The World Bank FOR OFFICIAL USE ONLY
Public Disclosure Authorized Report No: ICR00004826
IMPLEMENTATION COMPLETION AND RESULTS REPORT (LN 8059-CN)
ON A
LOAN
Public Disclosure Authorized IN THE AMOUNT OF US$150 MILLION
TO THE
People's Republic of China
FOR THE Shandong Energy Efficiency Project
Public Disclosure Authorized July 9, 2019
Energy & Extractives Global Practice East Asia And Pacific Region
Public Disclosure Authorized
CURRENCY EQUIVALENTS
(Exchange Rate Effective May 20, 2019)
US$1 = RMB 6.9
FISCAL YEAR January 1 – December 30
Regional Vice President: Victoria Kwakwa Country Director: Martin Raiser Senior Global Practice Director: Riccardo Puliti Practice Manager: Jie Tang Task Team Leader(s): Jonathan Edwards Sinton, Yanqin Song ICR Main Contributor: Yanqin Song, Rachel Mok
ABBREVIATIONS AND ACRONYMS
ADB Asian Development Bank CHUEE China Utility-based Energy Efficiency CHP Combined Heat and Power CPS Country Partnership Strategy ECSO Energy Conservation Supervision Office ECO Energy Conservation Office EE Energy Efficiency EHS Environmental, Health and Safety EIRR Economic Internal Rate of Return EMS Energy Management System EPC Energy Performance Contracting ESCO Energy service company EMCA Energy Management Contract Association FIRR Financial Internal Rate of Return FYP Five Year Plan GDP Gross Domestic Product GEF Global Environment Facility IFC International Finance Corporation ISR Implementation Status Report MOF Ministry of Finance NDRC National Development and Reform Commission PAD Project Appraisal Document PDO Project Development Objectives PIU Project Implementing Unit RPF Resettlement Policy Framework SCD Systematic Country Diagnostic SEEP Shandong Energy Efficiency Project SOE State Owned Enterprise TCE Tons of coal equivalent
TABLE OF CONTENTS
DATA SHEET ...... 1 I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES ...... 5 A. CONTEXT AT APPRAISAL ...... 5 B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE) ...... 10 II. OUTCOME ...... 13 A. RELEVANCE OF PDOs ...... 13 B. ACHIEVEMENT OF PDOs (EFFICACY) ...... 14 C. EFFICIENCY ...... 19 D. JUSTIFICATION OF OVERALL OUTCOME RATING ...... 21 E. OTHER OUTCOMES AND IMPACTS ...... 21 III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME ...... 23 A. KEY FACTORS DURING PREPARATION ...... 23 B. KEY FACTORS DURING IMPLEMENTATION ...... 24 IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME .... 25 A. QUALITY OF MONITORING AND EVALUATION (M&E) ...... 25 B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE ...... 27 C. BANK PERFORMANCE ...... 29 D. RISK TO DEVELOPMENT OUTCOME ...... 29 V. LESSONS AND RECOMMENDATIONS ...... 30 ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS ...... 32 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION ...... 36 ANNEX 3. PROJECT COST BY COMPONENT ...... 38 ANNEX 4. EFFICIENCY ANALYSIS ...... 39 ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS ... 42 ANNEX 6. SUPPORTING DOCUMENTS (IF ANY) ...... 44
The World Bank Shandong Energy Efficiency Project (P114069)
DATA SHEET
BASIC INFORMATION
Product Information Project ID Project Name
P114069 Shandong Energy Efficiency Project
Country Financing Instrument
China Investment Project Financing
Original EA Category Revised EA Category
Partial Assessment (B) Partial Assessment (B)
Organizations
Borrower Implementing Agency
People's Republic of China Shandong Financial Bureau
Project Development Objective (PDO)
Original PDO The objective of the Project is to improve energy efficiency in selected enterprises in the Borrower's Shandong Province,particularly through financial leasing arrangements, and increase use of biomass for power and heat generation.
Revised PDO The objective of the Project is to improve energy efficiency in selected enterprises in the Borrower's ShandongProvince,particularly through financial leasing arrangements.
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The World Bank Shandong Energy Efficiency Project (P114069)
FINANCING
Original Amount (US$) Revised Amount (US$) Actual Disbursed (US$) World Bank Financing
150,000,000 110,081,967 110,081,967 IBRD-80590 Total 150,000,000 110,081,967 110,081,967
Non-World Bank Financing 0 0 0 Borrower/Recipient 167,100,000 0 0 Total 167,100,000 0 0 Total Project Cost 317,100,000 110,081,967 110,081,967
KEY DATES
Approval Effectiveness MTR Review Original Closing Actual Closing
09-Jun-2011 25-Nov-2011 03-Nov-2014 30-Sep-2016 31-Dec-2018
RESTRUCTURING AND/OR ADDITIONAL FINANCING
Date(s) Amount Disbursed (US$M) Key Revisions 07-Aug-2013 15.00 Other Change(s) 30-Sep-2016 55.00 Change in Project Development Objectives Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Cancellation of Financing Change in Financing Plan Change in Disbursements Arrangements Change in Implementation Schedule Other Change(s) 29-Mar-2018 116.27 Change in Loan Closing Date(s) Reallocation between Disbursement Categories
KEY RATINGS
Outcome Bank Performance M&E Quality Moderately Satisfactory Moderately Satisfactory Substantial
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The World Bank Shandong Energy Efficiency Project (P114069)
RATINGS OF PROJECT PERFORMANCE IN ISRs
Actual No. Date ISR Archived DO Rating IP Rating Disbursements (US$M) 01 22-Sep-2011 Satisfactory Satisfactory 0
02 07-Nov-2012 Satisfactory Moderately Satisfactory 15.00
03 23-Jun-2013 Moderately Satisfactory Moderately Satisfactory 15.00
04 22-Dec-2013 Moderately Satisfactory Moderately Satisfactory 15.00
05 24-Jun-2014 Moderately Satisfactory Moderately Satisfactory 15.00
06 09-Dec-2014 Moderately Satisfactory Moderately Satisfactory 15.00
07 16-Jun-2015 Moderately Satisfactory Moderately Unsatisfactory 27.68 Moderately 08 09-Dec-2015 Moderately Unsatisfactory 37.56 Unsatisfactory Moderately 09 24-Mar-2016 Moderately Unsatisfactory 45.12 Unsatisfactory Moderately 10 06-Nov-2016 Moderately Unsatisfactory 55.00 Unsatisfactory 11 04-May-2017 Moderately Satisfactory Moderately Satisfactory 89.71 Moderately 12 27-Nov-2017 Moderately Unsatisfactory 116.27 Unsatisfactory 13 18-Jun-2018 Moderately Satisfactory Moderately Satisfactory 116.27
14 24-Jun-2019 Moderately Satisfactory Moderately Satisfactory 109.71
SECTORS AND THEMES
Sectors Major Sector/Sector (%)
Energy and Extractives 100 Renewable Energy Biomass 12 Public Administration - Energy and Extractives 1 Other Energy and Extractives 87
Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%)
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The World Bank Shandong Energy Efficiency Project (P114069)
Environment and Natural Resource Management 100
Climate change 100
Mitigation 100
ADM STAFF
Role At Approval At ICR Regional Vice President: James W. Adams Victoria Kwakwa Country Director: Klaus Rohland Martin Raiser
Director: Ranjit J. Lamech
Practice Manager: John A. Roome Jie Tang Jonathan Edwards Sinton, Task Team Leader(s): Gailius J. Draugelis Yanqin Song ICR Contributing Author: Yanqin Song
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The World Bank Shandong Energy Efficiency Project (P114069)
I. PROJECT CONTEXT AND DEVELOPMENT OBJECTIVES
A. CONTEXT AT APPRAISAL
Context
1. At the time of appraisal, Energy Efficiency (EE) was a key measure for China’s efforts to mitigate Climate Change impacts. China’s leadership had called for a reduction in carbon dioxide intensity of its economy (CO2 emissions per unit of GDP) by 40-45 percent from 2005 to 2020. Achievement of this objective would require sustained efforts to reduce energy intensity in the economy and increase the share of non-coal fuels in the energy mix. Related targets included to reduce energy intensity per unit of GDP by 20 percent from 2005 to 2010 and increase the share of primary energy from non-fossil fuel sources to 15 percent by 2020. The 12th Five Year Plan (FYP) set a target to reduce energy intensity by 16 percent from 2011 to 2015. These national targets indicate recognition that due to China’s size, its efficient use of natural resources is critical not only to its own sustainable development, but also that of the world.
2. The efficient use of energy resources is one of the most important elements of China’s resource conservation goals. China was already the world’s largest energy consumer and the largest emitter of energy-related CO2. Without significant gains in EE, continued economic growth at recent rates would require energy use on a massive scale – especially of coal, China’s predominant fuel comprising about 69 percent of total primary energy consumption at the time of project appraisal. The energy intensity of China’s economy - the measure of energy input per unit of GDP – after about 25 years of steady decline, showed signs of stagnation and even slight increase at the outset of the decade of 2011. In those years, China’ s energy consumption increased by around 5 percent annually, almost three times as fast as the world average. The intensive use of coal also resulted in serious environment pollution, as well as increased GHG emission.
3. The response of the Government in the 11th FYP (2006-2010) was to bolster its drive for energy conservation results to a level that probably no large country has ever attempted. In response to a slow start in its effort, the Energy Conservation Law was revised in 2007 to more clearly define responsibilities, delegating execution and primary supervision responsibility over important elements of its program to provincial governments.
4. At the time of project appraisal, the energy intensity target was a real challenge to achieve during a continuing era of industry-led growth, with an annual average growth rate of 20 percent from 1998 to 2005. A cumulative reduction in energy intensity over the 11th FYP totaling 19.1 percent is therefore an impressive achievement, and energy intensity targets would be increasingly more difficult to achieve in the years to come.
5. Provincial governments play a critical role in implementing the country’s energy conservation agenda. Many weaker provinces look to front runners for guidance and lessons learned. This direction was expected to continue for the 12th FYP.
6. Shandong Province is one of the front runners in energy conservation policies and implementation. Its energy conservation program is known for its relative strength in organization and provincial government policy development. Shandong was one of four provinces with a 11th FYP target to reduce energy intensity
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The World Bank Shandong Energy Efficiency Project (P114069)
of GDP at a rate higher than the national average (22 percent). During the 11th FYP implementation, Shandong Province was reported to achieve the energy intensity target, reaching 22.1 percent compared to the base year.
7. Shandong Province is exploring opportunities to pilot new business models to attain more ambitious energy saving targets. The key concern for Shandong, as in other provinces, was to accelerate the delivery of EE through the timely but effective design and implementation of huge, largely new, comprehensive energy conservation programs. Critically, greater participation of enterprises in the continuous identification and delivery of EE was needed. Large industry enterprises are usually the focus of many national programs. They have scale of economy, technology, skill, and access of financing. Small and medium enterprises (SMEs) often found difficulties in obtaining the right kind of financing that match the cash flow profile of EE investments, particularly after the financial crisis in 2008. SMEs play a very important role for meeting the energy intensity reduction target, due to its large number and high energy intensity. However, service providers that specialized in EE investment projects and financing were far fewer than investment needs.
8. The Chinese Banking sector comprises several national level banks which are usually overly regulated. These banks are constrained by high reserve ratios set by the China’s policy Bank1, and lack the technical resources and flexibility to assess these cost saving investments properly. In general, these banks regard EE investments as too small and risky to meet their rigid credit criteria and prefer instead to concentrate on conventional large industrial expansion projects. The Shandong Energy Efficiency Project (SEEP) supports for specialized leasing companies, which understand this business, could address this market failure by identifying, packaging and co-financing these projects; demonstrating its potential to prospective market participants; and leveraging the Bank loan to expand new EE investment, particularly in SMEs.
9. The SEEP sought to complement other World Bank Group projects that were implemented around the same time. Other projects, namely Global Environmental Facility (GEF) Energy Conservation II, China EE Financing I & II, IFC’s China Utility-Based Energy Efficiency Finance Program I & II, and GEF/WB supported Provincial EE Scale Up Project engaged directly with the large commercial banks to build capacity and demonstrate the viability of EE investments. The SEEP aimed to improve EE in Shandong and in China through EE leasing to demonstrate the suitability of the financial leasing to scale up EE investments. Financial leasing is the lease that allows a customer to use EE equipment without purchasing it outright. While many models of financial leasing exist in China, SEEP was the first to support only new equipment leasing through a direct financial lease. In addition to financial leasing, SEEP also aimed to demonstrate the suitability of other new business models, namely the Energy Performance Contract (EPC) and Super-ESCO model.
10. The objective contributes to the higher objectives of energy conservation and emission reduction. The project was fully consistent with the Country Partnership Strategy (CPS) for 2006-2010 (Report No. 35435- CN), approved by the Board on May 23, 2006. It directly supports one of five pillars of the CPS for China: managing resource scarcity and environmental challenges.
Theory of Change (Results Chain)
11. The results chain of the project is illustrated in Figure 1. It shows how the implementation of project activities would result in outputs and intermediate outcomes that would in turn achieve the development
1 China People’s Bank
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The World Bank Shandong Energy Efficiency Project (P114069)
objectives and further contribute to longer-term outcomes. A major focus of the SEEP was to demonstrate the use of innovative business models, particularly financial leasing, for EE investments in Shandong. Financial leasing can help to cover a large part of the upfront capital costs associated with EE projects. Similar to loan or debt financing for EE projects, the lease may be structured so that cost savings from the EE improvements are enough to cover the finance charges. While the focus was on demonstrating the use of financial leasing models, the EPC financing model and the Super ESCO business model were also to be tested as part of the project as a set of innovations to scale -up EE investments. It was expected that with these demonstrations, more ESCO companies would finance EE through financial leasing and bigger investments would be carried out to harvest EE in various industries, particularly SMEs. Ultimately, this would help Shandong to realize its energy intensity reduction target in line with the FYPs.
12. The SEEP also sought to contribute to Shandong Province’s major target to increase use of biomass resources in its energy mix. biomass CHP had proven difficult to implement particularly in relation to collecting fuel. Thus, the Anqiu component was designed to give special focus on issues related to securing the feedstock supply and other environmental issues.
13. The capacity building component would provide overall project management support. This component included: (a) technical assistance (TA) for project implementation and special studies that would evaluate mid-term achievements and impediments to achieving desired outcomes; (b) training and study tours; and (c) project management to improve the capacity of the project management office and other key concerned stakeholders in order to ensure the successful implementation of the project and sustainable development of the sector in Shandong Province.
14. It was envisioned that the project can provide positive demonstration effects to scale up the use of financial leasing and EPC for EE investments in Shandong and in other provinces in China, and that more biomass- based CHP can be developed following the experience learnt from Anqiu. Therefore, with the combination of all these efforts, the SEEP could contribute to the provincial government and even China’s target on energy intensity reduction and climate change targets as outlined in its FYPs.
15. Key assumptions on which the project design depended include that: (a) the Shandong Provincial and national government policy objectives would continue to support EE and promote biomass in its energy mix; and that (b) all three EE service providers would continue to have strong commercial incentives to make the financial leasing and EPC mechanisms for expanding EE investment work.
16. In parallel to SEEP, the Provincial EE Scale-up Project (financed by GEF and WB) was implemented during the same period. This and SEEP provided mutual benefits for each other, as SEEP would make important contributions towards improving the quality and sustainability of provincial EE programs and vice versa.
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The World Bank Shandong Energy Efficiency Project (P114069)
Figure 1. Results Chain
Project Development Objectives (PDOs)
17. The proposed project objective was to improve EE in selected enterprises in Shandong province, particularly through financial leasing arrangements, and to increase the use of biomass for power and heat generation.
Key Expected Outcomes and Outcome Indicators
18. The project contained two objectives: (i) improved EE in particular through financial leasing; and (ii) increased use of biomass for two purposes: power generation and heat generation.
19. the first objective can be assessed in terms of outcome indicators: (1) associated annual energy savings capacity achieved directly through project investments; (2) the associated cumulative amount of funds leveraged by the World Bank loan for energy efficiency projects. The second objective is supported by the key project outcome indicator: (3) the associated cumulative incremental amount of electricity and heat from biomass-based heat and power generation.
20. Key intermediate outcome indicators include for component A (EE service industry): (1) annual energy savings achieved directly through investments of the project (Rongshihua, Guotai, Luxin Energy) and (2) annual energy conservation project investment flows (Rongshihua, Guotai, Luxin Energy); for component B (Anqiu Biomass CHP): (3) cumulative amount of avoided coal consumption.
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The World Bank Shandong Energy Efficiency Project (P114069)
Components
21. The project originally proposed three components: (a) EE Service Industry Component; (b) Anqiu Biomass CHP Plant Component; (c) Project Management, Monitoring and Evaluation Component. The total estimated project cost was RMB2.1 billion (US$317.1 million equivalent)2, with IBRD loan support of US$150 million (47% of total estimated project costs). The total actual project cost is US$234.67 million, with the actual IBRD loan US$110.08 million (46.9% of the actual project cost).
22. Component A: EE Service Industry Component (estimated component cost: US$267.4 million, IBRD loan financing US$133 million; actual component cost:215.89 million, actual IBRD loan: US$99.26 million). This component aimed to support financial leasing and EPC of EE investments in selected enterprises, particularly in the industrial sector. The IBRD loan was designed to be on-lent to two leasing companies and one ESCO: (a) a US$64 million sub-loan to the Shandong Rongshihua Leasing Company, Ltd., (Rongshihua); (b) a US$50 million sub-loan to the Guotai Leasing Company, Ltd. (Guotai); and (c) a US$20 million sub-loan to Shandong Luxin Energy Investment and Management Company (Luxin Energy).
23. The Component aimed to support the Shandong Provincial Government’s EE service industry development program through the demonstration of successful use of financial leasing for EE investments and through the demonstration of how a relative newcomer to the ESCO business, Luxin Energy, can efficiently and effectively adopt the EPC mechanism.
24. Financial leasing offers many advantages. For example, host enterprises, with less upfront cash outlay, can have better cash management and alternative source of financing, besides traditional bank lending which is often more restrictive. There is also end-of-term flexibility to either carry out buy-back or lease renewal according to the agreement of both lessor and lessee. Furthermore, financial leasing has a lighter tax burden compared to traditional EE loan. However, there could also be several disadvantages with financial leasing. For example, leasing could result in higher capital costs than other financial model depending on the level of the rent and lack of flexibility to increase capital for leasing once rent payment terms are fixed. Credit worthiness can also largely impact the availability of financing and rates offered (See Figure 2 below).
Figure 2. Illustration of the Financial Leasing Business Model
2 Slight discrepenncies exist for some values as reported in different places. The value of $317.1 million comes from the PAD description (pages 5, 41) and Operations Portal Financing Plan as reflected in the ICR Datasheet. Based on eligible expenses per the Loan Agreement and the PAD Annex 5 Project Costs, the amount at approval would be $316.135 million. See Annex 3 of this ICR for further details. For Component A, the PAD Results Framework gives the end target value of associated cumulative funds leveraged by the IBRD loan for energy efficiency projects as $134m, and annual energy conservation project investment flows (including IBRD) as summing to $268m.
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The World Bank Shandong Energy Efficiency Project (P114069)
25. Component B. Anqiu Biomass CHP Plant Component (estimated component cost: US$36 million, IBRD loan financing US$16 million; Actual component cost: US$18.63 million; Actual IBRD loan: US$10.67 million). The investment included: (a) 2x15 MWe units (condensing extraction turbines, air cooled generators, boilers); and (b) steam network to nearby industrial customers (about 3 km of pipes) and district heating network (4 km of dual pipe channel - 8 km of pipes) for space heating. Biomass fuel (226,300 tce per annum) was to be collected from an area within 35 km radius of the plant including corn stalks and wheat stalks. There would be four collection points for the biomass in the area where the feedstock is collected from farmers.
26. Component C. Project Management, Monitoring and Evaluation Component. (estimated component cost US$0.4 million, indicative IBRD loan financing US$0.4 million; Actual component cost: US$0.15 million; Actual IBRD loan: US$0.15 million) This component would finance: (a) TA for project implementation and special studies that would evaluate mid-term achievements and impediments to achieving desired outcomes; (b) training and study tours; (c) project management support.
B. SIGNIFICANT CHANGES DURING IMPLEMENTATION (IF APPLICABLE)
The project experienced three main restructurings, as outlined in Table 1 below.
Table 1: Project restructurings on September 30, 2016 and March 29, 2018 Time Activities PDO Indicator Bank loan
Dropped the requirements in the Operation Manual “the first two sub- 7-Aug-13 projects appraised by each leasing company and Luxin Energy will be Restructuring1 subject to the Bank’s prior review” 1) closing date extension by 18 months; 2) cancelation of component B; 3) Increase percentage of
2 expenditures to be financed; Indicator 4) Adjust performance Indicators of Cancelled related to Loan the project downwards by 20 descriptions energy cancelled by 30-Sep-16 percent; related to saving US$5.277 5) Increase Guotai and Luxin as super Component B changed million
Restructuring ESCOs; accordingly 6) Adopt advance payment and direct payment; 7) Expend the scope of the sub- projects to cover renewable energy.
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The World Bank Shandong Energy Efficiency Project (P114069)
1) Closing date extension by 9
3 months; 2) Luxin would not use any more Bank loan, Guotai will use US$23.2 million to support a new loan 29-Mar-18 subproject, all the remaining fund in reallocation Component A and C will be used by
Restructuring Rongshihua to support new sub- projects.
27. As part of the second restructuring (restructuring in the rest of the document without specifying), the original project objective was revised to "improve EE in selected enterprises in the Borrower's Shandong Province, particularly through financial leasing arrangements" to reflect the cancellation of Component B. Financial leasing remained highlighted as part of the PDO as a key means to achieve the development objective.
28. As a result of the unexpected macroeconomic downturn, during the second restructuring, the end targets for the associated annual energy savings capacity (ktce/yr) was reduced by 20 percent, both for the project overall and the individual targets for Component A Project Implementing Units (PIUs) (i.e. 318 ktce/yr overall, 150 for Rongshihua, 118 for Guotai, and 50 for Luxin).
29. The cancellation of component B was due to the shortage of counterpart funding from the local government and ineligible expenses. By the cancellation of component B, US$18.63 has been spent, out of which Bank loan is US$10.67, and majority of the civil works were completed. No additional work was commissioned to build the plant after component B's cancellation. The remaining IBRD loan proceeds of US$5,277,624 in this component was cancelled and the PDO was revised accordingly. The counterpart funding of this component has not been solved until the project closing.
30. Since the economic downturn in 2012, SMEs experienced difficulties in continuing EE projects due to the market shrinking. Some SMEs stopped production activities or even went bankrupt. Commercial banks tightened their requirements for lending to EE projects with requesting collateral or guarantee. The two leasing companies adopted similar measures to reduce the risk, which in turn brought negative impact on their project portfolio. This resulted in delays in project identification and implementation. Restructurings were carried out to accommodate the changed situation aiming at achieving the PDO.
Revised PDO Indicators
31. The restructuring on September 30, 2016 resulted in changes in the PDO indicators. First, to reflect the cancellation of Component B, the PDO indicator related to Component B was dropped: “Associated cumulative incremental amount of electricity (GWh) and heat (coverage m2) from biomass-based heat and power generation”. Second, economic downturn resulted in the reduction of the PDO indicator of “Associated annual energy savings capacity generated by the project” (see Table 2).
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The World Bank Shandong Energy Efficiency Project (P114069)
Table 2: Project Baseline and Outcome Indicators PDO Target Revised Target with Unit of Baseline Indicators in Level One Measure in PAD PAD Restructuring Indicator One: 000’ tce 0 397 318 Associated annual energy saving capacity Indicator Two: Associated accumulative amount of funds 000’ US$ 0 134 134 leveraged by the WB loan for EE Projects Indicator Associated cumulative Three: incremental amount of GWh 0 165 - electricity Associated cumulative 000’M2 0 700 - incremental heat
Other Changes
32. Project extension: The project closing date was extended twice. The closing date of the project was first extended by 18 months, from September 30, 2016 to March 31, 2018, and then extended again by 9 months to December 31, 2018. The cumulative extension reached 27 months.
33. Fund Allocation for component A: On September 30, 2016, disbursement arrangements were adjusted to increase the allowable financing ratio of IBRD/counterpart funding for subprojects under Component A from 50 percent to 80 percent. On March 30, 2018, fund allocation was adjusted for Component A by reallocating remaining loan proceeds to Rongshihua, the best-performing PIU, who had disbursed 100 percent by March 31, 2018; and disbursement estimates were revised accordingly.
34. Dropping the Super ESCO Business Model: When the project was designed, Rongshihua was authorized to develop subprojects through the Super ESCO business model. During the restructuring in September 2016, Guotai and Luxin were authorized to invest in subprojects through this business model as well. However, none of the three PIUS were able to pilot the Super ESCO model because the model was considered complex and risky, particularly during the economic downturn.
35. Revision of the Operation Manual to include RE subprojects: Energy saving from RE was accounted based on the emission factor in the Shandong grid and the amount of electricity from RE, basically solar PV projects.
Rationale for Changes and Their Implication on the Original Theory of Change
36. The economic downturn had following negative impacts which were primary cause for project restructuring. Firstly, the energy intensive industries rarely operate at full capacity, thus the associated energy consumption was reduced and there was not enough incentive to engage in EE activities. Secondly, after the financial crisis, financing institutions tightened their lending policy and criteria, and enhanced risks management measures, which significantly slowed down the development speed of the investment in the EE sector. Thirdly, the cost of EE investments rose substantially since project appraisal. This is because "low-
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The World Bank Shandong Energy Efficiency Project (P114069)
hanging fruits", i.e. EE investments in large industries with high intensity of energy consumption, such as iron and steel, cement, chemical, and power generation, have already been harvested in the past, which means that the remaining EE projects became more complex, comprehensive and expensive (See Figure 2). Moreover, the significant economic slowdown diminished the pool of projects at credit-worthy SMEs, which typically are more in need of the services of the project implementation units.
37. As a result, it became clear that subprojects were likely to deliver significantly lower energy savings per unit of investment than previously estimated (See table 5-1). Therefore, associated annual energy saving capacity target was revised downward and the project closing date was extended to accommodate the changed situation. The associated cumulative amount of funds leveraged by WB loan for EE projects target remained unchanged since during the restructuring period, the unit energy saving cost had been increasing. Figure 3 and Figure 4 below illustrates the general trend of the investment in EE sector in China from 2011 to 2018 and the trend of GDP during 2010 to 2019. It shows that from 2014, the investment in EE sector reached a plateau with a significant drop in investment growth rate. Other project restructuring, including revision of the Operation Manual and change in disbursement arrangements were considered critical considering the growing difficulties faced by PIUs in raising domestic funds.
Figure 3: Investment and Increase Rate in EE Sector in China Figure 4: GDP Trend in China (2010 – 2019)
Source: https://www.qianzhan.com/analyst/detail/220/ Source: https://www.ceicdata.com/en/indicator/china/ /190124-d05978c0.html (EMCA) nominal-gdp-growth
38. Component B was cancelled because, despite repeatedly committing to provide sufficient counterpart funding, the project company (Anqiu Shengyuan Company) did not procure the required funds, resulting in serious delays in the progress of the project. Ineligible expenses were found out during auditing which raised concerns of the developer’s integrity3. After extensive discussions among the Bank, National Development and Reform Commission (NDRC), Ministry of Finance (MOF), and project management, the Client requested a cancellation of the undisbursed IBRD loans for component B. Dropping component B has affected the original Theory of Change to narrow the focus on EE investments through financial leasing.
II. OUTCOME
A. RELEVANCE OF PDOs
3 Anqiu had most of the counterpart funding provided in December 2015 transferred away on the same day it was deposited, and failed to honor its written undertakings.
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The World Bank Shandong Energy Efficiency Project (P114069)
Assessment of Relevance of PDOs and Rating
39. The relevance of the PDO is considered high: There is clear relevance of the PDOs to the Government's own priorities, that is to reduce carbon dioxide intensity (CO2 emissions per unit of GDP) in its economy by 40- 45 percent from 2005 to 2020, which would require sustained efforts to reduce energy intensity in the economy and increase share of non-coal fuels in the energy mix, as well as the WBG goals as shown in the CPS at appraisal and current Systematic Country Diagnostic (SCD) discussed in 2018.
40. At the time of the project appraisal, the PDOs were also fully consistent with the CPS (FY 2006-2010), in which, pillar 3 is: manage resource scarcity and environmental challenges, through reducing air pollution, conserving water resources and optimizing energy use (partly through pricing reforms), improving land administration and management, and observing international environmental conventions. The PDOs also fell in the focus area identified as a priority in the WBG Country Partnership Strategy (Report 67566-CN), discussed by the Board in November 2012 for the CPS (FY2013 - 2016) for "supporting greener growth, in particular, shifting to a sustainable energy path". In addition to its alignment with the World Bank's strategic engagement with China, the PDOs were also consistent with the World Bank's corporate commitment to increase EE and renewable energy lending and addressing climate change.
41. At the time of the project completion, the project in line with one of key five pillars identified in the 2018 China Strategic Country Diagnostic (Report 113092-CN), making fuller use of market mechanisms to promote green growth. China has made strong commitments to fundamentally shift towards a "green growth model". For example, under the 13th FYP (2016 - 2020), China committed to reduce energy intensity by 15 percent from 2015 to 2020. To support the 13th FYP at the provincial level, Shandong has committed to cut coal consumption in 2020 by about 10 percent compared to that in 2015. The PDO also supports China's broader climate change mitigation targets. For example, China's NDC set a goal to achieve the peaking of CO2 emissions around 2030 and bring down CO2 emissions per unit of GDP by 60-65 percent from 2005 level.
B. ACHIEVEMENT OF PDOs (EFFICACY)
Assessment of Achievement of Each Objective/Outcome
42. The project experienced major restructuring with changed PDOs and outcome indicators. Therefore, a split method was adopted to measure the achievement of the outcomes following the ICR guidance.
43. Before the restructuring, there were two main objectives of the project, one on energy saving through financial leasing and one on biomass-based CHP for power and heat. Reflecting the changes in the PDOs during the restructuring, the outcome indicator on biomass-based power and heat related to Component B was dropped, and only energy saving through financial leasing remained. The achievement of the development objective was designed to be measured by two indicators. One is associated annual energy savings capacity and the other one is associated with the cumulative amount of funds leveraged by World Bank loan for energy efficiency projects. However, the associated amount of funds leveraged by the Bank loan was also set up as an outcome indicator. This could have been treated as an intermediate outcome
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The World Bank Shandong Energy Efficiency Project (P114069)
indicator instead of a PDO level outcome indicator. At the same time, other metrics such as the deployment rate of financial leasing by PIUs and number of SMEs that are engaged in EE subprojects can be considered as relevant indicators beyond the Results Framework to help assess the first project objective of demonstrating financial leasing to improve EE of enterprises in Shandong.
44. The implementation of project progressed very slowly and the disbursement rate was only 55 percent before the restructuring. For Component A, it was mainly due to the shrinking pool of potential clients, higher financial risks, and slower subproject development, exacerbated by greater difficulty in obtaining commercial bank financing, as well as other constraints related to project scope, financing ratio, and procurement method. These factors even more negatively affected implementation of Component B of biomass-based CHP.
Original project
45. The original PDO included two objectives: to improve EE in selected enterprises in Shandong province, particularly through EE leasing arrangements, and increased use of biomass for power and heat generation. The objectives are assessed according to the Results Framework indicators as listed in Table 2 above as well as additional relevant evidence.
46. The first objective is well measured in part by the first PDO indicator, associated annual energy savings capacity. the second outcome indicator related to the amount of funds leveraged by the WB loan, on its own is not sufficient to reflect the project's intention to demonstrate the use of models such as financial leasing to promote EE in selected enterprises. Therefore, other evidence is used to show the demonstration effect of the financial leasing in line with the PDO.
47. The project outcomes at the time of restructuring were only partly achieved for two primary reasons. First, the market was unfavorable for energy efficiency due to the economy downturn and tightened financing standards and criteria discussed above. In addition, other constraints such as limited project scope, low financing ratio, and strict Bank procurement requirements for the first two subprojects all contributed to the project implementation delay. However, for Component A, at least the 27 out of 34 project companies validated successfully implemented energy efficiency investment projects, 26 subprojects using financial leasing, and significantly improved their energy saving performance, and reached the energy saving capacity target. The funds leveraged by the Bank loan had achieved 87 percent of the target value. The leverage ratio is 1:1.3 at the project completion which is higher than 1:1 estimate during the project appraisal. More importantly the financial leasing model had become the main business model for Rongshihua and Guotai at the company level.
48. The second PDO is measured above all by the third PDO indicator, the amount of electricity and heat from biomass-based power and heat generation in Anqiu municipality associated with the CHP plant. The result value at restructuring was zero as the plant had not been constructed. However, many efforts and resourced were put into the preparation and early stage of implementation of the Anqiu project. It was well designed, and grid connection permission was obtained. No outcome was achieved in terms piloting the power and heat generation and associated fuel collection. However, the company has gained valuable experience in planning and design of the CHP plant, and the design remains available as a model for future biomass-fired
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power and heat plants. In this respect, while the project activities have resulted in no target value of the main results indicator, they nevertheless provide a modest contribution to potential increased use of biomass for power and heat generation in the future.
Revised project
49. With the cancellation of Component B, improved EE in selected enterprises, particularly through financial leasing became the only development objective of the project. This objective was almost fully achieved by project completion. The EE in selected enterprises significantly improved. The overall energy saving target was fully achieved with less unit cost than expected at appraisal stage and the funding leverage target was largely achieved. Most significantly, 26 out of the 34 subprojects were financed through financial leasing and 8 through EPC. As shown in the Table 3 and Table 4 below, 92 percent of the subprojects and 93 percent of the energy saving capacity were achieved through financial leasing. This fully corresponds with the PDO focus on leasing arrangements as the main model of financing.
Table 3: Financial Leasing shares around 92 percent of the total investment (Yuan million) of the project
Total investment Financial leasing EPC b/a* c/a* a b 100% c 100% Bank Loan 654.25 606.93 92.8% 47.32 7.2% Counterpart funding 651.69 603.33 92.6% 48.36 7.4% Total 1305.9 1210.26 92.7% 95.68 7.3%
Table 4: Financial Leasing shares around 93 percent of the total energy saving capacity of the project Total investment Financial leasing EPC a b b/a*100%c c/a*100% Energy saving capacity (000'tce) 330.3 309 93.6% 21.3 6.4%
50. Overall, the implementation of the project played a demonstration role in mainstreaming financial leasing as a key business model for EE in Shandong Province. When the project started implementation, there were only five domestic financial leasing companies in Shandong, and Rongshihua and Guotai were the only two financial leasing companies that carried out financial leasing services in the EE sector. By the time of project closure in 2018, there were already 19 domestic financial leasing companies registered in Shandong, some of them investments in EE projects. This suggested strong demonstration effects since SEEP was the only a project initiative that was supporting direct financial leasing for EE projects at its infancy in Shandong/China during the project implementation period. During the project implementation period, the provincial government issued some incentive policies to promote the development of financial leasing. For example, Shandong Provincial Government issued a circular on March 21, 2012 to select companies who are interested in financial lease and other ESCO business models to promote EE (See Annex 6).
51. At the project level, following the restructuring, the project reached an annual energy saving capacity of 331,100 tce, which means that the revised PDO target 1 was achieved by 104.1 percent. This is considered
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a significant achievement, given the substantial challenges with declining macroeconomic conditions and implementation delays.
52. The amount of funds leveraged by the World Bank loan for EE project is US$ 116.63 million, which was 87 percent of the target to leverage US$134 million (See Table 6). While this PDO target was largely achieved, the indicator itself does not adequately measure the project’s objective to promote EE in enterprises, particularly through financial leasing arrangements. Furthermore, the fact that the annual energy saving target was achieved with lower associated cumulative amount of World Bank loan leveraged showed that the amount of energy saved per unit of investment was higher than expected. The annual energy saving unit cost of subproject was about US$650/tce, compared to US$840/tce assumed at appraisal (See Table 5). The investment efficiency increased by 25 percent (1.5-1.2)/1.2=0.25. However, this was largely driven by one single large subproject supported by Guotai, namely the Rizhao Co., Ltd. of Shandong Iron and Steel Group. Taking this single large project out, the unit cost would be US$1,200/tce, which is above the unit cost assumed at appraisal. This indicates that the investment condition remains not as encouraging as expected during appraisal for SMEs. It was expected that the investment environment for EE would improve with the macroeconomy picking up and an action plan agreed with the PMO and PIUs was developed in January 2016, which provided confidence that the end targets could be met within the span of an 18-month extension. However, the situation did not change as expected after the restructuring. The investment environment for SME has become even worse. The strong difference between large companies and SMEs in terms of EE investment efficiency was also reflected in the results of this project. If taking out the large subproject in Shandong Iron and Steel Group Rizhao Co., Ltd implemented by Guotai, the unit investment cost is almost doubled (see Table 5 and Table 5-1 below). Out of the 34 subprojects financed by this project, 29 are with SMEs.
Table 5: Investment Flow and Energy Saving Overall project Roshihua Guotai Luxin Investment Efficiency Target Actual Target Actual Target Actual Target Actual Energy saving ('000 tce) 318 331.1 150 74.47 118 239.29 50 21.34 Investment flow (US$million including IBRD) 268 215 128 98.38 100 103.43 40 14.16 Investment efficiency ('000tce/US$) 1.2 1.5i 1.2 0.8 1.2 2.3 1.3 1.5 Unit cost ('000US$/tce) 0.84 0.65 0.85 1.32 0.85 0.43 0.80 0.66
Table 5-1: Investment Flow and Energy Saving Without Shandong Iron and Steel Group Rizhao Co., Ltd. Overall project Roshihua Guotai Luxin Investment Efficiency Target Actual Target Actual Target Actual Target Actual Energy saving ('000 tce) 318 141.4 150 74.47 118 49.59 50 21.34 Investment flow (US$million including IBRD ) 268 171.72 128 98.38 100 60.15 40 14.16 Investment efficiency ('000tce/US$million) 1.2 0.8 1.2 0.8 1.2 0.8 1.3 1.5 Unit cost ('000US$/tce) 0.84 1.21 0.85 1.32 0.85 1.21 0.80 0.66
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53. The results indicator for Component C was fulfilled. However, it should be noted that disbursement for Component C was slow and that only a small amount of expenditures of funds were earmarked for consulting services, training and other capacity building activities. In the end, only US$150,000 of the allocation of US$400,000 were disbursed. It was noted by the government that Component C may have been underutilized, and that the project could have been benefited from additional spending on knowledge sharing with other provinces and training on Operation Manual.
Table 6: Detailed results of project outcome Baseline Target Actual PDO indicators Associated annual energy saving capacity (‘000 tce) 0 (31 May 2011) 318 331.1 Associated cumulative amount of funds leveraged by WB loan for EE 0 (31 May 2011) 134 116.63 projects (US$M) Intermediate indicators Component A Cumulative energy conservation project investment flows 0 (31 May 2011) 268 215.98 Cumulative energy conservation project investment flows: 0 (31 May 2011) 128 98.39 Rongshihua (USDM) Cumulative energy conservation project investment flows: Guotai 0 (31 May 2011) 100 103.43 (USDM) Cumulative energy conservation project investment flows: Luxin 0 (1 Sept 2011) 40 14.16 (USDM) Cumulative energy savings achieved through project investments: 0 (30 Jun 2011) 150 70.47 Rongshihua (‘000 tce) Cumulative energy savings capacity achieved directly through 0 (30 Jun 2011) 118 239.29 project investments: Guotai (‘000 tce) Cumulative energy savings capacity achieved through project 0 (30 Jun 2011) 50 21.34 investments: Luxin Energy (‘000 tce) Component C No. of satisfactory progress reports (per reporting period) 0 (31 May 2011) 2 2
Justification of Overall Efficacy Rating
54. Rating at Restructuring: Modest. If the project was closed at the original closing date without restructuring, the achievement toward the PDO indicators would be partly achieved for financial leasing and not achieved for biomass-based CHP.
55. Rating at Closing: Substantial. Despite difficulties caused by tough macroeconomic conditions, the key PDO objective to increase EE in selected enterprises in Shandong was achieved with less financial resources than estimated at appraisal. The funding leverage target was largely achieved, and the leverage ratio reached 1:1.3 compared to the expected leverage ratio 1:1 at appraisal. Most significantly, 26 out of the 34 subprojects were financed through financial leasing and 8 through EPC. 21 project companies are private one and 29 are SMEs. It was also concluded that the demonstration effect of the project has played an important role in mainstreaming financial leasing as a key business model for EE in Shandong Province.
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C. EFFICIENCY
Assessment of Efficiency and Rating
56. Economic and financial analysis at the time of appraisal: An evaluation of the project component was undertaken on the basis of the operation and financial data, and the basic models of each of the four sponsors. The analysis demonstrated that project components are economically viable, providing real economic returns between 20 percent and 35 percent on an aggregate capital investment of RMB2.1 billion (US$ 323 million) and an aggregate net present value of RMB2.4 billion (US$373 million) at an 8 percent discount rate (used in Chinese feasibility study guidelines for public infrastructure projects). Switching values demonstrated that the expected returns are robust and economically justified over a wide range of assumptions.
57. Since not all sub-projects are identified at the appraisal stage, an assessment of three representative EE subprojects in following three areas: (1) boiler renovation, (2) waste heat recovery, and (3) motor adjusting speed drives was conducted. The analysis shows that the financial rate of return (FIRR) ranges from 28 percent to 59 percent, and the economic internal rate of return (EIRR) ranges from 42 percent to 77 percent. The payback period ranges from 2.7 to 3.4 years. To diversify and minimize risks of credit default of the two non-banking financial intermediaries and ESCO, the financial covenants are supplemented by ensuring that a rigorous in-house credit management is adopted.
58. Economic and financial analysis at the ICR stage: Although an economic analysis was carried out during appraisal of the project, this was not re-evaluated at restructuring when the scope of the project changed. As such, it is difficult to evaluate the potential improvements in project efficiency related to the design stage. That said, the economic and financial analysis was also carried out for component A at the ICR stage. Economic and financial analysis at the project close indicated that the economic and financial performance of the project is not that encouraging as expected at the project appraisal due to the decline of investment return and the delay of the project implementation. However, they are higher than the weighted average capital cost which is around 5.5 percent, and also higher than the standard discount rate for public infrastructure projects which 8 percent, which was used at appraisal (except EIRR of Rongshihua). The main reasons caused the lower EIRR and FIRR compared to the estimate at appraisal are the increase of investment cost for energy saving, higher default rate than expected at appraisal, the delay of the project implementation, and higher financing cost for counterpart funding.
59. To better analyze the results of the project implementation, the assumptions for economic analysis at the project appraisal stage were followed during the analysis at the project ICR stage except for the following assumptions:
• The average return on EE subprojects reduced to 25.7 percent at the ICR stage from 37 percent at the appraisal stage because the annual energy saving unit cost of the subproject was about US$1210/tce, compared to US$840/tce assumed at appraisal. • The project investment costs estimated at the project appraisal were replaced by the actual project investment costs.
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• The original costs and working capital of the subprojects were replaced by the real costs derived from the audited financial statements of the project companies.
The results of the analysis at the ICR stage were presented in Table 7 and Table 7-1 below:
Table 7: Financial and Economic Project Returns Financial Economic Component FIRR (%) NPV* (RMB EIRR (%) NPV* (RMB million) million) Appraisal 9.5 1.17 20.0 9.49 A1. Rongshihua Co., Ltd. ICR 8.5 10.6 6.7 -77.71 Appraisal 8.9 0.16 12.1 217.9 A2. Goutai Leasing Co., Ltd. ICR 8.2 3.07 8.6 17.45 A3. Luxin Energy Investment and Appraisal 9.6 55.3 35.4 489.2 Management Co., Ltd. ICR 8.3 1.4 9.9 11.3
Table 7-1: Financial and Economic Project Returns With Benefit of CO2 Emission Reduction Financial Economic Component FIRR (%) NPV* (RMB EIRR (%) NPV* (RMB million) million) A1. Rongshihua Co., Ltd. 9.5 117.0 10.4 142.63 A2. Goutai Leasing Co., Ltd. 8.2 307 24.6 572.28 A3. Luxin Energy Investment and 8.3 137 19.00 65.79 Management Co., Ltd.
Note: CO2 shadow price is US$30
60. Implementation efficiency: For component A, the project is the first Bank financed financial leasing project in China to support only new equipment leasing through a direct financial lease and as such encountered unforeseeable difficulties in implementation. For example, due to a downturn in the national macroeconomy, the PIUs faced difficulties in identifying industrial EE subprojects at enterprises that were both creditworthy and interested in the financial leasing model. There has also been the slowdown in demand for industrial products from the SMEs targeted by the project, as a result of slower economic growth, which in turn led to a decrease in demand for EE investments in the industry sector. As a result, the PIUs refocused on SOEs, where identifying and executing subprojects took considerably longer. Three restructurings were carried out to address these implementation delays, including extending the project end date and adjusting disbursement arrangements to increase the percentage of IBRD funds for subprojects.
61. The overall efficiency is rated Modest. This rating accounts for the significantly lower than expected EIRRs and the low implementation efficiency, notwithstanding the reasonable financial returns of investments compared to market benchmarks. As shown in Table 7-1, the EIRR will significantly improve with taking the CO2 emission reduction benefit into account.
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D. JUSTIFICATION OF OVERALL OUTCOME RATING
Table 8: Summary of split ratings before and after restructuring Before Restructuring After Restructuring Relevance of the objective High Efficacy PDO Modest Substantial Efficiency Modest 1 Outcome rating MU MS 2 Numerical value of the outcome rating 3 4 3 Disbursement (US$ million) 55 61.27 4 Share of disbursement 47.3% 52.7% 5 Weighted value of the outcome rating (Row 2 X Row 3) 1.42 2.108 6 Final outcome rating Moderately satisfactory 1.42+2.108=3.527 Note: Highly Unsatisfactory (1); Unsatisfactory (2); Moderately Unsatisfactory (3); Moderately Satisfactory (4); Satisfactory (5); Highly Satisfactory (6)
62. The calculated rating rounds up to Moderately Satisfactory (Table 8). Considering the first PDO outcome was fully achieved qualitatively, largely achieved by the target values, and given the strong demonstration impact of the project in terms of financial leasing, Moderately Satisfactory rating is justified.
E. OTHER OUTCOMES AND IMPACTS
63. During the preparation and implementation, 3 staff from the PMO attended 4 training workshops on financial management and procurement respectively. The Bank team also organized training programs in Shandong in the area of financial management (three times with 45 people), procurement (four times with 45 people), and social and environment (once with 40 people). The training activities carried out by this project enhanced PMO and PIUs employees’ capacity on subprojects selection, contract management, experience sharing, and so on. The project companies’ capacity for implementing the EE projects have been strengthened and became more confident in using financial leasing service to carry out EE projects.
64. As noted above, the actual spending for component C was lower than expected. PIUs faced challenges in implementing training activities partly due to the strict expenditure of SOEs and management regulations. However, the implementation of the project benefited from other projects implemented by the same PMO in terms of training and capacity building. For example, the TA component of the Asia Development Bank financed EE and Emission Reduction Project carried out some training program on project management, environment and social management system, project monitoring and evaluation. Furthermore, the Bank executed research and studies on energy saving and GHG emission reduction methodology and associated training activities, which were financed by the GEF Provincial EE Scale Up Project also helped the PMO and PIUs enhance its capacity to implement the project. Many participants of those training programs are also involved in the implementation of the GEF project.
Mobilizing Private Sector Financing
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65. Out of the 34 projects financed by the three leasing companies, 29 are in SMEs, 85 percent of the total; and 21 are private companies, two third of the total, and contract value of private owned companies amounted US$90 million, about half of the total.
Poverty Reduction and Shared Prosperity
66. The benefits of EE are multiple and go beyond enhancing economic and social development, reducing GHG emissions, strengthening energy security and improving environmental sustainability. For example, it leads to improved comfort and health of occupants of industrial, commercial and residential buildings.
Other Unintended Outcomes and Impacts
67. Beside implementing the Bank financed EE leasing project, Rongshihua and Guotai also used their own funding to carry out EE leasing project. By the project closure, Rongshihua carried out additional 21 project with total investment RMB 1.1 billion (US$16 million); Guotai carried 300 plus additional projects with total investment as high as RMB 60 billion (US$870 million). In 2012, there were 19 leasing companies in Shandong, out of which 6 domestic and 13 foreign owned; compared to that in 2018, where there were 382 leasing companies, out of which 19 domestic, 363 foreign owned (Figure 5). Some of the leasing companies also carry out EE leasing (Figure 6).
Figure 5: Leverage effect of the project at different level Figure 6: UNDP and WB Financed Leasing Project Experience Sharing Workshop China, India, Brazil
68. Almost every province has now established financial leasing companies to support EE investments. This business model has even expanded from EE to environment protection. As the first demonstration project of its kind financed by the Bank, SEEP has played an important role for the scale up of financial leasing. Rongshihua was invited to many events at provincial, country, and international level to present its experiences in financial leasing to promote EE, including one South-South Knowledge Exchange Event organized the World Bank in Singapore in 2018; China Financial Leasing Forum organized by China Foreign Investment Company Association on September 11, 2011; and others in Shandong Provinces. Rongshihua was once invited to attend the consultation workshop chaired by the Premier Li Keqiang to introduce its experience in carrying out ESCO business through financial leasing.
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III. KEY FACTORS THAT AFFECTED IMPLEMENTATION AND OUTCOME
A. KEY FACTORS DURING PREPARATION
69. The PDO is clear and project deign is straight forward although some outcome indicators could have been reconsidered. The project design was directly informed by similar program documents, consultation with a broad range of stakeholders, and sound background analyses. The Bank team closely coordinated with other ongoing and planned low-carbon and EE programs, both at the national and municipal levels in China. The project design was also informed by two analytical studies: (a) ESMAP-financed study of China’s provincial EE programs; and (b) A Bank-Australian Agency for International Development (AusAID) supported a TA report “Accelerating Energy Conservation in China’s Provinces” (2010) which included Shandong province as formal counterparts of the study. With these solid foundations, the project has established a clear and logical results chain to achieve the development objective through implementing a series activity. For the EE component, the key outcome of the project is EE improvement in selected enterprises in Shandong Province, which can be measured by associated energy saving capacity developed in the project.
70. The original PDO targets of energy saving have been revised to accommodate the changed market conditions. The economy had not recovered as optimistically forecasted after the financial crisis, even with the stimulus package. The stimulus often went to large SOEs and resulted in over capacity. SMEs were more vulnerable than large enterprises to the prolonged economic down turn, which made implementation of the project more difficult than expected at appraisal time, as SMEs became less well placed to take on responsibility for EE investments even with the advantages provided by financial leasing.
71. The risk was anticipated during the appraisal "risk associated with attempting to demonstrate the proposed approach to achieve substantial impact, especially in the wake of the financial crisis". The risk was underrated as moderate. However, the economic growth rate never recovered to pre-crisis level as estimated at the appraisal stage. The revised PDO's energy saving target was adjusted and the project scope was more focused on EE investments and financial leasing.
72. The capacity of the project developer of Component B has been proved limited to implement the project. The project developer, Shengyuan Company, is a shareholding company with a thermal power design institute taking the control position. The company had limited access to the commercial Bank to mobilize investment funding. It turned out that neither the projected district connection fees nor the proposed commercial loans materialized.
73. During the design stage, two-stage public consultations were conducted with those affected by the Anqiu CHP projects, including different groups, gender, socioeconomic and educational background. Information about the project, was disclosed through major local TV, newspapers, websites etc.
74. A stricter assessment of PIUs' financial management capacity could have been conducted since there are two cases where PIUs violated the World Bank procurement and financial management rules.
75. The PIUs indicated that the changing exchange rate for USD/RMB increased investment uncertainty, since the funds for the project are denominated in USD and the actual contract was signed in RMB during the
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project implementation. The fluctuating exchange rate greatly affected financial costs and rate of return. Different instruments could have been considered during the preparation to cope with the fluctuation of the exchange rate.
B. KEY FACTORS DURING IMPLEMENTATION
76. The project was fully consistent with national priorities for low-carbon development and is strongly supported by the Provincial Government of Shandong. During project implementation, a range of EE targets and policies were introduced to encourage EE investments, including Shandong's commitment to cut coal consumption in 2020 by about 10 percent compared to coal consumption in 2015 and the launch of the "Blue Sky Defense War" campaign which requires enterprises to limit emissions.
77. Capacity varied across PIUs, for PIUs of EE, the overall strong commitment to the project and adequate internal management have enabled satisfactory performance and outcomes in achieving energy saving. In particular, Guotai has been relatively successful in leveraging its large balance sheet and extensive network to originate projects and offer good terms and has increased the number of staffs in its energy saving industry department. On the other hand, while Rongshihua has considerable technical strength and reputation, it faced implementation delays and procurement issues. Rongshihua disbursed 100 percent of its loan amount by the original closing date, but did not reach the energy saving target because it financed several solar PV subprojects which had comparatively low energy saving capacity. During the third restructuring, Rongshihua decided to use the remaining funding reallocated from Guotai and Luxin. However, several subprojects identified by Rongshihua were ultimately dropped for various reasons, such as failure to obtain requisite guarantees needed for counterpart funding, insufficient time to complete procurement before loan closing for use of reallocated funding, and non-compliance with the procurement requirements under the legal agreement and Operation Manual. Unlike the two leasing companies, Luxin Energy's business model has a very long cycle, with verification of energy savings required before documentation needed for withdrawal can be obtained, resulting in lengthy delays in disbursement. While for Anqiu, the financial management and procurement capacity is lower than expected. Anqiu committed ineligible expenses and used the counterpart funding for other purposes which resulted in cancellation of the biomass for the power and heat generation component.
78. Expertise on EE technology and financing within PIUs was difficult to retain given the high staff turnover rate. This brought significant challenges to the project implementation, particularly during the last year of implementation. WB could consider collaborating with related development partners (e.g. ADB and GEF) to conduct joint capacity building/knowledge sharing activities at the design stage instead of operating in an ad hoc manner.
79. The Environmental Management Framework developed during project preparation has been followed by the two leasing companies (Rongshihua and Guotai) and one ESCO (Luxin Energy) to secure the environmental screening and compliance during the subproject identification and implementation. This has strengthened their capacity to identify and manage environmental and social risks associated with potential investments.
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80. Annual progress reports are provided by PIUs which provided detailed analysis of the data monitoring approach and energy savings and investment amounts for subprojects. However, on-site monitoring was not carried out for seven out of the 34 subprojects due to various issues such as production suspension or company shutdown and turnover of staff.
81. Issues encountered during project implementation that were unforeseen at the design stage were dealt with adequately. For instance, in light of the macroeconomic downturn, the project was carefully restructured to extend the project timeline and reallocate funds to accommodate changing market conditions and other unforeseeable implementation challenges. There was also efficient follow-up and resolution of implementation issues, such as requesting for action plans to provide reasonable confidence that the PDO could be met and calling for more capacity building.
Other factors
82. The slowdown of the national macroeconomy, and especially a downturn in energy-intensive industries, was a critical issue that led to higher financial risks for the EE service industry. This has made it more difficult for PIUs, especially Rongshihua with the lowest registered capital, to mobilize financing from commercial banks for EE operations for reasons such as high perceived risks associated with high energy-consuming industries, lack of familiarity with the range of EE technologies and processes and associated financial benefits. Additionally, the cost of EE investment significantly increased since the majority of low-hanging fruit (in the form of discrete, large retrofit projects) have been harvested, which led to a sharp decline in EE investment and energy saving output in recent years.
83. As a result, the demand and supply balance have been reversed since project appraisal. When the project was designed, it was supply-constraint and soon after the effectiveness it became demand constraint. Some subprojects ceased operations due to the halt in core business because of the unexpected market situation.
IV. BANK PERFORMANCE, COMPLIANCE ISSUES, AND RISK TO DEVELOPMENT OUTCOME
A. QUALITY OF MONITORING AND EVALUATION (M&E)
M&E Design
84. The quality of M&E design is rated substantial. PDO indicator 1 on associated energy saving capacity was compatible with the Government’s approach and overall EE agenda at the time, and the energy savings was directly attributable to the project. However, PDO indicator 2 on associated cumulative amount of funds leveraged by WB loan for EE projects does not directly measure the PDO and does not fully link to the Theory of Change.
85. The project required comprehensive reporting, including annual progress reports, monitoring of performance indicators from the project results framework and mid-term review of implementation progress. The results framework adequately covers the results chain. The three PIUs are fully responsible for project monitoring and evaluation and reporting. Under the Operation Manual, a variety of methods for Measurement and Verification (M&V) of Savings were provided for the leasing companies. This provided
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the flexibility for leasing companies to select a methodology based on their capacity. Quality of M&V was managed by ensuring that all deemed or stipulated savings calculations and technical analyses will be certified by a Senior Engineer or a professional with equivalent qualifications. As the EPC mechanism or the ESCO market matures, the parties involved may use more advanced M&V methods such as short term or continuous measurements, or whole facility utility meter or sub-meter analysis.
M&E Implementation
86. The quality of M&E implementation is rated substantial. Annual progress reports were provided separately by the 3 PIUs to monitor progress. Rongshihua and Guotai’s estimations of energy saving were mainly calculated by their staff based on data provided by the subproject companies. On the other hand, Luxin hired a third-party organization to collect data since it used the EMC business model. On-site monitoring has been carried out for 27 of the 34 projects, but was not carried out for the other 7 subprojects due to the enterprises going out of business and high turnover of staff.
87. The PMO, with inputs from the PIUs, was responsible for the overall M&E system and furnished progress reports on project implementation. The PMO had previously planned to use Part C funds to hire a consulting firm as a monitoring agency and completed the procurement in September 2015. When preparing to implement the contract, the PMO was informed that the company to be hired was listed on the World Bank’s debar list. The contract was terminated after negotiation between the two parties. Since the original closing date of the project was approaching and it was not clear whether the closing date would be extended or not, the plan for hiring another monitoring company to replace thatfirm was put on hold. In the end, Shandong Coal Energy Saving Technology Service Center was hired as the energy saving verification agency in November 2017. One lesson learnt in this regard is that it may be better to hire a third-party organization to collect data for all 3 PIUs and the overall project from the beginning of the implementation to ensure the consistency and accuracy of the M&V methodology and approaches.
M&E Utilization
88. The quality of M&E utilization is also rated substantial. The PMO coordinated the project implementation and monitored the progress of each project in a timely manner to assist project decision-making by Provincial Government Agencies and the three PIUs. When the project implementation experienced difficulties, the PMO carefully analyzed the issues encountered by the project based on the monitoring and evaluation, and formulated restructuring ideas that had effectively addressed the issues and advanced the implementation. The three restructurings and other adjustments were all carried out based on close M&E of the progress of the project and analysis of the issues.
89. However, there are shortcomings in the M&E, the 3 PIUs failed to monitor the performance of subprojects as frequently as requested. Only until the final stage of the project implementation, did the PMO collect data and information from the three PIUs in a comprehensive manner, prepared a project implementation progress report. The PMO and PIUs were requested to report to the Bank on a monthly basis in later stage of the implementation. This effectively incentivized the PIUs to speed up the implementation of the project and ensure the timely delivery of the project.
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The World Bank Shandong Energy Efficiency Project (P114069)
Justification of Overall Rating of Quality of M&E
90. Although there were moderate shortcomings in the M&E implementation, the overall rating of quality of M&E is substantial. Although there were moderate weaknesses in timely collection of information and data from the project companies by the three PIUs during the implementation, the M&E, as designed, was generally sufficient to assess the achievements of the objectives and test the links in the results chain. Some information beyond the results framework was also collected and used to assess the PDO. The utilization of the M&E served the implementation and restructuring of the project. The substantial rating of Quality of M&E can be justified.
B. ENVIRONMENTAL, SOCIAL, AND FIDUCIARY COMPLIANCE
91. Environment and social safeguards is rated satisfactory. The project was classified as Category B under OP/BP 4.01 (Environmental Assessment). For Anqiu Biomass CHP, the main social impact is land acquisition for the CHP plant site and temporary land occupation for related heat networks. For the plant site, about 7.57 ha of land areas was acquired, including 5.75 ha of farmland, affecting 8 villages. Because the site had been acquired during preparation, due diligence review was carried out by independent agency. In conclusion, the land acquisition procedures for Anqiu Biomass CHP had followed relevant national laws and regulations; adopted compensation policies and rehabilitation measures were adequate and fully delivered; the affected people were consulted and informed; and the process and outcomes of land acquisition were considered satisfactory to the affected people.
92. For the component A, since most of subprojects involved replacing old equipment within the existing plants, no land acquisition would be required. The only possible negative impacts were those subprojects of using waste heat for heat supply, which might involve land acquisition impacts for construction of heat pipelines outside the plants. To accommodate such potential negative impacts, a resettlement policy framework (RPF) was developed during preparation for two participating leasing companies and one ESCO, which will apply to those subprojects that might be involved in any land acquisition and resettlement. Due to the nature of the subprojects, only a few might be involved in construction of certain facilities extending beyond the existing plants or building on new locations. To facilitate compliance of RPF, a land acquisition screening was required for all subprojects in order to determine whether RPF would be triggered, which was included in the Operation Manual for both leasing companies and ESCO. During the implementation, this policy was not triggered.
93. For all the 34 subprojects financed by two leasing companies and one ESCO, none of them triggered RPF, except in some cases, where subprojects were located in the enterprises recently acquiring land. For example, both Guotai and Rongshihua involved subprojects associated with Rizhao Co. Ltd of Shandong Iron and the Steel Group in Rizhao City. In such cases, due diligence review was conducted on the plant, which confirmed that land acquisition and resettlement for Rizhao Co. Ltd of Shandong Iron and Steel Group Project had been carried out following the procedures of national laws, and compensation adopted for the project was consistent with provincial regulations. The compensation and rehabilitation measures were delivered to the affected villages, and no remaining issues were reported.
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94. By the project closing date, no construction activities that would cause adverse environment al and social impacts were conducted. Therefore, the World Bank-financed activities under the project did not cause any negative environmental and social impact. Considering that there was no induced impacts from the World Bank investment and the remaining few pending safeguard works were not the consequences of rehabilitation activities, no follow up or supervision from the World Bank was required after the project closure.
95. Financial management is Moderately Unsatisfactory. Financial management, which covers six aspects (budgeting, accounting, financial report, fund flow, internal control an auditing), was analyzed over the seven-year project implementation period. Overall, the project accounting and financial reporting were in line with the regulations issued by the MOF and the requirements specified in the loan agreement; the withdrawal procedure was straightforward and running effectively; total loan available was fully disbursed; and the auditor is well-engaged and there were no-overdue audit reports.
96. However, the auditor found two issues of ineligible expenditure related to the project in 2015 and 2017. One is overclaiming the Bank loan of US$924,056 using artificial documents produced by the Anqiu Shengyuan Company. As a result, the ineligible amount was refunded to the Bank, component B was dropped and the related loan of US$5,277,624 was cancelled. The second case was incurred by the Rongshihua Leasing Company due to non-compliance with the procurement requirements specified in the Bank's procurement guideline and Operation Manual. The ineligible amount of US$17,456,933 was refunded to the Bank. Cancellation of the relevant loan was not effective since it occurred very close to the project closing date. The two issues reflected non-compliance of the agreed requirements and procedures as specified in the legal agreement and project manual, and significantly affected the overall performance of the project.
97. Procurement performance in the project is rated Unsatisfactory. The two ineligible expenditures are also serious integrity cases from a procurement perspective. In both cases, the non-compliance cannot be interpreted as genuine misunderstanding of the agreed requirements and procedures as specified in the legal agreement and the project Operation Manual. The lessons and experience learned from the project implementation monitoring are: (a) closer collaboration with the government audit office can strengthen fiduciary work in the project; (b) physical inspection is necessary during the Bank's fiduciary implementation support and monitoring mission; (c) even for procurement following well-established private sector procurement methods or commercial practices, the project Operation Manual needs to set out detailed procurement requirements and procedures so that open or limited competitive bidding would be the most appropriate method to be used to ensure the core principles of procurement (value for money, economy, integrity, fit for purpose, efficiency, transparency, and fairness). The project Operation Manual also needs to specify in detail the procedures for quantity measurement, quality acceptance, and operational and performance acceptance to be verified and certified by an independent third party.
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C. BANK PERFORMANCE
Quality at Entry
98. Moderately Satisfactory. The project was strong in strategic relevance and economic justification. Furthermore, lessons from other similar World Bank-funded projects were incorporated into the project design. However, the quality at entry could have been stronger if (a) the appraisal of Component B was carried out more strictly and appropriate risk mitigation measures had been taken into account, and (b) if a robust survey on the super ESCO company model was carried out, the super ESCO pilot may not have been included in the scope of the project.
Quality of Supervision
99. Moderately Satisfactory. The project implementation progress was regularly reviewed through formal World Bank missions and other informal interactions with the PMO and the provincial government. The implementation support missions were regular and ISRs and Aide Memoires were filed accordingly. Thirteen Implementation Status Reports (ISR) were also prepared to highlight issues for the Bank management's attention and track progress against baselines. Likewise, support and guidance for the implementing agencies on project implementation, financial management, procurement, and environment and social safeguards was provided by the World Bank's team as needed, on a regular basis. During the last ISR mission, both the achievement of the PDO and the implementation progress were rated 'Moderately Satisfactory'.
100. The achievement of development objectives was mixed. The energy saving target was fully achieved, accumulative amount of funds leveraged by the Bank loan largely achieved, and incremental amount of electricity and heat from biomass-based power and heat failed. The World Bank project team has professional management experience and rich knowledge. The team regularly visited Shandong every year to review the progress of the project, investigate the implementation of the subproject and guide the next phase of work. During the implementation of the project, World Bank experts paid attention to the opinions of the project units, carefully listened to the project restructuring proposals, and expediently corrected the deviations of the project to ensure that the project adjustment measures could be implemented in a timely manner, which effectively guarantees the project schedule.
Justification of Overall Rating of Bank Performance
101. Based on the abovementioned ratings, the overall rating of the World Bank’s performance is ‘Moderately Satisfactory’.
D. RISK TO DEVELOPMENT OUTCOME
102. The project successfully demonstrated the use of financial leasing as an effective tool to allow entities to obtain necessary technical equipment for EE with a relatively small amount of capital. The demonstration of the use of a financial leasing model through this project successfully contributed to mainstreaming financial leasing as a common financing method for EE investments in Shandong. At the project completion, there are 382 leasing companies providing various financing leasing services in Shandong. Governments at
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different level have issues incentives policies to promote financial leasing business model in various sectors, including energy efficiency (See Annex 6).
103. All 3 PIUs indicated their intention to continue their EE business. Luxin aims to continue to grow to become an investment platform for energy conservation and emission reduction projects, with most of the financing conducted through EMCs. On the other hand, Guotai and Rongshihua plan to broaden its investment management activities including EE. At the country and provincial level, there is also strong political commitment to support low carbon development through EE investments.
V. LESSONS AND RECOMMENDATIONS
104. Robust project supervision supported by detailed Operation Manual and collaboration with relevant government agencies may help to prevent and ease fiduciary implementation. This project experienced several challenges with financial management. In two cases, the implementation of projects violated the World Bank procurement and financial management rules. Possible solutions to address these issues include:
• closer collaboration with the government audit office can strengthen fiduciary work in the project; • physical inspection is necessary during Bank’s fiduciary implementation support and monitoring mission; • the project Operation Manual needs to set out detailed procurement requirement and procedures so that open or limited competitive bidding would be the most appropriate method to be used to ensure the core principles of procurement.
105. The detailed project Operation Manual with well-defined procedures for the quantity measurement, quality acceptance, operational and performance acceptance to be verified and certified by an independent third party and early involvement of an independent third-party organization may help to monitor and evaluate all elements of the project to ensure consistency and accuracy of the M&V methodology and approaches.
106. Underrating of important risks and insufficient or untimely market analysis at preparation and implementation, may jeopardize implementation process and achievement of the objectives. Two major risks were envisaged at the appraisal stage: macroeconomic downtown and difficulties in subproject pipeline development. These risks turned out to be substantial instead of moderate as rated at appraisal, which brought significant impact of the project implementation and therefore the achievement of the project development objectives. As such, more comprehensive and robust project market research should have been carried out during the preparation to assess these risks and capacity of subproject companies and take countermeasures to mitigate the risks. This also applies to the preparation of Anqiu project in terms its bankability, and the design of the super ESCO business model in terms of market soundness. At the macro level, more frequent and robust analysis of macroeconomic conditions could also be conducted to foresee risks beyond the control of the project and to restructure the project in a timely manner.
107. Establishing and keeping right capacity, knowledge, and skill of staff at PMO and PIUs are critical for the successful project implementation. It is important to increase knowledge of EE technology and specialized knowledge outside the scope of traditional project management. Capacity building support should be adjusted based on PIUs' capacity and knowledge. Ensuring that PIUs have staff with strong technical,
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financial and business experience is key to enhance the effectiveness of EE investment delivery systems in local institutional environments. Further considerations to address high staff turnover rate is needed to retain skilled staff.
108. Early adoption of commercial practice of procurement may prevent the implementation of the project from long delay. For about a year after effectiveness of the project, not a single subproject has been put into operation due to the delay of the procurement following the Bank's competitive bidding procedures. However, at the same time, the PIUs have evaluated 40 subprojects and have 15 contracts signed and implemented.
109. Project flexibility and commitment from implementing entities are important for successful implementation. Flexibility is needed in program design to respond to unexpected challenges and opportunities. For example, adopting commercial practice for procurement directly without using the Bank's competitive bidding procedures for the first two subproejcts; including the distributed RE in the scope of the subprojects, and etc. The financial leasing model proved to be appropriate for an expansionary environment, but less so during a period of retrenchment. For future projects to be undertaken over a period of years, flexibility in applicable financing mechanisms would build in resilience for implementation. Furthermore, Guotai's relative success in implementing EE subprojects suggests that strong technical expertise, large balance sheets and extensive network to originate projects and offer good terms are key factors to ensure successful implementation of the financial leasing model.
110. Commercial practice is more suitable for leasing business, since the project companies have usually already selected the equipment through commercial practice when they approach the leasing company for financing support. In addition, many project companies are SMEs, to them the Bank prior review . procedures take too long time, and they could not afford to wait.
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ANNEX 1. RESULTS FRAMEWORK AND KEY OUTPUTS
A. RESULTS INDICATORS
A.1 PDO Indicators
Objective/Outcome: Energy savings capacity (ktce/yr), cumulative Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Projected energy or fuel Mega Joules 0.00 397.00 318.00 331.00 savings (MJ)
31-May-2011 30-Sep-2016 31-Dec-2018 31-Dec-2018
Comments (achievements against targets):
Objective/Outcome: Amount of funds leveraged by WB loan for energy efficiency projects ($m) Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Associated cumulative Amount(USD) 0.00 134.00 134.00 116.63 amount of funds leveraged by WB loan for energy 31-May-2011 30-Sep-2016 31-Mar-2019 31-Dec-2018 efficiency projects (US$M)
Comments (achievements against targets):
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A.2 Intermediate Results Indicators
Component: Project Management, Monitoring and Evaluation
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Number of satisfactory Number 0.00 2.00 2.00 2.00 progress reports per year 31-May-2011 30-Sep-2016 31-May-2019 13-Dec-2018
Comments (achievements against targets):
Component: Energy Efficiency Service Industry
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Cumulative energy Amount(USD) 0.00 268.00 268.00 215.98 conservation project investment flows (US$M) 31-May-2011 30-Sep-2016 31-Dec-2018 31-Dec-2018
Cumulative energy Amount(USD) 0.00 128.00 128.00 98.39 conservation project investment flows: Rongshihua ($m)
Cumulative energy Amount(USD) 0.00 100.00 100.00 103.43 conservation project investment flows: Guotai
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($m)
Cumulative energy Amount(USD) 0.00 40.00 40.00 14.16 conservation project investment flows: Luxin 01-Sep-2011 30-Sep-2016 31-Dec-2018 Energy ($m)
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Cumulative energy savings Tones/year 0.00 188.00 150.00 70.47 capacity achieved directly through project investments: 30-Jun-2011 30-Sep-2016 31-Dec-2018 31-Dec-2018 Rongshihua (000 tce)
Comments (achievements against targets):
Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Cumulative energy savings Tones/year 0.00 62.00 50.00 21.34 capacity achieved directly through project investments: 30-Jun-2011 30-Sep-2016 31-Dec-2018 31-Dec-2018 Luxin Energy (000 tce)
Comments (achievements against targets):
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Formally Revised Actual Achieved at Indicator Name Unit of Measure Baseline Original Target Target Completion Cumulative energy savings Tones/year 0.00 147.00 118.00 239.29 capacity achieved directly through project investments: 30-Jun-2011 30-Sep-2016 31-Dec-2018 31-Dec-2018 Guotai (000 tce)
Comments (achievements against targets):
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ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION
A. TASK TEAM MEMBERS
Name Role Preparation Supervision/ICR Jonathan Edwards Sinton, Yanqin Song Task Team Leader(s) Jianjun Guo Procurement Specialist(s) Fang Zhang Financial Management Specialist Robert P. Taylor Team Member Cristina Hernandez Team Member Aristeidis I. Panou Counsel Shanshan Ye Team Member Mauricio Monteiro Vieira Social Specialist Xiaodan Huang Environmental Specialist Na Han Team Member
A. STAFF TIME AND COST
Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation FY09 9.600 98,960.07 FY10 28.550 196,431.01 FY11 16.913 132,482.05
Total 55.06 427,873.13
Supervision/ICR FY12 8.050 86,285.88 FY13 7.892 45,098.16 FY14 10.731 85,464.96
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FY15 18.497 132,165.08 FY16 15.938 117,839.39 FY17 11.237 78,045.26 FY18 11.195 88,317.27 FY19 13.805 85,940.00 Total 97.35 719,156.00
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ANNEX 3. PROJECT COST BY COMPONENT
Amount at Approval4 Actual at Project Amount at approval Cost item (US$M) Closing (US$M) as share of closing Component A. Energy Efficiency Service 266.690 215.89 81.0% Industry IBRD 133.350 99.26 74.4% Rongshihua 63.690 53.13 83.4% Guotai 49.755 55.86 112.3% Luxin Energy 19.000 7.65 38.4% Component B. Anqiu Biomass CHP Plant 36.000 18.63 51.8% IBRD 15.910 10.67 67.1% Anqiu Shengyuan Biomass CHP 20.090 7.96 39.6% Company Component C. Project Management, 0.370 0.15 37.5% Monitoring and Evaluation (IBRD) Physical contingencies 6.000 - - Price contingencies 6.000 - - Interest during constrution 0.700 - - Front End Fee (IBRD) 0.375 n.a.5 100% Total Financing 316.135 234.67 74.2%
4 For the amount at approval, values here are based primarily on the Loan Agreement (page 12 eligible expenditures) and secondarily on the PAD Annex 5. Slight discrepenncies exist for some values as reported in different places. The PAD Datasheet Financing Plan and Annex 5 gives the total as $316.2 million. The PAD description (pages 5, 41) and Operations Portal Financing Plan as reflected in the ICR Datasheet gives the original total cost as $317.1m. The PAD economic analysis assumes aggregate capital investments of $323m. 5 The Front-end Fee actual amount is capitalized as counterpart contributions counted under respective component costs.
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ANNEX 4. EFFICIENCY ANALYSIS
Economic Analysis at ICR Stage
The economic analysis was also carried out at project ICR stage. Since the sub-project under Component B was cancelled, the economic analysis at ICR stage was only carried out on the sub-projects under Component A.
To better analyze the results of the project implementation, the assumptions for economic analysis at project appraisal stage were followed during the analysis at project ICR stage except the following assumptions:
• The average return on energy efficiency subprojects reduced to 25.7 percent at ICR stage from 37 percent at appraisal stage because the annual energy saving unit cost of subproject was about US$1210/tce, compared toUS$840/tce assumed at appraisal6. • The project investment costs estimated at project appraisal were replaced by the actual project investment costs. • The original costs and working capital of the subprojects were replaced by the real costs derived from the audited financial statements of the project companies.
The results of the analysis at ICR stage were presented in the following table:
Table 4-1: Financial and Economic Project Returns Financial Economic FIRR (%) NPV* EIRR (%) NPV* Component (RMB (RMB million) million) Appraisal 9.5 1.17 20.0 9.49 A1. Rongshihua Co., Ltd. ICR 8.5 10.6 6.7 -77.71 Appraisal 8.9 0.16 12.1 217.9 A2. Goutai Leasing Co., Ltd. ICR 8.2 3.07 8.6 17.45 A3. Luxin Energy Investment and Appraisal 9.6 55.3 35.4 489.2 Management Co., Ltd. ICR 8.3 1.4 9.9 11.3
Table 4-2: Financial and Economic Project Returns With Benefit of CO2 Emission Reduction Financial Economic FIRR (%) NPV* EIRR (%) NPV* (RMB Component (RMB million) million) A1. Rongshihua Co., Ltd. 9.5 117.0 10.4 142.63 A2. Goutai Leasing Co., Ltd. 8.2 307 24.6 572.28
6 As indicated in the main text. Rizhao Co. Ltd of Shandong Iron and Steel Group Project is really a very special case seized by Guotai and it is difficult find similar projects in the future.
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A3. Luxin Energy Investment and 8.3 137 19.00 65.79 Management Co., Ltd.
Note: CO2 shadow price is US$30
The table above shows that the results of analysis at ICR stage are not so good as ones concluded at appraisal stage. The main reasons caused the lower EIRR and FIRR compared to the estimate at appraisal are the increase of investment cost for energy saving, higher default rate than expected at appraisal, the delay of the implementation, and higher financing cost for counterpart funding. As shown in Table 4-2, the EIRR will significantly improve with taking the CO2 emission reduction benefit into account.
Financial Analysis at ICR Stage
To ensure a prudent financial structure, adequate liquidity and proper financial management, financial covenants were designed at appraisal stage. These covenants include debt service coverage ratio, det equity ratio, and return on equity.
It was required that the debt service coverage ratio should be at least 1.3. The debt to equity ratio should not be more than 60:40 (or 1.5) for Luxin Energy Investment and Management Co., Ltd. and 80:20 (or 4.0) for Rongshihua Co., Ltd. and Guotai.
At ICR stage, those financial covenants were recalculated according to the audited financial statements of the project companies. The results of these calculation are presented in the following tables:
Table 4-2: Compliance Status of Financial Covenants - Rongshihua Co., Ltd. 2010 2011 2012 2013 2014 2015 2016 2017 2018 Debt Service Coverage Ratio 22.3 2.8 0.8 1.1 5.0 5.4 (694.7) (0.0) 0.2 Debt to Equity Rate 3.9 2.8 1.0 2.7 2.7 3.1 8.7 0.9 11.2
It is obvious that recent three years from 2016 to 2018, Rongshihua Co., Ltd. did not comply with the covenant of debt service coverage ratio but complied with the covenant of debt to equity rate for only two years.
Table 4-3: Compliance Status of Financial Covenants - Goutai Leasing Co., Ltd. 2010 2011 2012 2013 2014 2015 2016 2017 2018 Debt Service Coverage Ratio 1.9 -28.5 -23.5 -21.2 0.2 -29.6 -32.7 0.1 -9.0 Debt to Equity Rate 1.2 1.3 2.2 2.0 1.9 2.8 3.5 4.5 3.1
It is obvious that recent three years from 2016 to 2018, the Goutai Leasing Co., Ltd. did not comply with the covenant of debt service coverage ratio but complied with the covenant of debt to equity rate for only two years.
Table 4-4: Compliance Status of Financial Covenants - Luxin Energy Investment and Management Co., Ltd. 2010 2011 2012 2013 2014 2015 2016 2017 2018 Debt Service Coverage Ratio (0.8) (1.9) (4.3) 11.5 0.7 4.6 10.1 3.9 0.3 Debt to Equity Rate 0.0 0.0 0.2 0.2 0.2 0.5 0.6 0.5 0.7
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It is obvious that recent three years from 2016 to 2018, the Luxin Energy Investment and Management Co., Ltd. complied with both the covenants of debt service coverage ratio and debt to equity rate.
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ANNEX 5. BORROWER, CO-FINANCIER AND OTHER PARTNER/STAKEHOLDER COMMENTS
Through the financial leasing and contract energy management methods, the World Bank Shandong Energy Efficiency Project has improved energy efficiency, improved enterprise competitiveness and improved environmental quality. The implementation of the project promoted the in-depth development of energy conservation and emission reduction in Shandong Province, promoted the further development of the energy conservation service industry and the ESCO mechanism, better realized the leverage junction of World Bank loans, and leveraged more social funds to invest in the field of energy saving and emission reduction. During the implementation of the project, many lessons have been learned, including:
1. The Bank's flexible management is the key to the success of the project. During the implementation of the project, the PMO raised request for restructuring according to the changes in the actual progress of the project under the premise of strictly abiding by the Project Grant Agreement and respecting the project design documents. During the project implementation, particularly during the restructuring, we enjoyed strong support from the Bank team. At the same time, the Bank's task team carried out project supervision regularly and provided support and advice to the PMO and PIUs. Many reasonable suggestions were made in the procurement and financial management for the success of the project.
2. The PIUs and PMO shall maintain fixed personnel. Except Rongshihua, the personnel responsible for the World Bank in the PIUs and in the PMO changed many times. The implementation of the World Bank project requires professional knowledge and skill and dedication. Even if the handover work is done, the new responsible personnel cannot be fully handy in a short period of time, which affects the work of writing progress reports, preparing withdrawals and reporting materials, and preparing financial statements to a certain extent.
3. The PMO staff must have comprehensive capabilities to cover a wide range of work. It requires knowledge in the area of financial management, project management, and basic knowledge of energy efficiency. Moreover, with the implementation of the project, new problems are constantly emerging, and new demands are placed on the capabilities of the PMO staff. The PMO has taken a series of measures to enhance its own capacity, including hiring financial experts and environmental experts, strengthening special management capabilities; participating in training and inspection activities to improve the capacity of the PMO staff; regularly organizing internal meetings and exchange activities, and improving the PMO’s work procedures.
4. Avoid the impact of exchange rate changes on the project. The Bank financing is in US dollars, and the actual withdraw and repayment are in RMB. During the implementation, due to frequent changes in the RMB against the US dollar, the implementation of the project was significantly influenced by these changes. The exchange rate of the RMB against the US dollar was 1:6.8 at the beginning of 2011, but by 2013, the exchange rate became 1:6.1. It became 1:6.9 and then 1:6.6 at the end of August. The most direct impact of frequent exchange rate changes is that project units cannot ensure the return on capital, and projects using World Bank funds have potentially high risks. Especially at the end of the project, Luxin even stopped using World Bank financing to avoid risks.
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We suggest that in future, the Bank can help design the project with reserving a portion of funds or set special terms to deal with exchange rate fluctuation.
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ANNEX 6. SUPPORTING DOCUMENTS (IF ANY)
Table 6-1: Monitoring and Evaluation Project List Project Serial Business Project Name Implementation Number Model Unit 50,000 Tons of Sheet Paper Production Line Energy-saving Financial 1 Rongshihua Renovation Project of Zaozhuang Huajin Paper Co., Ltd. leasing Second-effect Evaporator Renovation Project of Shandong Rongshihua Financial 2 Xingguang Sugar Group Co., Ltd. leasing Flue Gas Waste Heat Recovery Power Generation Project Rongshihua Financial 3 of Shandong Luxing Steel Pipe Co., Ltd. leasing Preheating, Recovery and Utilization Project of Pipe- Rongshihua Financial 4 bundle Drying Agent of Jining Ludian Bio-Industry Co., Ltd. leasing Sewage Utilization and Biogas Power Generation Project Rongshihua Financial 5 of Zaozhuang Qingyuan Water Treatment Co., Ltd. leasing 3# Production Line Raw Grinding Equipment and Coal Rongshihua Financial 6 Grinding Equipment Energy-saving Technical Reform leasing Project of Shandong Quanxing Cement Co., Ltd. Taikoo Mechanical Distributed Roof Photovoltaic Financial 7 Generation Energy-saving Project of Qingzhou Luxi Rongshihua leasing Energy-saving Management Service Co., Ltd. Lishan College Micro-emission Campus Energy-saving Financial 8 Technical Reform Project of Qingzhou Luxi Energy-saving Rongshihua leasing Management Service Co., Ltd. Energy-saving Technical Reform Project of Cement Kiln Financial 9 Production Line Dust Removal System of Shandong Rongshihua leasing Quanxing Cement Co., Ltd. Energy-saving Technical Reform Project of Cement Kiln Financial 10 Production Line Dust Removal System of Zaozhuang Rongshihua leasing Wofeng Cement Co., Ltd. Cement Production Line Energy-saving Technical Reform Financial 11 Rongshihua Project of China United Cement Lunan Co., Ltd. leasing Shandong Linyi 10MW Roof Distributed Photovoltaic Financial 12 Generation Project of China Clean Energy Lvzhou Science Rongshihua leasing and Technology Co., Ltd. Weifang GoerTek 21MW Roof Distributed Photovoltaic Financial 13 Generation Project of China Minsheng New Energy Rongshihua leasing Investment Group Co., Ltd. Shandong Steel Rizhao Boutique Base Belt Conveyor Financial 14 Renovation Project (wharf to raw material field) of Libo Rongshihua leasing Heavy Industries Science and Technology Co., Ltd.
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Shandong Steel Rizhao Boutique Base Belt Conveyor Financial 15 Renovation Project (within the factory area) of Libo Heavy Rongshihua leasing Industries Science and Technology Co., Ltd. New Energy Public Transport Project of Xintai Public Financial 16 Rongshihua Transport Co., Ltd. leasing New Energy Public Transport Project of Longkou Public Financial 17 Rongshihua Transport Co., Ltd. leasing Carbon Black Production Line Technical Renovation Financial 18 Guotai Project of Shandong Aolong Carbon Black Co., Ltd. leasing A Complete Lubricating Oil Production Line Tail Gas Financial 19 Guotai Recovery Equipment of Zibo Taiwei Lubricant Co., Ltd. leasing World Bank Direct Financial Leasing Project of Shandong Financial 20 Guotai Qianjin Electronic Technology Co., Ltd. leasing World Bank Direct Financial Leasing Project of Shandong Financial 21 Guotai Guangfu Group Co., Ltd. leasing Steam Supply Equipment World Bank Direct Financial Financial 22 Leasing Project of Shandong Mingke Energy-saving Guotai leasing Engineering Co., Ltd. 8 Megawatt Distributed Solar Power Plant Direct Financial Financial 23 Leasing Project of Shandong Guofeng Wind Power Guotai leasing Equipment Co., Ltd. Waste Heat Generation Project of China United Cement Financial 24 Guotai Taian Co., Ltd. leasing Tail Gas Generation Self-use Project of Rizhao Co., Ltd. of Financial 25 Guotai Shandong Iron and Steel Group leasing Commercial Lighting Renovation Project of Inzone Mall 26 Lucion EPC Co., Ltd. Lighting Renovation Project of in the Wide Thick Plate EPC 27 Lucion Factory of Jinan Iron&Steel Group Steam Boiler Energy-saving Technical Reform Project of EPC 28 Lucion Shandong Futian (Dingtao) Sugar-alcohol Co., Ltd. Recycling Waste Heat Recovery Project of Bucun Power EPC 29 Lucion Plant Steel Ladle Cover Energy-saving and Renovation Project of EPC 30 Lucion Laiwu Iron&Steel Group 4MW Distributed Photovoltaic Generation Project of EPC 31 Lucion Tongyu Heavy Industry Co., Ltd. Vacuum System Energy-saving and Renovation Project of EPC 32 Lucion Shandong Guihe Xianxing Paper Industry Co., Ltd. Waste Heat Recycling Boiler Fan System Energy Saving EPC 33 and Reconstruction Project of Shandong Yaohua Luxin Lucion Energy Saving Investment Co., Ltd. Note: Project No.3 is of two phases
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Links of the Document Issued by Shandong Provincial Government to Promote Financial Leasing
List of Financial Leasing Company in Shandong: http://commerce.shandong.gov.cn/col/col16384/index.html (Commerce Department of Shandong Provincial Government)
List of Incentive Policies Issued by the Shandong Provincial Government During the Implementation of the Project:
Shandong Provincial Government Circular of Measures on Promoting Financial Leasing (2016) No. 7 https://www.jicleasing.cn/news/industry-view?id=370
Shandong Provincial Government Circular of Measures on Tax Rebate for Financial Leasing Services (August 26, 2013)
Shandong Provincial Government Circular on Piloting EMC and Equipment Financial Leasing in SMEs (March 21, 2012)http://m.rzzlchina.com/a/xingyeyanjiu/zhanluefazhanyanjiu/2015/1123/6147.html
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