Public Disclosure Authorized

The World Bank

Document o f

FOR OFFICIAL USE ONLY

Report No: 35870-XK

Public Disclosure Authorized

PROJECT APPRAISAL DOCUMENT ONA PROPOSED GRANT

Public Disclosure Authorized

IN THE AMOUNT OF SDR 3.8 MILLION (US$5.5 MILLION EQUIVALENT)

TO THE UNITED NATIONS INTERIMADMINISTRATION MISSION INKOSOVO FOR THE BENEFIT OF KOSOVO FOR AN ENERGY SECTOR CLEAN-UP AND L N RECLAMATION PROJECT A D
May 15,2006

Public Disclosure Authorized

Environmentally and Socially Sustainable Development Unit Europe and Central Asia Region
a This document h s a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS (Exchange Rate Effective April 30,2006) CurrencyUnit = Euro Euro0.805834 = US$1 US$1.46139 = SDR 1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS BAT CLRP DALY DMM EA EAR EC ECSEE EIA EIR ERO ESTAP EU FDI FR FPAG GIS ICB ICMM ICR IDA IFC IF1 IPP PPC ISN KCB KEK KEM Best Available Technologies Clean Up and Land Reclamation Project Disability Adjusted L i f e Year Directorate o f Mines and Minerals Environmental Assessment European Agency for Reconstruction European Commission Energy Community o f South East Europe Environmental Impact Assessment Extractive Industries Review Energy Regulatory Office Energy Sector Technical Assistance Project European Union Foreign Direct Investment Financial Report Fiscal Policy Adjustment Grant South East Europe Generation Study International Competitive Bidding Independent Commission for Mines and Minerals Implementation Completion Report International Development Association International Finance Corporation International Financial Institution Independent Power Producer Integrated Pollution Prevention and Control Interim Strategy Note Kosovo Consolidated Budget Korporata Energjetike e Kosoves Shea.(Kosovo Energy Corporation J.S.C.) Kosovo Economic Memorandum Kreditanstalt fur Wiederaufbau Kosovo Trust Agency Letter o f Energy Sector Development Policy Lignite Power Technical Assistance Project

Kfw

KTA LESDP LP-TAP

..

MIGA MFE MEM MESP PEMTAG PISG POEs PCC PMU RFP RFQ SBD SESA SME SOEs SRSG TA TSMU TSS UCTE UNMlK USAID

Multilateral Investment Guarantee Agency Ministry o f Finance and Economy Ministry o f Energy and Mining Ministry o f Environment and Spatial Planning Economic Policy and Public Expenditure Management Provisional Institutions of Self Government Publicly Owned Enterprises Project Coordination Committee Project Management Unit Request for Proposals Request for Qualifications Standard Bidding Documents Strategic Environmental and Social Assessment Small to Medium Enterprises Socially Owned Enterprises Special Representative of the Secretary-General o f the UnitedNations Technical Assistance Transmission System and Market Operator Transitional Support Strategy Union for the Coordination o f Transmission o f Electricity United Nations Interim Administration Mission in Kosovo United States Agency for International Development Vice President: Country ManagerDirector: Sector Manager: Task Team Leader: Shigeo Katsu Orsalia Kalantzopulos Marjory-Anne Bromhead Frank Van Woerden

KOSOVO Energy Sector Clean-up and Land Reclamation Project

CONTENTS Page A

2.

1.

STRATEGIC CONTEXT AND RATIONALE

Rationale for Bank involvement ......................................................................................... Higher level objectives to which the project contributes ....................................................

Country and sector issues....................................................................................................

.................................................................

1 4

3.

4
6
6 6 9

PROJECT DESCRIPTION

2.

1.

Lending instrument .............................................................................................................

Project development objective and key indicators .............................................................. Lessons learned and reflected in the project design ............................................................

.................................................................................................

3.

4.
C

Project components ............................................................................................................. 6 Alternatives considered and reasons for rejection .............................................................. Partnership arrangements (if applicable) ..........................................................................

5.

9
10
10 10

IMPLEMENTATION

2. 4.

1.

........................................................................................................

3.

Institutional and implementation arrangements................................................................ Monitoring and evaluation o f outcomeslresults................................................................ Sustainability .....................................................................................................................

. . .

11 11
13 15

5.

6.

Critical risks and possible controversial aspects...............................................................

Loadcredit conditions and covenants............................................................................... Economic and fmancial analyses ......................................................................................

..

APPRAISAL SUMMARY

2.

1.

.................................................................................................

16
16 18 18 19

4.

3.
5.

Fiduciary ........................................................................................................................... Environment ...................................................................................................................... Policy Exceptions and Readiness...................................................................................... Safeguard policies ............................................................................................................. Social.................................................................................................................................

Technical ...........................................................................................................................

6.

20
21 21

7.

Annex 1 Country and Sector or Program Background :

......................................................... 23 Annex 2: M a j o r Related Projects Financed by the Bank andlor other Agencies .................28 Annex 3: Results Framework and Monitoring ........................................................................ 30 Annex 4: Detailed Project Description...................................................................................... 34 Annex 5: Project Costs ............................................................................................................... 37 Annex 6: Implementation Arrangements ................................................................................. 38 Annex 7: Financial Management and Disbursement Arrangements ..................................... 42 Annex 8: Procurement Arrangements ...................................................................................... 47 Annex 9: Economic and Financial Analysis ............................................................................. 52 Annex 10: Safeguard Policy Issues............................................................................................ 57

.............. Annex 12: Project Preparation and Supervision ..................................................................... Annex 13: Documents in the Project File ................................................................................. Annex 14: Statement of Loans and Credits .............................................................................. Annex 15: Country at a Glance ................................................................................................. Annex 16: MAP IBRD 34711..................................................................................................... Annex 17: MAP IBRD 34702 .....................................................................................................
Annex 1 :Project Implementation Scenario without Additional Funding 1

64 66 67 68 69 72
72

KOSOVO
ENERGY SECTOR CLEANUP AND LAND RECLAMATION PROJECT

PROJECT APPRAISAL DOCUMENT EUROPE AND CENTRAL ASIA ECSSD

Date: May 15,2006

Country Director: Orsalia Kalantzopoulos Sector ManagerlDirector: Laura Tuck

Project ID: PO96181

Lending:Instrument: Technical Assistance Grant
Y

Team Leader: Frank Van Woerden Sectors: Mining and other extractive (70%); Power (30%) Themes: Environmental policies and institutions (?);Other social development (P); Pollution management and environmental health (S) Environmental screening category: Full Assessment

3 Loan

[ ] Credit

[XI Grant

3 Guarantee

[ ] Other:

~~

For LoanslCreditslOthers: Total Bank financing (US$m.): 5.50 Pronosed terms: Standard r Financing Plan (US$m) Source Local 2.54 BORROWERlRECLPIENT 0.73 IDA Grant 1.53 Financing Gap 4.80 Total:

Foreign 0.61 4.77 1.17 6.55

Total 3.15 5.50 2.71 11.35

Recipient: United Nations Interim Administration Mission in Kosovo (UNMIK) - Provisional Institutions o f Self Government (PISG) Kosovo Responsible Agency: Korporata Energjetike e Kosoves Sh.a. (Kosovo Energy Corporation J.S.C.) Kosovo

Annual Cumulative

2.88 2.88

4.50 7.38

0.33 7.71

0.28 7.99

0.21 8.20

0.00 8.20

0.00 8.20

0.00 8.20

0.00 8.20

The project objectives are to: (a) address environmental legacy issues related to open dumping o f ashes on land; (b) enable KEK to free land for community development purposes currently taken by overburden materials and enable KEK to remove Kosovo A a h dump; and(c) build capacity s in KEK for continued clean-up and environmentally good practice mining operations. Project description Re$ PAD B.3.u, Technical Annex 4
The Project has four components:

Component A. Preparation o f the Mirash Open Pit Mine for Ash Management: (US$2.76 million: US$1.86 million IDA, US$0.9 million KEK). This component will prepare the Mirash open pit mine to receive and store ash from the Kosovo A Thermal Power Plant and the ash removed from Kosovo As open ash dump. Component B. Relocation of Kosovo A Ash Dumps into Mirash Open Pit Mine (USS5.48 million: US$2.95 million IDA; US$1.08 million KEK, US$1.45 million TBD). This component will support the full removal o f ash and overburden materials from the Kosovo A ash storage facility; transportation o f these materials to the disposal site in the Mirash mine; and proper backfilling o f the mine prepared under Component A. Component C. Reclamation o f Overburden Dump Areas (US$2.4 million: US$0.075 million IDA; US$1.15 million KEK, US$l. 175 million TBD). T h i s component will reclaim about 6.5 km2 (650 ha) o f land through reshaping and re-cultivating the overburden dumps in the South Field and locations west o f the Bar& mine. Component D. Project Management (US$0.715 million: US$0.615 million IDA; US$O.O15 million KEK; US$O.O85 million TBD). This component will provide project implementation support to KEK.

The Clean-up Project has been classified as Category A, triggering OP 4.01 (Environmental Assessment). The recipient has prepared the EA which includes an assessment o f potential impacts o f the proposed project and recommends mitigation measures and monitoring responsibilities that should be undertaken during the construction as well as implementation stages o f the project. The scope o f the Environmental Impact Assessment was discussed in a consultation workshop in Obiliq I Obilic municipality on March 10,2006. The EIA report was presented in a public hearing in the same municipality on April 19,2006 and disclosed in Kosovo on the same date. The EA report was disclosed to the Infoshop on April 24,2006. One o f the objectives of the project is to reclaim additional land that could later b e made available for land swaps in the event o f future resettlement due to mining activities in the Sibovc mine field. However project activities will not require any land acquisition or resettlement. At the public hearing, nearby residents raised concerns about resettlements that were needed in the past due to the instability of the Kosovo A a h dump and the adjacent overburden dumps. I t has s been confirmed that implementation o f the Clean-up Project will take away these geotechnical hazards and hence the risk o f future resettlements due to this problem. The project does not deal with ashes that are disposed o f in a wet manner. Hence the policy on Safety of Dams has not been triggered Overall, the Project i s expected to have important and positive environmental impacts on the project area that will lead to: (i) re-direction o f ongoing ash production and transport o f dumped ashes into sustainable engineered site o f an existing open lignite mine pit; ( i i reclamation of land ) from areas where overburden materials has been dumped in the past; ( i ) ii improving the living standards o f the population in the project area by reducing their exposure to air, land and waterbased pollution generated by ash transport and disposal; and (iv) removal o f unsafely stored hazardous waste from the area. Significant, non-standard conditions, if any, for: Re$ PAD C.7
Board presentation:

Loadcredit effectiveness: The effectiveness conditions are:

9 Establishment of the Project Coordination Committee, with the composition and terms o f reference satisfactory to IDA; 9 Establishment of the Project Management Unit, in a manner satisfactory to IDA, including the appointments o f a procurement specialist and a financial management

specialist, and other qualified staff in sufficient numbers under appropriate terms of reference, acceptable to IDA; 9 Appointment by KEK o f the PMU Director, under terms o f reference and with qualifications satisfactory to IDA; and 9 The Sub-Grant Agreement satisfactory to IDA has been executed o n behalf o f UNMIK, KTA and KEK pursuant to which the proceeds o f the IDA grant made available under the Financing Agreement will be on-granted to KEK.

Covenants applicable to project implementation:

9 UNMIK shall ensure that a Project Coordination Committee i s maintained throughout

Project duration, under terms o f reference and resources satisfactory to IDA.

9 UNMIK shall ensure that the PMU i s maintained for the duration o f project

implementation, with qualified and sufficient number o f staff, under terms o f reference and resources satisfactory to IDA.

9 UNMIK shall ensure that KEK obtains a written no-objection from IDA prior to any hiring or dismissal o f staff o f or consultants to the PMU. 9 UNMIK shall ensure that KEK's annual budget will provide the funding necessary or appropriate to enable KEK to perform i t s obligations under the Project, including all operating and maintenance costs o f KEK equipment required for the Project. 9 Prior to the start o f any civil works under the Project, UNMIK shall ensure that an EIA for Components A, B and C, satisfactory to IDA and under terms o f reference acceptable to IDA will be carried out. 9 Prior to the start o f any civil works under components A, B and C, UNMIK shall ensure, through the PMU, that KEK will have independent environmental assessment experts prepare an environmental management plan satisfactory to IDA, to eliminate, offset, or reduce any adverse environmental and social aspects related to components A, B and C. 9 Without IDA'Sprior written consent, UNMIK shall not, and shall ensure that KEK will not ( ) any final decision on the use o f the land reclaimed pursuant to Component C itake o f the Project; or ( isell, transfer, lease or otherwise dispose o f the whole or any part of i) the land; unless and until a land use plan, satisfactory to IDA, has been developed consistently with applicable spatial planning legislation in Kosovo and i a participatory n manner acceptable to IDA. 9 UNMIK shall ensure that K E K s Board o f Directors meets at least once in each calendar
quarter to: (a) consider progress in project implementation and any recommendations made by the PCC to the Chairman o f KEK's Board o f Directors; (b) review the PMU's quarterly project progress reports; and (c) consider providing to the PMU Director whatever advice or recommendations it may consider appropriate or necessary.

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues

Background
Kosovo i s rebuilding i t s economy in the aftermath o f the 1999 conflict and under the ongoing international talks o n its final political status. At the end o f the conflict, Kosovo inherited an economy that was damaged by poor economic policies, broken trade links, international sanctions, a lack o f investment, and a non functioning government. In the 1 9 9 0 economic ~~ output had already fallen by half, and with the conflict, it f e l l by another 20%, coupled with high and chronic unemployment. Despite post-conflict economic recovery, poverty in Kosovo is wide spread. Out o f a population o f about 2 million almost 36% live below the poverty line, half o f its population is below 24 years o f age, and about 47% o f the population i s unemployed significantly higher than in neighboring Balkan countries2. I 2004 Kosovos GDP per capita n was estimated at 1,230 Euros, which i s one of the lowest in Central and Southeastern Europe.

After the conflict, Kosovo was placed under the administration o f the United Nations Interim Administration Mission in Kosovo (UNMIK) under the terms o f UN Security Council Resolution 1244 (1999). I 2001, a Constitutional Framework was agreed establishing the n Provisional Institutions of Self-Government (PISG). In June 2002, the Kosovo Trust Agency (KTA) was established by UNMIK and entrusted inter-alia with the responsibility o f business oversight over the energy and mining sector enterprises, restructuring o f the Publicly Owned Enterprises (POEs), and privatizing o f the assets o f Socially Owned Enterprises (SOEs). Although UNMIK retains certain reserve powers and final legal authority, including over the energy and mining sectors, there i s a continued transition to self-government with the PISG assuming significant responsibility on matters relating to economic policy, trade, and investment.
Following a massive donor-funded reconstruction effort, post-conflict support to Kosovo is on the decline as Kosovo nears the end of the reconstruction period. Given decreasing donor resources and weak economic growth, there i s urgent need to support Kosovos development goals to facilitate generation o f sufficient opportunities to reduce unemployment and poverty while ensuring associated environmental and social improvements.

The last Kosovo Economic Memorandum (KEM) 2004, identified the energy and mining sectors as potential sources o f economic growth, provided the existing infrastructure i s rehabilitated, the industry i s restructured in l i n e with the emerging regional electricity market, and private sector investors are brought in to expand power generation and mining business primarily for export purposes. Both energy and mining have the potential in the medium to longer term to revitalize Kosovos economy, especially given large and increasing energy needs throughout the region and the rebound in global commodity prices.
Under the 2006 Interim Strategy for Kosovo, the World Banks focus i s on the long-term development o f energy and i s supporting Kosovos Lignite Power Initiative (LPI) with the
(UNMIK) under the terms o f U Security Council Resolution 1244 (1999). N See Kosovo Economic Memorandum, World Bank (May 2004)

Kosovo is currently under the administration o f the United Nations InterimAdministration Mission inKosovo
1

objective o f developing an enabling environment to allow reputable investors to develop and utilize Kosovos lignite resources in a transparent, competitive fiscally responsible, and environmentally and socially sustainable manner. The Interim Strategy Note (ISN) proposes to lay the foundation for: (i) sustainable development o f Kosovos high quality lignite resources the and power generation capacity; ( iassociated environmental and social improvements; and ( i ) i) ii the transparent competitive and fiscally responsible management o f Kosovos public finances. Because mining and power generation are potential sources o f growth, Kosovo aims to develop its lignite reserves by employing modern technology to meet i t s own energy needs and also export power to Southeast Europe where demand i s increasing in a sustainable fashion. Further, concern over energy security i s also increasing the desire for diversification o f energy supply across Europe. This could provide (i)substantial long-term source o f income to pay for a priority development programs and much-needed social services for Kosovos population, and ( ian opportunity to significantly boost trade links between Kosovo and Southeast Europe and i) thus facilitate closer integration with the rest o f Europe by assisting in meeting EU standards in the energy sector. The shortage o f reasonably priced alternative new power sources elsewhere in the regionY3 combined with the recent establishment o f the Energy Community o f Southeastern Europe (ECSEE), provides an opportunity for Kosovos energy sector to become an engine o f growth rather than a constraint and drain on public resources.
Sector Issues

Kosovos key energy resource i s i t s extensive lignite deposits; the Sibovc field alone i s estimated to hold over 1 billion tons (geological deposits). I t has no other fossil fuel resource and has only a very modest hydroelectric potential. It does not import natural gas and has no gas supply inffastructure. It has no o i l refinery and depends entirely o n imported liquid fuels. Kosovos energy sector is dominated by Korporata Energjetike e Kosoves Sh.a. (Kosovo Energy Corporation J.S.C. or KEK), a publicly owned joint stock company which operates lignite mines, power generation, transmission and distribution networks. The PISG is facing a number o f challenges in the sector and the key Ministries, the Ministry o f Energy and Mining, and the Ministry o f Environment and Spatial Planning are relatively new. Kosovo has a history o f disregard for good environmental practices; natural resources, especially in the mining and energy sectors have been exploited. Heavy metal contamination o f soil and food is unacceptable as is lead contamination, the latter especially in Northern Kosovo, an environmental hotspot where lead intake i s 15 times the EU average (Interim Strategy Note 2006). Air pollution particularly from the dust generated by the power stations and the ash dumps near Pristina is a critical problem. Soil and groundwater contamination f i o m the ash dumps create negative environmental impacts, but pose less o f a direct threat to public health than the direct exposure to airborne dust. Wastewaters f i o m the mining and power operations are heavily polluted. The use o f outdated mining practices, an industrial infrastructure that ignored environmental impacts and a non-functioning environmental management system are the main factors behind the high exposure to environmental health risks4. The sizeable ash dumps
See Regional Electricity and Generation Investment Study, December 2004, carried out by Pricewaterhouse Coopers for the European Union and the World Bank World Bank, Kosovo, Poverty Assessment, Promoting Opportunity, Security, and Participation for All ,2005

from power generation and overburden dumps from lignite mining occupy large areas near the Obiliq mines, sterilizing land for other productive uses. Environmental concerns in the energy and mining sector in Kosovo are substantial due to the legacy o f poor environmental management practices in the past. The air quality in the Obiliq I Obilic municipality near the capital city o f Pristina where mining and power generation activities are located, i s not acceptable at present, and much o f this, particularly high dust levels can be attributed to the Kosovo A ash dump. Air pollution caused by dust i s a prime public health risk. Although there is still uncertainty on estimates, the overall health status o f the population in Kosovo is poor and among the worst in south-east Europe. For the post natal period, infections and particularly respiratory infections are the first cause o f hospital admission and death.

In this context, the PISG is focusing on efforts to develop strong regulatory systems for sector development, to address the major environmental legacy issues and to undertake land reclamation efforts by removing ash piles and overburden around Kosovo A and B power plants, the countrys main lignite powered stations, located in the Obiliq area. K e y issues to be addressed are:
Emissions Control: Due to ageing technology, poorly functioning equipment and outdated ash disposal practices, the Kosovo A power plant and i t s dry ash disposal facility emit unacceptable amounts o f particulates into the air. Total dust emissions are estimated at 167,000 tons per year with 77,000 tons from stacks (73,000 tons from Kosovo A and 4,000 tons from Kosovo B), 20,000 tons fiom the lignite mines, 20,000 tons from ash handling and transport, and 50,000 tons per year from ash disposal. To reduce the operational pollution o f the existing power plants and improve the plants environmental performance, KEK will need to modernize the plants with climate friendly technology, repair the wastewater treatment, and ash handling and disposal system, and install an environmental monitoring system. This i s critical for reducing emissions in KEK and improving KOSOVOS environmental quality and public health situation. overall currently covered with overburden material from the mines would provide an important source o f land for alternative uses including agriculture and possible resettlement. Capacity building i s also needed to address land development issues, including the creation and enforcement of property rights, inclusion o f community participation in land planning and mechanisms for transfer o f land rights and dispute resolution. The Lignite Power Technical Assistance Project (LP-TAP) includes a Strategic Environmental and Social Assessment (SESA) that will be executed in 2006. The SESA will address the environmental and social impacts o f clean-up and land reclamation activities and provide input to the development o f a regional spatial planning plan. The SESA will identify potential planning purposes for the reclaimed land from mining operations, to help the (local) community and facilitate resettlements from h t u r e sector developments in the region. Environmental Mitigation Measures: Kosovos recent efforts to develop an effective institutional structure for environmental regulation have defined the most important actors, their roles and supporting legislation, but the structure i s s t i l l very weak. Environmental legislation and standards are partially in place, but need further development to deal with the challenges of new initiatives. The environmental fiamework law i s inadequate to address proper development

Land Reclamation: Kosovo has small land holdings. Reshaping and re-cultivating land

o f mining and power generation projects, and regulation o f existing polluting sources and new projects i s not effective.

2. Rationale for Bank involvement

Consensus has emerged among donors and the PISG on the strategic and comprehensive specific actions in the energy and mining sector which include among them: (a) establishing enabling frameworks and building local capacity for attracting private sector investments in new power plants and mine with modern technologies in a transparent, environmentally and socially sustainable, and fiscally responsible manner; (b) undertaking measures to reduce air and water pollution from the existing power plants; and (c) reclaiming lands covered by lignite ash piles and overburden material from lignite mines for agriculture and alternative uses in support o f community development. The Banks overall involvement in the energy sector would complement the role o f donors such as the EC, which has been providing significant contributions to the energy and mining sectors through the European Agency for Reconstruction (EAR), and bilateral institutions from the US, Germany, and the Netherlands. I t would also play a catalytic role in helping to attract world-class, private strategic investors to develop and utilize Kosovos lignite resources in a transparent, competitive, environmentally and socially sustainable, and fiscally responsible manner.
In line with the World Banks Interim Strategy for Kosovo 2006, the Clean-up and Land Reclamation Project (CLRP) will complement a series o f three other World Bank Energy Sector Technical Assistance Projects (ESTAP I1, and 1 1, the proposed Lignite Power Technical , 1 1) Assistance Project (LP-TAP) and EC-fimded financial and technical assistance designed to support Kosovos efforts to prepare a comprehensive program for energy sector development.

Inthis context, the Banks participation in the sector would allow the PISG to draw on state-ofthe-art technical expertise, and extensive international experience in dealing with the physical, social and institutional aspects o f the clean-up and land reclamation efforts. The CLRP also provides a least-cost financial alternative for a relatively costly program that would yield significant financial and environmental benefits.

3. Higher level objectives to which the project contributes The PISGs and donors development strategy for Kosovo supports generating new sources o f economic growth for Kosovo while ensuring associated environmental and social improvements.
The CLRP i s a key element o f that strategy, as part o f the World Banks overall support under Kosovos lignite power initiative. Under the complementary Lignite Power Technical Assistance Project (LP-TAP), support will be given to build the capacity o f PISG to develop the energy sector in an environmentally and socially sustainable manner. The objectives o f the LPTAP are (a) to help PISG strengthen the enabling policy, legal and regulatory frameworks conducive to new investments in the energy sector; and (b) to assist PISG to attract qualified private investors to build new capacity for lignite thermal power generation guided by high standards o f environmental and social sustainability. The LP-TAP objective will be attained through: (a) developing and strengthening the enabling policy, legal and regulatory frameworks in the energy sector, including mitigating environmental impacts and developing a framework

for expropriation and resettlement; (b) developing an institutional structure and capacity to implement the broader sector strategy, including mobilizing financing and dealing with foreign investments in the energy sector; and (c) technical consultancies to seek qualified strategic investors in the proposed independent power plant (PP) and mine. The environmental issues related to the current lignite mining and power generation operations in Kosovo are a major concern for public health and the environment and form an obstacle to building regional community support and attracting high-quality investors for future and sustainable development o f this sector. Implementation o f the CLRP will bring good practices in how to deal with environmental legacy issues and new developments to the mining sector for both operators and regulators. The envisaged clean-up and reclamation activities would (a) reduce the impact o f pollution on public health and the environment, reversing decades o f local opposition to additional sector development because problems were not addressed, and (b) help improve the investment climate. The activities would reduce some o f the concerns about the readiness o f Kosovos business and regulatory environment, and send a clear positive signal to k t u r e private investors. The CLRP would improve public health in Kosovo through reduction o f dust generating sources; and reclaim land for community development and to meet resettlement needs to be identified under the LP-TAP.

Yiewfrom the Eastern Tip

B. PROJECT DESCRIPTION 1. Lending instrument

In accordance with the I S N approved on March 29,2006, the project i s expected to be funded through an IDA Grant which will be provided to UNMIK (the Recipient), for the benefit o f

Kosovo.

2. Project development objective and key indicators

The proposed Clean-up Project aims to support KEK and the Kosovar authorities in the efforts to enhance the countrys long-term power development and electricity supply while improving the environment for the population through promoting higher standards o f environmental and social sustainability. The specific project objectives are to: (a) address environmental legacy issues related to open dumping o f ashes on land; (b) enable KEK to free land for community development purposes currently taken by overburden material and to enable KEK to remove Kosovo A ash dump; and (c) build capacity in KEK for continued clean-up and environmentally good practice mining operations. The objectives o f the Banks support for the energy and mining development strategy are to work in concert with other donors to boost Kosovos long-term development, enhance the electricity supply, improve its badly-polluted environment and provide cleaner air and water for the population. By building local capacity, it would enable the PISG to attract, in a transparent manner, qualified world-class strategic investors into building new capacity for lignite thermal power generation conforming to high standards o f environmental and social sustainability.
The project will help KEK and the Kosovar authorities to develop an integrated approach to deal with environmental legacy issues from lignite mining and power generation activities. I t will also build capacity within KEK and o f environmental officials in central and local g o v e m e n t for such operations. The clean-up activities are expected to substantially reduce the environmental pollution currently created by the ash deposited in the open ash dump.
K e y performance indicators to assess the fulfillment o f the projects development objectives are described in Annex 3.

3. Project components The project size i s about US$11.355 million consisting o f ( ) 5.5 million IDA grant; ( i iUS$ i) US$3.145 million borrower contribution (KEK); and ( i ) ii US$2.71 million unidentified funding (to be determined, TBD). The approach to attract the required unidentified funding and the alternatives if funding will not be available is discussed in Section C.5 and in Annex 11. this The project has a four and a half years implementation period and includes the following four components:

Component A. Preparationof the Mirash Open Pit Mine for Ash Management: (US$2.76 million: US$1.86 million IDA, US$0.9 million KEK): This component will prepare the Mirash open pit mine to receive and store ash from Kosovo A Thermal Power Plant and the ash removed from Kosovo As open ash dump. Activities under the component would include: (i) geotechnical, environmental and hydro-geological investigations, analyses, an environmental assessment and environmental management plans, a land use plan and detailed design for all project components, including Components B and C; ( ireshaping o f a dedicated part o f the i) Mirash mine and installation o f a simple base liner (overburden claylash mix), including affiliated preparatory works for the reception o f ashes and overburden materials; ( i ) ii inclusion o f a drainage and mine water management system, and (iv) adaptation o f Kosovo A Thermal Power Plant direct ash disposal system to stop open ash dumping and redirect ash disposal to the prepared compartment o f the Mirash mine. Component B. Relocation of Kosovo A Ash Dumps into Mirash Open Pit Mine (US$5.48 million: US$2.95 million IDA, US$l.OS million K K US$1.45 million TBD): This E, component will develop the full removal o f ash and overburden materials from the Kosovo A ash storage facility. These materials will be transported to the disposal site in the Mirash mine, prepared under Component A, and properly backfilled. Component C. Reclamation of Overburden Dump Areas (US$2.4 million: US$0.075 million IDA; US$1.15 million K K US$1.175 million TBD): This component will reclaim about 6.5 E, km2(650 ha) o f land through reshaping and re-cultivating the overburden dumps in the South Field and locations west o f the Bardh mine. Component I).Project Management (US$0.715 million: US$0.615 million IDA, US$0.015 million K K US$0.085 million TBD): The project will provide support to KEK to implement E, the project. It will include support for: (i) overall project management and technical assistance in such areas as detailed design, construction supervision, procurement and financial management; and ( i i monitoring and evaluation o f project impacts including implementation o f environmental ) management plan for construction activities carried out under the project.
Under the Project, the PMU in KEK will work closely with other departments within KEK, the Mining department of MEM, EIA, Spatial Planning and Waste Department o f the MESP. All these departments will be trained in environmental clean up projects through hands on experience. The Project Management Unit will provide regular trainings and facilitate internships for MEM and MESP staff.

In addition to clean-up and land reclamation activities under Components A, B and C, additional financing will be sought for the clean-up o f organic chemicals (e.g. phenol) at the former chemicals separation plant site. This clean-up i s envisaged to cost US$5 million and will be financed through parallel funding from other donors. Once financing is available, this activity will invest in the removal o f hazardous substances stored in a number o f tanks at the former chemicals separation plant at the site o f Kosovo A Thermal Power Plant. The activity will investigate the site using international Best Available Technology (BAT) to remove, package, and export for incineration or reprocessing, about 11,000 m3o f chemicals including phenol,

benzene and tarry residuals. If this activity will be implemented, a separate EIA and EMP will be preparedprior to the final decision on its implementation. The diagram below provides a snapshot o f the layout o f the ash dumps and open pit mines that make up the project site.

4. Lessons learned and reflected in the project design The design o f the Clean-up Project reflects lessons learned from Bank financed previous and ongoing Energy Sector Technical Assistance Projects (ESTAP I1, and 1 1, the Lignite Power , 1 1) Technical Assistance Project (LP-TAP) and EC-funded financial and technical assistance for the rehabilitation o f power plants. Extensive consultations have been undertaken with PISG officials, managers, and KEK administrators, and the donor community. The lessons learned include the importance o f ownership by local institutions, preparation o f comprehensive implementation arrangements, selection o f competent consultants, detailed reviews to ensure quality o f consultants outputs, realistic timeframe, and wide consultations with local institutions, donors and other stakeholders, and have been taken into account. A positive example for the design o f the project was the success o f accomplished clean-up operations within the mining and ore processing industry Trepca supported by Dutch funding. I t clearly demonstrated the importance o f project implementation by the enterprises own staff. This created ownership and built capacity and expertise for further clean-up operations and sustainable environmental management. This model has been applied in a similar manner to involve KEK in the project implementation arrangements.

5. Alternatives considered and reasons for rejection

Several alternatives for stand-alone projects were considered, including:

Postponement or Do-Nothing. Postponement o f the project and the do-nothing scenario were rejected for the Kosovo A disposal component. These options would neglect the urgent demands of stakeholders. They would also allow continuation o f the current high impact related dust problems, including public health and safety issues and landscape pollution. If only the ongoing ash disposal would be stopped, environmental impacts would improve but there would s t i l l be continuous dust problems (including resulting health problems) due to the existing ash dump.
For the reclamation of the overburden dump areas, project postponement and the do-nothing scenario were rejected since the benefitlcost ratio is so advantageous and land is a scarce commodity in Kosovo. Furthermore in terms o f development o f the entire energy sector and the future development of the new Sibovc mine, having land available for resettlement purposes i s crucial for proper development o f the mining sector.

Reshaping of the Kosovo A Ash Dump. Reshaping o f the ash dump instead o f i t s full removal was considered but rejected. The costs o f the two options are in the same order o f magnitude but the full removal o f the ash dump has the advantage as it i s a long-term solution to the problem, and materials from the reshaping are also applied to reclaim part o f the Mirash mine. If the reshaping option would be implemented, less land would be reclaimed and i t would hinder future development o f the lignite D Field deposits underneath the dump. Complete Removal of the Kosovo B Ash Dump. KEK is implementing a project to stop Kosovo B ash disposal at the Kosovo B open ash dump and redirect ash transport to a dedicated section in the Mirash mine. The geotechnical stability o f the Kosovo B Ash Dump i s better and

the surface i s hard and cemented, causing much less dust problems, but making it harder to remove. In view o f the limited financial resources, only the removal o f the Kosovo A Ash Dump has been included in the project. Based on the successful completion o f the removal o f the Kosovo A Ash Dump, KEK would consider mobilizing resources for the removal o f the Kosovo B Ash Dump.

Removal o f Overburden Dumps: According to international practice, overburden materials are commonly returned to open pit mines for backfilling after the lignite has been excavated. This practice was not foreseen when the existing Mirash and Bardh mines were opened and this operation i s now far more costly compared to the reshaping and re-cultivation alternative proposed under Component C. Inclusion of a Technical Assistance Component for StrenPthening Regulatory Institutions: Clean-up and land reclamation activities have not been implemented before in Kosovos energy sector and its institutions are not familiar with the required interventions to assess, authorize and regulate these operations. The involvement o f Ministry o f Environment and Spatial Planning, the Ministry o f Energy and Mining and the Municipality o f Obiliq I Obilic i s important for the successful implementation o f the project and these institutions should develop capabilities in this respect. The LP-TAP Project provides adequate technical assistance to these institutions and supports them to prepare legislation and build on the required skills to develop and regulate the energy sector. The preparation o f the two projects has been closely coordinated and the implementation o f the two projects will to a certain extent run in parallel. Hence, a technical assistance component for the regulatory institutions has not been included separately included in this Project. C. IMPLEMENTATION 1. Partnership arrangements (if applicable)

The allocated IDA Grant for the Clean-up Project and the contributions from KEK are not sufficient to cover the total project budget for all the project components. For the full implementation o f the project, KEK and the Government with support from the World Bank are in the process o f seeking additional fimding from donors (see Annex 11).

U S A I D has proposed to provide assistance to KEK in operational aspects and help define the high priority areas o f transmission and distribution improvements and an associated financing plan. U S A I D is also proposing to assist KEK in post-ESBI transition management aspects. EAR and K f W are financing the initial investment needs for the development o f SW Sibovc mine. 2. Institutional and implementation arrangements
Institutional and implementation arrangements are described more fully in Annex 6. The Grant Agreement will be signed by UNMIK, the Recipient, and UNMIK will sign an on-granting agreement with K T A (the shareholder o f KEK) and KEK. The Project Management Unit @MU) within the Mining Division o f KEK will provide day-to-day assistance in managing and

10

coordinating the clean-up and remediation activities including all grant financed activities and KEKs own contributions to the implementation o f the project and h c t i o n s directly under KEK. The PMU staff will also be the direct counterparts o f the consultants working o n the various studies.

The PMU will manage procurement; negotiate contracts; supervise, report and evaluate progress; and process payments through the Ministry o f Finance and Economy (MFE) and UNMK. The PMU will prepare withdrawal applications for joint signatures by these agencies, and submission to the Association by UNMIK. The P M U will be under the supervision o f a Project Manager. The Project Manager will have the overall responsibility o f supervising the PMUs work, and signing on procurement activities and other contracts on behalf o f the PMU. The Project Manager will report through K E K s Mining Division to the KEK Board. The Board will meet quarterly and more fiequently if necessary to review project implementation.

A Project Coordination Committee (PCC) will be chaired by the Minister o f Environment and Spatial Planning (MESP), or hisher duly authorized delegate, with representatives at director level o f the Ministry o f Energy and Mining (MEM), KEK, the Independent Commission for Mines and Minerals (ICMM), the Kosovo Trust Agency (KTA) and the Municipality o f Obiliq I
Obilic. The PCC will coordinate activities o f various agencies involved in project implementation and in particular involvement of MESP, the Municipality and MEM in the EL4 preparation, spatial planning issues and public consultations. The PCC will promote ownership within local institutions, provide quality overview of consultants outputs and internal consistency among the components, and ensure consultation with local institutions, donors, and other stakeholders. The Chair o f the PCC will provide recommendations to the Board o f KEK on project implementation.

Project implementation i s expected to start in August 2006, and the closing date i s December 31, 2010.

3. Monitoring and evaluation of outcomeslresults

The KEK Project Management Unit will be responsible for monitoring project progress against the agreed performance indicators described in Annex 3 - Arrangements for Results Monitoring.

4. Sustainability

The Kosovar authorities have demonstrated ownership and commitment to the sustainable development o f the (lignite) power sector through (i) adopting the Energy Strategy o f Kosovo 2006-2015, ( i i) implementing measures to fulfill commitments under the Athens Memorandum and the ECSEE Treaty, etc., ( i ) i ilaunching community consultation mechanisms, and for the LPTAP (iv) creating a project working group.

Board members include U N M I K s Special Representative of the Secretary-General o f the United Nations (SRSG), the Minister and Deputy Minister o f MEM, the Director o f Kosovo Trust Agency (KTA)s Socially Owned Enterprises (SOE) and KEK Managing and Acting Managing Directors.

11

The Clean-up Project has the strong support o f the Kosovar authorities and KEK. The Ministry o f Environment and Spatial Planning, in the Kosovo Environmental Action Plan identifies the ash dump as one of Kosovos environmental hotspots needing remediation. Similarly, the Energy Strategy of Kosovo 2006-2015 identifies the need to: mitigate ash disposal emissions, remediate ash sites, and reclaim land occupied from mining activities. The authorities consider the Clean-up Project important to demonstrate to international investors their willingness to manage environmental problems and regulate the sector in an environmentally and socially sustainable manner.

M M and MESP have participated in public consultations held to present and discuss the project E and will participate in the projects coordination committee.
The Kosovar authorities and Kl3K regard good environmental practice and land reclamation activities as an integrated part of sustainable mining and the project as the tool to commence and integrate these activities in mining operations. There are strong incentives for KEK to implement this project and use this opportunity to commence with clean-up and land reclamation activities and learn how to integrate these activities in its mining operations. New mining licenses in Kosovo can now only be obtained if a proper mining closing plan i s in place. This means that mining operations should anticipate work required for mine closure and that land reclamation, and to a certain extent clean-up activities, will have to be an integrated part o f mining operations. KEK will need to adjust i t s mining operations and adopt i t s organization to accommodate these requirements in order to remain a candidate for future mining licenses in Kosovo. KEKs commitment to the sustainable implementation of the project is demonstrated by its effort to prepare the Environmental Assessment during project preparation, and execute drilling tests to perform environmental investigations. KEK will also carry all staffing, operational and maintenance costs o f implementing the Projects clean-up and land reclamation works from i t s own resources, and set up a dedicated unit in its mining division for clean-up and reclamation operations. Furthermore, KEK has committed itself to make available all existing mining equipment and earth moving equipment necessary for project implementation in a timely and dedicated fashion.

KEK has committed part of the Mirash mine dedicated to and sufficient in capacity to receive the Kosovo A ash dump materials and the ongoing production o f ashes from Kosovo A Thermal Power Plant.

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5. Critical risks and possible controversial aspects

Risks To Project Development Objectives The project will be executed by a newly established and dedicated clean-up and land reclamation Project Management Unit o f the MiningDivision within KEK. These activities will then be part o f three core mining operations: (i) ongoing mining, ( i i) development o f new mine in the Southwest Sibovc Field and ( i ) ii the clean-up I reclamation activities. During periods of critical constraints, conflicts o f interest may arise between these activities over the input o f staff and equipment. To ComponentResults Project management capacity constraints: Project management capacity within KEK i s developing. KEK lacks experience in good practice clean-up and land reclamation activities, particularly outside o f the staff o f the current international intermediate management. Currently, the contributions o f KEK to make staff and existing equipment available to implement the project and the IDA Grant, are sufficient to initiate the clean-up and land reclamation operations in KEK and implement some key components but not to cover the budget o f the full project. Risk Mitigation Measures Risk Rating with Mitigation
Modest, Significant

The most important mechanism to minimize the continuity risk i s KEKs commitment t o institutionalize the clean-up and reclamation operations as a key activity in the structure o f the mining division with dedicated staff and equipment. Other factors to reduce this risk are: supervision by the Board o f KEK and the establishment o f the Project Coordination Committee. I addition n continuity risks are reduced by the fact that equipment remobilization between operations i s time consuming and costly and will have to be coordinated between the PMU and other mining operations within KEKs Mining Division.

It has been considered sufficient to strengthen the PMU in the first two years with internationally experienced consultants in this field.

Negligible

Good prospects exist for the closing the financing gap by attracting additional funds from other donors, IDA or other sources. If the required additional financing o f US$2.7 million can not be found, the project will s t i l l generate the following benefits: The Mirash mine will be fully prepared for sanitary disposal o f Kosovo A ash and the ash stream fi-om Kosovo A t o the dump site will be stopped and redirected to the Mirash mine. This also will reduce the dust arising &om the transport o f ash. All cleanup (Kosovo A ash dump removal) and land reclamation preparation works will be implemented with site investigations, environmental assessments and detailed designs. KEK has the management unit and mobilized staff and equipment t o commence the

Modest

13

works in clean-up and land reclamation. KEK will s t i l l be able to remove the Kosovo A ash dump and disposal o f the dump in the Mirash mine but with less equipment will need more time to complete this operation. Land reclamation will take place at a slower pace with less infrastructure and greening budget. Benefits related to an increase in capacity in institutions and KEK for good practices for lignite mining operations will be f i l l y realized. There i s also a r i s k connected with KEKs precarious financial situation and the enterprise i s currently dependent on donor aid. Underground phenol contamination below ash dumps: There i s a possibility o f phenol contamination o f the underground below the ash dumps although initial drilling tests have not detected this. Ths contamination risk can not be filly excluded but does not affect the execution o f the ash removal component o f the project or i t s validity to eliminate the dust problem. Status o f the land to be reclaimed: Rather than a project risk, land ownership issues are a point o f attention. The land i s currently legally identified as state-owned property. KEK may not be able to make a decision o n i t s future disposition without consultation with KTA. U MK N I has established a special chamber to the Supreme Court to deal with complaints, assets, and property liability during the privatization process. Previous land owners (whose lands were expropriated during the nationalization period) have filed cases to regain property rights.

KEK has a financial recovery plan in place to address these problems. Furthermore, the majority o f the annual contribution o f costs by KEK in terms o f operation and maintenance are in-kind costs that will have to be made anyway regardless o f the implementation o f the project (staff costs) Further site investigations during the detailed design stage o f implementation will determine whether contaminants are present and to what extent tailored working procedures for project implementation should be put in place.

Modest

Modest

As the clean-up process will take 3-4 years t o complete, decision on the disposition can be postponed until clean-up i s complete. During this time period, any claims o n land could be submitted to the special chamber (or its successor) and decisions made o n the status o f the land. Concurrently, property rights will also be clarified which will allow KEK to make an informed decision based o n the available and best options o f disposing o f this land for economic activities. The project supports a best practice approach to clean-up o f the existing ash dumps and land reclamation.

Negligible

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6. Loanlcredit conditions and covenants

Effectiveness Conditions:
0

Establishment of the Project Coordination Committee, with the composition and terms o f reference satisfactory to the Association; Establishment of the Project Management Unit, in a manner satisfactory to the Association, including the appointments o f a procurement specialist and a financial management specialist, and such other duly qualified staff in sufficient numbers under appropriate terms of reference, all acceptable to the Association; Appointment by KEK o f the P M U Director, under terms o f reference and with qualifications satisfactory to the Association; The Sub-Grant Agreement satisfactory to the Association h s been executed on behalf o f a the Recipient, KTA and KEK pursuant to which the proceeds o f the IDA grant made available under the Financing Agreement will be on-granted to KEK,

Withdrawal Condition - Retroactive Financing

Retroactive financing up to a maximum amount o f U S $ 100,000 equivalent will be made available upon project effectiveness for expenditures incurred under Component D prior to the signing o f the Financing Agreement but after M a y 15,2006.

Covenants
0

UNMIK shall ensure that the PCC shall be maintained for the entire duration o f Project implementation, and with the composition, terms o f reference and resources satisfactory
to the Association.

UNMIK shall ensure, through the Sub-Grant Agreement, that the PMU shall be maintained for the entire duration o f Project implementation, and with the composition, terms o f reference and resources satisfactory to the Association, and with suitably
qualified staff in sufficient numbers.

UNMIK shall ensure, through the Sub-Grant Agreement, that KEK obtains a written noobjection fi-om the Association prior to any hiring or dismissal o f any staff o f or consultant to the Project Management Unit.

UNMIK shall use i t s best reasonable efforts to ensure that KEKs annual budget will provide the funding necessary or appropriate to enable KEK to perform i t s obligations under the Project, including, without limitation, for all operating and maintenance costs o f KEK equipment required for the Project.
Prior to the commencement of any o f the civil works under the Project, the Recipient shall ensure that through the PMU EIA o f Components A, B and C o f the Project, satisfactory to the Association and under terms o f reference acceptable to the Association will be carried out. Prior to the commencement of any o f the civil works under Components A, B and C o f the Project, the Recipient shall ensure ,through the PMU, that KEK causes the

15

independent environmental assessment experts to prepare an environmental management plan satisfactory to the Association, to eliminate, offset, or reduce any adverse environmental and social aspects, including the actions needed to implement the mitigation, monitoring and institutional measures to be taken during the implementation and operation o f Components A, B and C.
0

Without the Associations prior written consent, UNMIK shall not, and shall ensure that KEK shall not (i) any final decision on the use o f the land reclaimed pursuant to take i ) transfer, lease or otherwise dispose o f the whole sell, Component C o f the Project; or ( i or any part of such land; unless and until a land use plan, satisfactory to the Association, has been developed consistently with applicable spatial planning legislation in Kosovo and in a participatory manner acceptable to the Association.

UNMIK shall ensure that K E K s Board o f Directors meets at least once in each calendar quarter to (a) consider progress in the implementation o f the Project and to consider any recommendations made by the PCC to the Chairman o f KEKs Board o f Directors; (b) review the PMUs quarterly Project progress reports; and (c) consider providing to the PMU Director whatever advice or recommendations it may consider appropriate or
necessary in the circumstances.

D. APPRAISAL SUMMARY 1. Economic and financial analyses

The proposed project will generate substantial benefits to Kosovo, many o f which can be measured in monetary terms. The following benefits are expected f i o m the Clean-up and Land Reclamation Project: elimination o f health hazards due to the dust, elimination o f dangers to property due to geotechnical instability, increased access to land due to reclamation, and building o f capacity o f KEK. Elimination o the dust problemJFom ash dumps, thereby creating health benefits f

The removal o f the Kosovo A Ash Dumps and final ash disposal into the Mirash open mine will eliminate pollution infiltration from the ashes into the groundwater and will eliminate the dust from the ash dump. This will in turn generate health benefits for the local population. Local residents report respiratory illnesses due to persistent presence o f dust in the atmosphere and the inhalation o f it. Removing the dust will also eliminate the negative impacts o f persistent soiling of goods and housing in the vicinity. Residents in the vicinity o f the ash dump see the dust as having a negative impact on agricultural production (particularly for household
consumption).

at dumpsites, without any environmental protection measures taken at the dumpsites to prevent ash spreading by wind. I t is estimated that the handling and transport currently causes about 19,500 tons o f dust and the disposal about 50,000 tons of dust. Typically, the total deposited dust has been measured during December 2005 through January 2006 at the Bardh location between the thermal power plant and the ash dump. The measurements clearly illustrate the overall negative impact of the Power generation and the Ash dump. The total dust measured in mg/ (m day) means the amount o f dust that settles per m2in a day in this location amounts to

Ash f i o m the both power plants is currently transported by open belt conveyors and i s deposited

16

1,128 in December 05, and 2,009 in January 06, which i s much higher than the World Health Organizations (WHO) no-effect limit o f 300 mg/ m2day. The largest contribution to health damage i s caused by particulate matter (PM). Approximately 30,000 people are estimated to live in Obiliq I Obilic municipality o f which approximately 21,000 are estimated to be affected by the dust coming from the ashes. According to air measurements o f PMlo, the air quality values attributable to the ash dump are on average, 50 ugh3per year, higher than limits established by the EU-Directive. Estimates for the quantitative effect o f air pollution on mortality, cases o f chronic bronchitis and lesser health impacts such as respiratory hospital admissions etc. were based on international studies examining the doseresponse relationships between exposure to fine particles and health impacts6. These doseresponse functions present a change in crude mortality rates and DALYs (Disability Adjusted L i f e Years) attributable to a change in 10 ug/m3 o f annual mean concentration o f PMlo. Details o f the dose response functions are provided in Annex 9. Based on the crude dispersion model, the number o f D A L Y s for Obiliq I Obilic municipality caused by the ash dump amount to 182 cases per year. This represents a benefit o f US$1,600,000 per year, once the ash dump i s fully removed.
Hazards due to geotechnical instabilities

The Kosovo A ASF ash dump presents hazards due to the geotechnical instabilities o f the dump and its pressure o n the land. The presence of the ash dump has jeopardized nearby settlements in the past. Removal o f the ash dump will eliminate the geotechnical instabilities and remove the hazard o f further loss o f property in the area. The benefits o f prevention o f loss o f properties are estimated at US$420,000.
Reclamation o landfor agriculture, natural habitats, and resettlement purposes f

The reclamation o f the overburden dumps will make land available for agriculture, natural habitats, agriculture and resettlement purposes. The amount o f land that will become available amounts to 4.5 km2for the South Field and 2 kmzfor the West Bardh Field. A consultative land use plan will be preparedbefore implementation o f the reclamation activities. Total benefits o f the reclamation o f land are estimated to be, US$9,400,000 per year for the benefits o f land reclaimed for agriculture over a period o f 5 years and US$2,700,000 per year for the benefits of the land reclaimed for resettlement over a period o f 10 years. In the event o f the low case, land reclamation will proceed more slowly and access to land will take somewhat longer
Capacity building

The project will build the capacity o f KEK and environmental officials in central and local government for clean-up and sustainable mining operations through hands-on experience. I t will also contribute to establishing an integrated approach to deal with environmental legacy issues fi-om lignite mining and power generation activities, improve the environmental performance of current operations and expose Kosovo to best practices for handling abandoned mining sites.

Environmental costs of fossil fuels, K. Lvovsky et al, the World Bank, 2000; Estimating the health effects of air pollution, B. Ostro, World Bank, 1994

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Capacity building o f KEK will lead to improved efficiency and reduced costs. An improved reputation o f KEK for efficiency i s expected to attract private investment in the sector.
costs

The costs o f the project are associated with the Preparation o f the Mirash Open Pit Mine and direct ash disposal from Kosovo A Thermal Power Plant into the Mirash Open Pit M i n e (US$ 2.76 million), Relocation o f Kovoso A Ash Dumps into the Mirash Open Pit Mine (USrS5.48 million), Overburden Dumps Reclamation (US$2.4 million), and Project Management (US$0.715 million). The operational costs born by KEK are differentiated into operational and maintenance costs o f the equipment (US$1.3 million a year) and staff costs for 200 staff (US$O.9 million a year).
Results

Based on the quantifiable benefits, the results o f the economic analysis show that the Economic Rate o f Return (ERR) i s 27% and the Economic Net Present Value o f the project against a discount factor o f 12% amounts to U S $ 11.8 m.
In the project implementation scenario without additional funding, substantial benefits will s t i l l remain even for the reduced project. The ERR o f the reduced Project amounts to 12% instead o f 27% when full financing i s available. See Annex 11 for the full description o f the Project Implementation Scenario without the full financing.

2. Technical

The proposed project builds upon international good practice and international experience o f land reclamation and sustainable ash disposal in lignite mining and power generation operations. The environmental and public health risks that are mitigatedby the project were identified as high priority issues o f support with Kosovos central and local authorities.
The proposed technical clean-up and land reclamation options to be applied in the project were determined through a feasibility study. The feasibility study conducted by an international technical specialist assisted by international mining specialists analyzed various options (see Section B.6). Based o n the available information, project activities include options that most effectively meet internationally accepted environmental standards. The proposed project components incorporate the selected techniques for the clean-up and land reclamation activities. The scope o f works and the allocated budgets have been identified in the projects feasibility study and its basic design. As part o f project implementation and before commencement o f the works, detailed site investigations will be conducted and a detailed construction design will be prepared.

3. Fiduciary
Procurement

18

Procurement would be carried out in accordance with the World Banks Guidelines: Procurement under IBRD Loans and IDA Credits dated M a y 2004; and Guidelines: Selection and Employment o f Consultants by World Bank Borrowers dated M a y 2004, and the provisions stipulated in the Legal Agreement. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, need for prequalification, estimated costs, prior review requirements, and time frame will be agreed between the Borrower and IDA in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Details o f the procurement arrangements are in Annex 8.

Financial Management Arrangements

The financial management arrangements o f the project are acceptable to the Bank. As of the date o f this report, UNMIK i s in compliance with its audit covenants o f the existing Bankfinanced projects. The annual audited project financial statements will be provided to the Bank within six months o f the end o f each fiscal year.

An Operational Financial Accountability Report was finalized in M a y 2005. Despite significant , progress since 200 1 public financial management in Kosovo suffers from fundamental weaknesses, and basic structures for financial accountability are s t i l l in their infancy. Carry-over practices and weaknesses in capacity, organization and coordination hamper budget preparation and undermine the credibility o f the budget as a policy management instrument. While treasury and cash management are well-regulated areas o f public financial management, they suffer from inefficiencies. The system through which Commitment and Payment Orders flow to ensure authorization o f payments i s well regulated. The Treasury authorizes commitments and payments based on proposals and supporting documentation by budget organizations and municipalities. The Treasury pays from a single account in the central Banking and Payment Authority o f Kosovo (BPK).
As with most public financial management functions, accounting i s constrained by limited capacity, and financial reporting needs more realistic requirements and statutory deadlines, improved procedures, and trained personnel. Internal control and internal audit at all levels of government are in their infancy. Considerable time and effort will be required to make them fully operational. External audit i s undeveloped and, as with internal audit, it will need sustained external support for its development. Specific procedures have been developed by MEF and KEK to ensure proper financial accountability o f this project.

4. Social
The project will have social benefits in terms o f demonstrating commitment by the government and KEK to addressing the impact o f previous mining and energy sector activities. I t will help to create the enabling environment and social license in which future development in the sector can occur. Stakeholders perceive past unsustainable mining activities as placing a disproportionate burden on the municipality. The loss o f land through dumping of overburden on productive lands and the presence of a large hill o f ash are perceived by many local residents as constant

19

reminders o f the extent to which the community was excluded from decision-making, yet affected by the developments. Municipal leaders and nearby residents would welcome visible evidence that these issues are being addressed. Demonstrable progress on cleaning up what i s considered by residents as an eyesore and a health hazard would be a key step in building community support for environmental and social sustainable development in the sector. With respect to the clean-up activities, findings from the Kosovo Poverty Assessment indicate that environmental health issues are a key concern. In addition, discussions with stakeholders in the Obiliq I Obilic municipality indicate that there i s strong support and commitment for undertaking clean-up and land reclamation activities. Municipal authorities expressed concern that fly ash from the ash dump contributes to the health problems in its vicinity. As a result, past instability o f the ash dump necessitated the movement o f a small settlement.

A public consultation was held in the municipality o f Obiliq I Obilic on the project in March 2006. Participants praised the public consultation process, and municipal officials said it was very seldom these discussions had occurred with them during the preparatory stage. The project was described by the mayor o f the municipality as a necessary and valuable project for tackling
environmental legacies.

A more thorough stocktaking on stakeholder perspectives will occur under the complementary Lignite Power Development Technical Assistance Project; technical assistance will be provided to the Kosovo authorities for preparation o f a Strategic Environmental and Social Assessment (SESA) specific to energy sector development which would identify environmental and social issues o f projected developments in the power generation and related lignite mining sectors. One element o f the SESA will be a regional social assessment that will review existing social data on the settlements in Sibovc lignite field and update and expand as necessary so as to assess and outline the expected socio-economic impacts, including those o f resettlement. The scope o f the SESA under the Lignite Power Development Technical Assistance Project would include consultative processes that would help identify issues and priorities for use o f reclaimed land.
5. Environment
Overall, the Project is expected to have important and positive environmental impacts on the project area that will lead to: (i) re-direction o f ongoing ash production and transport o f dumped ashes into sustainable engineered site o f an existing open lignite mine pit; ( ireclamation o f land i) from areas where overburden materials has been dumped in the past; and ( i increasing the ii ) living standards o f the population in the project area by reducing their exposure to air, land and water-based pollution generated by ash transport and disposal. The environmental impacts o f the project are mostly expected from the investments supporting specific works related to: (a) stopping the open ash disposal fi-om Kosovo A and transfer these to the Mirash mine; (b) relocation o f about 25 million m3o f ash from the Kosovo A storage facility to the Mirash mine; and (c) preparation of the Mirash mine to receive and safely deposit ash.

The major findings from the EA indicate that the main negative impacts could only be expected during the construction phase o f the project if the selected contractor does not comply at all times with the relevant national environmental, health and safety legislation. The necessary

20

engineering measures and operational practices to ensure proper construction and operation will be incorporated in the detailed design o f the specific civil works and in the bidding documents. Implementation o f a monitoring program linked to a closure and rehabilitation plan during and after completion o f the main works will ensure that any potential negative impact i s discovered at an early stage and mitigated and monitored accordingly.

6. Safeguard policies
The Clean-up Project has been classified as Category A, triggering OP 4.01 (Environmental Assessment). The EA includes an assessment o f potential impacts o f the proposed project and recommends mitigation measures and monitoring responsibilities that should be undertaken during the construction as well as implementation stages o f the project. The scope o f the Environmental Impact Assessment was discussed in a consultation workshop in Obiliq I Obilic municipality on March 10,2006. The EIA report was presented in a public hearing in the same municipality on April 19,2006 and disclosed in Kosovo on the same date. The EA report was disclosed to the Infoshop on April 26,2006.
One o f the objectives o f the project i s to reclaim additional land that could later be made available for land swaps in the event o f future resettlement due to mining activities in the Sibovc mine field. However project activities will not require any land acquisition or resettlement. At the public hearing, nearby residents raised concerns about resettlements that were needed in the past due to the instability of the Kosovo A ash dump and the adjacent overburden dumps. I t has been confirmed that implementation o f the Clean-up Project will take away these geotechnical hazards and hence the risk o f future resettlements due to this problem.

The project does not deal with ashes that are disposed o f in a wet manner. Hence the policy on Safety o f Dams has not been triggered.
Safeguard Policies Triggered by the Project Environmental Assessment (OPIBP 4.01) Natural Habitats (OPIBP 4.04) Pest Management Cultural Property (OPN 11.03, being revised as OP 4.1 1) Involuntary Resettlement (OPIBP 4.12) Indigenous Peoples (OPIBP 4.10) Forests (OPIBP 4.36) Safety o f Dams (OPIBP 4.37) Projects in DisputedAreas (OPIBP 7.60)* Projects on International Waterways (OPIBP 7.50)

Yes
[XI

No
[XI

11 11 11 [I [I [I [I [I [I

[I

[XI
[XI [XI [XI

[XI
[XI [XI [XI

7. Policy Exceptions and Readiness

The Project is not expected to require any policy exceptions and would be ready for implementation subject to satisfactory completion o f project preparation.
* By supporting theproposedproject,the Bank does not intend to prejudice thefinal determination o theparties' claims on the f disputed areas

21

22

Annex 1: Country and Sector or Program Background

KOSOVO: Energy Sector Clean-up and L a n d Reclamation Project

Kosovo i s rebuilding i t s economy in the aftermath o f the 1999 conflict and under the ongoing international talks on its final political status. At the end o f the conflict, Kosovo inherited an economy that was damaged by poor economic policies, broken trade links, international sanctions, a lack o f investment, and no functioning government. In the 1990s, economic output had already fallen by half, and with the conflict, it fell by another 20 percent, coupled with high and chronic unemployment. Despite post-conflict economic recovery, poverty in Kosovo i s wide spread. Out o f a population of about 2 million almost 36% live below the poverty line, half o f i t s population is below 24 years of age, and about 47% o f the population i s unemployed significantly higher than in any other Balkan country*. I 2004 Kosovos GDP per capita was n estimated at 1,230 Euros, which i s one o f the lowest in Central and Southeastern Europe.

After the conflict, Kosovo was placed under the administration o f the United Nations Interim Administration Mission in Kosovo ( N K under the terms o f UN Security Council U M ) Resolution 1244 (1999). In 2001, a Constitutional Framework was agreed establishing the Provisional Institutions of Self-Government (PISG). In June 2002, the Kosovo Trust Agency (KTA) was established by U MK and entrusted inter-alia with the responsibility o f business N I oversight over the energy and mining sector enterprises, restructuring o f the Publicly Owned Enterprises (POEs), and privatizing of the assets o f Socially Owned Enterprises (SOEs). Although UNMIK retains certain reserve powers and final legal authority, including over the energy and mining sectors, there i s a continued transition to self-government with the PISG assuming significant responsibility on matters relating to economic policy, trade, and investment.
Following a massive donor-funded reconstruction effort, post-conflict support to Kosovo is on the decline as Kosovo nears the end o f the reconstruction period. Given decreasing donor resources and weak economic growth, there is urgent need to support Kosovos development goals to facilitate generation o f sufficient opportunities to reduce unemployment and poverty while ensuring associated environmental and social improvements. The last Kosovo Economic Memorandum (KEM) 2004, identified the energy and mining sectors as potential sources o f economic growth, provided the existing infi-astructure i s rehabilitated, the industry i s restructured in line with the emerging regional electricity market, and private sector investors are brought in to expand power generation and mining business primarily for export purposes. Both energy and mininghave the potential in the medium to longer term to revitalize Kosovos economy, especially given large and increasing energy needs throughout the region and the rebound in global commodity prices.

Under the 2006 Interim Strategy for Kosovo, the World Banks focus is on the long-term development o f energy and i s supporting Kosovos Lignite Power Initiative (LPI) with the objective o f developing an enabling environment to allow reputable investors to develop and
Kosovo i s currently under the administration o f the United Nations Interim Administration Mission in Kosovo (UNMIK) under the t e r n of U Security Council Resolution 1244 (1999). N Kosovo Economic Memorandum, World Bank (May 2004)

23

utilize Kosovos lignite resources in a transparent, fiscally responsible, and environmentally and socially sustainable manner. The I S N proposes to lay the foundation for: (i) sustainable the development o f Kosovos high quality lignite resources and power generation capacity; ( i i) associated environmental and social improvements; and ( i ) transparent and fiscally ii the responsible management o f Kosovos public finances.

A regional review of the energy sector concluded that the development o f lignite mining in Kosovo for power generation and sale to the regional market i s a least-cost solution to close the emerging gap in generation capacity in Southeast Europe. The concern over energy security i s

increasing the desire for diversification of energy supply across Europe, placing greater emphasis o n lignite resources. By developing its power sector, Kosovo can also meet i t s own demand and improve stability of supply, thereby removing a significant barrier to private sector development currently constrained by rolling blackouts. This has the potential to produce a multiplier effect o n business investment, and on job prospects. By supplying to the regional market, Kosovo has the potential to have: (i)substantial long-term source o f income to pay for priority development a programs and much-needed social services for Kosovos population; and ( ian opportunity to i) significantly boost trade links between Kosovo and Southeast Europe and thus facilitate closer integration with the rest o f Europe. Because mining and power generation are potential sources o f growth, Kosovo aims to develop its lignite reserves by employing modern technology to meet its own energy needs and also export power to Southeast Europe where demand i s increasing in a sustainable fashion. Further, concern over energy security i s also increasing the desire for diversification o f energy supply across Europe. This could provide (i)substantial long-term source o f income to pay for a priority development programs and much-needed social services for Kosovos population, and ( ian opportunity to significantly boost trade links between Kosovo and Southeast Europe and i) thus facilitate closer integration with the rest o f Europe by assisting in meeting EU standards in the energy sector. The shortage of reasonably priced alternative new power sources elsewhere in the region, combined with the recent establishment o f the Energy Community o f Southeastern Europe (ECSEE), provides an opportunity for Kosovos energy sector to become an engine o f growth rather than a constraint and drain on public resources.

U M and PISG have collaborated in developing a comprehensive strategy for the energy N K sector, which i s intended to address the short- to medium-term issues and challenges, and put the sector on a path o f long term growth and development in line with EU Directives and standards.

See Regional Electricity and Generation Investment Study, M a y 2005, carried out by Pricewaterhouse Coopers for the European Commission. The Study was managed by the World Bank. lo See Regional Electricity and Generation Investment Study, December 2004, carried out by Pricewaterhouse Coopers for the European Union and the World Bank Energy Strategy o f Kosovo, 2005-2015, July 2005

24

Sector Issues

Environment The Ministry o f Environment and Spatial Planning (MESP) and the Kosovo Environmental Protection Agency (KEPA) are responsible for environmental protection. MESP i s responsible for preparing environmental legislation, and policy and strategy formulation. KEPA, created by merging the existing Institutes of Nature Protection and Hydrometeorology, will be in charge o f pollution control and monitoring, EIA review, environmental information management and research. The establishment o f KEPA i s s t i l l inprocess. The Inspectorate o f Environmental Protection (IEP) within the MESP i s responsible for permitting and enforcement. However with only five inspectors who focus on spatial planning issues, little logistic support, and coordination with local government, the inspectors are not able to carry out duties designated to the IEP. Acknowledging that environmental impacts from mining and power generation were neglected in the past, in 2005 the Ministry o f Energy and Mining (MEM) established a small environmental department. The overall objective o f the new department is to ensure environmentally sustainable production in existing and new mining.activities. K e y issues for attention are: (i) practice of ash dumping and existing ash dumps; and ( iland reclamation the i) for post mining development. Recent efforts to develop an effective institutional structure for environmental regulation have defined the most important actors, their roles and supporting legislation, but the structure i s s t i l l very weak. Key people in MESP have received training, but they have little experience. Specific environmental legislation is being developed under the umbrella of the environmental framework law (Law on Environmental Protection). Laws on air protection and water management have been approved by the Kosovo Assembly, while other laws (e.g. waste management law, noise law, radiation law and eco-fund) are in various stages o f development or approval. Substantial international assistance has been provided in developing legislation. The Kosovar authorities approved the Administrative Instruction on EIA in 2004. MEM has stressed the need to elaborate the weak environmental framework law to cover proper development o f mining and power generation projects. MESP is preparing the Kosovo Environmental Action Plan. An unresolved issue i s finding funds for mitigating and managing the long list o f priority environmental issues MESP has identified. The national environmental strategy has been approved by the Cabinet of Ministers and i s also expected to be approved by the National Assembly. The regulation o f existing polluting sources and new projects i s very weak. Given KEPA and EPs weaknesses, structural monitoring and enforcement have not yet been established. Environmental Impact Assessments have been prepared for some projects (cement plant, lead production), but this procedure i s not common practice.

25

Enernv
Kosovos key energy resource i s i t s extensive lignite deposits; the Sibovc field alone is estimated to hold over 1 billion tons. I t has no other fossil fuel resource and has only a very modest hydroelectric potential. It does not import natural gas and has no gas supply infrastructure. It has n o o i l refinery and depends entirely on imported liquid fuels. Kosovos energy sector i s dominated by Korporata Energjetike e Kosoves Sh.a. ((Kosovo Energy Corporation J.S.C.)) the publicly owned joint stock company utility which operates lignite mines, power generation, transmission and distribution networks. The PISG i s facing a number o f challenges in the sector and the key Ministries, the Ministry of Energy and Mining, and the Ministry o f Environment and Spatial Planning are relatively new. PISG is facing a number o f challenges in the sector. Kosovo has a history o f poor environmental practices while exploiting i t s natural resources, especially in the mining and energy sectors. The environmental issues related to the current lignite mining and power generation operations in Kosovo are a major concern for public health and the environment, and form an obstacle in attracting high-quality investors for future and sustainable development o f this sector. Heavy metal contamination o f soil and food i s high as i s lead contamination, the latter especially in Northern Kosovo, an environmental hotspot where lead intake is 15 times the EU average (ISN). Air pollution, particularly from the dust generated by the power stations, i s a critical problem. Wastewaters from the mining and power operations are heavily polluted. The use o f outdated mining practices, an industrial infrastructure that ignored environmental impacts and a weak environmental management system are the main factors behind the high exposure to environmental health risks. The sizeable ash dump from power generation and overburden dumps from lignite mining operations occupy large areas near the Obiliq mines, sterilizing land for other productive uses.

Inthis context, the PISG i s focusing on efforts to develop strong regulatory systems for sector development, to address the major environmental legacy issues and to undertake land reclamation efforts by removing ash piles and overburden around Kosovo A and B power plants, the countrys main lignite powered stations, located in the Obiliq area. K e y issues to be addressed are:
Emissions Control: Due to i t s ageing technology and poorly functioning equipment, the Kosovo A power plant emits unacceptable amounts o f particulates into the air and pollutes surface water. Inview o f the health implications and Kosovos desire to integrate into the EU, KEK will need to comply fully with applicable EU Directives for dust and particulate emissions from 2008 onwards at both Kosovo A and B. To reduce the operational pollution o f the existing power plants and improve the plants environmental performance, KEK will need to modernize the plants with climate friendly technology, repair the entire wastewater treatment and ash handling and disposal system, and install an environmental monitoring system. This is critical for reducing the impacts o f the coal ash dumps, the water treatment plant and emissions in KEK and improving Kosovo s overall environmental quality.

Land Reclamation: Kosovo has small land holdings. Reshaping and re-cultivating land currently covered with overburden material from the mines would provide an important source
of land for alternative uses including agriculture and possible resettlement. Capacity is also

26

needed to address land development issues including the creation and enforcement o f property rights, mechanisms for transfer o f land rights and dispute resolution. Environmental Mitigation Measures: Kosovos recent efforts to develop an effective institutional structure for environmental regulation have defined the most important actors, their roles and supporting legislation, but the structure is still very weak. Environmental legislation and standards are partially in place, but need further development to deal with the challenges of new initiatives. The environmental framework law i s inadequate to address proper development o f mining and power generation projects, and regulation o f existing polluting sources and new projects i s not effective.

27

Annex 2: M a j o r Related Projects Financed by the Bank andlor other Agencies

KOSOVO: Energy Sector Clean-up and L a n d Reclamation Project

Sector Energy Sector Project Energy Sector Technical Assistance I (ESTAP I , ) Energy Sector Technical Assistance I1(ESTAP 1) 1 Energy Sector Technical Assistance I11(ESTAP 11 1) Lignite Power Technical Assistance Project Status Closed S at I C R Closed H S - quality at entry S - final ISR Ongoing - S Under preparation - S

Energy Sector Energy Sector Energy Sector

Report

Energy Sector Energy Sector Energy Sector Energy Sector Energy Sector Energy Sector

Management Development and Technical Assistance to KEK KEK Skills Development Supply o f Electrical Equipment - Lot 1 Zabel Scoping, Installation, and Supervision o f the Computerized Maintenance and Management System Kosovo B Substation Work Pre-feasibility Study for New Power Plant and

Completed Completed Completed Completed Completed Completed

'2

Inthe mining sector, donor activities are restricted to corresponding assistance to lignite mining.

28

I Mining
Mining
Energy Sector Energy Sector

I SW Mine Development Initial Works (KCB)

SW Mine Development Strategy for Commercial andlor Private Financing Legal Advisor to the MEM Feasibility Study for Kosovo C Power Plant,
Heat Market Study, (Italian Trust Fund Grant) Partnership with NARUC Institutional Development o f TSMO TA for Operational Support o f TSMO (EU)

1 Ongoing
under consideration

Energy Sector Energy Sector Energy Sector Energy Sector

Energy Sector

T&D Interface Metering, (KCB)

Environmental Upgrades at Kosovo A and B Power Plants (KCB) Peya SS (110 kV), (KFW). Distribution Operation Twinning KEK Transition Management assistance

under consideration expected to start in late 2006 planned proposed proposed expected to start in 2006 to start in 2006
to start in 2006 to start in 2006 under consideration under consideration

Energy Sector Energy Sector Energy Sector Energy Sector

29

Annex 3: Results Framework and Monitoring

KOSOVO: Energy Sector Clean-up and L a n d Reclamation Project

Results Framework

PDO
T h e project has the following objectives: (a) address environmental legacy issues problems related to open dumping of ashes o n land (b) enable KEK to free land for community development purposes currently taken by overburden material and enable KEK to remove Kosovo A ash dump; (c) initiate structural operations in KEK for continued clean-up and environmentally good practice mining operations.

Project Outcome Indicators

Disposal o f ashes from Kosovo A at the open ash dump will be stopped and redirected to the Mirash mine. Initiate and enable KEK to remove Kosovo A ash dumps and final disposal i the Mirash mine, thereby n initiate and enable KEK to eliminate pollution infiltration from the ashes into the groundwater Reduce dust arising from the transport o f ash and initiate and enable KEK to eliminate dust arising from the ash dump. Initiate and enable KEK to achieve land reclamation for natural habitats, agriculture, resettlement or other land use purposes. Initiate and enable KEK to reduce loss o f private property in the area by eliminating the extensive geotechnical instabilities from the Kosovo A ash dumps and adjacent overburden dumps n Increase incapacity i institutions and KEK for good environmental practices mining operations

Use of Project Outcome Information

Measure the effectiveness o f the redirection o f the ash production from Kosovo A and measure effectiveness o f increased capacity o f KEK with regard to the removal o f Kosovo A ash dump and land reclamation from overburden dumps

Component A Mine preparation and ash disposal redirection

Component A Prepare Mirash mine for sanitary disposal o f Kosovo A ashes

termediate Outco Indicators

Determine adequacy o f preparations works inmine lining and drainage system Determine if required installations for ash redirection have been installed and ash i s being fully and permanently transported t o the mine Determine if Kosovo A ash dumps are removed according to agreed

Transfer o f ash stream from Kosovo A to the dump site will be stopped and redirected to the Mirash mine.
Component B Ash dumps removal Component B Removal o f Kosovo A ash dumps and final disposal in the Mirash

30

mine, eliminating dust problems and pollution infiltration from the ashes into the groundwater

planning and design

Component C Reclamation o f overburden land

Component E Institutional Development and Capacity building o n environmental management and good practices for lignite mining operations

available for community development including agriculture, resettlement purposes andlor natural habitats Component E Increase in capacity in institutions and KEK for good practices for lignite mining operations

by eliminating the geotechnical instabilities from the Kosovo A ash dumps Component C R e c l k a t i o n o f 6.5 lun o f land

Reduce loss o f property in the areas

Ensure that the overburden dumps are properly reshaped and recultivated to enable land use purposes. Monitor quality o f work and contribution o f KEK and Ministry o f Energy and Mining and Ministry o f Environment and Spatial Planning and improve potentially identified shortcomings in management of international good practices. Readjust programs and capacity building as necessary.

31

. 8
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Annex 4: Detailed Project Description

KOSOVO: Energy Sector Clean-up and Land Reclamation Project

The proposed Kosovo Clean-up Project aims to support the Government o f Kosovo and KEK in i t s efforts to enhance the countrys long -term power development and electricity supply while improving cleaner environment for the population through promoting higher standards o f environmental and social sustainability: The overall objective o f the proposed project i s to: (a) address environmental legacy issues related to open dumping o f ashes on land; (b) enable KEK to free land currently taken by overburden material for community development purposes and to enable KEK to remove Kosovo A ash dump; and (c) build capacity in KEK for continued cleanup and environmentally conscious mining operations. The Project includes the following components and activities:

Component A. Preparation of Mirash Open Pit M i n e for ash management: (US$2.76 million: US$1.86 million IDA, US$O.9 million KEK)
Objective. This component will include site preparation works at the existing Mirash open pit mine to develop proper conditions for sustainable storage o f ash and overburden materials collected from the ash dump facilities and future lignite mining developments. A separate component will include direct ash disposal into the Mirash Open Pit Mine from the current Kosovo A thermal power plant operation.

The Mirash open pit mine offers sufficient capacity and favorable geotechnical and hydrogeological conditions for the safe storage o f ash and overburden materials o f up to 200 million m3. However, proper preparation work i s necessary to allow sustainable ash disposal such as the construction o f a base liner and cell structures for hydro-transported ash using clay from overburden material. Currently, the open mine area i s covered by a thin layer o f overburden materials and in many parts the coal i s exposed. The ash disposal will be partly in slurry form (from Kosovo B Thermal Power Plant) and partly as dry ash (from relocation o f dumps and ongoing ash production at the Kosovo A Thermal Power Plant) totaling about 25 million m3relocated materials and an annual production o f 2 million m3.
Component descrQtion. The activities financed by this component include the following tasks: (i) geological and hydrogeological investigations and analyses, an environmental assessment, environmental management plans, a land use plan and detailed design; ( iinstallation o f a i) simple base liner (overburden claylash mix) including affiliated preparatory works; ( i ) i iinclusion o f a drainage and mine water management system, and (iv) adaptation o f Kosovo A Thermal Power Plant direct ash disposal system,

The overall preparation activities o f the Mirash mine will require existing equipment (excavators, bulldozers) and staff resources already present within KEK. A foundation layer will be constructed and lateral dam structures will be raised against the existing pit walls to provide stability o f the overall disposal scheme. A drainage and mine water system in the ash disposal area connected to the mines overall drainage system i s needed to collect and discharge storm water and the inflow o f groundwater. The water required to provide the right moisture content

34

for ash and overburden during ash disposal will be taken from the ongoing mine water operations. Investments under this component will allow for continual disposal o f ash from Kosovo A Thermal Power Plant directly into the Mirash mine. To remove the ash currently stored in the ash dump, the on-going disposal o f ash stored in the Kosovo A ash dump should be diverted towards the Mirash mine as soon as the conveyor belt line from the ash dumps to the Mirash mine is installed. A additional 2.5 km conveyor belt with 2 driving stations will be installed to n carry the ash produced by the on-going Kosovo A thermal plant operation. Component B. Relocation o f Kosovo A Ash Dumps into Mirash Open Pit Mine: (US$5.48 million: US$2.95 million IDA; US$l.OS million KEK, US$1.45 TBD)
Objective. This component will remove the ash and overburden materials in the Kosovo A storage facility, which will be transported to the engineered disposal sites in Mirash Open Pit

Mine, dumped and properly backfilled.

Component description. This component will include investments for site investigations and works related to rehabilitation o f equipment including mobilization o f equipment for proper ash relocation into Mirash Open Pit Mine.

Ash relocation would require use o f special mining machinery and equipment (provided by KEK) to excavate ash and overburden materials and place them safely onto belts that will transport them into the Mirash mine. For effective ash transportation, about 7 km o f conveyor belt systems will be set up, including 4-5 drive stations (belt wagons). The project investment would provide the initial capital to allow KEK to: (i) repair and rehabilitate equipment, ( i i) buy necessary spare parts, and (c) implement the necessary works for the conveyer belt lines, service roads, and access ramps for moving the excavator to the dump site.
Component C. Reclamation of Overburden Dump Sites: (US$2.4 million: US$0.075 million IDA; US$1.15 million KEK, US$1.175 million TBD)
Objective. This component will mobilize existing KEK earth moving equipment (budgets for spare parts) and reclaim about 6.5 km2o f land through reshaping and re-cultivating the South Field overburden dump and the overburden dump west o f the Bardhmine. The reclaimed land should represent in the future an area suitable for community development e.g. for agriculture, new housing developments or recreation.

greening areas. The activities will include physical reshaping, construction o f main and minor access roads and a bridge network, installation o f a surface drainage system and planting o f trees and mixed vegetation. A detailed landscaping and re-cultivation plan will be prepared on the basis o f a current survey of the entire dump area. The future use o f land is subject to the Strategic Environmental and Social Assessment (SESA) for the development o f the energy sector in the Obiliq-Sibovc area to be prepared under the LP-TAP. The SESA would include consultations with the stakeholders, and public planning procedures under Kosovar spatial

Component description. The total costs comprise site investigations, civil works, planting and

35

planning legislation. KEK has purchasedthe land. The current arrangement i s that KEK will make land available for future agricultural or other purposes through lease arrangements or sales.

Component D. Project management: (US$0.715 million: US$0.615 million IDA US$0.015 million KEK, US$O.085 million TBD):
This component will provide support to KEK to implement the project. I t will include support for: (i) project management and technical assistance in such areas as detailed design, construction supervision, procurement and financial management; and ( imonitoring and i) evaluation o f project impacts, including implementation o f an environmental management plan for construction activities carried out under the project.

Under the Project, the PMU will work closely with other departments within KEK, the Mining department o f MEM, EIA, Spatial Planning and Waste Department o f MESP. All these departments will be trained in environmental clean up projects through hands on experience. The P M U will provide regular trainings to and facilitate internships for MEM and MESP staff.
In addition to the components that will be financed under the IDA grant and fi-om KEKs internal resources, financing will be sought for the clean-up o f organic chemicals (e.g. phenol) at the gasification plant site. This clean-up i s estimated to cost US$5 million and will be financed through parallel funding from other donors. Once finding is available, this activity will invest in the removal o f hazardous substances stored in a number o f tanks at the former gasification plant at the Kosovo A Thermal Power Plant. The activity will include investigation o f the site using international good practice to remove, package, and export for incineration or reprocessing, o f about 11,000 m3of chemicals including phenol, benzene and tarry residuals. If t h i s activity will be implemented, a separate EIA and EMP will be prepared prior to the final decision on i t s implementation.

36

Annex 5: Project Costs

KOSOVO: Energy Sector Clean-up and L a n d Reclamation Project

Project Cost By Component andlor Activity

Local Foreign Total U S $million U S $million U S $million 1,056 1,704 2,760 Component A. Preparation of Mirash Open Pit Mine for ash management Component B. Relocation o f Kosovo A Ash Dumps 1,384 4,096 5,480 into Mirash Open Pit Mine Component C. Reclamation o f South Field 1,997 402 2,400 Overburden Dump Component D. Project management 366 348 715 Total Baseline Cost Physical Contingencies* Price Contingencies** 4,803 4,803 4,803 6351 6,551 6351 11,355 11,355 11,353

Total Project Costs' Interest during construction Front-endFee Total Financing Required

* All physical contingencies were included in the cost estimates o f the separate components, hence there i s no separate calculation o f the contingencies in this line.
deflation, hence no price contingencies have been added to this line.

** Inflation in Kosovo over the past few years has been negative and estimates are also about

'Identifiable taxes and duties are US$ Nil and the total project cost, net o f taxes, i s U S $ 11.4 million. Therefore, the share o f project cost net o f taxes is 100%.

37

Annex 6: ImplementationArrangements

KOSOVO: Energy Sector Clean-up and Land Reclamation Project

The Clean-up Project will be implemented over a four and a half year period from August 2006 to December 2010. Project activities will include design, study (EIA and land use plan), site investigations and the repair and mobilization o f equipment, The actual clean-up and land reclamation activities consist in principle o f civil works. KEK will be the main project beneficiary and implementing agency. Consultants and advisors will be hired to help with implementation. Institutions, in particular MEM, MESP and the Municipality o f Obiliq I Obilic, will play an advisory role and coordinate participating activities such as the preparation o f the EIA and the land use plan. The implementation time frame for the IDA grant and physical excavation activities is presented below,

from Kosovo A TPP irdo Mires

Overtyrden dumps r e c W i o n Pro)& Managernerd
Excevaton of Ash Dump inlo Open Pd M m by KEK

In order to support smooth implementation o f this important project for Kosovo, KEK will be responsible for day-to-day project management, including hiring and supervising consultants through the P M U that will be established within KEK. The hiring o f some internationally experienced specialists for the PMU will be financed by the grant under component D. A Project Coordination Committee (PCC) will be established to provide advice and monitor project execution, and oversee coordination between KEK and local and central authorities.

The PCC will be chaired by the Minister o f MESP or h i s h e r duly authorized delegate and would include representatives from KEK, the Kosovo Trust Agency (KTA), the Ministry o f Energy and Mining, the Independent Commission o f Mines and Minerals (ICMM), and the Municipality o f Obiliq I Obilic. Representation in the PCC would require participation from all key institutions that have involvement or an interest in one or more o f the aspects o f implementation. The representatives will ensure that suitable staff from their party will participate in PCC meetings.

The Chair o f the PCC would convene meetings o f the PCC as required, and the PCC would meet at least once every quarter and more often in the first months o f project initiation if necessary. The Chair would invite specific attendance at the meetings, depending on the topic(s) o f discussion. The Chair would indicate the mandatory attendance and the optional attendance for each meeting. Attendance by representatives o f the KTA, KEK, MEM, MESP and the Municipality o f Obiliq I Obilic would be mandatory.

38

The detailed functions and responsibilities o f the PCC and the P M U will be defined in an Operations Manual, which will be adopted not later than two months after project effectiveness.
The key responsibilities o f the PCC would be to:
a

Coordinate the activities o f the various agencies involved in the implementation o f subcomponents, especially those related to environmental and social aspects (regulatory supervision particularly from MESP and MEM); Ensure consultation with local institutions, donors and other stakeholders as appropriate, based o n recommendations from the PMU; Review the PMUs quarterly Progress reports; Advise KEKs Board o f Directors on project execution and progress.

The P M U will serve as the Secretariat for the PCC and prepare and distribute the MinuteslAgenda for each PCC Meeting. The responsibilities o f the P M U will be to:
a

Manage day-to-day project implementation, including, but not limited to, procurement, project monitoring and evaluation, financial management, progress and financial reporting in close cooperation with the Grant Unit o f the Ministry o f Economy and Finance; Prepare quarterly progress reports for KEKs Board o f Directors, the Association and the PCC; Draft Terms of Reference for consultant assignments; Function as the counterpart o f the services provided from the grant; Review consultants reports and monitor the performance o f the consultants; Serve as the Secretariat o f the Project Coordination Committee and assist in follow up of activities approved by the PCC; Arrange for public consultations as required; Ensure that project subcomponents are completed on schedule and achieve their planned outcomes; Ensure that procurement and financial management are carried out in accordance with World Bank procedures and that the annual financial audit i s submitted to the World Bank within 6 months o f the close o f the financial year;
Maintaingrant implementation records;

a
0

a
a

Serve as the contact point for information on the grant; and Coordinate clean-up and reclamation activities with other KEK projects.

39

The P M U will report through the head o f K E K s Mining Division to K E K s Board o f Directors and the PCC, and be responsible to KEKs Mining Division. Board members include representatives from U N M I K s Special Representative o f the Secretary General o f the United Nations (DSRSG), the Minister and Deputy Minister o f MEM, the Director o f KTA SOEs and KEK Managing and Acting Managing Directors. K E K s Board will meet quarterly and more frequently if necessary, to review project implementation, quarterly project progress reports, and recommendations made by the PCC. The Board will provide to the PMU Director advice and recommendations on grant implementation.

The Project Management Unit would consist o f the following key staff

1. PMU director, liaison with donors and regulators (MEM, MESP), financial and technical project management, budget planning, strategic planning; 2. Construction management specialist (PMU deputy director), overall supervision o f project works and planning o f staff and equipment; 3. Financial specialist, financial planning and controlling o f project, definition o f clear cut cost components, establishment and maintenance o f benchmarking system; monitoring o f project finances, preparation o f financial reports; 4. Procurement specialist, procurement o f required goods and services by third parties (e.g. investigations, services, spares); possibly liaison to and supervision o f INKOS as quasi in-house contractor; 5. Mining specialist, technical controlling and progress monitoring o f excavation and relocation operations; steering and supervision o f technical consultants and subcontractors, management o f geotechnical investigation campaigns; 6. Mechanical specialist, technical controlling and supervision o f technical equipment (BWE, CB, spreaders) for relocation operations; liaising with KEK technical services dept.,management o f maintenance budgets within project; 7. Environmental specialist, technical controlling and monitoring o f environmental issues, such as contamination scenarios, a h disposal site preparation, environmental s investigation and monitoring programs; implementation supervision o f environmental measures (e. g. greening, planting); 8. Communication I social specialist, liaison to adjacent communities, communication o f project goals, progress and results to general public, complaints box for involved communities and other stakeholders; and 9. Office manager and translators (2 persons), office management, maintenance and safekeeping o f project records, documentation and archives; assistance with correspondence; translation services.
Staff in the PMU would be recruited from current KEK staff or externally, and paid by KEK. The IDA grant provides funds for the first two years o f the project to hire a PMU director and a

procurement specialist, both with international experience. Office equipment and incremental operating costs would also be financed by the grant. The PMU will be responsible for monitoring progress against agreed performance indicators described in Section B.2 and Annex 3. The PMU will monitor implementation o f project

40

activities, and the performance of the consultants in accordance with the contracts, review and approve the consultants inception reports, mid-term reports, and final reports. A quarterly report on project implementation will be submitted by the PMU through UNMIK to the Association as per the formats agreed during Negotiations. Based on the Associations review of the quarterly reports and outcomes o f the supervision missions, measures will be taken to ensure the projects subcomponents are completed without delay and achieve their planned outcomes. The PMU will be responsible for approving payments, while the execution o f payments and financial reporting will be made through the treasury system. The grant unit in the Ministry of Economy and Finance will assist in the reporting as well as in the disbursement procedures. An external auditor will be appointed to audit the financial statements o f the project The cost o f the annual project audits will be paid from the Grant. More details on financial management arrangements are in Annex 7. Procurement activities will be carried out in accordance with the World Banks Guidelines by KEK through its PMU. More details on procurement are in Annex 8.

Position of Project Management Unit in KEKs Mining Division

KEK - Coal Production Division
EXeWtIM director

Secretary

ProdusUon safety

work

Shm Engineers

At the start o f the project, the PMU will be under the head o f the MiningDivision. During project implementation, the PMU should develop into a h l l y established, permanent element o f KEKs mining division that deals with mining closures and clean-up and reclamation operations.

41

Annex 7: Financial Management and Disbursement Arrangements

KOSOVO: Energy Sector Clean-up and Land Reclamation Project

Country Issues

An Operational Financial Accountability Report was finalized in May 2005. Despite significant progress since 2001, public financial management in Kosovo suffers from fundamental weaknesses, and basic structures for financial accountability are s t i l l in their infancy. Carry-over practices and weaknesses in capacity, organization and coordination hamper budget preparation and undermine the credibility o f the budget as a policy management instrument. W h i l e treasury and cash management are well-regulated areas o f public financial management, they suffer fkom inefficiencies. The system through which Commitment and Payment Orders flow to ensure authorization o f payments is well regulated. The Treasury authorizes commitments and payments based o n proposals and supporting documentation by budget organizations and municipalities. The Treasury pays fkom a single account in the central Banking and Payment Authority o f Kosovo (BPK). As with most public financial management functions, accounting is constrained by limited capacity, and financial reporting needs more realistic requirements and statutory deadlines, improved procedures, and trained personnel. Internal control and internal audit at all levels of govemment are in their infancy. Considerable time and effort will be required to make them fully operational. External audit i s undeveloped and, as with internal audit, i t will need sustained external support for its development.
A financial management assessment was conducted for the project. The assessment found that the MEF, KTA and KEK have developed satisfactory specific procedures to ensure proper financial accountability o f this project.
Strengths and Weaknesses

The significant strengths that provide a basis o f reliance on the project financial management ithe system include: ( ) experience o f MEF, KTA and UNMlK o f implementing previous projects and satisfying Bank financial management requirements; and ( i well-functioning o f the i) the treasury system.

KEK has not previously implemented Bank financed projects. However, their capacity to do so and the suggested mitigating measures for strengthened internal control and use o f private auditor for the audit o f the entity and the project accounts were found to be acceptable.
Implementing Enti@

The Clean-up Project will be implemented over a four and a half year period fkom August 2006 to December 2010. KEK will be the main project beneficiary and implementation agency. A s KEK i s not a budgetary institution KTA will provide the necessary approvals as regulated in a sub-grant agreement between UNMIK, KTA and KEK. Consultants and advisors will be hired

42

to help with implementation also and institutions, in particular KEK, MESP and the Municipality of Obilic I Kastriot, w i l l play a role in giving guidance to the project and coordinate in multiparty participating activities such as the preparation o f the EM.

In order to support smooth implementation o f Clean-up Project, KEK will be responsible for day-to-day project management, including hiring and supervising consultants through a Project Management Unit (PMU) that will be established within KEK. The hiring o f some internationally experienced specialists for the P M U will be financed by the grant under component D. A Project Coordination Committee will be established to provide guidance and monitoring o f project implementation, and to coordinate between KEK and local and central authorities.

The PCC will be chaired by the representative o f the Ministry o f Environment and Spatial Planning and would include representatives from the Kosovo Trust Agency, the Ministry of Energy and Mining, the Independent Commission o f Mines and Minerals (ICMM), and the Municipality o f Obilic I Kastriot. Representation in the PCC i s designed to ensure participation from all key institutions that have involvement or an interest in one or more o f the aspects of implementation. The representatives will ensure that suitable staff from their party will participate in PCC meetings.
Funds Flow

All payments will be made by the MEF from i t s own sources o f funds and no designated account will be needed. Based on the documents prepared by the implementing entity all relevant documents will be processed by the P M U in KEK, either to be paid by treasury or by direct, payments. In addition, the PMU will prepare all the relevant documents in support o f applications for withdrawal, ensure signing by KTA and MEF and forward to the Bank through UNMIK. U N M I K s Delegation for negotiations of the IDA Grant, proposed that the sub-grant agreement among UNMIK, K T A and KEK contain a delegation o f authority from KTA in favor o f the PMU Director to co-sign with MFE withdrawal applications on behalf o f the KTA before they are sent to the Association through W E and UNMIK.
Staffing

KEK will before effectiveness, assign a Financial Management Specialist (FMS) familiar with the treasury payment procedures from their finance department to do the processing and control o f payments, prepare withdrawal applications, and produce quarterly interim un-audited financial reports (previously called Financial Monitoring Reports, FMRs) and annual financial statements for the project. The Commitment and Payment Orders (CPOs) produced by the KEK will be submitted to the MEF through KTA. The grant unit o f the MEF has assigned a staff member to be the focal point for preparation of the reports which will be the basis for the PMU for the preparation o f the interim un-audited financial reports (IFRs) and the annual accounts. The director o f the PMtT will ensure that IFRs, annual financial statements and other progress reports reflecting the implementation status o f the project are submitted to the Bank on time.

43

Accounting Policies and Procedures

The accounting books and records w i l l be maintained on a cash basis by the MEF based on payment requests forwarded by the P M U through KTA. Quarterly IFRs and yearly project financial statements will be presented in EUR. KEK will institute a set o f appropriate accounting procedures and internal controls including authorization and segregation o f duties.
Internal Control

After a separation o f the transmission division from the rest o f KEK, the business has been restructured in a two-step legal process into the newly incorporated companies Kosovo Energy Corporation J.S.C. (KEK) and Transmission System and Market Operator J.S.C. (Transko). As a result, the enterprise has now, in the form o f two companies, a clearly defined legal structure, defined and properly valued assets, and a clear financial situation. The new corporate governance structure i s commercially oriented and conducive to a new managerial discipline. Currently, the executive top management o f KEK i s outsourced to E S B I (ESB International Consultants Ltd), under a two and a half years contract signed with the Kosovo Trust Agency. Under this contract there are approximately seven international managers who fill most o f the executive director positions. Gradually, competences will be transferred from KTA to the personnel o f the Companies.

Additional information on policies and procedures are described in the above paragraph.
Internal Audit

KEK has a functioning Internal Audit unit which reports to the Audit, Finance and Insurance (AFIC) Subcommittee of K E K s Board o f Directors. In due course the Clean-up Project will be included in the annual audit plan o f the Internal Audit unit by the AFIC. Internal audits are not deemed a necessity for this project.
External Audit

As o f the date o f this report, U M is in compliance with the audit covenants o f the existing N K Bank-financed projects. The current auditing arrangements used by MEF for Bank financed project in Kosovo, such as the audit scope, the terms o f reference, the auditors, and the audit standards applied are satisfactory to the Bank and it has thus been agreed that a similar arrangements will be adopted for the audit o f the Clean-up Project. KEK will appoint an auditor acceptable to the Bank for the project. Specific terms o f reference were agreed during negotiations. Financial statements will be made o n a cash basis, The due date for the first audit covering the period from effectiveness to 3 1 December 2007 will be 30 June 2008. The financial statements for the entity will be prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Satisfactory audit arrangements have been agreed for the years 2006 to 2008. The audited Financial Statements o f KEK shall be furnished to the Association not later than six months after the end o f each year. The due date for the audit o f the year 2006 will be 30 June

44

2007. Beginning in 2009, KEK will continue having its financial statements audited by independent auditors acceptable to the Bank, in accordance with consistently applied auditing standards acceptable to the Bank. The 2003 and 2004 audit o f K E K s financial statements (performed by Ernst &Young) has been qualified. The auditors have, among others, expressed doubts about K E K s ability to continue to operate because the Company is heavily dependent on grants and subsidies from the Kosovo Consolidated Budget.

Reporting and Monitoring

The PMU will produce all financial reports and Summary Reports (previously known as Statement o f Expenditures or SOEs) for the Bank. The formats o f the quarterly interim unaudited financial reports similar to the ESTAP 11FMRs were agreed during negotiations to be 1 used for project monitoring and supervision. The formats o f these will be included in the FM manual. KEK will produce a full set o f interim un-audited financial reports every three months throughout the l i f e o f the project.

Information Systems
direct payments o n an exceptional basis are chosen, and the accounts would be maintained as part o f the MEFs accounting system. The chart o f accounts o f the treasury is based on the Governments Financial Management Information System. This system was assessed in the Operational Financial Accountability Report and found to be acceptable for the purpose o f registering the necessary financial information. Based on monthly reports from this system (Freebalance) MEF will send to the PMTJ, through KTA, all the information that will enable the project to produce the quarterly and annual financial reports. The reports o n Statement of Sources and Uses of Funds, on uses o f funds according to organizational code, the uses of funds according to sub-components, and the commitment analysis report with commitment and actual data, will all be produced by the Freebalance system on request o f the PMU. KEK will produce the contract monitoring information based on the commitment analysis report and the information on each contract.

All project related payments would be made via the Single Treasury Account (STA), unless

Disbursement Arrangements
Disbursements from the Grant will be made as reimbursements and documented through the transactional method based on Summary Reports as well as using direct payments from the Grant, although only in exceptional cases as initiated by the PMU and agreed with MEF. No designatedlspecial account will be opened. Reimbursement will be made monthly throughout the project period. There i s no plan to move to report-based disbursement.

Supervision Plan During project implementation, the Bank will supervise the projects financial management arrangements in two main ways: ( ) ireview the projects quarterly interim un-audited financial reports as well as the projects and entitys annual audited financial statements and auditors management letter; and ( iduring the Banks supervision missions, review the projects i)

45

financial management and disbursement arrangements to confirm that satisfactory financial management arrangements have been maintained. As required, a Bank-accredited Financial Management Specialist will assist in the supervision process.
Financial Management Action Plan

A time-bound action plan has been developed to provide additional fiduciary safeguards.
Action

Assign a Financial Management Specialist (FMS) conversant with the treasury payment orocedures f i o m their finance deoartment

I KEK

Responsibility

I To be ready by

Due Date

project effectiveness

46

Annex 8: Procurement Arrangements

KOSOVO: Energy Sector Clean-up and Land Reclamation Project

A) General
Procurement for t h e proposed project would be carried out in accordance with the World Banks Guidelines: Procurement Under IBRD Loans and IDA Credits dated M a y 2004 (Procurement Guidelines); and Guidelines: Selection and Employment o f Consultants by World Bank Borrowers dated M a y 2004 (Consultants Guidelines), and the provisions stipulated in the Financing Agreement. The various items under different expenditure category are described below. For each contract financed by the Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between UNMIK and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement o f Works: Works procured under this project, would include re-vegetation o f overburden dumps and construction o f main and minor access roads. All works will be procured through International Competitive Bidding (ICB) and National Competitive Bidding (NCB). The procurement will be done using the Banks Standard Bidding Documents (SBD) for I C B and E C A regional documents for NCB. All documents will be agreed with the Bank.

Procurement o f Goods: Goods procured under this project would include: pumps and appliances for mine water management system; supply of spare parts for belt conveyors, C B driving stations, bucket wheel coal excavators, for spreader in Mirash Open Pit Mine, etc.; and office equipment. The following methods o f procurement will be used depending o n the packages, their cost estimates and sources o f supply: International CompetitiveBidding (ICB) procedures will be used for contracts in the amount o f US$ 100,000 equivalent or more for supply o f pumps and appliances for mine water management system and supply o f spare parts. Limited InternationalBidding (LIB) procedures may be used for contracts in the amount o f U S $ 100,000 equivalent or more for supply o f spare parts if there i s only a limited number o f suppliers. Shopping procedures will be used for contracts in the amount o f less than US$ 100,000 equivalent per contract for supply o f office equipment, vehicles and spare parts. Direct Contracting@C) would be used, subject to the Banks prior approval, for supply o f spare parts which meet requirements for direct contracting referred to in paragraph 3.6 o f the Procurement Guidelines.

47

The procurement will be done using the Banks Standard Bidding Document for all I C B and LIB, and the Banks sample documents for all shopping. All documents will be agreed with the Bank.

All contracts in the amount o f U S $ 100,000 equivalent or more and the first two contracts in the amount of less than U S $ 100,000 equivalent per contract and all direct contracts will be subject to the Banks prior review. All other contracts will be subject to post review.
Procurement o f non-consulting services: The non-consulting services procured under this project would include: sampling, laboratory analysis and environmental monitoring. The procurement will be done using the Banks I C B Sample Bidding Documents for Procurement o f Non-Consultant Services. Selection of Consultants: Consultants will be selected to provide: geological and hydrogeological survey, other surveys, data collection, analysis, and project design, EIAIEMPs for land use and planning, auditing services etc. Short lists o f consultants for services estimated to cost less than US$ 100,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. The following methods for selection o f consultants would be followed: Quality and Cost-based Selection (QCBS) procedures will be used for geological and hydrogeological surveys, other surveys, data collection, analysis and project design. Least Cost Selection (LCS) procedures will be used for selection o f auditing firm for annual audits throughout the l i f e o f the project. Selection Based on Consultants Qualifications (CQ) procedures would be used for very small consulting assignments in the amount o f less than U S $ 100,000. Individual Consultants (local and international) would be hired in accordance with Section V o f the Consultants Guidelines. Single Source Selection (SSS) would be used, subject to the Banks prior approval, for very specialized l o w value contracts which meet requirements for SSS o f the Consultants Guidelines.

The selections will be done using the Banks Standard Request for Proposal (RFP) and other regional sample documents agreed with the Bank.
RFPs, short lists, terms and conditions o f contracts, as well as evaluation reports and recommendations for award for the first two individual contracts and all individual contracts in the amount o f more than US$25,000 equivalent and contracts with firms in the amount o f more than US$50,000 equivalent and all SSS contracts will be subject to Banks prior review.

48

Operational Costs: The PMU operating costs for office supplies, operating and maintenance expenditures, communication, utilities, travel expenses, among others, will be disbursed o n the basis of annual budgets to be prepared by the P M U and agreed with the Bank. Others: Training and study tours will be carried out according to a training plan, which the PMU will revise semi-annually and submit to the IDA for approval prior to implementation. The expenses will be covered under the training category and disbursed based on SOE.

B.

Assessment of the agencvs capacity to implement procurement

Procurement activities are envisaged to be carried out by PMU at KEK. According to the information provided by KEK, currently (at the moment o f preparation o f this PAD) there is no staff assigned to deal with project implementation and procurement. KEK shall establish the P M U immediately after the signing the FA. The establishment o f the PMU, staffed by highly qualified specialists, including an international procurement adviser with experience in the Banks procurement rules, will be included in the FA as a condition for grant effectiveness. The capacity of the established PMU including procurement staff shall be satisfactory to the Bank. The Kosovo Operational Procurement Review (June 2004) assessed the risks (legal and regulatory framework, control environment, corruption, etc.) that may negatively affect the ability o f implementing agencies to carry out procurement processes and has rated i t a high risk. Therefore the prior review thresholds are those peculiar to a high risk. The recommended corrective measures are that the Bank Procurement Specialist will: (i) provide training to the P M U procurement staff on the application o f the current Procurement and Consultants guidelines and the respective documents; ( iprovide training to the PMU staff o n the i) preparation o f the technical parts o f the bidding documents and requests for proposals; ( i ) ii conduct comprehensive procurement training for all project related staff as part o f the project launch workshop; (iv) provide the PMU with the Banks Standard Bidding Documents and Requests for Proposals and ECAs sample formats for small procurement.

The Bank will monitor procurement activities. The Bank Procurement Specialist will conduct prior and post reviews and will provide guidance in all procurement related activities.
C. Procurement Plan

The Recipient, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan was agreed between the UNMIK and Project Team on M a y 2,2006 and i s available in the Projects database and on the Banks external website. The Procurement Plan will be updated annually in agreement with the Project Team or as required, to reflect actual project implementation needs and improvements in institutional capacity.

49

D.

Freauencv o f Procurement SuDervision

The following frequency o f procurement supervision i s recommended: one supervision mission per six months to visit the field and to carry out post review o f procurement actions. The PMU procurement staff shall properly collect and maintain the procurement documentation.

E. Details o f the Procurement Arrangements Involving International Competition 1. Goods, Works, and N o n Consulting Services
(a) L i s t o f contract Packages to be procured following ICB and Direct contracting

Rcritr bp tbc Bark [PriorCP

*Stl

Expected Dott+:Bidd qC+eltctioa

C*rtr.Com

Prior and Post Prior and Post

? w a # &# M f A I i 4m Adoption of drainage and mine water managsment system

Corporcrt B

zOa,Oaa
IG

R * && d X##5# A A S F &#a#ilks& W# Supply arf spare parts o bucket wheel coal excavator F Supply OF spare parts for spreader iri Mirash OPM

I
I

I
I I
I

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i,aoo,oaol

I
I

llca

1 I

I Prior
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1

act ai, 200l; Jan 310,2008;

IG

BOo, ao1 o

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IIGB, LIB, IFriar and I ISH. DC I Pest IICB, LIB, IPrior and

50

2. Consulting Services
(a) List o f Consulting Assignments with short-list o f international firms.

(b) RFPs, short lists, terms and conditions o f contracts, as well as evaluation reports and recommendations for award o f the first two individual contracts and all individual contracts in the amount o f more than US$25,000 equivalent and contracts with f i r m s in the amount o f more than US$50,000 equivalent and all SSS contracts will be subject to the Banks prior review.
(c) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than US$ 100,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines

51

Annex 9: Economic and Financial Analysis

KOSOVO: Energy Sector Clean-up and L a n d Reclamation Project

Background

The proposed project will generate substantial benefits for Kosovo, many o f which can b e measured in monetary terms. The following benefits are expected from the Clean-up and Land Reclamation Project.

P The removal o f the Kosovo A Ash Dumps and final disposal in the Mirash Open Pit Mine will eliminate pollution infiltration from the ashes into the groundwater and the dust arising from the ash dump. This will in turn generate health benefits for the local population.

9 Removal o f the Kosovo A Ash Dumps will eliminate the extensive geotechnical instabilities from the dumps and related hazards, and further loss o f property in the
area.

P The reclamation o f the overburden dumps will reclaim land available for natural habitats, agriculture and resettlement purposes.
9 The structural operations o f the project in KEK for clean-up and sustainable mining operations and the capacity building o f environmental officials in central and local government, through hands-on experience, will contribute to an integrated approach for dealing with environmental legacy issues from lignite mining and power generation activities. They will also improve environmental performance o f current operations and expose Kosovo to best practices in terms o f abandoned mining sites.
Economic Benefits
Removal o Kosovo A Ash Dump f Interms o f geotechnical hazards, there are currently 13 houses immediately affected by the Kosovo A Ash Dump. About 3-4 are already damaged beyond habitability and several more

show clear signs o f damage such as cracks and deformations. Some o f the houses are currently abandoned or temporarily uninhabited due to the danger. According to information received from the Ministry of Environment and Spatial Planning, current prices that are used for compensation for damaged houses are 350 euro/m2. Calculation o f the price i s done according to the realistic price o f the market in Kosovo and a resettlement coefficient. The average size o f one house is estimated at 100 m2. The dust problems from the ash dumps do not only affect the company workers. They are also an external problem. The ash i s mechanically removed without any precaution and transported dry to the disposal sites by truck. Collected fly ash i s transported dry to a temporary storage from where i t i s transported wet to the disposal site. I t i s estimated that the handling and transport currently causes about 19,500 tons o f dust and the disposal o f about 50,000 tons o f dust.

52

Typically, the total deposited dust has been measured during December 2005 through January 2006 at the Bardh location in between Kosovo A Thermal Power Plant and Kosovo Ash Dumps and the measurements clearly illustrate the overall negative impact o f the Power generation and the Ash dump. This i s presented in the following table: Total dust in Mgl (m day) Bardh Location between Kosovo A Thermal Power Plant and Kosovo A Ash Dumps 1,128.06 2009.16

WHO limit

December 05 January 06

131.30 482.52

Though there were no measurements taken in the immediate vicinity o f the Ash dump, it i s clear that the total dust that i s measuredhalfway from the power plant and the ash dump has excessive levels o f dust compared to the location at Bardh. The dust level i s much higher than the limits set by WHO.

30,000 people are estimated to live in Obiliq I Obilic municipality o f which approximately 2 1,000 are estimated to be affected by the dust from the ashes. According to air measurements for air quality measured just south o f Kosovo A (between Kosovo A and the ash dump o f Kosovo A), PMlo measurements confirm that the these values exceed the limits according to EUDirective with on average 50 uglm3(annual rnean)l3. For mines and disposal sites, the highest concentrations are typically between 0 and 5 km from the sites, while for stacks, dependent on the wind conditions, most o f the pollution i s typically in the range between 35 and 45 km. Estimations for the quantitative effect o f air pollution on mortality, cases o f chronic bronchitis and lesser health impacts such as respiratory hospital admissions, cardiovascular hospital admissions, emergency room visits etc. are based on international studies examining the dose response relationships between the exposure to fine particles. The dose-response functions used are presented in the following table14. These present a change in crude mortality rates and DALYs attributable to a change in 10 ug/m3o f annual mean concentrations o f PMlo.
Health effects Mortality Chronic bronchitis Respiratory hospital admissions Emergency room visits Restricted activity days Lower respiratory illness in children Respiratory symptom (percent change inthe crude mortality rate) per 100,000 adults per 100,000 population per 100,000 population per 100,000 adults per 1000 children per 100,000 adults 0.084 3.06 1.2 23.54 5,750 169 18,300 100,000

12,037 264 3 3 3 3

l3 European Agency for Reconstruction, Carl Bro, EnvironmentalImpact Assessment and Action Plan for Kosovo A and B Power Plants and Coal Mines, June 2003 l4 Sources: Environmental Costs of fossil fuels, K. Lvovsky et al., The World Bank, 2000; Estimatingthe health effects of air pollution, B. Ostro, World Bank, 1994;

53

Cough days Chest discomfort days

per 100,000 children per 100,000 adults

3 3

Based on the crude dispersion model, the number o f D A L Y s (Disability Adjusted L i f e Years) for Obiliq / Obilic Municipality amounts to 182 per year. With an average value o f US$9,000 per DALYI5,this amounts to US$1,600,000 benefits per year, once the ash dump i s fully removed.
Reclamation o overburden dumps at South Field and West Bardh f

The project will finance the reshaping and cultivation o f the overburden dumps at the South Fieldwith a size o f 4.5 km2and o f the West Bardh field with a size o f 2 km2. Inprinciple, after reclamation, the overburden dump can be used for agricultural or housing purposes and approximately 1 km2 would be worth protecting as natural habitats (e.g. some now quasi natural ponds as well as some areas on the slopes which are less suitable for human use anyway). I n terms o f prices for agricultural land, a price o f 5 euro/mZis estimated, for construction land a price o f 23 euro/mz and for natural habitats a price o f 3.25 euro/m2 (equivalent to value of unproductive land) i s estimated based on the criteria established by the government working group for the evaluation of property and wealth. For agricultural land it i s estimated that it will become fully available in 5 years after the reshaping. It i s assumed that only 1km2will be used for housing andor resettlement and that the land will become gradually available in the 10 years after the reshaping o f the overburdens. costs The costs o f the project are associated with the Preparation o f Mirash Open Pit M i n e and direct ash disposal fiom Kosovo A Thermal Power Plant into Mirash Open Pit M i n e (USS2.76 million), Relocation o f Kovoso A Ash Dumps into Mirash Open Pit M i n e (US$5.48 million), Overburden Dumps Reclamation (US$2.4 million), and Project Management (US$0.715 million). The operational costs borne by KEK are differentiated into operational and maintenance costs o f the equipment (US$1.3 million a year) and staff costs for 200 staff (US$O.9 million a year).

l5European Commission,

EcoSense Model.

54

6)

VI VI

mm

Annex 10: Safeguard Policy Issues

KOSOVO: Energy Sector Clean-up and Land Reclamation Project

Environmental Assessment (EA). The EA report was prepared by KEK under terms of reference acceptable to the Bank. A draft EA and executive summary have been finalized in March 2006 and reviewed by the project team. The EA document clearly indicates the overall positive environmental impact o f the project. The EMP has been prepared prior to project appraisal and has been presented with the EA report in a public hearing on April 20h in the Municipality o f Obiliq I Obilic. Background

The environmental status of Kosovo i s dominated by a range o f issues including polluted air, land and water and poor infrastructure management generated mostly by the lack o f an environmental protection regime in the past. The historical legacy o f contamination poses a serious health risk due to the environmental pollution fiom lead, cadmium, zinc, and copper in the surroundings, mostly from the mining sector and particularly in the river Sitnica which, after flowing in the Iber river, follows i t s route up to the Danube and into the Black Sea. The uncontrolled development in both the industrial and urban sectors and the continuing lack o f
effective regulation o f activities such as unrestricted construction works has increased the environmental protection problems. Overall, public health and the environment are mostly threatened by industrial complexes activities, power plants and mining operations, and the lack o f sewage and effluent treatment plants.

The heavy pollution in hot spots concentrated in large industrial areas such as the coalpowered thermo-electric facilities near Prishtina and the large mining industrial complex in the Mitrovica area i s a major environmental and social issue in Kosovo. Although coal is o f major significance for Kosovo as it provides direct and indirect employment for thousands o f people in the coal mining and electricity generation industry, it also has a great impact on the surrounding urban areas which additionally suffer from poor infrastructure and lack o f municipal services, with a significant difference between Prishtina and, for example, the outlying towns such as Lipjan. Arguably, the highest impact from coal-fired power generation in Kosovo o n public health i s caused by exposure to unfiltered dust emissions from Kosovo A power station stacks and dust coming from the dry ash dumping from the same Kosovo A power station. Kosovo B power station has dust filters installed to treat flue gases and ashes are disposed o f in a wet manner causing less dust problems. Due to the lack o f treatment o f industrial wastewaters, power plants also cause water pollution.

The review o f the impact of lignite mining operations in Kosovo o n the environment has been recently carried out to assess past damages and future effects. Measures to minimize the future effects o f dust and noise emissions, water pollution and resettlements have been planned by the local Government. With respect to past damages, two main areas o f concern have been identified, the re-cultivation o f the old overburden dumps and the extinguishing o f smoldering mine fires. Special attention must be paid to the mine fires, which cause environmental 57

problems (air pollution), safety problems in the mines and a economic damage o n the mine

deposits.

hn Additional problems are the ash dumps containing more t a 40 million tons o f ash, which occupy about 150 ha o f land, as well as the pits created during the coal extraction in the lignite open pit mines. Furthermore, the social pressures from the growing population and poverty levels are also putting a strain on large and valuable protected areas and emphasizing the environmental degradation throughout Kosovo.

Assisted by the World Bank and other donors, the government administration o f Kosovo i s preparing a comprehensive program for energy sector development in Kosovo to address the main environmental issues related to the current lignite mining and power generation operations in Kosovo. This strategy intends to focus on the decrease o f environmental degradation due to inadequate mining operations and to improve the environmental performance o f the thermal power stations in the area, which are a major concern for public health and the environment, and form an obstacle in attracting high-quality investors for future and sustainable development o f this sector. In addition to the World Banks Lignite Power - Technical Assistance Project for Kosovos lignite power initiative, KEK and the PISG are preparingin collaboration with the World Bank the Kosovo Energy Sector Clean-up and Land Reclamation Project (the Project or CLRP). The project aims at restoring some o f the environmental problems caused in the past and will establish good environmental practices for future operations, to meet local and regional power demands. The project involves the implementation o f a clean-up and reclamation pilot project in the area of Obiliq about 3 km NW from Prishtina where current lignite mining operations take place and the power stations Kosovo A and B are located. Kosovo A plant i s generating limited output and needs substantial investments in equipment and environmental control measures to be able to contribute to Kosovos power generation basis for the coming years while Kosovo B has been the subject o f major investments to upgrade environmental and operational performance. The Projects main objective i s to deal with high priority environmental issues related to Kosovo A ash dump sites rehabilitation, reclaim land currently occupied by overburden dumps ftom the existing mines and, if addition funding is found, possibly the removal o f hazardous chemicals improperly stored at the abandoned coal gasification plant in the area. Together with the concerned institutions and the organization currently responsible for mining operations and generation (KEK), a World Bank Consultant investigated, in a pre-feasibility study, the most suitable activities to be financed by the Project which include the following main actions: ( ) iPreparation o f the Mirash Open Pit Mine for Ash Management; ( iRelocation o f i) i iReclamation o f Overburden Dump Kosovo A Ash Dumps into Mirash Open Pit Mine; and ( i ) Areas. Furthermore, the pre-feasibility study acknowledged the need to remediate the area of a former gasification plant where currently hazardous chemicals such as phenols and other byproducts from coal gasification are deposited in a manner that cause a risk for the environmental and health o f the local population. The proposed Project includes the option to manage and possibly to dispose o f these hazardous chemicals if additional funding is offered by other donors.

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Reasons for Project Classification

The proposed project's primary objectives are to stop the open disposal o f ashes from the Kosovo A power station, the environmental restoration o f the Kosovo A ash dumps near Obliq and land reclamation o f areas currently occupied by overburden dumps from the existing mines, as a necessary step in ensuring a safe environment and agriculture for humans in the area,
Despite the fact that the project i s designed to mitigate negative environmental impacts and improve the environmental situation, at the beginning o f project preparation, the project received a Category A rating in line with the World Bank's Policy on Environmental Assessment (OP 4.01). As the project will demonstrate post-mining clean-up and land reclamation, this activity could include soil contaminated by hazardous residues from an old gasification plant or the removal o f hazardous chemicals currently stored at the site o f this gasification plant.
The main environmental impacts o f the proposed project actions are affiliated with the cleanup o f the former gasification plant site where there has been the management and possible disposal o f hazardous chemicals by packaging and transporting to incineration o f about 13,000 m3o f phenol, benzene and other coal gasification affiliated organic materials. Duringthe course o f project preparation it was decided that the project will not include neither the clean-up (soil remediation) o f the gasification site nor the removal o f the stored hazardous chemicals from the site. This decision was made in view o f available funds and the higher prioritization o f the removal o f the Kosovo A ash dumps based o n public health impacts. If additional donor funding becomes available, the Clean-up and Land Reclamation Project may be extended to include the re-packaging and removal for safe disposal o f the hazardous chemicals. If this will happen, a detailed environmental assessment will be conducted prior to a decision o n the implementation o f this activity. There i s a possibility that phenols have been discharged to the field below the ash dumps that will be removed. An investigation o f samples from a drilling test, executed during the preparation o f the pre-feasibility EIA, suggests that phenol discharges to the underground did not take place on a large scale. However since the presence o f phenols cannot completely b e excluded at this stage, it was decided to maintain the Category A rating o f the project. As a consequence the project and the prepared EIA/EMP were discussed in two consultation rounds in the Municipality of Obiliq / Obilic. It was agreed that during the design stage o f project implementation, a detailed environmental site investigation and a detailed EIA and EMPs will be prepared.

Environmental Baseline Conditions

Several studies o f general description o f the Obiliq mining site pollution have been developed during the last few years but there is insufficient quantitative information available to support final conclusions on the physical and chemical extent o f the contaminated zone, properties and concentrations o f main contaminants, and the a m o h t o f contaminated materials in soil, groundwater and surface water.

59

The environmental (treatment) installations are from the time the units were erected, poorly maintained and with insufficient capacity considering the higher quantities o f h e 1 currently used. The dust pollutes soil and water courses, but primarily i s considered the source o f health problems and illnesses in the local population. Although no formal health studies to quantify the specific effects attributable to the ash tips have been undertaken, evidence suggests the problems are extremely widespread including recorded deaths o f cancers o f the respiratory system o f people living in the immediate vicinity o f the tip.
From available information collected from the Institute o f Mines and INKOS, the proposed sequence for geology in the vicinity o f the tipping area and project site would appear to comprise of mainly silty clays overlying a sequence o f brown coals and clays with high impermeability. The groundwater flow would be expected to follow from the east to west trend towards the river. A quantity o f soft compressible overburden material, comprised o f saturated silty clays and topsoil was placed at least in part, in the area currently occupied by the Western Tip, where there i s evidence o f slope failure and tip movement. N o detailed monitoring data was available to determine the impact on soil and surface waters from the solid ash tips. Several drillings recently performed in the middle o f the Western Tip o f Kosovo A Ash Dump suggested there i s an elevated concentration o f cadmium (above the maximum allowed standard value for ash) while phenol and PAH were within the acceptable limits. These results as well as the given structure o f the soil (ash layer on top o f overburden clay and coal layers at l o w permeability) are the basis for the conclusion that contamination o f groundwater from phenols and PAHs i s unlikely. Furthermore, the alkaline content o f the ashlclay samples prevents dissemination o f the organic materials in groundwater if these would ever reach this depth. However, further detailed sampling is strongly recommended for final conclusions over the presence or absence and migration o f pollutants in the underground below the ash dumps.

The current potential hazardous materials stored on the gasification site including about 15,000 m3o f hazardous waste (e.g., TAR (l,000m3); Heavy Tar (500m3); medium oils (l,000m3); Ammonium Hydroxide (1,00h3); benzene (500m3); polluted o i l (250m3); phenol mixed with water (13,000 m3);concentrated phenol (750 m3)is significantly high. There i s no knowledge o f the pollution o f the groundwater or soil surrounding this gasification plant.
Some uncertainties that remain concerning the presence o f contamination at the project site stress the importance o f careful investigations prior to the remediation works and preparedness to take into account in the working procedures, the possibility o f underground phenol contamination that could be encountered during cleanup operations. A detailed E M will be conducted at the design stage o f project implementation and prior to the commencement o f works to investigate environmental conditions and define measures regarding geology, hydrogeology, geotechnical properties and stability, and the chemical composition and properties o f potential hazardous materials, seepage water and groundwater which will allow the fmalization o f a category A project baseline data. The geotechnical characteristics o f the in-situ overburden, the tipped mine overburden, and the ash within the tip need to be fully established as well as a formal geotechnical site investigation, including detailed sampling and monitoring program.

60

Alternatives Considered
The pre-feasibility EIA identifies and evaluates several alternatives to the proposed project, including the no action alternative; alternative ways o f decreasing the environmental pollution at the site through rehabilitation of the Kosovo B waste water treatment plant; several cleanup technology alternatives, including in situ remediation o f the Kosovo A and B ash storage facilities and complete removal of Kosovo B ASF; alternative off-site storageldisposal and management o f hazardous waste.

Predicted Impacts of the Selected Alternatives

The pre-feasibility EIA concludes that the alternatives to be considered under the Project involve the following actions: ( ) ipreparation o f the Mirash Open Pit M i n e for Ash Management; ( i i) relocation o f Kosovo A Ash Dumps into Mirash Open Pit Mine; and ( i ) i iReclamation o f f Overburden Dump Areas. Iadditional funding is available fiom other donors the Project will consider to implement the management o f phenols and other hazardous waste located at the gasification plant through packing and transporting them outside Kosovo. Predicted environmental impacts of the chosen activities are related mostly to construction works performed during the proposed activities and to the transport o f hazardous materials fiom the gasification plant for incineration if this activity would be included in the project. Effects could be encountered through generation o f dust and noise as well through accidental spill o f contaminants during their packing andor transport in case the hazardous chemicals component would be later included in the project. Mitigation measures for such effects have been analyzed and proposed to be implemented during the execution o f the project. Furthermore, monitoring o f the groundwater, soil, air and noise pollution would be performed during construction works period and once the works have stopped. A summary o f the environmental management plan i s presented below.

Summary of the Environmental Management Plan

The EMP provides mitigation measures applicable to the stages o f clean-up and land reclamation components likely to be recommended in the final EIA. These include: Site management and institutional controls - limiting access to clean-up sites and restricting land and water uses where appropriate.

Health and safety protection for clean-up workers and nearby residents - air monitoring, personnel training, use of personal protective equipment, decontamination o f equipment, communications.

Contingency planning and emergency response - on-site emergency response, community emergency response, incident reporting, practicing responses, first aid procedures and equipment, training, spill control plan. Mitigation measures for removing hazardous wasteslphenols - recommended techniques. Soil removal mitigation measures - timing o f operations to avoid wet weather, flooding and high winds; covering o f excavation areas and stockpiled soils to prevent dispersion and dust emissions and rain erosion, underliningo f soil stockpiles to prevent leaching to

61

clean soil and groundwater, installation o f ridges and ditches to control surface water run0

Soil transport mitigation measures - waste characterization and labeling, safe loading and unloading, wetting wastes and covering trucks to prevent dust generation, emergency response.

o n and run-off.

The EMP summarizes a series o f environmental monitoringprograms, aimed at measuring contamination in air, soil, surface water, sediments, ground water, drinking water, fish, crops, livestock, and humans before, during and after clean-up. Monitoring parameters, locations, frequencies and methods are provided for each clean-up program activity.

Institutional arrangements and costs for implementing the mitigation and monitoring are also provided. Implementation will be carried out through a project management structure within KEK and supported by staff o f relevant government agencies seconded to the project and domestic and international consultants as needed.
Consultationwith Affected Groups and Local NGOs

A public consultation process has been implemented for the proposed Project; initial public meetings were held in early April 2006 at the project site in Obiliq; a final public meeting was held in late April 2006 based on the Draft pre-feasibility EIA report.
Compliance with World Bank Safeguards

The pre-feasibility EIA has been prepared and submitted in compliance with all applicable World Bank Safeguard Policies relating to EIAs. The overall EIA complies with the Environmental Assessment safeguard policy (OP4.01). The Dam Safety safeguard policy (OP4.37) i s not triggered since the proposed project will not involve remediation o f wet mine tailings or wet ash disposal. The Pest Management (OP4.09), Natural habitats (OP4.04), Cultural property (OP 4.1 l), Forestry (OP4.36), Indigenous Peoples (OD4.20), Involuntary Resettlement (OP4.12), and Projects o n International Waterways (OP7.50) are not triggered,
Environment-RelatedLoan Conditionalities and Covenants

The following two covenants are included in the draft Financing Agreement.

( ) to the commencement o f any o f the civil works under the Project, UNMIK shall ensure, iPrior through the Sub-Grant Agreement, that KEK, through the Project Management Unit, will cany out an environmental impact assessment o f Components A, B and C o f the Project, satisfactory to the Association, which assessment shall be conducted by independent environmental assessment experts not affiliated with the Project and which shall have been retained by KEK under terms o f reference acceptable to the Association. (i i ) to the commencement o f any o f the civil works under Parts A, B and C o f the Project, Prior as the case may be, UNMIK shall ensure, through the Sub-Grant Agreement, that KEK, through the Project Management Unit, causes the independent environmental assessment experts or other independent environmental assessment experts not related to the Project and acceptable to the Association, to prepare an environmental management plan for each o f Components A, B and C
62

o f the Project, as the case may be, satisfactory to the Association, to eliminate, offset, or reduce to acceptable levels any adverse environmental and social aspects, including the actions needed to implement the mitigation, monitoring and institutional measures to be taken during the implementation and operation o f the components.

63

Annex 11:Project Implementation Scenario without Additional Funding

KOSOVO: Energy Sector Clean-up and Land Reclamation Project

Good prospects exist to close the financing gap o f US$2.7 million by attracting additional financing from other (bilateral) donors or other sources and it is envisaged that the financing gap might b e closed in the course o f the Bank's next fiscal year. However, if the required additional financing o f US$2.7 million cannot be found, the Project can be reshaped and reduced to a meaningful set o f activities which will still generate substantial benefits. With the US$5.5 million fiom IDA and KEK's contribution o f US$3.145 million, the Project would be able to finance the following activities: (i) Component A: the Mirash mine will be fully prepared for sanitary disposal o f Kosovo A ashes and the ash stream from Kosovo A to the present dump site will be stopped and redirected to the Mirash Mine; ( isite investigations i) (geo-technical, geo-hydrological, environmental), EIAIEMP's, land use plan and design for all components A, B and C will be executed; and ( i ) full PMU will be set up in KEK with i ithe mobilized staff and equipment to commence the work in clean-up and land reclamation. Savings will be found in Component B and C, which would result in a longer implementation period (4-7 years) for the activities and relying to a greater extent on internal KEK-resources. For Component Byless equipment will be repaired for the removal o f the ash dump (1 bucket wheel excavator instead o f three). This would imply that the removal o f the ash dump will take longer than under the full Project. The removal o f the most problematic west wing o f the dump will take 7 years instead o f 3 years and for the complete removal o f the ash dump 13 years will be required rather than the 5 and a h a l f years that are currently envisaged. For Component Cyless equipment will be repaired for the overburden dump reclamation (earthmoving equipment. Only unpaved roads will be constructed and only limited re-vegetation will be possible. The reclamation o f the overburden dump will take 6-10 years instead o f the 2-3 years that are currently envisaged and careful planning within KEK will be necessary since the works will rely more upon the earthmoving equipment that stands idle during the summer months for doing the works rather than repairing additional equipment that can be used hll-time.

If the financing gap cannot be closed, the monitoring indicators as specified in Annex 3 will be amended following discussions with UNMIK and KEK and based o n projections o f achievable outcomes.
Nevertheless, the Project's specific development objectives: ( ) iaddress environmental legacy i) enable KEK to free land for issueslproblems related to open dumping o f ashes on land; ( i community development purposes currently taken by overburden material; and ( i ) i ienable KEK to remove Kosovo A ash dump and initiate structural operations in KEK for continued clean-up and environmentally good practice mining operations, can s t i l l be met even without the additional funding. Substantial benefits will remain even for the reduced Project in terms o f the DAL,Ys16 (Disability Adjusted L i f e Years) prevented from air pollution o f the ash heap, available land for agricultural and resettlement purposes and prevention o f damages to houses located in
~~

'6

See annex 9 for full calculation and explanation o f the benefits related to DALYs

64

nearby villages. The ERR o f the reduced Project amounts to 12% instead o f 27% when full financing i s available. All benefits related to an increase in capacity in institutions and KEK for good practices for lignite mining operations will be fully realized.

65

Annex 12: Project Preparation and Supervision

KOSOVO: Energy Sector Clean-up and Land ReclamationProject

PCN review Initial PID to PIC Initial ISDS to PIC Appraisal Negotiations Board/RVP approval Planned date of effectiveness Planned date o f mid-term review Planned closing date

Planned 08G WOO5 09\06\2005 09\06\2005 04\25\2006 05\06\2006 06\13\2006 09\13\2006 09\13\2008 12\31\2010

08G 1\2005 09\13\2005 09\06\2005 04\26\2006 05\08\2006

Actual

Key institutions responsible for preparation o f the project are: KEK, PISG (MEM, MESP, MEF).

Bank staff and consultants who worked on the project included: Name Frank Van Woerden Paula F. L y t l e PlamenKirov Elona Gjika Michael Stanley Katelijn Van Den Berg Mark Walker N e i l Richard Bush Dr. Wolfhart Pohl RuxandraFloroiu Irene Bomani Title Project Team Leader Sr. Social Development Specialist Procurement Specialist Financial Management Analyst Sr. Mining Engineer Environmental Economist Lead Counsel Consultant Consultant Environmental Engineer Senior Program Assistant

ui nt ECSSD ECSSD ECSPS ECSPS COCPO ECSSD LEGEC ECCKO ECSSD ECSSD ECSSD

Bank funds expended to date on project preparation: 1, Bank resources: US$160,363.00 2. Trust funds: 3. Total: US$160,363.00 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost:

66

Annex 13: Documents in the Project File KOSOVO: Energy Sector Clean-up and Land Reclamation Project

I World Bank Staff Assessments .

P Financial Management Assessment Report

9 Procurement Assessment Report
1 . Other Documents 1

9 Preliminary Environmental Assessment (and Environmental Management Plan) for the Clean-up and Land Reclamation Project, 2006

9 Preparatory Works Report and Pre-Feasibility Study for the Clean-up and Land
Reclamation Project, 2006

9 Energy Strategy o f Kosovo, 20006-2015, Ministry o f Energy and Mining. 9 Program for the Implementation o f the Kosovo Energy Strategy for the Period 20062008, Strategy Ltd., December 2005 9 Pre-feasibility Studies for the New Lignite Fired Power Plant and Pollution Mitigat ion 9 Measures at Kosovo B Power Plant, EAR, draft final report, February 6,2006 (on
C D Rom)

9 Complementary Mining Plan for Sibovc SW, EAR, Interim Report 9 Opportunities in Kosovo for Independent Power Producers: Pre-feasibility Study for a Lignite Fired Power Plant, USAID 9 Draft Kosovo Environmental Action Plan, 2005, Ministry o f Environment and
Spatial Planning

67

Annex 14: Statement of Loans and Credits

KOSOVO: Energy Sector Clean-up and L a n d Reclamation Project

Difference between expected and actual disbursements Cancel. Undisb. 5.48 6.96 2.43 1.59 1.69 0.16 18.31

Original Amount in US$ Millions ProiectID PO78674 PO88045 PO88865 PO79259 PO79260 PO72405

FY
2005 2005 2005 2004 2003 2002

Purpose ECON POUPUB EXF MGMT BUSENVTA ENERGY SECT TA 3 COMM DEVT FUND 2 EDUCATION SOC PROT (KOSOVO TF) Total:

IBRD

IDA 0.00 0.00 0.00 0.00 0.00 0.00 0.00

SF 0.00 0.00 0.00 0.00 0.00 4.20 4.20

GEF 0.00

Oria. 0.00
0.13 0.33 -0.64 1.14 0.16 1.12

Frm. Revd 0.00 0.00 0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00 0.00 0.00 0.00 0.00

0.00

0.00
0.00

0.00
1.11 -0.10 1.01

0.00
0.00
0.00

0.00
0.00

0.00

KOSOVO STATEMENT OF IFCs Held and DisbursedPortfolio In Millions o f U S Dollars

Committed IFC
FY Approval
Company Loan Equity Quasi Partic. Loan

Disbursed IFC
Equity Quasi Partic.

Total portfolio:

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Approvals Pending Commitment

FY Approval Company
Loan

Equity

Quasi

Partic.

Total pending commitment:

0.00

0.00

0.00

0.00

68

Annex 15: Country at a Glance

KOSOVO: Energy Sector Clean-up and L a n d Reclamation Project

POVERTY and.SOCIAL 2004 Population,mid-year (millions) GNlpercapita (Aflas method, US$) GNI (Aflas rnefhod, US$ billions) Average annual growth, 3998-04 Serbla Europe 8 and Central Montenegro Asla 62 2,620 214 4.4 5.0 472 3290 1553 4.1 -0.5 Lowermlddleincome 2,430 1560 3,847
10

Development diamond'

Life expectancy

Population(%J Lab0r fo me (%) Poverty (% of populafionLmlow nationalp vertyline) Urban population (%of tofelpopulafion) Life expctancyat birth (pars) Infant moftality(per {OOOllve births) Childmainutrition (%ofchildren under51 Access to an improvedvntersoumef%ofpopuietion) Literacy(%of populationage ti+) Gross primaryenroliment (%of school-agepopulafion) M ale Female

0.7

M o s t recent estimate (iatert year available, 1908-04) 52 73 P 2 93 93 + 96 96 Q6 1904 u.9

64 66 29
49

GNI per capita

91 97 01 a 3 Ul 2003 20.7 16.1 202

-59

70 33 1 1 61 1 % 1% 10 2004 24.0 17.6 24.6 -113 4.5 -0.1 12 62.0 9.6

90

ACCESSo improvedvntersoume l -Se&ia

~

and M ontenegru Lo mer-middle-inco me group

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984

GDP (US8 billions) Gross capital formatioWGDP W r t s of goods and seniceslGDP Gross domestic savingslGDP Gross nationalsavingslGDP Current account balancdGDP Interest paynentsiGDP Total debUGDP Total debt seniceiexports Present valueof debtiGDP Present value of debtlewfts (average annualgro Vvrh) GDP GDP percapita Eqorts of goods and sewices

..

Economic ratios'

Trade

6.4

-9.7 11 692 6.5 64.0 1812 1984-94 1994-04 2003 2.7 2.6 7.3

2004 2004-08 72 7.1 42.5 4.9 4.6 P.6

Indebtedness -Se&ie
~

..

..

..

14 4.9 9.4

end Monfenegm Lowr-middlejncorne arum

69

STRUCTURE o f tha E C O N O M Y

(%of GDP) Agriculture lndustiy Manufacturing Services

Householdfinal consumption expenditure General gov't final consumption expenditure Imports of goods and services

1984

1994

2003

2004

Growth o f capital and GDP (X)

140 20 0
T

0.0

0.0 0.0 93.2 18.1 53.5

2004

0.0 67.7 12 8 42.3

1904-94 1994-04

-20
,-40 1

(average annualgmueth) Agriculture Industry Manufacturing Services Householdfinal consumption expendture General gov't final consumption ewenditure Gross capital formation Imports of goods and services Note:2004data arepreliminaryestimates.

2003

Growth of exports and imports ( X )

50 25 0

..
.. ..

..

7.0 -15 114 U.8

4.8 -10 6.6 7.9

16.8 6.4 26.0 42.4

-25

-50

'Thediamonds showfourkeyindicators in thecountry(in bold)comparedwithits income~mupaverage.~&taaremissing,thediamond~ll be incomplete.

Serbia and Montenegro

PRICES a n d G O V E R N M E N T FINANCE
1984 1994

D o m e s t l c prlces (%change) Consumer prices Implicit GDP deflator

Government flnance (%of GDP, includescumnt grants) Current revenue Current budget balance Overall surplusldeficit TRADE (US$ mi//ions) Totalexports (fob)

2003 113 18.0

2004

/ ~ n f i a t i o nx ) (

9.5 9.9

_.

42.5 0.3 -3.1

44.8 2.3 0.2

1904

1994

2003 3,054

2004

Export and Import levels (US$ mill.)

ma. Manufactures Total imports (cif) Food Fuel and energy Capital goods

na.

..

420

..

7,941

11653

w o r t priceindex(ZOOO=tW) Import price index (2000=tM) T m s of trade (ZoW=rOO)

70

BALANCE o f PAYM ENTS

(US$ millions) ~xports goods and services of imports of goods andservices Resource balance

1984

I994

2003

2004

/Current account balance to GDP

(Oh)

4,84 8,738 -4,552 -231 2,777 -2,006 3,007 -4,001 3,557

57.5

5,897 12,845 -6,948

Net income Net cumnt transfers Current account balance Financingitems (net) Changes in net reserves Memo: Reserves includinggold (US$ millions) Conversion rate (DEC, locaVUS$)
EXTERNAL D E B T and RESOURCE FLOWS 1984

-293 4.093 -3,m 3,859 -711 4,302 58.4

t9

(US%mi//ions) Total debt outstanding and disbursed IBRD IDA

1994

2003

2004

Composition o f 2004 debt (US$ mill.)

14,302 2270 283 451 1)4 1

538 302 357 1405

14,876

2839

482 972 P3 2

Total debt Service IBRD IDA Composition of net resource f l o w Official grants Official creditors Private creditors Foreign direct investment (net InflOWS) Portfolio equity(net inflows)
Worid Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

583 4s 703 1028

E 3,924

190
95 0 95

64
0 164 P5

181

A - IBRD B IDA

C-IMF

D - Other Mltilateril

E- Bilderi4 F- PriMte G- Wrt-term

1)6 -11

39

Development Economics

9115105

71

Annex 16: Maps KOSOVO: Energy Sector Clean-up and Land Reclamation Project

wb96966 P : ~ O S O V O ~ U ~ ~ G E N E ~ L \ C l e and Land Reclamation ProjectWoardWinal CLRP PAD Master M a y 12 06 - 2pm.doc an-up 05/12/2006 3:50:00 P M

72

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

Plemetin

POTENTIAL MINING FIELD OVERBURDEN DUMP ASH DUMP COAL YARD EXISTING MINE BUILDING

KOSOVO B THERMAL POWER PLANT ASH DUMP

KOSOVO B THERMAL POWER PLANT

CHEMICAL SEPARATION FACILITY

Field Sibovc
Palaj Hade

Obiliq

KOSOVO A THERMAL POWER PLANT

KOSOVO A THERMAL POWER PLANT ASH DUMP

Field D
MIRASH AND BARDH OPEN PIT MINE

Lismir

Field South
Graboc i Poshtm Kuzmin
WEST OVERBURDEN DUMP

Fush Kosov

SOUTH OVERBURDEN DUMP

IBRD 34711

MAY 2006

IBRD 34702
2000' E 2030' E To Kraljevo 2100' E To Kraljevo 2130' E
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

To Nis
lica Top

PROJECT SITE LOCATION

To Nis

4300' N Gazivodsko Jezero To Leskovac

MONTENEGRO
To Ivangrad

Zubin Potok

Zvecan (Zvecan)

Mitrovica (Mitrovic)

Podujevo
Batlavsko Jezero
l Jab

a anc

Istok (Istog)
To Ivangrad
Kli na
Beli Drim Djurakovac

Vucitrn (Vushtrri) Srbica For more details, Obilic see IBRD 34703 (Obiliq) Glogovac (Gilogoc)
a nic Sit
La

R B I

PRISTINA (PRISHTIN) Kosovo Polje (Fush Kosov)

Gracanicko Jezero

Pec (Peje) Klina (Kline)

Radonjicko Jezero
Er

Malisevo Orahovac (Rahovec) Suva Reka (Suhareke)

en

Djakovica (Gjakove)

Urosevac (Ferizaj) Gabrica

rim

ALBANIA
To Durrs Liqeni i Fierzs

li Be

Prizren

Strpce (Shterpce)

MAIN ROADS RAILROADS SELECTED CITIES* NATIONAL CAPITAL PROVINCE BOUNDARIES REPUBLIC BOUNDARIES INTERNATIONAL BOUNDARIES
To Durrs

Gora (Dragashi)

To Bitola
A dr ia tic

To Bitola *When two city names are shown, Serbian spellings are shown first, followed by Albanian spellings in parentheses. When only one name is shown, the spelling is the same in both languages. 2000' E 2030' E 0 10 20 30 Kilometers

10

20 Miles 2100' E

Vitina (Viti)

Kacanik (Kacaniku)
Lepe

4230' N

Decani (Decan)

Novo Brdo (Novo Berde)

Kosovska Kamenica

Lipljan (Lipjan) Gnjilane (Gjilani)

ck Bina
M

Stimlje (Shtime)

ava or

FYR MACEDONIA
SKOPJE
2130' E To Sofia 4200' N

AUSTRIA
SLOVENIA

20

HUNGARY CROATIA
BOSNIA AND HERZEGOVINA

ROMANIA

SERBIA AND MONTENEGRO

BULGARIA KOSOVO
Se a
FYR MACEDONIA

ITALY

ALBANIA
40 40

Tyrrhenian Sea
20

GREECE

Aegean Sea

Leposavic (Leposaviq)

CLEANUP AND LAND RECLAMATION PROJECT

r Iba

SERBIA & MONTENEGRO

4300' N

To Leskovac 4230' N

ik

c na

A LDOV MO

30

Black Sea

TURKEY

APRIL 2006