Report No. PID6728 Project Name Mongolia-Energy Project (@+) Region East Asia and Pacific Sector Energy Project ID MNPE40907 Borrower(s) Government of Mongolia Implementing Agency International Cooperation Dept. Environment Category B Projected Appraisal Date September 30, 1999 Projected Board Date February 2000 Sector and Institutional Background 1. Mongolia's district heat and electric power system is a critical part of the country's basic infrastructure. It provides the heating needs for much of the urban population in one of the coldest climates in the world, and electricity supply for core mining activities, and industrial, public, commercial and household consumers. The central system is based upon five coal-fired combined heat-and-power (CHP) plants, of Russian design for base load operation, interconnected by 220 kV line with Russian Siberian grid. Most of the small towns (aimak centers) outside of the central system are serviced by small coal-fired CHP plants and district heating systems, or various combinations of coal-based boilers and diesel-fueled power generation sets. The central system and aimak power systems are managed by the Energy Authority, an umbrella institution comprised of a number of subsidiary energy enterprises. 2. Although there has been some improvement in recent years, the country's coal-power-heat supply system remains in poor condition, and is unable to meet the basic supply requirements of industrial and commercial enterprises and the urban population. Power system losses remain very high. In addition to exceptionally high losses and internal use in the CHP plants, losses and faultily metered or unmetered consumption in the electricity distribution system are in excess of 25 percent. Poor bill collection and revenue management practices cause further financial losses. Although the financial situation of the EA and its subsidiaries has improved substantially since mid-1996, it remains precarious, due to the high system losses, revenue collection difficulties and insufficient tariff levels (especially for heat) to cover the cost of service. Financial information systems are insufficient and/or inappropriate, and skills and procedures need to be developed to undertake proper financial planning. Hardware, software and skills in Mongolia are completely inadequate for efficient operation of the main generation and transmission system, and interfaces with distribution systems. 3. Aimak centers have some small power utilities. With populations in the 15,000-30,000 range, these towns are the administrative, educational and economic centers for large areas of range land, settled primarily by herdsmen. Economic activity is depressed, with many industries closed, and unemployment and poverty rates are high. Power supply is marred by voltage and frequency fluctuations, and frequent outages which may last for weeks. Reliable and better quality power supply is needed not only to sustain existing and prospective economic activities, but also to power essential infrastructure, such as district heating and water pumps, and for lighting. Although ability to pay is low, electricity supply costs are high, due to high fuel costs, inefficiencies throughout the system, and very high losses. Local staff have had no exposure to modern technology or utility management practices. Project Development Objectives and Description 4. The objective of the project is to reduce system losses and improve revenue collection in electricity distribution companies in Mongolia Building upon ongoing investment projects to rehabilitate core components of the country's electricity and heat supply system, the project seeks to modernize and commercialize operations of Mongolia's electric power utilities, to improve cost-effectiveness, increase efficiency, improve service quality, and increase revenue collection. The project includes support for investments to upgrade elements of the electricity distribution system, reduce electricity system losses and electricity theft, improve financial management, and, in provincial towns, upgrade selected isolated power production facilities. Institutional capacity building and human resource development in the utilities are key aspects of the project, with special focus on improving capabilities in (a) financial management, (b) commercially-oriented distribution company management, and (c) benefit/cost analysis of investment projects. 5. The project will include three components: Ulaanbaatar Distribution Component, Aimak Energy Component, and TA support for the regulatory energy agency. The purpose of the first component is to improve the efficiency and reliability of the electricity distribution system in the capital city, to increase revenue collection and reduce system losses, and to assist Ulaanbaatar Electricity Distribution Office (UBEDO) of the EA to become a modern electric power distribution company. The project will assist UBEDO to operate according to market-based commercial principles and practices, and to improve its management of sales, cost revenue and control, and customer service. The Aimak Energy Component is to improve the reliability and cost- effectiveness of electricity and heat supply in the aimak (provincial) centers, to meet the needs of economic production and the basic needs of the population. IDA financing will be provided for implementation of a number of small subprojects in selected aimak centers by the EA. Subprojects are expected to include investments in electricity distribution system upgrading and loss reduction, upgrading of diesel generation facilities, alternative generation sources where cost effective, and improved metering, billing and financial management. International technical assistance for the preparation of other subprojects will be provided under the credit, to the extent required. The purpose of the third component is to provide training support to the new energy regulatory agency. Institutional and Implementation Arrangements 6. The EA will be the project beneficiary and will implement the project, through its main office and its subsidiaries, including the UBEDO and selected aimak utilities. IDA funds will be onlent by the Ministry of - 2 - Finance to the EA, with the EA bearing the foreign exchange risk. The EA has established a Project Implementation Unit (PIU), which is responsible for project preparation and implementation. The PIU includes staff specifically assigned for each of the project's components. All IDA-financed procurement will be conducted by the EA's PIU. During project implementation, IDA's project team is providing training and technical assistance to the PIU and related Mongolian staff in implementation arrangements and procedures, especially procurement and disbursement procedures. Benefits and Target Population 7. The main direct benefits of the proposed project include improved electricity supply reliability; less disruption to production and supply of heat, water and electricity to consumers; and quality improved cost effectiveness of electricity supply; and reduction in power system losses. The target population is power consumers in Mongolia. Environmental Aspects 8. In accordance with Bank OD 4.01 (Environmental Assessment), the project has been assigned to Category B. Electrical equipment with PCBs may need to be replaced in the rehabilitation of the distribution system. For the aimak component, a procedure must be developed for identification of any environmental issues in subproject feasibility studies, and inclusion of mitigation plans where necessary, prior to IDA's approval of specific subprojects. One aimak component subproject area which has already been identified for early attention is any asbestos removal involved in any possible district heating subprojects in Choibalsan. Transmission line clearances in Ulaanbaatar project areas need to be checked against international standards. Resettlement Aspects Not applicable. Contacts: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Mr. B. Erdenebileg International Cooperation Dept. Energy Authority Ulaanbaatar, Mongolia Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending October 29, 1999. - 3 - Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID) . If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. -4-