Document of The World Bank Report No: ICR00004191 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80640) ON A LOAN IN THE AMOUNT OF US$200 MILLION TO THE JOINT STOCK COMPANY “THE STATE EXPORT-IMPORT BANK OF UKRAINE” FOR THE ENERGY EFFICIENCY PROJECT September 26, 2017 Energy and Extractives Global Practice Europe and Central Asia Region     CURRENCY EQUIVALENTS (Exchange Rate Effective September 16, 2017) Currency Unit = Ukraine Hryvnia (UAH) UAH 1.00 = US$0.038 US$1 = UAH 26.20 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS CAR Capital Adequacy Ratio CAS Country Assistance Strategy CPS Country Partnership Strategy DSCR Debt Service Coverage Ratio EBRD European Bank for Reconstruction and Development EDP Export Development Project EDP2 Second Export Development Project EEF Energy Efficiency Fund EEP Energy Efficiency Project ERR Economic Rate of Return EU European Union FIL Financial Intermediary Loan FRR Financial Rate of Return GDP Gross Domestic Product GHS Greenhouse Gas GoU Government of Ukraine IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion and Results Report IFI International Financial Institution IFRS International Financial Reporting Standards IMF International Monetary Fund ISR Implementation Status and Results Report IT Information Technology O&M Operation and Maintenance M&E Monitoring and Evaluation MoF Ministry of Finance NPL Nonperforming Loan PAD Project Appraisal Document PDO Project Development Objective PB Participating Bank PIU Project Implementation Unit ROA Return on Assets ROE Return on Equity SAEE State Agency of Ukraine for Energy Efficiency and Energy Conservation   SMEs Small and Medium Enterprises UAH Ukrainian Hryvnia UAS Ukrainian Accounting Standards UEB Joint Stock Company “The State Export-Import Bank of Ukraine” USD United States Dollar Senior Global Practice Director: Riccardo Puliti Practice Manager: Sameer Shukla Project Team Leader: Dmytro Glazkov ICR Team Leader: Dmytro Glazkov   UKRAINE Energy Efficiency Project   CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives, and Design .................................................. 1  2. Key Factors Affecting Implementation and Outcomes .................................................. 5  3. Assessment of Outcomes .............................................................................................. 14  4. Assessment of Risk to Development Outcome ............................................................. 25  5. Assessment of Bank and Borrower Performance ......................................................... 27  6. Lessons Learned............................................................................................................ 29  7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners............... 31  Annex 1. Project Costs and Financing .............................................................................. 32  Annex 2. Outputs by Component...................................................................................... 34  Annex 3: Economic and Financial Analysis ..................................................................... 37  Annex 4. Bank Lending and Implementation Support/Supervision Processes................. 50  Annex 5. Beneficiary Survey Results ............................................................................... 52  Annex 6. Stakeholder Workshop Report and Results ....................................................... 53  Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ......................... 54  Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ........................... 59  Annex 9. List of Supporting Documents .......................................................................... 60  MAP OF UKRAINE ......................................................................................................... 61    A. Basic Information UA - ENERGY Country: Ukraine Project Name: EFFICIENCY Project ID: P096586 L/C/TF Number(s): IBRD-80640 ICR Date: 09/26/2017 ICR Type: Core ICR Joint Stock Company “The State Export - Lending Instrument: Specific Investment Loan Borrower: Import Bank of Ukraine” Original Total US$200.00 million Disbursed Amount: US$200.00 million Commitment: Revised Amount: US$200.00 million Environmental Category: F, Financial Intermediary Assessment Implementing Agencies: Joint Stock Company “The State Export-Import Bank of Ukraine” Cofinanciers and Other External Partners: Not applicable B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 09/30/2009 Effectiveness: 12/07/2011 11/09/2011 Appraisal: 12/20/2010 Restructuring(s): 12/03/2015 Approval: 05/17/2011 Mid-term Review: 09/10/2014 11/17/2014 Closing: 03/31/2016 03/31/2017 C. Ratings Summary   C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Low or Negligible Bank Performance: Satisfactory Borrower Performance: Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Implementing Quality of Supervision: Highly Satisfactory Highly Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance: i    C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of Supervision Yes None time (Yes/No): (QSA): DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes  Original Actual Major Sector/Sector Energy and Extractives/ Other Energy and Extractives 100 100 Major Theme/Theme/Sub Theme Finance/Financial Stability/Financial Sector oversight and 10 10 policy/banking regulation & restructuring Environment and Natural Resource Management/Climate 80 80 change/Mitigation Environment and Natural Resource Management/ Environmental Health and Pollution Management /Air quality 3 3 management Environment and Natural Resource Management/ Environmental Health and Pollution Management / Water 3 3 Pollution Environment and Natural Resource Management/ Environmental Health and Pollution Management / Soil 3 3 Pollution E. Bank Staff   Positions At ICR At Approval Vice President: Cyril E. Muller Laura Tuck Country Director: Satu Kahkonen Martin Raiser Practice Manager: Sameer Shukla Ranjit J. Lamech Project Team Leader: Dmytro Glazkov Gary Stuggins ICR Team Leader: Dmytro Glazkov ICR Primary Author: Alexey Morozov F. Results Framework Analysis   ii    Project Development Objectives (from Project Appraisal Document) The Project Development Objective (PDO) is to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies by facilitating sustainable financial intermediation for the financing of energy efficiency investments. Revised Project Development Objectives (as approved by original approving authority) Not applicable. (a) PDO Indicator(s) Original Target Actual Value Values (from Formally Revised Achieved at Indicator Baseline Value approval Target Values Completion or Target documents) Years Indicator 1: Volume of EE sub-loans Value (amount, US$, 0.00 200,000,000 n.a. 200,000,000 custom) Date achieved 12/15/2010 05/18/2011 03/31/2017 Fully achieved. The indicator was calculated using the total amount of sub-loans provided by both the Borrower and the participating banks. The volume of loans Comments increased gradually in the initial years with the final years of the project’s implementation witnessing a rapid rise in borrower interest and the indicator was fully achieved by the end of the project. Indicator 2: Projected lifetime fuel savings Value (MJ) 0.00 n.a. 25,120,800,000 27,800,000,000 Date achieved 12/15/2010 05/18/2011 12/03/2015 03/31/2017 Comments Target exceeded. The indicator was included in the Results Framework during the restructuring in 2015 to fulfill the requirement of inclusion of core sector indicators. Indicator 3: Number of participating banks Value 0.00 2 n.a. 1 (number) Date achieved 12/15/2010 05/18/2011 03/31/2017 Partially achieved. The political and economic crisis in Ukraine during 2014–2015 (which caused considerable devaluation of the hryvnia and was followed by conflict in the Eastern part of Ukraine) affected the banking sector. Most potential participating banks could not fulfill the financial terms established by the project as entry conditions. In 2013–2014, two banks signed Subsidiary Loan Agreements with Ukreximbank, Comments namely, Megabank and Alfa-Bank. Alfa-Bank terminated the sub-loan agreement in the end of 2015 without disbursing funds to any of the subprojects due to its decision to freeze lending to the commercial sector and focus on other priorities. Only one participating bank stayed in the project by the closing date. However, even under these conditions, the projected volume of energy efficiency sub-loan disbursements was fully achieved due to the efficient and cooperative work of Ukreximbank and Megabank, iii    which were able to on-lend loan proceeds and accelerate disbursements in accordance with the project time line. Indicator 4: Extent of energy savings Value (toe) 0.00 500,000 600,000 663,900 Date achieved 12/15/2010 05/18/2011 12/03/2015 03/31/2017 Target exceeded. The target, calculated as estimated pro rata energy savings of Comments subprojects, was revised during the restructuring to reflect the actual and potential increase in energy savings, observed during 2015, as more evidence on the actual progress and expected outcomes of new beneficiaries’ sub-projects was collected. (b) Intermediate Outcome Indicator(s) Original Target Actual Value Achieved at Values (from Formally Revised Indicator Baseline Value Completion or Target approval Target Values Years documents) Indicator 1: The Borrower’s loan commitments (Percentage, Custom) Value 0.00 100 n.a. 100 (percentage) Date achieved 12/15/2010 05/18/2011 03/15/2017 Fully achieved. The Borrower has consistently demonstrated strong ownership of the project as well as the ability to adjust to the dramatic changes in the market Comments environment. Based on the analysis of the demand, the Borrower initiated the project’s (including % restructuring and amendment of the sub-loan criteria, which at the critical stage of the achievement) project helped dramatically increase the level of commitments and arrive to its closing with 100% loan commitments. Indicator 2: The number of ESCO subprojects Value 0.00 0 2 4 (number) Date achieved 12/15/2010 n.a. 12/03/2015 03/15/2017 Target exceeded. The indicator enhances tracking of municipal type enterprises covered Comments by the project. Signing two ESCO subprojects was estimated as a reasonable target, (including % considering that legal framework, regulating ESCOs work was still in the making. achievement) However, owing to the active outreach work by Ukreximbank during the last year of the project’s implementation, four ESCO subprojects were signed by the end of the project. Indicator 3: Extent of energy savings, gas Value (tcm) 0.00 2,600 160,000 199,000 Date achieved 12/15/2010 05/18/2011 12/03/2015 03/15/2017 Target exceeded. Based on the evaluation of results held before restructuring, the target was increased by 60 times. As the project picked up its pace and the number of subprojects started growing, UEB and the World Bank witnessed an increase in demand Comments for gas-related energy savings. This was due to the rapid growth of gas prices in Ukraine during the project’s implementation, which increased the attractiveness of energy efficiency investments in gas savings. Indicator 4: The Borrower’s loan disbursements Value 0.00 100 n.a. 100 (percentage) iv    Date achieved 12/15/2010 05/18/2011 03/15/2017 Fully achieved. The Borrower has consistently demonstrated strong ownership of the project as well as the ability to adjust to the dramatic changes in the market environment. Based on the analysis of the demand, the Borrower initiated the project’s Comments restructuring and amendment of the loan conditions which, at the critical stage of the project, helped dramatically increase the level of disbursements and arrive to its closing with 100% loan disbursed. Indicator 5: Extent of energy savings, electricity (GWh) Value (GWh) 0.00 400 120 213 Date achieved 12/15/2010 05/18/2011 12/03/2015 03/15/2017 Target exceeded. During the implementation period the Borrower witnessed an increase in demand for gas-related energy efficiency projects and a decline in the number of applications for subprojects with electricity energy savings. To address the dynamics, the Borrower asked for a reduction of the electricity indicator, expecting the project Comments pipeline to produce no more than 120 GWh of energy savings at the closing. The last year of the project, however, together with the increased overall demand for financing brought subprojects with high electricity savings and, as a result, the indicator was exceeded almost two times. Indicator 6: Number of Municipal Energy Efficiency Subproject signed Value 0.00 n.a. 5 5 (number) Date achieved 12/15/2010 05/18/2011 12/03/2015 03/15/2017 Fully achieved. The indicator was introduced during the restructuring to reflect the growing demand from municipal sector enterprises for energy efficiency subprojects. As Comments a result, the World Bank, together with UEB and participating banks, decided to set the target of 5 municipal subprojects, which was fully achieved. G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (US$, millions) 1 09/21/2011 Satisfactory Satisfactory 0.00 2 06/26/2012 Moderately Satisfactory Moderately Satisfactory 5.00 3 05/16/2013 Moderately Satisfactory Moderately Satisfactory 19.13 4 12/31/2013 Moderately Satisfactory Moderately Satisfactory 58.59 5 07/08/2014 Moderately Satisfactory Moderately Satisfactory 82.15 Moderately Moderately 6 03/06/2015 89.01 Unsatisfactory Unsatisfactory Moderately Moderately 7 09/18/2015 89.01 Unsatisfactory Unsatisfactory 8 11/13/2015 Moderately Satisfactory Moderately Satisfactory 109.75 9 06/06/2016 Moderately Satisfactory Satisfactory 151.49 10 01/05/2017 Satisfactory Satisfactory 188.48 11 03/31/2017 Satisfactory Satisfactory 199.50 H. Restructuring (if any)   v    ISR Ratings Amount Board at Disbursed at Restructuring Reason for Restructuring and Approved Restructuring Restructuring Date(s) Key Changes Made PDO Change DO IP in US$, millions The key changes included: (a) extension of the project closing date by 12 months, from March 12/03/2015 MS S 31, 2016, to March 31, 2017; (b) 112.06 updating of the project indicators and targets; and (c) revision of the debt service coverage ratio for subprojects.   I. Disbursement Profile   vi      1. Project Context, Development Objectives, and Design 1.1 Context at Appraisal Country and Sector Background 1. Until mid-2008, Ukraine showed strong economic growth and had an active banking sector, but signs of overheating were becoming increasingly apparent. Growth over 2001– 2008 averaged 7.5 percent, which was among the highest in Europe. Greater amounts of inflows, mainly through bank borrowing abroad, flowed into the country and, together with strong improvements in trade (due to high steel prices), fueled domestic demand. With a pre-crisis fixed exchange rate and pro-cyclical fiscal policies, buoyant international liquidity translated into higher inflation and growing current account deficits. 2. As a result of the financial crisis in 2008, banking sector lending came to a standstill, postponing necessary investment finance in the economy. During the crisis, tightening liquidity and increasing credit risks resulted in ceasing of bank lending to the economy and households. The economic recession, growing unemployment, and depreciation of the Ukrainian hryvnia resulted in a 5.5-fold increase in nonperforming loans (NPLs) from October 1, 2008, until January 1, 2009, and a 3.3-fold increase in 2009. The banking sector had stabilized in 2010 in line with the overall economic recovery, but lending activities remained limited. Banks’ loan portfolio decreased by 5.7 percent in 2009 and continued to shrink in the first half of 2010, even as growth in deposits resumed. Lending was slowly resuming in 2011; however, the economy continued to suffer from the absence of vital credit financing. Energy Efficiency 3. Ukraine was among the most energy-intensive economies in the world and continues to be so. At the project appraisal, Ukraine’s energy intensity1 exceeded that of Germany by a factor of 3.7 (0.45 kg of oil equivalent in Ukraine versus 0.12 kg in Germany) and more than double that of the EU-12 countries. Part of its energy efficiency problem was structural: Ukraine was an important source of heavy equipment manufacturing in the former Soviet Union. Nearly 20 years later, most of these assets were using the same technology. As a result, the Ukrainian industrial sector was labor and energy intensive, made viable due to the low cost of energy and labor. The industrial sector, particularly heavy industry, was expected to be one of the primary sources of energy savings. Other sectors such as chemicals, agriculture, and food production were equally estimated to have significant energy savings potential. Rationale for Bank Assistance 4. During 2005–2011, the World Bank played an active role in policy dialogue and technical assistance to support energy efficiency improvements. The World Bank had been supporting Ukraine to reform and restructure its energy sector through policy dialogue, technical assistance, and financing of adjustment and investment projects since the early 1990s. Because of                                                              1 Energy intensity is measured herein as kilogram of oil equivalent of energy use per constant purchasing power parity (PPP) gross domestic product (GDP). Energy use refers to use of primary energy before transformation to other end-use fuels. PPP GDP is GDP converted to 2005 constant international dollars using PPP rates.    1   continuous involvement, the World Bank developed deep country and sector knowledge that placed the World Bank in a strong position to support energy sector reforms and development. 5. The Government of Ukraine (GoU) made it a strategic priority to reduce Ukraine’s energy intensity. In 1996, the GoU developed an Energy Efficiency Program, where it outlined a strategy for decreasing energy consumption in the industrial, energy, and housing sectors. In its 2006 Energy Strategy looking out until 2030, the GoU set a target of improving Ukraine’s energy intensity by 50 percent by 2030. In 2010, the National Agency of Ukraine for the Effective Use of Energy Resources, later the State Agency of Ukraine for Energy Efficiency and Energy Conservation, developed a Targeted Economic Energy Efficiency Program, which was approved by the Cabinet of Ministers. The program set a target of decreasing energy intensity of Ukraine’s economy by 20 percent by 2015. In addition, the state agency prepared a complementary National Energy Efficiency Action Plan, designed to identify energy efficiency investments, barriers to implementation, and agencies responsible for implementation. 6. The World Bank assigned a high priority to supporting energy efficiency projects in Ukraine. The decrease in energy consumption was expected to contribute to addressing the fiscal deficit by lowering the cost for imported fuel. Increase in energy efficiency of its industries was expected to, not only contribute to increasing its competitiveness and resilience in an economic downturn by decreasing its operating expenses, but also to lead to sustainable growth opportunities for the economy as a whole. Furthermore, energy efficiency options were identified as the highest priority investment to enable the reduction of local, regional, and global (greenhouse gases [GHGs]) pollution. World Bank assistance was required to address the systemic political and regulatory constraints to creditworthiness of municipal Borrowers to facilitate the sustainable financing of energy efficiency projects for district heating companies and other municipal entities. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 7. The project development objective (PDO) was to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies by facilitating sustainable financial intermediation for the financing of energy efficiency investments. 8. The following key results indicators were selected to monitor the PDOs at the project approval:  Extent of energy savings  Volume of EE sub-loans  Number of participating banks  Projected lifetime fuel savings (was added as a core sector indicator). Revised Key Indicators 9. The Key indicator “Extent of Energy Savings” was increased, as indicated in Section F (a) pf the datasheet, to reflect the actual and potential increase in energy savings, observed during    2   2015 as more evidence on the actual progress and expected outcomes of potential beneficiaries’ energy efficiency activities was collected. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 10. The PDO was not revised. 1.4 Main Beneficiaries 11. The primary beneficiaries for this project were industrial and commercial companies, municipalities and municipal sector enterprises, and energy service companies (ESCOs). The Loan Agreement and the Operations Manual provided detailed eligibility criteria and evaluation guidelines for the beneficiary enterprises, subprojects, and sub-loans. 12. The secondary beneficiaries were the Joint-Stock Company “The State Export-Import Bank of Ukraine” (Ukreximbank, UEB) and the participating banks (PBs). Participation in the project was expected to: incentivize local banks to develop capacity for better risk management, procurement, and monitoring of safeguards required by loan covenants; help banks adopt sound business practices; develop new energy efficiency products for industrial and commercial companies, municipalities and municipal sector enterprises, and ESCOs; and attract new lines of credit financed by other international financial institutions (IFIs). 1.5 Original Components (as approved) 13. The project was designed to encourage the banking sector to play an important and sustainable role in meeting the financing needs for improving energy efficiency by the industrial and municipal sectors. It was expected to finance sub-loans up to US$30 million per sub-borrower, including investments in energy-intensive industries, such as metals, chemicals, building materials, and commercial enterprises. 14. The project consisted of one component that included the following list of energy efficiency subprojects to be financed out of the proceeds of the loan: (a) modernization of inefficient and obsolete equipment and facilities; (b) installation of highly energy-efficient industrial equipment and processes for new production capacities, whose current energy use considerably exceeds current best practices; (c) utilization of waste gas and heat and excess pressure; (d) improvement of systems that involves a suite of measures to increase energy efficiency; (e) reduction of energy loss reduction in municipal sector enterprises; (f) preparation of energy efficiency-related studies and technical assistance; (g) reduction of energy losses in buildings; and (h) implementation of other energy efficiency subprojects satisfactory to the World Bank. 1.6 Revised Components 15. The Project components were not revised, however some of the intermediate indicators were amended as the Bank responded to fluctuations in the demand for the Project’s funds (see Section F (b) in the datasheet and paragraph 18 below).    3   1.7 Other Significant Changes 16. The project was restructured once, in 2015. 17. Dramatic events in Ukrainian political and economic landscapes in 2014–2015, including the second wave of banking sector crisis, had their toll on the project’s implementation progress, causing a lack of demand for energy efficiency subproject financing. Businesses were mostly focusing on financing operational expenses and maintaining the financial status quo, rather than planning or implementing long-term investment programs. By the end of 2015, the economic situation began to improve and additional measures were taken by UEB and the World Bank to make the financing terms more attractive and to expand the project pipeline (will be covered below). As a result, witnessing an increasing interest in the credit line, UEB, together with the Ministry of Finance (MoF), decided that a 12-month extension of the closing date would enable full utilization of the remaining credit funds and achievement of the PDO. The World Bank agreed with the proposal and the closing date was extended from March 31, 2016, to March 31, 2017, in view of the impact of the crisis in 2014–2015, allowing more time to achieve full disbursement of funds and achievement of the project results. 18. In addition to the extension of the closing date, two new indicators were added to the project’s Results Framework. A core sector indicator, ‘projected lifetime fuel savings’, measuring energy savings was added at the PDO level. The savings were calculated using annual benefits in energy consumption for each subproject converted into tons of oil equivalent and further using the conversion factor (from toe to MJ). The projected lifetime was calculated as the period from the date of the launch of each subproject up to the closing date of the Energy Efficiency Project (EEP). An intermediate results indicator was added to measure the number of ESCO subprojects that participated in the project. The indicator was added to promote using ESCOs as a tool for improving energy efficiency in the public sector and, specifically, in municipalities. Due to regulatory restrictions, which are described further in this Implementation and Completion Results Report (ICR), municipalities were facing difficulties directly borrowing funds for the purposes of energy efficiency improvements. The Project’s intermediary indicators were also amended with 60-times increase of the gas savings indicator and reduction of the electricity savings indicator. This was done to address changes in the structure of demand for the credit line, since it turned out as the Project progressed that there were substantially more projects with gas savings potential, eligible for financing, that it was initially expected. 19. To accommodate the demands of potential sub-borrowers struggling with the Ukrainian financial crisis, the World Bank, on September 7, 2015, issued a temporary waiver of the debt service coverage ratio (DSCR) requirement until March 31, 2016. The project documentation initially required the DSCR to be at least 1.3:1 after receipt of the sub-loan based on a three-year moving average of investments throughout the life of the sub-loan. After the financial crisis hit Ukraine, local companies were struggling to maintain the DSCR required by the project, due to their increased debt burden and reduced cash flows caused by the financial crisis. As a result, a significant number of Ukrainian companies could not qualify for loan funds and demand for subprojects fell. The results of the temporary waiver proved effective in increasing the demand and no increase in NPLs took place, which prompted the appropriate amendments into project agreements during the project restructuring to formalize the reduction of the ratio from 1.3:1 to 1:1.    4   2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design, and Quality at Entry Soundness of Background Analysis 20. Project preparation started in 2010 in response to a Government request. At the time of appraisal in 2011, the World Bank had almost twenty (20) years of experience providing active support to the Government’s activities in the banking and energy sectors in Ukraine. 21. The project included an on-lending mechanism to other eligible financial institutions— PBs—that were willing to invest in eligible energy efficiency projects in the industrial and municipal sector. The PBs were supposed to make medium- or long-term investment loans to eligible companies and municipalities to improve their energy efficiency. 22. The project relied on the following lessons learned in previous World Bank engagements in Ukraine and energy efficiency projects, implemented by the World Bank across the world:  Distributing funds for financing energy efficiency projects through a financial intermediary(ies) helps simultaneously address the country’s energy efficiency challenges and improve the capacity of the banking sector. After analysis of possible design options, which included direct lending to entities with a Government guarantee, lending through the Government or Government-owned agencies or through a financial intermediary, the project was designed to be implemented by a financial intermediary, UEB. The World Bank based the project design approach primarily on the positive results of two World Bank energy efficiency financing projects (China Energy Efficiency Financing Project and Renewable Energy Project in Turkey), which used financial intermediaries to distribute funds to energy efficiency sub-borrowers.  Strong implementing agencies familiar with the market and having a good grasp of project financing issues is a necessary condition for successful implementation of World Bank projects involving financial intermediaries. In addition to a number of Development Policy Loans2 with financial sector conditionality, the World Bank had completed implementation of the Export Development Project (EDP) in 2005 through UEB and then EDP23 followed by EDP2 Additional Financing. As the official                                                              2 Development Policy Loan 1 (2005, US$251 million) supported priority reforms in social and economic spheres of the Government's ‘Action Plan for Meeting the People’ relating to (a) the investment climate, (b) public administration and public finance, and (c) social inclusion. Development Policy Loan 2 (2007, US$300 million) supported the national program aiming at (a) improving the investment climate to sustain growth, (b) creating fiscal space for growth through strengthened public finances and public sector reforms, and (c) improving service delivery and social inclusion. 33 Both Export Development Projects (EDP) served similar objectives, by developing UEB capacity and providing funds to Ukrainian enterprises through UEB—a local financial intermediary. EDP (P044851) (1997, US$70 million) was aimed at developing Ukraine’s emerging private sector export potential by: (a) supporting the production and marketing of goods, works, and services for export in all sectors of the economy; (b) providing an integrated package of information, technical assistance, and finance services to private and privatized exporters; and (c) developing the capacity of UEB through a comprehensive institutional development program.    5   agent of the GoU for the intermediation of IFIs’ credit lines, and having the benefit of EDP and EDP2 experience, UEB was well-positioned to be the implementing agency under EEP and had a solid industrial clientele and a strong team dedicated to developing energy efficiency financing projects. In particular, EDP assisted UEB with carrying out a comprehensive institutional development program and provided it with an integrated package of information and technical assistance. In addition, UEB had a proven track record in implementing energy efficiency projects under the credit line supported by the European Bank for Reconstruction and Development (EBRD) (Energy Efficiency Program (2007, 2008, and 2012).  A careful approach is needed in achieving a balance between policy framework, institutional arrangements, training, and implementation effectiveness. The project did not include a specific policy component as UEB, being the main implementing agency, did not have the power to make national policy decisions in energy efficiency and wanted to keep the project focused on intermediary financing. This has turned out to be the right approach since the political crisis of 2014–2015 shifted Government priorities and there would have been a high risk of delays with implementation of policy interventions. Energy efficiency policy advice was provided through other World Bank engagements in Ukraine, implemented beyond the Project’s framework. For example, the Bank produced a Policy Paper, prepared with the help of ESMAP in 2015 on Facilitating Municipal Energy Finance in Ukraine.4 Another example is a Concept note for Energy Efficiency Fund,5 prepared in coordination with international donors by the Government of Ukraine in 2016, which became a basis for the Law “On Energy Efficiency Fund” approved by the Ukrainian Parliament in June 2017. A number of policy assistance interventions was provided through The District Heating Energy Efficiency Project (P132741), the preparation of which was combined with policy dialogue on tariff reforms.  Focus programs to deliver real energy savings quickly (within one to two years) to build program credibility and learn from early implementation. A pipeline of subprojects was prepared and three subprojects were reviewed in detail before appraisal, two of which met the eligibility criteria. By the end of the second year of the project’s implementation period, eight subprojects were signed and disbursements began.                                                              EDP2 (P095203) and the EDP2 Additional Financing (2006, US$304.5 million) served two objectives: (a) serve as a catalyst to support export and real sector growth in Ukraine during the EDP2 implementation period (2006–2011) and beyond by providing medium- and long-term working capital and investment finance to Ukrainian private exporting enterprises; and (b) further improve the ability of the Ukrainian banking sector to provide financial resources to the enterprise sector, through further development of intermediation, by expanding its depth and breadth through more and better lending products. 4  Policy Paper. Ukraine: Facilitating Municipal Energy Efficiency Finance. October 2015. ESMAP// http://documents.worldbank.org/curated/en/398561467997561296/pdf/103219-ESMAP-P150553-Box394857B- PUBLIC-EECI-Policy-Paper-Finalt-Clean-2015-09-30-v2-002.pdf.  5 Concept of Energy Efficiency Fund. 2016// http://www.minregion.gov.ua/wp- content/uploads/2016/02/Concept_of_Energy_Efficiency_Fund.pdf    6   Assessment of Project Design 23. Project objectives. The project established a clear connection between its activities and the PDO. The subprojects, financed under the loan, directly contributed to the improvement of energy efficiency while disbursing the Bank’s funds through local financial institutions indeed helped facilitate sustainable financial intermediation. 24. Project design and components. The project was designed to have one component, with clearly articulated types of activities to be financed from the loan proceeds. A similar one- component design was used in a similar project – World Bank Energy Efficiency Finance Project (P112578), implemented in Turkey (closed in 2017). The project’s proceeds were provided to UEB, a 100 percent state-owned joint stock company, which was to provide long-term loans to two types of clients: (a) subproject sponsors for eligible energy efficiency investments; and (b) PBs that would lend for eligible energy efficiency investments as well. UEB reviewed subprojects based on procedures established in the project’s Operations Manual, which covered aspects such as eligibility, safeguards compliance, and monitoring requirements. UEB was also responsible for prequalification of commercial banks for the project based on eligibility criteria that were identical to the eligibility criteria of UEB, including full compliance with the National Bank of Ukraine (NBU) regulations. PBs had to agree to use the same criteria for on-lending for energy efficiency subprojects, as agreed with UEB. The project’s design proved to be well tailored to the country context and agile enough for the project to survive one of the hardest economic crises in the modern history of Ukraine while achieving or exceeding most of its targets. 25. Adequacy of Government commitment. The Government was committed to the project’s design and facilitated a smooth implementation of the project. Promoting energy efficiency was one of the top priorities of the Government at the time of appraisal and continued to be so up to the closing. In this project, UEB was the Borrower of the project’s funds and the main implementing agency, whereas the Government provided sovereign guarantee to the World Bank for a guarantee fee of 0.05 percent. The Government also assisted UEB with regulatory and fiscal support, providing necessary liquidity during the banking crisis and developing legislation aimed at promoting energy efficiency policy both at the national and municipal levels. 26. Assessment and mitigation of risks. The project’s risks were assessed correctly at the appraisal and no new risks materialized during implementation. At the time of the appraisal, the following risks were identified: macroeconomic risk (mitigated by the International Monetary Fund (IMF) program and World Bank Development Policy Loan program); political risk; and implementation risk. The political (or country) risk materialized during implementation in the form of a deep political crisis that took place in 2014. Overall implementation risk was assessed to be moderate and was addressed through the identification of a reliable counterpart (UEB), increased reliance on the private sector for project preparation and implementation, and early marketing of the project. A set of the following measures were adopted to accelerate disbursement from the outset of the project: (a) identification of a counterpart (UEB) with a successful track record on disbursing World Bank projects; (b) increased reliance on the private sector for project preparation and implementation; (c) marketing of the project early on during project preparation; (d) establishment of an indicative project pipeline about double the size of the loan to accommodate dropouts; (e) preparation of and joint review of at least three subprojects before appraisal; and (f) accommodating retroactive financing of up to 20 percent of the loan amount.    7   2.2 Implementation 27. The project was implemented under budget and was closed on March 31, 2017, reaching full disbursement and achieving or exceeding most of its targets. The factors that contributed to its successful implementation are detailed in the following paragraphs. 28. Simple and straightforward project design and realistic Results Framework. The Project included one component and was designed as a straightforward operation using financial intermediary mechanism (see paragraphs 13, 23, 24 above). The PDO, component activity and results indicators were well aligned with each other based on realistic assumptions. 29. Experienced Project Implementing Entity and Project Implementation Unit. UEB, the project implementing entity, has been working with the World Bank since the 1990s as an implementing entity for two export development projects (EDP and EDP2) and Additional Financing for EDP2. Over the years, UEB has demonstrated its reliability as a counterpart, with a highly competent Project Implementation Unit (PIU) and unique and in-depth knowledge of the local market and subsectors of the national economy. In addition, UEB developed internal capacity and systematically trained staff in its regional offices on specifics of work with the World Bank financing and with energy efficiency projects. UEB assigned day-to-day supervision and management over the project’s daily operations to the PIU. Continued availability of adequate resources and skilled staff in UEB contributed significantly to successful project implementation. The technical and operational risks associated with energy efficiency investments required UEB to have a strong technical capacity to appropriately identify, appraise, and monitor the subprojects, since this was still a relatively new area for Ukrainian financial institutions. In addition to the PIU structure, UEB had an established Energy Efficiency Unit that had been evaluating energy efficiency projects under the EBRD loan that was implemented during the project’s appraisal. The unit had staff qualified to work with technical aspects of potential energy efficiency investments. UEB also helped the PBs develop capacity in handling energy efficiency projects through active trainings, providing materials and advice. 30. Conditions of the sub-loans that beneficiaries found attractive, especially amid a volatile environment in the Ukrainian banking sector in 2011–2012 and 2014–2015. According to a survey carried out among the beneficiary enterprises, a combination of attractive loan maturities (up to 10 years and grace period up to 5 years) and interest rates (which varied throughout the Project) were among the main factors that attracted the sub-borrowers to the project. The project has also benefited from the credit line option of refinancing energy efficiency investments that were made by sub-borrowers before signing the sub-loan agreement,6 if made within a certain period (as a result, around 40 percent of subprojects enjoyed such options). The combination of those loan terms was truly unique for the Ukrainian banking sector, especially during the banking crisis when the average loan maturity rarely exceeded a year and banks offered                                                              6 The terms of the sub-loan agreement provided that no expenditures for a subproject by a PB or a beneficiary enterprise shall be eligible for financing out of the proceeds of the Project if such expenditures shall have been made earlier than 360 days before the date on which UEB shall have received the sub-loan application package, with the proviso that expenditures incurred one year before the date of loan signing up to an amount of 20 percent of the IBRD loan amount will also be eligible for financing.    8   double-digit interest rates. The project, however, faced a number of challenges, as described in the following paragraphs. 31. The 2014–2015 financial crisis affected the pace of the project’s implementation. The severe economic crisis, loss of control over Crimea, and conflicts in Donbass and Lugansk regions in Eastern Ukraine triggered massive local banking system losses, with total loss reaching UAH 53 billion in 2014 (reversing from the marginal profit of UAH 1.3 billion in 2013). Deep recession and national currency depreciation caused deposit outflows, rising levels of NPLs, and a large number of bank failures, which further reduced confidence in the economy. The number of loss- making banks increased from 20 in 2013 to 52 in 2014. Against the heavy deposit outflows, banks offered increasing interest rates, and lending activity slowed to a standstill due to high economic and security risks. The few foreign banks that remained well capitalized through the crisis held mostly cash and were not lending to local enterprises. Thirty-eight banks failed during 2014 (out of 181 at the start of the year). As a consequence, the project did not disburse any funds between January and May 2015. 32. However, timely reaction of UEB’s team and the World Bank’s close supervision helped handle the consequences of the financial crisis and restructure the project to increase demand. During the course of implementation in 2014–2015, when the disbursement rate stalled and the risk of cancellation of funds became apparent, UEB’s team asked the World Bank to consider a temporary reduction of the DSCR from 1.3:1 to 1:1 to expand access of the businesses to the credit line. The severe economic situation shifted priorities of Ukrainian enterprises toward financing their operational expenses instead of considering investment programs. Over the months that followed, a combination of factors including the improving situation in the Ukrainian economy and a positive response to the reduced DSCR caused an increase in demand for the credit line and in 2015 UEB asked the World Bank to consider reducing the DSCR permanently and extend the closing date to March 31, 2017. Since the milestones that were established earlier by the World Bank as a precondition to restructuring were fulfilled,7 the closing date was extended and as a result, the project achieved a 100 percent disbursement rate by the revised closing date. 33. The following table demonstrates the dynamics of signing subprojects throughout the implementation period and the positive impact of the measures undertaken by the World Bank and EUB during 2015–2016.                                                              7 The World Bank required UEB to achieve the following milestones before the decision to proceed with restructuring was to be considered: (a) signing of an additional US$30 million of sub-loans; (b) disbursement of an additional US$20 million compared to June 1, 2015, levels; and (c) signing of one municipal energy efficiency subproject.    9   Table 1. Signing of Subprojects Year of Commitment Number of Subprojects 2011 0 2012 1 2013 7 2014 17 2015 52 2016 102 2017 121 34. As a result of the joint World Bank and UEB response, by the closing date, UEB had a solid pipeline of projects amounting to US$80 million, ready for further energy efficiency financing, including using new municipal financing mechanisms, introduced in 2016 through budget decentralization measures. 35. The project faced challenges in bringing PBs to the project. The political and economic crisis in Ukraine during 2014–2015 considerably affected the banking sector. Most potential PBs could not fulfill the financial terms established by the project as entry conditions. In 2013–2014, two banks signed subsidiary loan agreements with UEB, namely, Megabank and Alfa-Bank. Alfa- Bank terminated the sub-loan agreement in the end of 2015 without disbursing funds to any of the subprojects due to its decision to freeze lending to the commercial sector and focus on other priorities. Only one PB stayed in the project by the closing date. However, even under these conditions, the projected volume of energy efficiency sub-loan disbursements was fully achieved due to efficient and cooperative work of UEB and Megabank, which were able to distribute funding and accelerate disbursements in accordance with the project time line. 36. The project faced difficulties in attracting municipal projects—a problem that was resolved during the course of implementation. Among the difficulties the project was facing throughout the implementation period was the low number of municipal subprojects. During the midterm review, the following obstacles, which limited the participation of municipalities, were identified: (a) limited creditworthiness of municipalities or municipal utilities and lack of cost- recovery tariffs for municipal utilities; (b) issues related to eligible collateral; (c) one-year budgeting processes by municipalities that did not correspond to the long-term investment funding requirements of energy efficiency investments; (d) market prices for loans in hryvnia are typically not affordable for municipalities or municipal utilities; (e) exposure to foreign exchange risk in the case of foreign currency loans; and (f) lack of institutional capacity to prepare bankable municipal energy efficiency projects. Despite these difficulties, the World Bank together with UEB and Megabank offered credit funds to municipal-type enterprises and ESCOs, which contributed to energy savings by municipalities. 37. UEB considered using leasing as an alternative disbursement channel, but such an option was found not feasible, considering the time needed to process the necessary legal amendments and, at a later stage, due to considerable project progress that eliminated the need for additional disbursement options. To increase the volume and the pace of disbursements without risking the quality of the project, the World Bank, together with UEB, was considering making funds available through alternative options, based on the needs of the enterprises and their financial standing. In 2015, UEB suggested that the World Bank consider provision of the loan proceeds through UEB’s leasing subsidiary using leasing mechanisms. The World Bank agreed to    10   consider this option under the condition of making all Ukrainian leasing companies eligible for such financing. This necessitated an extensive discussion related to eligibility requirements and their respective controls/monitoring and required amending the project agreements. As a result, in light of the time pressure, UEB and the World Bank team were reluctant to reopen the discussion of legal amendments (including amendments to operational procedures, the eligibility criteria, provisions regarding adding several new counterparts, and so on), which would have required considerable time for review and approval. However, subsequent energy efficiency interventions by the World Bank in Ukraine could employ such schemes, since UEB noticed significant interest in such schemes from its clients, especially during the last two years of the implementation period. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 38. M&E design. The M&E framework was generally aligned with the PDO and consisted of indicators commonly used in energy efficiency projects. The established framework included a good combination of indicators, measuring both the financial progress of the project and the extent of energy savings achieved as a result of the project’s implementation. 39. The PDO could have been worded in more general terms, without listing the types of enterprises, subject to financing. In a similar project, namely, China Energy Efficiency Financing Project (P113766), the PDO was worded more broadly: “improve energy efficiency of selected medium and large-sized industrial enterprises in China.” Such an approach better reflects the recurring need to adjust the project to fluctuations in demand from PBs and sub-borrowers. However, since the EEP’s PDO did not directly require all of the mentioned entities to be the sub- borrowers of the Loan (the Project’s objective was to contribute to the entities’ improved energy efficiency, but it didn’t require the same entities to be the subject of financial intermediation), the task team considered this wording better reflecting the utilization of the energy efficiency benefits supported by the project. 40. M&E implementation. UEB in coordination with the MoF and PB submitted project progress reports on a regular basis and the data collected were used for the World Bank’s implementation reviews and Implementation Status and Results Reports (ISRs). The data needed for monitoring selected indicators were of the type that were normally collected by UEB from sub- borrowers and thus were easily monitored. Progress indicators were instrumental in keeping track of and identification of problems in implementation progress. The quality and timeliness of the data collection and reporting were satisfactory and no issues were raised during the implementation phase. 41. M&E utilization. The intermediate indicators were instrumental in assessing the project’s progress. Based on the information collected, the World Bank was able to make necessary adjustments to accommodate the requests from enterprises and increase the demand and disbursements without losing in overall quality of the project. As a result, few adjustments were made to the Results Framework. A core sector indicator ‘project lifetime fuel savings’, measuring energy efficiency in heat and power, was added at the PDO level. During restructuring in 2015 intermediate results indicators measuring the number of municipalities covered by the Project were added, measuring the number of ESCOs participating in the project (see paragraph 9) and the number of signed municipal type sub-projects. Other indicators were adjusted to reflect changes in the source of energy savings, as the Project resulted in more gas than electricity savings.    11   2.4 Safeguard and Fiduciary Compliance 42. Safeguards. Overall, safeguard and fiduciary compliance were satisfactory during the implementation phase. In accordance with the World Bank environmental assessment policies and procedures (OP/BP/GP 4.01), the project has been assigned Category F. UEB was responsible for ensuring that subprojects financed under the project undergo environmental screening to ensure their conformity with Ukrainian environmental legislation and regulations and the World Bank’s safeguard policies and procedures. UEB also undertook environmental screening of the sub-loan applications to determine the appropriate environmental risk category for the sub- borrowers/subprojects. The sub-borrowers were responsible for carrying out environmental analysis and confirming that the proposed subprojects comply with national environmental guidelines and for obtaining the necessary clearance from the appropriate licensing authorities. The well-developed Operations Manual and experienced PIU staff, with qualified environmental and social experts, contributed significantly to ensuring the effective implementation of safeguards and fiduciary compliance. The World Bank conducted a regular environmental and social safeguard compliance monitoring and supervision of the project through regular reviews of sub- borrowers’ activities. The missions carried out by the World Bank contributed to an overall compliance of sub-borrowers with agreed environmental procedures. No environmental or social risks/issues related to safeguards were observed during the project’s implementation. At the request of UEB, the World Bank provided training on environmental screening of subprojects— on providing guidance to sub-borrowers with regard to preparation of environmental assessment/environmental management plans, environmental information sheet preparation, supervision, and reporting activities. 43. The World Bank’s safeguard team initially did not include the option of Pesticide oversight in the project’s safeguard documentation; however, as the project proceeded, the team updated the Operations Manual to ensure the proper PCB management in UEB’s and PBs’ subprojects, when reconstruction of old utilities/buildings was financed, to make sure that PCBs were well managed and did not impose negative impact on workers. 44. Financial management. The World Bank’s financial management team conducted regular monitoring of UEB’s financial management systems, including accounting, reporting, budgeting, flow of funds, and staffing, and found that systems were overall satisfactory. The financial management and disbursement arrangements were well established and operated properly throughout the project: qualified staff was available, the project’s Operations Manual and internal controls system were in place, the Designated Account was operational, and the authorized signatories were available. The automated accounting and reporting systems were in place and small modifications to enhance the system throughout the project’s term were introduced by UEB. The project was in compliance with its quarterly interim financial reporting requirements. The entity audit reports were submitted on time and were properly disclosed by both UEB and the World Bank. The project audit reports were also submitted on time and clean audit reports were issued. No substantial weaknesses in internal controls were identified by the auditors. Staff of the PIU benefitted from participating in several seminars and workshops organized by the World Bank. 45. Procurement. The procurement reviews were made on a regular basis and have not revealed any irregularities in procurement aspects of the project implementation. The UEB PIU    12   closely monitored all procurement procedures with due diligence and in accordance with the Loan Agreement and Operations Manual provisions. The World Bank concluded that all procurement procedures were conducted in accordance with commercial practices and followed a competitive approach. UEB monitored the compliance of sub-borrowers to ensure that all contracted firms met the World Bank’s eligibility criteria and ensured the check of all firms against the World Bank’s list of debarred firms before awarding a contract. 2.5 Post-completion Operation/Next Phase 46. By the end of the implementation period, UEB indicated that it has prepared a strong project pipeline in the amount of US$80 million, representing a number of important sectors, including agriculture, food, plastic packaging, retail trade, timber processing, construction materials, energy, and municipal energy efficiency. If all subprojects were approved by the closing date, UEB would have had a significant financing gap using the EEP IBRD loan proceeds. Considering growing interest from the enterprises to use the credit line, UEB was interested in additional financing or launching a new project to meet the increased demand for energy efficiency financing and broaden the coverage of the energy efficiency credit line. However, based on factors beyond UEB’s control, the World Bank took the decision not to proceed with additional financing. A modified reiteration of the project, however, could still be an option to consider at a later stage with the goal of scaling up the growing energy efficiency demand. 47. The need for long-term financing still persists in Ukraine as the local banking sector is only starting to adjust to new market conditions and enterprises continue to point to lack of affordable financing as the main constraint for their expansion. This constraint is particularly acute considering that Ukraine has only recently started to move out of economic and political turmoil, which all but cut off other possibilities for external financing for energy efficiency improvements. Among the most affected by this crisis are the country’s small and medium enterprises (SMEs), which need financing to reduce dependence on expensive types of fuel and/or reduce consumption through efficiency improvements. 48. Energy efficiency is a top priority of the energy policy agenda for the Ukrainian Government. In 2015, the Government, following the Ministerial Council’s adoption of Directive 2012/27/EU on energy efficiency in the European Union (EU), set energy efficiency targets for Ukraine, developed a number of laws including Energy Efficiency Law, Law on Energy Performance of Buildings, and Metering and Labelling legislation. In addition, the Cabinet of Ministers of Ukraine adopted on November 25, 2011, Decree No. 1228 ‘On National Energy Efficiency Action Plan until 2020’. The legislation will help improve the regulatory environment in energy efficiency and will attract a wider range of enterprises, especially at the municipal level. 49. The project’s considerable progress toward achieving its objectives and the level of expertise gained by UEB during the implementation (as well as during the implementation of other three lines of credit to UEB, totaling US$385 million) were the key factors enabling the World Bank to approve the Access to Long Term Finance Project in May 2017 to UEB in the amount of US$150 million. The project includes a line of credit component for UEB’s lending to SMEs both directly and through other qualified financial institutions. This line of credit would further enhance the local capacity and will engage a wide range of SMEs.    13   50. Based on the above discussion, UEB and the MoF of Ukraine expressed their interest in developing a second EEP2 with the World Bank. The second project could build up on the success of the closed EEP and enhance energy efficiency in the municipal and industrial sectors, where financing is still lagging behind. If the potential project crystallizes, it could include a line of credit component for UEB’s lending to industrial and municipal entities both directly and through PBs and a component supporting use of renewable energy technologies. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Relevance of Objectives Rating: High 51. The relevance of the project’s objectives is rated high, based on the following. The PDO was relevant at the time of the appraisal and was aligned with the Country Partnership Strategies (CPS) for FY08-118 (namely, with a Core Program on improving energy efficiency of CPS Pillar 1 “Sustaining Growth and Improving Competitiveness”) and for FY12–FY16 9 (Result Area 3 “Improved energy efficiency, quality and governance of municipal infrastructure services, by involving municipal-type sub-projects and ESCOs and Result Area 5, Outcome 14 “Improved energy efficiency in the public and private sectors”). The Project is relevant considering the Country Partnership Framework (CPF) for Ukraine for FY17–FY21 and its first Focus Area 1 objective of improving the quality of infrastructure services, particularly in energy and transport, which also supports [...] establishment of energy efficiency financing mechanisms. The Project was the first World Bank’s project which offered Ukrainian entities energy efficiency financing mechanisms and experience gained during the operation will help to further develop and strengthen such mechanisms. The Project supports second CPF Focus Area 2 objective, namely, strengthening the financial sector and laying the basis for the sound credit growth. The Project reached out to a variety of local banks and provided a solid financial source which was one of the very few amidst the banking crisis 2014-2015. Both UEB and participating bank further strengthened their expertise in working with energy efficiency projects and will continue further expanding their credit lines. 52. The PDO remains relevant and consistent with the current government priorities and conditions and is aligned with the Energy Strategy of Ukraine (which set a target of improving                                                              8 World Bank. 2008. Ukraine - Country partnership strategy for the period FY08-FY11. Washington, DC: World Bank http://siteresources.worldbank.org/INTUKRAINE/Resources/CPS-Sept-20-2007-eng.pdf 9 World Bank. 2012. Ukraine - Country partnership strategy for the period FY12-FY16. Washington, DC: World Bank. http://documents.worldbank.org/curated/en/789181468309270721/Ukraine-Country-partnership-strategy-for- the-period-FY12-FY16, Result Area 3 “Improved energy efficiency, quality and governance of municipal infrastructure services, by involving municipal-type sub-projects and ESCOs and Result Area 5, Outcome 14 “Improved energy efficiency in the public and private sectors”. The PDO is specifically aligned with Result Area 5 ‘Improving infrastructure for business activities’, and specifically, Outcome 15 ‘Improved performance of power sector’. The project design reflected the identified financing constraints facing industrial and commercial companies, municipalities, municipal sector enterprises, and ESCOs by facilitating sustainable financial intermediation for the financing of energy efficiency investments.    14   energy intensity by 50 percent by 2030),10 the Targeted Economic Energy Efficiency Program, and the National Energy Efficiency Action Plan. Relevance of Design and Implementation Rating: High 53. The project design was focused and gave due consideration to the country context. It was simple and established a clear relationship with the PDO. It had one component, listing the types of subprojects eligible for the World Bank’s financing. Based on the experience with other World Bank projects in the energy sector, carried out in parallel in Ukraine (namely, the Hydropower Rehabilitation Project (P083702) and the Power Transmission Project (P096207), both closed in 2016), the Bank’s and the Borrower’s intent to avoid including technical assistance components addressing institutional issues in the project turned out to be a justified approach. In both the Power Transmission Project and the Hydropower Rehabilitation Project, technical assistance components included assisting the Government in power sector reform, however due to the unstable political landscape during the course of the projects’ implementation (2011-2016), reforms were stalled for months. As a result, both projects faced difficulties with accounting for the success of the TAs (the Projects went through numerous restructurings, reducing the scope of supported legislative interventions, needed to complete power sector reform), mostly for reasons beyond the World Bank or implementing entities’ control (such as frequent changes of government). 54. The project design was based on the lessons learned during the previous World Bank engagements involving financial intermediaries in Ukraine. The design of the project was based on the framework used in Export Development Project (P044851) and Export Development Project 2 (P095203) by involving strong local banks and several PBs, channeling funds downstream to the subproject level. The project reached a reasonable balance between flexibility of the loan terms/loan eligibility criteria and considerations of selecting project participants with good financial standing. Although (as it was covered in paragraph 39) it mentioned the types of covered enterprises, EEP did not include restrictions for lending by sectors or currency, and it did not establish a fixed allocation between the sectors, the regions, or the technologies used to increase energy efficiency, enabling a more flexible approach to lending in changing circumstances. 55. The PDO indicators were well aligned with the project’s objectives. The changes to the project’s Results Framework, introduced during the project’s term, were minor and did not affect the direction of the project. The terms and conditions of the sub-loans were well designed to attract a solid pipeline of subprojects. Lessons from earlier projects in Ukraine were used to make the project flexible enough to respond to the changing political and economic environment. 3.2 Achievement of the Project Development Objective Rating: Substantial                                                              10 New Energy Strategy of Ukraine until 2035. “Security, Energy Efficiency, Competiveness”. 2017. http://mpe.kmu.gov.ua/minugol/doccatalog/document?id=245213112    15   56. The PDO was to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies by facilitating sustainable financial intermediation for the financing of energy efficiency investments. 57. Achievement of the PDO is measured against two specific objectives of the PDO statement: (a) to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies; and (b) to facilitate sustainable financial intermediation for the financing of energy efficiency investments. The achievement of PDO indicators is summarized in Table 2. Table 2. Achievement of PDO Indicators Original Actual No. PDO Indicator End Target Comments Target Actual % of Target Volume of EE 200,000,000 1 200,000,000 200,000,000 100 Fully achieved sub-loans (US$) Projected 2 lifetime fuel 25,120,800,000 25,120,800,000 27,800,000,000 111 Target exceeded savings (MJ) Target not achieved due to banking crisis in Ukraine during 2014–201. As a result of the crisis, only two participating Number of banks qualified to participate in 3 participating 2 2 1 50 the project, with one of them banks canceling sub-loan agreement due to changed priorities. Both UEB and one PB which stayed until the Project’s closing were able to disburse 100% of funds. Extent of energy 4 600,000 663,900 110.65 Target exceeded savings (toe) 500,000 58. One PDO indicator was partly achieved, namely, the indicator requiring UEB to work with two PBs. This, however, should be viewed in light of the impact of a major banking crisis that took place in 2014-2015, which affected the pace of the project implementation and significantly reduced the number of banks which could potentially qualify for the Project; and the fact that there were two PBs at a certain point during the implementation period, with one PB dropping out for reasons beyond UEB’s control (will be covered below). Objective 1: To contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies Rating: Substantial 59. The project surpassed the expected total volume of energy benefits and achieved remarkable results in the reduction of CO2 emissions. At the closing date, initial estimates of expected energy savings and projected lifetime fuel savings were overachieved by more than ten percent with extent of energy savings totaling 663,900 toe per year (instead of the planned 600,000) and projected lifetime fuel savings of 27,800,000,000 MJ (instead of planned 25,120,800,000). The project has significantly contributed to annual savings in energy consumption, including in gas: 199 mcm; electricity: 213 GWh; and coal: 680,000 tons.    16   60. At project approval, the annual gas savings were supposed to equal 2.6 mcm. During the implementation phase, UEB and the World Bank task team realized that the subprojects being submitted by sub-borrowers were demonstrating much better annual gas savings and, as a result, the indicator was amended during the 2015 restructuring to account for 160 mcm. By the closing date, the project had overachieved the revised target, resulting in 199 mcm of annual gas savings, thus beating the initial estimates 60 times. While the target on natural gas was increased 60 times versus the initial project goal, the indicator on electricity savings was reduced to reflect the real sector response to the project: major savings under EEP were reached through natural gas and coal efficiency. The project’s annual energy benefits exceeded 213 GWh and in 10 years the project is estimated to lead to benefits in the amount of 30 GWh. The project has also helped achieve significant GHG emission reductions—by the closing date, the project resulted in a reduction of over 680,000 tCO2. 61. The project covered a wide range of industries and enterprises. As can be seen from Table 3, the project financed 121 subprojects and covered more than 7 industrial sectors with the largest number of subprojects in agriculture and food/beverages. According to UEB, around 45 percent of credit line funds were disbursed to SMEs, with large enterprises receiving the rest. 62. The Construction Materials sector, which comprises of cement industries, achieved the highest financial leverage (2.7), largest energy savings (2 million toe) and emissions reduction (7.2 million tCO2e) over a 10-year assessment period (which has been chosen to enable comparability between the different investments which range in life from 10 to 25 years). However, the actual investment lifetimes have been taken into account in determining the economic rates of return (ERRs). For cement industries, equipment lifetimes range from 20 to 25 years, and over the lifetime of the equipment, this would account for significant addition to energy savings through continued reduction in consumption of coal, natural gas and heat. 63. The Agriculture sector saw the largest number of subprojects (48) with a financial leverage of 1.47. The energy savings (118 thousand toe) and emission reduction (349 thousand tCO2e) are largely from replacement of agricultural machinery and in some cases replacement of natural gas with biomass (e.g., straw and wood waste).    17   Table 3. Outcomes by Sector Cost of GHG Cost of Energy Financia GHG Emission Energy Total Subprojects Total Savings l Emission Number of Reductio Savings Sector (US$, Investmen over 10 Leverag Reductio Subproject n over 10 - 10 Breakdown millions/Percentage t (US$, Years e n - 10 s Years Years s) millions) (thousan Achieve Years (thousand (US$ per d toe) d (US$ per tCO2e) KGoe) tCO2e) Agriculture 48 64.93 32.00% 95.31 118.42 349.41 1.47 0.80 272.78 Food and 23 32.46 16.30% 45.09 86.49 253.73 1.39 0.52 177.71 beverages Consumer 15 17.99 9.02% 32.91 34.38 151.00 1.83 0.96 217.94 goods Glass 6 3.99 2.00% 5.95 21.15 58.46 1.49 0.28 101.78 production Construction 5 54.90 27.52% 292.08 2,081.26 7,217.24 5.32 0.14 40.47 materials Energy/heat 5 4.79 2.40% 24.44 33.10 151.54 5.10 0.74 161.28 supply Pharmaceutic 5 1.76 0.88% 2.31 6.69 20.74 1.31 0.35 111.38 s Other 14 18.67 9.36% 41.05 116.53 358.85 2.20 0.35 114.39 Total 121 199.50 — 539.14 2,498.00 8,561.00 2.70 0.22 62.98   64. Figure 1 shows the distribution of funds according to the project components. Most of the funds were spent on (i) modernization of inefficient and obsolete equipment and facilities and (ii) installation of highly energy efficient industrial equipment (i. e. installation of new equipment).    18   Figure 1. Distribution of Project Funds by Component’s Category 1.90% 0.20%   2.20% modernization of inefficient and obsolete equipment and facilities; installation of highly energy‐ efficient industrial equipment improvement of systems which 39.50% involves a suite of measures to 56.10% increase energy efficiency reduction of energy losses reduction in municipal sector enterprises implementation of other Energy Efficency Sub‐Projects satisfactory to the Bank 65. Five municipal type projects and four ESCOs received project financing, thus helping Ukraine continue enabling access of municipalities to the benefits of energy efficiency financing. The project initially faced considerable difficulties in attracting municipal-type projects due to a number of legal impediments. First, public entities in Ukraine have limited capacity to borrow money, and throughout the project’s lifetime, municipalities avoided any type of credit. Second, public entities’ budgets were approved only for a one-year period, and municipalities could not provide sufficient assurances that there will be enough funds to repay the loan during subsequent years. Third, the distribution of funds between local and central budgets did not allow for municipalities to have free funds at their disposal. 66. Despite those difficulties, the World Bank, UEB, and PB were able to develop and offer working mechanisms and attract municipal-type energy efficiency subprojects. The project’s target included five municipal energy efficiency subprojects. The project’s Legal Agreements did not include the definition of the term ‘municipal energy efficiency subproject’ and therefore the UEB and PB teams gave this term a broad interpretation, by which they were treating the privately owned companies providing services to municipalities as municipal energy efficiency subprojects since municipalities were the ultimate beneficiaries of such loans. For example, as a result of the financing, provided by the project, heat supply equipment was renovated at Gorodnya Central District Hospital in Chernigiv Region. In Vinnytsya Region, the credit line provided to an operator of the local district heating network resulted in replacement of worn-out sections of the district heating pipeline (see Table 4 for details).    19   Table 4. Breakdown of Municipal Sub-Projects (ESCOs) Source Region Type of Business Sub-loan Energy Use of Proceeds CER Amount (toe) (tCO2e) (US$, millions) Megabank Chernigiv Municipal 0.09 Reconstruction of EE/ESCO heat supply equipment for local hospital Megabank Chernigiv Municipal 0.08 1,270 Reconstruction of 3,229 EE/ESCO (for both heat supply (for both projects) equipment for local projects school UEB Vinnytsya Municipal EE 0.03 214 Replacement of 544 worn-out sections of heat distribution pipeline UEB Vinnytsya Municipal energy 0.10 13,393 Replacement of gas 34,048 efficiency/ESCO boilers with biomass- fired boilers to replace gas consumption UEB Zaporozhzhya Municipal 0.05 552 Reconstruction of 1,404 EE/ESCO heat supply equipment at local hospital Total 0.36 15,429 39,225 67. Therefore, although no municipality was granted funds directly from the credit line due to the reasons mentioned above, municipalities were the ultimate beneficiaries of the Project, since they benefitted directly through lower heating costs via fuel switch, energy efficiency improvements (boilers/pipes/pumps replacement, etc) and indirectly by provisioning of improved services. 68. The Results framework aimed at signing 5 municipal energy sub-project and 2 ESCOs. As it can be noted from the Table above, the Project closed with 1 non-ESCO municipal sub-project and 4 ESCOs sub-projects which, while being privately owned companies, were considered municipal-type sub-projects by the Bank, since they benefitted local municipalities by improving the energy efficiency of municipal facilities. Such an arrangement allowed the Project to promote ESCOs specifically, since due to the legal impediments mentioned above, they were one of the very few tools available for enabling energy efficiency investments at the municipal level. For this reason the Bank considered it possible to allow the inclusion of ESCOs in the list of municipal- type subprojects, hence, the Project accounts for 5 municipal-type subprojects, 4 of which were ESCOs. By the Project’s closing UEB informed the Bank about the increased interest for energy efficiency investments from municipalities, which resulted in UEB signing a credit agreement in the amount of US$500,000 with Kryvyi Rig municipality for modernization of the municipal heating capacity. In addition, UEB also informed the Bank that it was evaluating lending transaction for a municipality in Dnipropetrovsk Region, for conducting energy efficiency modernization and reduce heat losses in generation and transmission.    20   Objective 2: To facilitate sustainable financial intermediation for the financing of energy efficiency investments Rating: Substantial 69. The project has become one of the most successful investment lending projects of such a scale implemented in Ukraine over the past several years. By the closing date, the total amount of the loan was fully disbursed to reach over 80 beneficiaries. By UEB’s estimates, the total amount of investments accelerated by the project equals US$539.14 million, thus creating more than 2.7 times leverage over the loan amount. The project has achieved a country-wide coverage, with subprojects being implemented in 20 out of 24 oblasts of Ukraine. Throughout the course of the implementation, the project became a key tool for energy efficiency finance in Ukraine. 70. The project’s sub-borrowers benefited from the inflow of IFI-backed energy efficiency financing to Ukraine, accelerated by UEB and the Government and solidified by EEP. In particular, throughout the project’s lifetime, sub-borrowers benefited from the IFI-backed sustainable energy financing facilities, including the EBRD Energy Efficiency Program (three credit lines totaling US$150 million), NIB Environmental Lending Program (US$50 million), GCPF sustainable energy facility (US$30 million), and facilitated carbon financing arrangements (Joint Implementation projects) with the MCCF under the United Nations Framework Convention on Climate Change (UNFCCC) Kyoto Protocol. Subprojects, financed under the listed facilities, included private sector energy efficiency improvements and small renewable energy investments. 71. The project strengthened UEB capacity as a financial intermediary. UEB managed to engage one PB against the appraisal target of two banks. However, given the extremely volatile environment in Ukrainian banking sector and Ukraine’s economy overall between 2014 and 2017, it is highly doubtful that other commercial banks might have been better placed to intermediate the World Bank’s funds. Throughout the project’s lifetime, UEB systematically monitored local banks’ potential for participation in EEP and evaluated eligibility of a number of Ukrainian banks, which resulted in processing of over 20 subsidiary loan requests. During 2014–2015, the anticipated risks of increased exposure to a depressed banking system were so high that no other Ukrainian bank was able to join the project as a PB. 72. In 2014, the project achieved the target of having two PBs. During project implementation, continuous dialogue was carried out between UEB and Alfa-Bank, which resulted in Alfa-Bank becoming a second PB in 2014. Preliminary consultations on several potential energy efficiency subprojects were initiated by Alfa-Bank in 2014. However, the 2014–2015 economic turmoil led to drastic changes in Ukraine’s real sector and the financial market, and Alfa-Bank’s management made a decision to cease investment lending, enhance their credit portfolio, and focus on acquisition of banking assets. 73. Although the PDO indicator to have two participating banks was only partly achieved by the closing date, UEB’s efforts ultimately produced increase of interest from the local Banks to participate in subsequent World Bank’s projects. By the project’s closing, the situation in the national banking sector has started to change: according to the estimates by the NBU, there is now an overall positive dynamic in the banking sector, and a dozen mid- and large-size Ukrainian banks, including those experienced in World Bank projects such as Megabank, Alfa-Bank, and    21   Ukrgasbank, were successfully screened for participation in another WBG backed project in 2017. During the meetings in Kiev with the ICR team, Alfa-Bank expressed its willingness to participate in EEP2, should it materialize. 74. By facilitating financial intermediation, the project helped strengthen expertise of UEB and PBs in preparation and implementation of the energy efficiency projects, involving IFI financing, as well as their risk management capacity. During the implementation period, UEB strengthened its capacity to originate, promote, and supervise the World Bank’s credit line by having access to World Bank energy efficiency assessment tools and expertise. Processing 121 subprojects required an upgrade of both UEB’s and PBs’ internal systems for using the World Bank standards of financial management, procurement, environmental, and social safeguards. UEB maintained continuous dialogue with the PBs and provided numerous trainings to support PBs in preparation of sub-loan requests in accordance with the project requirements, including advising on ways to market the credit line, evaluation of energy benefits, and compliance with environmental and social, and procurement procedures. 75. Sustainability. The increased capacity of banks and beneficiaries in handling WB projects as well as improved economic and legal environment and solidified banking system have further increased demand for energy efficiency financing from the potential beneficiaries beyond the Project’s life. By the Project’s Closing Date UEB and PB had developed a pipeline of potential sub-projects in the amount of US$80 million, which if approved, would require additional financing, therefore creating a basis for EEP-2. However, even if EEP-2 never materializes, both UEB and Megabank would continue supporting energy efficiency investments, though on a lower scale, as months past the Closing Date demonstrate. Both UEB and Megabank continue working with the World Bank with UEB being an implementing agency of the Access to Long Term Financing Project (P156766) signed in 2017. The Project will provide a total of US$150 million to be intermediated by UEB, targeting export oriented SMEs. UEB will further on-lend to local private financial institutions, thus using its experience in engaging local banks. 76. The Project contributed to a better understanding of the needs of the Ukrainian banking sector and businesses in the energy efficiency – information collected during the Project’s implementation demonstrated a growing need for a variety of alternative approaches to energy efficiency financing, including leasing schemes and guarantees. The expected growing demand for energy efficiency financing from municipalities would favor designing subsequent energy efficiency projects, which in addition to financing, could include technical assistance components, helping the municipalities to prepare and implement such projects – this, together with combined strengthening banking sector would favor even wider Bank’s outreach. 3.3 Efficiency Rating: Substantial 77. Despite difficulties posed for the overall financial sector in Ukraine by weaknesses in the Ukrainian economy with low rates of growth, major devaluation of the hryvna, and the impact of the conflict situation in Eastern Ukraine and Crimea, the project was carried out efficiently with a delay of one year over the originally planned completion date. 78. The efficiency of the investments was assessed by the cost benefit of the investments, based on a representative sample of 20 subprojects accounting for 63 percent of the total project cost.    22   The post-completion assessment applies the same metrics that were used during project appraisal. Details of the post-completion assessment are provided in annex 3. The indicators used to assess the cost-benefit rate were (a) economic rate of return (ERR) and (b) financial rate of return (FRR). For the ERR, no minimum threshold was specified at appraisal. However, two prototype subprojects were reviewed to determine ERRs that may be expected for those types of subprojects. For the post-completion analysis, ERRs for the sampled subprojects were estimated for two cases, with and without carbon benefits. Details are given in Table 3.5. The ERRs range between 10.6 percent and 81.8 percent. Weighted average estimates for the sample as a whole are given in table 5. In all cases, the ERRs are higher than 10 percent and higher than the discount rates (6–8 percent) that are prescribed under the current guidelines in the World Bank for economic evaluation of investment projects. Table 5. Post-completion Economic and Financial Rates of Return (Weighted Average) FRR ERR Without carbon benefits With carbon benefits 19.0% 15.9% 21.7% 79. For the FRR, a minimum threshold rate of return of 10 percent (in real terms) was specified at appraisal as an eligibility criterion for the subprojects. For the sampled subprojects, the estimated FRRs are in all cases higher than the threshold rate and range from 11.6 percent to 76.0 percent, with a weighted average of 19 percent (table 5). Details for the sampled subprojects are given in Table 3.5. 3.4 Justification of Overall Outcome Rating Rating: Satisfactory 80. The project met its development objectives. The project resulted in significant energy savings, was fully disbursed, and provided much-needed energy efficiency finance to industrial and commercial companies, municipal sector enterprises, and ESCOs with maturity structures and flexibility that the project beneficiaries valued highly. It had a multiplier effect creating more than 2.7x financial leverage over the loan amount with total investments brought by the Project equaling US$539 million. For a number of months during the banking crisis, the project was the only available source for energy efficiency financing in Ukraine and by the closing date a number of other financial institutions started developing similar programs seeing an interest in the project from the clients. 81. The project, however, faced a few shortcomings in achievement of its objectives; in particular, the Borrower had difficulties (though often for reasons beyond its control) in attracting PBs and expanding the project to a wider base of municipalities. For these reasons, the project’s overall outcome rating is rated Satisfactory. 82. No split evaluation of the outcomes was done since the only PDO indicator added was a Core sector indicator, which does not constitute a restructuring requiring split evaluation.    23   3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 83. Gender Aspects. The project did not originally include any systematic analysis or indicators to measure social development outcome including gender aspects as the local population was not the direct beneficiaries of the intended interventions. 84. Social Aspects. The Project mostly focused on energy efficiency improvements by businesses, however 5 sub-projects, carried out at the municipal level, directly benefitted local communities. As a result of the Project, heat supply equipment was replaced in local hospitals and schools in Chernigiv and Zaporoshya Regions. In addition, parts of the district heating equipment were replaced in one of the municipalities of Vynnytsya region. The sub-projects were implemented during the last years of the Project and no exact estimates are available as to the effect of those investments. However, the team expects the social benefits of those investments to be considerable, both in terms of increased quality of services and public image/perception of those facilities by the local population, since the replacement of the heat supply equipment was highly anticipated by beneficiaries of the local services. (b) Institutional Change/Strengthening 85. UEB achieved progress in skills upgrading and training in its PIU, thereby mobilizing additional foreign credit lines as a result of participation in EEP. UEB’s PIU for EEP consisted of four to five full-time specialists with additional four to five part-time employees, who worked for the same department but were also engaged in other IFI-related credit lines’ implementation. UEB invested in training its staff to align with the World Bank standards for procurement, social risk management, environment safeguards monitoring, and monitoring of other loan covenants. This specialized training at the PIU improved UEB’s capacity and attractiveness to other IFIs and foreign donors and multilateral projects. 86. Megabank, the project’s PB has strengthened some aspects of its internal procedures as a result of working with the World Bank and UEB on the project. The project was only able to attract one PB, which was able to disburse the World Bank’s funds. Megabank has been working with the IFC and several other IFIs for a number of years and for this Project the Megabank received additional training to work with IBRD requirements, focused mostly, on safeguards and procurement. Megabank used the training opportunities provided both by the World Bank and UEB and demonstrated commitment to enhancing its internal processes to increase its ability to develop and implement interventions in the energy efficiency area. (c) Other Unintended Outcomes and Impacts (positive or negative) None. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshop 87. After the closing date, the ICR team met with UEB and Megabank to discuss the possibility of distributing a survey to the beneficiaries. The survey’s goal was to find whether the project had an additional value for the beneficiaries, whether the beneficiaries were affected by the events in    24   Ukraine in 2014–2015, and the areas where the credit line terms could be improved. As a result, 16 (out of 80) sub-borrowers have responded, with 15 out of 16 of them being the existing clients of UEB or Megabank before signing a sub-loan agreement. The key survey’s findings are detailed in the following paragraphs. 88. Credit line terms. The team wanted to find out whether the project was the main motive for launching the energy efficiency activities by the sub-borrowers. It appears that out of 16 sub- borrowers, only for 6 the existence of the credit line was a key factor in launching their energy efficiency activities, whereas 4 were planning such activities even without World Bank funding and 5 used the credit proceeds to compensate for the costs that were incurred earlier (the credit line terms provided an option to finance such activities on retroactive basis). The majority of the sub-borrowers mentioned low interest rate and long maturity among the most attractive features of the credit line. A sub-borrower working in the agriculture industry mentioned the repayment schedule adjusted to the agricultural cycle as the loan’s attractive feature. 89. Regulatory environment. Both UEB and PBs were significantly affected by the economic and political crisis of 2014–2015. The team wanted to find out whether the same events affected the decision of sub-borrowers to apply for EEP credit funds, since increase of fuel prices, which took place around the same period, could potentially increase the demand for energy efficiency activities. For 15 out of 16 participants, the events of 2014–2015 in Ukraine did not have a direct effect on their decision to participate in the credit line, neither did the change in the legislative framework in Ukraine. One company started implementing the energy efficiency measures out of its own funds during this period despite the uncertainties in the Ukrainian economy. It is quite possible that further discussion on the impact of the fuel prices fluctuations would have indicated it as a trigger for launching energy efficiency activities by sub-borrowers. 90. Areas for improvement. When asked which loan terms they would like to improve, the sub-borrowers referred to reduction of the DSCR (5 sub-borrowers) and/or the interest rate (4 sub- borrowers) and simplification of the credit application process and reducing the volume of the environmental documents (1 sub-borrower). Two sub-borrowers suggested introduction of the revolving terms of the credit line. 91. A number of questions addressed the economics of the subprojects and this information was used in calculations of the project’s efficiency. 92. Overall, information received during the survey will help improve the subsequent World Bank interventions in the energy efficiency area in Ukraine. 4. Assessment of Risk to Development Outcome Rating: Low 93. Based on the above factors, the risk to development outcome is Low. At the time of the preparation of the ICR, Ukraine remains among the most energy-intensive economies in the Europe and Central Asia Region. Ukraine is undergoing major energy reforms, which causes businesses and municipalities to be more cost conscious and consider investing more in energy saving measures.    25   94. As a member of the Energy Community, Ukraine has committed to bringing its national energy efficiency legislation in compliance with Energy Community requirements. Currently, several laws are being considered in the Ukrainian Parliament: Energy Efficiency Law, Metering Law, Law on Peculiarities of Public Procurement of ESCO Services, and Law on Energy Performance of Buildings. If approved, these laws will create a legal framework, encouraging energy efficiency activities by commercial and noncommercial enterprises, including municipalities, thus substantially increasing the demand for energy efficiency financing. 95. In July 2017, the Ukrainian Parliament approved the law establishing Energy Efficiency Fund (EEF), which will serve as a technical and financial tool that will help enable the more efficient use of state budget funds and is intended to attract international aid. The EEF will act as an immediate catalyst for attracting investment in projects aimed at reducing energy consumption and developing a more energy-efficient infrastructure. 96. Even before the approval of the energy efficiency legislation, the GoU has adopted a number of measures aimed at creating conditions for implementation of energy efficiency programs by municipalities, and, as a result, new opportunities have crystalized for municipalities to turn to commercial lending for implementation of local municipal energy efficiency programs. Among those changes are the amendments to the Tax Code and Budget Code, introducing more decentralization in distribution of local revenues. As a result, local communities now have the capacity to spend part of their earnings on investments and local improvements. The new taxation regime caused an increase in the share of taxes that remain in the local budgets (100 percent of uniform tax, real estate tax, 60 percent of profit tax, and 25 percent of environmental tax now remain in the local budgets). This led to an increase in local income by over US$1.65 billon (+47 percent in comparison to 2015). Over 2016, municipalities accumulated bank deposits in the amount of US$550 million. According to the estimates of the State Agency on Energy Efficiency and Energy Saving of Ukraine, potential debt financing volumes for municipal sustainable energy development is estimated to exceed US$5 billion over the next several years. 97. Replicability. The core design of the credit lines in Ukraine has not changed substantially. In subsequent credit lines (for example, for the EEP, EDP, and SMEs) by the World Bank and other IFIs, some features might be tweaked to enhance performance, but at its core the basic model has been tried, and all parties have gained experience in ensuring its effectiveness. 98. Demand from the banking sector. The year preceding the project’s closing date coincided with the period when the reforms in the energy and banking sector, carried out during 2014–2015, started taking effect and the Ukrainian economy started demonstrating sustainable growth. As a result, the local banking sector showed signs of revival and local enterprises expressed considerable enthusiasm for undertaking energy efficiency activities. One of the PBs, which terminated a sub-loan agreement with UEB in 2015, a year later has finalized its restructuring process, as a result of which it has acquired another local bank and thus considerably expanded its regional presence. By the time of the project’s closing, it has expressed significant interest in partnering with UEB for the next phase of the EEP if such a project is approved. Both UEB and the PB, which stayed in the project until the closing, have confirmed the growing demand for the credit line. This is in addition to the fact that despite the improving situation in the economy and the banking sector, the local businesses still lack access to long-term financing for energy efficiency, which is why the continuation of the project interventions is important.    26   99. Sustainability. By the project closing, both UEB and Megabank continued to provide energy efficiency financing to their clients, showing commitment to the project’s goals. Both banks admit that there is a potential to expand a pipeline of energy efficiency projects even further, and UEB is currently looking for more IFI financing to back its plans. Although UEB has expressed its readiness to finance energy efficiency investments from its own funds, if there is a good subproject, a reliable client, and relatively low risks, the IFI funds could provide sizable financing and assist the banks in taking riskier energy efficiency projects. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory 100. The project was built on the successful results and lessons of the previous World Bank projects involving financial intermediation in Ukraine. The World Bank, working in cooperation with UEB, was able to roll out a financial product on terms unique for the local market. The implementation period has shown that both institutional arrangements with a strong local bank partner and the terms of the credit line were attractive to the local enterprises and stimulated wider interest and leveraged financing in the area of energy efficiency. By the time of the project’s effectiveness, several subprojects were already in the pipeline and the project has gradually taken off. (b) Quality of Supervision Rating: Highly Satisfactory 101. Throughout the implementation period, the World Bank consistently provided high-quality supervision support to the project, ensuring the presence of necessary skill mix of the World Bank staff in the field office, which enabled maintaining a constructive working relationship with UEB and PBs and quickly addressing any problems as they arose. 102. The World Bank’s team effort was aimed at ensuring regularity of supervision missions (twice a year on average), providing timely responses to project issues, involving management when called for by the complexity of the project matters, and applying realistic project performance ratings. Implementation support missions often included field visits to beneficiaries in different regions; these visits included discussions with loan recipients on both the loan process and the effects of the energy efficiency financing on their business. 103. During the political and banking crisis of 2014–2016, the World Bank continued close monitoring of the situation and together with UEB worked on finding ways to continue the project and increase disbursements, which stalled for several months in 2015. The team was able to recognize the temporary nature of the negative factors affecting the development of the project and managed to address the risks of canceling funds by adopting a set of measures aimed at adjusting the project’s terms to the pace of the changes. In particular, a number of milestones were established for UEB, upon which the continuation of the project depended. Among them are (a) committing a certain amount of sub-loans and achieving a certain commitment threshold by a deadline, (b) achieving a disbursement threshold, and (c) signing a minimum number of municipal    27   energy efficiency subprojects. To enable achievement of those milestones, the World Bank team, in cooperation with UEB, developed a number of amendments to the conditions of the credit line aimed at broadening the range of eligible enterprises and easing some of the terms. Owing to the constructive and creative approach to solving the project’s problems, the World Bank’s management was satisfied with the significant progress achieved by UEB during the last year of the project and extended the closing date, which allowed for successful completion of the project and full disbursement of the project funds. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 104. Considering the ratings of Quality at Entry and supervision, the overall rating for World Bank performance is Satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 105. The Government did not have a key role in the operational phase of the project, since UEB was both the project’s borrower and the implementing agency. The project was designed such that it would provide UEB with enough operational discrepancy. During the banking crisis of 2014– 2016, the MoF and the NBU took adequate measures to keep the banking sector afloat and both demonstrated high quality of supervision over the sector, by taking targeted actions and timely reacting to emergency situations. Both the MoF and the NBU paid close attention to the financial condition of UEB and during 2017, UEB was recapitalized to stay within the revised limits established by the NBU. Throughout the implementation period, there were no major changes in the staffing of the PIU, which created conditions for maintaining the institutional memory and avoiding time delays, which some other World Bank projects with less stable ministerial PIUs were facing in Ukraine. 106. At the policy level, the Government could have considered improving a regulatory environment encouraging municipalities to invest in energy efficiency activities. Both UEB and municipalities were pointing to the legal obstacles (including provisions of Tax Code and Budget Code) preventing municipalities from applying to the World Bank funds for carrying out energy efficiency activities. However, this has to consider the political environment during 2014–2016, when the Government had more pressing priorities to address. By the end of the implementation period, the Government has indeed introduced a number of significant changes to the legislation, which created surplus in local budgets and started building a solid foundation for a strong demand for energy efficiency projects from municipalities in the future. (b) Implementing Agency or Agencies Performance Rating: Highly Satisfactory 107. Overall, the performance of UEB was highly satisfactory. UEB has established a very constructive relationship with the World Bank team and was responsive to the team's requests throughout the implementation period. Over the past several years, UEB developed strong institutional capacity and market expertise and became a trusted partner of the World Bank in    28   Ukraine. UEB maintained continuous dialogue with the PBs to support preparation of sub-loan requests in accordance with the project requirements, including educating PBs on the ways to market the project, evaluation of energy benefits, and compliance with E&S and procurement procedures. Apart from initial EEP presentations (managerial, sales, and operations), consultations with the PBs were conducted on a regular basis, including the meetings within the frames of the World Bank missions. Comprehensive guidance on all EEP implementation aspects was regularly provided to lending and methodology departments to support subproject preparation—normally one to two internal workshops and one distant training per year. 108. The UEB was sensitive to the concerns of the enterprises involved in the project and maintained a constant dialogue with the World Bank on the best ways of adjusting the project to the changing needs of the clients without risking its sustainability. As a result, the project’s closing date was extended only for one year, despite the project going through one of the most severe banking crises in the modern history of Ukraine, and all the funds were fully disbursed. Throughout the implementation period, auditing and reporting were carried out on time and in a manner satisfactory to the World Bank. (c) Justification of Rating for Overall Borrower Performance  Rating: Satisfactory 109. Based on the ratings of the Government performance and of the implementation agency, the overall rating for borrower performance is Satisfactory. 6. Lessons Learned 110. Key lessons for the World Bank are detailed in the following paragraphs. 111. A broader wording of the PDO with high implementation risks will provide the Bank with more room when the need materializes to adjust the project terms to the evolving market conditions. The EEP PDO wording used a fairly detailed list of the types of beneficiaries, which reduced the Bank’s room for flexibility when it became apparent that due to regulatory constraints one category of beneficiaries might not be motivated in applying for World Bank financing. 112. When designing a project, which is looking to developing intermediary financing (for example, through involving local PBs), it could be practical to initially include and appraise several participating financial institutions and build flexibility for funds allocation (for example, leaving some unallocated funds to a separate disbursement category, for whichever financial institutions disburse fastest). This can help build in contingency if there is a problem with one or more private financial institutions (PFIs) and encourage and benefit other PFIs to get into World Bank Group-financed projects. 113. When designing subsequent energy efficiency projects in Ukraine, it may be advisable to explore the option of having a renewable energy component, which would focus on promoting certain technologies, determined in cooperation with the Government and local businesses. The project did not pursue an objective of advancing renewable energy technologies or supporting renewable energy projects specifically, since it was the first energy efficiency financing project implemented by the World Bank in Ukraine and it was more important to pilot    29   the basic elements of the energy efficiency scheme. However, both banks (UEB and Megabank) expressed their interest in having energy efficiency and renewable energy instruments in the credit line in future. The next energy efficiency financing project in Ukraine may, therefore, explore further layers of the sophistication of the energy efficiency scheme. To reduce the risk of turning EEP2 into primarily a renewable energy project, a threshold could be established, by which 80 percent (or other agreed percentage) of the credit line would be used for energy efficiency and 20 percent for renewable energy projects. 114. In the project that pursues the goal of attracting additional sources of funding for the beneficiaries, it would be advisable to include the M&E tools, allowing to track both the leveraged amount and the progress of such leveraging. The only monitoring indicators available in the project at hand to measure the financing aspects of the project were the volume of energy efficiency loans and amount of commitments/disbursements within the loan amount. This significantly diminishes the possibility of adequate evaluation of the financing impact of the project and the added value of the respective financing product. 115. As the economy moves to sustainable levels of growth, the energy efficiency projects in Ukraine can be structured using partial credit risk guarantees or other types of leveraged financing. Partial risk guarantees enable banks to raise funds from the international markets with improved terms compared to what would have been possible by the bank on its own creditworthiness under market conditions. The structures allow the borrower to secure the much- needed financing at reasonable costs while also minimizing transaction risk in a climate of volatility. Leveraged financing arrangements ensure that the participating financial institution complements borrowed funds with resources from its own balance sheet. In the face of limited IBRD resources, leveraging funds through such instruments should be encouraged whenever possible. 116. Introducing technical assistance components in the project design shall be measured against the country risk, since in the countries with evolving political environment, focusing on investment lending results in higher overall project performance at the closing. The project component in the EEP did not include any technical assistance or policy-related subcomponents except for trainings and capacity building. No policy reforms in energy efficiency financing or municipal sector were supported by the project, which, considering the political environment in 2014–2015 accompanied by slowing down of a number of the reforms in the Ukrainian energy sector, turned out to be a well-founded decision. 117. The project could have benefitted from early-stage assistance to the financial intermediary in promoting the project among potential clients and developing a country- wide communication campaign. While UEB and the PB did carry out promotional campaigns to increase the demand for financing, the lack of specific experience in communicating the benefits of the energy efficiency financing played its role in lower than expected demand during the first few years of the implementation. 118. A strong local partner with a proven track record of implementation of World Bank projects and established clientele is a solid foundation for the project’s success. The project built its successes on a foundation of extensive expertise and capacity of the local bank with more than a 10-year history of implementation of World Bank projects in Ukraine. During the banking    30   crisis, UEB, owing to its professional management and strong Government support, was able, in cooperation with the World Bank, to revive the project and finalize it by achieving the project’s objective with minimum delay, considering the severe nature of the crisis. By having a partner with extensive client portfolio, the World Bank saved the project a considerable amount of time and guaranteed the maximum coverage and financial outreach. 119. The EEP could benefit from having a number of optional financing mechanisms embedded in the project’s legal framework, to be activated based on specific preconditions. As the project develops into new iterations, there might be a demand for alternative financing options depending on the nature of beneficiaries and availability of capital in the market. Availability of a single financing option reduces the chance of maximization of the available market opportunities since adding alternative options often requires restructuring of the project and cannot be employed quickly. As far as the EEP is concerned, lack of mechanisms allowing introduction of leasing options deprived the project of additional dynamics at a time when such boost was needed. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing Agencies 120. The borrower’s and implementing agency’s comments were incorporated in the ICR. (b) Cofinanciers Not applicable. (c) Other Partners and Stakeholders Not applicable.      31   Annex 1. Project Costs and Financing (a) Project Cost by Component (in US$ Million Equivalent) Appraisal Estimate Actual/Latest Estimate Percentage of Components (US$, millions) (US$, millions) Appraisal Total Baseline Cost 0.00 0.00 0 Component 1: Financing of EE 199.50 199.50 100 Investments Total Project Costs 199.50 199.50 100 Front-end fee IBRD 0.50 0.50 100 Total Financing Required 200.00 200.00 100 (b) Financing Appraisal Actual/Latest Type of Percentage of Source of Funds Estimate (US$, Estimate (US$, Cofinancing Appraisal millions) millions) Borrower 0.00 200.00 0 IBRD 200.00 200.00 100 Additional Data Table 1.1. Banking Sector Performance Indicators, 2008–2015 12/31/200 12/31/200 12/31/201 12/31/201 12/31/201 12/31/201 12/31/201 Indicators 12/31/2007 8 9 0 1 2 3 4 Number of 175 184 182 176 176 176a 181a 143a licensed banks Total Bank Enterprise 276,184 472,584 474,991 508,288 580,907 609,202 698,777 802,582 Lending (UAH, millions) Regulatory capital adequacy 13.92 14.01 18.08 20.83 18.90 18.06 18.26 15.60 (sufficiency) (Н2), % Financial results of the banks’ 6,620 7,304 −38,450 −13,027 −7,708 4,899 1,436 −52,966 activities (UAH, millions) Return on assets, 1.50 1.03 −4.38 −1.45 −0.76 0.45 0.12 −4.07 % Return on 12.67 8.51 −32.52 −10.19 −5.27 3.03 0.81 −30.46 equity, % Source: NBU. Note: a. Of which one bank is licensed as a remedial bank that is a bad asset entity not taking deposits.    32   Table 1.2. Annual Growth (Decline) in Enterprise Lending, Ukraine Banks 2007–2014 2007 2008 2009 2010 2011 2012 2013 2014 Total Bank Enterprise Lending (UAH, 276,184 472,584 474,991 508,288 580,907 609,202 698,777 802,582 millions) Growth in Enterprise 71 1 7 14 5 15 15 Lending (%) Source: NBU.    33   Annex 2. Outputs by Component The Project had one component, which included a list of types of energy efficiency subprojects to be financed out of the proceeds of the loan. The table below provides a breakdown by a number of sub-projects and the amount of sub-loans per each category. Table 2.1. Outputs by Component A number of US$mln sub-projects Modernization of inefficient and obsolete equipment and facilities 72 112.01 Installation of highly energy-efficient industrial equipment and processes for new 39 78.80 production capacities, whose current energy use considerably exceeds current best practices Improvement of systems that involves a suite of measures to increase energy 4 3.89 efficiency; Reduction of energy loss reduction in municipal sector enterprises 5 0.36 Implementation of other energy efficiency subprojects satisfactory to the World 1 4.44 Bank. Total 1 121 199.5 More detailed information on sub-projects can be found on p. 39 in Table 3.4 below. Below are some examples of Projects financed by EEP. Figure 2.1. Energy Efficiency Improvements as Part of the EEP Box 2.1. Ivano-FrankivskCement JSC Ivano-Frankivskcement was registered back in 1999 and is currently a leading Ukrainian cement producer and a major budget forming enterprise in the Ivano-Frankivsk Region, with 2.4 million tons per year cement production capacity (3.4 Mt per year after investment completion). High-quality products of the company are vastly used in the western regions of the country for infrastructural developments, utilities, and residential construction, as well as for road construction (including special cements—only produced by ‘dry’ facilities in Ukraine) and so on. Since 2006, the company has been implementing its strategic modernization program, transition from the outdated ‘wet’ method to the energy- and resource-efficient ‘dry’ method of production. Its investment was supported by local financial intermediaries, major IFIs operating in the region (IBRD, the EBRD, and European Investment Bank [EIB]), and Europe and Central Asia funding; the plant also successfully implemented a joint implementation project under the mechanisms of the UNFCCC Kyoto Protocol (http://ji.unfccc.int/JIITLProject/DB/7LOQP1JWIPZ2UVSD8NEJ8099MA3023/details). JSC Ivano-Frankivskcement has successfully carried out two consecutive stages of the ‘wet-to-dry’ transition and is currently implementing the third stage (estimated launch in the first half of 2018). The modernization allowed Ivano-Frankivskcement to increase its cement production capacity from 0.5 to 2.4 Mt per year (3.4 Mt per year after completion of the third stage), as well as enhance efficiency of its energy consumption. Estimated energy benefits gained from implementation of the investment program (at full capacity) include over 580,000 toe per year coal (replaced with 470,000 toe per year coal sludge), 20 mcm per year natural gas, and 120,000 toe per year peat. Estimated environmental effect exceeds 1 million tCO2e of GHG emission reduction. Total estimated cost of the transition is US$292 million; EEP financing of US$54 million (‘no-objections’ to financing over US$30 million granted on October 19, 2015, and August 17, 2016) and equity investment of around US$106 million. Estimated project benefits: the plant’s production capacity increased from 0.5 to 3.4 Mt per year; specific energy consumption to produce clinker reduced from 1,600 to 760 kcal per kg (over 50 percent); 300,000 toe per year    34   incremental savings; social benefits: over 50 percent increase in the company’s budgetary payments and over 10 percent new jobs and over 30 percent increase in share of environment-friendly ‘dry’ cement production in the local market. Estimated lifetime benefits: over 2 million toe energy and over 7.2 million tCO2e GHG emission reduction. Box 2.2. Nibulon Agricultural Limited Liability Company Nibulon is a major Ukrainian agricultural operator, with activities ranging from growing crops and livestock to logistics services, including onshore and offshore transportation, grains storage, and exports. As of today, Nibulon aggregates, among others, a transshipment terminal for grains and oil crops, a shipping company, a ship-building/repair facility, grain elevator facilities, and 39 branches all over Ukraine. Since the beginning, the company has been investing in modernization and scaling up of its activities, vertically and horizontally, with support of the IFIs (the World Bank, EBRD, EIB). Under the frames of the EEP, Nibulon partnered with UEB to support its investment project aimed at modernization of its agricultural machinery, major shift from on-road to offshore grains transportation, and reconstruction of the shipbuilding/repair facility. Out of the US$47 million investment costs, US$30 million was granted through two sub-loans under the EEP. Estimated project benefits exceed 4,750 toe per year in energy consumption (natural gas and motor fuel) and GHG emission reduction by over 12,700 tCO2e per year. Estimated lifetime benefits exceed 25,000 toe energy and 68,000 tCO2e GHG. Box 2.3. Mayak - Municipal Sector/Utilities Energy Efficiency Mayak is a privately owned group of companies in the Vinnytsya Region involved in generation and distribution of heat, operation of heat mains and local networks, and supply of heat (hot water/steam) and electricity to consumers (households and businesses). Two companies of the group took part in the EEP: (a) TeploKommunEnergo Mayak LLC and (b) Subsidiary Enterprise TeploKommunEnergo Mayak. Under the frames of the EEP, the companies of the Mayak Group implemented (a) reconstruction of the local heating network, including replacement of worn-out sections of pipes with hydro-insulated new ones to reduce heat losses, and (b) modernization of the heat generation facilities and installation of three biomass boilers to reduce consumption of natural gas. The costs of the investment projects totaled US$308,000, including two EEP sub-loans of US$134,000. Estimated annual project benefits include 2.6,000 toe energy and GHG emissions reduction of 6,500 tCO2e per year. Lifetime benefits include13,500 toe energy and over 34,500 tCO2e GHG. Table 2.2. Beneficiary Enterprises and Loan Disbursement by Region Energy Efficiency Value of Projects Improvements per Value Sub-loans Financed in Region No. of Region as Extent of Region Disbursed in as % of Total Subprojects Energy Savings of Region (US$) Projects Financed in Total 602,200 toe per the EEP Year (%) Kyiv 4 12,773.2 0.62 6.39 Dnipropetrovsk 5 2,047.5 0.15 1.02 Zaporizhzhya 6 21,864.6 3.06 10.93 Poltava 1 294.0 0.36 0.15 Kharkiv 17 10,417.0 0.60 5.21    35   Energy Efficiency Value of Projects Improvements per Value Sub-loans Financed in Region No. of Region as Extent of Region Disbursed in as % of Total Subprojects Energy Savings of Region (US$) Projects Financed in Total 602,200 toe per the EEP Year (%) Mykolayiv 3 32,186.1 0.50 16.09 Odesa 6 253.3 0.02 0.13 Lviv 0 0.0 0.00 0.00 Kirovograd 7 8,772.1 3.78 4.39 Sumy 11 2,609.4 0.11 1.30 Vinnytsya 6 12,983.8 1.89 6.49 Cherkasy 2 868.4 0.03 0.43 Zhytomyr 11 9,725.0 1.79 4.86 Ivano-Frankivsk 7 57,015.2 85.24 28.51 Khmelnytsky 10 15,647.0 0.70 7.82 Kherson 5 1,459.2 0.06 0.73 Ternopil 3 3,736.5 0.26 1.87 Other regions not included: Volyn, Zakarpattya, Luhansk, 17 7,347.7 0.83 3.67 Rivne, Chernivtsi, Chernihiv Total 121 200,000.0 100.00 100.00    36   Annex 3: Economic and Financial Analysis Economic and Financial Analysis at Appraisal 1. Subproject analysis. Since the project was a financial intermediary operation and actual subprojects to be financed were not known up front, the financial and economic analysis at appraisal focused on a review of prototype subprojects that could potentially be financed. The viability indicators determined at appraisal were the FRR and ERR. To be eligible for financing under the project, (a) subprojects had to have a minimum real FRR of 10 percent using energy savings only as benefits, and (b) the subproject implementing entities were required to have a minimum DSCR of at least 1.3. With regard to ERRs, while no threshold level was specified under the project, the analysis indicated levels of ERRs that may be expected for two different types of subprojects (see Table 3.1). Table 3.1. Economic Analysis of Selected Potential Subprojects Investment Subproject Cost (US$, ERR (%) Savings (year, average) millions) Coal 16,400 tons Energy efficiency in 54 12.25 Natural gas 19,280 tcm cement production Electricity 14.68 GWh Energy Natural gas 65.2 tcm efficiency/modernization 5 16.35 in steel rolling plant Electricity 11.59 GWh 2. Entity-level financial analysis. A financial assessment was carried out for UEB. No assessment was carried out for other PBs as no other PB had been identified at appraisal. Eligibility criteria were established for both UEB and PBs (see table 3.3). Post-completion Economic and Financial Analysis 3. A total of 121 subprojects were financed under the project, with a total investment cost of US$539.14 million equivalent. The post-completion economic assessment was carried out of (a) cost benefit and (b) cost-effectiveness for a representative sample of subprojects. Benchmark comparisons could not be made for cost-effectiveness due to lack of relevant data. Therefore, the subprojects are only evaluated by a cost-benefit analysis in the following section. However, estimates for cost-effectiveness are reported both for the overall subproject portfolio and the subset of sampled subprojects in the relevant tables (see Table 3.4 and Table 3.5). 4. Cost benefit. A cost-benefit analysis was carried out for a representative sample of 20 subprojects, which represent 63 percent of total investment cost in the project. Subprojects in the sample were selected to represent the major subproject types in the portfolio and based on availability of adequate information for the post-completion analysis. The indicators used to assess costs and benefits were (a) the ERR and (b) the real FRR. 5. ERR. Costs considered in the ERR analysis include capital costs and incremental operation and maintenance (O&M) expenses. Benefits include the value of output estimated at economic prices. Taxes and duties are excluded for both costs and benefits. Economic benefits were valued for two cases: including and excluding CO2 reduction benefits. CO2 emission reduction benefits    37   were valued at US$30 per tCO2 as indicated under the World Bank’s currently applicable guidelines. Results are reported in Table 3.5. The ERR estimates are generally higher than the appraisal estimates. The weighted average ERRs for the sampled subprojects are 15.9 percent without carbon benefits and 21.7 percent with carbon benefits. Furthermore, all 20 subprojects exceed the ERRs (6–8 percent) that are recommended in the current World Bank guidelines (Discounting Costs and Benefits for the Economic Analysis of Investment projects, May 2016) for economic analysis of investment projects for economies growing at annual rates similar to Ukraine. 6. FRR. Costs considered in the FRR analysis include capital costs and incremental O&M expenses, including applicable taxes and duties. Energy savings were valued at the costs of energy including taxes and duties. Results are reported in Table 3.5. For FRR, a minimum threshold of 10 percent was defined at appraisal as an eligibility criterion for subprojects. All 20 sampled subprojects have FRRs higher than the stipulated threshold level. The weighted average FRR for the sample as a whole is estimated at 19 percent. 7. Cost-effectiveness. Indicators (investment costs per Tcal of energy savings and investment cost per tCO2 reductions) are provided in Table 3.4. Results for the sampled subprojects are given in Table 3.5. Financial Assessment for UEB and Megabank 8. For a major part of the project implementation period (2012–2017), the economy of Ukraine, including the financial sector, was seriously affected by a number of adverse developments. The issues arose from both external factors, including the continuing uncertainty and weakness in the global economy, and internal factors, particularly the conflict situation in Eastern Ukraine and the Crimea. The banking sector was affected by a number of issues arising from the following:  Major devaluation of the exchange rate (the value of the hryvna deteriorated from UAH 7.9 per US$ in 2011 to UAH 27 per US$ in 2016), which increased debt service obligations arising from foreign debt. (  Deterioration in quality of assets and increase in NPLs.  Disruption of lending business, including the impact of the situation in Eastern Ukraine and Crimea.  Deterioration in the banks’ capital adequacy positions as a combined result of the adverse factors. 9. In early 2015, in consultation with the IMF and IFIs, the GoU adopted a Comprehensive Program for Financial Sector Development for Ukraine Until 2020. Under the program, the NBU required the banks to adopt programs for financial recovery. The NBU continues to review and monitor the implementation of the programs by individual banks.    38   10. The main financial indicators for UEB and Megabank during the project implementation period are summarized in table 3.2. Compliance with financial requirements set by the NBU and under the loan covenants are reported in table 3.3. Table 3.2. Financial Indicators for UEB and Megabank (UAH, millions) Indicator UEB Megabank 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Income statement items Interest 7,691.2 9,244.3 10,096.1 12,919.9 12,823.2 435.4 511.7 653.0 829.4 891.0 income Interest 4,133.2 5,298.9 7,418.5 10,818.2 10,446.4 288.8 352.0 443.0 648.1 749.3 expense Net interest 3,558.0 3,945.4 2,677.6 2,393.2 3,234.0 146.6 159.7 210.2 181.2 141.4 income Loan impairment 3,070.9 2,779.8 11,431.0 10,326.2 5,700.1 42.1 28.0 42.0 36.3 106.0 charge Net interest margin after loan 487.1 1,165.5 (8,753.4) (7,933.1) (2,466.1) 104.5 132.0 168.5 145.0 35.4 impairment charge Net noninterest (225.8) (832.3) (3,688.4) (6137.4) (1,273.7) (88.4) (85.8) (93.5) (66.6) (124.6) income Profit/loss (14,070.5 261.3 333.2 (12,441.8) (1,192.4) 6.2 32.4 12.2 30.0 89.0 before tax ) Profit/loss (14,063.8 137.3 200.6 (11,249.3) (977.3) 2.0 24.0 9.2 24.0 83.0 after tax ) Balance sheet items Total assets 160,402. 87,206.1 93,274.8 141,348.5 4,552.0 5,416.0 6,870.0 8,873.0 9,003.0 2 Total 155,042. 69,825.6 75,663.4 144,408.9 3,916.2 4,756.1 6,201.3 8,043.5 8,257,5 liabilities 0 Shareholder 17,380.5 17,611.3 (3,060.3) 5,360.3 635.5 659.5 669.0 829.1 745,3 ’s equity Ratios Capital adequacy ratio (CAR) 29.18% 29.22% 22.55% 2.41% 9.89% 16.89% 14.59% 13.45% 12.58% 10.45% - minimum 10% Liquidity ratios Quick - minimum 77.87% 54.74% 61.03% 64.68% 45.25% 51.42% 44.62% 54.51% 56.29% 49.71% 20% Current - minimum 90.68% 98.42% 134.69% 123.09% 180.29% 69,02% 61,94% 79.13% 49.62% 43.40% 40% Short term - minimum 95.61% 97.47% 114.29% 136.97% 154.82% 94,02% 102,09% 119.99% 105.59% 87.36% 60%    39   Table 3.3. Compliance with Eligibility Criteria/Financial Covenants NBU Regulatory Eligibility Criteria/Covenant IFRS Compliance Requirements UEB Complied with Risk weighted CAR to be not more than Minimum Minimum 10% except in 2015 and 10% 10% 2016 Single insider lending exposure should Maximum not exceed 5% of the bank’s IFRS Maximum 5% Complied with 5% regulatory capital Aggregate insider lending should not Maximum exceed 30% of the bank’s IFRS Maximum 30% Complied with 30% regulatory capital Single exposure per single borrower Complied with Maximum should not exceed 25% of the bank’s Maximum 25% except in 2015 and 25% IFRS regulatory capital 2016 Total large exposures should not exceed Maximum 8 Complied with 8 times the bank’s IFRS regulatory Maximum 8 times times except in 2015 capital Quick - minimum 20%; current Liquidity ratios - minimum 40%; short term - Complied with minimum 60% Full compliance with loan loss Complied with provisioning requirements Full compliance with all other NBU Complied with regulatory requirements Complied with Profitability - the bank should operate on except in 2014– a profitable basis 2016 Megabank Risk weighted CAR to be not more than Minimum Minimum 10% Complied with 10% 10% Single insider lending exposure should Maximum not exceed 5% of the bank’s IFRS based Maximum 5% Complied with 5% regulatory capital Aggregate insider lending should not Maximum Complied with exceed 30% of the bank’s IFRS Maximum 30% 30% except in 2016 regulatory capital Single exposure per single borrower Maximum should not exceed 25% of the bank’s Maximum 25% Complied with 25% IFRS regulatory capital Total large exposures should not exceed Maximum 8 8 times the bank’s IFRS regulatory Maximum 8 times Complied with times capital Quick - minimum 20%; current Liquidity ratios - minimum 40%; short-term - Complied with minimum 60% Full compliance with loan loss Complied with provisioning requirements Full compliance with all other NBU Complied with regulatory requirements Profitability - the bank should operate on Complied with a profitable basis except in 2016 Note: IFRS = International Financial Reporting Standards.    40   Table 3.4. Subproject Economic and Financial Summary (Ex Ante as Appraised) Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Wet to dry Cement process 99.25 2.83 2012 2013 718,993 2,424,818 14.0 40.9 production conversion Replacement of Poultry complex natural gas by 8.13 6.30 2013 2013 30,861 70,060 25.9 116.0 straw fuel Plant Sugar plant 10.52 10.52 2013 2013 24,086 47,642 32.4 220.8 modernization Wet to dry Cement process 93.03 27.00 2013 2014 596,798 2,099,903 22.6 44.3 production conversion Plant Ironing boards 0.33 0.26 2013 2013 1,249 6,339 43.9 52.1 modernization Equipment Confectionery 2.70 1.85 2013 2014 4,604 14,481 18.3 186.5 modernization Machinery Agriculture 0.13 0.11 2013 2013 136 364 17.5 357.1 replacement Machinery Agriculture 2.92 2.92 2014 2014 2,116 5,665 11.1 515.4 replacement Machinery Agriculture 1.07 0.94 2014 2014 755 2,022 10.4 529.2 replacement Machinery Agriculture 0.51 0.51 2014 2014 425 1,137 10.7 448.5 replacement Equipment Food industry 0.73 0.73 2014 2014 317 2,013 11.4 362.6 modernization Machinery Agriculture 0.32 0.32 2014 2014 1,002 2,683 15.7 119.3 replacement Machinery Agriculture 3.40 3.40 2014 2014 2,241 5,999 11.6 566.8 replacement Machinery Agriculture 0.10 0.10 2014 2015 135 360 13.5 277.8 replacement Vegetable oil Gas to biomass 8.44 0.91 2014 2015 61,793 157,087 44.8 53.7 extraction fuel conversion    41   Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Furnace Glass plant 0.76 0.30 2014 2015 4,267 10,848 38.8 70.1 modernization Equipment Cable production 2.30 0.48 2014 2015 2,745 17,451 18.8 131.8 modernization Municipal heat Facility 0.17 0.17 2015 2015 1,270 3,229 33.5 52.6 supply reconstruction Machinery Agriculture 0.49 0.49 2015 2015 338 904 11.6 542.0 replacement Equipment Food industry 5.16 2.19 2015 2016 6,163 15,667 12.3 329.4 replacement Bathroom Equipment 1.27 1.23 2015 2015 6,299 21,294 55.6 59.6 equipment replacement Vegetable oil Gas to biomass 0.51 0.29 2015 2015 7,075 17,845 83.5 28.6 extraction fuel conversion Gas to biomass Poultry complex 0.65 0.64 2015 2015 4,004 10,178 43.4 63.9 fuel conversion Grain elevator Reconstruction 2.17 1.61 2015 2015 3,098 4,691 25.7 462.6 Equipment Heat supply 0.11 0.03 2015 2015 214 544 19.8 202.2 modernization Dairy production Fuel substitution 0.06 0.05 2015 2016 261 665 29.7 90.2 Facility Plastic packaging 3.31 2.38 2015 2016 2,160 13,733 12.8 241.0 modernization Confectionery Equipment 0.52 0.14 2015 2016 8,823 20,220 60.9 25.7 production modernization Furnace Glass plant 0.16 0.16 2015 2015 2,661 6,766 149.8 23.6 reconstruction Facility Grain drying 0.20 0.11 2015 2016 1,199 3,504 148.1 57.1 reconstruction Machinery Agriculture 1.20 0.75 2015 2016 1,107 2,962 12.3 405.1 replacement Machinery Agriculture 16.50 12.00 2015 2016 9,660 25,858 10.6 638.1 replacement Filtration unit Dairy production 0.47 0.19 2015 2015 1,022 6,500 42.4 72.3 replacement    42   Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Confectionery Equipment 0.55 0.54 2015 2016 720 1,831 11.1 300.4 production modernization Equipment Grain drying 0.08 0.05 2015 2016 50 317 11.8 252.4 replacement Machinery Agriculture 0.31 0.26 2015 2016 417 1,117 20.8 277.5 replacement Corrugated box Equipment 0.07 0.04 2015 2016 440 1,119 55.4 62.6 production modernization Machinery Agriculture 0.28 0.22 2015 2016 459 1,228 40.5 228.0 replacement Furnace Glass plant 2.09 0.90 2015 2015 3,807 9,678 14.6 216.0 reconstruction Livestock Heat supply 0.27 0.22 2015 2016 3,911 9,941 117.8 27.2 breeding modernization Supermarket Heat supply 0.47 0.42 2015 2016 2,674 10,614 78.7 44.3 chain modernization Wet to dry Cement process 10.00 10.00 2015 2016 22.6 production conversion Heat efficiency Dairy production 0.71 0.48 2015 2016 12,229 32,491 106.3 21.9 improvements Elevator Agriculture 1.36 1.20 2015 2015 6,798 17,647 49.6 77.1 modernization Equipment Printing 1.48 0.83 2015 2016 935 5,945 20.1 248.9 modernization Heat supply Pharmaceuticals 0.14 0.13 2015 2015 335 870 21.6 160.9 modernization Machinery Agriculture 0.31 0.17 2015 2016 411 1,100 20.1 281.8 replacement Equipment Metal products 0.11 0.09 2015 2016 57 365 14.0 301.4 modernization Agriculture Equipment 4.74 3.43 2015 2015 12,168 77,358 38.5 61.3 machinery modernization Fuel substitution Wood processing 0.28 0.11 2015 2015 2,896 7,363 18.2 337.9 by biomass    43   Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Equipment Carpet production 3.86 3.16 2015 2016 1,797 11,424 12.4 337.9 modernization Machinery Agriculture 0.23 0.18 2015 2016 231 619 19.9 371.6 equipment Facility Wood processing 2.74 1.12 2016 2016 598 3,787 14.0 723.5 modernization Polyethylene film Equipment 0.04 0.04 2016 2016 89 567 40.7 70.5 production replacement Machinery Agriculture 0.58 0.37 2015 2016 474 1,268 10.5 457.4 replacement Machinery Agriculture 0.52 0.52 2015 2016 610 1,634 20.2 318.2 replacement Machinery Agriculture 0.10 0.08 2016 2016 40 255 72.6 392.2 replacement Equipment Dairy production 0.12 0.10 2016 2016 236 601 15.1 199.7 modernization Refrigeration Food industry 1.06 1.06 2016 2016 2,679 17,031 61.0 62.2 modernization Equipment Dairy production 0.84 0.58 2016 2017 1,327 5,134 22.3 163.6 modernization Confectionery Equipment 0.73 0.55 2016 2016 1,234 3,209 12.7 227.5 production modernization Machinery Agriculture 1.08 0.60 2016 2016 1,001 6,688 33.1 161.5 replacement Machinery Agriculture 0.42 0.35 2016 2016 474 3,457 41.5 121.5 replacement Machinery Agriculture 0.87 0.59 2016 2016 1,089 2,914 29.0 298.6 replacement Equipment Glass plant 1.57 1.55 2016 2017 7,343 21,741 46.7 72.2 modernization Equipment Plastic packaging 15.00 5.60 2016 2016 17,659 66,876 11.2 224.3 modernization Equipment and Aircraft engines, process 27.00 13.21 2016 2016 35,491 131,428 15.8 205.4 gas turbines modernization    44   Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Equipment Polymer materials 0.14 0.12 2016 2017 298 1,893 49.6 74.0 modernization Equipment Carpet production 4.29 3.28 2016 2016 2,087 13,270 12.5 323.3 modernization Machinery Agriculture 0.03 0.02 2016 2016 52 138 33.7 217.4 replacement Process and Pharmaceuticals equipment 0.54 0.18 2016 2016 4,614 13,532 84.8 39.9 modernization Process and Pharmaceuticals equipment 0.28 0.27 2016 2016 435 1,329 14.5 210.7 modernization Cardboard Equipment 0.02 0.02 2016 2016 17 47 14.3 425.5 production replacement Equipment Pharmaceuticals 0.57 0.47 2016 2016 752 1,610 11.1 354.0 modernization Machinery Agriculture 0.23 0.20 2016 2016 237 634 17.9 362.8 replacement Equipment Agriculture 0.28 0.20 2016 2017 387 2,263 29.9 123.7 replacement Equipment Poultry complex 2.67 1.39 2016 2017 3,273 8,379 14.5 318.7 modernization Process and Pharmaceuticals equipment 0.78 0.71 2016 2017 534 3,398 21.3 229.5 modernization Heat supply Retail trade 0.14 0.12 2016 2016 410 983 27.3 142.4 modernization Gas to biomass Heat supply 0.20 0.10 2016 2017 13,393 34,048 286.6 5.9 fuel substitution Furnace Glass plant 0.28 0.22 2016 2016 382 1,168 15.3 239.7 reconstruction Machinery Agriculture 0.11 0.09 2016 2017 250 668 87.4 164.7 replacement Heat supply Heat supply 0.09 0.05 2016 2017 552 1,404 32.6 64.1 reconstruction    45   Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Equipment Polyethylene film 0.02 0.02 2016 2016 158 1,004 87.4 19.9 replacement Equipment Agriculture 1.95 0.69 2016 2017 2,958 18,804 36.2 103.7 modernization Machinery Agriculture 0.05 0.04 2016 2017 42 111 12.6 450.5 replacement Refrigeration Food industry 7.85 1.44 2016 2017 4,334 25,855 12.4 303.6 modernization Packaging Food industry 0.32 0.20 2016 2016 279 1,773 17.6 180.5 modernization Process and Industrial safety equipment 0.44 0.33 2016 2017 622 2,354 13.5 186.9 gear modernization Incubator Poultry complex 0.54 0.51 2016 2017 402 2,557 14.6 211.2 modernization Food industry Fuel substitution 1.56 0.72 2016 2017 5,714 13.995 16.2 111.5 Machinery Food industry 1.70 1.63 2016 2016 1,699 4,549 17.1 373.7 replacement Machinery Food industry 0.82 0.66 2016 2016 1,078 2,886 24.8 284.1 replacement Machinery Agriculture 0.25 0.17 2016 2017 473 1,266 41.2 197.5 replacement Wet to dry Cement process 89.70 15.00 2016 2018 765,399 2,692,099 36.6 33.3 production conversion Furnace Glass plant 2.10 0.87 2016 2017 2,684 8,260 17.3 254.2 reconstruction Construction Equipment 0.10 0.08 2016 2016 66 418 15.3 239.2 materials modernization Equipment Printing 0.42 0.28 2016 2016 1,108 6,481 53.7 64.8 modernization Polyethylene film Equipment 0.03 0.03 2016 2017 239 1,522 180.7 19.7 production modernization Agriculture Grain elevator 0.24 0.13 2016 2016 134 358 10.2 670.4    46   Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Machinery Agriculture 0.26 0.15 2017 2017 413 1,106 32.4 235.1 replacement Grain elevator Agriculture 2.69 1.12 2017 2017 3,248 5,527 25.1 486.7 modernization Packaging Food industry equipment 0.22 0.15 2017 2017 131 835 10.5 263.5 modernization Consumer goods Equipment 0.08 0.05 2017 2017 194 511 26.2 156.6 production modernization Machinery Agriculture 0.02 0.01 2016 2017 38 101 73.4 198.0 replacement 5 MW Energy generation cogeneration 23.88 4.44 2017 2018 17,667 112,317 21.1 212.6 plant Road to rail Agriculture transport 3.79 2.00 2017 2017 6,523 17,460 35.3 217.1 logistics conversion Machinery Agriculture 0.23 0.19 2017 2017 222 593 18.2 387.9 replacement Polyethylene film Equipment 0.01 0.01 2017 2017 260 1,652 418.6 6.1 production modernization Machinery Agriculture 0.25 0.20 2017 2017 201 537 14.4 465.5 replacement Machinery replacement and Agriculture 30.33 18.00 2017 2017 16,092 42,967 ?? 705.9 transport conversion Machinery Agriculture 0.19 0.13 2017 2017 252 674 27.5 281.9 replacement Machinery Agriculture 0.97 0.62 2017 2017 797 2,134 14.7 454.5 replacement Equipment Retail trade 0.86 0.09 2017 2017 828 5,136 22.1 167.4 modernization Equipment Food industry 6.49 4.46 2017 2017 6,598 17,550 11.7 369.8 modernization    47   Total Sub-loan 10-Year 10-Year Cost- Type of Investment Amount Approval Completio Emission Type of Business Energy FRR (%) Effectiveness Investment (US$, (US$, Date n Date Reduction Savings (toe) (US$/tCO2e) millions) millions) (tCO2e) Transportation Quarry 0.29 0.15 2017 2017 734 1,965 52.6 147.6 modernization Total for all 121 536.12 199.50 2,498,018 8,560,965 27.2 63.1 subprojects Table 3.5: Post-completion Economic and Financial Viability Assessment for Sampled Subprojects Sub-project Investment (USD 10 year energy 10 year CO2 emission FRR Cost- ERR (%) million) savings (toe) reductions (tCO2e) (%) Effectiveness (tCO2e/USD) Without carbon With carbon benefits benefits Cement production 99.25 718,993 2,424,818 13.7% 40.9 12.6% 23.6% Poultry farm 8.13 30,861 70,060 25.9% 116.0 23.1% 26.1% Sugar plant 10.52 24,086 47,642 32.1% 220.8 30.0% 31.0% Cement production 93.03 596,798 2,099,903 22.6% 44.3 15.1% 22.2% Confectionary 2.70 4,604 14,481 12.6% 186.5 11.5% 13.3% Vegetable oil extraction 8.44 61,793 157,087 37.9% 53.7 35.6% 39.0% Municipal heat supply 0.17 1,270 3,229 27.1% 52.6 25.1% 25.5% Vegetable oil extraction 0.51 7,075 17,845 74.5% 28.6 69.3% 81.8% Confectionary 0.52 8,823 20,220 53.3% 25.7 50.0% 58.8% Agriculture 16.50 9,660 25,858 12.5% 638.1 11.6% 12.1% Glass works 2.09 3,807 9,678 14.6% 216.0 12.6% 14.0%    48   Agriculture 1.56 6,798 17,647 35.1% 88.4 32.7% 36.5% Agriculture machinery 4.74 12,168 77,358 31.9% 61.3 29.6% 32.7% Glass works 1.57 7,343 21,741 39.7% 72.2 36.2% 40.1% Aircraft engines, gas 27.00 35,491 131,428 15.8% 205.4 14.2% 14.4% turbines Pharmaceuticals 0.54 4,614 13,532 76.0% 39.9 71.4% 72./0% Poultry complex 2.67 3,273 8,379 14.5% 318.7 13.8% 14.8% Heat supply/energy 23.88 17,667 112,317 21.1% 212.6 19.5% 21.1% generation Agriculture logistics 3.79 6,523 17,460 28.9% 217.1 26.8% 28.6% Agriculture 30.33 16,092 42,967 11.6% 705.9 10.6% 10.9% Total /weighted 337.94 5,333,650 19.0 63.4 15.9 21.7 average    49   Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team Members Names Title Unit Responsibility/Specialty Lending Lead Energy Economist, Task Team Gary Stuggins ECSS2 Task Team Leader Leader Yadviga Semikolenova Energy Economist ECSS2 Energy economics Shinya Nishimura Financial Analyst ECSS2 Energy economics Feng Liu Senior Energy Specialist SEGES Energy efficiency Senior Energy Specialist (Task Team Dmytro Glazkov ECSS2 Task Team Leader Leader) Irina Babich Financial Management Specialist ECSO3 Financial management Knut Leopold Senior Procurement Specialist ECSO2 Procurement Energy Efficiency, Task Astrid Manroth Senior Energy Specialist ECSS2 Team Leader Rajeev Kumar Swami Senior Financial Management Specialist ECSO3 Financial Management Leiping Wang Senior Energy Specialist EASIN Energy Efficiency Bogdan Constantin Constaninescu Senior Financial Management Specialist ECSO3 Financial Management Rozena Serrano Program Assistant GEE03 Program Assistant Supervision/ICR Dmytro Glazkov Senior Energy Specialist GEE03 Task Team Leader Monali Raade Senior Energy Specialist GEE05 Irina Babich Senior Financial Management Specialist GG021 Financial Management Irina Shmeleva Senior Operations Officer OPSFM Procurement Monitoring and Juliana Victor Senior Operations Officer GEE08 Evaluation Hiwote Tadesse Operations Officer GEE03 Quality Kishore Laxsmikant Nadkarni Consultant GEE03 Energy economics Alexey Morozov Consultant GEE03 Primary author Dung Kim Lee Senior Program Assistant GEE03 Program assistance (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (Including No. of Staff Weeks travel & Consultants Costs) Lending 2010 69.97 346,647 2011 37.89 161,258 Total: 107.86 507,905 Supervision/ICR 2012 10.74 52,480 2013 9.29 36,940 2014 13.46 18,255    50   2015 15.22 38,244 2016 20.81 44,684 2017 13.11 37,814 2018 0.05 391 Total: 82.68 228,806    51   Annex 5. Beneficiary Survey Results The team has received filled-in questionnaires from 16 sub-borrowers, and the summary of the survey results is provided in Section 3.6 of the ICR.    52   Annex 6. Stakeholder Workshop Report and Results No stakeholder workshop was undertaken.    53   Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Summary of Borrower’s ICR 1. The final EEP ICR is being prepared by UEB in accordance with the requirements and methodology determined by the Procedure for Preparation, Implementation, Monitoring, and Closure of Socioeconomic Projects of Ukraine supported by the IFIs, as approved by the Resolution of the Cabinet of Ministers of Ukraine No. 70, dated January 27, 2016. 2. A total of 121 subprojects, for a total amount of US$199.5 million, were implemented under the EEP, with over 75 participants across sectors from all over Ukraine (the territory controlled by Ukrainian authorities). Five municipal subprojects, including four ESCO type, were financed. Project Monitoring Indicators Table 7.1. Achievement of Project Monitoring Indicators Indicator Unit Value % Project Outcome Indicators Extent of energy savings Thousand toe 663.9 110 Projected lifetime fuel savings Million GJ 27.8 110 Volume of EE sub-loans US$, millions 199.5 100 Intermediate Outcome Indicators ESCO subprojects Number 4 200 Extent of energy savings Natural gas Million m3 199 124 Electricity GWh 213 177 Coal Thousand tonnes 680 — Motor fuel Thousand m3 10 — Ukreximbank loan commitments % 100 100 Ukreximbank loan disbursements % 100 100 Municipal energy efficiency subprojects 5 100 3. As detailed earlier, the project monitoring indicators were fully achieved. More details on the dynamics of the project implementation are provided in figure 7.1.    54   Figure 7.1. Project Indicators (energy, thousand toe, cumulative) 2,500 2,000 1,500 1,000 500 0 FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY10 Coal Natural Gas Electricity Motor Fuel 4. Implementation of the project was carried out during 2011–2017 through on-lending to beneficiary enterprises and subsidiary lending to (PBs for financing of energy efficiency investments (subprojects). Figure 7.2. Energy Efficiency Project Implementation 200.0 120 175.0 100 150.0 125.0 80 100.0 60 75.0 40 50.0 25.0 20 0.0 0 2011 2012 2013 2014 2015 2016 2017 Subproject amounts Number of subprojects 5. The total amount of the EEP financing provided to subprojects equaled US$199.5 million, including financing of subprojects under the subsidiary lending in the amount of US$10 million. The number of financed energy efficiency subprojects totaled 121, including 11 subprojects through the PB. 6. The most active phase of the project implementation was during 2015–2017; since the project effectiveness (November 9, 2011) and up to 2014 the number of subprojects equaled 17,    55   with the total amount of EEP finance of US$59.5 million. During 2015–2017 over a hundred subprojects totaling US$140 million were implemented. Table 7.2. Project outcomes by Category Number of Amount (US$ No. Subproject Categories Subprojects millions) 1. Modernization of inefficient and obsolete equipment and facilities 72 112.01 Installation of highly energy-efficient equipment and processes 2. 39 78.80 for new production capacities Improvement of systems that involves a suite of measures to 3. 4 3.89 increase energy efficiency 4. Reduction of energy losses in municipally owned utilities 5 0.36 Implementation of other energy efficiency subprojects satisfactory 5. 1 4.44 to the World Bank Total 121 199.50 7. Financing of subprojects under the EEP was conducted throughout Ukraine (territory controlled by the Government), while in terms of the number of subprojects, Kharkiv, Zhytomyr, Sumy, and Khmelnytsky Regions were the most active, with around 50 subprojects and 19 percent of the total loan amount. Figure 7.3. Geographical Project Structure (number of subprojects) Kharkiv, 17 Other, 22 Kherson, 5 Zhytomyr, 11 Dnipro, 5 Cumy, 11 Odesa, 6 Zaporizhzhya, 6 Rivn Khmelnytsky, 10 Vinnytsya, 6 e, 8 Kropyvnytsky  Ivano‐Frankivsk, 7 (ex.Kirovograd), 7   8. At the same time, the following regions attracted the lion’s share of the EEP funding: Ivano-Frankivsk, Mykolayiv, Zaporizhzhya, and Khmelnytskyi Regions—over US$125 million.    56   Figure 7.4. Geographical Project Structure (sub-loan amounts) Ternopil Rivne 2% Kropyvnytsky  2% (ex.Kirovograd) 4% Other 5% Zhytomyr 5% Kharkiv Ivano‐Frankivsk 5% 29% Kyiv 6% Vinnytsya 7% Mykolayiv 16% Khmelnytsky 8% Zaporizhzhya 11%   9. The sector breakdown indicates that agricultural enterprises were the most active project participants; around 50 subprojects for the amount of US$62 million were financed (over 30 percent of the total project amount). Agricultural machinery fleet renovation, improvement/optimization of processes at grain storage facilities were among the most typical items of investment in the agricultural sector. Figure 7.5. Sectoral Project Structure (number of subprojects) pharmaceutics, 5 other, 14 energy / heat  supply, 5 construction  materials, 5 agriculture, 48 glass production, 6 consumer  goods, 15 food &  beverages, 23   10. Food processing enterprises and consumer products manufacturers have also been actively involved in the project modernizing their technological equipment and processes, improving supply of energy for their production needs and so on.    57   Figure 7.6. Sectoral Project Structure (sub-loan amounts) glass production pharmaceutics 2% 1% energy / heat supply 2% other consumer goods 6% 5% agriculture machine building 31% 9% food & beverages 16% construction  materials 28%   11. The largest-scale investments supported by the project were initiated by agriculture (US$62 million), manufacture of construction materials (US$55 million), food processing (US$32 million), machine building (US$19 million), and manufacture of consumer goods (US$9 million).    58   Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable.    59   Annex 9. List of Supporting Documents 1. Project Appraisal Document 2. Project Legal Agreements 3. Aide Memoires dated  November 5–15, 2012  October 18, 2013  November 17, 2014  December 12–14, 2016  March 31, 2017 4. ICRs dated  September 2011  June 8, 2012  May 2013  December 2013  March 2015  November 13, 2015  June 2016  December 2016  March 2017 5. Borrower’s ICR, June 2017 6. Subprojects’ data sheet 7. Procurement Plan, 2011    60   MAP OF UKRAINE    61