public disclosure authorized - world bank · province, particularly through financial leasing...

The World BankShandong Energy Efficiency Project (P114069)

Regional Vice President: Victoria Kwakwa Country Director: Bert Hofman

Senior Global Practice Director: Riccardo PulitiPractice Manager/Manager: Jie Tang

Task Team Leader: Jonathan Edwards Sinton, Yanqin Song

REPORT NO.: RES31282

DOCUMENT OF THE WORLD BANK

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF

SHANDONG ENERGY EFFICIENCY PROJECT

APPROVED ON JUNE 9, 2011

TO

PEOPLE'S REPUBLIC OF CHINA

ENERGY & EXTRACTIVES

EAST ASIA AND PACIFIC

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I. BASIC DATA

Product Information

Project ID Financing Instrument

P114069 Investment Project Financing

Original EA Category Current EA Category

Partial Assessment (B) Partial Assessment (B)

Approval Date Current Closing Date

09-Jun-2011 31-Mar-2018

Organizations

Borrower Responsible Agency

People's Republic of China Shandong Financial Bureau

Project Development Objective (PDO)

Original PDO

The objective of the Project is to improve energy efficiency in selected enterprises in the Borrower's Shandong Province,particularly through financial leasing arrangements, and increase use of biomass for power and heat generation.

Current PDO

The objective of the Project is to improve energy efficiency in selected enterprises in the Borrower's Shandong Province,particularly through financial leasing arrangements.

Summary Status of Financing

Ln/Cr/Tf Approval Signing Effectiveness ClosingNet

Commitment Disbursed Undisbursed

IBRD-80590 09-Jun-2011 02-Sep-2011 25-Nov-2011 31-Mar-2018 144.72 116.64 28.08


Policy Waiver(s)

Does this restructuring trigger the need for any policy waiver(s)?No

II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES

A. Background1. The Shandong Energy Efficiency Project (SEEP) was approved on June 9, 2011 and became effective on November 25, 2011 with a closing date of September 30, 2016. The loan amount is US$150,000,000. The Project Development Objective (PDO) is to improve energy efficiency in selected enterprises in the Borrower's Shandong Province, particularly through financial leasing arrangements. The project has two components: (i) Component A Energy Efficiency Service Industry; and (ii) Component C Project Management, Monitoring and Evaluation. Financial leasing in energy efficiency service industry (EESI) is an innovative financing mechanism in China, and the project is the first IBRD financed energy efficiency operation at provincial level in the country.

2. The project has been restructured twice before. The first instance, on August 7, 2013, was to allow commercial practice for procurement; no other changes were made. The second instance, on September 30, 2016, made the following changes: (i) dropped Component B, cancelled the remaining proceeds of US$5,277,624 in this component, and revised the PDO accordingly; (ii) extended the closing date by 18 months, from September 30, 2016 to March 31, 2018; (iii) adjusted disbursement arrangements to increase the allowable financing ratio of IBRD/counterpart funding for subprojects under Component A from 50 percent to 80 percent; (iv) revised the results framework to eliminate those targets pertaining to Component B, and to reduce the energy savings capacity targets pertaining to Component A by 20 percent from current levels; and (v) revised the disbursement estimates.

B. Proposed Changes3. The proposed restructuring will: (i) extend the project closing date by nine months to December 31, 2018; (ii) adjust disbursement arrangements for Component A, Energy Efficiency Sub-projects, and reallocate remaining loan proceeds to the best-performing Project Implementing Unit (PIU); and (iii) revise the disbursement estimates. The extension and reallocation are necessary to enable achievement of the PDO end targets. The restructuring will enable reaching of the targets for energy savings capacity and funds leveraged for energy efficiency projects. This will be the third restructuring of the project, and the second extension of the closing date, cumulatively reaching 27 months of extension.

C. Factors Affecting Implementation Progress4. This project is the first in China to use the financial leasing model, and as such encountered unforeseeable difficulties in implementation. The slow implementation progress is attributable mainly to the continued difficulty in identifying industrial energy efficiency subprojects at enterprises that were both creditworthy and interested in the financial leasing model. The chief factor has been the slowdown in demand for industrial products from the SMEs targeted by the project, and the consequent reduction in demand for energy efficiency investments from that segment of the industry sector. As a result, the PIUs refocused on SOEs, which have larger investment subprojects, but where identifying and executing subprojects takes considerably longer. The project has also allowed several photovoltaic (PV) subprojects to be implemented in the past two years. Per the Operations Manual, the PV subprojects were eligible for project financing. They were attractive and relevant at the time, and could be completed quickly. As agreed with the Borrower, however, there was a limit to the portion of loan proceeds that could be used


for the PV subprojects, and it was agreed during the September 2017 mission that remaining funds will be used for industrial subprojects that yield high enough energy savings to reach the PDO targets. In addition to the challenges in attracting the most suitable subprojects, the implementation has encountered project a management-related issue, as a highly capable manager at one of the PIUs, who had been instrumental in implementation progress after the second restructuring, had to withdraw from project work due to health-related concerns. A new manager was assigned by the PIU, and, after a period of learning, implementation resumed. The Action Plan, described below and which the Borrower has carried out, and the elements of the proposed restructuring, address these factors.

D. Implementation Status5. Component A, Energy Efficiency Sub-projects (US$133,345,000). Three PIUs have disbursed US$104,040,390, or 78 percent of Component A. Since the September 2017 implementation support mission, the Bank team requested that the Project Management Office (PMO) and PIUs produce an Action Plan that would urgently address the implementation issues, and submit it to the Shandong Provincial Finance Bureau and the World Bank. The Action Plan included measures to enhance the management capacity of PIU (Guotai), and to define project activities and actions with clear milestones, such as contract signing, equipment delivery, and system installation. These were to be undertaken by two of the PIUs; the third PIU agreed to relinquish its remaining loan reallocation to make it available to the most capable PIU that had already fully utilized its loan allocation. The project has demonstrated the value of an innovative model for clean energy deployment (financial leasing), including better defining the local institutional and organizational capacities needed for effective implementation, characterizing the project hosts for which the model is most suitable, and the market circumstances under which it is most effective. On that basis, the government and the Bank team believed that it was important to make all reasonable efforts to support further implementation in order to achieve the project objectives.

6. Following the second restructuring, disbursement increased from 37 percent to 62 percent, and the DO and IP ratings were upgraded to MS in December 2016. As of today, the total loan disbursement from the Designated Account (DA) is US$116.64 million, equivalent to 81 percent of the loan amount. However, the DO and IP ratings were again downgraded to MU in November 2017, because although disbursements had increased from 62 percent to 81 percent, implementation progress remained too slow to achieve the PDO by the closing date of March 31, 2018.

7. As of the end December 2017, the two active PIUs had identified two subprojects that would enable achievement of the project end targets, but they had yet to sign preliminary contracts, and requested additional time to finish negotiations. An additional mission, undertaken in late January 2018, provided the Bank team with sufficient evidence that the proposed subprojects are compliant with the Operations Manuals and are of sufficient quality to qualify for financing by the World Bank loan. While the process of fulfilling the Action Plan was lengthy, and necessitated a delayed request for extension of the project closing date, it has been successful in finding a path for the project to meet its objectives. The local government was active throughout in facilitating execution of the Action Plan, demonstrating its strong desire and commitment to fully utilize the remaining loan proceeds to ensure the full achievement of the PDO within the proposed extension of the loan closing date.

a. Laiwu Guangyuan Heat Company. This subproject will utilize waste heat from industry for space heating in buildings. As of late February 2018, Rongshihua PIU was in the process of signing the contract for this subproject; the contracts with the lessee and the equipment supplier had both passed the PIU’s internal approval process and had been provided to the counterparts for signing. Preparatory construction work for the project by the lessee was underway. It is expected that Rongshihua will disburse 30 percent of the Bank financing for the subproject in April 2018, and complete disbursement in August 2018.


b. Shandong Steel Group Rizhao Company. This subproject will generate power with waste gas and steam. As of late February 2018, Guotai PIU had signed the contracts for this subproject with both the lessee and equipment supplier, and preparatory construction work was underway. It is expected that Guotai will disburse 50 percent of the Bank financing for the subproject in April 2018, and complete the disbursement in August 2018.

8. Component B (US$370,000). Throughout the project, the allocation for Component B, Project Management, Monitoring and Evaluation, which supports Consultants Services, and Training, Study Tours, and Workshops, has been underutilized, despite repeated support from the Bank team to utilize this component to facilitate project implementation. At present, about US$62,000 of the allocation of US$370,000 has been disbursed. Current plans for use of these funds would result in expenditures of US$150,000. The unallocated amount of US$179,400 will be reallocated to the highest performing PIU under Component A.

E. Rationale for Restructuring9. As mentioned above, in order to fully meet the PDO and related targets, capitalize on demonstrated innovative financial leasing and performance contracting approach and positive outcomes of the 33 energy efficiency subprojects implemented to date, the proposed closing date extension and funds reallocation would be necessary. With the proposed restructuring, sufficient disbursement would take place as well. Most of the remaining disbursements are anticipated to occur over the summer of 2018 when equipment is expected to be delivered. The Team anticipates that extending the closing date to December 31, 2018 will allow the project to close with satisfactory performance and outcome ratings.

F. Other10. Results Framework. The Results Framework, including the end targets, would remain unchanged. Although the intermediate indicators for two of the PIUs (Rongshihua and Luxin) will not be met, those for the third PIU (Guotai) will be significantly exceeded, with the overall result that the project-level indicators will be met.

11. Compliance. This restructuring complies with the requirements of the IPF Policy and Directive for extensions, i.e. that following the restructuring, the PDO remains achievable and the DO rating is expected to be upgraded (as described above), the Borrower’s performance remains satisfactory (Project Management rating is MS in the latest ISR Report (Seq. No. 12) and, although the overall IP rating is MU because of recent deceleration in implementation progress, all the implementation sub-ratings are S or MS. The Borrower has prepared an Action Plan to complete the project activities within the extended implementation period. Implementation of social and environmental safeguards is in compliance with Bank policy. There are no changes in the project's safeguard category, implementation arrangements or global environment objectives. The project has no existing financial management or auditing issues that would negatively influence the restructuring, and there are no unresolved fiduciary or legal compliance issues.

12. Disbursement. The Borrower has prepared a schedule for disbursements consistent with the Action Plan, and the disbursement plan has been revised accordingly (in a separate attachment).

13. Risks. The overall risk remains Substantial, as macroeconomic co nditions affecting Component A are unchanged.

III. DETAILED CHANGES


LOAN CLOSING DATE(S)

Ln/Cr/Tf StatusOriginal Closing

Revised Closing(s)

Proposed Closing

Proposed Deadline for Withdrawal

Applications

IBRD-80590 Effective 30-Sep-2016 31-Mar-2018 31-Dec-2018 30-Apr-2019

REALLOCATION BETWEEN DISBURSEMENT CATEGORIES

Ln/Cr/TFCurrent Expenditure Category

Current Allocation

Actuals + Committed

Proposed Allocation

Disbursement %(Type Total)

Current Proposed

IBRD-80590-001Currency:USD

GDs-Rongshihua,P.A

63,690,000.00 63,393,617.13 80,699,366.71 80.00 80.00

GDs-Guotai, P.A 49,755,000.00 22,506,384.66 45,712,000.00 80.00 80.00

GDs-Luxin Energy, P.A

19,900,000.00 6,393,335.51 7,153,633.29 80.00 80.00

GDs & WKs under P.B

10,632,375.79 10,632,375.79 10,632,375.79 100.00 100.00

CS,train, study tour &WS

370,000.00 61,585.82 150,000.00 100.00 100.00

At. Cancelled Sep.12,16

0.00 0.00 0.00 100.00 100.00

Total 144,347,375.79 102,987,298.91 144,347,375.79

public disclosure authorized - world bank · province, particularly through financial leasing...

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