PROPOSAL FOR REVIEW

PROJECT TITLE: BELARUS: PHASEOUT OF OZONE DEPLETING SUBSTANCES

GEF FOCAL AREA: Ozone Depletion

COUNTRY ELIGIBILITY: Ratified the Montreal Protocol in 1988; GEF eligibility on basis of IBRD membership.

TOTAL PROJECT COST: US$14.7 million

GEF FINANCING: US$7.4 million

COUNTERPART FINANCING: US$7.3 million

CO-/PARALLEL FINANCING: None

ASSOCIATED PROJECT: None

GEF IMPLEMENTING AGENCY: World Bank

EXECUTING AGENCY: World Bank

LOCAL COUNTERPART AGENCY: Belarus Ministry of Natural Resources and Environmental Protection

ESTIMATED STARTING DATE: January, 1997

PROJECT DURATION: 3 Years (maximum length for an enterprise sub-project)

GEF PREPARATION COSTS: The Danish Government provided US$200,000 for assistance with sub-project and Country Program Preparation

REPUBLIC OF BELARUS

PHASEOUT OF OZONE DEPLETING SUBSTANCES

BACKGROUND INFORMATION ON BELARUS

1. General recognition of upper atmosphere ozone depletion has led to a substantial international effort to phase out Ozone Depleting Substances (ODS). The ozone layer forms a thin shield in the stratosphere protecting biological systems from the sun's harmful rays. Ozone layer thinning can cause impacts such as increased skin cancer, eye cataracts, decreased plant productivity, and deterioration of the marine food chain. In the mid-1980's it was found that CFCs and other chemicals used in refrigeration, foams, aerosol sprays, fire protection, and solvent cleaning is destroying the ozone layer.

2. ODS includes chlorofluorocarbons (CFCs), halons, several halogenated solvents, the agricultural fumigant methyl bromide and a class of transitional chemicals known as hydrochlorofluorocarbons (HCFCs). The basis of this effort is the 1987 Montreal Protocol, ratified by all developed and most developing countries. Further recognition that ozone depletion is occurring more rapidly than first anticipated has led to two protocol amendments which added materials and accelerated phaseout. The first in June, 1990 (London Amendment) added methyl chloroform (MCF) and carbon tetrachloride (CTC), as well as tightening the phaseout schedule. The Copenhagen Amendment in November, 1992 added HCFCs and methyl bromide as regulated substances, as well as further accelerating phaseout. For developed countries, the phaseout dates are:

  1. January 1994 for Halons
  2. January 1996 for CFCs, MCF, and CTC
  3. Year 2010 for Methyl Bromide (critical agricultural use exemption)
  4. Year 2030 for all HCFCs.
3. Belarus ratified the Montreal Protocol in October 1988 and the London Amendment in February 1996. The instrument of Ratification is expected to be submitted to the United Nations by end-March, 1996. Ratification of the Copenhagen Amendment has not been acted on. Based on its anticipated ratification status as a developed country under the Montreal Protocol, Belarus' obligations for ODS phaseout will be in accordance with the accelerated developed country schedule. It will also assume obligations to contribute to the Multilateral Fund of the Montreal Protocol (MFMP). In July, 1993, the Council of Ministers passed a resolution for action on ODS phaseout by directing the Ministry of Natural Resources and Environmental Protection (MNREP) to develop an ODS Country Program. In August, 1993, the Interagency Commission on ODS was established by resolution of the Council of Ministers to supervise the development of the Country Program. Coordination responsibility for the Country Program was assigned to the Belarus research Center "Ecology", an institute subordinate to MNREP. Belarus completed their formal Country Program for the phaseout of ODS in May, 1995 with bilateral assistance from the Danish Government. The ODS Country Program and national phaseout strategy contained in it have been adopted by the Government and accepted by Parties to the Montreal Protocol as evidence of the country's commitment. Belarus has acknowledged that it will be unable to meet the developed country phaseout schedule due to the current economic situation without external assistance, and has therefore requested the financial assistance of the Global Environmental Facility (GEF).

4. The phaseout strategy adopted by the Government calls for the complete phaseout of ODS consumption by the end of 1997, based on receiving international financial assistance in mid-1995. Assuming such assistance will now be committed by mid-1996, phaseout will still be achieved ahead of the London Amendment schedule (January 2000), but slower than the Copenhagen Amendment schedule (January 1996). On this basis, realistic phaseout dates by principal consuming sectors are as follows: refrigeration manufacturing - July 1998; refrigeration servicing - December 1998, solvents - December 1997, and fire protection - December 1997.

ODS SECTOR BACKGROUND

5. No ODS material is produced in Belarus. It is dependent on supplies from major producers in Russia, currently scheduled to discontinue production by year 2000 or earlier by virtue of Russia's commitments under the Montreal Protocol. GEF assistance to ODS consuming enterprises in Belarus would allow them to make the transition to non-ODS materials in a gradual, planned manner and avoid a later crisis when supplies are cut off. Early reduction of ODS consumption will also reduce demand for ODS materials from a black market supplier. In 1994, Belarus consumed 1,043 metric tons (MT) of ODS, as compared with 2,773 MT in 1986. Earlier reductions during this period can be attributed to the conversion of aerosol manufacturers to hydrocarbon propellants, while more recent declines reflect difficult economic conditions and limited phaseout investments in the refrigeration sector. The refrigeration sector remains the dominant consumer of ODS, accounting for approximately 80% of use. The solvent sector accounts for 13% of consumption, while fire protection accounts for 2%. Residual aerosol sector use, largely for medical applications, account for the remainder. Fifty four enterprises, service organizations, and agencies spanning all four sectors have been identified as ODS consumers in Belarus. Six consumers, dominant in their respective sectors, have proposed seven sub-projects for GEF assistance. Atlant, which has proposed two sub-projects, is the largest manufacturer of domestic refrigeration equipment (750,000 units per year) in Belarus and the largest single consumer of ODS (373 MT in 1994).

PROJECT OBJECTIVES

6. The project's main objective is to assist Belarus with the rapid phaseout of ODS consumption in a manner consistent with international efforts. Assistance to high consumption enterprises in Belarus would enable them to make the transition to non-ODS materials before legal supplies diminish, and will thus reduce the demand for ODS from black market suppliers. The project would also allow Belarus to meet its consumption phaseout obligations under the Montreal Protocol within a realistic time frame and provide needed technical assistance and institutional strengthening.

PROJECT DESCRIPTION

7. The project targets priority consumption phaseout activities in the refrigeration and solvent sectors. It also provides modest technical assistance at both the institutional and enterprise levels to facilitate implementation of the ODS Country Program, and technology transfer for phaseout in the fire protection sector. It is structured as a framework project consisting of a series of seven enterprise specific technology conversion investment sub-projects and two technical assistance sub-components. The project has been designed consistent with relevant GEF policies, particularly those on cost effectiveness, exports, ownership, retroactive financing, operational costs and financial viability as included in chapter five of the GEF Operational Strategy. The overall project is summarized by sub-project and sub-component in Annex 1 and a summary of each investment sub-project is provided in Annex 2. The Danish Government has provided resources to assist Belarus in preparing the project to a level acceptable for GEF review. Preparation to date includes detailed technology and institutional strengthening proposals and associated cost analyses.

Technology Conversion Investment Sub-projects

8. The technology conversion component consists of two sub-projects in the refrigeration manufacturing sector, one sub-project in the industrial/commercial refrigeration servicing sector, and four sub-projects in the solvent sector . Several sub-projects were pre-appraised prior to the approval of the GEF ODS Operational Strategy. Consequently, the choice of technologies will be subject to reconsideration in line with relevant provisions of the Strategy, particularly those on synergism during appraisal.

Technical Assistance and Training

9. The technical assistance component consists of two sub-components addressing transfer of technology and training for conversion in the fire protection sector and institutional strengthening as follows:

RATIONALE FOR FUNDING UNDER THE GLOBAL ENVIRONMENT FACILITY

10. Belarus is a significant consumer of ODS material, but lacks the financial capacity to undertake comprehensive phaseout in accordance with its obligations under the Montreal Protocol. As a developed country signatory to the Montreal Protocol, it is not eligible for support from the Montreal Protocol Multilateral Fund but is eligible for GEF funding as defined in the GEF Operational Strategy. The proposed project is consistent with GEF Guidelines for ODS phaseout which have been carefully developed to reflect Montreal Protocol policies and procedures, thus ensuring consistency of approach between GEF and Montreal Protocol projects. These guidelines endorse working with a range of enterprise specific subprojects that offer substantive ODS phaseout gains, and for which the beneficiary enterprise would not be able to obtain sufficient financing from commercial sources. Within these subprojects, grant funding is limited to eligible incremental investment costs, while the enterprises are responsible for financing the balance from their own resources or loans.

SUSTAINABILITY AND PARTICIPATION

Project Sustainability

11. The project will help the Government of Belarus to phase out ODS substances by compensating enterprises for incremental costs incurred during the process of technology conversion. Technology conversion will allow beneficiary enterprises to be competitive both in the domestic and export markets. Sustainability will be ensured by conducting a financial viability analysis for the enterprises to consider income statements, balance sheets, presence of well defined markets, credibility of their business plan, prospects for maintaining a positive cash flow, organizational structure, and technical capabilities. The analysis of financial viability for project enterprises will be completed for appraisal, and beneficiary enterprises have been informed that support for project proposals will be dependent on positive results. Sustainability of specific sub-projects will be assured through the evaluation of proposed technologies and their cost effectiveness in relation to other alternatives, during the project preparation work and its review by STAP. Assistance under the project for the Ozone Office will enable the Government to provide a sound institutional and policy framework for its ODS phaseout program.

Participation

12. As part of the Country Program development, MNREP undertook consultations with a broad spectrum of enterprises and interested parties: other ministries, including industry, economics, finance, NGOs, industry associations and others. Enterprises were given the opportunity to participate in the Project as long as they could provide the necessary data for project staff to evaluate their financial viability, technological capabilities and eligibility for financial assistance.

LESSONS FROM PREVIOUS BANK INVOLVEMENT AND TECHNICAL REVIEW

Lessons from Previous Bank Experience

13. The proposed project will be the seventh GEF funded ODS phaseout project to be initiated in the transitional economics of Central and Eastern Europe and, therefore, little direct World Bank experience and associated lessons are available at this time. However, as one of the Multilateral Fund Implementing Agencies, the World Bank is now implementing ODS phaseout projects in fifteen countries. A number of lessons have been learned from experience with these projects, including: i) the importance of a national phaseout policy or ODS Country Program as a basis for assuring commitment and ownership by the client country; ii) the value of strong enterprise/government linkages to achieve phaseout objectives; and iii) the need for institutional strengthening and training for local implementation units and financial intermediaries. Additional lessons have been learned from World Bank and GEF projects in Belarus and other FSU countries, including the importance of: i) identifying a consistent committed counterpart team with sufficient authority and implementation experience to move the project forward; ii) coordination among key interested parties at the federal, regional and enterprise levels; iii) early detailed attention to procurement and other implementation issues; and iv) involvement of local consultants and institutes in the process.

Technical Review

14. The technology conversion investment sub-projects have been reviewed and approved by outside specialists selected from a roster prepared and cleared by the GEF's Scientific and Technical Advisory Panel (STAP). These specialists are also approved reviewers under the parallel Ozone Operations Research Group (OORG) review system established by the World Bank to provide technical advice on technology selection under the Multilateral Fund. Sub-projects have been revised and updated based on the recommendations of the technical review panel.

PROJECT FINANCING, BUDGET AND INCREMENTAL COSTS.

Project Cost and Financing

15. The estimated total cost of the project is US$14.7 million which includes goods and services, technical assistance, training, physical and price contingencies, sub-grant processing charges for local implementation and financial intermediaries, and net present value of incremental operating cost increases. The project would be financed by a US$7.4 million GEF grant and US$ 7.3 million in contributions from the beneficiary enterprises, including US$13.6 million in enterprise incremental investment costs. All costs are incremental in nature and calculated in accordance with the "Indicative List of Eligible Incremental Costs" adopted by the Parties to the Montreal Protocol and accepted under the GEF ODS Operational Strategy. Consistent with GEF guidelines, the grant amount limits eligible assistance for enterprises with export markets to OECD countries. To retain markets, some enterprises have already begun the conversion process, and it is expected that these costs would be retroactively financed. Retroactive financing will be subject to review during appraisal and expenditures will be required to comply with the GEF ODS policy on retroactive financing. Cost-effectiveness ratios are at or below the thresholds recommended under the Montreal Protocol, with the exception of two solvent enterprise sub-projects. Although solvent enterprises are generally lower consumers of ODS than other sectors; the inclusion of two solvent sub-projects with higher cost-effectiveness ratios represents Belarus' effort to comprehensively phase-out ODS consumption in all sectors under a one-time project.

ISSUES, ACTIONS, BENEFITS, RISKS.

Issues and Actions

16. The following outstanding issues and actions are to be addressed during appraisal and the documents revised if necessary, to conform with GEF ODS Operational Strategy:

Project Benefits

17. The project will contribute to global efforts by eliminating the use of 652 MT/year of ODS. The provision of a GEF grant allows Belarus to substantially meet its national obligations under the Montreal Protocol within a three year period, which, in its absence, would not be achievable. This will serve to enhance the country's credibility with the international community. In the longer term, it allows the country to avoid the economic and social disruption that would occur when imported ODS is no longer available for industrial, commercial and other consumer applications. The technology conversion provided under the project will contribute to industrial modernization of key industries and allow them to maintain domestic and export markets. The institutional capacity for monitoring and regulatory enforcement of ODS phaseout will also be strengthened under the project.

Project Risks

18. Risks of the project can be divided as follows: i) implementation risks; ii) risks associated with the seven enterprise sub-projects; and iii) risks associated with the two technical assistance subprojects.


IDENTIFIED RISKS         MEASURES TO MINIMIZE RISK                              

PROJECT IMPLEMENTATION                                                          

A. Overall project       Project implementation will be a key focus of          
implementation           subsequent missions to identify opportunities for      
arrangements and         strengthening this aspect of the project.              
management of the MNREP                                                         
Ozone Office are                                                                
critical to the success                                                         
of the project.                                                                 

B.  MNREP's lack of      The project will encourage outsourcing key activities  
familiarity with Bank    to a procurement and financial agents with             
procedures, and project  established World Bank experience.  Institutional      
management.              strengthening included in the project will address     
                         project management and training in Bank                
                         procurement/disbursement procedures.                   

ENTERPRISE SUB-PROJECTS                                                         

A.  Risk of supporting   A financial viability analysis will be a condition of  
a potentially            appraisal and the basis for eliminating enterprises    
non-viable enterprise.   from eligibility if necessary.                         

B.  Risk of an           Ability to meet counterpart funding requirements will  
enterprise not meeting   be part of the enterprise viability analysis.  The     
its counterpart          grant generally meets costs an enterprise would        
funding.                 eventually incur to remain competitive and retain      
                         markets, and therefore provides a strong incentive     
                         for cooperation.                                       

C.  Potential for        The STAP review required by the GEF project cycle      
supporting a             focuses specifically on technical issues to minimize   
technically unsound      this risk.                                             
project proposal.                                                               

TECHNICAL ASSISTANCE                                                            
SUB-PROJECTS                                                                    

A.  Risk of the          Measures to minimize this risk will be discussed       
Government not meeting   further with the Government during subsequent          
its counterpart          missions.                                              
funding/contribution.                                                           

B.  Fragmented           An inter-agency commission for the fulfillment of the  
decision-making on       Montreal Protocol, formally established in 1993, will  
environmental and        be used as a mechanism for better coordination.  The   
investment matters at    role of the ODS office will be further clarified       
the national and         during subsequent missions.                            
regional levels.                                                                



INSTITUTIONAL FRAMEWORK AND PROJECT IMPLEMENTATION

Project Implementation

19. The Government has assigned MNREP as the executing agency for the project. Within MNREP, project of the grant by the GEF Council and which will be supported through the grant for a two year implementation responsibility will be assigned to the Ozone Office to be established upon approval period. It will be staffed on a full and part time basis by qualified personnel recruited from, and with salaries paid for by, MNREP and BSRC "Ecology" (consistent with GEF policy, no salaries of government employees in the coordinating unit will be financed by GEF funds). It is anticipated that these individuals will have previously been involved with development of the ODS Country Program. As a permanent structure within the Ministry, the Ozone Office will have overall responsibility for ODS matters including: i) acting as secretariat to the Interagency Commission; ii) coordinating implementation and updating of the ODS Country Program; iii) communicating with the Executive Committee of the Montreal Protocol; iv) collecting and reporting consumption, trade and recycling information to the Government and international bodies; and v) preparing legislative and regulatory initiatives such as ODS import licensing, sector specific bans, and sanctions for noncompliance with phaseout schedules. Project specific responsibilities will be handled by a project implementation unit including: i) appointment and supervision of a Local Financial Agent (LFA) to administer disbursements for the project; ii) appointment and supervision of a project procurement agent; iii) making arrangements for annual audits of the LFA; iv) coordination of environmental approvals required for sub-project implementation; and iv) submission of progress reports to the Bank. A detailed project implementation plan will be developed and agreed at appraisal, including performance indicators to be monitored.

20. Prior to appraisal, the Ozone Office will identify and appoint an LFA and procurement agent acceptable to the Bank. The duties of the LFA in regards to the management and disbursement of funds would cover: i) monitoring of beneficiary enterprise financial performance on a quarterly basis; ii) holding and managing a Special Account for project funds on behalf of the Ozone Office; iii) administering project disbursements through the World Bank and Special Account including payments under approved contracts, eligible claims for retroactive financing, and funding allocations to technical assistance components; and iv) monitoring all sub-project expenditures. The duties of the procurement agent are to: i) provide advice and assistance on World Bank procurement procedures; ii) prepare bid packages; and iii) administer bid evaluation, contractor selection, and contract negotiations. Sub-project procurement plans will be developed and agreed upon at appraisal.

21. The Project will be covered under an Umbrella Grant Agreement between the Bank as GEF Implementing Agency and MNREP which defines the overall framework by which GEF grant funds can be disbursed to enterprise specific sub-projects. Individual sub-projects will be covered by Sub-grant Agreements between the MNREP and the participating enterprises. Both the Grant Agreement and Sub-grant Agreements will to be patterned after those utilized for the Ozone Project's Trust Fund (OTF). Sub-projects will be approved in accordance with the Bank's trustee obligations to GEF and individual sub-project funding will be subject to prior approval by GEF. Sub-grant Agreements will be drafted for appraisal and their execution will be a condition of negotiations.

Timing of Preparatory Activity

22. The following steps are planned for project processing:

     Step                                Estimated Date

     IPID Review Meeting                 January 1996
     Pre-Appraisal                       April 1996
     GEF Council Approval                April 1996
     Appraisal                           June 1996
     Negotiations                        October 1996
     Board Approval                      November 1996
Click here for Sub-Project Summaries


WORK PROGRAM PROPOSED FOR COUNCIL APPROVAL

GEF/C.7

GEF Council Meetings

Return to GEF Home Page Menu