RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF ENERGY EFFICIENCY PROJECT GEF TRUST FUND GRANT NUMBER TF OCTOBER 14, 2004 TO THE

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1 Public isclosure Authorized Public isclosure Authorized Public isclosure Authorized Public isclosure Authorized ocument of The World Bank RESTRUCTURING PAPER ON A PROPOSE PROJECT RESTRUCTURING OF ENERGY EFFICIENCY PROJECT GEF TRUST FUN GRANT NUMBER TF OCTOBER 14, 2004 TO THE REPUBLIC OF POLAN {ATE OF RESTRUCTURING} Report No: PL

2 CURRENCY EQUIVALENTS (Exchange Rate Effective April 19, 2011) Currency Unit = New Polish Zloty (PLN) PLN 1.0 = US$ US$ 1.0 = PLN 2.77 FISCAL YEAR January 1 - ecember 31 ABBREVIATIONS AN ACRONYMS BGK O PL EE ESCO GEF GHG PIP POE ESCO TA TM Bank Gospodarstwa Krajowego evelopment Objectives evelopment Policy Loan Energy Efficiency Energy Service Company Global Environment Facility Greenhouse Gas Project Implementation Plan ESCO Subsidiary of MPEC Technical Assistance Thermo-Modernization Vice President: Country irector: Country Manager Sector Manager / irector: Task Team Leader: Philippe Le Houérou Peter Harrold Thomas Laursen Ranjit Lamech Peter Johansen

3 POLAN ENERGY EFFICIENCY PROJECT P CONTENTS Page A. SUMMARY... 1 B. PROJECT STATUS... 1 C. PROPOSE CHANGES APPRAISAL SUMMARY... 7 ANNEX 1: RESULTS FRAMEWORK AN MONITORING... 8

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5 ENERGY EFFICIENCY PROJECT RESTRUCTURING PAPER SUMMARY 1.1 The proposed restructuring consists of a reallocation of uncommitted GEF funds from the Partial Credit Guarantee Facility Component to a new Thermo-Modernization (TM) Investments Component at the Bank Gospodarstwa Krajowego (BGK). The Partial Credit Guarantee Facility has performed poorly due to low demand from participating banks and will be abandoned except for the amount needed to cover existing liabilities. The freed-up funds will be transferred to the new TM Investments Component and used to provide grants to eligible Energy Efficient (EE) investments in residential buildings. The grants will be channeled to beneficiaries through the existing government-owned TM Fund that will provide grants to partially cover the investment cost of an EE investment which has been financed by commercial banks that have signed a cooperation agreement with the BGK (in the following referred to as TM Partner Banks). As a result of the introduction of the TM Investments Component, the Environmental Management Framework has been revised and updated and has been re-disclosed. To ensure that the Project s objectives are met, a twelve-month extension of the Closing ate of the Project to June 30, 2012 is requested. The Project s results framework will be modified to reflect the changes made (see Annex 1 for details). PROJECT STATUS 2.1 The Project is financed by a GEF Grant of US$11 million and has three components. Below is a brief description of each component and its status as of March 2011, roughly three months before the present Closing ate of June 30, 2011: (i) Part A - Partial Credit Guarantee Facility (US$5.7 million): Establishment of a Partial Credit Guarantee Facility at BGK to provide Participating Banks partial guarantee of loans made for EE investments throughout the territory of the Recipient. Only one guarantee transaction has taken place representing less than 1% of the forecasted number of transactions. There has been no demand for a guarantee instrument from participating banks and their customers. (ii) Part B - Energy Efficiency Investments (US$2.0 million): Partial financing, through a Capital Grant Facility, of EE investments under energy performance service contracts. The Capital Grant Facility was successfully implemented by POE ESCO in Krakow. It has financed EE upgrades in 29 schools and 9 other public buildings in Malopolskie region. The original target was to upgrade 30 buildings. (iii)part C - Technical Assistance (US$3.3 million): Provision of technical assistance to BGK for the deployment of the guarantee mechanism and to POE ESCO 1

6 for preparation of the investments under the Capital Grant Facility. This component has produced several market studies and surveys for partial credit guarantees and energy performance service contracts in support of the implementation of Parts A and B. PROPOSE CHANGES 3.1 Results/Indicators. The Project evelopment Objective level indicators are unchanged but the output level indicators referring to the Partial Credit Guarantee Facility have been dropped and new indicators for a TM Investments Component have been introduced. Please refer to Annex Components. The proposed restructuring follows a request from the Ministry of Finance of Poland (letter dated January 13, 2011) and seeks to address the poor performance of the guarantee facility. The restructuring will take into account existing institutional and market capacities and will improve progress in meeting the Project evelopment Objective. Uncommitted funds under the Partial Credit Guarantee (around US$5.65 million) will be reallocated to a new support modality for EE investments. Instead of providing a guarantee to facilitate commercial lending to building owners, the Project will now finance grants that will provide a subsidy to the same kind of investments. 3.3 The new component will be channeled to the beneficiaries through the Government-owned Thermo-Modernization (TM) Fund using its existing delivery mechanisms. The TM Fund has successfully facilitated EE investments in buildings for more than ten years by providing grants that subsidize these EE investments (TM Bonus). ue to budget constraints, the Government did not allocate additional budget resources to the TM Fund in 2010 and the funds allocated for 2011 are insufficient to cover the builtup demand. The funds reallocated from the Partial Credit Guarantee Facility will be used to extend the TM Fund s activities during 2011 tapping into an existing pipeline of EE investments that are already in preparation and where the grant (the so-called TM Bonus) is expected to be paid out during calendar year 2011 and the first six months of In recognition of the particular need to scale-up EE investments in residential buildings the new component will selectively support this category of buildings (historically covering over 95% of all investments from the TM Fund). The proposed component changes are described below. 3.4 Part A of the Project - the Partial Credit Guarantee Facility Component, will continue but the funds available will be reduced to only cover BGK s liabilities in connection with the one guarantee that has been approved. No further guarantees will be supported by the Project. 3.5 Part B of the Project the Energy Efficiency Investments Component, has already been successfully implemented and will not be changed. 2

7 3.6 Part C of the Project - the Technical Assistance (TA) Component will continue. However, The TA Component will be expanded to include technical assistance to the Recipient for energy efficiency barrier removal at the national level. The identification of the specific TA activities have been coordinated with the preparation of a evelopment Policy Loan (PL) for Poland with focus on energy efficiency in buildings and they will be reflected in the updated Procurement Plan which has been agreed in principle with the Bank. 3.7 A new component a Thermo-Modernization Investments Component - will be introduced as Part of the Project. The TM Investments Component will be established at BGK in the following manner. The existing government-owned TM Fund provides TM Bonuses for eligible energy efficient thermo modernization investments in buildings and heating networks financed by select commercial banks (TM Partner Banks) on commercial terms (TM Loans). The TM Bonus corresponds to up to 20% of the TM Loan amount and will be paid by the TM Fund once EE investments are fully implemented. The TM Investments Component will then reimburse the TM Fund based on proof of payment of a TM Bonus but only to residential buildings. The TM Fund operates under the operational guidelines set in the Act of 21 November 2008 on support of Thermo- Modernization and Renovation of Buildings (OJ 223/2008 item. 1459). The TM Fund is managed and operated by BGK which means that BGK has experience with all procedural and operational aspects. 3.8 According to the operational guidelines mentioned above, the beneficiary submits a combined loan and TM Bonus application to a TM Partner Bank with an energy audit attached. The TM Partner Bank carries out its standard due diligence and verifies the creditworthiness of the potential beneficiary and that the beneficiary is eligible for a TM Bonus. The next step is the signing of the TM Loan agreement, which is sent to BGK along with an energy audit of the EE investment. BGK reviews the application and based on the TM Partner Bank s confirmation that it meets the eligibility criteria, the energy audit is sent for verification by an independent audit verification company already on contract with BGK. The following eligibility criteria apply: (i) The TM Bonus for a given TM Loan cannot exceed the lowest of these three values: 20% of the commercial bank loan; 16% of the total investment cost; and 200% of the expected annual energy costs savings (as defined in a verified energy audit); (ii) The TM Bonus is available to: home owners associations; cooperatives, commercial companies (but only for non-commercial purposes); individuals; and municipalities (gminas) and local authorities; (iii)the TM Bonus can support TM of: residential buildings 1 ; non-commercial buildings; public buildings; local heating networks; and local heating sources; and (iv) TM Grants may only be provided for EE investments in residential buildings. If the energy audit verification by an independent auditor is positive, the TM Bonus application is accepted and the implementation of the EE investment can start. Once the 1 This is the only type of project that will be supported from the GEF grant 3

8 EE investment is carried out by the beneficiary, the TM Bonus is paid to the TM Partner Bank thus reducing the outstanding principal of the TM Loan. 3.9 In combination with the continued TA facility, the TM Investments Component would demonstrate the commercial viability of EE investments in buildings and break down barriers for EE investments. This approach is also consistent with supporting Poland on a low-carbon path to development Safeguards. The existing Environmental Management Framework (EMF) has been updated to include EE investments financed by the TM Investments Component. The TM Investments Component will only finance EE investments in residential buildings. According to the classification of EE investments financed under the TM Fund (as indicated in the updated Eligibility Criteria), residential buildings fall under three investment categories: (i) one-family dwellings, (ii) multi-family dwellings, and (iii) collective dwellings (collectively representing 93% of the TM Fund portfolio to date, with multi-family dwellings accounting for the great majority). As indicated in the EMF, EE Investments financed under these three eligible investment categories include only minor renovation works (e.g. replacing windows, renovating balconies, insulating walls and roofs, etc.), which all fall under Environment Assessment Category C. In accordance with the updated EMF, which was disclosed April 13, 2011 on BGK s website, BGK will make sure that TM Bonuses paid from the GEF grant will only finance EE Investments which fall under these three residential investment categories and are Category C Financing. Project Costs (US$ million) Components/Activities Current Proposed Partial Credit Guarantee Facility TM Investments Component Energy Efficiency Investment Technical Assistance Project management fee Training Total Financing Plan Category/ Sector Indicative Costs Amount (US$ million) 4 % of Total Financing Plan (US$ million) % of GEF Private GEF Financing Sector Component GEF Partial Credit Guarantee Facility Barrier removal % % 0.19 EE Investments Barrier removal % % 7.75 Barrier removal, Technical Assistance capacity building % % 0 TM Investments Barrier removal % % 52.80

9 Total Project Costs % % Total Financing Required % % isbursements. Uncommitted GEF funds (defined as those not committed to or encumbered by any outstanding loans or committed via existing framework agreements with participating banks) sitting in the Partial Credit Guarantee Facility account at BGK would be refunded to the GEF Trust Fund account. Following the restructuring procedure, a new special category (Category 8) would be created for the proposed TM Investments Component. The refunded amount and the remaining balance under Category 7 (Partial Credit Guarantee Facility) would be reallocated to Category 8. Category 8 will be disbursed to the TM Fund account at BGK, in order to reimburse the TM Fund for TM Bonuses, against proof of payment of TM Bonuses to TM Partner Banks Flow of Funds. Grant proceeds for the TM Investments Component will be disbursed on a reimbursement basis to BGK for the TM Fund. Withdrawal applications under the TM Investments Component will be sent to the Bank on a quarterly basis and all withdrawals would be made on the basis of Statement of Expenditures. Supporting documentation for all transactions will be received and retained by BGK according to the requirements set in the Cooperation Agreements signed between BGK and the TM Partner Banks and will be made available to the Bank during Project supervision and for audit purposes. Specific documentation includes:(i) notification by the TM Partner Bank that the eligibility criteria for obtaining the TM Bonus has been met, (ii) statement on the construction design in accordance with the EE audit verified by BGK during the application process, and (iii) statement on the execution of the EE investment in accordance with the construction design and the within the deadline specified in the TM Loan agreement Retroactive Financing. To meet the financing needs of TM Fund, the Grant will finance retroactively expenditures paid from January 1, 2011 until the countersigning of the Restructuring Amendment, up to a limit of 20% of the grant amount for this component which is US 1.16 million. The reimbursement will be based on a list of payments from TM Fund to the TM Partner Bank linked to the EE investments, and accompanied by the evidence of payment from TM Fund account to these commercial banks. The reimbursement will be done directly to the TM Fund account Reallocations. There will be a need to reallocate the majority of the funds under the Partial Credit Guarantee Facility Component to the new TM Investments Component. A number of smaller adjustments will also be needed, including an upward revision of the allocation for Supply and Installation and Works under due to exchange rate fluctuations. Finally, the management fee for BGK is to be reduced due to the reduction in staff in the last years of Project implementation. 5

10 Category of Expenditure Allocation % of Financing Current Revised Current Revised Current Revised 1. Supply and 1. Supply and $800,000 $850,000 36% 36% installation of equipment installation of equipment 2. Goods 2. Goods $600,000 $600,000 36% 36% 3. Works 3. Works $600,000 $650,000 36% 36% 4. Consultants Services, including auditing services 4. Consultant s Services, including auditing services $1,930,000 $1,880, % for foreign consulting firms and individual consultant and 83.5% for local consultants, including 100% of eligible social charges 100% for foreign consulting firms and individual consultant and 83.5% for local consultants, including 100% of eligible social charges 5. Training 5. Training $35,000 $35, % 100% 6. PMU (a) Management Fee (b) Goods 6. PMU (a) Management Fee (b) Goods $1,300,000 $35,000 $1,100,000 $35, % 82% 100% 82% 7. Partial Credit 7. Partial Credit $5,700,000 $50, % 100% Guarantee Facility Guarantee Facility 8. TM Investments - $5,800, % Component Total Total $11,000,000 $11,000, Financial Management. The financial management functions will be handled by BGK in a similar manner to the existing arrangements in place 2. The audit of the Project financial statements will be conducted by independent private auditors acceptable to the Bank, on terms of reference acceptable to the Bank. The annual audited Project financial statements (or for other periods as agreed by the Bank) will be submitted to the Bank within six months of the end of each fiscal year. Also, the BGK will have its annual financial statements audited. Un-audited Interim Financial Reports (IFRs) will be used for the Project monitoring and supervision. The existing formats of the IFRs will be supplemented with an additional line for a new TM Investments Component and a supplementary list of financed EE investments. The Project will prepare a full set of IFRs every quarter throughout the life of the Project and will submit them to the Bank within 45 days after the end of each calendar quarter Procurement. Procurement in relation to the new TM Investments Component will include two additional methods of procurement under the Consultant Services. 2 BGK is acting as a fiduciary agent on behalf of MOE. 6

11 These are (i) the Quality Based Selection; and (ii) the Single Source Selection. The firm for the Single Source Selection is approved based on the justifications provided by the Recipient. There will be post-review on a sample basis to verify that the grant funds have been used according to the agreed guidelines. This will be reflected in the amended legal documents Closing ate. Given that the Project is only three and a half months from its Closing ate and that the ratification of the restructuring by Poland would take about three months, a twelve-month extension of the Project Closing ate to June 30, 2012 is requested. This extension would ensure that the funds reallocated from the Partial Credit Guarantee Facility Component to the new TM Investments Component can be fully disbursed and that the studies under the TA component can be completed in time. The requirements for an extension of the closing date are being met: (i) the Project objectives continue to be achievable, (ii) the performance of the Recipient and BGK continue to be satisfactory, (iii) BGK has prepared an action plan acceptable to the Bank to complete the Project in time, and (iv) there are no outstanding audit reports for the Project. APPRAISAL SUMMARY 4.1 Economic and financial analysis. With the implementation of the proposed changes, during the Project implementation period the Project would produce reductions in greenhouse gas emissions in Poland by catalyzing US$42 million in investments in energy efficiency. These investments would yield carbon dioxide reductions of about 0.64 million tco 2 3 over the assumed 20 years lifetime of the equipment installed. 4.2 Compared to the Project as originally appraised, the estimated GHG reduction resulting from investment in energy efficiency would be less than half the estimated CO 2 emissions reductions of 1.4 million tco 2 expected at the Project Appraisal. With the total cost of the Project remaining unchanged (US$11 million), the CO 2 abatement cost increases from $8/tCO 2 to $17/tCO The difference is due to the fact that (i) Project investment costs have almost doubled since Project inception and at the same time, the US ollar has depreciated considerably against the Polish currency; and (ii) at Appraisal a lower average pay-back time was assumed than what is considered realistic in the type of residential EE investments targeted by the restructured Project. 3 Assuming an average TM Bonus of 10% of the total investment per loan. 7

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13 ANNEX 1 Results Framework and Monitoring POLAN: ENERGY EFFICIENCY PROJECT Project evelopment Objective (PO): Increase public and private sector investments in energy efficiency in buildings in the territory of the Recipient by: (i) Overcoming the risk barriers in the financial markets inhibiting commercial bank participation in energy efficiency project financing; (ii) emonstrating the feasibility of packaged investments in higher-cost energy efficiency measures in buildings and increasing acceptance of energy performance contracting mechanisms; and (iii) Stimulating the demand for energy efficiency services in the buildings sector and increasing awareness and capacity of commercial banks to originate and implement loan transactions for Energy Efficiency investments. Revised Project evelopment Objective: The PO remains unchanged PO Level Results Indicators* Core =ropped C=Continue N= New R=Revised Unit of Measure Baseline 2004 Cumulative Target Values** Frequency ata Source/ Methodology Responsibility for ata Collection Indicator One: Number of transactions relating to EE projects/escos in the Polish market Indicator Two: Volume of debt financing relating to EE projects/escos in the Polish market Indicator Three: Number of EE/ESCO projects larger than $250,000 Indicator Four: Number of in-country commercial business that can provide energy C Number ,566 23,739 28,070 Annual Market Study Consultants C (US$m) ,672 2,075 Annual Market Study Consultants C Number ,543 1,785 Annual Market Study Consultants C (US$m) ,307 1,400 Annual Market Study Consultants 9

14 efficiency services to target market INTERMEIATE RESULTS Intermediate Result (Partial Credit Guarantee Facility Component): The Guarantee Facility will leverage US$16.3 million in investments from commercial banks for approx. 130 projects Revised Intermediate Result (Thermo-Modernization Investments Component): The TM Investments Component will leverage US$ 58.5 million in total investments for approx. 480 projects Intermediate Level Results Indicators* Intermediate Result indicator One: Total investment in EE supported by TM loans Intermediate Result indicator Two: Total investment directly leveraged by TM Investments Component Intermediate Result indicator Three: Energy savings resulting from TM loans Intermediate Result indicator Four: Energy savings directly leveraged by TM Investments Component Intermediate Result indicator Five: Emissions reductions resulting from TM loans Intermediate Result indicator Six: Emissions reductions directly leveraged by TM Investments Component Core =ropped C=Continue N= New R=Revised Unit of Measure Baseline 2004 Cumulative Target Values** Frequency ata Source/ Methodology Responsibility for ata Collection N (US$m) 276 1,205 2,396 2,834 Annual BGK BGK N (US$m) Annual BGK BGK N (GWh/y) 324 1,415 2,814 3,328 Annual BGK BGK N (GWh/y) Annual BGK BGK N N (1000 tco 2 ) (1000 tco 2 ) ,083 1,281 Annual BGK BGK Annual BGK BGK 10

15 Intermediate Result (Energy Efficiency Investments Component): Support bundled EE project investments of US$6.4 million. Local Banks and POE ESCO contribute US$5.4 million of this investment, and client co-financing is equal to US$1 million of total project cost. Revised Intermediate Result (Energy Efficiency Investments Component): Intermediate Level Results Indicators* Intermediate Result indicator One: Total investment in EE projects initiated by POE and supported by grant Intermediate Result indicator Two: Total co-financing contributed by building owners Intermediate Result indicator Three: Total lending by local banks to POE ESCO Intermediate Result indicator Four: Energy savings resulting from grant financing Intermediate Result indicator Five: Emissions reductions resulting from grant financing Core =ropped C=Continue N= New R=Revised C Unit of Measure (US$m) Baseline Cumulative Target Values** Frequency Annual C (US$m) Annual R (GWh/y) Annual R (1000 tco 2 ) Annual ata Source/ Methodology BGK, POE ESCO Records BGK, POE ESCO Records BGK, POE ESCO Records BGK, POE ESCO Records Responsibility for ata Collection Intermediate Result (Technical Assistance Component): Successful deployment of the guarantee mechanism and development of adequate capacity within BGK to manage facility. evelopment of a performance contracting model by POE ESCO. Revised Intermediate Result (Technical Assistance Component): n/a (was related to guarantee component) BGK BGK BGK BGK Intermediate Level Results Indicators* Core =ropped C=Continue N= New R=Revised Unit of Measure Baseline 2004 Cumulative Target Values** Frequency ata Source/ Methodology Responsibility for ata Collection Intermediate Result indicator One: Number and volume of projects for which performance contracting was 11

16 used Intermediate Result (Partial Credit Guarantee Facility Component): The Guarantee facility will leverage US$16.3 million in total investment by commercial banks participating in the Program, for approximately 130 projects ranging in size from US$25,000 to US$500,000. Revised Intermediate Result (Partial Credit Guarantee Facility Component): This component is dropped Intermediate Level Results Indicators* Intermediate Result indicator One: Number of Guarantee Framework Agreements signed Intermediate Result indicator Two: Number of guarantee transactions Intermediate Result indicator Three: isbursements into Guarantee Account Intermediate Result indicator Four: Guarantee claims paid Intermediate Result indicator Five: Net reserves (comes from above + BGK leverage) Intermediate Result indicator Six: Net outstanding exposure Intermediate Result indicator Seven: Project liabilities to reserves ratio Intermediate Result indicator Eight: Loan volume supported by guarantee Intermediate Result indicator Nine: Total investment in EE supported by guarantee Intermediate Result indicator Ten: Energy savings resulting from guaranteed loans Intermediate Result indicator Eleven: Emissions reductions resulting from guaranteed loans Core =ropped C=Continue N= New R=Revised Unit of Measure Baseline 2004 Cumulative Target Values** Frequency ata Source/ Methodology Responsibility for ata Collection 12

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