Document of The World Bank FOR OFFICIAL USE ONLY Report No: 58288-CN PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION TO THE PEOPLE‟S REPUBLIC OF CHINA FOR A SHANDONG ENERGY EFFICIENCY PROJECT May 13, 2011 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Exchange Rate Effective November 20, 2010 Currency Unit = RMB RMB6.6 = US$1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank IFC International Finance Corporation ASD Adjustable speed drive ISO International Organization for AusAID Australian Agency for International Standardization Development LA Loan agreement BOT Build, Operate, Transfer MBD Model Bidding Documents CCS Carbon Dioxide Capture and Storage MOF Ministry of Finance CDM Clean Development Mechanism M&E Monitoring and Evaluation CDQ Coke dry quenching M&V Monitoring and Verification CFAA Country Financial Accountability MWe Megawatts electric Assessment NCB National Competitive Bidding CHEEF China Energy Efficiency Financing NDRC National Development and Reform Project Commission CHP Combined Heat and Power NGO Non-governmental organization CHUEE China Utility-based Energy NO x Nitrogen oxide Efficiency OECD Organization for Economic CNAO China National Audit Office Cooperation and Development CO 2 Carbon dioxide OM Operations Manual COD Chemical oxygen demand PA Project agreement CQ Consultant‟s Qualifications PAD Project Appraisal Document DA Designated account PBC People‟s Bank of China EA Environmental Assessment PDCA Plan-do-check-act ECO Energy Conservation Office PFI Participating Financial Institution ECSO Energy Conservation Supervision PIU Project Implementing Unit Office PMO Project Management Office EE Energy Efficiency PPO Project Preparation Office EHS Environmental, Health and Safety QBS Quality-Based Selection EIRR Economic Internal Rate of Return RFP Resettlement Framework Policy EMP Environmental Management Plan RMB Renminbi EMC Energy Management Company RP Resettlement Plan EMCA Energy Management Company QCBS Quality- and Cost-Based Selection Association SBD Standard Bidding Document EMS Energy Management System SEEP Shandong Energy Efficiency Project EPC Energy Performance Contracting SO 2 Sulfur dioxide ESCO Energy Service Company SPAO Shandong Provincial Audit Office FIRR Financial Internal Rate of Return SPMO Shandong Provincial Project FMS Financial Management Specialist Management Office FYP Five-year-plan SPFB Shandong Provincial Finance Bureau GDP Gross Domestic Product SLA Subsidiary loan agreement GEF Global Environment Facility TA Technical assistance GHG Greenhouse gas TCE Tons of coal equivalent GOC Government of China TSP Total suspended particle IBRD International Bank for Reconstruction VOC Volatile organic content and Development VSL Variable spread loan ICB International Competitive Bidding WUTP Wastewater treatment plant IGCC Integrated Gasification Combined Cycle Vice President: James Adams Country Director: Klaus Rohland Sector Director: John Roome Sector Managers: Ede Jorge Ijjasz-Vasquez Vijay Jagannathan Task Team Leader: Gailius J. Draugelis CHINA Shandong Energy Efficiency Project CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE ..............................................................1 A. Country and sector issues ...............................................................................................1 B. Rationale for Bank involvement .....................................................................................3 C. Higher level objectives to which the project contributes ..................................................4 II. PROJECT DESCRIPTION.............................................................................................5 A. Lending instrument ........................................................................................................5 B. Program objective and Phases ........................................................................................5 C. Project development objective and key indicators ...........................................................5 D. Project components........................................................................................................5 E. Lessons learned and reflected in the project design .........................................................6 F. Alternatives considered and reasons for rejection............................................................7 III. IMPLEMENTATION .................................................................................................8 A. Partnership arrangements ...............................................................................................8 B. Institutional and implementation arrangements ...............................................................9 C. Monitoring and evaluation of outcomes/results ............................................................. 10 D. Sustainability ............................................................................................................... 10 E. Critical risks and possible controversial aspects ............................................................ 11 F. Loan/credit conditions and covenants ........................................................................... 12 IV. APPRAISAL SUMMARY ......................................................................................... 13 A. Economic and financial analyses .................................................................................. 13 B. Technical ..................................................................................................................... 14 C. Fiduciary ..................................................................................................................... 15 D. Social .......................................................................................................................... 15 E. Environment ................................................................................................................ 16 F. Safeguard policies........................................................................................................ 17 G. Policy Exceptions and Readiness ................................................................................. 18 Annex 1: Country and Sector or Program Background ....................................................... 19 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 27 Annex 3: Results Framework and Monitoring ..................................................................... 28 Annex 4: Detailed Project Description.................................................................................. 31 Annex 5: Project Costs .......................................................................................................... 37 Annex 6: Implementation Arrangements ............................................................................. 38 Annex 7: Financial Management and Disbursement Arrangements ................................... 42 Annex 8: Procurement Arrangements .................................................................................. 52 Annex 9: Economic and Financial Analysis .......................................................................... 56 Annex 10: Safeguard Policy Issues ....................................................................................... 71 Annex 11: Project Preparation and Supervision .................................................................. 77 Annex 12: Documents in the Project File.............................................................................. 78 Annex 13: Statement of Loans and Credits .......................................................................... 79 Annex 14: Country at a Glance ............................................................................................. 84 Annex 15: Maps .................................................................................................................... 86 CHINA SHANDONG ENERGY EFFICIENCY PROJECT PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASCS Date: May 13, 2011 Team Leader: Gailius J. Draugelis Country Director: Klaus Rohland Sectors: District heating and energy Sector Director: John A. Roome efficiency services (90%); Sector Manager: Ede Jorge Ijjasz-Vasquez Renewable energy (10%) Vijay Jagannathan Themes: Climate change (100%) Project ID: P114069 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan Joint IFC: Joint Level: Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 150.00 Proposed terms: Variable Spread Loan (VSL) linked to commitments, with level repayments, and recovered over a period of seventeen (17) years, inclusive of a grace period of our (4) years. Financing Plan (US$m) Source Local Foreign Total Borrower 166.2 0.0 166.2 International Bank for Reconstruction and 89.2 60.8 150.0 Development Total: 255.4 60.8 316.2 Borrower: People's Republic of China Ministry of Finance International Department Beijing China Responsible Agency: World Bank and Asian Development Bank Energy Conservation Project Management Office No. 1 Shengfu Qianjie, Lixia District Shandong Province China 250011 Tel: 86-531-8692 3484 Fax: 86-531-8612- 5071 sdecpmo@126.com Estimated disbursements (Bank FY/US$m) FY 2011 2012 2013 2014 2015 2016 2017 Annual 0.00 30.00 30.00 35.00 35.00 15.00 5.00 Cumulative 0.00 33.00 60.00 95.00 130.00 145.00 150.00 Project implementation period: Start November 1, 2010 End: April 30, 2016 Expected effectiveness date: August 17, 2011 Expected closing date: September 30, 2016 Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Ref. PAD I.C. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [X] No Is approval for any policy exception sought from the Board? [ ]Yes [ ] No Does the project include any critical risks rated “substantial” or “high”? [X]Yes [ ] No Ref. PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Ref. PAD IV.G. Project development objective Ref. PAD II.C., Technical Annex 3 The objective of the Project is to improve energy efficiency in selected enterprises in the Borrower‟s Shandong Province, particularly through financial leasing arrangements, and increase use of biomass for power and heat generation. Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4 Component A: Energy Efficiency Services Industry Carrying out eligible energy efficiency Sub-projects through financial leasing and energy performance contracting arrangements. Component B: Anqiu Biomass CHP Plant Building biomass CHP plants in Anqiu of Shandong Province, including, inter alia, the provision of relevant civil works, goods, and equipment and the construction of relevant steam network and district heating network. Component C: Project Management, Monitoring and Evaluation Strengthening the capacity of the Project Management Office, Rongshihua, Guotai, Luxin Energy, and ACHP in Project management, monitoring and evaluation through provision of technical assistance, training and study tours. Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 The Environmental Assessment and Involuntary Resettlement safeguard policies are triggered. Significant, non-standard conditions, if any, for: Ref. PAD III.F. Board presentation: None. Loan/credit effectiveness: None. Disbursement Conditions: For their respective expenditure categories, respectively, signing of Subsidiary Loan Agreements, satisfactory to the Bank, between  Shandong Provincial Finance Bureau (SPFB) and Guotai  SPFB and Rongshihua  SPFB and Luxin Energy  Anqiu municipal finance bureau and ACHP Implementation Covenants: Financial Covenants: Except as the Bank shall otherwise agree,  Luxin Energy and ACHP shall not incur debt unless a reasonable forecast of net revenues shall be at least 1.3 times debt service requirements;  Luxin Energy and ACHP shall not exceed a debt to equity ratio of 60:40; Rongshihua and Guotai shall not exceed a debt to equity ratio of 80:20. I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. Macroeconomic Outlook. China is emerging from a 10 year period of sustained growth and development. GDP grew by an average of 9.9 percent per year in 1999-2009. During this period, China had a strong record of macroeconomic management. Inflation was kept under control, volatility was managed, and external competitiveness was preserved. The resulting low levels of public and external debt and large stocks of foreign exchange reserves gave China the space to pursue significant macroeconomic stimulus in the face of the global financial crisis. 2. At the same time, significant risks remain. China could face further external shocks as recovery ensues. Waves of optimism are likely to alternate with the unexpected emergence of problems (as currently in Europe). Such cyclical recovery will have impacts on China. Domestically, the massive recent growth of bank credit has spilled over into rapid growth of property prices. The enormity of the slowdown in credit growth which will ultimately need to be achieved, combined with continued turbulence in external markets, will make this task extremely challenging. Also the sustainability of land transactions and borrowing by local governments to fund infrastructure bears watching. Finally, although the financial sector has remained relatively resilient to shocks owing to limited exposure of Chinese banks to toxic assets of western banks and financial sector reform measures effected over the past several years, their asset qual ities could deteriorate in the coming years as a consequence of the rapid credit expansion as part of the economic stimulus policies in the past two years. Looking ahead, however, China‟s strong track record, significant fiscal space, and access to a wide range of macro management tools should serve the country well. 3. Energy Efficiency as a key measure for China’s efforts to mitigate Climate Change impacts. China‟s leadership has called for a reduction in carbon dioxide intensity (CO 2 emissions per unit of GDP) in its economy by 40-45% from 2005 to 2020. Achievement of this objective will require sustained efforts to reduce energy intensity in the economy and increase share of non-coal fuels in the energy mix. China has set a domestic energy intensity reduction target of 20% per unit of GDP from 2005-2010 and a non-fossil fuel target of 15% of primary energy by 2020. The new 12th Five Year Plan sets an additional 16% domestic energy intensity reduction target (2011-2015). These national targets indicate recognition that due to China‟s size, its efficient use of natural resources is critical not only to its own sustainable development but also that of the world. 4. The efficient use of energy resources is one of the most important elements of China‟s resource conservation goals. China is already the world‟s second largest energy consumer and the largest emitter of energy-related CO 2. Without significant gains in energy efficiency, continued economic growth at recent rates will require energy use on a massive scale – especially of coal, China‟s predominant fuel comprising about 69 percent of total primary energy consumption. The energy intensity of China‟s economy - the measure of energy input per unit of GDP – after about 25 years of steady decline, showed signs of stagnation and even slight increase at the outset of the decade. In those years, China‟s energy consumption increased by around 5 percent annually, almost three times as fast as the world average. Primary energy consumption in 2005 reached 2.2 billion tce, over two thirds of its expected consumption in 1 2020, based on forecasts in the early 2000s. China‟s elasticity of energy to GDP was assumed in these forecasts to be 0.5 based on observations in the 1980s and 1990s, but it was about 1.0 in 2000-2005, which is similar to elasticities observed in other countries at similar stages of industrialization. 5. The response of the Government in the 11th Five Year Plan (FYP, 2006-2010) was to bolster its drive for energy conservation results to a level that probably no large country has ever attempted. In addition to promoting non-fossil fuels in its energy mix, it set the 20% energy intensity reduction target. China rolled out programs in ten key areas covering manufacturing, residential and commercial buildings, transportation and public facilities. Responsibility contracts for achieving specific and quantified energy savings, monitored annually, have been established top-to-bottom through China‟s government hierarchy, and with the top 1000 energy consuming industrial enterprises, representing about 1/3rd of total primary energy consumption. Outdated energy intensive industrial and power plants were closed. Other structural adjustment programs aim to shift away from industry and export driven growth to a more balanced economy with services playing a larger role. Standards for buildings, equipment, materials and enterprise energy management were rolled out. In response to a slow start in its effort, the Energy Conservation Law was revised in 2007 to more clearly define responsibilities, delegating execution and primary supervision responsibility over important elements of its program to provincial governments. 6. The energy intensity target is a real challenge to achieve during a continuing era of industry-led growth, with an annual average growth rate of 20% from 1998 to 2005. A cumulative reduction in energy intensity over the 11th FYP totaling 19.1% is therefore an impressive achievement. However, energy intensity targets will be increasingly more difficult to achieve. With naturally long lifecycles in infrastructure and energy sectors, the decisions made in energy efficiency policy and program designs as China prepares to implement the 12th FYP will have lasting impacts for decades to come. 7. Role of Provincial Governments. Provincial governments play a critical role in implementation of the country‟s energy conservation drive. This is the government level that interfaces with large consumers, consolidates resources for specific activities, and organizes implementation on the ground. In the 11th FYP, all provinces have negotiated specific energy intensity reduction targets with the central government as their contributions to the national Five Year Plan goal, and provincial governors are being held accountable for achi evement of these targets. Provincial governments have promulgated new laws and decrees to deepen foundations for implementation, and organized new institutional arrangements to focus the related agencies on the task of achieving energy savings. Provincial programs generally mirror the programmatic themes of national programs, but priorities, specific implementation arrangements and provision of financial and human resources vary substantially between provinces. Many provinces have developed novel approaches of their own. Program strengths and weaknesses vary dramatically across China‟s 30 provinces. Many weaker provinces look to front runners for guidance and lessons learned. This direction is expected to continue on the eve of the 12 th FYP. 8. Shandong Province’s challenges to pursuing energy efficiency objectives. Given its economic characteristics, Shandong‟s energy intensity reduction challenges are representative of 2 the opportunities and barriers to attaining greater energy efficiency facing other energy i ntensive Chinese provinces. Located along the eastern seaboard with a population of 94 million, the second most populous in China, Shandong is ranked second in GDP with RMB3.1 trillion (US$454 billion equivalent) in 2008 – and first in energy consumption with 306 million tons of coal equivalent1 (tce) in 2008. Manufacturing accounted for 57% of Shandong‟s GDP in 2007, and industry accounted for 74% of energy consumption. Coal accounted for about 80% of energy use, which is high even by Chinese standards. Additionally, the province is pursuing a plan for the rational use of biomass resources for power and heating. 9. Shandong Province‟s energy conservation program is known for its relative strength in organization and provincial government policy development. Shandong is one of four provinces with a 11th Five Year Plan (FYP) target to reduce energy intensity of GDP at a rate higher than the national average (22 percent). The province also has aggressive mandatory FYP targets for sulfur dioxide control. During the 11th FYP implementation, Shandong Province is reported to achieve the energy intensity target, reaching 22.1% compared to the base year. 10. The key concerns for Shandong – as in other provinces – is to accelerate delivery of energy efficiency through the timely but effective design and implementation of huge, largely new, comprehensive energy conservation programs. Local level human and financial capacities are, however, inadequate compared to the challenge – successful achievement of new ambitious targets will not be easy. Moreover, while the demand for results during a Five Year Plan brings immediate pressure, authorities are also concerned about constructing systems and mechanisms which can provide continued results far into the future, as it is clear that pressures for energy conservation are likely to continue indefinitely. 11. Critically, greater participation of enterprises in continuous identification and delivery of energy efficiency is needed. Although energy conservation projects in industrial sectors are financially viable and technologically feasible, most host enterprises do not carry out these projects, or they do the bare minimum to comply with targets, due to a lack of knowledge or skills, or a greater interest in expanding production lines pulled by demand (mainly so far) from overseas. Small and medium enterprises have found difficulties in obtaining the right kind of financing or bank loans that match the cash flow profile of energy efficiency investments. Service providers that specialize in energy efficiency investment projects and financing, including ESCOs (called Energy Management Companies in China), are far fewer than investment needs and capacities require. B. Rationale for Bank involvement 12. During the last several years the Chinese Government has asked the Bank Group to scale up its support for design and implementation of energy efficiency programs, which is an area that the Bank has been closely involved in for more than a decade. In addition to its longstanding support for energy efficiency investments in China, the value added of the Bank is also in its ability to package activities to provide sustained and flexible support for design improvements and effective implementation of the series of energy efficiency programs. At the provincial level the Bank is increasingly asked to act concurrently as advisor and resource for new ideas and 1 One ton of coal equivalent is equal to 7 million kilocalories. 3 provider of long term debt financing, which provides an operational business model for incubation and scale up of innovation that is well-suited to the local institutional context. The proposed SEEP is part of an emerging provincial level support platform which combines GEF supported policy and capacity building support with IBRD supported mechanisms to accelerate adoption of new approaches. (See Section III. A. Partnership Arrangements.) The Bank‟s support package both at local and national levels creates opportunities to provide feedback on the effectiveness of certain energy efficiency programs, which is important at this stage in China when programs are being evaluated and improvements are being considered on the eve of the new 12th Five Year Plan (2011-2015). 13. Looking to the 12 th Five Year Plan (2011-2015), Shandong is strengthening its set of energy efficiency policies and programs and has asked the Bank to bring a broad range of financial and technical assistance resources to support certain priorities. This fits well in the suite of services currently offered by the World Bank Group. While on the one hand the Bank Group‟s recent projects (GEF Energy Conservation II, China Energy Efficiency Financing I & II, and IFC‟s China Utility-Based Energy Efficiency Finance Program I & II) engage the large commercial banks directly to build capacity and demonstrate the viability of energy efficiency (EE) investments, SEEP, on the other, aims to complement this strategy by scaling up EE investments through the use of well capitalized leasing companies to demonstrate the suitability of the leasing and EPC mechanism to mitigate risk, facilitate the use of commercial bank credit through co-financing of these sub-projects and indirectly encouraging the formal banking system to enter and/or support this missing market. The Bank‟s significant on-going and developing energy efficiency program in China is described in more detail in Annex 1. 14. Despite demonstrating the commercial viability of energy efficiency investments through these projects, barriers persist in the availability and use of commercial credits. The overly regulated Chinese Banking sector comprises the large policy banks and a number of national banks. They are constrained by the required high reserve ratios set by the Bank of China, generally lack the technical resources and flexibility to assess these cost-saving investments properly, regard them as too small and risky to meet their rigid credit criteria, and prefer instead to concentrate on conventional large industrial expansion projects. Support for the two specialist leasing companies, who understand this business, address this market failure by: identifying, packaging and co-financing these projects; demonstrating potential to prospective market participants; and leveraging the Bank loan to expand new energy efficiency investment. C. Higher level objectives to which the project contributes 15. The objective of the proposed project is fully consistent with the Country Partnership Strategy (CPS) for 2006-10 (Report No. 35435-CN), approved by the Board on May 23, 2006. It directly supports one of five pillars of the Country Partnership Strategy for China: managing resource scarcity and environmental challenges. This pillar supports China‟s effort to meet its ambitious goals for creating a more resource-efficient, less polluting society under the 11th FYP. It also supports China‟s undertaking to improve energy efficiency, to expand use of renewable energy and to address climate change. The project is also expected to be consistent with the new CPS for 2011-2015, currently being prepared in alignment with China‟s 12 th Five Year Plan for 2011-2015. 4 II. PROJECT DESCRIPTION A. Lending instrument 16. The proposed project is a specific investment loan. The Shandong Government has chosen a variable spread loan (VSL) which it considers are favorable terms and conditions. B. Program objective and Phases Not applicable. C. Project development objective and key indicators 17. The proposed project objective is to improve energy efficiency in selected enterprises in Shandong province, particularly through energy efficiency leasing arrangements, and increased use of biomass for power and heat generation. 18. Key performance indicators include: (a) the amount of associated annual energy savings capacity achieved directly through project investments; (b) the associated amount of funds leveraged by the World Bank loan through the energy efficiency leasing mechanism for energy conservation projects; and (c) the associated amount of electricity and heat from biomass based heat and power generation in Anqiu municipality. D. Project components 19. The proposed project, described further in Annex 4, has three components: (a) Energy Efficiency Service Industry Component; (b) Anqiu Biomass CHP Plant Component; (d) Project Management, Monitoring and Evaluation Component. The total estimated project cost is RMB2.1 billion (US$317.1 million equivalent), with IBRD loan support of US$150 million (47% of total estimated project costs). 20. Component A: Energy Efficiency Service Industry Component (estimated component cost: US$267 million, IBRD loan financing US$133 million). This component will support financial leasing and Energy Performance Contracting (EPC) of energy efficiency investments in selected enterprises, particularly in the industrial sector. The IBRD loan will be on-lent2 to two leasing companies and one Energy Services Company (ESCO): (a) a US$64 million sub-loan to the Shandong Rongshihua Leasing Company, Ltd., (Rongshihua); (b) a US$50 million sub-loan to the Guotai Leasing Company, Ltd. (Guotai); and (c) a US$20 million sub-loan to Shandong Luxin Energy Investment and Management Company (Luxin Energy). 21. The Component aims to support the Shandong Provincial Government‟s energy efficiency service industry development program through the demonstration of successful use of financial leases for energy efficiency investments and through the demonstration of how a 2 Numbers are rounded. 5 relative newcomer to the ESCO business, Luxin Energy, can efficiently and effectively adopt the Energy Performance Contracting mechanism. 22. The two participating leasing companies and one ESCO play a special role in Shandong‟s energy conservation policies and programs. Rongshihua was created by Shandong Province to successfully introduce EPC, with Bank support, in 1997. Guotai, the second leasing company in this Project, is part of the Xinwen Mining Group that is one of China‟s top 1,000 energy intensive enterprises and is one of nine enterprises which piloted Shandong‟s energy management system (EMS) standard. Both companies acquired pilot leasing licenses, which offer an opportunity for the Province to leverage the Bank‟s loan several fold to accelerate energy efficiency investments. These two leasing companies were proposed by the provincial government based on their operational performance, financial strength, market position, interest in the energy efficiency market, and thus their potential to scale up energy efficiency investments and reinforce energy management systems. The ESCO participating in SEEP is part of the Luxin Investment Holding Group and one of the 66 ESCOs Shandong Province submitted to NDRC for endorsement to expand Government promotion of EPC. 23. Component B. Anqiu Biomass CHP Plant Component (estimated component cost: US$36 million, IBRD loan financing US$16 million3). The investment includes: (a) 2x15 MW e units (condensing extraction turbines, air cooled generators, boilers); and (b) steam network to nearby industrial customers (about 3 km of pipes) and district heating network (4 km of dual pipe channel – 8 km of pipes) for space heating. Biomass fuel (226,300 tons per annum) will be collected from an area within 35 km radius from plant including corn stalk and wheat stalk. There will be four collection points for the biomass in the area where the feedstock is collected from farmers. 24. Component C. Project Management, Monitoring and Evaluation Component. (estimated component cost US$0.4 million, indicative IBRD loan financing 4 US$0.4 million) This component will finance: (a) technical assistance for project implementation and special studies that would evaluate mid-term achievements and impediments to achieving desired outcomes; (b) training and study tours; (c) project management support. E. Lessons learned and reflected in the project design 25. The project builds on a decade-long experience of the World Bank Group/GEF energy efficiency operations and studies in China. Collective experience to date from China Energy Conservation Project I & II (IBRD loan and GEF grant support for introducing the ESCO business model and a guarantee facility for bank loans to ESCOs), and from China Energy Efficiency Financing (CHEEF) I & II projects (IBRD credit lines to three large Chinese banks for large-scale energy efficiency financing and GEF support) indicates:  Local risk mitigation and project evaluation methods, rather than procedures created outside local systems are effective and local institutions should be given full authority to 3 Numbers are rounded. 4 Number is rounded. 6 make specific investment decisions in accordance with the operation manual agreed with the Bank.  Selection criteria for energy conservation sub-projects should be sufficiently defined to meet the project development objective, but allow for adjustment in project pipelines to adapt to changes in market demand and needs of host enterprises.  Associating GEF projects with investment financing is an effective operational model, provided they leverage their respective comparative advantages – GEF for institutional strengthening, capacity building and technical assistance, and investment lending as a financing mechanism designed to test and scale up energy efficiency investments. 26. IFC‟s China Utility-based Energy Efficiency Financing (CHUEE) Projects I and II gained experience with risk sharing products offered to a number of large commercial banks to leverage EE investments in industrial enterprises. IFC was consulted and provided constructive comments on the formulation of this project based on lessons learned from IFC support of the commercial banking sector and private sector development of the EE market, including: (a) proper alignment of interests between Participating Financial Institutions (PFIs) and IFC; and (b) strong management commitment within the participant PFIs. IFC and Bank interventions are mutually reinforcing, and promote the development of the EE market through a broad range of products and services. 27. A recently completed ESMAP financed Review and Assessment of Biomass-fired Power Development in China provides the following suggestions: (a) fuel supply arrangements, including storage and processing, need to be well assessed and prepared to mitigate downstream fuel supply and price risk; (b) technical requirements for boilers should be tailored to expected fuel conditions; and (c) development plans are needed to guide local biomass power proposals, avoiding irrational competition for fuel supply. F. Alternatives considered and reasons for rejection 28. Three project design alternatives were considered. The first was to finance a series of smaller sub-projects up to the full loan amount. It was rejected because the large number of sub- projects and sponsors would increase complexity, reduce economies of scale and increase transaction costs. The second alternative was to lend through commercial banks. This alternative was rejected by the Provincial government as it wanted to demonstrate the selected energy efficiency leasing mechanisms by working directly with companies with pilot leasing licenses to address persistent market failures in this area. The third alternative was to propose a fully blended project with the GEF Provincial Energy Efficiency Scale Up Project. This alternative was rejected because the loan would support only one of the three provinces included under the GEF project. The pace of Bank loan and GEF project cycles were also difficult to synchronize given the large number of parties involved. The chosen hybrid supports Shandong Provincial Government‟s dual objectives of introducing mechanisms to scale up energy efficiency investments, while also promoting a broader resource conservation concept that encourages energy efficiency while substituting for coal, where practicable, in its energy mix. 7 III. IMPLEMENTATION A. Partnership arrangements 29. The Provincial Energy Efficiency Scale Up Project (GEF financing of US$13.38 million) together with World Bank lending support will launch a multi-year support platform focused on building capacity and accelerating energy savings in provinces. SEEP is considered by GEF as partially blended with the Provincial EE Scale Up Project. It is envisaged that with indications of successful implementation of the first group of projects, a second phase will be launched in several more provinces. The Shandong Component of the GEF Provincial Energy Efficiency Scale Up Project (GEF financing, US$4.462 million) will finance activities that aim to help Shandong Provincial Government achieve the following four objectives: a) Establish policies and measures for the development of the energy efficiency service industry across the province to promote it as a viable force for energy conservation. b) Establish an energy conservation supervision and information platform which (i) collects and analyzes data to monitor compliance of major energy consumers with energy efficiency targets, (ii) provides training and capacity building on energy management informatics, and (iii) disseminates energy efficiency policies, regulations, energy efficiency technologies, and case studies. c) Establish policies and measures to improve enterprise Energy Management Systems (EMS) and scale up implementation of the Shandong Province and national Government‟s EMS standards in major energy consuming enterprises. d) Establish policies and measures to build capacity of Energy Conservation Offices (ECOs) and Energy Conservation Supervision Offices (ECSOs) at provincial, municipal and county levels for effective execution of their respective functions. 30. The proposed SEEP will reinforce objective 1 through investment support for development of an energy efficiency services industry by promoting basic principles of Energy Performance Contracting in financial leasing and supporting energy efficiency investments that have been in part identified in action plans generated from the implementation of the EMS by a major energy consuming enterprise. A proposed US$300 million IBRD loan for the Shanxi Province Energy Efficiency Project, under active identification, is expected to augment operational support to this platform. 31. Trust Fund partnerships were critical to building this new platform. ESMAP5 financed a kick off overview of China‟s provincial energy efficiency programs and case studies (2009). A Bank-Australian Agency for International Development (AusAID) supported TA report Accelerating Energy Conservation in China’s Provinces (2010) reviews China‟s provincial energy efficiency programs, analyzes issues and challenges, and provides recommendations for further improvement in the 12th Five Year Plan. Shandong and Shanxi Provinces were the formal counterparts of the study. 32. The Bank will continue to seek out similar partnerships that provide the resources needed for sustained, in depth analytical and advisory support and policy dialogue that is hard to 5 The multi-donor Energy Sector Management Assistance Program managed by the World Bank. 8 maintain only through projects. In addition, the Bank will maintain contact with the Asian Development Bank (ADB), which is also supporting energy efficiency and renewable energy projects in Shandong. B. Institutional and implementation arrangements 33. The project will be implemented over a five year period. It follows the standard lending arrangements for provincial level projects with the loan advanced to the provincial Government through MoF. This will in turn be on-lent to Rongshihua, Guotai, Luxin Energy, and Anqiu Shengyuan Biomass CHP Company under Subsidiary Loan Agreements on similar terms and conditions, which will be secured by a guarantee from commercial Banks in Shandong or other forms of collateral acceptable to Shandong Province. The funds to Rongshihua and Guotai will effectively be used for financial leasing to host enterprises for financing eligible EE sub-projects at competitive market related rates, based on the published Peoples Bank of China (PBC) lending rate, plus a net interest margin of about 6 percent depending on the credit worthiness of the host enterprises and the inherent returns of the projects to be financed. Interest rates in China, despite on-going financial reforms, remain largely controlled by the PBC and from 2007 have varied within a narrowed range of between 7.35% and 5.31%. The current PBC benchmark lending rate has remained fixed at 5.31% since January 2009. It is expected, therefore, that the leases will under current circumstances be based on an interest rate of around 15% p.a. for leases of between 3 to 5 years. 34. The World Bank and Asian Development Bank Energy Conservation Project Management Office (PMO), established in 2009, is responsible for overall management of SEEP on behalf of Shandong Province. It will be responsible for coordination, consolidated project reporting, and formal communications with the Bank and Shandong Provincial Government. Rongshihua, Guotai, Luxin Energy and Anqiu Shengyuan Biomass CHP Company will be the Project Implementation Units (PIUs) fully responsible for implementing their respective project sub-components under the terms and conditions of the Subsidiary Loan Agreements, including procurement, financial management, monitoring and evaluation (M&E), and project reporting. Each has formed project teams and established project management systems, satisfactory to the Bank. 35. Rongshihua, Guotai, and Luxin Energy have each adopted an Operations Manual, satisfactory to the Bank and referenced in the Bank‟s legal agreements, which sets forth guidelines for credit risk management and sub-project appraisal, including requirements for financial exposure limitations, beneficiary enterprises, technical scope of sub-projects, and frameworks for Bank safeguards, technical evaluation, procurement, monitoring, supervision, reporting and financial management. The first two sub-projects appraised by each leasing company and Luxin Energy will be subject to Bank prior review, and subsequent sub-projects will be based on the agreed project eligibility criteria in the Operations Manual and solely on prevailing investment and commercial practices; however, the Bank reserves the right to review any sub-project during supervision missions. 9 C. Monitoring and evaluation of outcomes/results 36. Monitoring of the implementation of the proposed project would involve: (a) the monitoring of performance indicators, as listed in Annex 3; (b) annual progress reports; and (c) a mid-term review of implementation progress. The PMO will be responsible for overall monitoring and systematic evaluation of implementation progress, including the collection of project performance information and reporting on the impact and results of the sub-projects submitted by each Project Entity. Rongshihua, Guotai, and Luxin Energy will follow monitoring processes and reporting requirements defined in the Operations Manual to report on energy savings achieved through their SEEP leasing operations or EPC sub-projects. The municipal environmental protection bureau of Anqiu municipality will report emissions information through the continuous emission monitoring systems installed in each plant. Anqiu Shengyuan Biomass CHP Company will provide an annual project progress report. D. Sustainability 37. Sustainability of project development objectives is likely because SEEP supports key Shandong Provincial government policy objectives in accelerating energy efficiency and promoting biomass in its energy mix. Shandong ranks first on energy consumption in China and has large energy efficiency investment potential in energy-intensive industries. National policy initiatives in the upcoming 12 th Five Year Plan are also expected to continue pressing for greater energy intensity reduction across provinces. Sustainable outcomes of SEEP components will be achieved if the business models are successfully demonstrated. 38. All three energy efficiency service providers have strong commercial incentives to make the financial leasing and EPC mechanisms for expanding energy efficiency investments work. Profits arising from these EE sub-projects are expected to be reinvested in the business to grow profits, enhance shareholder value and increase capital adequacy ratios to enable participating companies to meet their debt service commitments, further leverage commercial credits, and especially in the case of financial leasing develop this missing market. Specifically:  Rongshihua aims to focus on new project structures using financial leasing, especially for small and medium enterprise industrial markets. In addition to its own projects, Rongshihua will also use a small portion of Bank loan proceeds to pilot a business model, which provides smaller or growing ESCOs and/or clients of ESCOs with energy efficiency equipment lease financing, provided they meet SEEP project eligibility criteria.  Guotai is a subsidiary of Xinwen Mining Group (Xinwen) – one of the 25 largest enterprises in Shandong – which signed a „responsibility contract‟ with Shandong Provincial Government, committing to improve the Group‟s energy efficiency as part of the central Government‟s 1000 key energy consuming enterprise program . One of Xinwen‟s subsidiaries was one of the eight companies that piloted the implementation of Shandong‟s EMS standard. As one of the largest financing companies in the province, but with less experience with energy efficiency projects, Guotai plans to develop energy efficiency projects inside its group – where energy efficiency opportunities are high – to 10 broaden its experience initially, but also would like to expand its business outside Xinwen.  Luxin Energy, a subsidiary of Shandong Luxin Investment Holding Group (Luxin Group) – a large provincial SOE – has recently been restructured to focus on the ESCO business in the wake of new energy efficiency policies, including the opening of the government sector for EPC business. It is therefore part of a broad Provincial program to scale up use of the EPC model. 39. Some activities under the Shandong component of the GEF Provincial EE project will also support the enabling environment for the development of a broad range of energy efficiency services and EMS promotion. Anqiu Shengyuan Biomass CHP Co. has visited several other biomass power plant sites and has incorporated many lessons learned in its design. E. Critical risks and possible controversial aspects 40. The overall risk rating is moderate, after mitigation. The major challenge for the two leasing companies and ESCO is to apply the credit controls, the screening and selection criteria, and implement the sub-projects in a manner that will be sufficiently responsive to client timelines and comply with Bank requirements. The major challenge for the Anqiu Shengyuan Biomass CHP company will be its ability to ensure timely grid connection and to secure a reliable source of fuel supply. Both components have applied lessons learned from previous Bank experience in the sector for risk mitigation. The main risks to the project development objective and component results are summarized below. Risks Risk mitigation measures Risk rating with mitigation To project development objective Risk associated with attempting to  All three companies have committed to matching Moderate demonstrate the proposed approach Bank loan financing 1:1 during project to achieve substantial impact, implementation. especially in the wake of the  Recent economic reports indicate that the Chinese financial crisis economy is on a robust recovery path. Weakened government commitment  Commitment to achieving a 16% energy intensity Low to promote energy conservation as a reduction under the 12th Five Year Plan has been major way to achieve carbon demonstrated to be one of the top priorities of intensity reduction target of 40-45% GOC. by 2020.  GOC has mobilized a vast administrative system and promulgated technical standards and policies that are expected to be enhanced and continued during the 12th Five Year Plan. To component results Slow sub-project pipeline  The number of energy efficiency investment Moderate development. opportunities in Shandong exceed the resources of this project.  All three companies have started to survey potential market opportunities Difficulties in implementing the  MOUs have been signed with four fuel supply Substantial biomass CHP due to collection of agents who committed to signing fuel supply adequate fuel supply. contracts after completion of project appraisal. 11 Two of the larger fuel storage sites will be directly controlled by the CHP company for greater supply chain management  While arrangements are satisfactory and in line with industry practices, the residual risk on fuel supply security remains substantial due to the track record of similar biomass projects in China. Difficulties with timely grid  Anqiu Shengyuan Biomass CHP Company has connection and dispatching have secured a letter of intent from the grid company for been known in the sector. grid connection and power purchase. The letter of intent will be included as part of the official endorsement of the project by the Shandong government at the formal completion of its appraisal. Risk that the loan will not be used  A Financial Management Manual has been adopted Moderate for the intended purpose and is a with a unified approach to accounting of Bank combination of country, sector and funds. project specific risk factors. The  FM training has been provided during preparation country and sector risks are and will be provided also in implementation. moderate. Lack of Bank project  Project accounting is relatively straightforward. experience could compromise financial management. Risk that project procurement will  A Procurement Management Manual will be Moderate not be according to Bank adopted by negotiations procurement guidelines.  Procurement training has been provided to the four companies and the PMO training also will be provided during implementation. A tendering company has been hired to support all four companies and the PMO. Social and environmental safeguards  Energy efficiency investments normally involve Moderate are not addressed appropriately. retrofits on existing facilities with minimal negative and sustained environmental and social impacts.  Environmental Screening Guidelines and a Resettlement Policy Framework have been developed to ensure sub-project compliance with Bank and national environmental and social safeguards regulations.  The Anqiu CHP Biomass Component has no significant environmental or social safeguards issues. Overall Risk Rating Moderate F. Loan/credit conditions and covenants 41. Standard loan covenants and effectiveness conditions shall apply. In addition, the following special conditions are proposed: Disbursement Conditions  For their respective expenditure categories, respectively, signing of Subsidiary Loan Agreements, satisfactory to the Bank, between  Shandong Provincial Finance Bureau (SPFB) and Guotai 12  SPFB and Rongshihua  SPFB and Luxin Energy  Anqiu municipal finance bureau and ACHP Implementation Covenants  Financial Covenants. To ensure a prudent financial structure, adequate liquidity and proper financial management no new debt will be incurred from 2010 unless a reasonable forecast of revenues, expenses and other financial obligations agreed with the Bank indicate that the sponsors will be able to maintain.  a cashflow that exceeds its debt service requirements by at least 1.3 times in the case of Anqui Biomass and Luxin Energy; and  a debt to equity ratio of no more than 60:40 in the case of both Anqiu Biomass (after commissioning) and Luxin Energy, and 80:20 for the two leasing companies. This differential is justified on the grounds of higher business/operational risk prevailing in the case of the former industrial companies. IV. APPRAISAL SUMMARY A. Economic and financial analyses 42. The evaluation of the components of this project was undertaken on the basis of operational and financial data, and the basic models of each of the four sponsors. On the basis of the assumptions outlined in Annex 9, it is apparent that each of the sub-components is economically viable, providing real economic returns of between 20 percent and 35 percent on an aggregate capital investment of RMB2.1 billion (US$323 million) and an aggregate net present value of RMB2.4 billion (US$373 million) at an 8 percent discount rate (used in Chinese feasibility study guidelines for public infrastructure projects). 43. Switching values given in Annex 9 show the sensitivity of the return on the individual investments to changes in the more significant assumptions and/or variables underlying the financial projections and economic assessment. They demonstrate that the expected returns are robust and economically justified over a wide range of assumptions. 44. The leasing companies will be required to analyze and confirm that eligible sub-projects are financially viable and thus economically justified from the perspective of the client (host enterprise). Because not all sub-projects are identified at this stage, an assessment of three energy efficiency sub-projects envisaged to be typically financed under this component was conducted as part of appraisal. The analyses show that the financial internal rate of return (FIRR) ranges from 28 percent to 59 percent, and the economic internal rate of return (EIRR) ranges from 42 percent to 77 percent. The payback period ranges from 2.7 to 3.4 years. Details were provided in Annex 9. 45. To diversify and minimize the risks of credit default of the two non-banking financial intermediaries and the ESCO, the financial covenants are supplemented by ensuing that a rigorous in-house credit management system is in place and maintained through provisions in the 13 Operations Manual acceptable to the Bank. These currently include: (a) for Rongshihua and Luxin, limit the concentration of aggregate investments in any one company of less than 20% of the total net worth and the size of any one investment to be less than 15% of the total net worth; (b) provide co-financing of individual leases of at least 50% of the lease or EPC contract value; and in addition (c) Guotai would limit the use of the Bank loan in each investment to no more than 10% of the total Bank loan to Guotai, i.e., US$5 million. 46. Financial Viability of Project Entities (sub-borrowers). The final borrowers will be the three project sponsors through Shandong Provincial Government. With the exception of Anqiu, the sponsors are well established joint stock companies with a strong management team and operational record. In constructing the projections, a review of the sponsors‟ performance and financial position was undertaken, including their capacity to provide counterpart funding, service the proposed debt, and comply with the financial covenants over the life of the projects. Detailed financial projections and key financial ratios show that each of the companies is (a) well capitalized and able to remain below the debt to total capitalization ratio of 60 percent after commissioning for Anqiu, and Luxin, and 80 percent for the leasing companies; and (b) generate sufficient liquidity to implement the project, and in the case of Anqiu, sustain a cashflow of at least 1.3 times the annual debt service required on the proposed loans. B. Technical 47. Technical Evaluation Framework for Leasing Operations. The Operations Manual includes a technical evaluation framework which defines the content, procedures, and responsibilities for technical evaluation of sub-projects. Leasing companies are required to ensure that the proposed solutions are proven to be technically feasible, using mature, low-risk, and reliable technologies widely recognized both in China and internationally. 48. Rongshihua has experienced staff with appropriate qualifications in engineering, management, and finance to carry out energy efficiency sub-projects and comply with the requirements in the Operations Manual. Guotai employs sufficient human resources to implement the financial leasing project with the Bank. It has a group of senior management personnel with good professional background in banking, securities, finance, equipment purchasing, etc. Guotai also plans to make full use of the parent company‟s (Xinwen Mining Group) senior staff. 49. The feasibility study report package of each sub-project, including all savings calculations and technical analyses, will be certified by a Senior Engineer or a professional with equivalent minimum qualifications. Details of technical eligibility criteria are presented in Annex 4: Detailed Project Description. 50. Anqiu Biomass CHP Plant Component. The Anqiu biomass CHP plant component will improve security and sustainability of heating and industrial steam services in the area where the plant will supply heat and steam to residential and industrial customers. Small polluting coal fired hot-water and steam boilers will be closed down and heat supply will be from the new energy efficient CHP plant. The plant will also be equipped with efficient flue gas cleaning systems for dust removal. For heat distribution, energy efficient pre-insulated pipes will be used 14 to minimize heat distribution and transmission losses. Metering will be included from the heat plant to the substation level, improving network controls and laying the foundation for eventual introduction of consumption based billing. 51. Special attention has been paid in the design for: (a) fuel collection and handling arrangements from farmers to the plant to secure the continuous supply of fuel; (b) safety and environmental protection related to the collection and handing; and (c) optimization of plant size for local heat and steam needs, and fuel supply capacity. C. Fiduciary 52. Procurement. The Bank carried out an assessment on the adequacy of the procurement capacity of the Project Management Office and the Project Implementation Units. This assessment concluded that, taking into account the mitigation measures and procurement approaches described in more detail in Annex 8, the procurement risk is Moderate. The Procurement Management Manual was drafted and is being revised in line with Bank comments. Shandong PMO has organized procurement training for all staff from the PMO and the PIUs to improve procurement. 53. Financial Management. The Bank carried out an assessment of the adequacy of the financial management systems for the project. The assessment, based on guidelines issued by the Financial Management Sector Board on March 1, 2010, concluded that the project meets the minimum Bank financial management requirements, as stipulated in OP/BP 10.02. Taking into account the risk mitigation measures proposed under the project, the financial management risk is assessed as Modest. More details are provided in Annex 7. D. Social 54. The Project will have positive social impacts for the residents of project cities. The Anqiu Biomass CHP especially includes both local residents who will be benefited from increased heat supply and improved heat quality as well as improved air quality due to the construction of CHP and related heat networks, and those people in surrounding areas of Anqiu City who might be involved in the process of biomass fuel collection, processing, and transportation, during which additional income could be made. 55. Energy Efficiency Services Industry Component. Most of the sub-projects will replace old equipment within existing plants with no land acquisition required. Negative impacts could arise in the case of sub-projects using waste heat from existing industrial facilities for heat supply, especially during the construction of heat pipelines outside the plants. A Resettlement Policy Framework (RPF) has been developed for the two leasing companies and the ESCO, which will apply to sub-projects requiring land acquisition and resettlement. A copy of RPF was disclosed in March 2010 in the province. 56. Anqiu Biomass CHP Component. The potential social impacts of the Project are limited land acquisition associated for the CHP site and temporary land occupation for related heat networks in Anqiu City. Since land acquisition for the component was completed in 2009, a 15 due diligence review was carried out by an experienced independent agency. The review found that land acquisition procedures had followed relevant national laws and regulations; compensation policies and rehabilitation measures were adequate and fully delivered to the affected people; the affected people were consulted and informed, and the process and outcomes of land acquisition for the two subjects were found to be satisfactory and in compliance with the World Bank policies on involuntary resettlement. E. Environment 57. The project was assigned a Category B. Overall, the proposed Project is expected to have a net positive environmental impact by expanding use of energy efficient technologies and utilizing biomass as renewable energy for power and heat supply. Major environmental concerns associated with potential activities for Components A and B are dust, noise, disposal of solid waste, interruption of traffic and chance find items of cultural significance. These impacts during construction are temporary in nature, and standard mitigation measures are in place. 58. Energy Efficiency Service Industry Component (Component A). Environmental Screening and Management Framework (ESMF) have been developed jointly by the two leasing companies and ESCO to screen SEEP-financed sub-projects and ensure compliance with Bank and national environmental safeguard requirements. The ESMF includes sub-project screening procedures, and requirements for EA preparation, approval, disclosure, supervision and reporting. The ESMF was disclosed prior to appraisal. Annex 10 contains summarizes the main content of the ESMF. 59. Anqiu Biomass CHP Component (Component B). The Anqiu Biomass CHP Plant is expected to have better environmental impacts compared to the alternative of using individual coal fired boilers. Combustion of agro-wastes can be used as raw material for fertilizer production. As Anqiu CHP is biomass-fired, SO 2 emission will be much less than the coal-fired alternative. Much higher volatile organic content in biomass fuel will result in lower NO X emissions than coal combustion. A bag-filter will be used to remove particulate matter with an efficiency of up to 99.7%. The EA shows that SO 2, NO X and particulate emissions can meet relevant national and provincial standards as well as the WB/IFC EHS guidelines. Arrangements have been made for sale of ash to a fertilizer manufacturer in the Province. 60. Public Disclosure and Consultations. Two rounds of public consultation were conducted during the EA preparation for Anqiu CHP, following information disclosure locally. The project‟s basic information, major anticipated adverse impacts and mitigation measures have been disclosed to the public through bulletins, local TV, a major newspaper, as well as website, with full draft EA reports available in the project agencies‟ offices for public review. 61. The Guidelines for Component A were disclosed at the PMO‟s official website in order to reach a wide audience, followed by public consultation (mainly through questionnaire) and feedback on the website. Majority of the public showed support, as the potential activities were viewed as beneficial for the local environment and quality of life. 62. The EA and ESMF in English have also been posted at the World Bank‟s Infoshop. 16 F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] 63. Environmental Assessment (OP. 4.01) The EA was prepared in compliance with the requirements of Bank OP 4.01 and relevant domestic regulations under the terms of reference agreed with the Bank. The EA covers baseline environmental and socio-economic conditions, impact assessment, alternative analysis, and an environmental management plan (EMP). The EMP defines the institutional arrangements for implementation and the supervision mechanisms, specifies mitigation measures for potential adverse impacts, and includes an environmental monitoring plan and a training plan with budget estimates. Annex 10 provides more details on the EA and the EMP. 64. Involuntary Resettlement (OP. 4.12) The EE Services Industry component will mostly finance sub-projects that will replace old equipment within existing plants, with no land acquisition required. However, some subprojects may have limited impacts during construction. A resettlement policy framework has therefore been developed, in accordance with relevant Chinese laws and regulations and World Bank OP 4.12, for those sub-projects that might involve with any limited land acquisition. In addition, the land acquisition process for the proposed Anqiu Biomass CHP plant site began in November 2008 and was completed in May 2009. A due diligence review was conducted on the implementation process and outcome of land acquisition. The due diligence review found that land acquisition procedure had followed relevant national laws and regulations; compensation policies and rehabilitation measures adopted were adequate and fully delivered; affected people were consulted and informed; and th e process and outcomes of land acquisition were considered satisfactory to the affected people and in compliance with the principles of the World Bank policies on involuntary resettlement (OP4.12). Annex 10 provides more details. 65. Lending to Financial Intermediaries (OP 8.30). Pilot leasing companies under this project are in substance financial intermediaries and will use the proceeds of the loan for financial leasing to host enterprises. An assessment of these companies was undertaken by the Bank and theirs were found to be compliant with the provisions of the OP 8.30. * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on t he disputed areas 17 G. Policy Exceptions and Readiness 66. The project does not require any policy exceptions and is ready for implementation. 18 Annex 1: Country and Sector or Program Background CHINA: Shandong Energy Efficiency Project National Focus on Resource Conservation 1. China‟s leadership has called for a reduction in carbon dioxide intensity (CO 2 emissions per unit of GDP) in its economy by 40-45% from 2005 to 2020. Achievement of this objective will require sustained efforts to reduce energy intensity in the economy and increase share of non-coal fuels in the energy mix. China has set a domestic energy intensity reduction target of 20% per unit of GDP from 2005-2010 and a non-fossil fuel target of 15% of primary energy by 2020. The new 12th Five Year Plan sets an additional 16% domestic energy intensity reduction target (2011-2015). These national targets indicate a recognition that due to China‟s size, its efficient use of natural resources is critical not only to its own sustainable development but also that of the world. 2. China‟s leadership has made conservation of natural resources a basic national policy and called for China to focus on building a „resource-saving‟ society because sustainable and strong economic growth in China over the long term is possible only if natural resources are used more efficiently. Due to China‟s size, its efficient use of natural resources is also critical for sustainable development globally. 3. The more efficient use of energy resources is one of the most important elements of China‟s resource conservation goals. Although a quadrupling of China‟s GDP between 1980 and 2000 was achieved with only a little more than doubling in energy consumption, this trend shifted during the big industrial boom of the first decade of this century. As industrial output grew at a torrid pace during 2001-2005, with steel production alone rising from 129 million tons in 2000 to 352 million tons in 2005 6 , energy consumption rose just about as fast as GDP, reaching 2.2 billion tce in 2005. This placed China as the world‟s second largest energy consumer. With coal accounting for almost 70% of energy consumption, China has also become the largest emitter of carbon dioxide, which is the biggest greenhouse gas contributor to climate change. Looking at the long term, China‟s leadership concluded that the tremendous energy consumption required for continuation of this type of economic growth model was unsustainable on many grounds. With strong aspirations to further increase incomes and improve livelihoods for its people, more goods and services must be obtained using less energy. Less energy- intensive sources of growth need to be cultivated, and energy waste in all manner of production and consumption processes needs to be eliminated where possible. Even so, development of sustainable energy supply to support the overall growth in energy use needed to raise incomes substantially above their current level of about one fourth of the OECD average still remains a daunting task, given China‟s large population. China’s 2006-2010 Energy Conservation and Emissions Control Targets 4. China‟s leadership has now put energy conservation at the center of its energy policy. A vision for the future was presented in the “Medium and Long Term Energy Conservation Plan” 6 China Statistical Yearbooks 2004 and 2006. 19 issued by the National Development and Reform Commission (NDRC) in 2004. A firm target to reduce China‟s national energy intensity by 20% was then highlighted in the country‟s 11th Five- Year Social and Economic Development Plan (FYP, 2006-2010), requiring an average annual reduction of energy intensity of 4.4%. The energy conservation target, together with targets for the reduction of sulfur dioxide air pollution and chemical oxygen demand (COD) levels in surface water, form China‟s aggressive FYP program for Energy Conservation and Emissions Reduction (jieneng jianpai). 5. China‟s leaders and many key government directives have continually emphasized the importance of achieving the target to reduce energy intensity by 20%. The target was a real challenge during the continuing era of industry (especially heavy industry) led growth , with an average annual growth rate of about 20% from 1998 to 2005. 7 Essentially, this trend of economic growth driven by heavy industry must be seriously shaken through application of a wide variety of direct and indirect policy, regulatory and investment measures. 6. Energy intensity is defined as commercial energy consumption divided by GDP, and can be measured nationally or for any region or subset of the economy. Calculation is strictly defined and controlled by the National Statistical Bureau under explicit orders from the State Council, with numerous additional progress assessments and evaluations undertaken by NDRC and others. It is very important to note that with the target focusing on reduction of energy consumption per unit GDP, both changes in the structure of economic output and changes in energy use per unit of physical output or service matter for achieving the target . Overview of China’s Main Energy Conservation Programs 7. China‟s current energy conservation programs are comprehensive in scope. The 11th FYP‟s “Ten Areas for Energy Conservation Construction” cover all economic sectors. The legal foundation for their implementation was also bolstered through the promulgation of a revised Energy Conservation Law in 2007. Responsibility contracts for achieving specific and quantified energy savings, monitored annually, have been established top-to-bottom through China‟s government hierarchy, and with all major energy consumers. Several prominent program themes include: (a) The 1000 Large Industrial Enterprises Energy Conservation Action Plan, to develop and implement specific energy conservation programs in the top 1,008 largest industrial energy consumers, accounting for about 30 percent of China’s total primary energy consumption. Many provincial and local governments have then established additional action plans following the same pattern for lower-level industrial enterprises. (b) A set of programs to encourage a structural shift in industry away from energy-intensity, including efforts to adjust fiscal policy towards export-oriented energy-intensive industry, major programs to restructure or close backward energy-intensive plants that lack economies of scale or efficient technology, and stronger control in granting permits for building new energy-intensive industrial plants, including efforts to roll out energy efficiency assessments as part of new project approval processes. 7 China Statistical Yearbooks and China Industrial Economic Statistical Yearbooks. 20 (c) Establishment of special energy efficiency funds to provide additional incentives for energy conservation investment. RMB23.5 billion was set aside by the Ministry of Finance in 2007 in support of energy efficiency and emissions reduction; these funds were increased in 2008 to RMB42.3 billion and in 2009 to RMB49.5 billion. Among other things, these funds support awards of RMB200-250 per ton of coal equivalent of energy savings achieved through new investment. All but four provincial governments had established similar types of special funds by the end of 2008. 8. One subsector within the 10 key energy conservation programs is the promotion of combined heat and power and energy efficiency in district heating. District heating has been called one of the last vestiges of the old welfare state in China. Heating services remain unmetered and retail and commercial customers are billed based on the heated area rather than on energy consumption. Work units in some provinces still pay a part of the heat bill. While reform efforts have been initiated by the central government since 2003, and an interim two part heat tariff guideline issued in 2007, only about 1 percent of the total district heating area in China is metered and billed according to consumption. As a result of this tariff system, utilities have had little incentive to adopt more modern district heating system designs and operating modes. Currently, there are 550 million people living in China‟s northern provinces where heating supply is legally required, yet the market share of district heating on average is only about 50- 60%. In pace with China‟s torrid pace of urbanization and housing construction, the district heating market is currently the largest and fastest growing in the world. 9. Since the issuance of the Renewable Energy Law in late 2006, biomass for power generation has developed very fast. By the end of 2008, the total installed capacity of biomass power generation plants in China had reached 3180 MW. However, sustainable business plans have been difficult to demonstrate. Provincial master plans have been slow to develop and early versions lacked sufficient resource assessments. Project developers usually tend to be too optimistic with the resource potential without sufficient knowledge of supply securit y. Fuel price volatility also was exacerbated by optimistic forecasts in business plans and lack of understanding of how to make fuel supply arrangements with farmers. Technical challenges also exist, especially for fuel storage and processing, as well as for operating CHPs which need to assure supply of heating during winter when fuel supplies are lowest. Finally, guidance to local governments is needed to ensure that they are able to avoid irrational development and competition for fuel resources. Recent Government Initiatives Promoting the Energy Efficiency Services Industry 10. In April 2010, the State Council approved the Opinions on Accelerating the Effort to Promote Energy Performance Contracting and Develop the Energy Efficiency Service Industry , submitted by the National Development and Reform Commission (NDRC), Ministry of Finance (MOF), People‟s Bank of China, and State Administration of Taxation and requested provincial and local governments to implement supporting policies to promote Energy Performance Contracting and develop the energy efficiency service industry. In June 2010, MOF and NDRC issued the Interim Method to Manage the Fiscal Rewards for Energy Performance Contracting Projects, which set eligibility criteria, application procedures and initial fiscal award standards of 21 RMB240/tce and at least RMB60/tce from the central and provincial budgets, respectively. Prospective energy efficiency service companies were identified by each provincial government, registered, and submitted for final determination of award eligibility to NDRC and MOF. Currently, only shared-saving EPC projects are eligible for the awards. GOC has allocated RMB2 billion for the awards in 2010. Results Thus Far of Energy Intensity Reduction Efforts 11. A cumulative reduction in energy intensity of the 11th FYP totaling 19.1% is therefore an impressive achievement. China‟s highly regarded economic stimulus plan achieved unprecedented growth in the face of a global financial crisis. Yet, about 92% of total growth in 2009 came from investment, mainly in infrastructure and industry, suggesting energy intensity reduction targets for that year to be difficult to achieve. With the naturally long lifecycles in infrastructure and energy sectors, the decisions made in energy efficiency policy and program designs as China prepares the 12 th Five Year Plan will have lasting impacts for decades to come. The new target of 16% during the 12 th FYP, therefore, will be challenging. The Role of the Provinces 12. China‟s Central Government assigns responsibilities and establishes the broad policies, the national programs and their implementation guidelines, and the key regulations and procedures for China‟s energy conservation effort. The Central Government also reviews and appraises the results achieved on the responsibilities it has assigned. Aside from efforts which clearly must be made at the national level (such as promulgation of national standards), implementation must be undertaken at provincial and local levels. Because of the great variati on that exists across China, considerable flexibility must also be maintained to allow programs to match local conditions and priorities. After a slow start, the Energy Conservation Law was amended in 2007, and clarified work planning and assigned further responsibilities down to provincial levels. 13. As a result, provincial governments have promulgated new laws and decrees to deepen foundations for implementation. They have organized new institutional arrangements to focus the related agencies on the task of achieving energy savings. Provincial programs generally mirror the national programmatic themes, but priorities, specific implementation arrangements and provision of financial and human resources vary substantially between provinces. Many provinces have developed novel approaches of their own. Program strengths and weaknesses vary dramatically across China‟s 30 provinces. 14. In terms of program implementation, provincial governments have particularly strong responsibilities for overall energy conservation program development and oversight in the province and consolidation of relevant financing. Among the sector programs, the role of provincial governments is especially strong in industry, where provincial governments interface directly with the big industries in the national 1000 key energy-using enterprise program, and carry responsibility for organizing further efforts through the prefectures and counties. In the building energy efficiency and urban transportation, provincial authorities play a critical coordinating role, but responsibilities for the specifics of implementation (e.g. , energy efficiency 22 code enforcement, heat system development and reform, or mass transit planning) fall to city governments. Many weaker provinces look to front runners for guidance and lessons learned. 15. Shandong Province, located along the eastern seaboard, ranked third among China‟s provinces in population in 2007 with 93 million people, second in GDP with RMB 2.6 trillion (US$382 billion equivalent) in 2007, and first in energy consumption with 250 million tons of coal equivalent8 (tce) in 2005. Manufacturing accounted for 57% of Shandong‟s GDP in 2007, and industry accounted for 74% of energy consumption. Coal accounted for about 80% of energy use, which is high even by Chinese standards. Shandong is one of four provinces with a Five Year Plan target to reduce the energy intensity of GDP at a rate higher than the national average, 22 percent and it surpassed this target reaching a reported 22.1% in the 11 th FYP. The province also had aggressive mandatory targets for sulfur dioxide control. Additionally, the province is pursuing a plan for the rational use of biomass resources for power and heating. Shandong‟s energy conservation program is known for its relative strength in organization and provincial government policy development. 16. The key concerns for Shandong – as in other provinces – are the timely but effective design and implementation of huge, largely new, comprehensive energy conservation programs. Human and financial capacities are, however, inadequate compared to the challenge; successful achievement of the ambitious targets will not be easy. Moreover, while the demand for results during a Five Year Plan brings immediate pressure, authorities are also concerned about constructing systems and mechanisms which can provide continued results far into the future, as it is clear that pressures for energy conservation are likely to continue indefinitely. Incentives for energy savings need to be improved beyond what can be achieved through direct administrative means. Public resources need to be leveraged cleverly to achieve maximum results. Market forces need to be better employed, stimulated by the public sector where needed. 17. Critically, greater participation of enterprises in continuous identification and delivery of energy efficiency is needed. Although energy conservation projects in industrial sectors are financially viable and technologically feasible, most host enterprises do not carry out these projects, or they do the bare minimum to comply with targets, due to a lack of knowledge or skills, or a greater interest in expanding production lines pulled by demand (so far mainly) from overseas. Small and medium enterprises have found difficulties in obtaining the right kind of financing or bank loans that match the cash flow profile of energy efficiency investments. 18. The EE service industry comprises service providers that specialize in energy efficiency assessments, investment projects and financing, including ESCOs (called Energy Management Companies in China). There are far fewer service providers than required to assess and support a major acceleration in energy efficiency investments needed to achieve China‟s ambitious energy intensity goals. Preliminary investigations show operation of a total of 76 EE service companies covering a broad range of EE services, such as EE technology consulting, EE technology development and application (production, installation, and marketing), energy auditing, EE appraisal, and CDM project development. Still, especially for new entrants in the industry its capacity needs to be strengthened in all aspects. This includes capacity to prepare technical studies and project proposals, ability to assist in mobilizing project financing, development of 8 One ton of coal equivalent is equal to 7 million kilocalories. 23 energy performance contracting, improved internal business management, and improved service capacity for monitoring and verification. Many service companies pursuing energy performance contracting are having difficulties securing project finance, and managing risks associated with the packaging, financing, and implementation of energy conservation projects. In 2010, Shandong Province submitted 66 ESCOs with a total EPC investment of RMB1.3 billion to NDRC for registration, and requested for RMB100 million fiscal awards. 19. During the 12th Five Year Plan (2011-2015), Shandong is strengthening its set of energy efficiency policies and programs and has asked the Bank for a broad range of financial and technical assistance. Under the proposed SEEP, it has asked the Bank to finance demonstration of various business models to accelerate energy efficiency investments and the three selected companies, each representing different approaches to developing the EE service industry. The two participating leasing companies play a special role in Shandong‟s energy conservation policies and programs; one was created by Shandong Province to successfully introduce Energy Performance Contracting, with Bank support, in 1997. The second leasing company is part of the Xinwen Mining Group that is one of China‟s top 1,000 energy intensive enterprises, and is one of eight enterprises piloting Shandong‟s energy management system (EMS) standard. While there is no direct connection between the EMS pilot and the Guotai Leasing Company, Ltd., the implementation of the EMS will enable the Group to develop action plans and implement investments in energy efficiency, which may be financed (and will be encouraged) through financial leasing. Both Rongshihua and Guotai hold pilot leasing licenses which offer an opportunity for the Province to leverage the Bank‟s loan several fold to accelerate energy efficiency investments. 20. Luxin is an example of anticipated new entrants into the energy efficiency services industry who are gearing up to take advantage of new government support programs. Luxin Energy Investment and Management Company (Luxin Energy) is one of the 66 ESCOs Shandong Province submitted to NDRC for the reward registration. Luxin Energy was established in 1994 with registered capital of RMB70 million. It is a member of EMCA and a subsidiary Shandong Luxin Investment Holding Group (“Luxin Group” for short). Luxin Group is a large-scale state-owned holding company formed in January 2002 on the base of Shandong International Trust and Investment Corporation, and Shandong Hi-tech Investment Corporation and other companies, approved by Shandong Provincial Government. Luxin Group is one of the key enterprises under the leadership of Shandong Provincial Government, and an important financial and investment platform of Shandong Province. Its business plan focuses on energy efficiency investments. Bank’s Involvement in Energy Efficiency 21. Chinese counterparts look to the Bank Group for new ideas, including those based on experience elsewhere; assistance for expanded and improved ways to use market -based incentives; design and implementation of new financing mechanisms and carbon finance; assistance in tackling the difficult areas of heat system modernization and reform, and overcoming institutional issues to promote building energy efficiency; disciplined focus on maximizing energy savings from public investment; and innovative means to introduce renewable energy in the energy mix. During the last several years the Chinese Government has 24 asked the Bank Group to scale up its support for design and implementation of energy efficiency programs, which is an area that the Bank has been closely involved in for more than a decade. 22. The proposed project is requested by the Shandong Provincial Government and is part of a multi-year program launched by the World Bank in partnership with Chinese agencies and other international partners to support continuing and increasing energy efficiency gains through provincial government programs, including both investment financing and technical assistance . The on-going and developing program now includes projects and technical assistance organized along five lines: (a) Development and expansion of Chinese ESCO industry (GEF/IBRD China Energy Conservation Projects 1 and 2, approved in 1998 and 2002, completed). (b) Development of energy efficiency lending programs in Chinese banks (IBRD/GEF China Energy Efficiency Financing (CHEEF) Projects 1 and 2, approved 2008 and 2010, as well as national level energy efficiency programs (GEF CHEEF). (c) Energy efficient and low carbon new technology development in the energy sector (GEF China Thermal Power Efficiency Project, 2009, Shanxi Coal Bed Methane Project, 2009, and a proposed activities involving CCS and IGCC technology). (d) Low carbon cities initiatives, urban district heating system modernization and reform, and building energy efficiency (GEF China Heat Reform and Building Energy Efficiency Project, IBRD Liaoning Medium Cities Infrastructure Project, approved in 2003 and 2007; GEF China Government Facilities Energy Efficiency Project, proposed for 2011; IBRD Beijing Energy and Environment Project, proposed for 2013). (e) Provincial level energy efficiency programs (GEF Provincial Energy Efficiency Scale-up Project; this Shandong Energy Efficiency Project (SEEP); Shanxi Energy Efficiency Project, under active identification; GEF China Energy Efficiency Promotion in Industry, under preparation). 23. Trust Fund partnerships were critical to building the new Provincial EE platform. ESMAP9 financed a kick off overview of China‟s provincial energy efficiency programs and case studies (2009). A Bank-Australian Agency for International Development (AusAID) supported TA report Accelerating Energy Conservation in China’s Provinces (2010) reviews China‟s provincial energy efficiency programs, analyzes issues and challenges, and provides recommendations for further improvement looking to the 12th Five Year Plan. Shandong and Shanxi Provinces were the formal counterparts of the study. The comprehensive study concluded that China needs both administrative and market-based measures to achieve the best long-term energy efficiency results; expanding the role of market-based mechanisms would improve the balance between the two. Improving the quality of program implementation is also critical. China‟s provinces have put comprehensive and extensive administrative programs in place to help achieve energy savings targets. Now the challenge is to reinforce the institutional systems required to make these programs work as effectively as possible over the long term. The first two projects of the Provincial EE platform, SEEP and the GEF Provincial EE Scale Up, are built around these two main directions. 9 The multi-donor Energy Sector Management Assistance Programme managed by the World Bank. 25 24. The Bank will continue to seek out similar partnerships that provide the resources needed for sustained, in depth analytical and advisory support and policy dialogue that is hard to maintain only through projects. In addition, the Bank will maintain contact with the Asian Development Bank (ADB), which is also supporting energy efficiency and renewable energy projects in Shandong. 26 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies CHINA: Shandong Energy Efficiency Project Sector Issue Project Latest Supervision Ratings (Bank-financed project only) Bank-GEF-financed Implementation Development Progress (IP) Objective (DO) Energy-efficiency and Energy Conservation S S environmental Project improvements Energy-efficiency and Second Energy S S environmental Conservation Project improvements Energy-efficiency and Heat Reform and MU MS environmental Building Energy improvements Efficiency Energy-efficiency and Shandong Environment S S environmental Project improvements Energy-efficiency and Energy Efficiency S S environmental Financing Project improvements IFC Energy-efficiency and China Utility-based NA NA environmental Energy Efficiency improvements Financing Project I & II IP/DO Ratings: S- Satisfactory MS – Moderately satisfactory MU – Moderately unsatisfactory 27 Annex 3: Results Framework and Monitoring CHINA: Shandong Energy Efficiency Project Results Framework PDO Project Outcome Indicators Use of Project Outcome Information Improve energy efficiency in  Associated annual energy savings YR2-YR3: determine if project selected enterprises in Shandong capacity generated by the project assistance strategies/activities need province particularly through energy  Associated cumulative amount of to be adjusted. efficiency leasing and increase use funds leveraged by World Bank of biomass for power and heating. loan through the energy YR5: provide strategic advice for efficiency leasing mechanism for scaling up energy efficiency energy efficiency projects investment and use of energy  Associated cumulative performance contracting through incremental amount of electricity financial leasing mechanism. (GWh) and heat (coverage m2 ) from biomass based heat and power generation Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring Component A: Energy Efficiency Services Industry Rongshihua and Guotai  Annual energy savings achieved  Annual energy efficiency Same as above directly through investments of investments implemented. the project  Annual energy conservation  Annual energy conservation project investment flows (US$ project investment flows (US$ million) million) Components B: Anqiu Biomass CHP Plant  Amount of avoided coal  Cumulative amount of avoided consumption for heating and coal consumption power generation in Anqiu municipality 28 Arrangements for results monitoring Target Values Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Data Collection Responsibility for Instruments Data Collection  Associated annual energy 0 80 84 90 95 48 Project progress RLC & GLC savings capacity (000 tce) reports  Associated cumulative 0 27 55 86 118 134 Financial reports RLC & GLC amount of funds leveraged by World Bank loan for Annual energy efficiency projects  Associated cumulative incremental amount of electricity (GWh) and heat GWh 0 83 165 165 165 165 Project progress ACHP (coverage m2) from biomass reports based heat and power 000 m2 540 540 700 700 700 generation Intermediate Outcome Indicators Component A: Energy Efficiency Services Industry  Annual energy savings achieved directly through investments of the project (000 tce) Project progress Rongshihua 0 36 41 44 53 14 reports Rongshihua, Guotai 0 34 31 31 26 25 Guotai, Luxin Luxin Energy 0 10 12 15 16 9 Annual Energy  Annual energy conservation project investment flows Financial reports (US$ million) Rongshihua 0 24 28 30 36 10 Guotai 0 23 21 21 18 17 Luxin Energy 0 7 8 10 10 5 Component B: Anqiu Biomass 29 CHP  Cumulative amount of 0 tce 50919 76619 95480 95480 95480 Annual Project progress ACHP avoided coal consumption. reports Component C: Project Management, Technical Assistance, Monitoring & Evaluation  Number of satisfactory 0 2 2 2 2 2 Annual Project progress PMO progress reports reports 30 Annex 4: Detailed Project Description CHINA: Shandong Energy Efficiency Project 1. The project has three components: (a) Energy Efficiency Service Industry Component; (b) Anqiu Biomass Combined Heat and Power (CHP) Plant Component; and (c) Project Management, Monitoring and Evaluation Component. The total estimated project cost is RMB2.1 billion (US$317.1 million equivalent) with IBRD loan support of US$150 million (47% of total estimated project costs). Component A: Energy Efficiency Service Industry Component 2. This component (estimated component cost: RMB1.8 billion (US$266.7 equivalent), IBRD loan financing US$133.35 million) will support financial leasing and Energy Performance Contracting (EPC) of energy efficiency investments in selected enterprises, particularly in the industrial sector. The IBRD loan will be on-lent to two leasing companies and one Energy Services Company (ESCO): (a) a US$63.69 million sub-loan to the Shandong Rongshihua Leasing Company, Ltd., (Rongshihua); (b) a US$49.76 million sub-loan to the Guotai Leasing Company, Ltd. (Guotai); and (c) a US$19.90 million sub-loan to Shandong Luxin Energy Investment and Management Company (Luxin Energy).10 3. Sub-project Typology. Eligible energy efficiency investments will cover renovation and rehabilitation (adjustment, replacement or extension) of existing physical component(s) and system(s). The leasing companies and ESCO will decide on the sub-projects they will finance, subject to the eligibility criteria detailed in their respective Operations Manuals. The component will finance supply and/or installation of goods and equipment for eligible sub-projects mainly in industrial enterprise markets, but may include building and government facilities markets. Sub- projects are expected to promote China‟s 10 key energy conservation projects 11 and focus on, but are not limited to: (a) replacement of inefficient industrial technologies with energy saving technologies such as more efficient industrial boilers, kilns, and heat exchange systems; (b) recovery and utilization of by-product gas, waste heat, and pressure; (c) installation of highly efficient mechanical and electrical equipments, including motors, pumps, heating, and ventilation equipment; (d) industrial system optimization to reduce energy use; (e) street lighting; and (f) other projects agreed by the Bank and the Government of China. 4. Sample lists of the three companies of typical sub-projects in industrial enterprises include, but are not limited to: (a) boilers; (b) chillers, cooling and refrigeration; (c) combustion; (d) compressed air; (e) controls and automation; (f) fans, blowers and pumps; (g) heating, ventilation and air-conditioning; (h) motors and drives; (i) process dryers, furnaces and kilns; and (j) steam and hot water heating. 5. Plans of each implementing agency are outlined below: 10 The total on-lent subloans are (a) $64 million to Rongshihua; (b) $50 million to Guotai and (c) $20 million to Luxin Energy. In addition to investment financing, the subloans cover the relevant portion of the capitalized front end fee and related technical assistance under Component C. 11 In 2004, China launched its “Ten Key Projects” initiative targeting technological improvements to save energy in ten areas, including specific focus on measures to improve industrial energy use. 31  Rongshihua plans to implement the sub-projects in the fields of paper making, petroleum, petrochemical, iron and steel, and cement. Typical sub-projects include green lighting, adjustable speed drives (ASD) for fans and pumps, waste heat recovery and utilization, boiler comprehensive renovation, city heating system, building auto-control, furnace thermal insulation, heat furnace renovation, textile, chemical industry, building materials, food, pharmaceutical, and urban infrastructure.  Guotai‟s sub-projects are mainly classified into (a) mine related operations (e.g., core dry-type transformers, pumps and blowers frequency conversion, drainage system high- efficiency pumps and automation, ventilating system optimization, air compressing system reconstruction, etc.); and (b) other industries (e.g., waste heat utilization, furnace combustion improvement, variable speed pumps, etc.). Luxin Energy will focus on “Ten Great Energy-saving Projects” advocated by governments and implement several EPC sub-projects in the fields of steel, petroleum, chemistry, urban public buildings, and municipal facilities. Typical sub-projects will include, but not limited to, high voltage adjustable inverters, ground source heat pump, coke dry quenching (CDQ) energy-saving, waste heat recovery for sinter, boiler renovation, and large public building and city lighting energy efficiency retrofit. Operations Manual and Eligibility Criteria 6. Operations Manuals (OMs), satisfactory to the Bank, were adopted by the three companies. The OMs detail: (a) eligibility criteria for the selection of energy efficiency sub- projects; (b) procedures to finance energy efficiency sub-projects, including financial leverage and portfolio risk targets, procurement and financial management arrangements, detailed institutional arrangements, and economic, financial, technical, environmental, and social due diligence procedures; and (c) monitoring and evaluation of energy savings. As standard Bank practice, the OMs may evolve over time to reflect changing project conditions and maintain its suitability to guide future project implementation within the scope of the legal agreements of the SEEP. 7. The leasing companies and ESCO will check the creditworthiness as well as business and financial track records of their clients, and will assess the technical feasibility and economic viability of the proposed energy efficiency sub-project. At least the first two sub-projects appraised by each leasing company and ESCO will be subject to Bank prior review; the Bank reserves the right to review any sub-project during supervision missions. 8. Beneficiary (Host) Enterprise. The beneficiary enterprise will likely be from industrial enterprise markets. In case of a holding company, the relevant beneficiary enterprise will be the subsidiary enterprise which is implementing the sub-project. The beneficiary enterprise should be in operation for 12 months or more. The leasing companies have to: (a) justify the operation and financial and credit situation of the enterprise; and (b) develop an acceptable methodology for calculating the baseline energy consumption of the enterprise or retrofit measure. 9. Technical Eligibility. The following box summarizes the eligibility criteria specified in the OM. 32 Eligibility Criteria for EE Leasing and EPC Sub-projects  Sub-projects will be limited to renovation and rehabilitation (adjustment, replacement or extension) of existing physical component(s) and system(s) with the objective of achieving higher energy efficiency.  Sub-project whose incremental benefits are primarily derived from capacity expansion or non -energy related cost savings will not be eligible for financing.  Sub-projects that are intended to increase the capacity to produce coal or directly increase production of coal will not be supported by SEEP. Sub-projects that substantially increase the capacity of coal burning facilities (e.g., power plants, etc.) are also ineligible. In addition, coal-based thermal power generation sub- projects targeted for development of new electricity production facilities, associated transmission infrastructure for power evacuation, and rehabilitation and modernization of existing coal power plants are ineligible.  Sub-projects must result in energy savings and corresponding greenhouse gas (GHG) emission reductions that can be calculated, measured, and/or verified.  Sub-projects must achieve a reduction in energy consumption per unit of output, with resulting energy cost savings 50% or more of total cost benefits.  Sub-projects must entail capital lease (for leasing companies) or EPC (for ESCO) of energy-saving equipment, assets, or project in industrial enterprises.  Sub-project must yield a simple payback period of less than ten (10) years based solely on energy cost 12 savings.  Sub-projects must comply with detailed guidelines on environmental as well as social safeguard eligibilities provided in the documents “Environmental Management Framework for Sub-Projects” and “Resettlement Policy Framework” of the SEEP.  The feasibility study report package of each sub-project, including all savings calculations and technical analyses, will be certified by a Senior Engineer or a professional with equivalent minimum qualifications. 10. Monitoring and Evaluation. Energy savings will be determined by one or a combination of the following methods: (a) deemed or stipulated savings; (b) short term or continuous measurements; or (c) savings based on whole facility utility meter or sub-meter. Leasing companies will decide which particular M&V method to use, and ensure that M&V is adequate for all significant savings streams. For example, the lessor and lessee may agree in many cases to deemed or stipulated savings due to cost constraints and practical considerations. As the EPC mechanism or the ESCO market matures, parties involved may use advanced M&V methods such as short term or continuous measurements, or whole facility utility meter or sub- meter analysis. Financial Leasing Model 11. Only new equipment leasing, through financing leases, will be supported by the SEEP. Figure 1 shows the resource flow diagram for direct financing lease. The lease term and payment may be determined or structured according to the energy savings of the equipment. The term of a contract is normally three to five years, but can be more in some cases. At the end of the lease 12 The simple payback period will be calculated as the total investment cost (including cost of engineering services, equipment, and installation plus other costs incurred in implementing the energy efficiency sub-project) divided by the annual energy cost savings (excluding non-energy related cost benefits) associated with the sub -project. 33 term, the equipment can be flexibly treated in a way of buy-back (lessor transfers the equipment ownership to lessee) or lease renewal according to the agreement of both lessor and lessee. New Equipment Leased Equipment Equipment Leasing Host Supplier Company Enterprise Purchase Amount Lease Payment Figure 1 – Resource Flow Diagram for Direct Financing Lease Super ESCO Model 12. The Super ESCO model – a small pilot to be implemented by Rongshihua – refers to a leasing or financial company that provides smaller or growing ESCOs and/or client of ESCOs with energy efficiency equipment lease financing. In the Super ESCO model, an ESCO submits a project application for assistance to Rongshihua. After reviewing the project, Rongshihua signs the equipment leasing contract with the ESCO. The ESCO provides a guarantee by pledging the account receivables of energy conservation project. The ESCO signs the energy services agreement and renovation contract with its client and structures a payment model. The ESCO pays a monthly lease to Rongshihua according to the equipment leasing contract. Rongshihua‟s financing position is secured by (a) taking rights of the energy service agreement between the ESCO and its client, and (b) requiring the client to pay Rongshihua directly according to the guarantee procedure. If the ESCO‟s client is also unable to make the payments, Rongshihua takes the loss due to the default. Energy Management System Model 13. Energy Management System (EMS) – based on the Plan-Do-Check-Act (PDCA)13 – is a management system approach which enterprises can adopt to assess their energy consumption, identify opportunities to use energy more efficiently, establish energy efficiency goals, and monitor and measure progress toward these goals on a continual basis. In March 2009, China‟s General Administration of Quality Supervision, Inspection and Quarantine issued China‟s new national standard for EMS Requirements, for voluntary implementation beginning November 2009. Shandong Province is at the forefront of developing EMS at the provincial level. The province prepared its own EMS standard (Shandong Province Energy Management System Standard-DB37/T1013-2008) and implementation guidance during 2007 to 2008 before the national standard was issued. 14. In Shandong, eight pilot industrial enterprises – including Xinwen Mining Group – undertook efforts to adopt EMS according to the provincial standard and guidance beginning in 2008. While Xinwen Mining Group‟s pilot EMS has no direct connection with Guotai‟s financial leasing business, there can be potential synergies in the future. Xiezhuang, the subsidiary of 13 Plan-Do-Check-Act (PDCA), also known as Deming Cycle, is an iterative four-step problem-solving process typically used in continual process improvement for businesses. It is also widely used in quality, environmental, energy management, and other standards developed by the International Organization for Standardization (ISO). 34 Xinwen Mining Group that piloted the EMS, has recently developed a waste heat recovery project that is included in Guotai‟s preliminary list for leasing financing – an example of how an energy efficiency project can be possibly developed, financed, and implemented within a group of company. EPC Models 15. Under the project operation model of Luxin Energy, there are two methods of EPC: (a) shared savings model; and (b) outsourced savings model (or quasi-BOT model). In a shared savings model – also called ESCO financing – the ESCO, i.e., Luxin Energy will prepare, finance and implement the sub-project either by using its own funds and/or borrowing from a third party financier. The ESCO takes up the financial and performance risks. The ESCO and enterprise share the energy savings generated by the EPC project for a predetermined length of time in accordance with a prearranged percentage. In an outsourced savings model – also called outsourcing – the enterprise entrusts the ESCO to retrofit the enterprise‟s energy system and manage its operation. The ESCO gets an outsourcing fee from the enterprise as set in the contract, which may have an element of shared savings in addition to the guaranteed savings element to provide incentives for the enterprise. 16. Luxin Energy will execute two contracts. One is an EPC contract with the host client , usually with a longer term. Another is an equipment and service procurement contract with suppliers, which will be partially financed by the Bank. If it is a turnkey project that includes design and construction work, Luxin Energy shall have procurement contracts with designers and builders. For a turnkey project, Luxin energy can be the chief contractor or select a reputable company as the chief contractor. Component B: Anqiu Biomass CHP Plant Component 17. This component (estimated subcomponent cost: RMB240.0 million, (US$36.0 million equivalent), Bank loan financing US$15.91 million)14 will aim to develop a sustainable business model for implementing biomass CHPs through financing of a new 30 MW e biomass CHP plant to generate power and heat in Anqiu County, Shandong Province. The investment includes: (a) 2x15 MWe units (condensing extraction turbines, air cooled generators, 2x75 t/h biomass boilers, fuel handling system); and (b) steam network to nearby industrial customers (about 3 km of pipes) and district heating network (8 km of dual pipe channel – 10 km of pipes) to the residential customers. Biomass fuel (about 226,300 tons per annum) will be collected from an area within a 35 km radius from the plant, including corn stalk and wheat stalk. The bank loan will be used to finance the supply and installation of the main equipment of the CHP Plant and related civil works. Local financing sources will be used for design of the plant and network, and for construction of the heat and steam networks, and related civil works. 18. The Anqiu CHP plant, located about 2 km outside the city area, will provide heating for residential buildings with a total floor area of about 370,000 m 2. The heat supply capacity of the plant will be about 30 MW. Most of the buildings are existing buildings currently heated by 14 The total on-lent subloan to Anqiu is $16 million. In addition to investment financing, the subloan covers the relevant portion of the capitalized front end fee and related technical assistance under Component C. 35 polluting small coal-fired heat-only-boilers. Some of the recently constructed buildings are awaiting connection from the new CHP plant and are temporally heated by electric space heaters. 19. There are about 10 industrial customers using steam with whom the new CHP plant has a principle agreement for steam supply from the CHP Plant. The small polluting coal-fired boilers currently used for steam supply will be not be used after the new biomass CHP plant is put into operation; 17 small coal-fired steam boilers will be closed. 20. The fuel sources are the crop residue from agriculture production, mainly corn stalk and wheat stalk. According to the survey performed by local government organizations, there currently is no competing demand for the needed biomass fuel supply. In addi tion, the plant is included in the Shandong Provincial Government‟s master plan for biomass development, the “Shandong Province Biomass Energy Development Plan”. 21. The fuel of the proposed project will be collected by four fuel supply agents deployed in fuel-rich areas, namely Guan Zhuang, Jing Zhi, Shi Fu Zi, and Huang Qi Pu. The project investor and the fuel suppliers will build 3 fuel storage sites of 15,000 tons each one in the power plant, and two in the fuel storage sites rented by the power plant. These, plus fuel in 2-3 smaller storage sites built by the fuel supplier, can guarantee 80 days operation (from winter to the new crop harvest). Component C. Project Management, Technical Assistance, Monitoring and Evaluation 22. This component (estimated component cost RMB2.4 million (estimated component cost US$0.37 million equivalent, IBRD loan financing US$0.37 million)will finance: (a) technical assistance for project implementation and special studies, including an evaluation of mid-term achievements and impediments to achieving desired outcomes; (b) training and study tours; and (c) project management support. 36 Annex 5: Project Costs CHINA: Shandong Energy Efficiency Project Local Foreign Total Project Cost By Component US US US and/or Activity $million $million $million Component A: Energy 213.4 53.3 266.7 Efficiency Services Industry A1. Rongshihua 101.9 25.5 127.4 A2. Guotai 79.6 19.9 99.5 A3. Luxin Energy 31.8 8.0 39.8 Component B: Anqiu Biomass 29.0 7.0 36.0 CHP Plant Component C: Project 0.3 0.1 0.4 Management, Technical Assistance, Monitoring and Evaluation Total Baseline Cost 242.7 60.4 303.1 Physical Contingencies 6.0 0 6.0 Price Contingencies 6.0 0 6.0 Total Project Costs 254.7 60.4 315.1 Interest during construction 0.7 0 0.7 Front-end Fee 0 0.4 0.4 Total Financing Required 255.4 60.8 316.2 For Anqiu, the total cost of land lease sale is RMB12.42 million, plus RMB0.9 million of attachment compensation. Land compensation to farmers comprises about RMB4.99 million of the land lease sale. 37 Annex 6: Implementation Arrangements CHINA: Shandong Energy Efficiency Project 1. This project follows standard lending arrangements for provincial level projects in China. The Bank will sign an IBRD Loan Agreement (LA) with the Government of China and a Project Agreement (PA) with Shandong Province. Shandong Province will ensure that Subsidiary Loan Agreements (SLA), satisfactory to the Bank, are signed with the four SEEP project sub- borrowers. Standard internal government arrangements have been made to ensure that loan funds pass through to sub-borrowers on terms and conditions agreed with the Bank. Figure 1. SEEP Legal Agreements (dotted lines represent internal Chinese government financial arrangements) Luxin SLA LA = Legal Agreement, PA = Project Agreement, SLA = Subsidiary Loan Agreement 2. Provincial Level Project Management Responsibilities and Arrangements. The World Bank and Asian Development Bank Energy Conservation Project Management Office (PMO) is responsible for the overall management of SEEP on behalf of Shandong Province. It was established by a joint decision of the Shandong Development and Reform Commission, Shandong Provincial Finance Bureau, the Shandong Economic and Information Technology Committee, and the Shandong Provincial Environmental Protection Bureau. The management team and staff have been appointed. Each bureau has a Deputy Director representative. The Director is on loan from the Shandong Economic and Information Technology Committee‟s Energy Conservation Office and some staff time from the Energy Conservation Office has been allocated to the PMO. This provides a direct connection between the project and the Energy Conservation Office where provincial level policies and programs are formulated, supervised and/or executed. 38 3. Project Implementation Units. Rongshihua, Guotai, Luxin Energy, and Anqiu Shengyuan Biomass Thermal Power Company will be the Project Implementation Units fully responsible for implementing their respective project sub-components, including procurement, financial management, M&E and project reporting. Each has formed project teams and was established project management systems, satisfactory to the Bank. The project will be implemented over a five year period. Figure 2. Project Management Arrangement of Component A Shandong Provincial The World Bank Government Finance Bureau Development and Reform Project Management Office Commission (PMO) Economic and Information Technology Committee Leasing Companies / ESCO Host Enterprises 4. Component A Implementation Arrangements. Figure 2 shows an overview of the project management procedure for SEEP, which involves close cooperation and collaboration of many organizations and institutions: (a) The World Bank – in collaboration with Shandong Provincial Government and PMO, and in accordance with the Operational Manual – supervises the implementation and utilization of the IBRD loan to the Province. (b) Shandong Provincial Government, through its PMO, oversees the use of the loan and project implementation, and ensures compliance with the Legal Agreements. (c) The PMO undertakes the day-to-day and overall coordination, supervision, and management of SEEP, and periodically reports to the Bank, MOF and Shandong Provincial Government on project progress and existing problems, with corresponding recommendations. (d) The leasing companies and ESCO, as PIUs of their respective components, implement sub-projects and provide host enterprises with financial leasing (leasing companies only), energy services, and technical support, in compliance with Chinese regulations and laws, loan and project agreements, as well as the Operational Manual. To a large extent leasing 39 companies and ESCO implement sub-projects within their existing institutional framework and under existing business procedures and regulations. (e) Host enterprises participate in the successful implementation and operation of energy efficiency sub-projects and abide by the terms, conditions, and obligations of the leasing agreements signed by them. 5. Rongshihua, one of the three pilot energy service companies or ESCOs created in China in 1997 with the support of the Shandong Provincial Government, the World Bank , and European Commission. Rongshihua helped pioneer the energy performance contracting (EPC)15 concept through ESCOs in China originally. Rongshihua has 45 staff members with expertise in management, finance, thermal power engineering, mechanical engineering, accounting, and environmental engineering. 6. Guotai, formed in 2007, is one of the pilot enterprises in Shandong granted with financial leasing license, and is a subsidiary of Xinwen Mining Group (Xinwen), one of the 25 largest enterprises in Shandong, and among the largest 520 enterprises in China. It is currently the largest financing and leasing enterprise in Shandong province and ranks nationally at the top among domestically funded pilot leasing companies. With a growing awareness of EMS and potential for energy savings, Guotai plans to develop energy efficiency projects inside the mining group – where energy efficiency opportunities are high – to broaden its experience initially, but also will like to expand its business outside Xinwen. Guotai employs sufficient human resources to implement the financial leasing project with the Bank, and plans to make full use of the parent company‟s senior staff who are experienced in energy conservation and environment protection. 7. Luxin Energy, a subsidiary of Shandong Luxin Investment Holding Group (Luxin Group). Luxin Group was formerly Shandong International Trust and Investment Corporation founded in 1988, and reformed to be Luxin Group in 2002. Luxin Group is a large-scale wholly state-owned holding company approved by Shandong Provincial Government, and its main business scope includes financing, investment, and capital operation. Luxin Energy, as a subsidiary of Luxin Group approved by the Shandong Government, was established through public share offer with Shandong International Trust and Investment Corporation as the major promoter in June of 1994. Currently, Luxin Energy is a member of the Energy Conservation Service Industry Committee of China Energy Conservation Association (EMCA). Luxin Energy has four departments (comprehensive office, financial, investment, and risk management departments) and 16 staff. 8. Component B Implementation Arrangements. The Anqiu Shengyuan Biomass CHP Company, Ltd, founded on May 16, 2008, will be the sub-borrower for the Anqiu Biomass CHP Component (Component B). It will be responsible for implementation of this component and the operation of the CHP plant after construction. It has in place a management structure, including: a General Manager, who is also Director of their Project Preparation Office; a Chief Engineer, who is Deputy Director of the PPO; and a Chief Financial Officer, who is also Deputy Director 16 China Report on the Observance of Standards and Codes - Accounting & Auditing (World Bank 2009) Financial Management and Governance Issues in China (ADB 2000) Public Sector Management Issues in China (Christine Wong 2005) 40 of the PPO. The Company plans to establish five departments during the construction phase of the project, including Procurement and Materials Management, Engineering, Safety, Finance and Comprehensive Management (Administration and Fuel Supply), each with a director and several technical and administrative staff. 9. Component C Implementation Arrangements. The Provincial PMO will manage this component in cooperation with Rongshihua, Guotai, Luxin Energy and Anqiu Shengyuan Biomass CHP Company for their respective parts of the component. 41 Annex 7: Financial Management and Disbursement Arrangements CHINA: Shandong Energy Efficiency Project Execution Summary 1. The Financial Management Specialist (FMS) has conducted an assessment of the adequacy of the project financial management system of SEEP. The assessment, based on guidelines issued by the Financial Management Sector Board on March 1, 2010, has concluded that the project meets the minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the FMS‟ opinion, the project will maintain adequate financial management arrangement acceptable to the Bank and, as part of the overall arrangements that the Borrower has in place for implementing the operation, provide reasonable assurance that the proceeds of the loan will be used for the purposes for which the loan is granted. Financial management risk is the risk that World Bank loan proceeds will not be used for the purposes intended and is a combination of country, sector and project specific risk factors. Taking into account the risk mitigation measures proposed under this project, a “Modest” FM risk rating was assigned to the project at the appraisal stage. 2. Funding sources for the project include Bank loan and counterpart funds. The Bank loan proceeds will directly flow into a project designated account (DA) to be set up at, and managed by, the Shandong Provincial Finance Bureau (SPFB). The Bank loan will be signed between the Bank and the People‟s Republic of China through its Ministry of Finance (MOF), and on -lending arrangements for the Bank loan will be signed between MOF and Shandong Provincial Government through SPFB. For the Energy Efficiency Leasing component, SPFB will further on-lend the Bank loan to Rongshihua Leasing Company (Rongshihua), Guotai Leasing Company (Guotai) and Luxin Energy. For Anqiu Shengyuan Biomass component, the Bank loan will be further on-lent to Anqiu Shengyuan Biomass CHP Company (Anqiu) through Anqiu Municipal Finance Bureau. Counterpart funds comprise local government appropriations and domestic financing. 3. No outstanding audits or audit issues exist with any of the implementing entities involved in the proposed project. The task team will continue to be attentive to financial management matters during project supervisions. Country Issues 4. To date, no CFAA has been carried out by the Bank for China. Our knowledge of the system is however fairly comprehensive, thanks to several studies carried out by the Government and others. 16 Based on the studies and material produced by others, our observations of developments in the areas of public expenditures, accounting and auditing, and Bank experience with China projects for the past several years, we noted that substantial progress has been made in the aforementioned areas and further improvement is expected in the next few years. This is a 16 China Report on the Observance of Standards and Codes - Accounting & Auditing (World Bank 2009) Financial Management and Governance Issues in China (ADB 2000) Public Sector Management Issues in China (Christine Wong 2005) 42 work in progress and as the economic reform program unfolds further, the Government of China has come to realize the importance of establishing and maintaining an efficient and effective market mechanism to ensure transparency and accountability, and minimize potential for fraud or corruption. 5. Due to the rather unique arrangement by the Government of China, funding (particularly Bank loan/grants) of Bank projects is controlled and monitored by MOF and its extension at sub - national level, (i.e., finance bureaus at provincial, municipal/prefecture and county level). However, project activities are usually carried out by implementing entities of a specific industry or sector due to the level and complexity of expertise involved. While this segregation of duties provides added fiduciary assurance, the above arrangement usually requires more coordination on the project as the multi-level management of the funding and implementation mechanism sometimes works to the detriment of smooth project implementation. Project Description 6. Please refer to Annex 4 – Detailed Project Description. Audit Arrangements 7. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank financed projects in China, the project will be audited in accordance with International Auditing Standards and the Government Auditing Standards of China. Shandong Provincial Audit Office (SPAO) has been identified as auditor for the project. The annual audit report will be issued by SPAO. The Bank currently accepts audit reports issued by China National Audit Office (CNAO) or provincial/regional audit bureaus/offices for which CNAO is ultimately responsible. 8. The annual audit report of project financial statements will be due to the Bank within 6 months after the end of each calendar year. This requirement is stipulated in the loan agreement. The responsible agency and timing are summarized as follows: Audit Reports Submitted by Due date Project consolidated financial Shandong Provincial June 30 of each statements PMO/(SPMO) calendar year Risk Assessment and Mitigation 9. The following risks with corresponding mitigating measures have been identified during the assessment: Risk Risk Rating Incorporated Risk Risk Rating Conditions of Before Mitigating Mitigating Measures After Negotiations, Measures Mitigating Board or Measures Effectiveness Inherent Risk 43 Country level Modest Continuous dialogue with related Modest N government entities and technical assistance from the Bank will help the government to improve its public sector financial management. In the short-term, annual audit requirements will reduce the risk that project funds are not used for their intended purposes. For those areas where the government system cannot be used, the Bank‟s specific requirements will be embedded into the project financial management system. Entity Level Substantial SPMO, Anqiu and Guotai lack Modest FMM was experience with Bank financed finalized by projects. However, SPFB has negotiation. extensive experience with Bank financed operations. Close monitoring and guidance from SPFB, as well as the Bank‟s regular supervision, can mitigate this risk, to some extent. In addition, a well-designed FM manual (FMM) and training sessions will be provided to all project financial staff before and during project implementation. Project Level Substantial The project will be implemented Modest N by SPMO and three PIUs. As such, a well designed FMM, to be prepared by SPMO, is required to unify and standardize the project financial management and disbursement arrangements at each project implementing agency. In addition, it is the first time that the Bank loan supports leasing companies for energy efficiency financial leasing in China, based on lease contracts. Also, not all sub-projects will be appraised by the Bank before project effectiveness. Responsibilities of the leasing companies, including sub-project selection criteria/framework, output verification procedures, and control procedures for payments and funds flow, will be explicitly stated in operations 44 manuals to be prepared by the two leasing companies and agreed with the Bank. Control Risk Budgeting Substantial Procedures regarding budget Modest N preparation and execution have been agreed by the Bank and government. The FM team will review their execution status during project implementation and help them to improve any identified weak areas. Accounting Modest Accounting policies and Modest N procedures are already in place. Circular #13 has been issued by MOF and adopted for all World Bank financed projects. The circular will be documented in the project FMM. Well-designed training workshop will be provided to all financial staff before project start. Internal Control Substantial Detail internal controls Modest N procedures, including segregation of duties, review, approval and reporting procedures, as well as safeguard of assets, will be established within the project. These procedures will be included in the FMM. The Bank task team will review actual practice during project implementation. Funds Flow Modest The Bank loan proceeds will be Low N managed and monitored through the finance bureau channels and all disbursement requests will be subject to their substantive reviews. The funds flow arrangement is straight forward and the approval processes have been streamlined. To avoid delayed disbursement, related requirements and procedures will be documented in the FMM. Financial Modest The format and content of Modest N Reporting financial statements have been stipulated by MOF. The project FMM will specify the format, content and timing requirements 45 for such financial reporting. The project financial statement will be consolidated by SPMO with the assistance of SPFB. Auditing Modest The external auditor, SPAO, has Low N extensive experience with previous Bank projects. Overall Substantial Modest 10. The overall FM risk-rating assigned to this project at the appraisal stage is modest, provided the proposed mitigating measures are carried out. The FMS will monitor the effectiveness of the measures and the project FM risk during project implementation. Fund Flow and Disbursement Arrangements 11. Four disbursement methods are available for the project: advance, reimbursement, direct payment and special commitments. Supporting documents required for Bank disbursements under different disbursement methods will be documented in the Disbursement Letter issued by the Bank. Applications will be supported by:  For reporting eligible expenditures paid from the Designated Account (DA) for requesting for reimbursement: (a) List of payments, together with records evidencing eligible expenditures (e.g., copies of receipts, supplier invoices) for the contracts subject to the Bank‟s prior review; (b) Statement of Expenditure in the form detailed in the Disbursement Letter for all other expenditures / contracts not subject to the Bank‟s prior review.  For requests for Direct Payment: records evidencing eligible expenditures, e.g., copies of receipts, supplier invoices. 12. The Bank loan would be disbursed against eligible expenditures (taxes inclusive) as in the following table. IBRD Loan Allocated Percentage of Amount Expenditures Category to be financed (1) Goods (including supply and installation for Sub-projects under Component A of the Project for a) Rongshihua 63,690,000 50 b) Guotai 49,755,000 50 c) Luxin Energy 19,900,000 50 46 (2) Goods (including supply and installation and works under 15,910,000 100 Component B of the Project (3) Consulting Services, training, study tours and workshops 370,000 100 under Component C of the Project (4) Front End Fee 375,000 100 Total 150,000,000 13. Retroactive financing of US$15.91 million for Part (2) of the project will be applied or eligible expenditures incurred on or after November 1, 2010. 14. One segregated designated account (DA) in US dollars will be opened at a commercial bank acceptable to the Bank and will be managed by SPFB. The ceiling of the DA is documented in the Disbursement Letter. 15. Disbursement Mechanism for leasing and Energy Performance Contracting (EPC) component. The Bank loan for the Energy Efficiency Service Industry component (including financial leasing and EPC) will be disbursed to the leasing companies, Rongshihua and Guotai, and the ESCO, Luxin Energy. The following measures should be followed by Rongshihua, Guotai and Luxin Energy to ensure that robust internal control systems are in place:  Selection of the Beneficiary Enterprise. These will be carried out according to the methods and selection criteria specified in the Operations Manual agreed with the Bank. A leasing EPC contract will be signed between the leasing company/the ESCO, and the beneficiary enterprise.  Reimbursement by the Bank. The Bank financed amount is 50% of the supply and/or installation contracts of eligible sub-projects. The aggregate value of these contracts is separately specified in lease agreements. The Bank loan will be disbursed in accordance with the payment terms specified in the procurement contracts. 16. SPFB will be directly responsible for the management, maintenance and reconciliation of the DA activities of the project. Supporting documents required for Bank disbursements will be prepared and submitted by each PIU, through the respective finance bureau to SPMO, for approval and verification before sending to the SPFB for further disbursement processing. The proposed flow of funds and withdrawal applications (WAs) are as follows: 47 World Bank SPFB SPMO Anqiu Municipal Leasing FB Companies WA Flow Anqiu PIU Funds Flow Contractor/ Supplier Financial Management and Reporting Arrangements 17. Strengths. SPFB has accumulated extensive experience in project financial management and disbursement, which will benefit project implementation. In addition, Rongshihua has experience of World Bank supported operations through implementation of the GEF - China Energy Conservation Project. 18. Weaknesses and Action Plan. The following significant weaknesses, and action plan for addressing each weakness, have been identified: Significant weaknesses Actions Responsible Completion Date Person Shandong SPMO, Anqiu and FM and disbursement related SPMO, SPFB FMM was finalized Guotai lack experience with training should be provided to all before project the Bank financed operations. project financial staff. A well negotiation. prepared FMM to detail and standardize financial management (a) requirements and disbursement arrangements should be finalized before negotiation. 48 The proposed Bank will be Responsibilities of the leasing (c) SPMO, SPFB, the first one to support companies, including sub-project Rongshihua, leasing companies for energy selection criteria/framework, output Guotai. efficiency leasing activities in verification procedures, and control China. procedures for payments and funds flow, should be explicitly stated in (b) operations manuals prepared by the two leasing companies. 19. Implementing Agencies. SPMO is responsible for project management, coordination, planning, implementation, monitoring and reporting, and financial management. Project implementation units (PIUs) have been established to implement the various project components. Anqiu Shengyuan Biomass CHP Company, Rongshihua and Guotai are all existing commercial enterprises, with good governance and internal control systems in place; Guotai and Rongshihua have extensive experience with financing and leasing business. A description of each agency and the project activities to be implemented by them are stated in Annex 6. 20. Budgeting. Each PIU will prepare an annual project implementation plan, including funding budget, and submit it to SPMO for review and consolidation. The budget for counterpart funds committed by local governments will be reviewed and approved by the local People‟s Congress at each level, and will be included in the sectoral budget. Based on the approved budget and implementation progress, the related finance bureaus will provide government appropriations to the project. Budget variance analysis will be conducted regularly by all PIUs, and necessary actions will be taken to implement the project as planned. The Bank will work with SPMO and PIUs through supervising project budgeting system to enhance their budget preparation and execution during project implementation. 21. Accounting. The administration, accounting and reporting of the project will be set up in accordance with the Circular #13: “Accounting Regulations for World Bank Financed Projects” issued in January 2000 by MOF. The circular provides in-depth instructions of accounting treatment of project activities and covers the following:  Chart of account  Detailed accounting instructions for each project account  Standard set of project financial statements  Instructions on the preparation of project financial statements 22. The standard set of project financial statements mentioned above has been agreed between the Bank and MOF, and applies to all Bank projects appraised after July 1, 1998 and includes the following:  Balance sheet of the project  Statement of sources and uses of fund by project components  Statement of implementation of loan agreement  Statement of designated account  Notes to the financial statements 49 23. SPMO and each PIU will manage, monitor and maintain their respective project accounting records. Original supporting documents for project activities will be retained by SPMO or the PIUs. The PIUs will prepare their own financial statements, which will then be submitted to, and reviewed and consolidated by, SPMO before submission to the Bank on a regular basis for review and comment. 24. Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one of the factors critical to successful implementation of project financial management. Based on discussions, observation and review of educational background and work experience of the staff identified for financi al and accounting positions in SPMO and in each PIU, the task team noted that they are qualified and appropriate to the work they are expected to assume. Well-designed training sessions will be provided to all project financial staff before project implementation to familiarize them with Bank financial management requirements and disbursement procedures. In addition, during implementation, their capacities will be further strengthened through Bank review and supervision of their work. 25. To strengthen financial management capacity and to achieve consistent quality of accounting work, a project FMM has been prepared to provide detailed guidelines on financial management, including internal controls, accounting procedures, fund and asset management, withdrawal application procedures, financial reporting, auditing arrangement, and etc. The FMM will be distributed to all the relevant financial staff before project start. 26. Each PIU will individually decide whether they would utilize computerized financial management information systems or manually record and maintain the project accounting books. The task team will monitor the accounting process especially during the initial stage, to ensure that complete and accurate financial information will be provided in a timely manner. 27. Internal Control and Internal Auditing. The related accounting policy, procedures and regulations have been issued by MOF. The FMM , which includes all these regulations, will be issued to SPMO, SPFB and PIUs. 28. There is no formal independent internal audit department for the project. However, this will not impact on the project‟s financial management as management and monitoring from various levels of finance bureaus and SPMO, and annual external audit will serve as the mechanism to ensure that financial management controls are functioning appropriately. 29. Financial Reporting. The format and content of project financial reports have been agreed between the Bank and SPMO and SPFB. As agreed, interim financial reports will be prepared and submitted to the Bank for review on a semi-annual basis. 30. Each PIU will prepare project financial statements on their implemented components, which will then be used by SPMO for preparing consolidated project financial statements; these will be submitted to the Bank on a regular basis for review and comment. The unaudited semi- annual interim consolidated project financial statements should be prepared and furnished to the 50 Bank by SPMO no later than 45 days following each semester (due dates will be August 15 and February 15), in form and substance satisfactory to the Bank. 31. Financial Covenants. No specific financial covenants are applicable to the project, except for standard financial covenants like project audit and interim financial reports. 32. Supervision Plan. The supervision strategy for this project is based on its FM risk rating, which will be evaluated on a regular basis by the FMS, in consultation with the task team leader. 51 Annex 8: Procurement Arrangements China: Shandong Energy Efficiency Project A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank‟s "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 revised October 2006 and May 2010; "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 revised October 2006 and May 2010; and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually, or as required, to reflect project implementation needs and improvements in institutional capacity. 2. Procurement of Works. Works procured under the project cover: construction of civil works for biomass CHP plant; turbines, boilers and electricity power generator installation; heating supply network; and heating exchange stations or other equipment needed by the project and sub-projects. Procurement will be done using the Bank‟s Standard Bidding Documents (SBD) for all ICB and Chinese Model Bidding Documents (MBD) agreed with or satisfactory to Bank. For works contract valued at and above US$20 million each, ICB will be applied; for contracts valued less than US$20 million each, NCB will be used; and contracts valued less than US$250,000 each will be procured through Shopping. 3. Procurement of Goods. Goods procured under the project include: Supply and Installation of Boilers; Electricity Power Generators and Biomass Boiler; Water or Chemical Analysis and Treatment Systems; Information Management System; chillers, cooling and refrigeration; compressed air; controls and automation; blowers and pumps; heating, ventilation and air-conditioning; motors and drives; steam and hot water heating, etc. Goods contracts valued at and above US$1,000,000 each will be procured under International Competitive Bidding (ICB) and the Bank‟s standard bidding documents (SBD) and bid evaluation report will be used. For contracts valued less than US$1,000,000 each, National Competitive Bidding (NCB) procedures will be followed, and MBD agreed by the Bank will apply. Small devices for office equipment supplies, which are readily available off-the-shelf and estimated to cost less than US$200,000 per contract, would be procured through shopping. In case of Supply and Installation of Plant and Equipment contracts, ICB will be used if the contract value is at or above US$20 million each, and NCB will be used in other cases. 4. Selection of Consultants. Consulting services would include technical assistance for project implementation and special studies, project management support, etc. Consulting contracts expected to cost more than US$200,000 equivalent per contract w ould use the Quality and Cost Based Selection (QCBS) or Quality Based Selection (QBS) in conformity with paras. 2.1 through 3.4 of the Guidelines. Most consulting services are estimated under US$200,000 equivalent per contract under this project; Selection Based on Consultants Qualifications (CQ) would be used for these contracts. Chinese university, design and research institutes, as well the 52 public training institutes and NGOs, as source of consultants may be included in the shortlist. In such cases, QBS or CQ would be used instead of QCBS. Short lists of consultants for services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Under the circumstances described in paragraph 3.10 of the Consultants guidelines, consultants may be selected and awarded on a sole-source basis, subject to Bank prior approval. 5. Individual consultants. Individual consultants would be selected under the project and contracts would be awarded in accordance with the provisions of paragraphs 5.2 through 5.3 of the consultant guidelines. Under the circumstances described in paragraph 5.4 of the Consultants guidelines, individual consultants may be selected and awarded on a sole-source basis, subject to Bank prior approval. 6. Single Source Contracting. Any need for single source contracting will be identified in the procurement plan. Detailed justification for single source contracts and description of the services will provided to the Bank. 7. Training and workshop. Training and workshops would be required under the project. Detailed programs would be developed by SPMO and Sub-project PMOs (PIUs) during project implementation and included in the project annual work plan for Bank review. Actual expenditures incurred in accordance with the approved detailed programs would be used as the basis for reimbursement. 8. The procurement procedures (including record keeping, complaint handling, information disclosing) and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the project operational manual. B. Assessment of the agency’s capacity to implement procurement 9. An assessment of the capacity of the Implementing Agencies (SPMO, Anqiu Shengyuan Biomass CHP Plant Sub-project, Rongshihua Leasing Company, Guotai Leasing Company and Luxin Company) to implement procurement actions for the project has been carried out. The assessment reviewed the organizational structure for implementing the project and the interaction between project staff responsible for procurement and the provincial government‟s relevant unit for administration and finance. 10. Key issues and risks concerning procurement identified are: procurement staff are not familiar with Bank ICB and other procurement procedures, including S & I of plant and equipment; and English language skills could be improved to handle ICB and other daily procurement work at provincial and sub-project levels. Corrective measures agreed are: (a) attend Bank procurement training offered by Tsinghua University and the Bank; (b) hire a qualified procurement agent; and (c) to have more technical experts‟ help and instruction. Two qualified procurement agents were hired by the PMO prior to appraisal to help on procurement. 11. Procurement training related to Goods and Works procurement as well as Supply and Installation of Plant and Equipment, were provided to SPMO and the PIUs during project 53 appraisal. Further procurement training will be provided at project launch, as well as periodically during project implementation. The Procurement Manual will be updated as needed. 12. Based on the above, the overall project risk for procurement is Moderate. C. Procurement Plan 13. The Borrower, at appraisal, developed a procurement plan (for Components B and C) for project implementation which has been agreed with the Bank and is available at the SPMO office in Jinan. It will also be available in the project‟s database and in the Bank‟s external website. The Procurement Plan will be updated in agreement with the Project Team annually, or as required, to reflect project implementation needs and improvements in institutional capacity. 14. Under Component A, Rongshihua, Guotai and Luxin Energy cannot develop Procurement Plans before selecting sub-projects but will follow Bank procurement guidelines. During project implementation, each company will provide a list of procurement activities under each sub-project. Special procurement notices will be published for any ICB procurement in accordance with the Procurement Guidelines. D. Frequency of Procurement Supervision 15. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment has recommended at least annual supervision missions to carry out post review of procurement actions. E. Prior Review Thresholds and Post Review 16. Table 1 indicates the thresholds for procurement methods and prior review. Table 1: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Threshold Procurement Contracts Subject to Prior Category (US$ million) Method Review (US$ million) 1. Works, Above US$20 million ICB All contracts equal to or above Supply and US$5 million and the first Installation of Less than US$20 million NCB Shopping contract in each sub- Plant and project Equipment Less than US$0.25 m Shopping 2. Goods Equal to or Above US$1 m ICB All contracts equal to or above US$0.5 m and the first NCB and Less than US$1 m NCB Shopping Contract regardless the contract value in each sub-project Less than US$0.20 m Shopping 54 3.Consulting Above US$0.20 (firm) QCBS/QBS All firm contracts equal to or Services above US$0.2 m Equal to or Less than US$0.20 CQS The first CQS Contract (firm) Individuals IC Any specific assignments SSS All SSS contracts 17. All other contracts will be subject to Post-Review by the Bank. The percentage will be 1 in 10. F. Retroactive Financing 18. Advanced contracting may be applied for the contracts awarded starting from November 1, 2010. The ceiling amount for retroactive financing under this project would not exceed US$15.91 million 55 Annex 9: Economic and Financial Analysis CHINA: Shandong Energy Efficiency Project 1. The projects are economically viable with EIRRs between 20 percent and 35 percent, and an aggregate net present value of RMB2.4 billion (US$373 million) at an 8 percent rate of discount; see Table 9.1 for more details. A. FINANCIAL PROJECTIONS 2. Incremental Project Projections. Incremental financial projections for each of the sub- projects and resulting economic evaluations were prepared on the basis of the feasibility study reports approved by the Shandong Provincial government, the financial statements and projections of the project sponsors, and on reasonable assumptions mandated by the Ministry of Housing and Urban-Rural Development (formerly Ministry of Construction) for the evaluation of projects of this kind, and those regarded as realistic and reasonable by the Bank team. All the projects will be financed by equity contributions, reinvestment of retained earnings, long -term loans from the World Bank and working capital loans commercial lenders. Details of the main assumptions underlying the financial projections are in the project file. 3. Financial Viability of Project Sponsors. The final borrowers will be the four project companies through Shandong Provincial Government. In constructing the projections, a review of the sponsors‟ performance and financial position was undertaken, including their capacity to provide counterpart funding, service the proposed debt and comply with reasonable financial covenants over the life of the projects. The detailed financial projections and key financial ratios show that each of the companies are (a) well capitalized and able to remain below the debt to total capitalization ratio of (i) 60 percent for Anqiu and Luxin Energy, and (ii) 80% for the two finance leasing companies; and (b) generate sufficient liquidity to implement the project and sustain a cashflow of at least 1.3 times the annual debt service required on the proposed loans. 4. Financial projections for these four companies are set out in detail in project files, in summary:  Rongshihua Company Ltd, established as a pilot project under the previous GEF China Energy Conservation project in 1996, has a successful track record of promoting energy performance contracting (EPC) and energy efficiency investment in China. The company recently converted to a financial leasing company with a capital base of RMB185.6 million (US$27.2 million) to finance EE investment through capital leases with industrial host enterprises. Rongshihua‟s shareholders are Shandong Duoxinda Investment Company (57%), Service Center of Shandong Economic and Trade Commission (35.5%), and Jinan Iron and Steel Group (7.5%). Rongshihua has adequate reserves and debt capacity to sustain the proposed sales which are expected to grow to a level of around of around RMB110 million over the next 5 years, and remain well within the proposed debt to equity covenants of 4 times.  Goutai Leasing Company Ltd was formed as a joint stock subsidiary of the large Xinwen Coal Mining Company in mid 2007 primarily to finance the capital investments of its holding company. The company has a large robust balance sheet with shareholders funds 56 of Y0.6 billion (US$85 million) as at the end of 2009 and the backing of one of the largest companies in Shandong. Guotai‟s shareholders are: Xinwen Mining Group (50%), Shandong Xinkuang Investment and Hopding Group (40%), and Shandong Huayuan Mining Group (10%). Estimated debt to capitalization ratio as at end 2009 was 56 percent, and projections show that there is sufficient head room to accommodate the proposed loan without exceeding loan covenants provided the dividend distribution is restricted to no more than 70 percent of distributable profits. It is expected to finance up to 50% of eligible projects, which meet the criteria set out in the Operations Manual, in an effort to: (a) encourage a greater proportion of overall EE investments; and (b) mobilize other commercial credits to leverage EE investments under the loan and introduce local banks to this type of investment opportunity.  To diversify and minimize the risks of credit default of two leasing companies, the financial covenants are supplemented by ensuing that a rigorous in-house credit management system is in place and maintained through provisions in the Operations Manual. These include: (a) limit the concentration of aggregate investments in any one company of less than 20% of the total net worth and the size of any one investment to be less than 15% of the total net worth; (b) maintain a debt to total capitalization ratio of no more than 80%; (c) provide co-financing of individual leases of at least 50% of the lease value; and (d) maintain a debt coverage ratio no lower than 1.3. In addition, to ensure adequate diversification of the loan and risk mitigation, Guotai would limit the use of the Bank‟s loan in each investment to no more than 10% of the total Bank‟s loan to Guotai, i.e. US$5 million.  Luxin Energy Investment and Management Company, a wholly owned subsidiary of Shandong Luxin Investment Holding Group (Luxin Group), was restructured as an ESCO in 2008 to focus more sharply on the energy efficiency and service business. The company is well capitalized with no debt and a 65% interest in the Group‟s corporate head quarter building in Beijing and a 5% minority interest in a producing oil well in the Dongin Oil field in Shandong. It proposes to further strengthen the balance sheet by an equity infusion of RMB80 million in 2011.  Anqiu Shengyuan Biomass Thermal Power Company Ltd., a new joint stock company, has formed by the Shandong Thermal Power Design Institute (87.9%), Anqiu Shengyuan Thermal Power Co. Ltd. (10%), and Jinan Haoyu Weiye Science and Technology Co., Ltd. (2.1%), to undertake this biomass project. The proposed share capital of RMB48 million, together with the district connection fees, will be able to support both the Bank and proposed commercial loans within the prudential covenants envisaged; as well as secure a credit line of RMB150 million from a commercial bank to ensure sufficient liquidity to cover all operational requirements and debt service commitments over the life of the project. 5. Proposed Financial Covenants. To ensure a prudent financial structure, adequate liquidity and proper financial management, no new debt will be incurred from 2010 unless a reasonable forecast of revenues, expenses and other financial obligations agreed with the Bank indicate that the sponsors will be able to maintain: 57  A cashflow that exceeds its debt service requirements by at least 1.3 times, in the case of Anqiu Biomass and Luxin Energy; a  A debt to equity ratio of no more than 60:40 in the case of both Anqiu Biomass (after commissioning) and Luxin Energy, and 80:20 for the two financial intermediaries. This differential is justified on the grounds of higher business/operational risk prevailing in the case of the former industrial companies. Incremental Economic and Financial Analysis 6. Costs for each component include: (a) investment in capital equipment, working capital and long-term leases; (b) incremental operating costs including wages, plant maintenance and overheads, and input costs such as fuel, electricity and water etc; and (c) amortization of capital costs, investment in long-term leases, EPC contracts and connection fees over the life of the asset, EPC or term of the lease as the case may be. A conversion factor of 1 is assumed when estimating economic costs from financial costs as the distortion in prices and exchange rate are not considered significant and do not justify the use of shadow pricing. Economic costs exclude all taxes, duties, and financial costs and other transfers. Major project benefits include increase in the incremental supply of heat and power; and improved energy efficiency and savings over the life of the sub projects. 7. Project returns based on incremental cash flows derived from the financial projections and adjusted for taxes, interest and other transfers, are set out in detail in the project file and summarized in Table 9.1. Based on conservative assumptions, the analysis demonstrates that the project components are robust, and show positive financial and economic returns, in aggregate, of 11.2% and 23.1% respectively. Table 9.1 Incremental Financial and Economic Project Returns Financial Economic Component FIRR NPV* EIRR NPV* (%) (RMB (%) (RMB million) million) A1. Rongshihua Company Ltd. 9.5 117.0 20.0 949.1 A2. Goutai Leasing Company Ltd. 8.9 165 21.2 709.3 A3. Luxin Energy Investment and 9.6 55.3 35.4 489.2 Management Company Ltd. B1. Anqiu Shengyuan Biomass Thermal Co. 23.9 234.4 28.7 316.6 Weighted Average 11.2 1,088 23.1 2,464 * At 8% discount rate Sensitivity Analysis - Switching Values 58 8. Switching values, shown in Table 9.2 below, demonstrate the sensitivity of the financial return on the individual components of the project to percentage changes in the more significant assumptions and/or variables underlying the projections and financial assessment. Switching values set out below represent the required percentage increase/(decrease) in the respec tive variables needed to yield a minimum 8 percent internal rate of return. Results of the analysis demonstrate that the expected returns of the project and its sub-projects are robust, and are economically justified over a wide range of assumptions. Table 9.2 Switching Values Key Switching Values (%) Variables Rongshihua Guotai Luxin Anqiu Biomass Investment in Leases (53.6) (43.4) (47.4) n/a Capital Expenditure n/a n/a n/a 146.0 Power Tariff n/a n/a n/a (39.7) Interest on Leases/EPCs (12.3) (8.9) (12.9) n/a Fuel Cost n/a n/a n/a 55.0 9. Financial projections supporting the above analyses and their economic analysis are set out in detail for each of the project components in real 2010 terms in the project file. Summary of Financial Projections A1 Rongshihua Leasing Company Ltd A2 Goutai Leasing Company Ld A3 Luxin Energy B1 Anqiu Biomass 59 A1. Rongshihua Leasing Company Ltd Shandong Energy Efficiency Project - Company Financial Statements (0,000's Rmb) 2010 2011 2012 2013 2014 2015 A. Pro Forma Income Statement Net Sales Revenue 10,096 9,088 9,759 7,989 9,132 10,138 less: Cost of Sales 4,064 2,862 2,913 1,585 1,638 1,695 Front end fee/ net Interest 2,376 2,329 2,202 2,420 2,579 2,677 add: other income 191 211 232 255 280 308 Pre tax Profit 3,847 4,107 4,876 4,240 5,195 6,074 less: Tax 962 1,027 1,219 1,060 1,299 1,519 Transfers to Public Welfare 433 462 549 477 584 683 dividend paid 289 308 366 318 390 456 Net Distributable Profit 2,164 2,310 2,743 2,385 2,922 3,417 B. Pro Forma Cashflow Statement i) Cash Flows from Operations: Operating Income 3,847 4,107 4,876 4,240 5,195 6,074 add: depreciation 22,296 23,892 25,715 28,416 32,448 36,282 change in working capital (6,989) (383) (305) (1,281) 577 (1,653) less: income tax paid 962 1,027 1,219 1,060 1,299 1,519 Net Cash Provided by Operations 18,192 26,589 29,066 30,315 36,921 39,185 II) Cash Flows from Investing Activities: new capital expenditure/IDC 21,963 26,532 30,648 33,280 40,040 40,040 Net Cash used for Investing Activities: 21,963 26,532 30,648 33,280 40,040 40,040 III) Cash Flows from Financing Activities: equity receipts 0 0 0 0 0 0 add: proceeds from long-term debt (+) (7,695) 235 (850) 8,948 10,910 (1,327) less: dividends paid 289 308 366 318 390 456 Cash used by Financing Activities (7,983) (73) (1,215) 8,630 10,520 (1,783) NET Inc./(Dec.) IN SURPLUS CASH (11,754) (16) (2,797) 5,665 7,401 (2,638) add: Bal ST deposits(+)/ Commercial Loan(-) b/f 6,262 (5,492) (5,507) (8,304) (2,640) 4,762 Balance ST deposits(+)/Commercial Loan(-) c/f (5,492) (5,507) (8,304) (2,640) 4,762 2,123 C. Pro Forma Balance Sheet Other Current Assets 8,585 9,518 10,235 11,779 11,878 13,531 Short-term deposits 0 0 0 0 4,762 2,123 Current Assets 8,585 9,518 10,235 11,779 16,640 15,654 Net Fixed Assets 45,198 47,838 52,772 57,636 65,228 68,986 Total Assets 53,783 57,356 63,007 69,414 81,867 84,640 Net Current Liabilities 2,521 3,071 3,483 3,746 4,422 4,422 WB Loan 8,743 15,779 23,996 32,944 43,854 42,526 Commercial loans 21,360 14,575 8,304 2,640 0 0 Total Long-term Liabilities 30,103 30,353 32,301 35,584 43,854 42,526 Paid In Equity 13,061 13,061 13,061 13,061 13,061 13,061 Public Provisions 433 895 1,443 1,920 2,505 3,188 Retained Earnings 7,666 9,976 12,719 15,104 18,026 21,443 Total Shareholders' Equity 21,160 23,932 27,224 30,085 33,592 37,692 Total Capital & Long-term Liabilities 53,783 57,357 63,007 69,415 81,868 84,640 D. Financial Ratios: Return on equity(%) 13.6% 12.9% 13.4% 10.6% 11.6% 12.1% Debt Service Coverage Ratio 2.2 3.0 2.7 10.8 12.3 6.4 Debt /Total Capitalization ratio (%) 56.0% 52.9% 51.3% 51.3% 53.6% 50.2% 60 A2. Guotai Leasing Company Ltd Shandong Energy Efficiency Project - Company Financial Statements (0,000's Rmb) 2010 2011 2012 2013 2014 2015 A. Pro Forma Income Statement Net Sales Revenue 20,713 24,572 25,994 24,758 23,035 22,656 less: Cost of Sales 1,355 1,476 1,609 1,756 1,917 2,094 Front end fee/ net Interest 1,096 5,417 9,771 9,368 8,093 6,692 add: Other Income 642 707 777 855 941 1,035 Pre tax Profit 18,903 18,386 15,392 14,490 13,966 14,905 less: Tax 4,726 4,596 3,848 3,622 3,492 3,726 Transfers to Public Welfare 1,418 1,379 1,154 1,087 1,047 1,118 Net Distributable Profit 12,760 12,410 10,390 9,780 9,427 10,061 B. Pro Forma Cashflow Statement i) Cash Flows from Operations: Operating Income 18,903 18,386 15,392 14,490 13,966 14,905 add: depreciation 145 145 145 145 145 145 dec. in long-term receivables 105,652 106,530 121,171 126,297 115,451 111,397 less: change in working capital 57,898 449 (30) (3,770) 5,510 (4,828) income tax paid 4,726 4,596 3,848 3,622 3,492 3,726 Net Cash Provided by Operations 62,076 120,015 132,890 141,080 120,561 127,549 II) Cash Flows from Investing Activities: new capital expenditure/IDC 152,475 125,000 117,000 115,000 100,000 120,000 Net Cash used for Investing Activities: 152,475 125,000 117,000 115,000 100,000 120,000 III) Cash Flows from Financing Activities: equity receipts 50,000 0 0 0 0 0 add: proceeds from long-term debt (113,496) 7,500 7,020 6,900 6,000 3,042 less: dividends paid 0 0 0 0 0 0 Cash used by Financing Activities (63,496) 7,500 7,020 6,900 6,000 3,042 NET Inc./(Dec) IN SURPLUS CASH (153,895) 2,515 22,910 32,980 26,561 10,590 add ST deposit (+)/ Commercial Loan (-) b/f 6,750 (147,145) (144,629) (121,719) (88,739) (62,179) Cash balance(+)/Commercial Loan(-) c/f (147,145) (144,629) (121,719) (88,739) (62,179) (51,588) C. Pro Forma Balance Sheet other Current Assets 33,044 31,375 31,000 27,150 32,008 28,231 short-term deposits 0 0 0 0 0 0 Current Assets 33,044 31,375 31,000 27,150 32,008 28,231 Net Fixed Assets 243,598 261,923 257,607 246,165 230,569 239,027 Total Assets 276,642 293,298 288,607 273,315 262,577 267,258 Net Current Liabilities 7,687 5,570 5,224 5,144 4,493 5,544 WB Loan 0 7,500 14,520 21,420 27,420 30,462 Commercial loans 147,145 144,629 121,719 88,739 62,179 51,588 Total Long-term Liabilities 147,145 152,129 136,239 110,159 89,599 82,050 paid In equity 100,000 100,000 100,000 100,000 100,000 100,000 public welfare fund 2,981 4,360 5,514 6,601 7,648 8,766 retained earnings 18,829 31,240 41,629 51,410 60,837 70,898 Total Shareholders' Equity 121,810 135,599 147,143 158,010 168,485 179,664 Total Capital & Long-term Liabilities 276,642 293,298 288,607 273,314 262,576 267,258 D. Financial Ratios: Return on equity(%) 11.6% 10.2% 7.8% 6.9% 6.2% 6.2% Debt Service Coverage Ratio 1.5 55.8 31.3 34.2 35.4 30.5 Debt /Total Capitalization ratio (%) 53.2% 51.9% 47.2% 40.3% 34.1% 30.7% 61 A3. Luxin Energy Investment Management Company Ltd Shandong Energy Efficiency Project - Company Financial Statements (0,000's Rmb) 2010 2011 2012 2013 2014 2015 A. Pro Forma Income Statement Net Sales Revenue 1,301 5,307 11,915 18,844 23,707 26,409 less: Cost of Sales 1,429 4,457 10,047 16,029 20,353 22,725 Front end fee/ net Interest 72 805 1,376 2,402 3,051 3,252 add: Dividend Income 625 625 625 625 625 625 Pre tax Profit 425 669 1,117 1,039 928 1,057 less: Tax 0 11 123 103 76 108 Transfers to Public Welfare 64 99 149 140 128 142 Dividends paid 43 66 99 94 85 95 Net Distributable Profit 319 494 746 701 639 712 B. Pro Forma Cashflow Statement i) Cash Flows from Operations: Operating Income 425 669 1,117 1,039 928 1,057 add: depreciation 215 215 215 215 215 215 amortization of EPC contracts 682 3,576 8,833 14,815 19,139 21,511 less: change in working capital (2,083) (761) (927) (270) (284) (298) income tax paid 0 11 123 103 76 108 Net Cash Provided by Operations (761) 3,689 9,115 15,696 19,923 22,378 II) Cash Flows from Investing Activities: new capital expenditure/IDC 4,992 15,000 18,000 21,600 22,680 23,814 Net Cash used for Investing Activities: 4,992 15,000 18,000 21,600 22,680 23,814 III) Cash Flows from Financing Activities: equity receipts 0 8,000 0 0 0 0 proceeds from long-term debt (+) 0 2,250 2,700 3,240 3,402 593 dividends paid 43 66 99 94 85 95 Cash used by Financing Activities (43) 10,184 2,601 3,146 3,317 498 NET Inc./(Dec) IN SURPLUS CASH 0 (5,795) (6,923) (13,207) (15,964) (15,404) add ST Ldeposit(+)/ Commercial Loan(-) b/f (5,795) (1,127) (6,284) (2,758) 560 (938) Bal ST deposits(+)/Commercial Loan(-) c/f (5,795) (6,923) (13,207) (15,964) (15,404) (16,342) C. Pro Forma Balance Sheet other Current Assets 3,794 4,555 5,482 5,752 6,036 6,333 short-term deposits 0 0 0 0 0 0 Current Assets 3,794 4,555 5,482 5,752 6,036 6,333 Net Fixed Assets 7,333 18,542 27,494 34,063 37,388 39,475 Equity Investments 2,885 2,885 2,885 2,885 2,885 2,885 Total Assets 14,012 25,982 35,861 42,700 46,309 48,694 Net Current Liabilities 0 0 0 0 1,015 1,015 WB Loan 0 2,250 4,950 8,190 10,577 11,169 Commercial loans 5,795 6,923 13,207 15,964 15,404 16,342 Total Long-term Liabilities 5,795 9,173 18,157 24,154 25,981 27,512 Paid In Equity Capital 7,000 15,000 15,000 15,000 15,000 15,000 Public Reserves 147 246 395 535 663 805 Retained Earnings 1,070 1,564 2,309 3,011 3,650 4,361 Total Shareholders' Equity 8,217 16,809 17,704 18,546 19,312 20,167 Total Capital & Long-term Liabilities 14,012 25,982 35,861 42,700 46,309 48,694 D. Financial Ratios: Return on equity(%) 5.2% 3.9% 5.6% 5.0% 4.4% 4.7% Debt Service Coverage Ratio (32.8) 8.6 14.3 13.1 13.0 9.0 Debt /Total Capitalization ratio (%) 41.4% 35.3% 50.6% 56.6% 58.3% 58.6% 62 A4. Anqui Shengyan Biomass Thermal Power Co Ltd. Biomas Cogeneration Project (0,000's Rmb) 2010 2011 2012 2013 2014 2015 A. Pro Forma Income Statement Net Sales Revenue 0 7,880 13,103 13,103 13,103 13,103 less: Cost of Sales 0 5,590 9,523 9,523 9,523 9,523 Front end fee/ net Interest 26 1 652 624 488 401 Pre tax Profit (26) 2,289 2,927 2,956 3,092 3,178 less: Tax 0 572 732 739 773 795 Transfers to Public Welfare 0 194 110 143 116 119 add: Connection Fee 0 2,164 0 641 0 0 Net Distributable Profit (26) 3,686 2,086 2,715 2,203 2,265 B. Pro Forma Cashflow Statement i) Cash Flows from Operations: Operating Income (26) 2,289 2,927 2,956 3,092 3,178 add: depreciation 0 793 1,546 1,546 1,546 1,546 connection fee 0 2,164 0 641 0 0 less: change in working capital 0 504 334 0 0 0 front end fee/net interest paid income tax paid 0 572 732 739 773 795 transfers to public welfare fund 0 194 110 143 116 119 Net Cash Provided by Operations (26) 3,975 3,297 4,261 3,749 3,811 II) Cash Flows from Investing Activities: new capital expenditure/IDC 8,492 12,317 3,600 0 0 0 Net Cash used for Investing Activities: 8,492 12,317 3,600 0 0 0 III) Cash Flows from Financing Activities: equity receipts 4,800 0 0 0 0 0 net proceeds from long-term debt 3,696 5,280 1,584 0 (621) (621) dividends paid 0 0 0 0 0 0 Cash used by Financing Activities 8,496 5,280 1,584 0 (621) (621) Net Inc./(Dec) IN SURPLUS CASH (23) (3,063) 1,281 4,261 3,128 3,189 add o/b Cash 0 (23) (3,086) (1,804) 2,457 5,584 Cash balance c/f (23) (3,086) (1,804) 2,457 5,584 8,774 C. Pro Forma Balance Sheet other Current Assets 0 837 1,392 1,392 1,392 1,392 short-term deposits 0 0 0 2,457 5,584 8,774 Current Assets 0 837 1,392 3,849 6,976 10,166 Net Fixed Assets 8,492 20,017 22,071 20,525 18,979 17,433 Total Assets 8,492 20,854 23,463 24,374 25,955 27,599 Net Current Liabilities 23 3,418 2,357 553 553 553 WB Loan 3,696 8,976 10,560 10,560 9,939 9,318 Commercial loans 23 3,086 1,804 0 0 0 Total Long-term Liabilities 3,719 12,062 12,364 10,560 9,939 9,318 Paid In Equity 4,800 4,800 4,800 4,800 4,800 4,800 Public Welfare Fund 0 0 0 0 0 0 Retained Earnings (26) 3,660 5,746 8,460 10,663 12,928 Total Shareholders' Equity 4,774 8,460 10,546 13,260 15,463 17,728 Total Capital & Long-term Liabilities 8,515 23,940 25,267 24,374 25,955 27,599 D. Financial Ratios: Profit Margin (%) 0.0% 46.2% 15.7% 20.5% 16.6% 17.1% Debt Service Coverage Ratio 0.0 0.0 0.0 2.1 4.4 4.6 Debt /Total Capitalization ratio (%) 43.8% 57.8% 52.7% 43.3% 38.3% 33.8% 63 B. Summary of Economic and Financial Analysis for A1 Rongshihua Leasing Company Ltd A2 Goutai Leasing Company Ltd A3 Luxin Energy B1 Anqiu Biomass 64 Rongshihua Leasing Company Economic and Financial Analysis A Economics Returns B. Financial Returns (Rmb 0,000) Benefits Costs Benefits Costs Net Net Total Economic dec in Financial Other Total Total Operating Working Total Net Total Investment Working Operating Year EE Benefit Year Long-term Tax Benefit Externalities Benefits Investment Costs Capital Costs Sales Benefits in Leases Capital Costs Savings Receivables 1 0 0 0 558 4,193 4,751 (4,751) 1 1,424 2,775 4,199 20,100 6,989 929 124 (23,943) 2 5,943 5,943 15,919 585 230 32,653 (26,710) 2 4,123 9,852 13,975 26,532 383 976 787 (14,703) 3 12,808 12,808 18,389 615 305 37,698 (24,890) 3 6,466 19,553 26,019 30,648 305 1,024 1,360 (7,319) 4 20,262 20,262 19,968 645 768 41,350 (21,088) 4 7,820 27,456 35,277 33,280 1,281 1,076 1,686 (2,046) 5 29,231 29,231 24,024 678 (577) 48,149 (18,918) 5 8,956 31,939 40,896 40,040 (577) 1,130 1,957 (1,654) 6 34,612 34,612 14,414 712 (4,920) 24,620 9,992 6 9,943 35,773 45,716 40,040 1,653 1,186 2,189 648 7 34,612 34,612 34,612 7 10,872 39,565 50,437 46,301 650 1,245 2,407 (166) 8 34,612 34,612 34,612 8 12,004 43,491 55,495 51,076 904 1,308 2,674 (466) 9 34,612 34,612 34,612 9 13,315 47,897 61,212 56,201 1,052 1,373 2,986 (399) 10 34,612 34,612 34,612 10 14,702 53,215 67,917 61,995 (456) 1,442 3,315 1,622 11 34,612 34,612 34,612 11 16,237 58,706 74,942 68,781 (456) 1,442 3,699 1,478 12 34,612 34,612 34,612 12 17,955 64,855 82,810 75,897 (456) 1,442 4,128 1,800 13 34,612 34,612 34,612 13 19,845 71,709 91,554 83,865 (456) 1,442 4,601 2,103 14 34,612 34,612 34,612 14 21,929 79,262 101,191 92,720 (456) 1,442 5,122 2,364 15 34,612 34,612 34,612 15 24,237 87,582 111,819 102,480 (456) 1,442 5,699 2,655 16 34,612 34,612 34,612 16 26,788 96,803 123,591 113,243 (456) 1,442 6,337 3,027 17 28,669 28,669 28,669 17 29,606 106,992 136,597 125,165 (456) 1,442 7,041 3,405 18 21,804 21,804 21,804 18 32,720 118,245 150,965 138,337 (456) 1,442 7,820 3,824 19 14,350 14,350 14,350 19 25,333 109,580 134,913 0 (456) 6,333 129,036 20 5,381 5,381 5,381 20 10,935 74,032 84,967 0 (1,087) 2,734 83,321 NPV (@ 8 %) = 94,906 NPV (@ 8 %) = 11,697 EIRR 20.0% FIRR 9.5% 65 Guotai Leasing Company Economic and Financial Analysis A Economics Returns B. Financial Returns (unleveraged) (Rmb 0,000) Benefits Costs Benefits Costs Net Net add Total Investment Economic Dec. in Financial Total EE Operating Total Net Total Net Investment Operating Year Other Net in EE Benefit Year Long-term Tax Benefit Savings Costs Costs Sales Benefits in Leases Costs Externalities Benefits Projects Receivables 1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 2 5,600 5,600 15,000 160 30,160 (24,560) 2 827 2,161 2,988 15,000 160 167 (12,339) 3 10,841 10,841 14,040 176 28,256 (17,414) 3 2,062 6,729 8,791 14,040 176 472 (5,896) 4 15,993 15,993 13,800 193 27,793 (11,800) 4 2,722 11,661 14,383 13,800 193 632 (243) 5 20,473 20,473 12,000 213 24,213 (3,740) 5 2,712 13,854 16,566 12,000 213 625 3,728 6 24,639 24,639 11,160 181 22,501 2,138 6 2,489 12,901 15,389 11,160 181 577 3,471 7 24,639 24,639 0 0 0 24,639 7 2,563 12,588 15,151 15,520 317 562 (1,248) 8 24,639 24,639 0 0 0 24,639 8 2,864 13,283 16,147 15,286 343 630 (113) 9 24,639 24,639 0 0 0 24,639 9 3,110 14,726 17,836 16,298 403 677 459 10 24,639 24,639 0 0 0 24,639 10 3,325 16,039 19,364 18,000 411 729 225 11 24,639 24,639 0 0 0 24,639 11 3,605 17,105 20,710 19,539 446 790 (65) 12 24,639 24,639 0 0 0 24,639 12 3,908 18,575 22,484 20,900 477 858 249 13 24,639 24,639 0 0 0 24,639 13 4,219 20,126 24,345 22,689 518 925 212 14 24,639 24,639 0 0 0 24,639 14 4,561 21,730 26,291 24,567 561 1,000 163 15 24,639 24,639 0 0 0 24,639 15 4,935 23,490 28,425 26,531 606 1,082 206 16 24,639 24,639 0 0 0 24,639 16 5,336 25,418 30,754 28,685 655 1,170 244 17 19,039 19,039 0 0 0 19,039 17 4,059 23,009 27,068 0 0 1,015 26,053 18 13,798 13,798 0 0 0 13,798 18 1,723 15,141 16,864 0 0 431 16,434 19 8,646 8,646 0 0 0 8,646 19 302 5,479 5,781 0 0 75 5,705 20 4,166 4,166 0 0 0 4,166 20 0 0 0 0 0 0 0 NPV (@ 8% ) = 70,931 NPV (@ 8% ) = 1,649 EIRR 21.2% FIRR 8.9% 66 Luxin Energy Investment Management Company Ltd Economic and Financial Analysis A Economics Returns B. Financial Returns (Rmb 0,000) Benefits Costs Benefits Costs Net Net add Investment Economic Financial Gross Total Operating Working Total Net Total Investment Working Operating Year Other in Benefit Year Tax Benefit Sales Benefits Costs Capital Costs Sales Benefits in Leases Capital Costs Externalities Leases 1 0 0 0 0 533 2,083 2,615 (2,615) 1 1,301 1,301 5,000 2,083 533 0 (6,314) 2 1,680 0 1,680 4,500 666 761 5,927 (4,247) 2 5,307 5,307 15,000 761 666 11 (11,131) 3 3,696 0 3,696 5,400 999 927 7,326 (3,630) 3 11,915 11,915 18,000 927 999 121 (8,132) 4 6,115 0 6,115 6,480 999 270 7,749 (1,634) 4 18,844 18,844 21,600 270 999 100 (4,124) 5 8,655 0 8,655 6,804 999 284 8,086 569 5 23,707 23,707 22,680 284 999 70 (326) 6 11,322 0 11,322 7,144 999 298 8,440 2,882 6 26,409 26,409 23,814 298 999 101 1,198 7 11,322 0 11,322 0 (4,622) (4,622) 15,944 7 28,255 28,255 25,005 313 999 118 1,822 8 11,322 0 11,322 0 0 11,322 8 29,653 29,653 26,255 328 999 130 1,941 9 11,322 0 11,322 0 0 11,322 9 31,121 31,121 27,568 345 999 143 2,067 10 11,322 0 11,322 0 0 0 11,322 10 32,662 32,662 28,946 0 999 1,409 1,308 11 11,322 0 11,322 0 0 0 11,322 11 34,371 34,371 28,946 0 999 1,409 3,017 12 11,322 0 11,322 0 0 0 11,322 12 35,202 35,202 28,946 0 999 1,409 3,849 13 11,322 0 11,322 0 0 0 11,322 13 35,484 35,484 28,946 0 999 1,409 4,130 14 11,322 0 11,322 0 0 0 11,322 14 35,484 35,484 28,946 0 999 1,409 4,130 15 11,322 0 11,322 0 0 0 11,322 15 35,484 35,484 28,946 0 999 1,409 4,130 16 11,322 0 11,322 0 0 0 11,322 16 35,484 35,484 28,946 0 999 1,409 4,130 17 9,642 0 9,642 0 0 0 9,642 17 35,484 35,484 28,946 0 999 1,409 4,130 18 7,626 0 7,626 0 0 0 7,626 18 35,484 35,484 28,946 (5,608) 999 1,409 9,738 19 5,207 0 5,207 0 0 0 5,207 19 34,371 34,371 34,371 20 2,667 0 2,667 0 0 2,667 20 29,570 29,570 29,570 NPV (@8 %) = 48,924 NPV (@ 8 %) = 5,526 EIRR 35.4% FIRR 9.6% 67 Anqui Biomass Poject Incremental Economic and Financial Analysis A Incremental Economics Returns B Incremental Financial Returns (Rmb 0,000) (Rmb 0,000) Benefits Costs Net Benefits Costs Net Economic Financial Year Gross Connection Capital Working Operating Economic Year Net Connection Benefits Capital Working Operating Financial Benefits Tax Sales Fee Expenditure Capital Costs Benefit Sales Fee Expenditure Capital Costs Benefit 1 0 0 0 8,492 0 0 (8,492) 1 0 0 0 8,400 0 0 0 (8,400) 2 8,394 2,164 10,558 12,317 504 4,798 (7,061) 2 8,300 2,164 10,464 12,000 504 4,798 576 (7,414) 3 13,957 0 13,957 3,600 334 7,977 2,046 3 13,801 0 13,801 3,600 334 7,977 767 1,122 4 13,957 641 14,599 0 0 7,977 6,621 4 13,801 641 14,442 0 0 7,977 765 5,700 5 13,957 0 13,957 0 0 7,977 5,980 5 13,801 0 13,801 0 0 7,977 781 5,042 6 13,957 0 13,957 0 0 7,977 5,980 6 13,801 0 13,801 0 0 7,977 808 5,016 7 13,957 0 13,957 0 0 7,977 5,980 7 13,801 0 13,801 0 0 7,977 831 4,992 8 13,957 0 13,957 0 0 7,977 5,980 8 13,801 0 13,801 0 0 7,977 855 4,968 9 13,957 0 13,957 0 0 7,977 5,980 9 13,801 0 13,801 0 0 7,977 880 4,944 10 13,957 0 13,957 0 0 7,977 5,980 10 13,801 0 13,801 0 0 7,977 880 4,944 11 13,957 0 13,957 0 0 7,977 5,980 11 13,801 0 13,801 0 7,977 880 4,944 12 13,957 0 13,957 0 0 7,977 5,980 12 13,801 0 13,801 0 7,977 880 4,944 13 13,957 0 13,957 0 0 7,977 5,980 13 13,801 0 13,801 0 7,977 880 4,944 14 13,957 0 13,957 0 0 7,977 5,980 14 13,801 0 13,801 0 7,977 880 4,944 15 13,957 0 13,957 0 0 7,977 5,980 15 13,801 0 13,801 0 7,977 880 4,944 16 13,957 0 13,957 0 0 7,977 5,980 16 13,801 0 13,801 0 7,977 880 4,944 17 13,957 0 13,957 0 0 7,977 5,980 17 13,801 0 13,801 0 7,977 880 4,944 18 13,957 0 13,957 0 0 7,977 5,980 18 13,801 0 13,801 0 7,977 880 4,944 19 13,957 0 13,957 0 0 7,977 5,980 19 13,801 0 13,801 0 7,977 880 4,944 20 13,957 0 13,957 0 (838) 7,977 6,819 20 13,801 0 13,801 (838) 7,977 880 5,782 NPV (@ 8 %) = 31,661 NPV (@ 8 %) = 23,443 EIRR 28.7% FIRR 23.9% 68 C. Financial Analysis of Selected Representative Sub Projects 10. Economic and financial analyses were performed on three representative sub-projects envisaged for financing under the EE Service Industry Component: (a) boiler renovation; (b) waste heat recovery; and (c) motor adjusting speed drives. The main assumptions are summarized below:  Energy prices are based on market prices of RMB860/ton of coal, electricity tariff of RMB0.6/kWh.  Energy savings from boiler renovation and waste heat recovery sub-projects are assumed from coal savings, energy savings from the motor adjusting speed drives sub-project are assumed to come from electricity savings.  Incremental changes on operation and maintenance costs are assumed to be negligible.  Equipment life in all sub-projects is assumed to be 15 years.  Emission factors and the value per ton of avoided emissions assumed for the economic analyses are presented in Table A9.1. Table A9.1. Emission Factors Fossil Fuel Electricity Heavy Oil Combustion Generation Combustion Value for Emission Emission (t/tce) (t/MWh) (t/ton) Avoided (RMB/ton) CO 2 2.61 0.86 3.12 67 SO 2 0.02 0.00083 0.01 1,456 TSP 0.01 0.00037 0.00 33,253 Note: 1. Electricity generation CO 2 emission factor comes from NDRC, 2009 2. Other emission factors come from Energy Conservation Projects Case Studies of Chinese ESCO 2006. 3. The carbon emission was valued at the recent carbon trade market price. 4. The externality cost of particulate and SO2 were calculated based on the "China-Environmental Cost from Pollution" report, which was jointly completed by the Chinese governments (State Environmental Protection Administration, Ministry of Water Resources, Ministry of Health and its Center for Diseas e Control), the World Bank, Resources for the Future (USA), and CICERO and ECON (both Norway) in January 2007 . 11. Table A9.2 summarizes the results from the economic and financial analysis of the three representative sub-projects. The financial internal rate of return (FIRR) ranges from 28 percent to 59 percent and the economic internal rate of return (EIRR) ranges from 42 percent to 77 percent. The payback period ranges from 2.7 to 3.4 years. 69 Table A9.2. Results of the Economic Analyses of Representative Sub-projects Annual Annual Energy Simple NPV @ Investment Energy Savings Payback 12% (million Savings (million Period (million Sub-project RMB) (tce) RMB) (years) RMB) FIRR EIRR Boiler 48.0 9,200 14.0 3.4 71.83 28% 42% renovation Waste heat 20.0 5,249 11.9 1.7 81.88 59% 77% recovery Motor 27.8 6,440 10.0 2.8 57.46 35% 70% adjusting speed drives 12. The annual energy savings of these three sub-projects amount to 20,899 tons of coal equivalent. Extrapolation, based on the analysis of three sub-projects indicates that the project could result in total energy savings of 0.39 million tce. Subproject 1: Papermaking Company Boiler Renovation 13. Description The proposed project in a papermaking company is to replace existing low - efficiency boilers, which are already outdated, with same capacity of high efficiency, circulating fluidized bed boilers. In addition, the auxiliary equipment, including fans and dust collectors, are also in poor operating condition with high energy consumption. After the investment, the thermal efficiency of the boiler system will increase by up to about 80%. Subproject 2: Cement Factory Waste Heat Recovery 14. Description The proposed project is to generate power with low temperature waste heat from a cement kiln. The project entails installation of waste heat boilers to recover heat from waste gas discharged into air from the clinker cooler and pre-heater installed at the end of the cement kiln. The waste gas dissipates large amount of heat energy and also causes environmental pollution. A steam turbine will be added to match the waste heat boilers. Subproject 3: Motor Adjusting Speed Drives 15. Description The proposed project is to install frequency converters in electric motors in many industrial applications. A frequency converter allows precise control of the motor output. Frequency converters are commonly used to convert the speed of pumps and fans, where significant energy savings are achieved. The savings in these cases can be calculated based on the fan affinity laws. 70 Annex 10: Safeguard Policy Issues China: Shandong Energy Efficiency Project A. ENVIRONMENT Environmental Benefits 1. The EA has identified and assessed, quantitatively to the extent possible, the Anqiu biomass CHP‟s benefits and impacts to the natural and social environment. The EA concluded that the Anqiu CHP project, as a whole, will benefit the environment, in particular air quality: it will not only avoid burning of agro-waste and air pollution caused, but also replace coal and associated carbon and SO 2 emissions; and greatly reduce dust and S02 per square meter of connected floor. The Energy Efficiency Service Industry Component (Component A) will involve retrofits, rehabilitation or replacement of existing plant and equipment, possibly with capacity expansion, and thus benefit the environment. 2. The Anqiu Biomass CHP Component and some sub-projects under Component A will potentially cause a variety of short-term construction and long-term operational impacts. These impacts and risks are discussed thoroughly in the EA of Anqiu CHP and the environmental Framework for Component A respectively and mitigation measures have been proposed to reduce the impacts to acceptable levels during construction and operation. 3. Construction phase. Since the Anqiu CHP is a green-field project outside the urban built-up area, impacts on surroundings are moderate and short-term, such as noise, dust, solid waste disposal, worker safety, and chance find of cultural relics. Construction of the heat network can be carried out rapidly, with limited disturbance on traffic and accessibility. Standard and well coded measures to mitigate typical impacts caused by construction are specified in the EMP. 4. For Component A, most project activities will involve retrofitting, rehabilitation and in some cases expansion within the boundary of existing plant. Potential negative impacts during construction are foreseen to be minor to moderate and confined, which can be easily minimized by standard and well known measures. 5. Operation phase. For the Anqiu Biomass CHP Component, major pollutants are flue gas emissions and solid wastes from boilers, followed by wastewater. Pollution of dust, SO 2 and NO 2 at stacks were estimated for major feedstocks, wheat straw and corn stems. Modeling to predict maximum concentration of these pollutants under various meteorological conditions at various distances from the proposed plants and for different receptors shows that with the proposed design and mitigation measures, emissions would meet applicable environmental standards in China, as well as those of the WB/IFC Environment Health and Safety (EHS) guidelines. 6. Due to the much lower sulfur content in biomass fuel, SO 2 emission is much less than coal-fired. The volatile organic content (VOC) of wheat straw and corn stems for Anqiu CHP is much higher than the VOC of coal used locally, as a result, both SO 2 and NOx emissions are 71 projected able to meet relevant standards without de-sulfurization or extra removal measures for NOx. For particulate matters, a bag-filter has been proposed, with expected efficiency of 99.7% for TSP. On-line monitoring of flue gas emissions will be installed for Anqiu biomass CHP plant and connected in real time to the city EPB as required by national and provincial regulations. 7. Slag and ash from combustion of agro-wastes will be used as raw material for fertilizer production. Wastewater from various processes of boiler operation will mostly be recycled or used as spray. A settlement tank will remove oil from the remaining wastewater before discharged into the sewage network and treatment at an existing wastewater treatment plant in Anqiu. 8. Impacts during operation of Component A sub-projects vary significantly depending on the nature of the sub-projects. The component‟s Environmental Guidelines (summarized below) rule out sub-projects with impacts that amount to Category A equivalent under Bank safeguard policy. It lays out the screening procedures and requires the sub-project proponent to prepare an EA with public consultation, and also prepare EMP in line with both national and Bank requirements. Alternative Analysis 9. Various alternatives were identified, evaluated, and compared during the EA process, in order to avoid or minimize potential adverse environmental and social impacts. The EA teams have worked closely with the project planners/owners and the feasibility study teams to compare and evaluate alternatives. A “no project” scenario was also considered as an alternative to each sub-project. 10. Alternative analysis for Anqiu CHP project included: (a) different raw material, with wheat straw preferred as the major feedstock to corn stems; (b) different types of boilers (chain, fluidized-bed and vibrating combined), with fluidized bed endorsed; (c) two different sites and different plant lay-outs; and (d) different de-dust treatment technologies (electrostatic precipitator, ESP, and bag filter), with the latter selected. Environmental Management Plan (EMP) 11. An EMP was developed as a chapter of the EA of Anqiu CHP to effectively address the negative impacts. The EMP will be included in the bidding documents and subsequently in contracts to ensure their implementation. 12. The EMP outlines the institutional arrangements and responsibility of each party (PMO, owner, contractor, supervision engineer, operator, regulating government agencies etc) in EMP implementation. It envisages that overall responsibility for ensuring EMP implementation rests with the provincial PMO. The PMO should have at least one staff in charge of EMP implementation, supervision and reporting. A budgeted training plan has been developed with content and arrangement for all parties involved (PMO staff, owners, contractors and workers, engineering supervision team, external monitoring and supervision agencies). It has been budgeted into the overall implementation plan and training plan of the project. 72 The EMP specifies mitigation measures in tabular format for easy reference during implementation and supervision. The table includes major negative impacts, mitigation measures, with the implementer and the supervision agency identified and proposed for the design/preparation, construction and operation phases. The EMP also has a detailed environmental monitoring plan for the construction and operation phases, covering ambient air, water quality, and noise level, as well as pollution at source. It specifies parameters monitored, sampling method, location, frequency, monitoring agency/consultant and budget estimate. Environmental monitoring has been integrated and budgeted into overall M&E program of the project. 13. The EMP includes a reporting scheme. Supervising engineers will be primarily responsible for routine monitoring of environmental performance during construction and for monthly reporting to the owner and the PMO. Public Consultation and Information Disclosure 14. Public Consultation. Two-stage public consultations were conducted with those affected by the proposed Anqiu CHP project and included persons from different groups, gender, socioeconomic and educational backgrounds, and occupations. The primary objective of the first round was to survey public opinion on the project, while that for the second was to communicate EA findings and discuss planned mitigation measures. These consultations took various forms, including questionnaires, expert consultations, and meetings with the affected public. 15. More than 100 people with a wide range of backgrounds were surveyed or consulted about the EA for Anqiu CHP. The overwhelming majority (more than 95%) of those consulted and surveyed has expressed strong support for the project and understanding of short-term consequences, such as noise and dust during construction. The environmental Guidelines for component A has been disclosed locally at the official website of the Provincial Energy Conservation Office, which serves as the PMO, followed by public consultation, mainly through questionnaire survey. 16. Information Disclosure. Information about the project, as well as the location and timing for public access to the full draft EA, was disclosed through major local TV, newspapers, websites and bulletins at local communities. The EA and the Guidelines in English have been posted at the World Bank Infoshop. The following table summarizes information disclosure for each project component. EA-related Information Disclosure Document disclosed 1st round 2nd round Location EA draft report for Anqiu 3 Aug. 2007 24 Nov. 2009 Anqiu TV. CHP. Anqiu Today Newspaper. Bulletins in local villages. Project owner‟s office. Environmental Guidelines March 2010 Website of Shandong Project For EE leasing component -- Management Office (SPMO) 73 Environmental Screening and Management Framework 17. Environmental Screening and Management Framework (hereafter referred to as the Framework) have been prepared for Component A jointly by Rongshihua, Guotai and Luxin, consistent with Chinese and Bank's requirements. The Guidelines provide guidance to host enterprises and leasing/ESCO companies on environmental screening, review and management of individual SEEP sub-projects. It defines procedure, responsibilities and requirements of each party involved to ensure compliance with both Chinese regulations and the World Bank environmental safeguard policies. 18. Sub-projects meeting the following criteria will be eligible under SEEP:  Impacts equivalent to Bank category B (moderate impacts of limited duration/extent and easily mitigated through standard, readily available measures), for which usually simple EA (EA form) is required in China.  Equivalent to category C (with little or no environmental impacts and requiring no mitigating measures) for which usually no EA is required in China.  If candidate sub-project satisfy one of the above two conditions, the host enterprise‟s existing production facility needs to have an approved EA as well as other approval, permits etc. required by the Chinese environmental authorities;  Sub-projects equivalent to category A (with significant adverse environmental impacts that are sensitive, diverse, or unprecedented) and those might trigger other safeguard policies (e.g., OP4.04 on natural habitat) are not eligible. The SEEP will also not support types of sub-projects listed in Appendix 2 of the Guidelines. 19. The host enterprise is responsible for preparing the EA, if an EA is required domestically, as well as an EMP to satisfy Bank requirements. A sample EMP is provided in the appendix 3 of the Guidelines. The host enterprise is required to conduct public consultation and disclosure for all EAs, as specified in the Guidelines. 20. For the first two Category B sub-projects, Rongshihua/Guotai/Luxin will submit the EMP and the record of public consultation to the Bank for prior review and clearance before signing the leasing/ESCO contract. With Bank clearance, such category B sub-projects will not need prior review and pre-approval by the Bank. 21. During lease contract period, leasing companies will be responsible to ensure EMP implementation, properly with SPMO supervising the leasing companies. Rongshihua/ Guotai/Luxin will carry out site inspection for EMP implementation once a year until the end of contract. After the leasing/ESCO contract expires, Rongshihua/Guotai/Luxin will submit an environmental performance report for the completed sub-project to SPMO. SPMO is responsible for organizing supervision on random basis of the host enterprises to ensure that they implement the EMP and other relevant domestic requirements. After the leasing contract expires, the host enterprise will be responsible for EMP implementation, SPMO in charge of supervising the enterprises. The same principle applies to the ESCO model under Luxin Energy and the super- ESCO model of Rongshihua. 74 22. SPMO's annual monitoring and evaluation (M&E) report to the Bank should include EMP implementation of sub-projects during the reporting period, summarizing environmental monitoring data and findings, and remedial actions for problems identified. 23. Rongshihua/Guotai/Luxin should include an environmental section in their periodic report to SPMO, with content required for SPMO to consolidate in the annual M&E report to the Bank. Such section should have same coverage of EMP implementation as described above. Accordingly, Rongshihua/Guotai/Luxin should request the host enterprises to submit similar report to them, if necessary. 24. The Project will have positive social impacts for residents in project cities. These include local residents who will benefit from increased heat supply and improved heat quality, as well as improved air quality due to the construction of CHP and related heat networks; people in surrounding areas of Anqiu City who might be involved in the process of biomass fuel collection, processing, and transportation, will also benefit from additional income. 25. Social Impacts. The main potential social impacts are limited land acquisition for the proposed CHP plant site and temporary land occupation for related heat networks. For two EE Leasing and ESCO components, no land acquisition is expected; the only anticipated negative impacts are during construction of district heating pipelines outside the industrial facilities. Individual resettlement plans have been prepared during project preparation. At appraisal no sub- projects requiring such plans had been identified. Due Diligence for Anqiu Shengyuan Biomass CHP Sub-project 26. Anqiu Biomass CHP Plant is located in Xiaoshi Village Xingan Sub-district, about four kilometers from the existing Anqiu County Town. A total of 7.56 ha of land areas are required for the plant site, including 6.63 ha of farmland. A total of 25 households in 8 villages or residential committees are affected. The land acquisition process for the proposed project site began in November 2008 was completed in May 2009. 17 27. A due diligence review of the implementation process and outcome of land acquisition has been conducted by an independent agency. The due diligence review found that land acquisition procedure had followed relevant national laws and regulations; compensation policies and rehabilitation measures adopted were adequate and fully delivered; affected people were consulted and informed; and the process and outcomes of land acquisition were considered satisfactory to the affected people and in compliance with the principles of the World Bank policies on involuntary resettlement (OP4.12). Resettlement Policy Framework for Two EE Leasing Companies 28. The EE Leasing and ECSO component will mostly finance sub-projects that will replace old equipment within existing plants, with no land acquisition required. However, sub-projects of 17 Some minor impacts like temporary land occupation for construction of water pipelines and heating pipelines took place in the later part of 2009. Since all such impacts are located in the stated owned waterway and road areas, no impacts on individuals were involved. 75 using waste heat from existing power generation units for heat supply might have limited impacts during construction of relevant heat pipelines outside the plants. A resettlement policy framework has therefore been developed for those sub-projects that might involve with any limited land acquisition. 29. In accordance with relevant Chinese laws and regulations, and World Bank Operational Policy OP4.12, the resettlement policy framework introduces the policy objectives, legal framework and compensation entitlements for different categories of impacts; specifies the screening procedures for those sub-projects that might involve with land acquisition and resettlement; and provides basic guidelines on preparation of individual resettlement plans. In addition, the requirements on consultation and disclosure, as well as monitoring and grievance procedures, have been highlighted in the policy framework. The RPF was disclosed in the province in March 2010. 30. To facilitate the resettlement screening by EE Leasing and ESCO Companies, a resettlement screening table has been developed and included in RPF. Based on such table, a resettlement screening will be carried out for all potential subprojects to be financed through EE Leasing and ESCO Companies. Once it is determined that land acquisition or any associated impacts is essential to complete any project activities, resettlement planning should begin. The overall responsibility for preparation and implementation of any necessary RPs rests with sponsors of individual subprojects. The sub-project owner will carry out a census survey to identify and enumerate all displaced persons, and a socioeconomic survey to determine the range and scope of adverse impacts in the affected area. Based on accurate baseline census survey and social economic survey, the RAP will be prepared in accordance with the policy principles and planning and implementation arrangements set forth in this RPF, and established appropriate mitigation measures as appropriate for all categories of adverse impacts. 76 Annex 11: Project Preparation and Supervision CHINA: Shandong Energy Efficiency Project Planned Actual PCN review 05/29/2009 05/29/2009 Initial PID to PIC 07/24/2009 Initial ISDS to PIC 12/24/2009 Appraisal 07/26/2010 08/16/2010 Negotiations 09/15/2010 04/25/2011 Board/RVP approval 06/09/2011 Planned date of effectiveness 08/17/2011 Planned date of mid-term review Planned closing date 09/30/2016 Key institutions responsible for preparation of the project: World Bank and Asian Development Bank Energy Conservation Project Management Office Shandong Rongshihua Leasing Company, Ltd. Guotai Leasing Company, Ltd. Shandong Thermal Power Design Institute Luxin Energy Investment and Management Company Bank staff and consultants who worked on the project included: Name Title Unit Gailius Draugelis Senior Energy Specialist (TTL) EASCS Alberto U. Ang Co Senior Energy Specialist EASIN Yanqin Song Energy Specialist EASCS Pekka Salminen Senior Energy Specialist (District Heating & ECSS2 Power) Yabei Zhang Energy Economist EASIN Xiaowei Guo Senior Procurement Specialist EAPPR Xin Ren Environmental Specialist ECSCS Graeme Eric Hancock Senior Energy Specialist, Mining COCPO Christopher Finch Senior Country Officer EACCQ Youxuan Zhu Consultant (Social Safeguards) EASCS Robert P. Taylor Consultant (Energy Efficiency) ECSIN Charles Husband Consultant (Financial Analyst) ECSCS Fang Zhang Financial Analyst (Financial Management) EAPFM 77 Annex 12: Documents in the Project File CHINA: Shandong Energy Efficiency Project 2x15MW Anqiu Biomass Cogeneration Feasibility Study, 2010 Environmental Impact Assessment Due Diligence Report (Social) –Anqiu Operations Manuals Accelerating Energy Conservation in China‟s Provinces, 2010 (Aus Aid / WB Study) GEF Provincial Energy Efficiency Scale Up Project – Project Appraisal Document 78 Annex 13: Statement of Loans and Credits CHINA: ProjectName Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev‟d P098078 2011 CN-Huai River Basin Flood Management 200.00 0.00 0.00 0.00 0.00 199.50 0.00 0.00 an. P116656 2011 CN-Zhejiang Qiantang River Basin Small 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 T P105872 2011 CN-Integrated Forestry Development 100.00 0.00 0.00 0.00 0.00 95.75 -4.00 0.00 P118647 2011 CN-Anhui Shaying River Channel Improv 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 P081615 2010 CN-Taiyuan Urban Transport Project 150.00 0.00 0.00 0.00 0.00 149.63 0.00 0.00 P086446 2010 CN-Chongqing Urban-Rural Integration 84.00 0.00 0.00 0.00 0.00 75.79 -4.00 0.00 Pro P096920 2010 CN-Ningxia Highway 250.00 0.00 0.00 0.00 0.00 174.55 -74.82 0.00 P099751 2010 CN-Sustainable Dev. in Poor Rural Areas 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P101716 2010 CN-Jilin Food Safety 100.00 0.00 0.00 0.00 0.00 91.75 -6.00 0.00 P100455 2010 CN-Henan Ecological Livestock Project 80.00 0.00 0.00 0.00 0.00 71.80 -8.00 0.00 P106956 2010 CN - Ningbo New Countryside 50.00 0.00 0.00 0.00 0.00 46.88 0.50 0.00 Development P108627 2010 CN - Nanning Urban Environment 100.00 0.00 0.00 0.00 0.00 89.75 0.00 0.00 P111163 2010 CN-Xinjiang Water Conservation Project 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P111421 2010 CN-Anhui Medium Cities Urban 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 Transport P112759 2010 Shandong Ecological Afforestation 60.00 0.00 0.00 0.00 0.00 53.85 -6.00 0.00 P112838 2010 CN-Wuhan Second Urban Transport 100.00 0.00 0.00 0.00 0.00 91.10 -8.65 0.00 P113766 2010 CN-Energy Efficiency Financing II 100.00 0.00 0.00 0.00 0.00 99.75 0.00 0.00 P117107 2010 CN-Tech Vocational Ed 40.00 0.00 0.00 0.00 0.00 36.90 -3.00 0.00 P096926 2009 CN-Jiangsu Water and Wastewater Project 130.00 0.00 0.00 0.00 0.00 82.71 -12.97 0.00 P096923 2009 CN-Shanghai APL III 200.00 0.00 0.00 0.00 0.00 199.50 20.44 0.00 P091950 2009 CN-Guizhou Cultural and Natural 60.00 0.00 0.00 0.00 0.00 59.70 9.35 0.00 Heritage P096812 2009 CN-Yunnan Urban Env 150.00 0.00 0.00 0.00 0.00 128.04 1.92 0.00 P096707 2009 CN - GD Tech&Vocational ED and 20.00 0.00 0.00 0.00 0.00 15.45 2.25 0.00 Training P096556 2009 CN-Eco-Farming 120.00 0.00 0.00 0.00 0.00 90.57 -4.13 0.00 P114107 2009 CN-Wenchuan Earthquake Recovery 710.00 0.00 0.00 0.00 0.00 601.41 308.91 0.00 Project P112359 2009 CN-NanGuang Railway 300.00 0.00 0.00 0.00 0.00 290.01 -9.20 0.00 P107559 2009 CN-Guizhou-Guangzhou Railway 300.00 0.00 0.00 0.00 0.00 299.25 20.00 0.00 P100968 2009 CN-Shanxi Coal Bed Methane 80.00 0.00 0.00 0.00 0.00 79.80 27.20 0.00 Development P101258 2009 CN-Hubei Yiba Highway 150.00 0.00 0.00 0.00 0.00 148.63 44.02 0.00 P101988 2009 CN-Jiangxi Shihutang Navi & 100.00 0.00 0.00 0.00 0.00 56.60 38.25 0.00 Hydropower P101829 2009 CN Xining Flood and Watershed Mgmt 100.00 0.00 0.00 0.00 0.00 74.30 3.55 0.00 P096925 2008 CN- Bengbu Integrated Environment 100.00 0.00 0.00 0.00 0.00 83.19 19.44 0.00 Improv 79 P099224 2008 CN-Liaoning Med. Cities (LMC) III 191.00 0.00 0.00 0.00 0.00 154.92 71.12 0.00 P099112 2008 CN-Anhui Highway Rehab & 200.00 0.00 0.00 0.00 0.00 42.96 -61.04 0.00 Improvement P099062 2008 CN-ShiZheng Railway 300.00 0.00 0.00 0.00 0.00 214.87 5.62 0.00 P093963 2008 CN-Guiyang Transport 100.00 0.00 0.00 0.00 0.00 32.77 13.50 0.00 P087224 2008 CN-Han River Urban Environment 84.00 0.00 0.00 0.00 0.00 68.09 44.00 0.00 P085376 2008 CN-Migrant Skills Dev. and Employment 50.00 0.00 0.00 0.00 0.00 47.45 14.57 0.00 P091949 2008 CN-Gansu Cultural & Natural Heritage 38.40 0.00 0.00 0.00 0.00 20.68 -0.82 0.00 P084874 2008 CN- Energy Efficiency Financing 200.00 0.00 0.00 0.00 0.00 105.18 47.90 0.00 P092631 2008 CN-Xi'an Sustainable Urban Transport 150.00 0.00 0.00 0.00 0.00 130.24 17.64 19.39 P093882 2008 CN-Shandong Flue Gas Desulfurization 50.00 0.00 0.00 0.00 0.00 33.95 30.47 0.00 P084437 2008 CN-Rural Health 50.00 0.00 0.00 0.00 0.00 34.81 -11.07 0.00 P086515 2007 CN-3rd National Railway 200.00 0.00 0.00 0.00 0.00 35.91 5.84 0.00 P077752 2007 CN-SHANDONG ENVMT 2 147.00 0.00 0.00 0.00 0.00 53.24 -16.26 0.00 P081776 2007 CN-GUANGDONG/PRD2 96.00 0.00 0.00 0.00 0.00 63.39 26.89 0.00 P083322 2007 CN-SICHUAN URBAN DEV 180.00 0.00 0.00 0.00 0.00 68.27 65.77 0.00 P088964 2007 CN-Guangxi Integrated Forestry Dev 100.00 0.00 0.00 0.00 0.00 5.70 -38.80 0.00 P091020 2007 CN-Fujian Highway Sector Investment 320.00 0.00 0.00 0.00 0.00 16.62 -39.58 0.00 P095315 2007 CN-W. Region Rural Water & Sanitation 25.00 0.00 0.00 0.00 0.00 9.02 1.58 0.00 P092618 2007 CN-LIAONING MED CITIES INFRAS 2 173.00 0.00 0.00 0.00 0.00 133.92 54.05 0.00 P096285 2007 CN-MSE Finance 100.00 0.00 0.00 0.00 0.00 5.00 5.00 0.00 P070519 2006 CN-Fuzhou Nantai Island Peri-Urban Dev 100.00 0.00 0.00 0.00 0.00 24.69 18.44 -2.66 P081348 2006 CN-HENAN TOWNS WATER 150.00 0.00 0.00 0.00 0.00 96.00 66.00 0.00 P081255 2006 CN-Changjiang/Pearl River Watershed 100.00 0.00 0.00 0.00 0.00 45.90 30.90 2.42 Reha P075732 2006 CN-SHANGHAI URBAN APL2 180.00 0.00 0.00 0.00 0.00 61.55 54.05 0.00 P096158 2006 CN-Renewable Energy II (CRESP II) 86.33 0.00 0.00 0.00 1.65 8.86 10.51 0.00 P086629 2006 CN-Heilongjiang Dairy 100.00 0.00 0.00 0.00 30.00 15.62 45.12 0.00 P099992 2006 CN-Liaoning Medium Cities 218.00 0.00 0.00 0.00 0.00 97.11 59.11 0.00 Infrastructure P085124 2006 CN-Ecnomic Reform Implementation 20.00 0.00 0.00 0.00 0.00 12.85 22.85 0.00 P081346 2005 CN-LIUZHOU ENVIRONMENT MGMT 250.00 0.00 0.00 0.00 0.00 156.20 4.90 0.00 P081161 2005 CN-CHONGQING SMALL CITIES 180.00 0.00 0.00 0.00 0.00 31.60 22.60 0.00 P075730 2005 CN-HUNAN URBAN DEV 172.00 0.00 0.00 0.00 0.00 81.71 81.71 16.71 P069862 2005 CN - Agricultural Technology Transfer 100.00 0.00 0.00 0.00 0.00 9.44 9.44 0.00 P071094 2005 CN - Poor Rural Communities 100.00 0.00 0.00 0.00 0.00 0.91 0.91 0.00 Development P066955 2004 CN-ZHEJIANG URBAN ENVMT 133.00 0.00 0.00 0.00 0.00 12.09 12.09 6.10 P075728 2004 CN-GUANGDONG/PRD UR ENVMT 128.00 0.00 0.00 0.00 0.92 49.44 50.37 49.73 P077137 2004 CN-4th Inland Waterways 91.00 0.00 0.00 0.00 0.46 0.21 0.67 0.21 P040599 2003 CN-TIANJIN URB DEV II 150.00 0.00 0.00 0.00 0.00 51.11 51.11 42.35 Total: 9,446.73 0.00 0.00 0.00 33.03 6,017.69 1,132.22 134.25 80 CHINA STATEMENT OF IFC‟s Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2006 ASIMCO 0.00 0.00 4.12 0.00 0.00 0.00 3.61 0.00 2005 BCCB 0.00 59.21 0.00 0.00 0.00 59.03 0.00 0.00 2003 BCIB 0.00 0.00 12.04 0.00 0.00 0.00 0.00 0.00 2006 BUFH 8.14 0.00 0.00 0.00 8.14 0.00 0.00 0.00 2005 Babei 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 Babei Necktie 11.00 0.00 0.00 6.00 8.94 0.00 0.00 4.88 1999 Bank of Shanghai 0.00 21.76 0.00 0.00 0.00 21.76 0.00 0.00 2000 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 2002 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2005 BioChina 0.00 3.70 0.00 0.00 0.00 3.13 0.00 0.00 2002 CDH China Fund 0.00 2.02 0.00 0.00 0.00 0.00 0.00 0.00 2005 CDH China II 0.00 17.99 0.00 0.00 0.00 11.38 0.00 0.00 2006 CDH Venture 0.00 20.00 0.00 0.00 0.00 0.51 0.00 0.00 2005 CT Holdings 0.00 0.00 40.00 0.00 0.00 0.00 0.00 0.00 2004 CUNA Mutual 0.00 10.53 0.00 0.00 0.00 0.00 0.00 0.00 2006 Capital Today 0.00 25.00 0.00 0.00 0.00 0.32 0.00 0.00 2005 Changyu Group 0.00 18.07 0.00 0.00 0.00 18.07 0.00 0.00 1998 Chengdu Huarong 3.36 3.20 0.00 3.13 3.36 3.20 0.00 3.13 2004 China Green Ener 20.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 2004 China Re Life 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2006 Chinasoft 0.00 0.00 15.00 0.00 0.00 0.00 10.00 0.00 2004 Colony China 0.00 15.31 0.00 0.00 0.00 9.29 0.00 0.00 2004 Colony China GP 0.00 0.84 0.00 0.00 0.00 0.49 0.00 0.00 2006 Conch 81.50 40.93 0.00 0.00 81.50 0.00 0.00 0.00 2006 Dagang NewSpring 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Darong 10.00 0.24 0.00 8.00 6.67 0.24 0.00 5.33 2006 Deqingyuan 0.00 2.85 0.00 0.00 0.00 2.85 0.00 0.00 1994 Dynamic Fund 0.00 2.21 0.00 0.00 0.00 2.01 0.00 0.00 2007 Epure 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Fenglin 17.64 0.00 6.00 13.47 13.64 0.00 6.00 12.53 2006 Fenglin HJ MDF 0.23 0.00 0.00 3.27 0.00 0.00 0.00 0.00 2005 Five Star 0.00 0.00 7.00 0.00 0.00 0.00 0.00 0.00 2006 GDIH 50.85 0.00 0.00 0.00 50.85 0.00 0.00 0.00 2003 Great Infotech 0.00 1.73 0.00 0.00 0.00 1.03 0.00 0.00 2006 Hangzhou RCB 0.00 10.85 0.00 0.00 0.00 0.00 0.00 0.00 2005 HiSoft Tech 0.00 4.00 0.00 0.00 0.00 3.00 0.00 0.00 2006 HiSoft Tech 0.00 4.34 0.00 0.00 0.00 1.74 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 52.18 0.00 0.00 81 2004 Jiangxi Chenming 40.00 12.90 0.00 18.76 40.00 12.90 0.00 18.76 2006 Launch Tech 0.00 8.35 0.00 0.00 0.00 8.33 0.00 0.00 2001 Maanshan Carbon 5.25 2.00 0.00 0.00 5.25 2.00 0.00 0.00 2005 Maanshan Carbon 11.00 1.00 0.00 0.00 5.00 1.00 0.00 0.00 2005 Minsheng 15.75 0.00 0.00 0.00 7.00 0.00 0.00 0.00 2006 Minsheng & IB 25.09 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2005 Minsheng Bank 0.00 2.80 0.00 0.00 0.00 2.79 0.00 0.00 2001 NCCB 0.00 8.94 0.00 0.00 0.00 8.82 0.00 0.00 1996 Nanjing Kumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00 2004 Nanjing Kumho 31.38 2.23 0.00 0.00 31.38 2.23 0.00 0.00 2006 Neophotonics 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 2001 New China Life 0.00 5.83 0.00 0.00 0.00 5.83 0.00 0.00 2005 New Hope 0.00 0.00 45.00 0.00 0.00 0.00 0.00 0.00 1995 Newbridge Inv. 0.00 0.22 0.00 0.00 0.00 0.22 0.00 0.00 2005 North Andre 8.00 6.74 0.00 0.00 0.00 4.25 0.00 0.00 2003 PSAM 0.00 2.01 0.00 0.00 0.00 0.00 0.00 0.00 RAK China 13.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2006 Renaissance Sec 0.00 0.00 20.04 0.00 0.00 0.00 0.00 0.00 2006 Rongde 0.00 35.00 0.00 0.00 0.00 31.38 0.00 0.00 SAC HK Holding 0.00 1.60 0.00 0.00 0.00 1.00 0.00 0.00 2003 SAIC 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2006 SBCVC 0.00 20.00 0.00 0.00 0.00 2.00 0.00 0.00 2000 SEAF SSIF 0.00 3.74 0.00 0.00 0.00 3.37 0.00 0.00 SH Keji IT 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SHCT 38.18 0.00 0.00 28.64 29.04 0.00 0.00 21.78 2004 SIBFI 0.14 0.07 0.00 0.00 0.00 0.07 0.00 0.00 1998 Shanghai Krupp 19.25 0.00 0.00 36.75 19.25 0.00 0.00 36.75 2006 Shanshui Group 50.00 5.50 2.20 0.00 50.00 5.50 0.00 0.00 1999 Shanxi 12.61 0.00 0.00 0.00 12.61 0.00 0.00 0.00 SinoSpring 0.00 0.00 20.00 0.00 0.00 0.00 0.00 0.00 Stora Enso 20.83 0.00 0.00 4.17 11.00 0.00 0.00 0.00 2005 Stora Enso 29.17 0.00 0.00 20.83 0.00 0.00 0.00 0.00 2006 Stora Enso 50.00 0.00 0.00 175.00 0.00 0.00 0.00 0.00 2006 TBK 4.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2006 VeriSilicon 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00 Wanjie High-Tech 9.89 0.00 0.00 0.00 9.89 0.00 0.00 0.00 2004 Wumart 0.00 1.62 0.00 0.00 0.00 1.62 0.00 0.00 2003 XACB 0.00 17.95 0.00 0.00 0.00 0.64 0.00 0.00 2004 Xinao Gas 25.00 10.00 0.00 0.00 25.00 10.00 0.00 0.00 2006 Zhejiang Glass 50.00 24.96 0.00 18.00 0.00 0.00 0.00 0.00 2003 Zhengye-ADC 10.43 0.00 0.00 4.87 10.43 0.00 0.00 4.87 2002 Zhong Chen 0.00 4.78 0.00 0.00 0.00 4.78 0.00 0.00 2006 Zhongda_Yanjin 21.89 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 733.58 577.30 181.40 340.89 470.95 371.06 29.61 108.03 82 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2002 SML 0.00 0.00 0.00 0.00 2004 NCFL 0.00 0.00 0.02 0.00 2007 Xinao CTC 0.04 0.01 0.00 0.14 2004 China Green 0.00 0.00 0.01 0.00 2006 Launch Tech 0.01 0.00 0.00 0.00 2005 MS Shipping 0.00 0.01 0.00 0.00 2003 Peak Pacific 2 0.00 0.01 0.00 0.00 Total pending commitment: 0.05 0.03 0.03 0.14 83 Annex 14: Country at a Glance CHINA: ProjectName 84 85 Annex 15: Maps CHINA: Shandong Energy Efficiency Project 86 IBRD 38348 I R U S S I A N F E D E R AT I O N I This map was produced by the Map Design Unit of The World Bank. I The boundaries, colors, denominations and any other information I shown on this map do not imply, on the part of The World Bank I HEILONGJIANG Group, any judgment on the legal status of any territory, or any I H E B E I endorsement or acceptance of such boundaries. I e I MONGOLIA nh I JILIN Yu I a I GOL D I I MON Sea of XINJIANG LIAONING D.P.R. OF NEI I Japan I BEIJING KOREA I BEIJING Bo Sea I TIANJIN REP. OF 0 20 40 60 80 I HEBEI KOREA I NINGXIA SHANXI SHANDONG I Yellow QINGHAI JAPAN KILOMETERS I Sea GANSU HENAN ANHUI JIANGSU Zhangwei Xinhe I SHAANXI I I SHANGHAI R. I HUBEI n XIZANG ING Ha East I SICHUAN ZHEJIANG GQ China I ON Sea I CH JIANGXI HUNAN DONGYING I National FUJIAN I GUIZHOU I Capital ia TAIWAN aj I YUNNAN Province Yantai Weihai I GUANGDONG M GUANGXI BINZHOU PACIFIC Boundaries HONG KONG I OCEAN MYANMAR International MACAO I VIETNAM I Boundaries LAO Dezhou Lai Zhou Bay I I He P.D.R. 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