Process of preparation and implementation of energy efficiency projects
Presented by: iC consulenten, Association of Energy Efficient Cities, The Covenant of Mayors Program Demonstration Projects Support Team
Increasing the energy efficiency of the national economy is one of Ukraine’s strategic priorities. Over the past four years, the Ukrainian authorities, with the support of the international community, have taken a number of important steps to reform the energy sector. In particular, the legislative framework creates conditions for:
stimulating the efficient use of energy resources through the implementation of European legislation and international standards;
attracting significant investment resources in energy-efficient projects from international financial and donor organizations (also referred to as IFIs) as well as individual countries.
At the same time, practical implementation of project initiatives in the field of energy efficiency is carried out at a slow pace that does not correspond to the country’s strategic interests to achieve a significant reduction of energy consumption, reduction of energy dependence and the development of the national economy on the basis of innovations and resource efficiency in the short term.
Given the deepening of Ukraine’s economic cooperation with partner countries and the expected increased investment, the issue of the effective use of external investment resources and the achievement of the expected results in the shortest time becomes of particular importance.
This document contains the vision of expert community regarding some factors that negatively affect the length of the project process, as well as suggestions for their elimination in order to create more favorable conditions for increasing investment in energy efficient modernization of the Ukrainian economy.
The current state of the project process in the field of energy efficiency
Today, the duration of the project process from concept to implementation (completion of construction) can reach 6 years or more. From them, the preparation of projects for the construction phase can take an average of 2-3 years, even for small and non complex objects.
Such duration of the project process is unreasonably long and completely unacceptable for the country, where more than 90% of buildings require modernization, especially in cases where projects are implemented with the attraction of funds from the IFIs. The main reasons for the long project process are numerous procedures for approving and taking the necessary decisions, as well as passing project expertise and obtaining permits. In general, problems arise at each stage of preparation and implementation of projects and require a systematic approach.
An illustrative example of the unfavorable situation in the area of implementation of energy efficiency projects is the low allocation\usage rate of the IFI loans from 2014-2015 under state guarantees in the amount of more than EUR 870 million:
The project of the International Bank of Reconstruction and Development “Increasing energy efficiency in the district heating system of Ukraine” – USD 272 million; since 2014 – allocation ratio of 9.15%;
European Investment Bank’s project “Ukraine Recovery Program” – EUR 200 million; since 2014 – allocation ratio of 16.94%;
The project of the European Investment Bank “Ukraine Municipal Infrastructure Development Program ” – EUR 400 million, since 2015 – allocation ratio of 1.8%. (currently, in fact zero allocation)
At the same time, Ukraine’s usage of grants from the E5P (established in 2009) in the amount of EUR 112 million, aimed to support investments in the municipal energy efficiency and environmental projects is only 12% over the past 10 years.
Given the complexity and length of the decision-making procedures for the implementation of projects for borrowed funds under government guarantees, some of the leading IFIs (NEFCO, EBRD) have started to use the lending mechanism more actively in the last three years under municipal guarantees. This allowed to reduce to a certain extent the overall project process, but the existing procedural and regulatory barriers still do not allow it to be reduced at full scale. The term of project cycle should not exceed 18 months, according to experts’ opinions.
The typical cycle of an energy efficiency project in Ukraine is shown in the figure below:
The reduction of the design process by eliminating organizational, procedural, regular and technical barriers should become a priority task of the Ukrainian authorities to ensure strategic goals in the field of energy efficiency, as well as to improve the investment climate.
The government should objectively assess the non needed formalities and, as a consequence, the length of decision-making procedures for the implementation of investment projects. Ukraine is currently simply not able to ensure the implementation of initiated projects and well-implemented energy-efficiency measures.
The key issue is how to improve the work of the government, so that the necessary solutions in the framework of the organization and implementation of energy efficiency projects are taken in the shortest possible time.
3. Expectations of investors: removal of procedural barriers at the national level to create more favorable framework conditions for attracting investments in energy efficiency projects
3.1. Reduce the deadlines for making decisions on attracting investment from the IFIs.
Today, the decision-making process on attracting investment from the FIs at the level of the Cabinet of Ministers of Ukraine lasts for up to 1 year, and at the level of the Verkhovna Rada of Ukraine – up to 3 years.
3.2. Identify the central government body and give it the necessary authority to coordinate projects that are implemented with the attraction of financial resources of the IFIs. Under coordination, we mean systematic work with the projects that are implemented with the participation of IFIs by eliminating formal and procedural obstacles and by making suggestions on their systematic reduction.
Implementation of investment projects (even small ones) requires the solution of a significant set of organizational and practical issues that are within the competence of various central government bodies (Ministry of Finance, Ministry of Economy, Minregion, Minecology, National Energy and Utilities Regulatory Commission, State Fiscal Sefvice, AMCU, etc.), resulting in a lot of time spent by IFIs on communication with representatives of each individual authority to solve the necessary issues. Bearing this in mind, it would be more reasonable to deal with a single government body (on the principle of a single window) that has the authority to coordinate the implementation of projects with other public authorities, as well as receive organizational support from it, if necessary. If the emerging issues are of a systematic nature, they must be resolved through changes to the procedures and legislative acts.
A separate interministerial group at the Cabinet of Ministers could be formed in cooperation with the Secretariat of the CMU and BRDO (the Office for Efficient Regulation), develop legislative proposals, amendments to legislative, regulatory and normative acts to reduce the number of the procedures for launching projects;
3.3 Reduce the timing of registration of international technical assistance projects.
Currently, in Ukraine the procedure for registering international technical assistance projects is bureaucratized and can last for months. For example, in Georgia, a similar procedure takes only 1 hour.
3.4. To introduce personal responsibility of heads of public and law enforcement authorities for making unreasonable decisions, which lead to the suspension or termination of projects
National Energy and Utilities Regulatory Commission procedures for including an investment component in utility tariffs are excessively bureaucratic and lengthy.
Consideration of complaints by the Antimonopoly Committee, as a rule, delays tenders for an indefinite period of time. There are numerous examples of the abolition of the AMCU on the formal features of procurement of works, equipment and materials during the implementation of projects, as a result the timing of the implementation of such projects goes out of an economically feasible framework. This leads to losses for the initiators of projects and performers of works caused by failure to achieve the expected effect in the specified time, loss of relevance of the estimated documentation, etc. Decisions on the commencement of construction works or the acceptance of objects in operation in many cases are taken by the authorities of DABI with a delay in the formal grounds.
Questions are raised about the justification for conducting numerous inspections of customers and contractors of works carried out within the framework of projects by law enforcement bodies.
3.5. Establish responsibility of officials for violating the terms of examination of project documentation.
Legally defined, the 30-day period for conducting project expertise (for CC2 and CC3 facilities) is actually delayed for 4-5 months.
3.6. Identify the categories of grounds on which the public authorities refuse to formally identify project initiators in addressing appeals, and define shortened deadlines for reviewing such recurring requests after eliminating deficiencies.
The limits for the examination of project initiators applications are stated in the relevant regulatory instruments and usually amount to 30 days. At the same time, there are numerous examples of refusals to initiators on the basis of formality and irrelevant reasons. In practice, repeated appeals of the initiators on the merits of the issues after the elimination of insignificant formal deficiencies are also considered by the state authorities in the maximum allowed time. In the case of reduction of the main term, and a significant reduction in the terms of re-examination, it is possible to significantly reduce the cycle of project preparation. It is clear that the category of refusal on the basis of a potential threat to life and health of people can not be considered in a short time and needs a separate approach.
3.7. Extend tax and customs incentives for projects that are implemented with the attraction of IFI funds.
Tax and customs preferences (exemption from taxation of value added tax on the import of equipment and materials for the production of alternative fuels or for the production of energy from renewable energy sources, as well as the production of energy-saving equipment and materials) apply only to energy-saving materials, equipment and components in the framework of demonstration projects of Japanese technologies.
3.8. Simplify the procedure for introducing tax privileges to energy efficient project executors, which are carried out with the attraction of funds from the IFIs.
The procedure for releasing project contractors from VAT is extremely bureaucratic, requiring the submission of a package of documents ranging from 300 to 500 pages, and the length of the decision takes 3-6 months. This greatly complicates the use of grant funds, especially such as those from E5P.
3.9. Improve public procurement procedures that are carried out in projects involving IFIs.
Due to the imperfection of the existing public procurement procedures using the ProZorro electronic auction system, IFIs are forced to demand project promoters to conduct tenders in accordance with established international procedures. In particular, the main criteria for evaluating bids in the ProZorro system – the “minimum bid price” – is not acceptable for projects aimed at achieving energy efficiency and ensuring the quality of project implementation.
One of the barriers at the procurement stage is a deliberate lowering of prices by contractors with future manipulations.
3.10. Eliminate procedural obstacles in registering contracts with subcontractors in the bodies of the State Treasury in shortest terms possible, as well as opening and using multicurrency accounts.
Representatives of IFIs in the process of implementing projects systematically face problems of registration of economic contracts with contractors in the bodies of the State Treasury, as well as the opening and use of multicurrency accounts.
3.11. Take additional measures to improve project management in municipalities.
Upgrade qualifications of local staff and introduction of mechanisms for their motivation should improve the quality of the preparation of project applications and the level of management of project implementation. Lack of systematic energy management in most cities significantly complicates both the preparation of project applications and project implementation.
3.12. To develop a mechanism of responsibility of local self-government bodies that receive technical and grant assistance for the development of project documentation in the event of a refusal to implement projects.
Currently there are cases when decisions taken earlier on cooperation with the IFIs are rejected mainly under the influence of political factors.
The solution of the above-mentioned issues will positively contribute to the acceleration of the number of implemented energy efficiency projects. Also, Ukraine will have an opportunity to prove international partners its ability to use their support and financing in a qualitative way. Namely, the quality of implemented energy efficiency measures remains a very important aspect of Ukraine’s progress towards energy efficiency.
Below is a list of factors that do not directly affect the cycle of project preparation but are important at the implementation phase and requires attention:
Low quality of energy audits and project documentation;
Lack of transparency of approval and examination procedures;
Acceleration of the implementation of European legislation and standards, especially with regard to the use of modern lighting and ventilation systems;
The absence in Ukrainian legislation of the rules of conduct and disposal of asbestos and asbestos-containing materials, which threatens to stop financing of projects for the modernization of buildings by international financial organizations;
Problems of tender procedures caused by the lack of construction companies able to meet the requirements of the project;
Improvement of procedures for technical supervision of the execution of construction works;
Introduction of mechanisms for motivation of employees municipalities.