Report No. PIC3187 Project Name Macedonia-Power System Operation Improvement Project (@+) Region Europe and Central Asia Sector Electric Power and Other Energy Project ID MKPA42399 Borrower Elektrostopanstvo Na Makedonija (ESM) Implementing Agency Elektrostopanstvo na Makedonija (ESM) Ul "Bote Bocevski" 9, 91000 Skopje Mr. Pande Lazarov, General Manager Tel. 389-91-211237 Fax. 389-91-228350 Date this PID Prepared March 4, 1997 Projected Appraisal Date May 1997 Projected Board Date September 1997 Country and Sector Background 1. The former Yugoslav Republic of Macedonia, FYR Macedonia, is a landlocked country located in the Balkan Peninsula with an area of nearly 26 thousand square kilometers and 2.1 million people. FYR Macedonia inherited from the former Socialist Federal Republic of Yugoslavia (SFRY) an inefficient economy and an institutional and legal framework inconsistent with a market economy. The economic situation in the country was then further hurt by the break up of the CMEA trading system, the civil war in Yugoslavia and the Greek embargo. As a result of these various difficulties, economic performance in FYR Macedonia declined continuously from inception through 1995 with real GDP falling nearly 35%. However, the economy began to stabilize in 1996 with the end of the embargo and Yugoslav civil war. 2. Electricity plays a significant role in the country's energy mix. Total electricity supply in 1995 was around 5,800 GWh (including import of 385 GWh). The total installed capacity of the system is 1474 MW (1045 MW thermal and 429 MW hydro plants). The Macedonian power utility, Elektrostopanstvo na Makedonija (ESM), operates as an integrated public utility in charge of generation, transmission and distribution of electricity. The power system of Macedonia, as a part of the power system of SFRY, used to be linked to the European 400 kV transmission system (UCPTE). Now the Macedonian power system operates in isolation from UCPTE and with only limited interchanges with other neighboring countries. The power system needs some rehabilitation and to be adjusted to better operate as a stand-alone system. Objectives 3. The Macedonian power system has been separated from the former integrated Yugoslav system and the main problems emerging in the sector are those related to the independent operation of the system , lack of peaking capacity, primary and secondary regulation, and the age of some of its plants. The proposed project has the following objectives: a)improve the power system operation; b) improve power system efficiency; and c) make system ready for regional interconnection and interconnection to UCPTE. Description 4. The proposed project is expected to include the following components: a) rehabilitation of 6 major hydropower plants; b) completion of the Energy Management System; and 3) beginning the rehabilitation of the distribution system. Financing 5. The Swiss Government is supporting the hydroplant rehabilitation component with US$4.5 million grant financing. The Bank's Loan is currently expected to be about $ 35 million. ESM will finance about $17-$20 million of local primarily local costs. Other cofinanciers would be welcome. Implementation 6. The project will be implemented by ESM. Sustainability 7. The project will improve the system operation by providing more reliable peaking capacity and reduce system costs by reducing maintenance and expanding generation of hydropower. However, the sustainability of the benefits will depend on: a) appropriate electricity prices; b) adequate operational and maintenance practice; and c) efficient overall company management. Lessons Learned from Past Operations in the Country/Sector 8. The Bank already approved four loans to the FYRM, one of which is fully disbursed. This project will be the first Bank financed energy project in FYR Macedonia. However, under the Financial and Enterprise Sector Adjustment Credit, ESM has been selected to participate in a Special Restructuring Program which involves completion of implementation of an approved cost-cutting action plan. International consultants were mobilized with technical assistance funds to help each enterprise identify cost-cutting measures, including labor staffing. ESM and the Government are now implementing a cost cutting plan. ESM was one of the beneficiaries of a Bank loan to the SFRY (Ln. 2338-YU) which was never completed. The main result of this project was that the dispatch center building has been constructed. Lessons of more recent experience in Eastern Europe point to the need for ensuring early agreement on the broad objectives of Bank assistance, focusing on institutional strengthening measures,ensuring that investment decisions are governed by economic criteria and providing assistance to the implementing agency until they become familiar with Bank procedures, particularly on procurement. Poverty Category -2- 9. Not applicable to this project Environmental Aspects 10. The project has a tentative environmental rating of B. The project has environmental benefits. As a result of improved system efficiency and expanded generation of hydropower the carbon dioxide and sulphur emissions by the lignite fired power plants may be reduced. Program Objective Categories 11. Environmentally sustainable development. The project will improve the system's operational efficiency with a positive environmental impact. Contact Point: Mr. James Moose, Task Manager The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)473-3563 Fax No.: (202)477-1386 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending March 14, 1997 Environmental Annex The project has significant environmental benefits. It will improve the efficiency of the Macedonian Power System which should result in less combustion of lignite (the main fuel) and therefore lower carbon dioxide and sulfur dioxide emissions. The latter emissions will also be reduced by an anticipated increase in hydropower generation which will replace generation from lignite. A safety/environmental review of the 4 dams involved in the project has been undertaken. It was found that the dams are in generally good condition and the 'professional level and awareness of dam safety aspects is surprisingly high'. The dams were analyzed to see how they would perform with an earthquake with a peak ground acceleration of 0.46g and they were all found to maintain their integrity during such an earthquake. In addition, all dams have survived actual major earthquakes since FYR Macedonia is a seismically active area. A number of recommendations were made for minor improvements. These mostly involve additional software, certain instruments, trade publications and outside training for the dam safety staff which was thought to be very competent but isolated. - 3 -