FOR OFFICIAL USE ONLY Report No: PAD2794 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED GREEN CLIMATE FUND GUARANTEE IN THE AMOUNT OF US$ 75 MILLION AND A PROPOSED GREEN CLIMATE FUND GRANT IN THE AMOUNT OF US$ 11.3 MILLION TO THE SOCIALIST REPUBLIC OF VIETNAM FOR A VIETNAM SCALING UP ENERGY EFFICIENCY PROJECT June 26, 2019 Energy & Extractives Global Practice 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 April 30, 2019) Currency Unit = Vietnamese dong VND23,290 = US$1 FISCAL YEAR January 1 - December 31 Regional Vice President: Victoria Kwakwa Country Director: Ousmane Dione Senior Global Practice Director: Riccardo Puliti Practice Manager: Julia M. Fraser Practice Manager Guarantees: Sebnem Erol Madan Task Team Leader(s): Thi Ba Chu, Joonkyung Seong, Jukka-Pekka Strand GLOSSARY AE Accredited Entity bps basis points, 1 basis point = 0.01% CAR Capital Adequacy Ratio CPEE Clean Production and Energy Efficiency Project, financed by the Global Environment Facility EA Environmental Assessment ECOP Environmental Code of Practice EIA Environmental Impact Assessment EM Ethnic Minority EMDP Ethnic Minority Development Plan EMPF Ethnic Minority Planning Framework ESCO Energy Service Company ESMF Environmental and Social Management Framework EVN Vietnam Electricity FAA Funded Activity Agreement between GCF and the World Bank FM Financial Management GCF Green Climate Fund GCF Grant US$11.3 million grant from GCF to the Government of Vietnam GCF Grant Grant agreement between the World Bank and Vietnam for the GCF Grant Agreement GCF Guarantee US$75 million Guarantee extended by GCF, through the World Bank to the PIE GCF Guarantee Guarantee agreement between the World Bank and the PIE for the GCF Guarantee Agreement GDP Gross Domestic Product GHG Greenhouse Gas GoV Government of Vietnam GRS Grievance Redress Service HCMC Ho Chi Minh City IBRD International Bank for Reconstruction and Development IBRD Loan IBRD Loan under the Vietnam Energy Efficiency for Industrial Enterprises Project IDA International Development Association IE Industrial Enterprise Implementation Agreement on implementation arrangements between MoIT and PIE Agreement KOICA Korea International Cooperation Agency LDR Loan to Deposit Ratio LNG Liquefied Natural Gas Master Guarantee agreement between the PIE and each PFI participating in the RSF Guarantee Agreement MFD Maximizing Finance for Development MoF Ministry of Finance MoIT Ministry of Industry and Trade MoU Memorandum of Understanding NDC Nationally Determined Contribution NGO Non-Governmental Organization NPL Non-Performing Loan NPV Net Present Value OM Operations Manual PCR Physical Cultural Resources PCRA Procurement Capacity and Risk Assessment PDO Project Development Objective PDP Power Development Plan PFI Participating Financial Institution PFI Loan Loans extended by PFIs to IEs/ESCOs to finance a Sub-Project PFI Loan Loan agreement between the PFI and the IE/ESCO for a PFI Loan Agreement PIE Program Implementing Entity PMB Project Management Board within MoIT PPSD Project Procurement Strategy Document RAP Resettlement Action Plan RE Renewable Energy RMF Risk Management Framework ROA Return on Assets ROE Return on Equity RPF Resettlement Policy Framework RSF Risk Sharing Facility RSF Years 6-15 of the Risk Sharing Facility during which period PFI Loans and the associated Amortization RSF Guarantees amortize and the RSF does not issue new RSF Guarantees anymore Period RSF Availability Years 1-5 of the Risk Sharing Facility when the facility is issuing RSF Guarantees Period RSF Guarantee A partial credit guarantee extended by the PIE to a PFI to cover potential defaults under a PFI Loan provided by the PFI to an IE/ESCO RSF Guarantee A guarantee letter issued by the PIE to a PFI in respect of a specific RSF Guarantee Letter pursuant to the Master Guarantee Agreement between the PFI and the PIE Sanctionable Sanctionable Practices include corrupt, fraudulent, collusive, coercive, or obstructive Practices practices, as defined in the World Bank Anti-Corruption Guidelines SBV State Bank of Vietnam Seed Funding US$3 million out of the US$11.3 million GCF Grant. Used to pay for operating expenses associated with the RSF. SME Small and Medium Enterprises STEP Systematic Tracking of Exchanges in Procurement Sub-Project Energy efficiency project prepared by the IEs/ESCOs and financed by RSF-guaranteed PFI Loans TA Technical Assistance TA and Capacity Technical Assistance and Capacity Building funded using grant funding from GCF and IDA Building UNFCCC United Nations Framework Convention on Climate Change US$ United States Dollar VND Vietnamese Dong World Bank World Bank Anti-Corruption Guidelines, revised as of July 2016 Anti-Corruption Guidelines The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) TABLE OF CONTENTS DATASHEET .......................................................................................................................... 1 1. STRATEGIC CONTEXT ...................................................................................................... 6 A. Country Context................................................................................................................................ 6 B. Sectoral and Institutional Context .................................................................................................... 8 C. Relevance to Higher Level Objectives............................................................................................. 10 2. PROJECT DESCRIPTION.................................................................................................. 10 A. Project Development Objective ..................................................................................................... 10 B. Project Components ....................................................................................................................... 10 C. Project Beneficiaries ....................................................................................................................... 14 D. Results Chain .................................................................................................................................. 14 E. Rationale for Bank Involvement and Role of Partners ................................................................... 15 F. Lessons Learned and Reflected in the Project Design .................................................................... 18 3. IMPLEMENTATION ARRANGEMENTS ............................................................................ 19 A. Institutional and Implementation Arrangements .......................................................................... 19 B. Results Monitoring and Evaluation Arrangements......................................................................... 21 C. Sustainability................................................................................................................................... 22 4. PROJECT APPRAISAL SUMMARY ................................................................................... 23 A. Technical, Economic and Financial Analysis ................................................................................... 23 B. Fiduciary.......................................................................................................................................... 24 C. Safeguards ...................................................................................................................................... 25 5. KEY RISKS ..................................................................................................................... 28 6. RESULTS FRAMEWORK AND MONITORING ................................................................... 31 7. TERMS AND CONDITIONS OF THE GCF GUARANTEE ....................................................... 37 ANNEX 1: Implementation Arrangements and Support Plan .......................................... 43 ANNEX 2: Assessment of Participating Financial Institutions .......................................... 59 ANNEX 3: Selection of Program Implementing Entity ..................................................... 61 ANNEX 4: Economic and Financial Analysis .................................................................... 63 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name Vietnam Vietnam Scaling Up Energy Efficiency Project Project ID Financing Instrument Environmental Assessment Category Investment Project P164938 F-Financial Intermediary Assessment Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [✓] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [✓] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date Expected Guarantee Expiration Date 28-Jun-2019 31-Jan-2025 31-Oct-2034 Bank/IFC Collaboration No Proposed Development Objective(s) The Project Development Objective is to improve energy efficiency in Vietnam's industrial sector. Components Component Name Cost (US$, millions) Page 1 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Risk Sharing Facility 78.00 Technical Assistance and Capacity Building 8.30 Organizations Borrower: SOCIALIST REPUBLIC OF VIETNAM Implementing Agency: Department of Energy Efficiency and Sustainable Development , Ministry of Industry and Trade PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 262.30 Total Financing 262.30 of which IBRD/IDA 0.00 Financing Gap 0.00 DETAILS -NewFinEnh1 Non-World Bank Group Financing Trust Funds 11.30 Green Climate Fund 11.30 Commercial Financing 251.00 Commercial Financing Guaranteed 100.50 Unguaranteed Commercial Financing 150.50 Expected Disbursements (in US$, Millions) WB Fiscal Year 2019 2020 2021 2022 2023 2024 2025 Annual 0.00 1.50 2.00 2.00 2.00 2.00 1.80 Cumulative 0.00 1.50 3.50 5.50 7.50 9.50 11.30 Page 2 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Energy & Extractives Infrastructure, PPP's & Guarantees Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of Yes country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or No men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) No SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ Moderate 2. Macroeconomic ⚫ Substantial 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Moderate 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Substantial 7. Environment and Social ⚫ Moderate 8. Stakeholders ⚫ Moderate 9. Other ⚫ Moderate 10. Overall ⚫ Substantial Page 3 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [✓] Yes [ ] No Have these been approved by Bank management? [✓] Yes [ ] No Is approval for any policy waiver sought from the Board? [ ] Yes [✓] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Performance Standards for Private Sector Activities OP/BP 4.03 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Sections and Description GCF Grant Agreement, Schedule 2: Covenants related to institutional and other arrangements (Operations Manual, Risk Sharing Facility, Implementation Agreement, Safeguards, etc.), project monitoring, reporting and evaluation. Page 4 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Conditions Type Description Effectiveness GCF Grant Agreement, Article V: The Program Implementing Entity has been duly authorized by MOIT to establish, maintain and manage the risk sharing facility under Part 1 of the Project on behalf of the Recipient. Type Description Disbursement GCF Grant Agreement, Schedule 2, Section IV.B.1(b): (i) the Recipient has furnished to the World Bank evidence acceptable to the World Bank that the Implementation Agreement has been executed on behalf of the Recipient, through MoIT, and the Program Implementing Entity, and is binding and enforceable upon the respective parties thereto in accordance with its terms. As part of the evidence to be furnished pursuant to the previous sentence of this sub-paragraph 1 (b), there shall be furnished to the World Bank an opinion or opinions satisfactory to the World Bank of counsel acceptable to the World Bank or, if the World Bank so requests, a certificate satisfactory to the World Bank of a competent official of each of the Recipient and the Program Implementing Entity, showing that the Implementation Agreement referred to in Section I.E of Schedule 2 to this Agreement has been duly authorized or ratified by the Recipient and the Program Implementing Entity and is legally binding upon each such party in accordance with its terms; (ii) the Operations Manual has been adopted by the Program Implementing Entity and MoIT, in form and substance satisfactory to the World Bank; and (iii) the GCF Guarantee Agreement has been executed on behalf of the World Bank and the Program Implementing Entity. Note: As indicated under the Compliance section of the Data Sheet above, Management exceptionally approved the waiver of Section III/paragraphs 29 and 30 of the Bank Directive on Investment Project Financing (IPF) and provisions related to Preparation of Approval Package for RVP Approval in Bank Procedure on IPF Preparation, in order to allow the submission of the Approval package for RVP Approval without a negotiated Grant Agreement. After RVP Approval, negotiations with the Green Climate Fund (GCF) on the Funded Activity Agreement (FAA) will commence followed by the process for finalizing the GCF Grant Agreement with the Government of Vietnam. Page 5 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 1. STRATEGIC CONTEXT A. Country Context 1. Vietnam has experienced impressive economic growth and poverty reduction in the past 25 years. The country’s Gross Domestic Product (GDP) has grown from US$33.6 billion in 2000 to about US$240 billion in 2018 and access to electricity services - which was below 10 percent in 1986 - has grown to more than 98 percent in 2018, contributing to reducing poverty and boosting shared prosperity. Expanded grid electrification of rural households has been mirrored by a sustained increase in GDP per capita. Rural electrification has been a critical component of the government’s program to eliminate poverty, redress imbalances in development, and improve overall welfare levels by providing reliable lighting sources, better living conditions, health care, and other rural services. The percentage of people living in extreme poverty (US$1.9 per day) stands at less than 3 percent today. 2. Vietnam’s creditworthiness and investment climate continue to improve. Fitch Ratings, on 14 May 2018, upgraded Vietnam’s Long Term Foreign-Currency Issuer Default Rating (IDR) to “BB� from “BB-� with a stable outlook. The upgrade of the IDR reflects the key rating drivers, including: (i) improved track record of policy-making focused on strong macro- economic performance, (ii) stronger external buffers with foreign exchange reserves in 2017 rising to US$49 billion (around 2.3 months of external current payments); (iii) build-up in liquidity in the banking system due to strong capital inflows and unsterilized reserve accumulation; and (iv) reduction in public debt (general government debt including guarantees) to 61.4% of GDP by end-2017, remaining below the 65% debt ceiling. 3. Vietnam is one of the most energy-intensive countries in East Asia. Its energy intensity of GDP is steadily increasing, and its energy elasticity of GDP is estimated at 2, compared to less than 1 for most countries. As a result, the final energy consumption tripled over the past decade. Industrial growth has been one of the key drivers of Vietnam’s increasing energy intensity, accounting for 48 percent or almost half of the final energy use. Vietnam Energy Statistics 2014 shows that cement and constructional materials and food processing industries consumed the most energy. Because industry is the most energy-intensive economic sector, this increase in the industrialization of Vietnam’s economy by itself contributes to the increase in Vietnam’s overall energy intensity. 4. Vietnam’s emissions are expected to increase dramatically by 2030. Between 2010 and 2030, Vietnam’s overall GHG emissions will increase fivefold, per capita emissions fourfold, and the carbon intensity of GDP by 20 percent. The government recognized the importance of green growth and passed the Vietnam Green Growth Strategy for the period 2011–2020 with vision to 2050, which aims to restructure and improve economic institutions toward more efficient use of natural resources and improved competitiveness of the economy, which will be achieved through increased investments in technological innovation, natural capital, and economic instruments. This will contribute to responding to climate change, reducing poverty, and addressing sustainable economic development challenges. One of the important strategic objectives is to encourage energy efficiency, with a 2020 target to reduce the intensity of greenhouse gas (GHG) emissions by 8–10 percent as compared to the 2010 and reduce emissions from energy activities from 10 –20 percent compared to business-as-usual case. 5. Vietnam has also pledged, in its Nationally Determined Contribution (NDC) submitted to the United Nations Framework Convention on Climate Change (UNFCCC), to reduce 8 percent of the GHG emission by 2030 compared to the business-as-usual scenario and to further aim at 25 percent reduction with support from the international community. Page 6 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) One of the measures to achieve the mitigation target is to “improve effectiveness and efficiency of energy use; reducing energy consumption�, with a particular focus on manufacturing industries where energy consumption is high. Vietnam is currently revising its NDC target following sectoral approaches, and preparing new Power Sector Development Plan 8 (PSDP8) which aims to penetrate more renewable energy sources and scaling up demand side energy efficiency. The revised NDC target is planned to be submitted to UNFCCC in 2019. 6. As part of an overall Bank engagement in Vietnam, the Bank has been providing various forms of support including technical assistance and financing resources for the achievement of Vietnam’s climate change and green growth agenda. The Bank’s support to Vietnam is centered around 4 pillars, including (a) improving the overall financial viability of the energy sector and promote efficient private sector participation; (b) promoting supply and demand side energy efficiency; (c) scaling up renewables; and (d) developing competitive energy markets. The recently completed Clean Production and Energy Efficiency Project (CPEE), financed by the Global Environment Facility, provided technical assistance on assessment of energy efficiency potential in key industrial sectors and development of a voluntary agreement mechanism for energy efficiency performance. Vietnam’s Low Carbon Development and Policy-Marginal Abatement Curve study supported by the Bank identified low carbon options and provided policy recommendations for scaling up renewable energy (RE) and energy efficiency. The Fossil Fuel Subsidy and Power Sector Financial Recovery studies identified sectorial issues and provided recommendations for sustainable development of Vietnam power sector. The Bank is currently providing technical and financial support to scale up solar PV development developing a solar auction program and advising the cities of HCMC and Danang to develop their rooftop solar PV potential. The Bank is also advising in promoting regional power trade and interconnections with Laos to import hydropower generated electricity, to change VN’s coal trajectory. Other relevant Bank projects related to energy and climate change include the Renewable Energy Development Project, Power Reform and Climate Change Policy Lending series, the recently launched Energy Efficiency for Industrial Enterprises (VEEIE) and two supply side energy efficiency projects (Distribution Efficiency Project and Transmission Efficiency Project) Financial Sector Context 7. Vietnam’s financial system is a bank-based system. According to the State Bank of Vietnam (SBV), by the end of 2015 the banks’ assets were almost 3.8 times of GDP and accounted for more than 90 percent of the financial sector’s total assets. By the end of 2016, the banking sector consisted of 97 banking entities including four fully state-owned commercial banks, 33 joint-stock banks, 51 foreign banks and branches, and two policy banks. The top 10 banks account for approximately 78 percent of the assets of the entire banking system. Much of the rapid credit growth in recent years has occurred through the banking system. According to SBV, credit growth was at approximately 18 percent during 2016, compared to the targeted 15-18 percent in the beginning of the year. However, continuing weaknesses include undercapitalization and a suboptimal allocation of resources. The level of non-performing loans (NPLs), which was high in the past, has lowered through recent debt restructuring and the establishment of the Vietnam Asset Management Company (VAMC). The NPL ratio across the sector was around 2.8% at the end of 2016. Nevertheless, there is still a concern that NPLs remain underreported and true asset quality is likely to be weaker than stated. 8. Capital markets in Vietnam remain small and underdeveloped but growing. As reported by the MOF, by the end of 2016, the combined stock market and bond capitalization was 71 percent of GDP, compared to 56.5 percent in 2014. Capitalization remains low compared to other countries in the region, such as 106 percent in Thailand and 136 percent in Malaysia in 2014. Total Government bond issuance volume in 2016 was estimated to reach VND280 trillion (i.e. more than Page 7 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) USD12 billion). Vietnam’s formal market is highly retailed in nature with more than 98 percent of accounts registered with the Vietnam Securities Depository. 9. Interest rates have been on a downward trend since 2013 and stabilized in 2016. While the caps on deposit rates were removed, deposits of six months and below are still subject to a cap of 5.5 percent per annum. Recently, a few banks have attempted to cut deposit interest rates owing to favorable macro-conditions, including good liquidity and low inflation, but smaller banks have kept the higher rates to maintain or expand market shares. Low inflation and declining deposit rates may also motivate many retail depositors to switch to higher-yield investment channels such as stocks and properties. The SBV used several monetary policy tools to lower lending rates, such as (i) requiring credit institutions to reduce lending rates by cutting and managing operation costs and (ii) keeping low discount rates, thereby encouraging low interbank rates. To date, Vietnamese dong lending rates to prioritized sectors are commonly set at 6-9 percent p.a. for short-term loans, while medium- and long-term rates charged by state-owned commercial banks remain in the 8-10 percent p.a. range. Lending rates to normal manufacturing/business sectors commonly range of 7-10 percent p.a. for short-term loans and 9-12 percent p.a. for long-term loans. 10. Access to finance is considered one of the significant barriers for the energy efficiency market. In the banking sector, only a few local financial institutions have dedicated energy efficiency lending as part of their green financing business line, which accounts for only a small fraction of the loan portfolio. Most of the existing energy efficiency lending is focused on a small number of large industrial companies with high creditworthiness. On the contrary, many industrial enterprises (IEs) and energy service companies (ESCOs) do not have the same creditworthiness or equity resources as the larger companies, and therefore have limited access to capital from the local banking sector. Local banks also have little incentive to provide long-term loans given the prevailing term structure of interest rates in Vietnam, which does not provide banks with much additional margin for longer tenors. In addition, many local banks lack experience and capacity to appraise energy efficiency investments or have a high risk perception of such investments, limiting opportunities to unlock the energy saving and climate mitigation potential of the industrial sector. Considering the various constraints together, local banks are currently not incentivized to expand their lending for energy efficiency purposes. B. Sectoral and Institutional Context 11. Electricity demand has grown at a compound annual growth rate of 13 percent since 2000, and is projected to continue at 8 percent through 2030. Vietnam’s energy sector is facing two major challenges to meet future energy demand: (a) resource constraints and energy security; and (b) high energy demand and huge financing needs. Vietnam has achieved more than 98 percent electricity access rates connecting over 20 million households and industry and commercial customers – this is a remarkable achievement. Today’s biggest energy challenge is to provide those customers with reliable electricity services and meet future demand. Per capita electricity consumption remains relatively low (that is, one-third of China), and it is anticipated that electricity demand will continue to grow fast for the next two decades. Current demand projections show a dramatic increase from 47.9 GW of installed capacity in 2018 to 60 GW in 2020 to 129.5 GW in 2030. 12. Vietnam has limited domestic energy resources remaining and has been planning to rely increasingly on imported coal to meet future energy needs. Most of the larger hydropower projects are developed, and Vietnam will need to improve the regulatory and pricing framework to further develop smaller hydro and largely unexplored solar and wind potential. There is large potential to bring more gas into the market from domestic fields and LNG. There have also been Page 8 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) substantial efforts to improve regional power trade, especially with Laos where up to 10 GW of hydropower generated electricity could be imported by 2030. Vietnam will increasingly rely on imported energy resources to meet its energy demand challenges, raising issues of energy supply security, vulnerability to international price fluctuations and subsequent impacts on domestic energy prices. 13. Meeting future energy demand by improving energy efficiency is the single best and lowest cost option to improve energy security, help consumers save and cope with potential rate hikes, reduce pollution, and mitigate climate change. If stronger programs and policies were put in place, current wasteful practices could be reduced and more efficient energy use technology could be adopted. This can meet a sizable portion of the business-as-usual demand for increased energy services, at costs which are typically one-fourth the cost of additional energy supply. The Bank’s Low Carbon Study has demonstrated that Vietnam could save up to 11 GW of new generation capacity by 2030 if comprehensive demand-side energy efficiency investments are carried out. 14. The Vietnamese government passed a Law on Energy Efficiency and Conservation, issued a series of decrees by the prime minister to promote energy efficiency, and set a target of 5–8 percent of energy savings from 2012 to 2015 compared to the forecast energy demand. The set target of energy saving has been mostly achieved, overall energy saving for the period was 5.81%. With the Bank’s support, MoIT now is preparing a new national energy efficient program for period 2020-2030 setting energy saving target of 8-10% in comparison to demand projection in revised PDP7. In addition to the government’s national programs, a number of parallel efforts have been initiated in direct cooperation with donor agencies. Also, to promote efficient use of electricity and reduce consumption, the government has introduced time-of- use electricity tariffs for medium and large customers and developed an energy efficiency standard and labeling road map. 15. In order to support the government commitments to energy efficiency, the Bank has provided many forms of technical assistance to MoIT related to demand side energy efficiency, including energy efficiency benchmarking for energy intensive industries, promotion of energy efficiency mandatory schemes, and development of an energy service companies (ESCO) market. Those efforts will help create market demand for energy efficiency and establish an enabling environment for energy efficiency investment, unlocking high energy efficiency potential in Vietnam’s industrial sectors. 16. To date, MoIT has issued energy efficiency circulars for six energy intensive industries which regulate minimum energy performance standards including chemical, iron and steel, pulp and paper, plastic, beverage and seafood processing. Those industries are mandated to achieve minimum energy performance set by MoIT’s circulars. Similar regulations will be promulgated for other industries including cement and sugarcane. MoIT has also issued guidelines for implementation of ESCO energy performance contracts which allow for an ESCO market to develop and scale up EE investment. Also, within the framework of the new national energy efficiency program, MoIT is setting EE targets for provincial administrations and industrial sectors, requiring energy users to be responsible for energy savings and emission reduction. 17. Energy tariff reform is being implemented toward cost recovery Industrial enterprises are paying a time of use electricity tariff which is currently about 12 US cent/kWh during peak hours. Nominal average electricity tariffs have increased by 62 percent from 2010 to 2017. However, the current tariff level does not allow EVN to fully cover i) O&M costs and debt service; or ii) future investments. A Bank study1 showed that for EVN to achieve full cost recovery, average 1 A Financial Recovery Plan for Vietnam Electricity: The World Bank. March 2016. Page 9 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) electricity tariffs needed to increase to US cents 12/kWh by 2020. The Bank continues providing technical advice on tariff reform toward efficient pricing and energy efficiency. 18. Despite numerous initiatives for energy efficiency investments from both the Government and donor community, significant barriers remain to implementing energy-saving measures. These binding constraints to investments are due to market failures and barriers rather than the financial viability or maturity of energy efficiency technologies. These constraints include: (i) limited public financing, (ii) limited availability of domestic or cross-border capital, (iii) unattractive financing terms, (iv) lack of awareness and capacity to identify and develop energy efficiency projects, (v) limited incentives to implement energy efficiency measures, and (vi) lack of IEs’ technical capacity to appraise projects. The principal barriers and the rationale of Bank involvement are explained in more details under Section 2.E. on Rationale for Bank Involvement and Role of Partners. C. Relevance to Higher Level Objectives 19. The Project is consistent with the World Bank Group Country Partnership Framework for FY18–FY22, across its multiple Focus Areas and Objectives. The design of the Project directly contributes to Focus Area 3: Ensure Environment Sustainability and Resilience through Objective 9: Promote low carbon energy generation, including renewables and energy efficiency, and reduce GHG emissions. In addition, it also supports Focus Area 1: Enable Inclusive Growth and Private Sector Participation, in particular Objective 1: Strengthen economic governance and market institutions and Objective 2: Promote private sector and agri-business development, by promoting a private-sector driven approach and financing from local financial institutions. The Project supports the Climate Change Action Plan 2016–2020 of the World Bank which commits to mobilizing US$25 billion in commercial funding for clean energy. Furthermore, the Project helps Vietnam achieve its pledges in the NDC and contributes to the implementation of its National Green Growth Strategy. 20. The Project design follows the Maximizing Finance for Development (MFD) approach of the World Bank Group which aims to mobilize private and commercial financing into infrastructure investments. Barriers to sustainable private sector solutions and proposed interventions to remove such barriers are described in more detail under Section 2.E. on Rationale for Bank Involvement and Role of Partners. 2. PROJECT DESCRIPTION A. Project Development Objective 21. The Project Development Objective (PDO) is to improve energy efficiency in Vietnam's industrial sector. The Project will thereby contribute to achieving the Government's overall energy saving and greenhouse gas emission reduction objectives. The PDO Level Indicators are: (1) Projected energy or fuel savings (MJ); (2) Net greenhouse gas emissions (ton/year). Details of the results framework are provided in Section 6. B. Project Components Page 10 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 22. The Project comprises two interrelated and closely coordinated components. The Project complements the existing Vietnam Energy Efficiency for Industrial Enterprises Project (VEEIE) 2 by supporting similar energy efficiency investments in the industrial sector and sharing implementation arrangements. 3 While VEEIE provides direct funding support through the IBRD credit line for those PFIs which require long-term funding to be able to lend more to IEs/ESCOs, this Project mitigates the risk perception associated with EE investments for those PFIs which otherwise have funding available for IEs/ESCOs. 23. Component 1: Risk Sharing Facility (RSF) (US$78 million in total, including US$75 million GCF Guarantee and US$3 million GCF Grant). This component supports the establishment of the RSF, which will provide partial credit guarantees (RSF Guarantees) to participating financial institutions (PFIs) to cover potential defaults on loans (PFI Loans) provided by PFIs to industrial enterprises (IEs) and energy service companies (ESCOs) to finance eligible energy efficiency sub-projects (Sub-Projects). The RSF is being established by Vietnam as a government program and the Program Implementing Entity (PIE), acting as manager of the RSF on behalf of Vietnam, will issue RSF Guarantees. RSF Guarantees are expected to mobilize private sector lending and equity and contribute to opening up a market for commercially financed energy efficiency investments. IE/ESCO borrowers would benefit from access to financing at competitive terms and with low collateral requirements. The RSF is expected to mobilize US$251 million of commercial financing. IE/ESCO borrowers are required to provide at least 20 percent of investment cost in a form of equity. Therefore US$50 million will be mobilized from IEs/ESCOs as equity, and US$201 million will come from PFIs as loans. 24. MoIT has a clear role to ensure the success of the RSF and good performance quality of the PIE. The government’s role in supervising the PIE will be documented in the Implementation Agreement between the Government and the PIE. Additionally, the GCF Grant Agreement will include obligations on the Government to ensure that it complies with the Implementation Agreement as well as remedies (suspension or cancellation of the GCF Grant) that the Bank may exercise if the Government fails to meet its obligations under the Implementation Agreement or takes actions that interfere with or impede the PIE’s ability to comply with its obligations under the Implementation Agreement or under the GCF Guarantee Agreement between the PIE and the Bank.4 25. This component consists of two sub-parts: Component 1(a) (US$75 million GCF Guarantee): Operation and management of the RSF by a Program Implementing Entity (the PIE), which will be a commercial bank appointed by MoIT. Under the RSF, the PIE will issue RSF Guarantees and would be required to make RSF Guarantee payouts to PFIs if IE or ESCO borrowers default on PFI Loans which are covered by RSF Guarantees. Risk coverage includes defaults on scheduled principal and interest payments and/or accelerated loan balances with accrued interest. The RSF Guarantees provide PFIs with a comprehensive credit risk coverage of up to 50 percent of defaulted principal and interest on a pari passu basis with the uncovered portion of the loan. From the PFIs’ perspective, they are exposed to the risk of the RSF 2 The Vietnam Energy Efficiency for Industrial Enterprises Project (VEEIE) (P151086) was approved by the World Bank Executive Directors on April 14, 2017 and became effective on December 29, 2017. The Project consists of an IBRD Loan of US$100 million and an IDA Credit of US$1.7 million. The IBRD Loan will be on-lent by the Ministry of Finance (MoF) to PFIs for financing energy efficiency investments made by IEs/ESCOs. The IDA Credit will provide capacity building support to MoIT on implementation and monitoring of energy efficiency measures. 3 The Project and VEEIE share the same eligibility criteria for eligible borrowers and sub-projects, select PFIs using similar eligibility principles for the selection of PFIs and apply similar environmental and social safeguards procedures. Both projects are overseen by the same Project Management Board at MoIT. 4 Further details on the contractual arrangements are provided in Section 3. Page 11 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) failing to honor RSF Guarantee claims and government performance risk in overseeing the work of the PIE. To address the risk of a capital shortfall in the RSF, the facility will be backstopped by a guarantee issued by the Bank and capitalized by GCF (GCF Guarantee5). A capital shortfall under the RSF could result if RSF Guarantee payouts exceed the capital available in the RSF’s accounts. Component 1(b) (US$3 million GCF Grant): Provision of seed capital to support the operation of the RSF, through the financing of management fees (to be paid by MoIT to the PIE) and initial capital for the issuance of RSF Guarantees. 26. PFIs would have the flexibility to use Component 1 or the IBRD Loan under VEEIE for three types of energy efficiency Sub-Projects: (i) “IBRD Loan only� Sub-Projects where the PFI is comfortable taking the full credit risk (and therefore does not need an RSF Guarantee) but for which it needs liquidity from the credit line provided under the IBRD Loan; (ii) “RSF Guarantee only� Sub-Projects for which the PFI would be willing to pay for credit enhancement (and therefore obtains an RSF Guarantee), but for which it does not need external liquidity (and therefore does not use the credit line under the IBRD Loan); and (iii) “blended IBRD/RSF� Sub-Projects for which PFIs would need both risk mitigation and funding support from the two facilities. In this third type, Sub-Projects would receive support from both the IBRD Loan and the RSF, as long as the two facilities were supporting separate debt tranches. In the third type, debt tranching would be required as RSF Guarantees cannot be used to backstop PFI Loans on-lent from the IBRD Loan. Particularly where the loan size is large, a PFI could be incentivized to finance some of it through the IBRD Loan, including co-financing as appropriate, and financing the balance from its own resources with risk mitigation support from the GCF-RSF. By combining two different tranches for a single Sub-Project, PFIs can access liquidity through the IBRD Loan and also lower cost through credit risk mitigation from the RSF, with the extent of such benefits determined by the size of the individual tranches. For all the three types of financing combinations discussed above, IEs/ESCOs are also required to provide co- financing of 20 percent of the Sub-Project cost. 27. While part of the Sub-Projects submitted for RSF Guarantees under Component 1, particularly the above- mentioned second type, could be marginally less creditworthy than those under the IBRD Loan, the same appraisal and credit standards will be applied for both Component 1 and the IBRD Loan to ensure that all projects meet the minimum requirements. Under Component 1, PFIs will only be given RSF Guarantees to enable risk sharing between them and the RSF and to incentivize the PFIs to undertake the loan appraisal as diligently as they would for any loan. 28. The decision on which modality of support to use ultimately falls to the PFIs. All energy efficiency Sub-Projects need to meet the same eligibility requirements to be considered for either Component 1 or the IBRD Loan but their financing needs can vary. The IBRD Loan provides relatively longer-term financing in US dollars whereas more price compression can be expected through the RSF. PFIs will need to assess the needs of candidate energy efficiency subprojects and their own constraints before seeking support from the RSF or the IBRD Loan. 29. The RSF would be managed by the PIE appointed by MoIT and it would issue RSF Guarantees, which are partial credit guarantees, to eligible PFIs to support their loans for eligible energy efficiency subprojects undertaken by IEs. Guarantee coverage would only be available for loans made from the PFIs’ own resources, made in addition to 20 percent 5Based on the team’s additional analysis of the structuring of the GCF Guarantee and banking market conditions in Vietnam, the GCF Guarantee complies with the Bank’s (i) Investment Project Financing Policy requirements for financial intermediary guarantees, (ii) Financial Terms Policy requirements for payment guarantees and (iii) IPF Policy and Financial Terms Policy requirements that payment guarantees be provided in favor of private entities. Page 12 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Sub-Project co-financing by the IEs/ESCOs, and would be partial to enable risk sharing with the PFIs and incentivize them to carefully appraise the underlying loans. RSF Guarantee coverage is set at 50 percent of the PFI Loan, although the PIE would have some flexibility to change it based on market needs. RSF Guarantees would cover credit defaults on underlying PFI Loans. PFIs would be required to pay upfront and recurring RSF Guarantee fees towards costs associated with RSF program implementation and GCF Guarantee, and towards a loss reserve to pay for possible RSF Guarantee calls. RSF Guarantees fees have been set to balance program cost recovery with attractive pricing for PFIs. The fees come in addition to the US$3 million seed grant, which will also be used towards RSF operating costs and guarantee payouts. 30. The RSF pays RSF Guarantee claims to PFIs if the underlying credit risks materialize, the PFI experiences a loss and there are insufficient funds in the RSF to front such a loss. The first RSF Guarantee claims in the event of losses would be paid from the Government’s RSF resources coming from the GCF seed grant and guarantee fee collections. If capital in the RSF fell short to meet all claims, which would only happen if actual RSF Guarantee payouts exceeded expected payouts, the GCF Guarantee would be called for up to US$75 million to meet the additional claims. The GCF Guarantee provides additional capital only in case of a shortfall of RSF and government capital to honor guarantee claims. Based on financial scenario analysis,6 such shortfall of capital is considered a very low likelihood event, arising either from unexpectedly high level of credit defaults on the guaranteed Sub-Loans or from the PIE’s non-performance in adequately managing portfolio risks, or the Government’s non-performance in exercising its oversight duties. 31. In practice, proactive risk management of the RSF means that the PIE will take corrective action if actual guarantee payouts exceeded expected payouts, for example by limiting the issuance of new RSF Guarantees. The requirements for guaranteed loan appraisal will be included in the OM, which the PIE is required to follow, and will include similar appraisal procedures as for Sub-Projects supported by the IBRD Loan and making sure that PFIs apply at least the same care and due diligence on RSF guaranteed loans as they would on their own loans. The partial nature of the RSF Guarantee coverage would further incentivize PFIs to do that. Further details on the RSF and GCF Guarantee are provided in Section 7 of the PAD (Terms and Conditions of the GCF Guarantee). 32. Component 2: Technical Assistance (US$8.3 million GCF Grant). Provision of technical assistance for: (a) MoIT and relevant government agencies responsible for energy efficiency policies and targets, to support the implementation of voluntary agreements with relevant industries, the improvement of incentives for industry to carry out energy efficiency investments, development and improvement of policies/regulations for scaling up energy efficiency investment, and the development of mandatory energy efficiency standards and benchmarks in energy-intensive industries; (b) PFIs to support the identification, appraisal, and implementation of energy efficiency lending projects in the industrial sector and business development to generate energy efficiency lending deal flows; and (c) IEs, ESCOs and other energy efficiency service providers to support the development of bankable energy efficiency projects. This component will leverage the results of CPEE project on developing energy efficiency policies and industry voluntary agreements. 33. Under the CPEE project, the Bank financed TA to key energy-consuming IEs to develop voluntary agreements, which could form a key part of the pipeline. In addition to the ongoing TA activities including development of a mandatory energy efficiency regime and an ESCO market, this component will support: (a) TA and capacity building to the MoIT will support (i) preparation and implementation of the next phase energy efficiency target program period 2019–2025; (ii) strengthening of the policy and legal and regulatory framework for energy efficiency in IEs; (iii) development of relevant energy use standards and establishment of 6 See Section 4 for further details. Page 13 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) energy efficiency industrial benchmarks; and (iv) development of the ESCOs, scaling-up and encouraging energy efficiency voluntary agreement, and conducting a communication campaign to raise awareness on energy efficiency for IEs. In addition, as the adoption of Energy Management Systems (ISO 50001) is considered the most effective practice for industrial eco-systems to generate energy efficiency and GHG reduction projects on a sustaining basis, TA will support MoIT to promote and strengthen capacity of enterprises in application of ISO 50001 or Energy Management System. (b) TA and capacity building to the PFIs include (i) business startup support, including creation, organization, staffing, and initial business plan of the energy efficiency lending business unit (or team); (ii) capacity building and training, including support for the development of necessary financial instruments, procedures, and the creation of an adequate knowledge base to evaluate and extend energy efficiency loans; (iii) marketing and development of an energy efficiency Sub-Project pipeline; (iv) support for due diligence of eligible PFI Loans for energy efficiency, including financial, technical, social, and environmental assessments; and (v) development of financing instruments and risk management tools related to energy conservation. (c) TA and capacity building for IEs will include support to (i) identify energy efficiency projects and prepare relevant energy audits, technical design, and energy efficiency project preparation and (ii) raise awareness through a communication campaign organized jointly with relevant industry associations. Capacity building on safeguards for the PFIs, ESCOs, and IEs as well as on-the-job training will be provided. TA to ensure adequate capacity for the review and implementation of safeguard issues will also be considered. 34. Detailed TA and capacity-building programs will be further developed in consultation with the direct beneficiaries, including MoIT, PIE, PFIs, and IEs. The associated procurement plan for the first 18 months will be also developed accordingly. 35. The Korea International Cooperation Agency (KOICA) has parallel TA activities during the Project implementation. KOICA has allocated US$1.9 million to support IEs and ESCOs in Vietnam for identifying energy efficiency investment opportunities and developing implementation plans for them, which initially targets energy intensive industrial enterprises in Bac Ninh Province as a pilot site. KOICA’s activity is expected to facilitate access to capital under Component 1 of the Project and the IBRD Loan by making ESCOs and IEs ready for accessing loans from PFIs. In the long term, KOICA’s contribution is expected to enhance the business environment for energy efficient investments. The Project will be closely coordinated with KOICA’s planned activities. C. Project Beneficiaries 36. The primary Project beneficiaries are IEs/ESCOs and PFIs. The former are expected to benefit from energy efficiency investments to reduce energy consumption, improve productivity and boost their overall competitiveness in the domestic and international markets. The PFIs are expected to benefit from the creation of a market for industrial energy efficiency lending and improved technical capacity for energy efficiency investment appraisal and monitoring. In addition, MoIT, as the responsible government entity, would gain from capacity building in energy efficiency regulations, guidelines and market standards. Finally, citizens would benefit from more reliable power supply and less pressure to increase tariffs for additional generation and transmission investment. D. Results Chain Page 14 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 37. The Project aims at scaling up energy efficiency investment in the industrial sector. Improvement in energy efficiency has been limited and it has posed challenges in energy intensity, energy supply and GHG emissions. To achieve the objective, the Project establishes the RSF to encourage PFIs to provide commercial financing to Sub-Projects. Furthermore, workshop, training and capacity building are provided to PFIs, IEs and ESCOs under Component 2. These Project activities will lead to outcomes of improved energy efficiency in the industrial sector and enhanced market capacity through multiple outputs measured in the results framework. The Project is expected to ultimately contribute to three major longer-term outcomes, namely promoting market-based solutions for industrial energy efficiency, strengthening industrial competitiveness and mitigating global climate change. The Theory of Change behind the Project is illustrated in Figure 1. Outputs and immediate outcomes will be monitored through the results framework in Section 6. Figure 1. Theory of Change E. Rationale for Bank Involvement and Role of Partners 38. The Project has been designed to help remove the principal barriers to investments in industrial energy efficiency projects. The Bank is having comprehensive engagement with the government on energy sector reform, building an enabling policy framework which addresses sectoral constraints to EE investment. Some of the barriers, or binding constraints, are related to the general availability of financing from domestic or cross-border sources. This Project will address the specific concerns of local financial institutions to lend for energy efficiency. The RSF aims to improve the viability of energy efficiency investments by mitigating the credit risk of loans extended to IEs/ESCOs, and thus encourage scaling-up of energy efficiency loans in the market. The TA and capacity building activities will address the knowledge, institutional, and capacity building needs of the banking and industrial sectors, address commercial banks’ risk perception Page 15 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) of energy efficiency projects, and strengthen government supervision of industrial energy efficiency and energy conservation. These efforts will be accompanied by the parallel VEEIE Project, which will provide financing support for PFIs, which face liquidity constraints in their lending activities. General constraints to energy efficiency investment 39. Limited public financing. The availability of public financing for energy investments in Vietnam is limited. The level of public debt is approaching the statutory limit of 65 percent of GDP. For some years to come, there will be limited fiscal space available either for direct public borrowing or for government guaranteed borrowing that counts towards the statutory limit. At the same time, Vietnam’s middle-income status is reducing the availability of highly concessional funds (at IDA terms). 40. Limited available domestic capital to energy sector. Vietnam has a pressing need to strengthen the domestic commercial banking sector, while deepening and broadening domestic capital markets. Neither project finance nor corporate finance structures have access to long term and low cost local currency financing from domestic capital markets. Better access to local currency financing generally would avoid the exchange rate and currency convertibility risks associated with cross-border borrowing. Furthermore, despite the high levels of domestic savings (30 percent of GDP or US$60 billion in 2016), a shrinking share has been reaching the energy sector. The total outstanding financing stock in the domestic capital markets is estimated at US$422 billion in 2016, of which only 3.3 percent was captured by the energy sector due to long-term funding constraints, lack of sector knowledge and exposure to single borrower limits (e.g. on borrowing by EVN). 41. Lack of available cross-border capital. Under Vietnamese regulations, borrowers need to have foreign currency earnings to be able to borrow in foreign currency. As most of the IEs/ESCOs targeted under the Project generate their revenue from domestic sources, they are prevented from borrowing in US dollar and other foreign currencies. In addition, the Sub-Projects expected to be financed under the Project are expected to be too small (US$2-5 million on average) to attract strong interest from international banks and investors, who are more focused on larger-scale Independent Power Producers (IPPs) or corporate financing for energy sector SOEs like EVN. The limited interest from cross-border investors is further constrained by challenges in the regulatory framework for, and protections given to, cross-border capital. Specific constraints to energy efficiency investment 42. Unattractive financing terms for energy efficiency investments. Domestic commercial banks have outstanding loans of US$250 billion, but they are heavily skewed towards short and medium-term lending (up to 3 years maturity), reflecting the lack of long term deposits and the flat yield curve by deposit duration. Additionally, the narrow interest rate difference between short-term and long-term borrowing rates gives little incentive to banks to lend long-term (normal business lending rates being 7-10 percent p.a. for short-term and 9-12 percent p.a. for long-term loans). The constraint on domestic loan tenors was confirmed during Project market soundings, where IEs reported that access to long-term funding (7-15 years) at affordable rates is a great challenge. The lack of affordable long-tenor funding prevents energy efficiency investments with longer payback periods from implemented. 43. Insufficient capacity of local banks to appraise energy efficiency investments. Most local financial institutions lack the required technical expertise to appraise energy efficiency investments, and view energy efficiency lending as risky. Credit risk associated with these projects is perceived as high by most local financial institutions, which often leads to high collateral requirements. Also, project-based financing that focuses on the cash flows from energy savings has not been Page 16 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) widely accepted by financial institutions. This lack of capacity has further limited the supply of financing for energy efficiency projects. 44. Limited incentives for the industrial sector to implement energy efficiency measures. Despite the increase in energy costs over the last few years and the phasing out of energy subsidies, energy cost for most industrial enterprises remains relatively low. There are some high energy intensive sectors (such as chemicals, food processing,) where energy costs can be up to 40 percent of operating costs. However, for the vast majority on industrial enterprises, energy costs represent a small share of industries’ operating costs, which has led to low interest in energy conservation and therefore energy efficiency investments. Many industrial enterprises rely on electricity as the primary energy source and the Government has introduced time of use tariffs and implemented tariff increases to promote the efficient use of electricity. The Bank is providing further support to improve the transparency of tariff setting and to move towards full cost recovery and current average electricity tariffs cover operating costs and deb service. 45. Lack of IE/ESCO technical capacity. Industrial enterprises, the main beneficiaries of energy efficiency investments, have inadequate information on the energy consumption and efficiency measures that can be adopted. This limits their capacity to identify suitable energy efficiency investments. ESCOs can supplement such insufficient technical capacity of IEs as a third-party expert, but the ESCO market is still very nascent in Vietnam. There are a small number of ESCOs operating in the market but their technical capacity also needs to be further improved. Sustainability of Bank involvement 46. The Project has been designed to address the specific market failures (as described above) that relate to domestic commercial banks and industrial enterprises. Through the combination of the RSF, and TA and capacity building components, this operation supports the transition to fully market-based energy efficiency financing in Vietnam. By providing credit risk mitigation, the RSF incentivizes PFIs to lend more to IEs at longer terms, build their energy efficiency portfolio, and increase their experience and capacity to prepare an adequate risk assessment of the underlying investments. Eligible IE and ESCO borrowers under the Project would benefit from access to financing at competitive terms and with low collateral requirements. In addition, the Project enhances the capacity of the IEs to assess the financial and economic benefits of energy efficiency investments. Ultimately, efficiency investments under the Project will be financed by the private sector, with risks partially borne by the RSF. As such, the Project is helping to create a market for industrial energy efficiency lending. 47. The Project is fiscally sustainable for the Government as it does not result in direct or contingent liabilities for Vietnam. GCF does not require a sovereign indemnity from the Government for the GCF Guarantee. The Government is also not providing direct or intermediated lending for Sub-Projects, which could trigger direct or contingent state liabilities. The RSF Guarantees issued under the Project are only backed by capital in the RSF, consisting of GCF funds and retained RSF Guarantee fee earnings 7 , without recourse to the Government to cover residual risks. The Project has a strong leveraging effect not only from the perspective of the Government of Vietnam but also when looking at the use of concessional financing. In this case, US$86.3 million of GCF funds are being used to leverage US$251 million of private capital for an industry that is currently underserved by local financial markets. 7Note that the seed grant portion of the GCF Grant and the RSF Guarantee fee earnings are considered as government capital, given that they are both used to capitalize the government’s RSF program. Page 17 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) F. Lessons Learned and Reflected in the Project Design 48. Global experience shows that providing partial credit guarantees can be effective in enhancing creditworthiness and easing collateral requirements of potential borrowers, incentivizing banks to lend at more attractive terms. The proposed Project incorporates lessons from similar Bank operations under implementation in India8 and the Philippines9, a closed Bank operation in Croatia10 and a closed IFC operation in China11. These include: (a) careful selection of project stakeholders (the PIE, PFIs, IEs, Sub-Projects) against well-defined criteria; (b) ability to replace the PIE in case of unsatisfactory performance; (c) facilitation of competition between PFIs for guaranteed PFI Loans; (d) requirement for dedicated project implementation staff with the PIE, with appropriate performance incentives and limits on personnel changes; (e) provision of sufficient flexibility to the PIE to manage the RSF in response to market needs; (f) provision of TA to support project pipeline development and capacity building of both PFIs and IEs; and (g) implementation of comprehensive marketing and business development efforts. 49. While the Project design incorporates lessons from similar past operations, it also recognizes that Vietnam-specific risks may need to be addressed during Project implementation. Especially at the start of the operation, building the pipeline for Sub-Projects is a critical activity, which needs to be managed proactively, not only by the PIE, but also by MoIT with support from the Bank. The lesson from India is that pipeline development should be the PIE’s main focus in the beginning and that TA resources should be provided to assist in that effort. Pipeline development could also be supported by strong ownership of the RSF at the PIE’s senior management level and close collaboration between the PIE and the government’s lead agency for energy efficiency promotion (MoIT in the case of Vietnam). 50. The Implementation Completion Report for the Croatia project12 noted that partial credit guarantees under the operation had not been transformative in reducing banks’ risk aversion to EE financing. Most banks did not practice project finance (as had been intended to happen through ESCO structures) but rather considered the borrowers’ overall balance sheet and collateral. Therefore, the main constraint for many banks was the borrowers’ lack of creditworthiness rather than the novelty of energy efficiency. This Project incorporates the lessons from Croatia by supporting PFIs’ standard corporate finance loans, which should benefit from the credit enhancement provided by RSF Guarantees. The Project seeks to improve access to credit beyond the PFIs’ existing creditworthy client base, acknowledging that in Croatia the constraints were more related to clients than the investments themselves. The facility will be open for ESCO-based financings, but project finance structures will not be mandated for PFIs. The Project also recognizes that building capacity on energy efficiency is only part of the market-making required, and that the RSF Guarantee product terms may need to be adjusted if they do not meet the needs of PFIs or adequately improve the creditworthiness of potential IE/ESCO borrowers. 51. The Independent Evaluation Group (IEG) assessed the impact of IFC’s energy efficiency risk sharing facility in China 13 and concluded that the program’s social benefits significantly exceeded its costs, although the impact could have been even greater with certain improvements. The evaluation emphasized the need to carefully select private sector partners 8 India Partial Risk Sharing Facility for Energy Efficiency Project 9 Electric Cooperative System Loss Reduction Project and Philippines Renewable Energy Development Project 10 Energy Efficiency Project 11 China Utility-Based Energy Efficiency Finance Program (CHUEE) 12 World Bank, Implementation Completion and Results Report on Croatia Energy Efficiency Project, Report No: ICR00001557 (Dec 28, 2010) 13 IEG, Assessing the Impact of IFC’s China Utility-Based Energy Efficiency Finance Program, IEG Report No: 55549 (2010) Page 18 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) (i.e. local banks) to meet strategic program objectives so that they reach out to new clients rather than lend to existing ones. It also found that flexibility is needed in the program design to respond to unexpected challenges and opportunities. The report also called for closer targeting of energy efficiency investment towards those technologies that have high CO 2 emission reduction potential but which are not currently financed by market participants. VSUEE has taken these lessons into account by targeting several PFIs to join the program (as opposed to only two under CHUEE) to maximize the access to finance for new clients. The Project also builds in flexibility into the OM to allow for adjustments, with relevant approvals, as needed. Finally, the Project specifically targets industrial enterprises and includes high potential eligible investments, such as industrial boiler retrofitting highlighted by IEG in its report. 3. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 52. Ministry of Industry and Trade. MoIT will be responsible for overall Project coordination, implementation, and monitoring and evaluation. MoIT’s existing Project Management Board, which is responsible for the implementation of the VEEIE Project, will be responsible for: (i) planning and managing the day-to-day implementation of the TA activities under Component 2 of the Project; (ii) ensuring coordination among all relevant departments and agencies; (iii) monitoring and reporting; and (iv) overseeing and supporting the activities of the PIE appointed to manage the RSF under Component 1 of the Project. 53. Program Implementing Entity. To facilitate the carrying out of Component 1 of the Project, MoIT will enter into an implementation agreement with the PIE (the “Implementation Agreement�), setting forth the responsibilities and obligations of the PIE with respect to the management of the RSF. The PIE will operate under the oversight of MoIT, and will provide regular reports to MoIT and the Bank on the performance of the RSF. The PIE’s responsibilities include (i) sub-project identification and pipeline development, (ii) RSF Guarantee review, approval and issuance, (iii) risk management and monitoring and (iv) cash management. If the PIE fails to perform in accordance with its obligations under the Implementation and/or the GCF Guarantee Agreement, this may give rise to MoIT’s right to replace the PIE, in accordance with the terms of the Implementation Agreement. 54. Participating Financial Institutions (PFIs). To be accredited as a PFI for the RSF, financial institutions will be required to satisfy the eligibility criteria for PFIs (see Annex 2) provided in the OM. Ten financial institutions have satisfied the eligibility criteria and are expected to be approved as PFIs, and additional financial institutions may apply to join the RSF during Project implementation provided they meet the eligibility criteria. PFIs will have full responsibility for the energy efficiency lending process and approvals, following the criteria and procedures in the OM. PFIs will also be required to monitor the performance of Sub-Projects and provide regular reporting to the PIE on such performance. 55. Operations Manual. An OM has been developed, with input from the PIE, to govern the day-to-day operations of the RSF. The OM includes details on, inter alia, roles and responsibilities of the various RSF stakeholders, eligibility criteria and approval processes, funds flow and cash management procedures, procedures for RSF Guarantee issuance and claims, and a risk management framework (the “RMF�). The OM also includes templates for key RSF documentation, such as a model RSF master guarantee agreement and reporting templates. The OM will be finalized, subject to the Bank’s no-objection, as a condition to the effectiveness of the GCF Guarantee and a condition for first disbursement of the GCF funds allocated to the RSF. Compliance with the OM by the PIE will be covenanted in the legal agreements governing the Page 19 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) PIE’s performance. 56. Contractual arrangements. The following contractual arrangements are expected to be put in place for the Project: (a) Funded Activity Agreement between GCF and IBRD, as an Accredited Entity of GCF: Provides the terms and conditions for the transfer of funds from GCF to IBRD, namely: (i) up to US$75 million (the “Reimbursable Funds�) to capitalize the GCF Guarantee, and (ii) an aggregate amount of US$11.3 million (the “Non-Reimbursable Funds�, and together with the Reimbursable Funds, the “GCF Proceeds�), to be disbursed as a grant by the Bank to Vietnam pursuant to the GCF Grant Agreement (see below). (b) GCF Grant Agreement between IBRD, acting as an Accredited Entity of GCF, and Vietnam: Provides the terms and conditions for the downstream transfer of the Non-Reimbursable Funds as a grant to Vietnam. (c) Implementation Agreement between the PIE and MoIT: Sets out the responsibilities and obligations of the PIE and MoIT in respect of management and operation of the RSF. (d) GCF Guarantee Agreement between IBRD, acting as an Accredited Entity of GCF (as guarantor), and the PIE (as guarantee beneficiary): Defines the terms and conditions of the GCF Guarantee to be provided by the World Bank to the PIE. (e) RSF Guarantee Agreements between the PIE (as RSF guarantor) and PFIs (as RSF beneficiaries): Define the terms and conditions of the RSF Guarantees offered. (f) PFI Loan Agreements between PFIs and IEs and ESCOs: Define the terms and conditions of the loans to be made from PFIs to IEs and ESCOs for Sub-Projects (“PFI Loans�), which will be backed by RSF Guarantees. 57. Further details on the implementation and contractual arrangements are provided in Annex 1 (Implementation Arrangements and Support Plan). 58. Funds flow. GCF will transfer to the Bank an aggregate amount of up to US$86,300,000, which will be disbursed and used as described below (also see Figure 1 for an overview chart). 59. The Reimbursable Funds of up to US$75,000,000 for the capitalization of the GCF Guarantee: (a) Funds from GCF to the Bank. GCF will transfer the Reimbursable Funds to the Bank in tranches14, expected to be US$10 million in both year 1 and 2 and US$27.5 million in both year 3 and 4 (for a total of US$75 million). The first tranche will be released prior to the effectiveness of the GCF Guarantee and subsequent tranches will be released as RSF Guarantees are issued. The maximum face value of the GCF Guarantee will be limited to aggregate amount of the Reimbursable Funds actually received by IBRD from GCF. The face value of the GCF Guarantee will be increased from time to time, as additional tranches are transferred by GCF. (b) Calls under the GCF Guarantee. The transfer of funds under the GCF Guarantee to the PIE will be handled by the Bank, in accordance with terms of the GCF Guarantee Agreement. The PIE may make calls under the GCF Guarantee when there is a capital shortfall in the RSF, which could result if RSF Guarantee payouts exceed the capital available. Further details on the provisions for calls under the GCF Guarantee are contained in in the term 14 The tranching structure is subject to change pending agreement with GCF. Page 20 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) sheet in Section 7 (Indicative Terms and Conditions for the GCF Guarantee). (c) Reflows. The Bank will reflow the Reimbursable Funds to GCF annually commencing from the end of the availability period of the GCF Guarantee (as further described in the GCF Guarantee term sheet), as the overall exposure of the retail RSF Guarantee portfolio decreases through the repayment of the underlying PFI Loans. 60. The Non-Reimbursable Funds in amount of US$11.3 million to be disbursed as a grant by the Bank to Vietnam pursuant to the GCF Grant Agreement: (a) US$3 million of the grant will be used as seed capital to support the operation and maintenance of the RSF under Component 1 of the Project, including management fees and coverage for the issuance of early RSF guarantees. (b) US$8.3 million of the grant will be used for the TA activities under Component 2 of the Project. 61. An overview of the Project implementation arrangements is provided in the figure below. Figure 2. Overview of Project Implementation Arrangements B. Results Monitoring and Evaluation Arrangements 62. The Project Management Board (PMB) under MoIT will be responsible for overall monitoring and evaluation (M&E) of the Project, including collection of project performance information and reporting on project impacts and results. For the results of the RSF, PIE will be responsible for collecting information from each PFI with assistance of the PMB and reporting to the Bank and the PMB. The PMB will provide the Bank with (a) semi-annual progress report including the PDO and intermediate results indicators listed in Section 6; (b) interim unaudited financial reports (IUFRs); (c) audited Page 21 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) financial statements; (d) other monitoring requirements as specified in the OM; and such other information as the Bank may reasonably require. Approximately three years after effectiveness, the PMB, with support of the PIE, will carry out a thorough review of Project implementation and report their findings and conclusions to the World Bank during a midterm review. C. Sustainability 63. Industrial energy efficiency has large potential for further scaling up and replication beyond the scope of the Project. The investment need was estimated at around US$3.6 billion in the key industries, and would be larger for the entire industrial sector. The Project is aimed at realizing only part of the identified potential, leaving bigger opportunities to be materialized. 64. The Project aims to address major bottlenecks in opening up a sustainable market for industrial energy efficiency that is supported by the local financial sector. Through a combination of interventions under the Project and the complementary IBRD operation (i.e. VEEIE), including on-lending (IBRD Loan), risk sharing, technical assistance and capacity building, PFIs are expected to learn from experience and to become active market players that offer energy efficiency loans to IEs and ESCOs with little need for support after the Project is closed. International experience demonstrates that dedicated credit lines are effective at increasing the capacity, interest, and confidence of PFIs in mainstreaming the energy efficiency financing business line through learning-by-doing and at changing their perceptions so that they recognize that energy efficiency investments are actually a profitable business. Risk sharing has been another effective tool in many countries to reduce high risk perception when the market is premature, and to increase capacity and confidence of PFIs in energy efficiency financing. PFIs will play a key role to launch and expand the industrial energy efficiency financing market, which has been limited in Vietnam so far, during and after the project implementation. 65. Other financial institutions that are not selected to be PFIs of the Project would be also able to find business opportunities in industrial energy efficiency from PFIs experience. Through the Project, more transactions would be known and proven to be commercially viable, being recognized as new business opportunities for non-participating banks and non-bank financial institutions. The Project is flexibly designed and will remain open, so financial institutions that do not participate in the Project from the beginning will still be able to join during implementation through the same selection procedures. This will enable further scaling up with a larger base of local financial institutions that are supportive to energy efficiency investments. 66. IEs and ESCOs are also expected to become more capable of identifying investment opportunities and developing investment pipeline, through technical assistance, capacity building and learning from actual transactions. Through Component 2, workshops will be offered to raise awareness and share good practices of other companies, and energy audit and training of auditors/energy managers will be provided for pipeline development. At the end of the Project, a number of trained auditors will be available in the market, identifying business opportunities and promoting energy efficiency investment in the industrial sector. Furthermore, technical assistance to be provided to the MoIT and other government agencies would improve the enabling environment, which would enhance possibilities of market uptake. 67. After the Project is closed, financing industrial energy efficiency is envisaged to be replicated as more PFIs and IEs have capacity, experience and interest. Taking into account the potential growth of energy efficiency opportunities in other sectors, e.g. residential, commercial, public, etc., where some of the experienced PFIs might be willing to explore, Page 22 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) the opportunities of scaling up would be much larger. 4. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis Technical analysis 68. Energy efficiency technologies vary by industrial subsectors but typical energy-saving measures include: • Energy systems. Upgrading boilers and switching fuels, using cogeneration facilities and electric-driven systems, including compressed air systems, electric chillers, machinery and lighting. • Process technology. Upgrading and replacing equipment, machinery, and facilities. • Waste heat and waste use. Use of waste heat (of hot/warm gases, liquids and solids) and burning combustible waste (gases, liquids, solids). • Use of renewable energy to decrease fuel and/or electricity consumption may also be considered. 69. Energy intensive industrial sectors include cement, steel, textile, pulp and paper, food processing, bricks, and ceramics. Potential energy efficiency measures for cement industry include using roller mill for grilling raw material, improving furnace fans, installation of variable speed drivers, using waste fuel and waste heat recovery. The cement industry is one of the energy-intensive sectors, producing a huge volume of heat exhaust at a temperature up to 350 degrees Celsius. Therefore, the key measure to improve energy efficiency is the utilization of heat exhaust for power generation. This is a well-tested solution achieving multiple purposes, including utilizing heat waste without consuming more fuel for power generation at a sizeable capacity scale, reducing emissions of GHG CO2, reducing heat and dust emissions into the environment, and increasing efficiency of equipment production line. 70. Energy efficiency technologies for steel and iron industries would include waste heat recovery, construction of closed production lines, replacement of low-performance air compressor, and installation of inverter for motors to operate at low or fluctuating load. Waste heat recovery uses the heat from flue gas (exhaust heat from electric arc furnaces, furnaces, kilns, and so on) to preliminarily heat up the steel scraps before putting into the electric arc furnace for reducing the time in the furnace, saving energy, and improving capacity. It could help heat the steel bars before entering the kiln to save oil for furnaces. Furthermore, it also helps heat up the oil instead of the drying resistors to reduce electricity consumption. 71. Energy efficiency solutions in pulp and paper sector include the investment of new efficient boilers for cogeneration (heat and electricity), replacement of motors, switching to biomass fuel technology, and chemical waste recovery for heating. 72. The OM will detail eligible criteria and industry specialists and energy audit experts will be included in the subproject due diligence teams. They will ensure that the subprojects are in compliance with Vietnamese industrial and Page 23 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) technical policies and regulations, fully satisfy the technical eligibility criteria, and are technically feasible. TA to build capacity for project technical due diligence will also be provided to the PFIs during project implementation. This will ensure that the design of the subprojects will be technically sound. Financial and Economic Analysis 73. Financial and economic returns of energy efficiency projects are robust. Financial returns for energy efficiency investments show equity returns ranging from 19% in the paper industry to 114% in the steel industry. A risk assessment was done to model the sensitivity of the returns to financing assumptions. This showed that the risk of Sub-Projects not meeting the financial hurdle rate is less than 5 percent for energy efficiency investments indicating high financial viability of energy efficiency projects across all key industries. The estimated economic returns are also robust with respect to the general level of international fuel prices, which were at their lowest in early 2015 (and which have already recovered from their 2015 lows of US$50/bbl (Brent) to US$80/bbl at the end of May 2018). Even in the unlikely case that such low prices prevail (unchanged) for the next 15 years, economic returns are substantially above the hurdle rate. All projects examined result in significant reductions in lifetime GHG emissions. Assuming mobilization of US$251 million for energy efficiency investment for the assumed Sub-Project portfolio, about 6.9 million tonnes of CO2 equivalent emissions are projected to be avoided annually. Additional details on the economic analysis are presented in Annex 4. 74. The financial assessment of the RSF indicates that with base case assumptions, the RSF is financially sustainable. In total, the seed capital and income from RSF Guarantee fees are sufficient to sustain the level of losses without a call on the GCF Guarantee. Based on sensitivity analysis, the RSF can cover its administrative expenses and guarantee payouts of up to 17 percent across the portfolio before the GCF Guarantee is called. 75. The seed grant portion (US$3 million of the GCF Grant) is the government’s upfront cash contribution to the RSF. The government facility will additionally earn RSF Guarantee fee revenue from PFIs, estimated to be US$4.7 million, and interest revenue, worth US$0.8 million, over 15 years. With these assumptions, the total government capital for the facility is therefore US$8.5 million, to be used for operating expenses (US$4.3million) and RSF Guarantee loss reserve (US$4.2 million). In the conservative base case of five percent of RSF Guarantee payouts (or losses) out of the total RSF Guarantee issuance, the total payouts (net of recoveries) are expected to be US$2.4 million. This leaves about US$1.8 million in the loss reserve account to pay for RSF Guarantee claims over and above the five percent base case. The GCF Guarantee would only be used in the event that losses are greater than 11.3 percent, which is considered very unlikely. B. Fiduciary Financial Management 76. The existing Project Management Board (PMB) under MOIT, which is currently implementing VEEIE will be assigned to implement this Project. PMB’s tasks include implementing the technical assistance activities funded by GCF grant under component 2 and overseeing and supporting the activities of the PIE appointed to manage the RSF under Component 1 of the Project. The financial management (FM) assessment for VEEIE was conducted and concluded that the PMB has adequate FM arrangements acceptable to the Bank. The overall arrangements in place for implementing the VSUEE provide reasonable assurance that the proceeds of GCF grant and RSF will be used for the purposes intended. Page 24 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Financial Intermediary Financing 77. In accordance with Bank Policy and Bank Directive: Investment Project Financing, a Bank review has been conducted to ensure that the Project, particularly Component 1 which includes the provision of partial credit guarantees through a financial intermediary, the PIE, meets good practices and requirements on financial intermediation. The review confirmed that the Project complies with World Bank requirements for financial intermediary financing, and that the key elements of the financial intermediary operation are properly designed. Procurement 78. Given the project design for VSUEE, no activity under Component 1, which uses a guarantee, will be subject to procurement. For technical assistance activities (TA) under Component 2, procurement will be carried out only at a total value of USD 8.3 million from GCF Grant. Procurement under this Recipient-Executed Trust Fund (RETF) shall be governed by the World Bank’s “Procurement Regulations for IPF Borrowers: Procurement in IPF for Goods, Works, Non-Consulting and Consulting Services, July 2016, revised November 2017 and August 2018� (hereafter called as “the Bank’s Procurement Regulations�). In line with the project institutional arrangements, procurement activities for the TA will be carried out by the PMB under MoIT, which is the same agency implementing the on-going and closely linked project VEEIE. For capacity assessment of the PMB under MoIT, the Procurement Capacity and Risk Assessment (PCRA) has been updated for VSUEE based on the PCRA that was carried out during the preparation/appraisal for VEEIE. The updated assessment noted that: (i) MoIT through its PMB has adequate institutional and organizational capacity in place; according to which the PMB has arranged relevant staffing to be in charge of procurement implementation under both on-going project VEEIE and new project VSUEE (both are closely interlinked); (ii) MoIT and PMB have gained some knowledge and experience of the Bank’s Procurement and Consultant Guidelines as results of its implementation of several ongoing Bank-financed projects, such as CPEE and VEEIE; however, the newly adopted Procurement Regulations by the Bank are relatively new to both PMB/MoIT. 79. Considering the project design and the scope and value of required procurement activities only for TA under Component 2, the procurement risk for the VSUEE is assessed as Substantial. More detailed findings of the capacity assessment, the proposed procurement arrangements, and measures to address the identified risks will be presented in Annex 1. Given the relatively nature of procurement activities for the TA, which is comprising series of consulting assignments of medium and small values for capacity building and few small packages for equipment to support implementation of PMB, the PMB has been preparing/ (has prepared) a simple short-form of Project Procurement Strategy for Development (PPSD) which summarizes the simple procurement arrangements for the TA and will result in a Procurement Plan under Component 2 (at least for the first 18 months of project implementation). The Procurement Plan will be/(has been) finalized before the project negotiations. C. Safeguards Environmental Safeguards 80. Under Component 1, the Project, through the selected PIE, will provide partial credit guarantees to PFIs to cover potential defaults on loans provided by PFIs to IEs and ESCOs to finance eligible energy efficiency Sub-Projects. These Sub- Projects are under energy intensive industries such as cement, iron and steel, and pulp and paper. The following potential energy saving measures will be used: (a) adoption of energy saving industrial technologies (e.g., efficient industrial boilers, Page 25 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) kilns, and heat exchange systems); (b) recovery and utilization of wastes and waste heat; (c) installation of highly efficient mechanical and electrical equipment (e.g. motors, pumps, heating and ventilation equipment); and (d) industrial system optimization to reduce energy use. Under Component 2, the Project will provide various technical assistance and capacity building activities to MoIT, IEs and PFIs to improve energy efficiency policy development, commercial involvement, and industry voluntary agreements. 81. OP/BP 4.01 Environmental Assessment is triggered due to the potential adverse environmental and social impacts associated with the provision of partially guaranteed financing for Sub-Projects under Component 1, requiring identification, assessment, mitigation and monitoring of these potential impacts. On the positive side, the Project will bring about important benefits to industries and the environment by contributing to the reduction of GHGs and pollutants, increasing energy savings, and encouraging the promotion of environmentally sound industry practices. On the negative side, the Project will cause potential environmental impacts during the construction and operation of Sub-Projects under Component 1. These impacts include noise, dust, labor safety, and disposal of old parts and equipment which may create hazardous waste and, in rare cases, oil extracted from transformers which may contain PCBs. The possible impacts during the operation of new equipment and facilities may include worker and health safety issues, air pollution, generation of solid waste, wastewater, and disposal of hazardous substances from such polluting industries as cement, steel, textile, pulp and paper, and food processing, albeit with less and lower toxicity than those generated from old technologies and equipment. It is anticipated that most of Sub-Projects will be category B, with typical impacts which are assessed as localized varying from small to moderate scale, and which can be mitigated via good management practices and readily designed mitigation measures. 82. As the types of Sub-Project and energy efficiency investments are the same under VEEIE, the ESMF for VEEIE has been updated for VSUEE by the client to guide and set out requirements for the environmental assessment and management during Project implementation. The ESMF is in accordance with the national regulations on environmental assessment, and the Bank’s safeguards policies. The ESMF also refers to the Interim Guidelines on the Application of Safeguard Policies for TA activities and the TA activities will be screened against the Interim Guidelines. The ESMF also includes World Bank Group guidelines on Environmental and Health and Safety procedures, as well as procedures for conducting environment and social audit/due diligence of existing facilities that PFIs support/retrofit under the Project. The PMB under MoIT, PIE, PFIs and IEs are the key actors responsible for safeguard implementation of the Project. Social Safeguards 83. The Project is expected to have overall positive social benefits because it promotes energy efficiency and thus reduces GHG emissions and other pollutants into the atmosphere. It will also have positive impacts from the perspective of consumers and workers who are employed by the participating IEs/ESCOs. Through energy efficiency investments, the companies’ energy cost will be reduced per unit of output with positive impacts on final prices of consumer products and services. This will also make IEs/ESCOs more competitive and ensure job security and potential expansion of the workforce. The energy efficiency Sub-Projects to be financed under the Project will be within the existing premises of industrial facilities. However, to anticipate the potential need of land acquisition required for Sub-Projects identified in implementation cycle, OP 4.12 is triggered and the Resettlement Policy Framework (RPF) under VEEIE has been updated and used for this Project. Among other things, it lays down the principles and objectives, eligibility criteria of displaced persons, modes of compensation and rehabilitation, participation features and grievance procedures, review and clearance process of each Sub-Project’s resettlement plan. The RPF will guide the preparation of Sub-Project-specific Resettlement Action Plans (RAPs) identified during the project implementation stage. Page 26 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 84. OP 4.10 Indigenous People is also triggered to maximize Project benefits in ethnic minority communities. The Ethnic Minority Planning Framework (EMPF) under VEEIE has also been updated for use of VUSEE, setting out guidelines to: (a) ensure that the ethnic minority peoples receive social and economic benefits that are culturally appropriate; (b) avoid potentially adverse effects on the ethnic minority communities; and (c) when such adverse impacts cannot be avoided, minimize, mitigate, or compensate for such effects. The IEs/ESCOs must be able to demonstrate that they have obtained broad community support for the Sub-Projects through a process of free, prior, and informed consultations with the affected ethnic minority communities. The EMPF provides the procedures and guidelines for the Ethnic Minority Development Plans (EMDPs) to be prepared during project implementation. A social assessment informed the preparation of the EMDP, reflecting the agreements reached during the free, prior and informed consultations, with community members where EMs broad community support was confirmed. Any non-social safeguard impacts (for example, gender and employment) will be addressed in the project Environmental and Social Management Framework (ESMF) developed under the framework of OP 4.01. The PFI Loan agreement between the PFIs and the IEs/ESCOs will specify that participating IEs/ESCOs must fully comply with the existing national labor laws, including those related to children and women and will include appropriate mitigation measures. 85. Gender. In Vietnam, women own about 21 percent of formal enterprises, which is equal to 95,906 enterprises, with 57 percent being microenterprises, 42 percent being SMEs, and 1 percent being large enterprises.15 According to a study conducted by IFC,16 three out of the nine banks studied considered women-owned small businesses “a good market opportunity�, while three others rated the quality of their women-owned small and medium enterprises (SME) portfolio as “good�.17 Most banks in the study do not collect or analyze gender-disaggregated data. The participating IEs in the Project are expected to come from different energy-intensive industries. Many of them are considered “men-intensive�, such as manufacturers of cement, iron, steel, pulp and paper, while others are “women-intensive�, such as food- processing factories. As part of the funding proposal to GCF, a gender action plan was prepared to promote female entrepreneurship and employment in energy efficiency investments and female leadership in IEs with energy efficiency investments. 86. Component 2 will include activities to raise awareness and sensitize PFIs’ staff about specific needs and opportunities presented by women-owned IEs, and to create a cadre of insider champions that can drive a strategy and refine understanding of this segment. Awareness of the linkages between gender and energy efficiency Sub-Projects in specific sectors will be raised for participating government agencies through relevant TA and capacity building activities to generate sex-disaggregated data and develop relevant energy efficiency regulatory framework, standards and guidelines. In addition, targeted training courses and workshops will be offered to women-owned/led SMEs to raise awareness and build capacity on potential business opportunities in delivering energy efficiency-related goods and services. 87. Public Consultation and Information Disclosure. All safeguard frameworks under VEEIE were updated for use of VSUEE. During revision of ESMF, EMPF and RPF, a consultation workshop was conducted with the aim to collect feedback/comments on the frameworks developed under the Project. The workshop was attended by representatives from the Ministry of Industry and Trade (MOIT), Ministry of Environment and Natural Resources (MONRE), local 15 GSO, 2015. Vietnam Enterprise Census. Following the IFC definition of enterprises, i.e. microenterprises have revenues of less than USD 100,000 per annum; SMEs have annual revenues between USD 100,000 and USD 15 million; and large enterprises have annual revenues over USD 15 million. 16 IFC, 2017. Women-owned enterprises in Vietnam: Perceptions and Potential. 17 One of them reported lower NPL percentages for women-owned SMEs, at 0.95% versus 2.17% for men-owned (IFC, 2017). Page 27 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) consultants, Non-governmental organizations, State Bank of Vietnam, Petroleum of Vietnam (PVN), and potential PFIs. Comments received in the workshop were incorporated in the final version of the framework. The Vietnamese versions of the ESMF, RPF, and EMPF were disclosed at the MOIT's website on May 23, 2018 before the consultation workshop. Prior to appraisal, the final ESMF, RPF and EMPF were disclosed at MOIT’s website, and at the World Bank’s external website June 7, 2018. All Sub-Projects’ safeguard instruments are also required to follow the Bank policy on access to information in public consultation and disclosure of information. Other Safeguards Policies Triggered 88. Physical Cultural Resources OP/BP 4.11 is triggered. The Project would not involve significant excavations, demolition, moving of earth, flooding, or other environmental changes. It is not expected that the Project will affect any known PCR. However, there is a possibility that some unknown PCR may be revealed during Sub-Project implementation as they include excavation activities. Therefore, the policy is triggered. A chance finds procedure and measures to mitigate impacts to PCR have been prepared and included in the ESMF, and will be incorporated in site-specific subproject safeguards instruments, bidding, and contractual documents during implementation. 89. Grievance Redress Mechanisms. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 5. KEY RISKS 90. Political and Governance: Moderate. The Project may be affected by the Government’s weak commitment and capacity to promote industrial energy conservation. The Government’s current policies, financial incentives, and institutional capacity are limited to achieve national energy efficiency targets. The Project will provide TA and capacity building to MoIT to address these limitations. 91. Macroeconomic: Substantial. Unfavorable macroeconomic developments (e.g. fluctuations in interest rates, exchange rates and oil prices) could reduce the incentives to implement energy efficiency projects and consequently impact the investment pipeline. Under the Project, PFIs can set PFI Loan interest rates at market levels, taking into account credit enhancement of the RSF Guarantee. To mitigate against exchange rate risk, the Project will provide RSF Guarantees in the currency of the underlying PFI Loan (either US$ or VND). Required RSF capitalization levels will be stress-tested to withstand expected forex movements. Finally, Sub-Project economic and financial analysis shows strong returns from economic efficiency investments even when compared to alternatives benefiting from low oil prices. Page 28 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 92. Sector Strategies and Policies: Moderate. The Government has been developing various policies and regulations to scale up the market for energy efficiency investments. However, enforcement of such measures has been lacking and the Government is therefore advised to introduce more stringent regulations and a mandatory energy efficiency regime (energy efficiency performance targets) to implement energy efficiency activities on the ground. The Project will provide TA and capacity building to MoIT to assist in these efforts. 93. Technical Design of Project: Moderate. The Project has been designed to address the binding constraints limiting commercial lending for energy efficiency investments, based on banking sector analysis and market soundings with potential lenders and borrowers. This Project aims to lower the risk perception associated with industrial energy efficiency measures, while the parallel VEEIE Project is designed to address liquidity shortages in the banking market. The technical design draws on the Bank’s global experiences with risk sharing facilities but importantly tailors the approach to suit the Vietnamese context. To allow for the technical design to adapt to prevailing market conditions, the PIE will have some latitude during implementation to set the RSF Guarantee terms in response to PFI feedback. The Project is also subject to the risk of the Sub-Project pipeline not materializing, which would limit the issuance of RSF Guarantees. The pipeline development risk is mitigated by the TA component, which aims to actively bring potential borrowers and lenders together, and the Bank’s implementation support for Sub-Project identification. 94. Institutional Capacity for Implementation and Sustainability: Substantial. The success of the operation depends on the implementation ability of the PIE and PFIs. A poorly resourced or incentivized PIE may fail to issue RSF Guarantees especially in the critical ramp-up period at the start of implementation. Even if the PIE is adequately resourced, RSF Guarantee issuance still depends on the PFIs’ efforts in providing loans under the program. Ultimately, the PIE needs to originate suitable energy efficiency projects together with IEs/ESCOs, which requires the PFIs to have capacity and incentives for project identification. The risks related to the PIE are mitigated by selecting it based on implementation capacity and holding it accountable for performance. The PIE will also be provided capacity building support, as necessary, to ensure that RSF Guarantee applications are carefully reviewed and approved. PFI implementation risks are addressed by careful selection of motivated financial institutions, and providing them with low-cost RSF Guarantees and TA support for Sub-Project identification and appraisal. During Project preparation, MoIT and the Bank organized Project marketing workshops for potential PFIs and IEs/ESCOs and invited experts from guarantee institutions in the Philippines and Indonesia to provide training to the leading PIE candidate. MoIT and the Bank will continue to provide such pipeline development and capacity-building support for the PIE and PFIs during the Project ramp-up period. 95. Fiduciary: Substantial. The existing MoIT PMB for VEEIE will also implement this Project with shared FM arrangements. The FM assessment conducted for VEEIE concluded that MoIT’s FM arrangements provide reasonable assurance that IBRD Loan and IDA Credit proceeds will be used for intended purposes and that as a result they are acceptable to the Bank. VSUEE will use the same PMB for implementation of the GCF Grant, relying on the accepted FM arrangements. Under VEEIE, PFIs’ FM capacity for both staff and experience was also considered acceptable. While VSUEE will not disburse loans to PFIs but rather RSF Guarantees, the Project will screen all PFIs for the prudential and risk management record of their lending practices. Assessment on PIE’s proposed financial management has been done with conclusion that the proposed arrangement is acceptable to the Bank. 96. Procurement: The procurement risk for the proposed Project is rated as Substantial mainly due to the MoIT/PMB’s lack of sufficient knowledge and adequate experience with the Bank’s “Procurement Regulations�, July 2016. Detailed assessments have been carried out during project preparation. To mitigate the identified risks and build capacity, an action plan has been developed and agreed during project preparation/appraisal and recorded in Annex 1 below. The Project Page 29 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Procurement Strategy for Development (PPSD) aligned with the Bank’s Procurement Regulations has been developed by the PMB to address how procurement activities will support the PDO and deliver the best value for money under a risk- managed approach that is fit-for-purpose under the country and market contexts. The PPSD is proportional, providing adequate justifications for the selection methods chosen in the Procurement Plans for Component 2 under the Project. 97. Environment and Social: Moderate. Sub-Projects are expected to involve small-scale construction for installation or replacement of energy efficient technologies and equipment. It is anticipated that the Project would mostly include category B Sub-Projects. However, all Sub-Projects will be screened carefully case by case, to determine the appropriate category and environmental safeguard instruments to manage the potential impacts. 98. MoIT has already prepared ESMF/RPF/EMPF frameworks to guide and set out the requirements to ensure the safeguard compliance of the Project during implementation period. The frameworks comply with the Bank’s safeguard policies and national legislations on environmental protection. They will be adopted by MoIT and integrated into the OM. The frameworks lay out procedures which includes (i) screening mechanism to exclude ineligible subprojects, (ii) identification of environmental and social impacts associated with the energy efficiency project and the mitigation measures; (iii) procedures for preparation and approval/clearance of EA documents per GoV regulations and Bank safeguard policies; (iv) monitoring, institutional arrangement and financial sources for ESMF implementation; and (v) public consultation and information disclosure requirements in accordance to the Bank safeguard policies. 99. During Sub-Project implementation, IEs/ESCOs will have the overall responsibility to carry out mitigation measures as set out in Sub-Project EMPs. IEs/ESCOs will carry out internal monitoring to ensure the contractors’ implementation of mitigation measures. PFIs, PIE, PMB, the Bank and local authorities will carry out external monitoring on IEs’/ESCOs’ safeguard implementation on a periodical basis. 100. Stakeholders: Moderate. The relevant stakeholders include relevant government counterparts, the PIE, PFIs and IEs/ESCOs as well as affected civil communities. The targeted energy efficiency investments fit within the Government’s sector-wide goals, using proven technologies with private sector participants experienced in implementing such projects. The PIE, PFIs and IEs are expected to derive financial and technical capacity benefits from the Project. E&S impacts are not expected to create considerable public resistance due to their limited nature. The stakeholders are generally expected to be supportive of the Project and will be provided targeted support to enable successful implementation. 101. Overall: Substantial . Page 30 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 6. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: Vietnam Vietnam Scaling Up Energy Efficiency Project Project Development Objectives(s) The Project Development Objective is to improve energy efficiency in Vietnam's industrial sector. Project Development Objective Indicators RESULT_FRAME_TBL_ PD O Indicator Name DLI Baseline Intermediate Targets End Target 1 Energy efficiency in the industrial sector improved Projected energy or fuel savings (CRI, Mega Joules 0.00 298,000,000,000.00 577,000,000,000.00 (MJ)) Projected lifetime fuel savings (CRI, Mega 0.00 206,000,000,000.00 398,000,000,000.00 Joules (MJ)) Projected electricity generation savings (CRI, 0.00 92,000,000,000.00 179,000,000,000.00 Mega Joules (MJ)) Net greenhouse gas emissions (CRI, Tones/year) 0.00 3,500,000.00 6,900,000.00 PDO Table SPACE Page 31 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Intermediate Results Indicators by Components RESULT_FRAME_TBL_ IO Indicator Name DLI Baseline Intermediate Targets End Target 1 Risk Sharing Facility Number of PFIs providing RSF guaranteed loan 0.00 2.00 5.00 (Number) Commercial financing mobilized (Amount(USD)) 0.00 130,000,000.00 251,000,000.00 Commercial financing mobilized from PFIs 0.00 104,000,000.00 201,000,000.00 (Amount(USD)) Number of bankable energy efficiency projects 0.00 50.00 100.00 developed (Number) Number of IEs adopting improved energy 0.00 35.00 75.00 efficiency technologies (Number) Technical Assistance and Capacity Building Number of PFI loan officers trained (Number) 0.00 40.00 50.00 Number of IEs/ESCOs participating in 0.00 160.00 200.00 workshops/trainings (Number) Number of IEs certified for ISO 50001/EMS 45.00 70.00 90.00 (Number) Number of training courses offered to women- owned/led SMEs to become clean energy 0.00 3.00 5.00 entrepreneurs with the capacity to deliver energy efficiency-related goods and services (Number) IO Table SPACE UL Table SPACE Page 32 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection PIE will collect data from each PFI which PIE progress Bi-annual monitors data from MoIT PMB Projected energy or fuel savings report IEs/ESCOs, and will report to the PMB PIE will collect data from each PFI which PIE progress Bi-annual monitors data from MoIT PMB Projected lifetime fuel savings report IEs/ESCOs, and will report to the PMB PIE will collect data from each PFI which PIE progress Projected electricity generation Bi-annual monitors data from MoIT PMB report savings IEs/ESCOs, and will report to the PMB PIE will collect data from each PFI which PIE progress Bi-annual monitors data from MoIT PMB Net greenhouse gas emissions report IEs/ESCOs, and will report to the PMB ME PDO Table SPACE Page 33 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Number of participating financial institutions Project Data collected from Number of PFIs providing RSF guaranteed providing loans guaranteed 6 months MoIT report supervision mission loan by RSF for energy efficiency investment in industrial sector PIE will collect data Commercial financing from the information of mobilized from PFIs and PIE progress the PFI Loan portfolio Bi-annual MoIT PMB Commercial financing mobilized IEs/ESCOs for energy report guaranteed by the RSF, efficiency Sub-Projects by and will report to the providing RSF Guarantees PMB PIE will collect data from the information of Commercial financing PIE progress the PFI Loan portfolio Commercial financing mobilized from mobilized from PFIs for Bi-annual MoIT PMB report guaranteed by the RSF, PFIs energy efficiency Sub- and will report to the Projects by RSF Guarantees PMB PIE will collect data from the PFI Loan Number of energy efficiency PIE progress Number of bankable energy efficiency Bi-annual portfolio guaranteed by MoIT PMB Sub-Project financed by PFIs report projects developed the RSF, and will report and supported by the RSF to the PMB Number of IEs adopting improved energy Number of IEs that have Bi-annual PIE progress PIE will collect data MoIT PMB efficiency technologies invested in energy efficiency report from the PFI Loan Page 34 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Sub-Projects financed by portfolio guaranteed by PFIs and supported by the the RSF, and will report RSF to the PMB The PMB will collect Number of PFI loan officers PMB data through the who have received training Bi-annual progress MoIT PMB Number of PFI loan officers trained implementation results provided by MoIT under report of the TA Component Component 2 Number of IEs and ESCOs The PMB will collect PMB that have participated in data from the Number of IEs/ESCOs participating in Bi-annual progress MoIT PMB workshops and trainings implementation results workshops/trainings report provided by MoIT under of the TA Component Component 2 Number of IEs adopting ISO The PMB will collect PMB 50001 Energy Management data from the Number of IEs certified for ISO Bi-annual progress MoIT PMB Systems through capacity implementation results 50001/EMS report building offered under of the TA Component Component 2 Number of training courses offered under Component 2 to SMEs owned or led by women to become clean Number of training courses offered to energy entrepreneurs with The PMB will collect PMB women-owned/led SMEs to become clean the capacity to deliver data from the Bi-annual progress MoIT PMB energy entrepreneurs with the capacity to energy efficiency-related implementation results report deliver energy efficiency-related goods goods and services. This of the TA Component and services course specifically targeting female entrepreneurs to address such a gender gap will be offered annually throughout project Page 35 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) implementation. ME IO Table SPACE Page 36 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 7. TERMS AND CONDITIONS OF THE GCF GUARANTEE 102. This GCF Guarantee Term Sheet contains a summary of the indicative terms and conditions of a proposed guarantee to be issued by the International Bank for Reconstruction and Development (“IBRD� or the “Bank�) acting as an Accredited Entity of the Green Climate Fund (“GCF�) and capitalized by GCF (the “GCF Guarantee�), and does not constitute an offer from the Bank to provide a guarantee. The provision of any such guarantee is subject, inter alia, to satisfactory appraisal by the Bank of the Vietnam Scaling Up Energy Efficiency Project (the “Project�), compliance with all applicable policies and procedures of the Bank, further consideration, review and acceptance of the Project/transaction structure and documentation by the Bank, and approval by the Management of the World Bank, in their sole discretion. If such approval by the Bank results in a material change in the GCF Funding Proposal from what was approved by the GCF Board, GCF reserves the right to reassess the Funding Proposal and obtain, if necessary, GCF Board approval. Overview and Form of GCF The GCF Guarantee provided by the Bank to the program implementing entity Guarantee (the “PIE�), appointed by Vietnam’s Ministry of Industry and Trade (“MoIT�) for the implementation of Vietnam’s risk sharing facility under the Project (the “RSF�), is a partial risk guarantee, which covers the risk of a capital shortfall in the RSF. A capital shortfall under the RSF could result if RSF Guarantee payouts by the RSF (as described below) exceed the capital available. Under the RSF, the PIE will provide partial credit guarantees (“RSF Guarantees�) to participating financial institutions (“PFIs�) to cover potential defaults on loans (“PFI Loans�) provided by PFIs to industrial enterprises (“IEs�) and energy service companies (“ESCOs�) to finance eligible energy efficiency sub-projects (“Sub-Projects�). The RSF would be required to make RSF Guarantee payouts to PFIs if IE or ESCO borrowers default on PFI Loans which are covered by RSF Guarantees. Risk coverage includes defaults on scheduled principal and interest payments and/or accelerated loan balances with accrued interest. RSF Guarantee coverage is expected to be up to 50 percent of losses (subject to a maximum coverage amount equivalent to up to 50 percent of the principal loan amount). The PIE may issue RSF Guarantees under the RSF up to the Leverage Ratio (as defined below). GCF Guarantee Guarantor IBRD, acting as an Accredited Entity of GCF Beneficiary The PIE, as the manager of the RSF on behalf of the Government, will be the beneficiary of the GCF Guarantee. GCF Guarantee Amount US$75 million, to be committed in [four] tranches of [US$10 million, US$10 million, US$27.5 million and US$27.5 million],18 with tranches to be disbursed 18GCF will transfer the funds for the capitalization of the RSF (the “Reimbursable Funds�) to the Bank in tranches (with the details of the tranching to be further discussed and agreed to between GCF and the Bank). The maximum face value of the GCF Guarantee will be limited to aggregate amount of the Reimbursable Funds actually received by IBRD from GCF. As such, the initial face value of the GCF Guarantee Page 37 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) by the GCF and committed by the Bank at the request of PIE to the Bank after 70 percent of the funds previously disbursed by GCF have been have been cumulatively disbursed by the Bank under the GCF Guarantee or legally committed in the form of the issuance of an equivalent amount of RSF Guarantees by the PIE. The PIE may also request (with the prior written consent of MoIT) a reduction of the GCF Guarantee Amount by notice to the Bank pursuant to the terms of the GCF Guarantee Agreement. If there are no calls on the GCF Guarantee, the GCF Guarantee Amount will reduce as exposure under the RSF Guarantees reduces after the end of the GCF Availability Period (as defined below), as guaranteed PFI Loans are amortized. After the GCF Availability Period, and if there are no calls on the GCF Guarantee, the Bank will reflow to GCF the funds received from GCF on pre-agreed dates in amounts corresponding to the decreasing GCF Guarantee exposure as outstanding PFI Loans are amortized. In case the Bank intends to increase the maximum guaranteed portfolio size, the Bank shall consult and agree with GCF on the process to be followed. GCF will reserve the right to reject the proposal. GCF Guarantee Currency US Dollar Covered Events The PIE may submit a demand notice to the Bank for payment in the event the (Obligations covered by balance in the Loss Reserve Accounts (as defined below) is not sufficient to meet GCF Guarantee) any eligible claim submitted by an eligible PFI under an RSF Guarantee in respect of principal and/or interest payment defaults by IEs/ESCOs. Procedures for making a The PIE may submit a demand notice to the Bank following any Covered Event, claim under GCF certifying, together with relevant documentary evidence that an eligible claim Guarantee by the relevant PFI under the applicable RSF Guarantee has been made in compliance with all relevant conditions under the RSF, and that there are insufficient funds in the Loss Reserve Account to satisfy the said claim. Use of Proceeds Proceeds of any payout by IBRD under the GCF Guarantee will be used by the PIE solely for the purpose of paying eligible claims submitted by PFIs under RSF Guarantees. Length of GCF Guarantee GCF Guarantee Availability Period: The GCF Guarantee is made available for commitment in an aggregate amount of up to US$75 million during a period starting on the Effective Date of the GCF Guarantee Agreement and ending on will be equivalent to the amount of the first tranche transferred by GCF. The face value of the GCF Guarantee will be increased from time to time, as additional tranches are transferred by GCF. The GCF Guarantee Agreement will include provisions to allow the increase the face value as such tranches are received, up to a maximum aggregate amount of US$75 million. Page 38 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) the [fifth (5th) anniversary] of the Effective Date of the GCF Guarantee. The GCF Guarantee Availability Period could be extended by another [5 years] depending on market demand for the RSF and as agreed between the Bank and the Government of Vietnam. Such proposed extension shall be communicated in writing to the GCF Secretariat for approval. GCF Guarantee Period: The GCF Guarantee is available for payment where a demand notice is submitted to the Bank no later than the [fifteenth (15th)] anniversary of the Effective Date. GCF Guarantee pricing GCF Guarantee Fee of 0.10% per annum on the committed and undisbursed balance of the GCF Guarantee Amount, will be payable semi-annually in advance by the PIE from the RSF Accounts to GCF through the Bank (as reflowed funds). The payment of the GCF Guarantee fees will be a priority in the waterfall of payments from the RSF Accounts. Exclusions, Standard exclusion, limitation/suspension and termination events for Limitations/Suspensions & transactions of this nature. Termination Events Conditions Precedent for The GCF Guarantee’s effectiveness conditions would include, inter alia, the Effectiveness of GCF following: Guarantee (a) Execution, delivery and effectiveness of an Implementation Agreement between the PIE and the Government of Vietnam (expected to be through MoIT) setting forth the responsibilities and obligations of the PIE with respect to the management of the RSF, and all other relevant agreements related to the RSF, all in form and substance satisfactory to the Bank. (b) Delivery of all relevant legal opinions, satisfactory to the Bank, including legal opinions from (i) [Ministry of Justice of Vietnam], (ii) counsel to the PIE and (iii) any other entity as required. (c) Payment of the first installment of the GCF Guarantee Fee. (d) Finalization of the OM (as defined below), in form and substance satisfactory to the Bank. (e) Receipt by the Bank of the first tranche of the Reimbursable Funds from GCF. Governing law The GCF Guarantee Agreement will be governed by English law or New York Law. RSF Guarantees RSF Guarantor PIE RSF Guarantee PFIs Beneficiaries RSF Guarantee Currency US Dollar or Vietnamese Dong Obligations covered by Any default by IE/ESCO borrowers on loan repayments to PFIs, and associated RSF Guarantees accrued interest (but excluding penalty interest, default interest or charges of a Page 39 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) similar nature), will be covered by the RSF, up to a coverage ratio not to exceed 50 percent of losses,19 subject to a maximum coverage amount not to exceed 50 percent of the loan principal amount. While the coverage ratio may not exceed 50 percent, the PIE will have flexibility in setting the coverage ratio based on market demand, under arrangements to be detailed in the OM. Length of RSF Guarantees The tenors of RSF Guarantees will correspond to those of the guaranteed PFI Loans, but cannot extend beyond the end of the RSF Amortization Period. RSF Guarantee Pricing20 RSF Guarantee fees: The fee payable by PFIs to the PIE will be split in two: a front-end fee of 0.25% on the initial RSF Guaranteed amount and a recurring annual RSF Guarantee fee of up to 0.70% on the outstanding RSF Guaranteed amount. Following market testing, the fees may be increased in accordance with the relevant procedures which will be detailed in the OM. Subject to approval by GCF, the annual RSF Guarantee fee may be reduced below 0.70%. All the front-end fees and RSF Guarantee fees received will be credited to the RSF Accounts (as defined below). RSF Accounts [RSF Accounts will be opened by the PIE at a financial institution acceptable to the Bank, and made available to the PIE for the sole purpose of making and receiving payments related to the RSF. RSF Accounts consist of: (i) Seed Capital Grant Accounts, which will be created for the purpose of initial RSF capitalization and fixed fee payments to the PIE; (ii) Loss Reserve Accounts, which will be created for the purpose of receiving and making payments to meet eligible claims by PFIs under RSF Guarantees; receiving RSF Guarantee fee payments, recoveries, and GCF Guarantee payouts; paying the GCF Guarantee Fee; and, in certain circumstances, paying the PIE’s variable fee; and (iii) an Implementation Account, which will be created for the purpose of transferring payments of the PIE’s fixed fees and, if applicable, variable fees. 21] Funds received by the RSF will be deposited and transferred among the various accounts in accordance with the OM. Capital Base Combination of committed and undisbursed GCF Guarantee Amount and funds in the Loss Reserve Account. Leverage Ratio Initially, in the base case, the RSF cannot issue RSF Guarantees in an aggregate amount which exceeds the Capital Base. The ratio of RSF Guarantee 19 The definition of a loss will be detailed in the OM. 20 The PIE will have flexibility to adjust RSF Guarantee fees as per the OM. GCF’s consent will be required for any significant changes to the fees, and the threshold for such significant changes will be pre-agreed with GCF and detailed in the OM. 21 To be confirmed with MoIT/PIE. Other accounts may be added depending on the final structure of the RSF. Page 40 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) commitments to the Capital Base is referred to as Leverage Ratio. The Leverage Ratio will be set at 1.0 in the base case but may be increased to 2.0 or greater upon agreement by the Government of Vietnam, the Bank and GCF. Reflow of funds from Loss At the maturity of all RSF Guarantees, any unused funds remaining in the Loss Reserve Account Reserve Account will be reflowed to the GCF in accordance with the Funded Activity Agreement, up to an amount equivalent to the aggregate amount of any pay outs under the GCF Guarantee and net of any recoveries reflowed to GCF (see below under Funds recovered by PIE). Funds recovered by PIE If any amount is recovered by PIE from the PFIs or IEs or any third parties on their behalf, in respect of any payouts for eligible claims under RSF Guarantees, such amount (net of eligible recovery costs incurred by PIE to be set out in the OM (as defined below)) will be remitted first to the Loss Reserve Account. Unless otherwise requested by the Bank to return such funds to the Bank for any payments made under the GCF Guarantee (in which case such funds would be reflowed to GCF in accordance with the OM), any such remitted amount may be used for meeting any further eligible claims under the RSF. Claw back. After the GCF Availability Period, should the RSF be able to recover all or a portion of the losses for which a pay out under the GCF Guarantee has been made (using Reimbursable Funds), GCF shall have the option of clawing back (through the Bank) from the RSF the amount corresponding to the losses that have been recovered by the RSF (net of eligible recovery and operating costs). Temporary cessation of During years 1-5 of the Project, the PIE will provide semi-annual progress reports RSF Guarantee issuance on the performance of the RSF to the Bank and GCF, which will inter alia, contain information on any calls and payouts under RSF Guarantees. If RSF Guarantees have been called in an aggregate amount of up to US$1 million, GCF may request a consultation among GCF, the Bank and the PIE. If: (a) the expected first loss reserve is depleted and; (b) for the initial temporary cessation, the GCF Guarantee has been called in an aggregate amount of up to US$3 million (and for subsequent temporary cessations, after each additional incremental US$5 million of RSF Guarantee calls), then GCF may, through the Bank, request that the PIE cease issuing further RSF Guarantees. The cessation may be lifted and the PIE may resume issuing RSF Guarantees upon notification by the Bank, when the PIE has taken corrective measures satisfactory to the Bank and GCF. Page 41 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Operations Manual (the The OM will be created as a guiding document for PIE for the administration of “OM�) the RSF. The OM will be finalized in form and substance satisfactory to the Bank prior to effectiveness of the GCF Guarantee and a final copy sent to GCF prior to the first disbursement of the Reimbursable Funds. Compliance with the OM will be included as a covenant for the PIE in the GCF Guarantee Agreement and the Implementation Agreement. Documentation. A summary of the contractual arrangements for the RSF is provided below in Annex 1 (Implementation Arrangements and Support Plan). Page 42 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) ANNEX 1: Implementation Arrangements and Support Plan A. Project institutional and implementation arrangements 1. Ministry of Industry and Trade. MoIT will be responsible for overall Project coordination, implementation, and monitoring and evaluation. MoIT’s existing Project Management Board, which is responsible for the implementation of the VEEIE Project, will be responsible for: (i) planning and managing the day-to-day implementation of the TA activities under Component 2 of the Project; (ii) ensuring coordination among all relevant departments and agencies; (iii) monitoring and reporting; and (iv) overseeing and supporting the activities of the PIE appointed to manage the RSF under Component 1 of the Project. 2. Program Implementing Entity. To facilitate the carrying out of Component 1 of the Project, MoIT will appoint a suitably qualified commercial bank to serve as PIE for the RSF. MoIT will enter into an implementation agreement with the PIE, setting forth the responsibilities and obligations of the PIE with respect to the management of the RSF. This will include the obligation of the PIE to: (i) manage the RSF in accordance with the Operations Manual for the RSF, (ii) support sub-project identification and pipeline development (iii) review applications for, and issue, RSF Guarantees under the RSF to PFIs, and enter into RSF Guarantee Agreements for this purpose; (iv) ensure that the PFIs comply with the eligibility and other criteria and requirements set forth in the Operations Manual for the selection, appraisal, evaluation and issuance of PFI Loans to IEs and ESCOs in support of eligible Sub-Projects, (v) implement risk management measures, including RSF Guarantee portfolio and loan monitoring and (vi) manage cash flows and RSF accounts. The PIE will operate under the oversight of MoIT, and will provide regular reports to MoIT and the Bank on the performance of the RSF, including notification of any payouts under the RSF. The government (MoIT and SBV) has identified strongest candidate to be the PIE22 following a technical and financial review. 3. RSF Accounts23. Accounts for the RSF will be created and maintained by PIE at a financial institution acceptable to MoIT and the Bank. The accounts, which will be used for the sole purpose of making and receiving payments related to the RSF, are expected to consist of (i) USD Holding Account. The PIE shall open USD denominated account, to be used to receive initially deposit and hold the proceeds of the US$3 million Seed Capital Grant from the World Bank to the PIE as instructed by MOIT. Upon receipt of the Seed Capital Grant in the USD Holding Account, the PIE shall promptly convert the proceeds of the Seed Capital Grant into VND and thereafter promptly transfer: (a) an amount equivalent to one million United States Dollars ($1,000,000) into the Loss Reserve Term Account; (b) an amount equivalent to the first installment of the Fixed Fee into the Implementation Account; (c) [an amount equivalent to the first installment of the GCF Guarantee Fee into the Loss Reserve Current Account; and]24 22 The selection remains subject to formal appointment as PIE by the government. 23 The type and number of the RSF Accounts is subject to change pending confirmation from MoIT/PIE. Other accounts may be added depending on the final structure of the RSF. 24 WB to confirm with GCF whether first instalment of GCF Guarantee Fee can be paid out of Seed Capital Grant or alternatively waived. Page 43 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) (d) the remaining balance of the Seed Capital Grant into the Seed Capital Grant Term Account. (i) Seed Capital Grant Term Account. The PIE shall open an interest-bearing VND denominated account, to be used to initially deposit and hold the proceeds of the Seed Capital Grant allocated for the payment of the Fixed Fees, pending transfer of such proceeds from time to time into the Seed Capital Grant Current Account. (ii) Seed Capital Grant Current Account. The PIE shall open a VND denominated checking account, to be used to deposit and hold the proceeds of the Seed Capital Grant to be periodically transferred from the Seed Capital Grant Term Account, for payment of the Fixed Fees expected to be payable during the applicable year (iii) Implementation Account (a) The PIE shall open an interest-bearing VND denominated checking account, to be used to deposit payments of the Fixed Fee transferred from the Seed Capital Grant Current Account, and of any Variable Fees transferred from the Loss Reserve Current Account. (b) Upon receipt of any PIE Fees into the Implementation Account, the PIE shall promptly transfer such funds into an account owned by the PIE and separate from the RSF Accounts. (iv) Loss Reserve Term Account. The PIE shall open an interest-bearing VND denominated account, to be used to hold the proceeds of the Seed Capital Grant transferred from the USD Holding Account, for the purposes of initially capitalizing the RSF. The Loss Reserve Term Account shall also be used to deposit and hold any surplus amounts from the Loss Reserve Current Account in relation to any GCF Guarantee payout that are not immediately required by the PIE to satisfy RSF Guarantee Claims. (v) Loss Reserve Current Account. The PIE shall open a VND denominated checking account, to be used: (a) to deposit and hold the proceeds of: (A) the Seed Capital Grant transferred from the Loss Reserve Term Account for the purposes of initially capitalizing the Loss Reserve Current Account; (B) RSF Guarantee Fees; (C) any revenues from recoveries made in relation to amounts paid out under RSF Guarantee Claims; and (D) any payouts under the GCF Guarantee; and (b) for the payment of: (A) RSF Guarantee Payouts, (B) the GCF Guarantee Fee, and, (C) the Variable Fee. 4. Detailed provisions for the management of these accounts will be included in the OM, and covenanted in the Implementation Agreement and GCF Guarantee Agreement. 5. Operations Manual. An OM has been developed, with inputs from the candidate PIE, to govern the day-to-day operations of the RSF. The OM includes details on, inter alia, roles and responsibilities of the various RSF stakeholders, eligibility criteria and approval processes (for the PFIs, IEs/ESCOs, and Sub-Projects), funds flow and cash management procedures, procedures for RSF Guarantee issuance and claims, safeguards and fiduciary requirements, including the ESMF, and the RMF. 25 The OM will also include templates for key RSF documentation, including RSF Guarantee 25The OM will be required to include the following: (i) the eligibility criteria for PFIs and Sub-Projects, including a requirement that Sub- Projects supported under the RSF may only include energy efficiency activities listed in the Joint Report on MDB’s Climate Finance, (ii) the terms and conditions to be complied with by the PIE when providing RSF Guarantees to PFIs, (iii) other parameters, requirements and/or restrictions that govern use of resources by PIE, (iv) a requirement to produce audited reports on the financial activities supported by the Reimbursable Funds (as defined in paragraph 6), in accordance with the relevant financial reporting standards; (v) measures to limit access to the RSF in case of failure to comply with (iv) in this paragraph, and the definition of corrective measures to be applied in case of non- compliance with (i), (ii) and (iii). Page 44 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) applications, agreements, and related forms. The OM will be finalized, subject to the Bank’s non-objection, as a condition to the effectiveness of the GCF Guarantee, and possibly as a condition for first disbursement of the GCF funds allocated to the RSF. Compliance with the OM by the PIE will be covenanted in the Implementation Agreement and GCF Guarantee Agreement. Changes to the OM during Project implementation will require approval from MoIT and the Bank. 6. Participating Financial Institutions. To be accredited as a PFI for the RSF, financial institutions will be required to satisfy the eligibility criteria for PFIs provided in the OM. The criteria include the minimum requirements to comply with SBV such as capital adequacy ratios, share capital, the level of non-performing loans, liquidity, efficiency of operations, and profitability. Out of 11 potential PFIs that expressed interest, including both state-owned banks and joint stock banks, 10 have satisfied the eligibility criteria, namely: Vietcombank, ACB, TP Bank, LienVietPostBank, MBBank, VietinBank, BICV, Techcombank, SHBank and HDBank. On this basis, these banks are expected to be accredited as PFIs. Additional information on the PFI eligibility criteria is presented in Annex 2. During Project implementation, additional financial institutions may apply to join the RSF. The Program Implementing Entity (PIE) will recommend suitable entities as PFIs based on the PFI selection criteria, for approval by MoIT and the World Bank. PFIs will thereafter enter into the applicable legal agreements for participation in the RSF (see description of the contractual arrangements in paragraph 6 below). PFIs will have full responsibility for the energy efficiency lending process and approvals, following the criteria and procedures in the OM. In particular, PFIs will be responsible for appraising potential Sub-Projects, issuing PFI Loans to IEs and ESCOs for approved Sub-Projects, and applying for RSF Guarantees. PFIs will also be required to monitor the performance of Sub- Projects and provide regular reporting to the PIE on such performance. 7. Contractual arrangements. The following contractual arrangements will be put in place for the Project: (a) Funded Activity Agreement between GCF and IBRD, as an Accredited Entity of GCF: Provides the terms and conditions for the transfer of funds from GCF to IBRD, namely: (i) up to US$75 million capitalize the GCF Guarantee to be provided by the Bank to the PIE under the GCF Guarantee Agreement (see below), and (ii) an aggregate amount of US$11.3 million, to be disbursed as a grant by the Bank to Vietnam pursuant to the GCF Grant Agreement (see below), consisting of: (x) US$3 million to be used as seed capital to support the operation and maintenance of the RSF under Component 1 of the Project, including management fees and coverage for the issuance of early RSF guarantees, and (y) US$8.3 million for the TA activities under Component 2 of the Project. (b) GCF Grant Agreement between IBRD, acting as an Accredited Entity of GCF, and Vietnam: Provides the terms and conditions for the downstream transfer of the Non-Reimbursable Funds as a grant to Vietnam. The GCF Grant Agreement will, inter alia, include covenants relating to establishment and oversight of the RSF, including obligations on the part of Vietnam to comply with the Implementation Agreement. (c) Implementation Agreement between the PIE and MoIT: Sets out the responsibilities and obligations of the PIE and MoIT in respect of management and operation of the RSF. The Implementation Agreement will be in form and substance satisfactory to the World Bank. (d) GCF Guarantee Agreement between IBRD, acting as an Accredited Entity of GCF (as guarantor), and the PIE (as guarantee beneficiary): Defines the terms and conditions of the GCF Guarantee to be provided by IBRD to the PIE, including covered risks, guarantee amount and term, payout procedures etc. Further details on the terms and conditions of the GCF Guarantee are provided in the term sheet in Section 6 of above (Indicative Terms and Conditions for the GCF Guarantee). The GCF Guarantee Agreement will also include certain representations, warranties and covenants on the part of the PIE relating to reporting, compliance with applicable World Bank Page 45 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) environmental and social safeguards requirement, World Bank requirements relating to Sanctionable practices, and compliance with the Operations Manual. (e) RSF Guarantee Agreements between the PIE (as RSF guarantor) and PFIs (as RSF beneficiaries): Define the terms and conditions of the RSF Guarantees offered, including covered risks, RSF Guarantee amount and term, payout procedures, etc. It expected that these agreements will consist of a Master Guarantee Agreement entered into between the PIE and each PFI, and an RSF Guarantee Letter in respect of each specific RSF Guarantee issued in support of a particular energy efficiency Loan. (f) PFI Loan Agreements between PFIs and IEs and ESCOs: Define the terms and conditions of the loans to be made from PFIs to IEs and ESCOs for Sub-Projects, which will be backed by RSF Guarantees. These agreements will include the obligation of IEs and ESCOs to comply with the applicable environmental and social, energy efficiency, technical, financial and reporting requirements for Sub-Projects, as set forth in the OM. 8. The diagram below summarizes the contractual arrangements for the Project. Figure A.1: Overview of Contractual Arrangements 9. Reporting. Monitoring of the implementation of the proposed project would involve (a) the monitoring of performance indicators, as indicated in Section 6; (b) semi-annual progress reports; and (c) a midterm review of implementation progresses. The PMB will be responsible for overall M&E of implementation progresses, including the collection of project performance information and reporting on the impact and results of the project during the implementation period. Regarding to Component 1, after the Project is closed, the PIE would take over the main Page 46 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) responsibility for monitoring guarantee portfolio and reporting on the results until the RSF is closed. The PMB will develop an M&E plan during the first year of implementation. A member of the PMB will be assigned to collect information and maintain databases to monitor the implementation performance of the project components. For activities to be implemented by the PIE/PFIs, the project team within each PIE/PFI will be responsible for collecting information with the assistance of the PMB and reporting to the Bank through the PMB. The midterm review will provide an opportunity to discuss and agree on more significant changes to achieve the project objectives or to increase the impact of the VSUEE. 10. Under component 1, IEs/ESCOs must prepare semi-annual reports. These IE/ESCO Progress Reports must be submitted to the PFIs that provided the loan for the subproject. A PFI must carefully review the IE/ESCO Progress Report and obtain additional inputs or clarifications from IEs/ESCOs where needed. Based on the IE/ESCO Progress Reports, the PFI will prepare a PFI Progress Report. This will consist of a simple and brief introduction/summary for all projects for which RSF guarantees have been obtained, with copies of the corresponding all IE/ESCO Progress Reports attached. The PIE will consolidate all PFIs reports and submit to PMB and WB as part of the PIE’s progress reports described below. 11. For the RSF, the PIE will be required to provide semi-annual progress reports on the performance of the RSF to the Bank and MoIT, providing information on operation of the facility and financial perspectives, including any payouts under the RSF. 12. Financial Management. The PMB currently established at the MoIT will implement the VSUEE with three main functions: (a) to overall coordinate project activities, (b) supervise RSF operation, and (c) to manage all TA activities being financed under the project. The PMB will be responsible for the financial management of its component, including preparation and submission of biannual interim financial reports (IFRs) for its own expenditures within 45 days of the end of the period covered, and also responsible for the whole Project consolidated annual financial statements and audit. Key staff of the PMB will be employed from the on-going Bank-financed VEEIE project in the MoIT. 13. The PIE’s responsibilities include (i) sub-project identification and pipeline development, (ii) RSF Guarantee review, approval and issuance, (iii) risk management and monitoring and (iv) cash management and (iv) reporting to MoIT (PMB) on regular basis. PIE will be responsible for FM of its RSF component. 14. PFIs will have full responsibility for the energy efficiency lending process and approvals, following the criteria and procedures in the OM. PFIs will also be required to monitor the performance of sub-projects and provide regular reporting to the PIE on such performance. Each PFIs will be responsible for FM of its sub-projects. 15. At each PIE/PFIs, the project FM function (including budgeting, accounting, internal controls, staffing, reporting, auditing, credit appraisals, and monitoring of subprojects) will be fully integrated in the management processes of the PIE/PFIs. 16. Biannual Interim Financial Reports. PMB established under MOIT will be responsible for preparing an interim financial report on all expenditures incurred under the Grant Agreement, including expenditures incurred and reported by PIE, and submitting it to the Bank every 6 months, within 45 days after end of the semester. PIE will be responsible for biannually reporting to the Bank the activities under the Guarantee Agreement. 17. External Audit. The PMB will appoint independent auditors acceptable to the Bank. The project consolidated financial statements will be audited annually in accordance with international auditing standards and acceptable terms of reference. The auditors’ reports will be made available to the Bank within six months of the close of the fiscal year. The auditor will also provide a management letter addressing any internal control weaknesses of the PMBs, PIE and PFIs that Page 47 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) might have become evident when implementing the Grant and Guarantee activities. 18. All PFIs and PIE will be required to submit auditor reports and audited entity financial statements annually to the Bank within six months after end of fiscal year. The financial statements will be prepared in accordance with accounting standards acceptable to the Bank. Annual financial statements and audit reports will be made available to the public through websites of the PMB and PFIs/ PIE. In addition, PIE and PFIs will be required to comply with Circular 41/2016/TT- NHNN on capital adequacy which is very close to Basel II requirement and will come to effectiveness on January 01, 2020. 19. Funds Flow. Pursuant to the terms of the Funded Activity Agreement, GCF will transfer to IBRD (as an Accredited Entity of GCF) an aggregate amount of up to US$86,300,000, which will be disbursed and used as described below. 20. Reimbursable Funds of up to US$75,000,000 for the capitalization of the GCF Guarantee. GCF will transfer the Reimbursable Funds to the Bank in tranches26, expected to be US$10,000,000 initially, with subsequent tranches released as RSF Guarantees are issued. The maximum face value of the GCF Guarantee will be limited to aggregate amount of the Reimbursable Funds actually received by IBRD from GCF. As such, the initial face value of the GCF Guarantee will be equivalent to the amount of the first tranche transferred by GCF. The face value of the GCF Guarantee will be increased from time to time, as additional tranches are transferred by GCF. The GCF Guarantee Agreement will include provisions to allow the increase the face value as such tranches are received, up to a maximum aggregate amount of US$75 million. 21. Conditions for disbursement of Reimbursable Funds from GCF. The disbursement by GCF of the first tranche of the Reimbursable Funds is subject to the following conditions: (i) notification by the Bank to the GCF Secretariat that it has issued its no-objection in respect of the selection of the PIE; (ii) submission by Bank to the GCF Secretariat of a list of approved PFIs participating in the Project; and (iii) finalization of the OM, in form and substance satisfactory to the Bank; and (iv) provision of information on the project management staff composition, structure and responsibility of the PIE, in form and substance acceptable to the Bank. Subsequent tranche disbursements will be made by GCF to the Bank once at least 70 per cent of the aggregate amount of Reimbursable Funds previously disbursed have been cumulatively disbursed by the Bank under the GCF Guarantee or legally committed in the form of the issuance of an equivalent amount of RSF Guarantees by the PIE. 22. Calls under the GCF Guarantee. The transfer of funds under the GCF Guarantee to the PIE will be handled by the Bank, in accordance with terms of the GCF Guarantee Agreement. In particular, payments in respect of calls under the GCF Guarantee will be made directly by the IBRD to the PIE, using the Reimbursable Funds already transferred to the Bank from GCF. The PIE may make calls under the GCF Guarantee when there is a capital shortfall in the RSF, which could result if RSF Guarantee payouts exceed the capital available. 23. Reflows 27 . The Bank will reflow the Reimbursable Funds to GCF annually commencing from the end of the availability period of the GCF Guarantee and throughout the RSF Amortization Period, as the overall exposure of the retail RSF Guarantee portfolio decreases through the repayment of underlying energy efficiency loans. 24. Non-Reimbursable Funds in an aggregate amount of US$11.3 million to be disbursed as a grant by the Bank to Vietnam pursuant to the GCF Grant Agreement: 25. US$3 million of the grant will be used as seed capital to support the operation and maintenance of the RSF under 26 Subject to change pending agreement with GCF. 27 The detailed reflow arrangements are subject to confirmation with GCF. Page 48 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Component 1 of the Project, including management fees and coverage for the issuance of early RSF Guarantees. This will be used to: (i) pay the PIE’s fixed and variable service fees under the Implementation Agreement, and (ii) provide funds for the initial capitalization of the RSF to cover potential early calls under the RSF which may arise before sufficient loss reserves have been accumulated from RSF Guarantee fees. 26. US$8.3 million of the grant will be used for the TA activities under Component 2 of the Project. 27. The figure below summarizes the flow of funds associated with the Project. (Please modify the Figure A.2 to reflect the direct payment of 3 m from WB to PIE) Figure A.2: Overview of Funds Flow 28. Reallocation28. Funds allocated to activities within a particular Project component may be reallocated, provided that any reallocation of GCF Proceeds among sub-components resulting in a variation of more than: (a) 20 percent of the previously agreed budget for the sub-component from which the funds are to be reallocated, or (b) USD amount to be agreed between GCF and the Bank, whichever is higher (the “Reallocation Threshold�), must be approved in writing by 28 Details to be agreed with GCF Page 49 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) the GCF Secretariat in advance. No reallocation of funds may be made between Component 1 and Component 2. 29. Retroactive financing29. The GCF Proceeds shall not be used to finance any commitments or costs incurred prior to the effective date of the Funded Activity Agreement, except (subject to agreement by GCF) for PIE start-up costs in an amount not exceeding 20 percent of the portion of the Non-Reimbursable Funds to be allocated to Component 1 of the Project as seed capital for the RSF, and which can be incurred only after the Bank has notified the GCF that it has obtained all final internal approvals required for the Project. If agreed to by GCF, this retroactive financing will be used to cover legal and administrative expenditures (e.g. hiring or legal counsel, financial advisor and local legal and regulatory expert) related to the finalization of the OM and RMF, legal agreements, and RSF transaction documents (e.g. RSF Guarantee application form, form of RSF Guarantee Agreement) prior to effectiveness of the RSF. In addition, the funds would be used to cover operational (staff and administrative) costs for mobilization of the PIE prior to effectiveness of the RSF. The expenditures would be expected to be incurred by the PIE and possibly MoIT. It is expected that these upfront costs requiring retroactive financing, will not exceed US$600,000 (or 20 percent of the US$3 million allocated as seed funding for the RSF). B. Disbursement 30. The Project will use the following disbursement methods: • Reimbursement. The Bank reimburses the borrower for expenditures eligible for financing pursuant to the Grant Agreement (“eligible expenditures�) that the MoIT has pre-financed from its own resources. • Advance for Non-Reimbursable Funds of US$8.3 million. The Bank will advance grant proceeds into a segregated designated account opened by the MoIT to finance eligible expenditures incurred in respect of Component 2 and for which supporting documents will be provided at a later date. The ceiling of the advance to designated account of the PMB is variable, based on forecast of one (1) quarter and minimum application size for reimbursement, direct payment and special commitment will be US$100,000 equivalent. • Direct payment30 for seed capital to support the operation and maintenance of the RSF under Component 1 of the Project of US$3 million. This is expected to be made in form of one-time transfer31 from the Bank to the PIE’s USD Holding Account upon request of MOIT, after effectiveness of GCF Grant Agreement, GCF Guarantee Agreement and Implementation Agreement. 31. The disbursement deadline date will be four months after the closing date of the Project. Supporting documentation required for reimbursement and for documenting eligible expenditures paid from the designated account will be Statements of Expenditure (SOE), for direct payment will be Copy of Records for category 2 or Request for Payment from the PIE for category 1 together with other required records and/or statements as indicated in the disbursement letter. 32. The Project will finance 100 percent (inclusive of taxes) of eligible expenditures. 29 To be agreed with GCF. 30 To be confirmed with MoIT/PIE. 31 To be confirmed with MoIT/PIE. Page 50 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) C. Procurement 33. According to the VSUEE project design, Component 1 with Guarantees has no activity that will be subject to procurement. Under Component 2 of the Project, activities for Technical Assistance (TA) will be subject to procurement in line with the World Bank procurement policy and procedures. The total value of TA activities under Component 2 will not exceed USD 8.3 million, composed of series of consulting assignments of medium and small values for capacity building and few small packages for equipment to support implementation of PMB. Neither procurement of Works, nor ICB for Goods, nor large-value consulting services (more than USD 2 million) are foreseen under this project. No large-value OPRC case is expected as well. 34. Applicable procurement procedures: For contracts financed in whole or in part by the Grant, TA activities under Component 2 of the Project shall be carried out in accordance with the World Bank’s “Procurement Regulations for IPF Borrowers: Procurement in IPF for Goods, Works, Non-Consulting and Consulting Services, July 2016, revised November 2017 and August 2018� (hereafter called as “Procurement Regulations�), and the provisions stipulated in the Grant Agreement. 35. Procurement Risk assessment: Procurement activities under VSUEE will be carried out by the PMB under MoIT, which is the same agency implementing the on-going VEEIE, and for which the Procurement Capacity and Risk Assessment (PCRA) has been carried out during the project preparation/appraisal for VEEIE. The updated assessment for VSUEE noted that: (i) MoIT through its PMB has adequate institutional and organizational capacity in place; according to which the PMB has arranged relevant staffing to be in charge of procurement implementation under both on-going project VEEIE and new project VSUEE (which are closely linked; (ii) MoIT and PMB have gained some knowledge and experience of the Bank’s Procurement and Consultant Guidelines as results of its implementation of several ongoing Bank-financed projects, including CPEE and VEEIE; however, the newly adopted Procurement Regulations by the Bank are relatively new to both MoIT and PMB. Based on the above findings and considering the specific nature of procurement for Technical Assistance (TA) required under Component 2 of the Project, the procurement risk for the proposed project is rated as Substantial. 36. Mitigation measures. To mitigate the identified procurement-related risks and strengthen procurement implementation capacities, procurement trainings will be provided to PMB staff, including a basic procurement training at the project launch, training on STEP use and more advanced procurement trainings during project implementation, and/or ad-hoc training whenever required. 37. Procurement method thresholds. Procurement for GCF Grant under Component 2 will include the following categories: Goods and Consulting Services (selection of firms and individual consultants); whilst works are not foreseen under the project. Thresholds for procurement methods and Bank prior review under this component will be set following risk-based approach. The thresholds can be adjusted during project implementation according to the Bank’s identification of procurement risk rating on frequent basis: at least 6-month period during regular project supervision mission. 38. Procurement Planning. The PMB has prepared a simple short-form of Project Procurement Strategy for Development (PPSD) which summarizes the simple procurement arrangements for the TA and will result in a Procurement Plan under Component 2. The Procurement Plan for Component 2 for the first 18 months has been developed by the PMB and agreed with the Bank, and will be updated on an annual basis or as needed throughout the Project implementation to reflect the actual needs and improvements in institutional capacity. The updated Procurement Plan will clearly specify procurement methods and their applicable thresholds, as well as the applicable thresholds for the Bank’s prior review. When and where the slice-and-package approach is followed, the total estimated cost of all lots consisting of a particular Page 51 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) package will be the basis to determine the estimated cost of the package. All updated Procurement Plans shall be uploaded by the PMU in the Bank’s online system so-called “Systematic Tracking of Exchanges in Procurement (STEP)� and be subject to the Bank review and clearance before implementation. The STEP will automatically publish the updated Procurement Plan once approved with the Bank on the World Bank’s website. 39. Monitoring by STEP. Through mandatory use of STEP by the Borrower, the Bank will be able to consolidate procurement/contract data for monitoring and tracking of all procurement transactions. Using STEP, comprehensive information of all contracts for goods, works, technical services and consultants’ services awarded under the whole Project, no matter those are subject to the Bank’s prior-review or post-review, will be available automatically and systematically on an annual basis and/or whenever required, including but not limited to: (i) reference number as indicated in the Procurement Plan and a brief description of the contract; (ii) estimated cost, (iii) procurement method; (iv) timelines of the bidding process, (v) number of participated bidders, (vi) names & reasons of rejected bidders, (vii) date of contract award; (viii) name of awarded supplier, contractor or consultant; (ix) final contract value; and (x) contractual implementation period.. 40. Prior review. The project Procurement Plan (mainly for Component 2) agreed between the Borrower and the Bank as uploaded and cleared on STEP will indicate the agreed prior review thresholds based on the procurement capacity assessment and mitigation measures. This will be updated annually or semi-annually during implementation support missions, based on the procurement capacity assessment at supervision (IFAS) and will be reflected in the updated procurement plan as appropriate. When the slice-and-package approach is relevant to be followed, where bids are invited, evaluated and awarded in the form of a package comprising multiple lots, the total estimated cost of all lots consisting the particular package will be the basis to determine whether the package is subject to prior- or post-review. 41. Procurement supervision and post review by the Bank. Contracts (under Component 2) not subject to prior review will be subject to post review in accordance with Annex II of the Procurement Regulations. The Bank will carry out procurement post reviews on an annual basis with an initial sampling rate of 20 percent. This rate will be adjusted periodically during project implementation based on the performance of the PMB. The Bank will also carry out regular procurement supervision missions on a biannual basis. In addition to applicable prior review, the capacity assessment of the PMB has recommended supervision missions on bi-annual basis to visit the sites to carry out post review of procurement actions. D. Safeguards Environmental Safeguards 42. The Project is part of the Bank’s long-term engagement to support Vietnam to increase energy savings and improve demand-side energy efficiency. Overall, this Project promotes energy efficiency investments and strengthening capacity of energy efficiency energy efficiency market participants, thereby contributing to reduction of GHGs and pollutants, increasing energy savings, and encouraging the promotion of environmentally sound industry practices. 43. The safeguard policy OP/BP 4.01 is triggered due to the potential adverse environmental safeguard impacts associated with project activities under Component 1. Under Component 1, the Project will finance various Sub-Projects under energy intensive industries such as cement, iron and steel, and pulp and paper, public and private; using these potential energy saving measures: (a) adoption of energy saving industrial technologies (e.g., efficient industrial boilers, kilns, and heat exchange systems); (b) recovery and utilization of wastes and waste heat; (c) installation of highly efficient Page 52 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) mechanical and electrical equipment (e.g. motors, pumps, heating and ventilation equipment); and (d) industrial system optimization to reduce energy use. 44. The potential impacts during the construction phase of Sub-Projects under Component 1 involve: (i) noise, dust, disposal of domestic waste and waste water typical to the installation/construction of activities; (ii) disposal of old parts of inefficient equipment which may contain hazardous waste and in rare case, PCB oil extracting from the old transformers; and safety issues during the construction/installation of new equipment and facilities. The construction related impacts are likely to be localized, can be managed and mitigated to acceptable levels by applying good construction standards and practices. The possible impacts during the operation phase of new equipment and facilities may include safety issues, air emission, solid waste, and wastewater; and disposal of hazardous substances from such polluting industries such as cement, steel, textile, pulp and paper, and food processing. For example, there may be some issues of combustion gas emissions associated with the installation of new boilers, kilns or other types of heat treating equipment. These are long-term impacts; however, the magnitude of toxicity and amount of pollutants generated from the new energy efficiency facilities are assessed to be lower than those from the older replaced technologies and equipment. These impacts are site-specific and measures for managing these impacts could be readily designed. Overall, it is anticipated that the Project would mostly include category B Sub-Projects. In any case, during the project implementation, all Sub-Projects will be screened carefully case by case, to determine the appropriate category and environmental safeguard instruments to manage the potential impacts. 45. TA under Component 2 mostly involves capacity building activities. These activities usually do not have adverse environmental and social impacts or risk. As such, the TOR for these studies will include requirements on screening, analysis, and on environmental and social aspects so as to ensure that the proposed activities are in accordance with Bank safeguard policies and national regulations. 46. Environmental and Social Management Framework. During the preparation stage, the MoIT has prepared an ESMF to guide and set out the requirements to ensure safeguard compliance of the Project during the implementation period. The ESMF is in compliance with the Bank’s safeguard policies and national legislations on environmental protection. It will be adopted by MoIT and integrated in the Project Operations Manual. For Sub-Projects benefiting from partially guaranteed financing under Component 1, the ESMF describes procedures to be followed by any IE/ESCO and PFI to satisfy both Vietnamese environmental regulations and the Bank’s safeguard policies. Key features of the framework include procedures to be followed for screening, environmental assessment documentation, public consultation, EIA review and approval, disclosure, supervision, and reporting. The ESMF also include the procedures for conducting environment and social audit/due diligence of existing facilities that will be supported/retrofitted under the Project. It also covers TA under Component 2. Concretely, it provides requirements for TA activities identified by appraisal stage. The ESMF also refer to the “Interim Guidelines on the Application of safeguard Policies for TA activities in Bank -financed Projects� to screen the other TA activities during implementation period for their implications on environmental and social impacts and determine the appropriate safeguard instruments. 47. Implementation Arrangements. The key stakeholders participate in ESMF implementation include IEs/ESCOs, PFIs, PIE, and MoIT. A Project Management Board (PMB) set up under MoIT will provide support to enhance capacity for PIE/PFIs staff on safeguard screening and management via TA activities. 48. Each PFI will form a Project Implementation team, supported by technical, safeguard and procurement experts. The PFI’s team will implement the lending activities and act as the PFI’s focal point to interact with the PIE, the Bank MoIT Page 53 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) and other stakeholders. The team with dedicated safeguard specialist will carry out the safeguard screening, appraisal, clearance and monitoring of Sub-Projects under its management. The WB will associate with PMB to provide technical support to enhance capacity of PFIs as needed. 49. Sub-Project screening is primarily responsibility of the PFI. The category of the Sub-Project will be classified in accordance with the Bank’s safeguard policies and appropriate instruments will be required as necessary. The results of Sub-Project screening by PFIs will be reviewed by the PIE. 50. The IEs/ESCOs will have to prepare all necessary documents in line with the national regulations on environmental assessment and protection. In addition, IEs/ESCOs have to prepare an EA in accordance with the Bank’s safeguard policies and requirements on public consultation and disclosure. For a category A subproject, a full EIA with an EMP as an integral part, has to be prepared, and the TOR for EIA and EIA report shall be prior reviewed and cleared by the WB. For a category B Sub-Project, an EMP shall be prepared by the IE/ESCO, primarily reviewed and cleared by PFI. The Bank will selectively review and clear about 30% of EMP of the total category B Sub-Projects. In the case that the EA report of category B Sub- Projects is available when the IEs/ESCOs apply for the PFI Loan, an internal due diligence of EA reports may be conducted and followed by an EMP preparation by IE as necessary. 51. During Sub-Project implementation, the IEs/ESCOs will have the overall responsibility to carry out mitigation measures as set out in Sub-Project EMPs. The IEs/ESCOs will be responsible for inclusion of Environmental Code of Practices (ECOPs) into the bidding documents of construction contracts. The IEs/ESCOs and their construction supervision consultant(s) will carry out internal monitoring to ensure the contractors’ implementation of mitigation measures. The PFIs, PMB and WB and local authorities will carry out external monitoring on IEs safeguard implementation on a periodical basis. 52. The knowledge and experience of key stakeholders of safeguard implementation i.e. IEs/ESCOs, PFIs, PIE, and MoIT are considered limited. MoIT has engaged in several WB funded projects. However, it is unlikely that the safeguard staff from previous WB projects will participate in the VSUEE Project; therefore, activities to build safeguards capacity will be required. There are about 10 potential PFIs. Among those, BIDV and Vietinbank have participated in Rural Finance 3 Project (RF3) and Renewable Energy Development Project respectively, supported by the Bank. As such, they are familiar with safeguard requirements of the World Bank. However, the other potential PFIs do not have experience with the WB’s safeguard policies. IEs/ESCOs too have almost no experience with those policies. Therefore, close guidance and tailored training programs for MoIT, PIE, PFIs and IEs/ESCOs will be developed and implemented to enhance their capacity in safeguards implementation. 53. Public Consultation and Information Disclosure. All safeguard frameworks under VEEIE were updated for use of VSUEE. During the preparation of the project safeguard instruments, a consultation workshop on ESMF, EMPF and RPF was conducted on May 29, 2018 with the aim to collect feedback/comments on the frameworks developed under the Project. The workshop was attended by representatives from the Ministry of Industry and Trade (MOIT), Ministry of Environment and Natural Resources (MONRE), local consultants, Non-governmental organizations, State Bank of Vietnam, Petroleum of Vietnam (PVN), and potential PFIs participants. Comments received in the workshop were fully addressed in the final versions of the ESMF, RPF and EMPF. The Vietnamese versions of the ESMF, RPF, and EMPF were disclosed at the MOIT's website on May 23, 2018 before the consultation workshop. Prior to appraisal, the final ESMF, RPF and EMPF were disclosed at MOIT’s website, and at the World Bank’s external website on June 7, 2018. 54. Public consultation and information disclosure of the Sub-Project safeguard instruments under the VSUEE project Page 54 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) will be conducted in compliance with the ESMF, RPF, EMPF, government regulations, World Bank safeguard policies, and the Bank’s policy on access to information at the Sub-Project level during project implementation. Social Safeguards 55. The Project is expected to have overall positive social benefits because it promotes energy efficiency and thus reduces GHG emissions and other pollutants into the atmosphere. It will also have positive impacts from the perspective of consumers and workers who are employed by the participating IEs/ESCOs. Through energy efficiency investments, the companies’ energy cost will be reduced per unit of output with positive impacts on final prices of consumer products and services. This will also make IEs/ESCOs more competitive and ensure job security and potential expansion of the workforce. The energy efficiency Sub-Projects to be financed under the Project will be within the existing premises of industrial facilities. However, to anticipate the potential need of land acquisition required for Sub-Projects identified in implementation cycle, OP 4.12 is triggered and Resettlement Policy Frameworks (RPF) under VEEIE has been updated and used for this Project. Among other things, it lays down the principles and objectives, eligibility criteria of displaced persons, modes of compensation and rehabilitation, participation features and grievance procedures, review and clearance process of each Sub-Project’s resettlement plan. The RPF will guide the preparation of Sub-Project-specific Resettlement Action Plans (RAPs) identified during the project implementation stage. 56. OP 4.10 Indigenous People is also triggered to maximize Project benefits in ethnic minority communities. The Ethnic Minority Planning Framework (EMPF) under VEEIE has also been updated for use of VUSEE, setting out guidelines to: (a) ensure that the ethnic minority peoples receive social and economic benefits that are culturally appropriate; (b) avoid potentially adverse effects on the ethnic minority communities; and (c) when such adverse impacts cannot be avoided, minimize, mitigate, or compensate for such effects. The IEs/ESCOs must be able to demonstrate that they have obtained broad community support for the Sub-Projects through a process of free, prior, and informed consultations with the affected ethnic minority communities. The EMPF provides the procedures and guidelines for the Ethnic Minority Development Plans (EMDPs) to be prepared during project implementation. A Social Assessment informed the preparation of the EMDP, reflecting the agreements reached during the free, prior and informed consultations, with community members where EMs broad community support was confirmed. Any non-social safeguard impacts (for example, gender and employment) will be addressed in the project Environmental and Social Management Framework (ESMF) developed under the framework of OP 4.01. The PFI Loan agreement between the PFIs and the IEs/ESCOs will specify that participating IEs must fully comply with the existing national labor laws, including those related to children and women and will include appropriate mitigation measures. 57. Gender. In Vietnam, women own about 21 percent of formal enterprises, which is equal to 95,906 enterprises, with 57 percent being microenterprises, 42 percent being SMEs, and 1 percent being large enterprises.32 According to a study conducted by IFC,33 three out of the nine banks studied considered women-owned small businesses “a good market opportunity�, while three others rated the quality of their women-owned small and medium enterprises (SME) portfolio as “good�.34 Most banks in the study do not collect or analyze gender-disaggregated data. The participating IEs in the Project are expected to come from different energy-intensive industries. Many of them are considered “men-intensive�, 32 GSO, 2015. Vietnam Enterprise Census. Following the IFC definition of enterprises, i.e. microenterprises have revenues of less than USD 100,000 per annum; SMEs have annual revenues between USD 100,000 and USD 15 million; and large enterprises have annual revenues over USD 15 million. 33 IFC, 2017. Women-owned enterprises in Vietnam: Perceptions and Potential. 34 One of them reported lower NPL percentages for women-owned SMEs, at 0.95% versus 2.17% for men-owned (IFC, 2017). Page 55 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) such as manufacturers of cement, iron, steel, pulp and paper, while others are “women-intensive�, such as food- processing factories. As part of the funding proposal to GCF, a gender action plan was prepared to promote female entrepreneurship and employment in energy efficiency investments and female leadership in IEs with energy efficiency investments. 58. Component 2 will include activities to raise awareness and sensitize PFIs’ staff about specific needs and opportunities presented by women-owned IEs, and to create a cadre of insider champions that can drive a strategy and refine understanding of this segment. Awareness of the linkages between gender and energy efficiency Sub-Projects in specific sectors will be raised for participating government agencies through relevant TA and capacity building activities to generate sex-disaggregated data and develop relevant energy efficiency regulatory framework, standards and guidelines. In addition, targeted training courses and workshops will be offered to women-owned/led SMEs to raise awareness and build capacity on potential business opportunities in delivering energy efficiency-related goods and services. E. Strategy and approach for implementation support 59. The strategy for implementation support aims to help the client implement its dual functions more efficiently and focuses on risk mitigation measures. Support required from the Bank team is described below: (a) Procurement. The Bank team will (i) provide training to members of the procurement committee and related staff in the project offices; (ii) review procurement documents and providing timely feedback to the procurement committee; (iii) provide detailed guidance on the Bank's Procurement Guidelines to the procurement committee and engineering consultants; and (iv) monitor procurement progress against the detailed Procurement Plan developed by borrowers. (b) Financial management. The Bank team will review the project's FM system, including, but not limited to, accounting, reporting, and internal controls. Supervision activities will also cover Sub-Projects on a sample basis. The Bank team will also work with the project management consultant to assist the PMB and PIE/PFIs in improving coordination among different departments and units for FM and reporting. (c) Environmental and social safeguards. The Bank team will supervise and provide support to the PMB and IAs for (i) the implementation of the ESMF/EMPs in accordance with the Bank’s safeguard policies and (ii) the preparation of safeguards instruments as necessary for new subprojects identified during the implementation. Training will be provided to relevant staff from IAs to prepare and supervise implementation of the safeguards plan. (d) Capacity building for PIE. During implementation (with more focused attention during the first two years), the Bank will provide technical and guarantee-related support to the PIE. Specifically, the team will provide training and coaching to PIE staff on technical appraisal, financial and economic analysis, and the OM, to ensure PIE has adequate capacity to manage the RSF effectively. F. Implementation support plan and resource requirements 60. Most of the Bank team members will be based in Vietnam and regional country offices to ensure timely, efficient, and effective implementation support to the client. Timely monitoring and support to the IAs will be provided mainly by the country office team members. Formal supervision will be carried out semi-annually; field trips will be undertaken as Page 56 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) needed not only for Sub-Projects under implementation but also for new Sub-Projects in the pipeline. Technical skills required from the Bank team are described below: (a) Guarantee expertise. For at least the first two years of implementation, guarantee specialists are required to provide training and coaching to the PIE, ensuring that the PIE has sufficient capacity to operate the RSF. (b) Technical expertise. Energy efficiency specialist inputs are required to review and provide advice on energy efficiency saving measures, selection of energy efficiency energy efficiency technologies, preparation of energy audits, and bankable energy efficiency projects. (c) Financial management and fiduciary expertise. FM and procurement specialists based in the country office will provide timely support. Formal FM supervision will be carried out semi-annually, and procurement supervision will be carried out on a timely basis as required by the client. Two staff weeks are estimated to be required annually from the FM specialist and four staff weeks from the procurement specialist during the first three years of the project implementation. Thereafter, two staff weeks of annual support are expected from both specialists. (d) Safeguards expertise. Inputs from an environmental specialist and a social specialist are required throughout project implementation. Training will be provided to the IA staff on preparation of safeguards instruments and on monitoring and reporting. Supervision will focus on the implementation of the agreed land acquisition and resettlement plan. Field visits for supervision are required on a semi-annual basis. (e) Performance review of PFIs. A financial specialist is required to regularly review PFIs’ performance. Semi- annual reviews and field visits will be required. (f) Operational. An operations officer based in the country office will provide day-to-day supervision of all operational aspects and coordination with the client and among Bank team members. 50. The implementation support plan is summarized in the table below. Table A.3. Project Implementation Support Plan Time Focus Resource Estimate Year 1 to Year 5 Capacity building for PIE (Y1-Y2) Guarantee specialist (4 staff weeks p.a.) Page 57 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Technical and procurement review of EE specialist (4 staff weeks p.a.) the bidding documents Procurement specialist (4 staff Procurement training weeks p.a. during years 1-3, 2 staff weeks thereafter) FM training and supervision FM specialist (2 staff weeks p.a.) Supervise the implementation of Social specialist (2 staff weeks safeguard instruments p.a.) and Review of EMPs, provision of training, Environmental specialist (2 staff and supervision weeks p.a.) Review of PFIs’ performance Financial specialist (2 staff weeks p.a.) Institutional arrangement and project Operations officer (20 staff supervision coordination weeks p.a.) Team leadership and development of Task team leaders plus EE project pipeline specialist (40 staff weeks p.a.) Page 58 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) ANNEX 2: Assessment of Participating Financial Institutions 1. Financial institutions that meet the Participating Financial Institution (PFI) selection criteria will be accredited as PFIs for the Risk Sharing Facility (RSF). As described below, 10 PFIs have satisfied the selection criteria. For the inclusion of additional PFIs, the Program Implementing Entity (PIE) will recommend suitable entities as PFIs based on the PFI selection criteria, for approval by MoIT and the World Bank. Candidate institutions are screened for their profitability, capital adequacy, risk management practices and governance compliance, among other things. The table below shows the 13 qualitative and quantitative eligibility criteria for PFIs. In addition, although not a requirement, the PFI strategy, as approved by its Board of Directors, should preferably include energy efficiency (EE) financing and have at least 3 EE sub-projects in pipeline. Table A.4. PFI Eligibility Criteria Minimum Capital 1 The bank must have a minimum chartered capital of VND3 trillion Minimum Number of Branches 2 The bank must have a minimum of 30 branches (Tier 1) with good geographical coverage in Vietnam National Accounts The bank must have unqualified audited accounts which are audited by one of the major international firms for the past three years, i.e. 2015, 2016, 201735. These accounts can be audited using Vietnamese national 3 accounting standards. All PFIs should commit to submit financial statements at the point of loan effectiveness and signing the RSF Master Guarantee Agreement (or another related agreement). If it is not possible for a PFI to submit their financial statements immediately after joining the project, they would need to submit the financial statements - acceptable to the Bank - before benefiting from an RSF Guarantee. Compliance with all SBV Regulations 4 The PFI must be licensed by the SBV and be in compliance with all the SBV regulations and banking law. Corporate Governance The PFI must have in place a management structure with clear segregation of duties between the 5 Supervisory Board and the Management Board as well as a good corporate governance process in full compliance with the requirements of SBV Decree 59/2009/ND-CP (and any subsequent revised versions of this regulation) Loan Classification and Provisioning 6 The bank must be in compliance with Circular 02 of the SBV in relation to the classification and provisioning of its loan portfolio (and any subsequent revised versions of this regulation). Maximum Level of Non-Performing Loans 7 Total nonperforming loans defined as all loans in excess of 90 days overdue must be less than 7% of the total loan portfolio according to SBV regulations. 8 Minimum Level of Provisions 35 Or 2015 and 2016 if audited 2017 financials are not yet available Page 59 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) The PFI must have provisions in place against non-performing loans which must be not less than 60% of the value of non-performing loans. Shareholder Funds 9 The level of shareholder funds to total risk weighted assets must be not less than 9% as per the requirements of SBV Circular No. 13/2010/TT-NHNN dated May 20, 2010 and any subsequent revisions. Liquid Assets 10 The bank must have liquid assets in excess of 10% of liquid liabilities as defined in SBV Circular No. 13/2010/TT-NHNN dated May 20, 2010 and any subsequent revisions. Liquidity 11 Total loans should not be in excess of 90% for state-owned banks (and 80% for other banks) of all mobilized funds. Efficiency 12 The cost-to-income ratio should be below 85% and cost-to-assets below 5%. Profitability 13 The bank should have a return on equity of at least 10% in 201736 as well as a return on assets in excess of 0.5%. 2. Out of 11 candidate banks that initially expressed interest, including both state-owned banks and joint stock banks, 10 satisfied the PFI eligibility criteria, namely: Vietcombank, ACB, TP Bank, LienVietPostBank, MB Bank, VietinBank, BICV, Techcombank, SH Bank and HD Bank. For this initial set of PFIs, MoIT assessed their eligibility based on the information provided by the banks on the eligibility criteria. During the project implementation period, the PIE will be responsible for eligibility screening of potential additional PFIs, and recommending additional PFIs for approval by MoIT and WB. 36 Or in 2016 if audited 2017 financial information is not yet available Page 60 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) ANNEX 3: Selection of Program Implementing Entity 1. The role of the PIE. The PIE will play a central role in implementing the RSF under the overall supervision of MoIT. The PIE is expected to require a team of up to five full-time staff for the RSF Availability Period, which is expected to be five years, for the expected processing of an estimated 100 individual RSF Guarantees. After five years, the operation enters the RSF Amortization Period, which will be up to 10 years, which consists mainly of RSF Guarantee monitoring requiring fewer staff. The commitment required from the financial institution selected to be the PIE is purely administrative, without the need to provide capital for RSF Guarantee underwriting. The PIE will be required to be a party to the Implementation agreement with MoIT, GCF Guarantee Agreement with the World Bank, and RSF Guarantee Agreements with PFIs. 2. Key responsibilities. The key responsibilities of the PIE include: (i) finalization of project documentation (such as the OM and template RSF Guarantee agreements), (ii) Sub-Project identification and pipeline development, (iii) RSF Guarantee issuance, (iv) portfolio and loan monitoring and (v) cash management. 3. Performance measurement. PIE performance will be assessed against agreed targets for RSF Guarantee issuance and the amount of capital mobilized for eligible energy efficiency investments. PIE performance will also be measured on the pricing and tenor improvements of guaranteed PFI Loans to IEs. The PIE will be required to regularly report on the improvement of lending terms using RSF Guarantees based on information provided by the IE borrowers. 4. Remuneration. The PIE will be remunerated based on a fixed component tied to fixed staffing and administrative costs and a variable component reflecting the amount of capital mobilized as well as the performance of the guarantee portfolio. Fixed costs would need to be budgeted each year based on the work expected for approval by MoIT. The variable, performance-based fee would be paid at the end of the year based on the PIE’s performance against agreed implementation targets, and will be funded from the revenue generated by the PIE. The PIE may also be entitled to a final bonus at the end of the RSF, based on its cumulative performance during the operation. In general, the PIE will be rewarded for maximizing the number of RSF Guarantees issued and minimizing the number of payouts needed to be made, while ensuring borrowers receive the maximum benefit from the facility. Active marketing and pipeline development efforts would be required, as well as careful review of loans and active risk monitoring. The variable fee will be adjusted based on whether the targets are met, exceeded or missed. Fixed costs are expected to be a relatively smaller portion of the compensation package for the PIE with most of the remuneration being variable. 5. Staffing composition. The PIE will be engaged for 15 years, split between the five-year program implementation phase (RSF Availability Period) and the following 10-year monitoring period (RSF Amortization Period). During the RSF Availability Period, the staffing composition is expected to include: (i) a program manager, (ii) a portfolio manager, (iii) a technical expert, (iv) a financial analyst and (v) a team assistant. 6. Given the complexity of setting up the RSF and ensuring adequate pipeline development, it is expected that all five positions will be required in the implementation phase, full time. The monitoring phase is expected to include less staffing either in terms of man hours and total number of staff. 7. PIE Qualifications. Interested financial institutions based in Vietnam and duly authorized to issue guarantees under applicable legislation, including commercial banks or guarantee agencies, were eligible to apply for the role of the Program Implementing Entity. They were expected to have proven experience from commercial loan appraisal, credit Page 61 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) review and risk monitoring activities, including associated documentation and processing. Experience from energy sector lending (including for energy efficiency) and working with industrial enterprises as borrowers were considered to be an advantage. 8. Selection. To select the most suitable PIE, MoIT arranged a technical review of candidate institutions, with consultations with SBV and the Bank. The review consisted of first identifying a long list of 20 local commercial banks to function as the PIE based, among other things, on their financial strength and experience with WB projects. The banks were then asked to indicate their potential interest in the PIE role based on the PIE terms of reference. The final shortlist consisted of three institutions which submitted relevant technical and financial information in response to the TOR. MoIT finally identified the strongest candidate to be the PIE37. 37 The selection remains subject to formal appointment as PIE by the government. Page 62 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) ANNEX 4: Economic and Financial Analysis Economic and Financial Analysis of Energy Efficiency Investments 1. In a risk sharing facility operation, the actual energy efficiency investments to be financed can only be forecasted ex-ante, which affects the approach to economic and financial analysis. As a result, an economic and financial analysis was made for a comprehensive sample of energy efficiency projects, including cogeneration from waste heat recovery (cement industry), variable speed motors and regenerative burners (steel industry), and energy-efficient pulp washers (paper). The analysis demonstrated robust economic and financial returns over a wide range of input assumptions. This annex provides a summary of the results of the economic and financial analysis. 2. For the economic analysis, benefits are assessed at international (border) prices. Industry savings in electricity are assumed to result in backing down of thermal generation (coal for base-load savings, combined cycle gas for intermediate and peak loads), based on the results of detailed simulations prepared by the National Load Dispatch Centre for calculation of the ACT for small RE producers. The economic returns (ERR and NPV) are calculated with and without consideration of environmental and global externalities: in the case of GHG emissions, using the Bank’s recent guidance document for carbon accounting,38 and valuing avoided GHG emissions at the values recommended in the recent guidance document on the social value of carbon.39 3. The baseline economic rates of return are high, ranging from 17 to 33 percent for the four sample industries. When the benefits of reduced carbon emissions are included in the economic analysis, economic returns are significantly higher, particularly where coal is displaced. In the paper industry example (which reduces the quantity of steam raised in an anthracite-fueled boiler), the baseline economic returns increase from 17 percent to 30 percent. All projects examined result in significant reductions in lifetime GHG emissions. Energy efficiency therefore makes a significant contribution to reducing the carbon intensity of the economy at no incremental cost (so really a win-win option), particularly when compared to options such as high-cost RE alternatives (such as wind) that bring carbon reductions only at significant incremental costs. 4. The economic returns are robust with respect to the general level of international fuel prices, which were at their lowest in early 2015 (US$50/bbl (Brent)) and have since recovered to US$80/bbl at the end of May 2018, boosting the economic benefits of energy efficiency investments. Even in the case that prices return to the low 2015 levels and stay there for the next 15 years, economic returns remain substantial. 5. For the financial analysis, the evaluation is from the perspective of the equity investors who are recipients of loans provided by the PFIs, calculating both the equity return (FIRR) and debt service cover ratios. The benefits are based on estimated nominal financial prices of electricity, fuel oil, and coal (the three main energy forms used in Vietnamese industry). In some cases, additional financial savings derive from reductions in operating and maintenance costs and in other inputs. The results show financial returns (equity FIRR) ranging from 19 percent to 114 percent, with small reductions for plausible scenarios of higher interest rates, lower fossil fuel prices, and low rates of electricity tariff increases. For example, a 2 percent increase in interest rate from the assumed 8.8 percent to 10.8 percent reduces the FIRR for the 38 World Bank. 2015. Guidance Note: Greenhouse Gas Accounting for Energy Investment Operations (Transmission & Distribution Projects, Power Generation Projects and Energy Efficiency Projects), Version 2.0, January 2015. World Bank Sustainable Energy Department. 39 World Bank. 2014. The Social Value of Carbon in Project Appraisal. Guidance Note to the World Bank Group Staff, September. Page 63 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) paper industry project from 19.1 percent to 18 percent, or if coal prices stayed unchanged at their present (nominal) level (that is, falling real coal prices), the corresponding FIRR falls to 17 percent. In most cases, the risk analysis shows that the probability of not meeting the financial hurdle rate is less than 5 percent (and for the largest project examined, waste heat recovery/cogeneration in the cement industry, less than 1 percent). The table below summarizes the main results of the economic and financial analysis. Table A.8. Summary of Economic and Financial Analysis of Energy Efficiency Projects Unit Waste Heat Regenerative VSD High-pressure Recovery Burner Pulp Washers Sector Cement Steel Steel Paper Saving Electricity Fuel oil Electricity Electricity coal Baseline FIRR [] 25.6% 65.2% 114.2% 19.1% Baseline ERR [] 33.4% 40.0% 124.6% 17.1% Investment (financial) VND billion 297 13.7 85.0 75.4 Distributional analysis NPV to Industrial EE VND billion 200 21 325 28 NPV to EVN VND billion ˗31 Not applicable ˗112 ˗1 Avoided externality benefits ERR including GHG emissions [] 70.6% 49.2% 244% 29.8% Lifetime GHG savings 1,000 tons 722 23 553 164 6. Portfolio-level Analysis. The Project will mobilize US$251 million for energy efficiency investment through the RSF. The mobilized investment is assumed to be allocated to support a portfolio of various energy efficiency technologies in different key industrial sub-sectors, including cement, steel, pulp and paper, seafood processing and chemical. The assumed Sub-Project portfolio will remain economically and financially viable, as each individual investment retains robust economic and financial returns. For the assumed Sub-Project portfolio, in aggregate about 57.7 billion MJ of energy savings is expected annually, of which about 17.9 billion MJ comes from savings of electricity consumption and the rest from fuel savings. About 6.9 million tonnes of CO2 equivalent emissions are projected to be avoided annually from the assumed portfolio. Financial Analysis of Risk Sharing Facility 40 Key Assumptions 7. Facility Term and Issuance of Guarantees: The facility has a 5-year Availability Period and a ramp up period of 5 years during which US$10 million of the GCF Guarantee is committed each year for the first 2 years and US$27.5 million each year for the next 2 years. During the Availability Period, as underlying loans are amortized together with the associated RSF Guarantees, the exposure that is released from the RSF Guarantee portfolio is reissued in the form of new RSF Guarantees. This reissuing of RSF Guarantees allows the facility to issue US$100m in RSF Guarantees (backstopping US$201 million in project debt), while not exceeding the maximum allowed RSF Guarantee portfolio size of US$75 million 40 The assumptions and results presented here are based on the latest information available during project appraisal. They are subject to finalization of the Facility structure and terms together with the Government, GCF and the PIE. Page 64 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) at any given year. The financial analysis was made for a RSF life of 15 years assuming an average loan repayment period of 6 years for loans guaranteed during the first four years and 10 years for loans guaranteed during the fifth year (reflecting expected improvement in guaranteed loan tenors). 8. Expected Payouts: It is assumed that 5 percent of RSF Guarantees issued by the RSF will be paid out to cover credit losses incurred during the facility life.41 A related assumption is that 25 percent of the losses will be recovered with a one- year delay through legal or other recovery proceedings. The 5 percent expected loss assumption is equivalent to the expected probability of default and is calculated on a portfolio level assuming individual RSF Guarantee coverage of 50 percent of the total loan outstanding. On a portfolio level, the facility is therefore taking risk for half of the expected probability of default. 9. To illustrate the assumptions, a US$10 million loan is assumed with a 5-year repayment period and straight-line amortization. For that loan, the 5 percent probability of default on the loan can be assumed to be over the life of the loan. Therefore, the probability of default in any given year is 5 percent divided by 5, so it becomes 1 percent. Multiplying the outstanding balance each year by 1 percent and summing the annual expected losses would give US$2,500,000 as the total expected credit loss over the loan life. Note that since the RSF Guarantee is applied on an amortizing balance of the loan, the 5 percent loss rate turns out to be 2.5 percent (US$2,500,000) when measured on the initial loan balance (but 5 percent on the average loan balance). Given a loss given default assumption of 75 percent (assuming recoveries of 25 percent), the loss given default on the loan would be US$1,875,000. As the RSF bears half of the final loss, net of the recoveries, the RSG Guarantee payout expected of the facility would be $937,500. 10. Administrative Fees: The PIE will incur administrative costs to manage the Facility, including reviewing and approving RSF Guarantee applications, and making RSF Guarantee payouts. It will conduct due diligence on the participating borrowers and projects to assess their riskiness and eligibility for RSF Guarantee coverage. The expectation is that adequate staffing of the PIE would consist of two senior experts with a background in finance, one technical analyst, one financial analyst as well as an office assistant. When main RSF operations move from origination to monitoring following the Availability Period, the PIE headcount will be reduced to reflect the workload. Administrative costs also include administrative overhead. The table below shows the expected fixed costs for each position during the Availability and Amortization Periods. Based on discussions with the forerunner PIE entity, the total administrative fixed cost during the entire RSF operating period is expected to be about US$1,988,000. 41 The actual risk can of course materialize at a higher level than what is expected. Page 65 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Table A.9. Salary and Overhead Cost Estimates (USD ‘000) Category Total cost during years 1-5 Total cost during years 6-1542 Project manager salary 260 521 Portfolio manager salary 233 N/A Technical expert salary 162 N/A Financial analyst salary 162 N/A Assistant salary 114 228 Overhead cost 145 163 TOTAL 1,076 912 11. Performance-based Fees43: In addition to the fixed administrative costs, the PIE will be entitled to performance- based fees depending on the surplus funds generated in the RSF. If the PIE succeeds in issuing RSF Guarantees during the Availability Period at the targeted issuance levels, it can earn a variable fee which is paid out of RSF net cash flow. The net cash flow would be lower in a given year if actual RSF Guarantee payouts exceeded what was expected and provisioned. In other words, the variable fee also reflects the extent to which the PIE can manage the level of RSF Guarantee payouts. At the end of the RSF operating period, not to exceed 15 years, the PIE may also receive a final bonus44 from the cash remaining in the RSF Accounts, subject to its cumulative performance during the RSF operating period. 12. GCF Capital and Fees: GCF funding will consist of a US$75 million Guarantee and US$3 million Grant in seed capital. The latter will be provided upfront and used to cover administrative start-up costs and operating expenses, as well as initial capital to make RSF Guarantee payouts. The GCF Guarantee fee is assumed to be 0.10 percent, applied annually to the maximum GCF Guarantee exposure in any given year. 13. Risk Sharing Facility Fees: The PFIs will be expected to pay an upfront fee of 0.25 percent of the initial guaranteed amount and an annual fee of 0.70 percent on the RSF Guarantee amount in each year. With 50 percent coverage, the annual RSF Guarantee fee amounts to 0.35 percent in terms of loan margin. The fee structure is sized to cover PIE variable fees, GCF Guarantee fees, and an expected loss level of 5 percent, net of recoveries. A key design principle has been to set the pricing at full cost recovery so that the GCF Guarantee is not called in the base case. At the same time, the fee has been minimized within the cost recovery limits to make the RSF Guarantee product attractive to PFIs and IEs/ESCOs. Such lower fees also help ensure that IEs/ESCOs can benefit from lower cost financings (lower loan margins due to the RSF Guarantee), even after accounting for the cost of the RSF Guarantee. 42 Note that during the amortization period the PIE may also need 2-3 staff members due to the reduced workload. 43 Subject to agreement with GCF, MoIT and PIE. 44 Subject to GCF approval and finalization of terms with Government and the PIE. Page 66 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 14. Base Case Results: In the base case, the facility generates sufficient revenue to cover 5 percent of expected RSF Guarantee payouts with no payout required of the GCF Guarantee amount. A critical assumption in the base case is that the RSF will issue a total of US$100 million in RSF Guarantees during the RSF Availability Period. Revenues from the RSF Guarantee fee of 0.70 percent and an upfront fee of 0.25 percent, interest earnings and RSF Guarantee recoveries cover most the facility operating costs and RSF Guarantee payouts. The GCF contribution of US$3 million as start up or seed capital is critical to the financial viability of the facility while also lowering the fee paid by the PFIs. Approximately US$2 million of the GCF Seed Grant will be earmarked for PIE fixed costs, while US$1 million will be set aside as additional RSF Guarantee payout reserve. The US$3 million are expected to be deposited into interest-bearing accounts. The expected total RSF revenue would be sufficient to cover all costs and RSF Guarantee payouts of up to 7.8 percent before the PIE would have to make a call to GCF under the GCF Guarantee. If losses stay at the expected 5 percent, the revenue collected will generate US$2.4 million of net cash flow during the 15-year facility life, which also represents the maximum variable fee that the PIE can earn (subject to its cumulative performance). In addition, the initial loss reserve of US$1 million would also remain untouched in the base case. 15. Issuance Scenario Results: In various issuance scenarios, the facility still generates sufficient revenue to pay for all RSF-related costs. With lower than expected issuance, the expected RSF Guarantee payouts will also be lower, assuming the same 5% RSF Guarantee portfolio payout rate as in the base case. The main difference is that in the downside scenarios the PIE would be paid considerably less in the form of variable fees, in line with its lower performance. Conversely, the PIE would be paid considerably more in upside scenarios where it manages either to exceed the RSF Guarantee issuance targets or minimize actual RSF Guarantee payouts. For example, in a scenario where the PIE issues the whole US$75 million GCF Guarantee commitment in the first year as RSF Guarantees, it will end up issuing a total of US$125 million of RSF Guarantee during the Availability Period due to reissuance of amortized exposure. In such a case, it will earn over US$200,000 in additional fees, assuming a payout ratio of 5%. With lower actual payouts, its additional fees could be considerably higher when taking into account the final bonus. In fact, the PIE compensation model incentivizes the PIE to maximize issuance while minimizing payouts. In an upside scenario where guarantee issuance is at 100% of the target levels and no RSF Guarantee payouts are made, the PIE could be entitled to a significant final bonus from the ending RSF cash balance of US$4.2 million (as compared to US$1.0 million in the base case). A summary of the financial results in the base case and various scenarios is provided in the below table. Page 67 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) Table A.10. Base Case and Issuance Scenario Analysis USD ('000) Downside Downside Downside Base case Upside Upside scenario 1 scenario 2 scenario 3 scenario 1 scenario 2 Scenario details No guarantee -50% target -20% target 100% target 100% 100% target issuance issuance issuance issuance guarantees issuance with issued in first no payouts year Guarantee issuance 0 50,208 80,333 100,417 125,000 100,417 Debt mobilization 0 100,417 160,667 200,833 250,000 200,833 Investment mobilization 0 125,521 200,833 251,042 312,500 251,042 Guarantee fee revenue (0.25% up-front, 0.70% recurring) 0 2,606 4,170 4,731 5,825 4,731 Grant for fixed fee 1,989 1,989 1,989 1,989 1,989 1,989 Interest 766 589 589 766 589 1,300 Recoveries 0 438 700 791 975 0 Total inflows 2,755 5,622 7,448 8,277 9,378 8,020 Fixed fee to PIE 1,989 1,989 1,989 1,989 1,989 1,989 GCF fee 10 354 567 640 788 640 Provisioning (expected payouts) 0 1,772 2,835 3,200 3,938 3,200 Total outflows 1,999 4,115 5,391 5,829 6,714 5,829 Net cash flow (max variable fee) 756 1,506 2,057 2,447 2,664 2,191 PIE performance against target 0% 50% 80% 100% 165% 100% Variable fee to PIE 0 753 1,645 2,447 2,664 2,191 Total fixed and variable fee 1,989 2,742 3,635 4,437 4,653 4,180 Starting program cash balance 1,000 1,000 1,000 1,000 1,000 1,000 Cumulative program cash balance 1,756 1,753 1,411 1,000 1,000 4,200 Page 68 of 69 The World Bank Vietnam Scaling Up Energy Efficiency Project (P164938) 16. GCF Loss Scenario Results: The RSF financial structure is designed to limit the likelihood of a call on the GCF Guarantee. Stress testing the facility shows that it can withstand a range expected loss levels while only partially utilizing the US$75 million GCF Guarantee amount. In the base case of 5% RSF Guarantee payouts, the RSF standard provisioning would be sufficient to meet all payouts and the GCF Guarantee would not be called. In addition to the standard provisioning, the RSF is expected to have additional cash reserves through the net cash flow and the initial US$1 million loss reserve funding. These additional cash resources mean that GCF would not be required start making payouts under its Guarantee until RSF Guarantee payouts reach 11.3 percent (“GCF first Loss�). At payout levels of up to 7.8 percent, the RSF can meet all its RSF Guarantee payout requests out of its own financing sources (seed capital, fees, interest and recoveries), which represents robust first-loss protection for GCF. GCF Guarantee payouts start increasing as portfolio payouts exceed 11.3 percent. For example, in the unlikely case of 15 percent of RSF Guarantee payouts, GCF payouts are forecast to be about US$1.8 million. RSF Guarantee payout levels of above 15% can be considered highly unlikely. The table below shows the expected GCF Guarantee payouts in various RSF Guarantee payout scenarios. Note that the additional cash available increases in higher payout scenarios due to higher expected recoveries. Table A.11. GCF Loss Scenarios (USD '000) Base case Downside GCF first loss Downside Downside Downside scenario 1 scenario scenario 2 scenario 3 scenario 4 Actual RSF Guarantee payouts (% of Max RSF Guarantee exposure) 5.0% 10.0% 11.3% 15.0% 20.0% 50.0% Actual RSF Guarantee payouts (amount) 3,200 6,400 7,226 9,600 12,800 32,000 Provisioning (5%) 3,200 3,200 3,200 3,200 3,200 3,200 Additional cash (net cash flow + loss reserve) 3,447 3,836 4,026 4,595 5,374 10,098 GCF Guarantee payouts 0 0 0.1 1,805 4,226 18,702 Page 69 of 69