0.1 0.1 0.2 0.2 0.2 0.4 0.2 OPERATIG PEWOrOAANCE Operating EV neesl/Ravnues () 101 109 93 8 76 77 80 74 PROFIBUU1rY Retumrn oGmeelx ed sse(%) - 3.4 3.1 1.4 0.9 0.8 0.7 0.9 RetumonNotFbmd Ae s(%) - 3.9 3.6 1.6 1.0 0.9 0.9 1.1 Retum on Capital () - 2.2 3.6 3.8 4.4 4.6 4.5 8.0 Retum on Equity (%) - 1.8 2.7 2.6 2.7 2.4 2.4 2.6 DEBT, FNANCIAL LEVERAGE Debt Sen. Coverage - - 4.2 1.3 1.3 1.3 1.3 1.3 hnterest Coverage - - 6.2 2.0 2.6 2.1 1.7 2.8 Long-Term DebtEquity - - 1.6 3.6 3.2 2.9 3.0 2.1 RECEVABLES Reoeiabb/Annual Amounte Due (DW*) 144 47 46 46 46 46 48 45 ANNEX 10 Page 1 of 7 ESTONIA DISTRICT HEATING REHABILITATION PROJECT Parnu District Heating Financial Analysis KEY ASSUMPTIONS FOR FINANCIAL PROJECTIONS 1. Heat Demand - The heat supplied to the end-user 2. Heat Losses - Estimated at 22.4% as of 1994 and thereafter. 3. Heat Production - The level of heat production required to meet the heat demand and the losses in the DH network system. The increasing production-levels in 1994 and 1995 are due to the expected better level of service to be provided to customers and to adjust for normal temperatures. Decreasing production levels in 1997 and thereafter result from efficiency improvements in the system. 4. Energy Prices - Assumed to increase by the rate of domestic or foreign inflation, depending on the type of fuel. INCOME STATEMENT 1. Operating Revenue - Heat demand x the tariff (calculated both including the VAT on fuels, goods and materials, which is the current regulation, as well as excluding VAT to illustrate the impact of the VAT on the tariff). 2. Operating Expenses 2.1 Fuel - Calculated as quantity x price of fuels. 2.3 Salaries and Benefits - Assumed to increase each year by the estimated rate of domestic inflation. 2.4 Goods and Materials - Assumed to increase each year in proportion with the level of production and the estimated rate of domestic inflation. 2.5 Maintenance - Estimated to remain at the 1993 level during 1994 and to increase by the rate of domestic inflation each year thereafter. 2.6 Other Expenses - Expected to increase by the rate of domestic inflation each year. 2.7 Value Added Tax (VAT) - 18% on fuels, goods and materials, no longer reimbursed as of January 1, 1994. ANNEX 10 Page 2 of 7 2.8 Depreciation - Estimated at 7% of fixed assets (revalued) during 1994. As of 1995, depreciation is estimated at 5% on average fixed assets. The project fixed assets are estimated to have a life of 20 years. 2.9 Government Operating Subsidy - Discontinued in August 1993. 2.10 Profit Tax - 35% through 1993 and 26% from 1994 and thereafter. SOURCE AND APPLICATIONS OF FUNDS STATEMENT 1. Debt Service Terms 1.1 World Bank Rehabilitation Loan - Interest: 12%, Maturity: 4 years, No grace period 1.2 EBRD- Interest: 10%, Maturity: 7 years, Grace: 3 years (first principal payment in 1997) 1.3 EIB Energy Project - Assumed to cover 100% of.project cost (excl. VAT/duties) Interest: 10%, Maturity: 15 years, Grace: 5 years (first principal payment in 1999) BALANCE SHEET 1. Fixed Assets - for 1992-94, amounts are based on revalued assets. In 1995 and thereafter (until 1998), amounts also reflect the project assets as they are commissioned. 2. Work-in-Progress - As of 1995, amounts reflect project costs including design and supervision during the project and VAT. 3. Accounts Receivable - Estimated at 60 days. 4. Advances - Estimated at 10 days of heavy fuel oil purchases, paid in advance. 5. Inventories - Represents 3 weeks of fuel and 3 months of goods and materials during 1994-95, and 4 weeks of fuels and 6 months of goods and materials during 1996 and thereafter. 6. Retained Earnings and Reserves - Prior year balances increased by the annual surpluses. 7. Accounts Payable - Estimated at 30 days of goods and materials, 45 days of oil shale and 20 days of peat and wood chips. ANNEX 10 Page 3 of 7 PARNU DISTRICT HEATING COmPANY KEY ASSUMPrIONS FOR FINANCIAL PROJECTIONS -A otua u---- - - Estimaed- 1991 10o2 1903 l9o4 166 1990 1997 1936 IM HEAT: Heat Demand (GYh) 181.9 11.14 120.7 114.5 16.7 184.7 184.9 1830 181.2 System Losses (%) 34.2 34.2 21.1 22.4 22.4 22.4 22.4 22.4 22.4 System Losese (AWh) 94.4 88.9 42.7 44.5 S2 1. 1s2 127 82.2 Heat Productlon (OW1h) 270.4 172.3 113.4 199.0 240.5 240.8 238.1 236.7 233.4 Supplied by Bollerhouses (3Wh): Pawnu 160.8 106.1 117.9 154.1 151.2 180.2 188.2 187.3 10864 Tervbs 70.6 30.8 24.8 30.5 61.3 51.3 49.9 48.4 47.0 Ntldu 48.0 38.4 20.7 14.0 0.0 0.0 0.0 0.0 0.0 Other Smal HOBD n.e. na. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Supply (OWh) 276.4 172.3 163.4 190.0 240.8 240.1 238.1 235.7 233.4 Supplied by Fuele (3Wh): Heavy Fuel O1 276.4 11U.9 104.1 1190. 107.1 103. 101.1 98.7 96.4 Onl shale Oil 0.0 16.4 16.3 79.6 0.0 0.0 0.0 0.0 0.0 Sod Peat 0.0 0.0 0.0 0.0 WS 91.3 91.3 01.3 91.3 Wood Chips 0.0 0.0 0.0 0.0 66 467 437 46.7 41.7 Total Supply (t3h) 276.4 172.3 1SS.4 199.0 240.5 240.6 228.1 2257 235.4 Ouantltles of Fuel for Heat Productlon: Heavy Fuel Ol(metrte tons) at 28,907.0 16,0.0 10.823. 112.70.8 11,666.3 11,2341 w0,73.6 110711 104335 Oil Shale Oil (tone) b 0.0 11871.0 6.70 9,0.0.6 0.0 6.0 0.0 0.0 0.0 Sod Pea tons) el 0.0 0.0 0.0 0.0 24,448.5 33.676A 3,578A4 33,M.4 332,.4 WVood Chips (nS) di 0.0 0.0 0.0 0.0 103,906.2 71.364.2 71.3142 71,254.2 71,354.2 ENERGY PRICES AND TAWIFFS: (ncl. transportatlon to be4br houses) Heavy Fuel Ol (EEKimetrto Son) 1,000 1,100 1,128 1.166 1.1" 1,214 1,246 Oil Shale Oil (EEKton) 6r 900 1,066 1,182 1.24 1,36 1,463 Sod Peat (EK/ton) 1E0 140 1N 16S9 113 96 212 Wood Chips (EEKlnmS) 32 0 Js 42 46 49 Avg. Heat Tariff (EEKIJWh) 113 224 235 936 245 266 270 317 a! Assumew 11.1 UIlVvh I produced by I ton of heavy fuel oil x . effIloIncy botor. b/ Aseumee 10.3 MWh Is produwod by I son ofl shal bdx .68 efficiency factr. of Ausumes 3.4 UMVh I produoed by I ton of sod peat (36% moisture ocnt*nt) x .8 effiency fato. di Aesumes 0.8 MWh Is produoed by I nS mboee volume) of wood chIp (S0Y moisture contenO x.6 efIIe fator. ANNEX 10 Page 4 of 7 PAPNU DISTRiCT HEATING SYSTEM INCOME STATEMENTS FOR YEARS ENDING DECEMBER 31 cEm( '000) -Actual- Eat-- i ed 19i2 low 1W94 lo" 1996 lOS lo lw Heat Doend (GMt) 111.4 120.7 164.1 1647 1.7 1t4.9 13O 151.2 Heat Triff (ESElMV) (Inol VAT) 1t3 224 266 236 246 2t6 279 317 Heat Ttaif (EEKM) (eWi. VAT) - - 236 207 22 246 266 202 Foreign infation (%) a6 26 2.6 2.6 2.6 2.6 DomtleInflation(%) 1,000.0 6. 16.0 11.0 9.0 5O O .0 Eihange Rat (EEKt8) 13.60 13.50 12.50 13.60 13 50 13.60 OPERATING REVENUES Not Heat Revenue 18,496 27,096 40,943 43,579 46,74t 49,171 61.06t6 67.42 OPERATING EXPENSES Fuel 16,936 21.469 22,956 20,64S 21.436 22,126 22.,t4 23.087 Salaris and 3endfibt 1,269 2,704 3.110 3.462 t.7t2 4,0t3 4,23t 4.739 Goode and Materials 340 1,348 1,964 2.316 2.M Z230 2,207 2.1t5 Maintenanco 1,200 1,200 1,332 1.412 1,66i 1,693 1,629 Oter 1,412 61? 940 1,043 1,137 1,225 1,22= 1,402 VAT 4,496 4,130 4.267 4,384 4,613 4,663 ToW Operating Expensoe 18,986 27,626 34.713 32920 34,326 36,698 36,992 31,600 Net Operating Inoomn belore (400) (432) 6,229 10.969 11,422 13.673 14,066 18.926 Deproton & hntwrt Deprecation 53 1,263 1,954 1.9t6 5421 4.594 4.996 6.163 Net Operatng Inoer bewreioInterest (63) (1,715) 4,276 1.911 4,001 5.979 9,069 13,7t3 Interest Inoom 2t 0 0 0 0 0 0 Interest on Borrowings 112 1,042 1,909 5.014 6,361 sILS 7,901 6,832 Not Operatng inoonw (66 (2,731) 2,366 3.9 1,060 2.173 2.039 4631 OGcv'tHeatOperatingSubidWy 2,604 2.822 0 0 0 0 0 0 Net inme balr Tax 1,939 91 2.38 3.978 1,.60 Z173 2,039 5,631 Profit Tax (36%, 26%) 626 26 616 1.084 420 6t6 6t0 1,77t Exraordinry Gains (Loeae) 6 (70) 0 0 a 0 0 ° Not hime afer Tax 1,065 (4) 1,761 Z943 1,221 1,606 1,060 6,066 _....... .......... ....... ........... ........ ............ ....... ...................... ... ...... ANNEX 10 Page 5 of 7 PAIMU DISTC HEATI SYSTE SOURCE ANM APPUCATKSNS OF FUNDS STATEMENTS FOR YEAS ENDING DECEMtIE 31 (EEK 000) 1W64 16w 16 1o7 16s 166 SOURCES Internal Sources Net Operating iom before Interest 42M D,W1 6.001 5,675 61111 13.7 DepreciatIon 1,964 1,6 .412 4,64 4.66 5.1,6 Total Internal Sources 6,221 10,666 11.422 13,73 14K06o 1,6,9 Borfowings EBRD Emergency Energy Loan slow E8 Energy Project Loan 24,375 24,116 3.561 6.480 Other 0 0 a O Total Borrowings 31,514 24,116 3.61 640 0 0 TOTAL SOURCES 35,043 31,07S 26,313 20.06M 14,066 1662 ....... .......... .... ..... _ .---.............. ---.- ............. .... ....._ APPUCATIONS Constructlon Requirernents Project 24,575 24,116 6,861 6.480 Other On going Projects 6,51 Future Projects 1.000 5,000 1.00O Total Construction Projects 31,614 24,116 4,891 7.40 5D,000 1.000 VAT/Dutle on Project 1,100 1,114 667 16 0 0 Debt Setvie VVrld BSk Relhab. Projet - intref 640 7 al S 0 6 - prindpl 2,611 2,611 2,011 2,611 EBRD - intret 347 ON4 64 a"4 m 46 - pidnpal 61 So1 W1 EIS -interest 6l 3,666 1S.44 6,112 SAW 6A - prinipal GAN Other - Interst 0 0 0 0 0 0 - principal 237 0 Total Debt ServIe 4,757 7,26 $.n66 10,466 0,022 14.360 Prolft Tax 616 1,034 426 66 GU0 1,776 inomanee(Dscrsm)In WorkingC apItl 1,1i0 1,012 1,2J2 63 26t2 1,001 TOTAL APLICATIONS 39,407 34,902 20,071 16,148 13A84 16.187 Surplus Funds (1.423) 13 242 o7 2J2 786 Opening Cash Balano 2,166 76 o 1,160 2,067 2,516 Closing Cash Balance 765 on 1,1 2,0J7 2,619 3,07x ANNEX 10 Page 6 of 7 PARNU DIfTRICT HEATING COMPANY BALANCE SHEETS AT YEAtS ENDING DECEMBER 31 (EEK 'oo) Estiated 1992 1963 1904 low low 197 t9ow 1999 ASSETS Flxed Assets Gross Fixed dAues 21,712 26,821 29.016 49,e64 67,150 96,607 103,260 103,260 Lses: Accumulaed Depreciation 6,66 7,626 9,760 11,748 16,1S9 19,766 24,760 29,922 Net Fbixd Assets 16.116 16,906 19,236 37,966 71,9t0 76,644 76,491 73,320 Work-4n-Progrevs 119 2,196 32,914 37,476 0,449 7,644 6,001 7,001 Total Fixd Assets, 16,236 21,190 62,160 76,412 61,439 64,408 84,492 S0,329 Long-Term investments 0 0 0 0 0 0 0 0 Curfent Assets Cah snd Bank Notes 2,782 2,186 766 966 1,160 2,007 2,319 3,07t Accounts Recelvble 6,427 4,96 6t,S24 7,313 7,624 6,196 8,610 9,672 Advances 1,204 S09 396 366 361 361 361 362 Inventorles 1,930 1,4S2 1,802 1,770 2,786 2,817 2,8t2 2,913 Other 4 469 260 275 300 326 350 376 Total Current Asets 10,777 9,704 10,067 10,662 1220 13,7M6 14,408 1,300 TOTAL ASSETS 26,012 30,S94 62,207 S6,074 t3,m t6,273 96,694 9K,629 ....... .......... ....... ........... ....... .......... ........ ............... ................. ............... EQUrTY AND LIABILITIES EQUITY CapItal 1,8"6 3,020 3,020 3,020 3,020 3,020 3,020 3,020 Capital Reserve 21 62 S2 62 62 62 62 62 Retaind Eamnings and Resesrvs 1,066 16,011 17,762 20,706 21,992 23,6J4 26,042 30,095 Total Equity 2,963 19,113 20,e64 26,S07 26,020 26,666 26,144 33,200 Long-Term Debt World Bank I 10,446 7,134 6,023 2611 0 0 0 EBRD 237 6,919 6,039 6,939 6,948 4,966 3,966 EIG Energy Prolect 0 24.676 4t,991 67,St2 64,362 64,362 67,026 Domstic Loans 0 0 0 0 0 0 0 0 Total Long-Term Loans 0 10,662 39,648 61,183 67,432 70,310 09,316 61,681 Current Liabillle Accounts Payable to SuppIers 9,316 731 1,26 60 60 63 732 773 Advanoces 1S 197 240 200 320 360 400 440 Short-TermLoans 0 0 0 0 0 0 0 0 Other 267 171 200 226 260 276 300 325 Total Current UabIltles 9,691 1,0t0 1,696 1,114 1,229 1,326 1,432 1,638 TOTAL EQUrrY AND LIABiLrTES 1Z664 30,S64 62207 8,074 m3,n 06,273 96,694 96,620 ,,,,,,, ....... ....... ........ ....... ....... ....... ....... ANNEX 10 Page 7 of 7 PANU DOITROT HATING COMPANY RATICO OF FINANAL PEOROMANCE u -Acta-- Estimated 106 IO 194 1W low 1W '106 1W99 OVERALL GOWrH Growh of Host Predulon) - (36) () 22 21 e (I) (t) OtwI odHoI Demand (%) - 0 2 21 0 (I) (1) (1) Ourn.t Assew/Curront LlUbiltU 1.1 0.6 5.* 0.9 10.0 10.4 10.1 10.0 Quick AssetalOurroni ULlnbW 0.6 2L0 0.5 0.6 1.0 1.6 1.0 20 OPERATING PEFKORMANCE Opatting EonslRenuea(%) 102 102 SO 7r 76 72 72 67 PAOFITADILflY Return on Oro"a Fbod Asts ) - 0 4 6. 10.1 2.4 2.4 2.0 6.6 Return on Net Fbed Assts (%) - 0.5 124 1a9 L0 2.9 2.6 9.0 Return on Capl () - .0 70A 131.7 14.6 71.9 67.5 228.2 Return n Equity (1) - 0.6 11.3 16.7 6.6 6.2 7.2 20.6 DEBT. FWMANCLAL LEVERAGE Debt ServiCoe aga - - 1.3 IA 1.3 1.2 1.6 1t3 Interest Covr - - 2. 2a 1. 2.0 20 2.7 Iong-TarrnO DbVEqulty 1.9 a z27 2.6 2.5 1.9 RECEIVABLES RPoelvI WAnnusi Amounts Due (Days) 106 a *0 s0 60 0o 6o 0o ANNEX 11 Page 1 of 7 ESTONIA DISTRICT HEATING REHABILITATION PROJECT Tallinn District Heating Financial Analysis KEY ASSUMPTIONS FOR FINANCIAL PROJECTIONS 1. Heat Demand - The heat supplied to the end-user. 2. Heat Losses - Estimated at 20% as of 1994 and thereafter. 3. Heat Production - The level of heat production required to meet the heat demand and the losses in the DH network system. The increasing production levels in 1994 and 1995 are due to the expected better level of service to be provided to customers and to adjust for normal temperatures. Decreasing production levels in 1996 and thereafter result from efficiency improvements in the system. 4. Heat Purchased from IRU - It is assumed that the Tallinn DH company will purchase all of IRU's production (net of losses). 5. Energy Prices - Assumed to increase by the rate of domestic or foreign inflation, depending on the type of fuel. INCOME STATEMENT The financial statements have been prepared by consolidating the Municipal and Network Companies' accounts. The income statement for 1992, however, reflects only the Municipal Company's activities, since the Network Company's activities were not separately accounted for. The income statement for 1993 is based on a whole year of actual data from the Municipal company and 6 months of actual data for the network company as they started operations as an independent company July 1, 1993. This has been annualized by the World Bank with assistance from the Network company's financial staff. 1. Operating Revenue - Heat demand x the tariff (calculated both including the VAT on fuels, goods and materials, which is the current regulation, as well as excluding VAT to illustrate the impact of the VAT on the tariff). 2. Operating Expenses 2.1 Fuel - Calculated as quantity x price of fuels. 2.2 Heat Purchased from IRU - Heat demand (from IRU) x the estimated required heat tartiff including VAT, which IRU needs to charge to cover all operating expenses. 2.3 Goods and Materials - Estimated to increase each year in proportion with the level of production and ANNEX 11 Page 2 of 7 the estimated rate of domestic inflation. 2.4 Salaries and Benefits - Assumed to increase each year by the estimated rate of domestic inflation. 2.5 Maintenance - Estimated to increase by about 5% each year as of 1994. 2.6 Value Added Tax (VAT) - 18% on fuels, goods and materials, no longer reimbursed as of January 1, 1994. 2.7 Depreciation - Estimated at about 12% on the Municipal Company's fixed assets and about 7% of the Network Company's fixed assets (revalued) during 1994. As of 1995, depreciation is estimated at 5% of the average consolidated fixed assets. The project fixed assets are estimated to have a life of 20 years. 2.8 Government Operating Subsidy - Discontinued in August 1993. 2.9 Profit Tax - 26% on net income before tax from 1994. SOURCE AND APPLICATIONS OF FUNDS STATEMENT 1. Debt Service Terms 1.1 World Bank Energy Project - Assumed to cover 90% of project cost (excl. VAT/duties) Interest: 10% Maturity: 15 years Grace pd: 5 years (first principal payment in 1999). BALANCE SHEET 1. Fixed Assets - For 1992-94, amounts are based on revalued assets. In 1995 and thereafter (until 1999), amounts also reflect the project assets as they are commissioned. 2. Works-in-Progress - Amounts reflect project costs including design and supervision during the project period and VAT. 3. Accounts Receivable - Estimated at 60 days. 4. Advances - Estimated at 1/3rd of fuels utilized in production, paid 2 weeks in advance. 5. Inventories - Represents 2 weeks of heavy fuel oil and shale oil, 3 months of coal and 1 month of goods and materials at end-1994 and thereafter. 6. Municipal Capital Contribution - Represents the 10% local contribution to the project cost, contributed by Tallinn Municipality as an equity contribution to the company. 7. Retained Earnings and Reserves - Prior year balances increased by the annual surpluses. 8. Accounts Payable - Estimated at 1 week of heavy fuel oil and shale oil purchases, 2 weeks of coal, 3 days of natural gas and 2 weeks of goods and materials. ANNEX 11 Page 3 of 7 TALUNN D8TFtICT HEATING COMPANY KEY ASSUMPTIONS FOR FINANCIAL PROJECTIONS Aaalu - - E Estimated - 1901 1902 1993 1994 1996 1006 1907 1996 1909 HEAT: Heat Consumpton (QVh) 1,Ut4 1,712 1,760 1,807 1,714 1.701 1,658 1.668 SyetfmLoosen(%) 10 20 20 20 20 20 20 20 Syte Lose (GtM) 209 428 437 4C2 429 426 421 416 Hal Productlon(GWM) 2.003 2,140 2,167 2,269 2,143 2,126 2,104 2,082 HeatPurchmodtromIRU(tJ(G) 910 1,036 1,148 1.148 1.146 1,145 1,148 1,148 Totd Heat supply (tWh) 3,003 3,175 3,336 3,407 3,201 3,274 3,262 3,230 Supplbd by Bolerhouse (GW): VWJ+Othefs 910 1,036 1.146 1,148 1,148 1.148 1,148 1.148 MunIipal CtH Company, Smal HOSe 284 213 226 260 240 260 240 230 Network Company: 1,8t2 1,927 1,062 1,090 1,903 1,676 1.814 1.862 Ulemlste 463 400 741 778 706 703 696 e9s Talinn 260 306 0 0 0 0 0 0 Mustsn 672 740 0 0 0 0 0 0 Kadeka 329 361 1,206 1,206 1,181 1,167 1,160 1,148 K vraa 9s 104 0 0 0 0 0 0 Hllu 17 16 1s 1s le 16 16a 1 Total Supply (Gu) 3,003 3.176 3,336 3,407 3,291 3,274 3,262 3,230 Suppled by Fue (GfWh Heavy Fuel Oil 2,63 2,790 2,9W6 2,973 2,888 2,861 2,860 2,838 Ught Fuol Ott 0 0 0 0 0 0 0 0 GM 316 209 309 330 310 313 306 300 Shale 06 79 64 a 78 72 76 72 s9 Cool 26 21 23 26 24 26 24 23 Tol Supply (GWA) 3,003 3,176 3,336 3,407 3,291 3,274 3,262 3,230 Quenltte of Fuel for Heat ProductIn: Heavy Fuel Oil ftone) a 212,66 212,734 311,214 316,114 306,746 303,276 302,024 300,774 LlghtFuelORl(tonu) bi 0 0 0 0 0 0 0 0 GM ('000 m3) cl 160,880 73.660 39,476 42,167 39.6a0 30,974 39,182 36,369 Shale Oi (tons) d/ 86t 6s 7,710 8,900 8,224 8,667 6,224 7,861 Coal (tone) * 2,279 2,279 4.664 6,274 4,868 6,071 4,86 4,656 ENERGY PRICES AND TARIFF& (ld trportaton lo bolr houne) Heay Fuel OM (EKton) 80 1,061 1.000 1,026 1,061 1,077 1,104 1,181 Ught Fuel 0 (EBEtJon) 603 2,000 2,060 2,101 2,164 2,20S 2,268 2,819 O (EBE/OO m3) 480 1,127 1,130 1,16t 1,187 1,217 1,247 1,278 Shae 06 lECiton) 697 800 900 9we 1,089 1,176 1,270 1,372 Coal (EEM-ton) 100 496 400 410 420 431 442 463 IUJhatseeMngprbe (EEKUAW)(nol. VAT) 129 224 160 171 180 180 196 206 Avg. Heat TarItff EEKAIMW) (ino VAT) 264 268 282 206 307 320 industrlal 230 200 ResIdentia 1S 209 al Aaumoe 11.1 MW Is produoed by ISon of heavy fuel o x *.8 b efcency factor. bl Aeumne 11.9 UWh b produced by I ton od Ight fuel oN x.86 effiloenoy fator d! amue 0.2 MWh Is produced by '000 mS of gm x .86 *fflolbncy fa1o. di Aaeunme 10. MWh Is produced by 1 ton of oil hale *o x .85 efficiency far. *1 Asumee 6. IWA Is produced by I ton of ood x .6 effkoency faoto. ANNEX 11 Page 4 of 7 TALiJNN DISTINCT HEATING COMPANY INCOME STATEMENTS FOR YEARS ENDING DECEMBER 31 (EE '000) AetuM - Et ednwXd 1992 1005 1904 1N6 1996 1997 1998 1999 Host Demnd from Own Producton (GVi) 1.84 1,712 1,760 1607 1,714 1,701 1,U63 1.666 HeatDemandfromPurchaedHas (GMW) 10 1,035 1,148 1148 1 1,148 1,148 1,148 Toti Hoat Demand (GWh) z794 Z,747 2,608 2,966 2,s82 2,5U 2,831 2,614 Heat Trf (W h) (Ind VAT) 34 224 264 286 282 296 30? 320 Heat Twi (EUM1M) (sxd. VAT) 229 240 266 267 276 289 Foreign hnflatbon (%) 2.6 2.6 2.6 2.6 2.6 2.6 Domestic Infaton (%) 16.0 11.0 9.0 6.0 8.0 8.0 Exchange Rate (EEKO) 13.6 13.6 13.6 13.6 13.6 13.6 OPERATING FVENUES Net Heat RPenuo 63,167 66,197 736.990 788.083 807,197 840,396 860,178 900,382 OPERATINo EXPENSES Fuel 20,129 336,089 364,588 362,917 379,332 387,487 394,646 402,300 Heat purchaod from IWU 39,782 160,108 183,6o 196,306 206,640 216,072 225,008 236,340 MaterWIs and Goode 38 36,090 42,668 48,100 60,877 54,687 68,607 62,90 Salte. and Benenfh 3,403 24,824 28,648 31,688 34,640 37,303 40,287 43,610 Mainteaoc 2,610 19,000 20,000 21.000 22,000 23,000 24,000 26,000 Other 6,168 7,000 8,000 9,000 10,000 11,000 12,000 VAT 73,258 77,609 77,438 79,803 81,637 83,764 Total Operating Expense 6,212 579,230 719,660 765,702 770,628 809,062 83,474 684,902 Net Operaing ineom before (3,046) (11,042) 16,321 20,381 27,369 31,344 33,705 35,460 Deprekiaion A Interet epreciatIon 204 6,361 13,475 14,069 15,664 18,148 19,587 19,838 NetOperatinghncomebefor lnterest (3,249) (17,403) 2,647 6,313 11,866 13,196 14,117 16,613 ntereot Inhoeo 0 Intemee on Bonowlng 39 24 340 4,006 8,242 10,166 10,602 10,703 Net Operating Income (3,268) (17,07) 2,607 2,307 3,443 3,029 3,516 4,010 Gov'tHa tOperatingSubsldy 6,177 20,694 0 0 0 0 0 0 Net Inom before Tax 4,680 2,067 2,607 2,307 3,443 3,029 3,616 4,910 Proi Tax (36%, 26%) 1,711 0,U7 662 600 806 768 914 1,277 Extrordinary aeine (.oee) (34) Not Inoome after Tax 3,144 (,900) 1,865 1,707 2,4 2,242 2e,1 3,633 ..._w"^"w ............................ .............. ....... .......... ....... .......... ....... .............. ANNEX 11 Page 5 of 7 TALUN OTFCr HEATING COMPANY SOURCES AND APPUCATONS OF FUNDS STATEMENTS FOR YEAMS ENDIN6 DECEMBER 31 mK '000) Estirrald -- 1994 193w 196 1097 166 1099 80URCES hntemal Sources NotOpefatinginowmsbefore lntsr 2.847 6,316 11U.6 13,196 14,117 16,613 Deprektlon 13,476 14,069 16,664 16,146 19,687 19,836 Totl Internal Souroe 16,321 20,361 27.369 31,344 33,706 36,460 Borrowings World Bank Energy Proet Loan 13,605 62,908 31.600 6,688 2,020 0 Other 0 0 0 0 0 0 Total Borrowings 13,OO6 62,90t 31,669 6686 2,020 0 Municipal Contributon to Project 2,366 8,640 6,197 9W 311 0 TOTAL SOURCES 32,284 81,929 64,375 39,027 36.036 36,460 APPTIONS Constnrotion Rsquirernents Profect 16,117 86,787 35,643 7,426 Z244 Other Ongdng Projects Future P.oet 6.000 10,000 12,000 12,000 12,000 Total Construotlon Projects 1S,117 66,787 46,343 19,426 14,244 12,000 Prom Tax 682 6oo 6N6 786 914 1,277 VAT/Duties on Project 684 Z761 1,663 266 87 0 Debt Service World Bank Energy Projeot - hntret 340 4,006 6,242 10,166 10,602 10,703 - prInoipa 9,632 Other- hntrent 0 0 0 0 0 - prhncip 0 0 0 Total Debt Servime 40 4,006 8,242 10,166 10,602 20,638 Inorea (Dmees) In Working Capital 21,897 7,622 1,723 4,062 3,472 4,069 TOTAL APPUCATIONS 3,6862 11,7116 57,6646 34,696 29,319 37,880 ... ........ ........_ ....... .......... ....... .......... ....... Surplus Funds Mm66) 2653 6809 4,336 6,717 (2,430) Opening C_sh Balance 16,344 8,776 9,029 16,838 19,677 26,594 Cboing Cash Blono 6,776 9,029 16,838 19,877 26,694 24,164 ANNEX 11 Page 6 of 7 TALLUN DI6TFCT HEAThS OOMPANY IALANCE SEErS AT YEARS ENDN DECEMBER 31 mm *000) -Actual- - Es*na*d ioog 1ees 1964 1006 Is". 1007 1908 19w Fh.d Assets G"o P.d Asel 3,02 2886o6 273,6a 268,562 339.026 367.006 3o6,660 387,910 Les: Aoeumutmtd Depreciation 1,2 142.502 156,977 173,048 1U,730 203,678 223,466 243,300 Net Fixd Asset 4,040 123,103 117,411 11,307 152,266 164,028 172,126 164,616 wrk-lr-progres 1,180 7,763 16,e0a 6,647 6768 37,662 44,329 64,000 Total Fbod Assets 6,229 130.866 133,374 168,684 220,176 221,710 216,484 208,816 Long-TeT nvenhminte 0 0 0 0 0 0 0 0 Current Asets Cnh nd Snk Nots- ,100 18,344 8,776 0,029 16,I88 10,877 26,604 24,184 Aounts Rsc.lrable 26,270 170,066 122,666 131,014 134,833 140,088 144,8e3 160.060 Advnoe 6,66 191 4,861 4,841 4,837 4,940 6,036 6,131 hveontorite 1,802 14,334 18,240 17,321 17,480 18,U02 19,663 10,282 Othe 240 16,806 21,733 24,123 26.204 28,a36 30,6M7 33.123 Totel Current Am**l 43,107 227,833 174,086 186,30 106,66 211,333 226,814 231,718 TOTAL ASSETS 48,336 368,716 307,436 376,223 418,658 433,043 442,267 440,374 ........ ........... ....... ........... ............ ....... .......... ....... ................................ EOUflY AND LAUES E-UITY Sta Capta 1,960 70,062 70,002 70,002 70,062 70,062 70,062 70,002 Munlcipal Ct Contributon 0 0 2,366 10,907 1m,166 17,193 17,604 17,604 stot Capia RPAeiw 1,886 16,760 16,780 18,760 18,780 18,780 16.780 18,780 Retined Eamnings and serves 6,168 112,662 114,407 116,114 118.682 120,003 12a5,06 127,136 TtaW Equty 0,031 201,424 206,637 216.063 223,726 226,666 220,681 233,614 Long-Tm Debt Wmt Bank Enery Project 13,606 e6614 66,322 103,W0 107,027 97,196 DOeetic Lons Tota Long-Tem Loan 0 0 13,06 66,614 66,322 106,006 107,027 97,196 Curent Lsdge AcountsPayabl to Supp! 33,781 80s 8,197 ,726 6,778 9,067 9,s36 90,8 Advnes 2,480 32,s3e 30,o00 32,000 34,000 36,000 36,000 40,000 Short-Tem Loan Other 24 87,880 60,000 62,000 64,000 56,000 86,000 60,000 Total Ourrent Ube 3s,25 167,266 88,167 02,726 966778 101,067 106,360 109,686 TOTAL EOUIrY AND LIABILITIES 48,336 388,710 307,430 376,223 418,828 433,043 442,267 440,374 …........ ....... ... ... ... ... ANNEX 11 Page 7 of 7 TALUM OIRT IEATN CO PAW PAT10 OPF FD*IJSA PWO024ANO ~± - --Aokm&-~~~~ 1 1, -1 1 OVEPALL GOW/rH hwi In Pduoc () Z2 .2 S.3 (L1) (DA) (1.0) (1.0) OrwIh in DOm,d ) 4.1) Z2 3.3 (61) 0) (1."0) (1.0) 0wrontre.wOunwtUebile 1.1 IA 2.0 LO Zt 2.1 I1 2.1 Quick AmsiultCuwee LibIh 0.2 0.1 0.1 0.1 0.2 0.2 0.3 0.2 OPERAThO PEWCE.ANCE Opwthg E_ 1i-- (%) 106 102 S7 0?7 16 9U e6 PRORrABLITY () PRmc on