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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF US$100 MILLION TO THE PEOPLE S REPUBLIC OF CHINA FOR AN ENERGY EFFICIENCY FINANCING PROJECT September 28, 2011 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region Report No: CN This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective September 8, 2011) Currency Unit = RMB Yuan RMB Yuan 1.00 = US$0.16 US$ = RMB Yuan 6.39 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AF Additional Financing HVAC Heating, Ventilation, Air conditioning CHEEF China Energy Efficiency Financing Project IBRD International Bank for Reconstruction and Development CO 2 Carbon dioxide ICB International Competitive Bidding EAF Environmental Assessment Framework IDP Institutional Development Plan EE Energy Efficiency IFR Interim Financial Report EIA Environmental Impact Assessment MOF Ministry of Finance EIRR Economic Internal Rate of Return NDRC National Development and Reform Commission EMC Energy Management Company NECC National Energy Conservation Center EMP Environmental Management Plan OM Operational Manual ESCO Energy Service Company OP Operational Policies EXIM Export-Import Bank of China O&M Operation and Maintenance FI Financial Intermediary PCN Project Concept Note FIL Financial Intermediary Lending PDO Project Development Objective FIRR Financial Internal Rate of Return PFI Participating Financial Institution FM Financial Management PMO Project Management Office FYP Five-Year Plan PSC Project Steering Committee GDP Gross Domestic Product RPF Resettlement Policy Framework GEF Global Environment Facility SME Small- and Medium-Sized Enterprises GHG Greenhouse gas TA Technical Assistance GOC Government of China tce Tons of Coal Equivalent Vice President: Country Director: Sector Managers: Task Team Leader: James W. Adams Klaus Rohland Ede Jorge Ijjasz-Vasquez and Vijay Jagannathan Xiaodong Wang

3 COUNTRY PROJECT NAME CONTENTS Project Paper Data Sheet Project Paper I. Introduction...1 II. Background and Rationale for Additional Financing...1 III. Proposed Changes...3 IV. Appraisal Summary...5 Annex 1: Results Framework and Monitoring...8 Annex 2: Operational Risk Assessment Framework (ORAF)...14

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5 COUNTRY PROJECT NAME ADDITIONAL FINANCING DATA SHEET Country Director: Klaus Rohland Sector Managers: Ede Jorge Ijjasz- Vasquez/ Vijay Jagannathan Team Leader: Xiaodong Wang Project ID: P Expected Effectiveness Date: January 31, 2012 Lending Instrument: Financial Intermediary Loan Additional Financing Type: Financial Intermediary Loan Basic Information - Additional Financing (AF) Sectors: District heating and energy efficiency services (90%); Banking (10%) Themes: Climate change (P) Environmental category: Financial Intermediary Assessment Expected Closing Date: December 31, 2016 Joint IFC: Joint Level: Basic Information - Original Project Project ID: P Environmental category: Financial Intermediary Assessment Project Name: Energy Efficiency Expected Closing Date: December 31, Financing Project 2013 Lending Instrument: Financial Joint IFC: Intermediary Loan Joint Level: AF Project Financing Data [X ] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Proposed terms: Fixed-spread loan, recovered over a period of 18 years, inclusive of a grade period of five years. AF Financing Plan (US$m) Source Total Project Cost: Co-financing from sub-borrowers: Borrower: Total Bank Financing: IBRD New Recommitted Total Amount (US $m) Client Information Recipient: The People s Republic of China Responsible Agency: The Export-Import Bank of China (EXIM) Contact Person: Mr. Zhou Anyue, Director General, On-lending Department Telephone No.: Fax No.: lironghui@eximbank.gov.cn 100

6 AF Estimated Disbursements (Bank FY/US$m) FY Cumulative Project Development Objective and Description Original project development objective: Improve energy efficiency of medium and large-sized industrial enterprises in China, and thereby reduce their adverse environmental impacts on climate. Revised project development objective [if applicable] Improve energy efficiency of selected energy end-users in key energy-consuming sectors, thereby reducing their adverse environmental impacts on climate. Project description [one-sentence summary of each component]: Component A: Energy Efficiency Investment Sub-loans to Beneficiaries. Component B: Technical Assistance and Capacity Building. Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Does the project require any exceptions from Bank policies? Have these been approved by Bank management? [X]Yes [ ] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [X]Yes [ ] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [ ] No Financing Agreement Reference Section I.1 and Section I.2.01 of the Schedule of the Project Agreement. Conditions and Legal Covenants: Description of Condition/Covenant EXIM Bank shall maintain a project team with adequate staff and resources and apply the Operational Manual, satisfactory to the Bank. Date Due Throughout the entire project implementation period.

7 I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to: a) provide an additional loan in an amount of US$100 million to the People s Republic of China to scale-up the Energy Efficiency Financing Project (Project ID P084874) through EXIM Bank (Loan No CN); and b) fund expanded activities by broadening the group of beneficiaries through both EXIM Bank and Huaxia Bank (Loan No CN) under the CHEEF Project and the Additional Financing Project. The PDO of the original Project (the CHEEF Project) is modified to be consistent with the PDO of the Additional Financing, concurrently seeking Board approval. The project development objective and the project outcome indicators have been revised to reflect these changes. II. Background and Rationale for Additional Financing 2. Background. The development objective of the China Energy Efficiency Financing Project (CHEEF) is to improve energy efficiency (EE) of medium and large-sized industrial enterprises in China, and thereby reduce their adverse environmental impacts on climate. This is to be achieved through: (a) two IBRD Loans of US$100 million each (Loan No CN to EXIM Bank and Loan No CN to Huaxia Bank); and (b) a GEF Grant (TF ) of US$13.5 million for technical assistance to the government and two participating banks. The CHEEF project was approved by the Board in May 2008 and became effective in October In June 2010 the Bank approved the CHEEF II Project of an IBRD loan of US$100 million to Minsheng Bank, to improve the EE of selected enterprises, and thereby reduce their adverse global environmental impacts through scaling-up commercial lending for EE investment. 3. Project Implementation Performance. The overall performance of the CHEEF Project, including the two separate loans being implemented by EXIM Bank and Huaxia Bank, as well as the GEF Grant, has been satisfactory. Project management, procurement, financial management, and safeguards are all rated satisfactory. The project is playing a significant role in increasing the participating banks capacity, interest, and confidence in mainstreaming the EE financing business line. 4. Performance of EXIM Bank (Loan 7529-CN). EXIM Bank has disbursed more than half of the allocated IBRD funds (US$57.4 million), and leveraged US$265 million (US$137 million from EXIM Bank and US$128 million from industrial enterprises). It has also exceeded the agreed matching funds of US$100 million from its own sources. These investments are expected to save 1.1 million tons coal equivalent (tce) of energy and reduce CO 2 emissions by 2.8 million tons per year. In addition, the CHEEF Project has played a catalytic role in leveraging additional financing for EE to EXIM Bank from KfW and EIB. 5. Performance of Huaxia Bank (Loan 7530-CN). Huaxia Bank has disbursed US$48.4 million of IBRD funds; these have leveraged US$165 million (US$62 million from Huaxia Bank 1

8 and US$103 million from industrial enterprises and other funding sources). These investments are expected to save energy of 533,000 tce and reduce CO 2 emissions of 1.3 million tons per year. Huaxia Bank has developed concrete action plans for business development and for developing new financial products for EE lending. 6. Performance of GEF Grant (TF090719). After a slow start, both components of the GEF-financed TA are now progressing well: The national policy support and capacity building component is supporting the government in development and implementation of the priority EE programs for the 12 th Five-Year Plan (FYP), and building capacity for the National Energy Conservation Center; and The building capacity of participating banks component is assisting the participating banks in market development and new financial products. 7. Lessons Learned from CHEEF. Experience to date of the on-going CHEEF Project demonstrates that a dedicated EE credit line, together with TA, can contribute significantly to increasing the capacity of participating financial institutions (PFIs) and their confidence in EE investments through a learning-by-doing process. The TA program has been critical. However, changing PFIs underwriting criteria from balance sheet financing that relies heavily on subborrowers credit rating (favoring large-scale industrial enterprises) to project-based financing that focuses on energy savings (increasing access to financing for energy service companies ESCOs - and SMEs) has been a major challenge. PFIs have focused narrowly on a few main heavy industries (iron & steel, cement, and chemical) and a few EE technologies (predominantly waste heat recovery). As a result, they are facing increasing difficulties in finding projects. However, market needs and opportunities exist (as confirmed by an NDRC study) to expand lending to a wider range of energy user sectors and EE technologies. 8. Rationale for Additional Financing. The Government of China (GoC) has made energy conservation one of the highest national priorities, and is targeting to reduce energy intensity by 16 percent during the 12 th FYP ( ). GoC has also committed to reduce the carbon intensity of GDP by percent from 2005 to 2020, and energy conservation will play an essential role to achieve this target. 9. The use of market-based mechanisms to promote EE is expected to increase during the 12 th FYP. The State Council recently issued new policies to strongly support growth of the ESCO industry, which offers subsidies, awards, and generous tax incentives for ESCOs, and encourages bank lending to ESCOs by allowing banks to use and recognize ESCO project assets, contracts and revenues as loan security. In addition, GoC plans to expand the focus of its energy conservation efforts from the industry sector to the building and transport sectors, as energy demand from buildings and transport will increase rapidly - tripling for buildings and more than quadrupling for the transport sector - over the next two decades. 10. The proposed additional financing (AF) for CHEEF supports the government s commitment to EE and endeavors to meet the huge needs of EE investments in China. The expanded scope for the proposed AF for CHEEF to scale up the project s impact and 2

9 development effectiveness takes into account the government s new EE policies and priorities, and lessons learned from CHEEF implementation so far, in particular the success of EXIM Bank in implementing the project. The proposed AF is the most effective way of achieving the above objectives, especially when compared to a new free standing project. 11. The expanded scope for the proposed AF is fully consistent with the Country Partnership Strategy for (Report No CN) and directly supports a major pillar: managing resource scarcity and environmental challenges. The objective of the proposed AF is also expected to be consistent with the new CPS for , which is under preparation, in alignment with China s 12 th FYP. In addition, the proposed AF would support the World Bank Group s corporate commitment to increasing energy efficiency and renewable energy lending. III. Proposed Changes 12. Changes in the project development objective (PDO). The AF intends to expand the target market segments of CHEEF, and hence the PDO of the CHEEF Project and the AF Project is to improve energy efficiency of selected energy end-users in key energy-consuming sectors, thereby reducing their adverse environmental impacts on climate. Board approval is concurrently being sought to modify the PDO of the CHEEF Project to be consistent with the PDO of the AF Project. 13. Changes in project scope. The AF has three improved or expanded features, compared to CHEEF: (a) piloting innovative ESCO lending, under which end-users pay for ESCOs EE services from the demonstrated energy savings under performance-based contracts, and broadening the sub-borrowers from large and medium-sized industrial enterprises to energy endusers of all sizes and ESCOs; (b) expanding the target market segments from the industrial to the building sector, given the rapid growth in energy demand for buildings, and government s plan to expand the range of priority energy conservation programs; and (c) increasing the leverage ratio of the IBRD loan to EXIM Bank contribution from 1:1 in CHEEF to 1:2 in the AF. 14. Energy Conservation Investment Lending to be financed by the proposed AF. The proposed AF loan will be on-lent through EXIM Bank to energy end-users of all sizes and to ESCOs in key energy-consuming sectors, primarily the industrial and building sectors. At least US$60 million of EE lending from the total AF project of $300 million (both IBRD and EXIM Bank contributions) will be provided to ESCOs and building EE sub-projects. Sub-project investments will be limited to renovation and rehabilitation. The AF will not finance any coalfired power plants. Detailed eligibility criteria, appraisal guidelines, and risk management strategies are outlined in the project Operational Manual (OM). Table 1 shows the costs of the parent loan and the AF by component. 3

10 Table 1. Costs by Component of the Parent Project and the Additional Financing Component Original cost ($m) Changes with AF($m) Revised cost ($m) 1. Promotion of EE financing Energy conservation investment lending National policy and institutional support 4. Project implementation support, monitoring, and ing Total TA and capacity building to support the AF loan. The GEF grant associated with CHEEF will continue to provide TA to EXIM Bank for AF activities. In particular, the TA will support: (a) developing new financial products for ESCO lending and adaptation of loan appraisal and underwriting criteria tailored to EE investments; (b) conducting specific market segment studies to broaden the end-user sectors and EE technologies in the portfolio; (c) building partnerships and engaging selected EXIM bank branches for marketing development and generating deal flows; (d) developing market aggregation tools for small and medium-scale enterprises and projects; (e) strengthening EXIM Bank s capacity; and (f) exploring a lowcarbon lending business. 16. Changes in project outcome indicators. Because of the expanded scope of the AF, a fourth Key Performance Indicator (KPI) will be added to the three KPIs of CHEEF. This indicator will measure the amount of incremental EE investment to ESCOs and building EE projects supported and leveraged by the project. Table 2 compares the original and revised project outcome indicators. Table 2. Project Outcome Indicators Indicator Original target Changes with AF Revised target Cumulative amount of incremental , EE investments supported by the project (US$ million) Associated total annual energy savings (million tons of coal equivalent) Associated total annual reductions of GHGs (million tons of CO 2 ) Cumulative amount of incremental EE investments to ESCOs and building EE projects (US$ million)

11 17. Closing date. The AF loan (Loan No CN) closing date will be December 31, The closing date of the two loans under CHEEF (Loan No CN and Loan No CN) and the associated GEF grant (TF ) will be extended from December 31, 2013 to December 31, Changes in procurement framework. Based on the experience with CHEEF implementation and because most supply and installation of EE renovation investments are widely and commercially available in the Chinese market, the international competitive bidding (ICB) threshold is proposed to be raised from US$10 million to US$20 million for supply and installation contracts, and from US$7 million to US$10 million for goods contracts. 19. Changes in environment and social safeguard frameworks. As in the case of the original CHEEF loan, sub-projects under the proposed AF are expected to be Category B or C. The Environmental Assessment Framework (EAF) screening procedures of the CHEEF Project, which equated Chinese screening categories with the World Bank categories, have been updated to bring out the difference between the two screening systems. EXIM Bank will be responsible for: (a) environmental safeguard screening; (b) reviewing and approving the Environmental Management Plan (EMP) prepared by sub-borrowers (end-users or ESCOs) and ensuring that sub-borrowers (end-users or ESCOs) have properly conducted consultations and disclosure in compliance of the EAF; and (c) supervising implementation by sub-borrowers (end-users or ESCOs). The AF will trigger the Involuntary Resettlement Policy (OP/BP 4.12) and a Resettlement Policy Framework (RPF) has been prepared. IV. Appraisal Summary Economic and financial analysis 20. Economic and Financial Due Diligence of the Participating Financial Institution. CHEEF Project was subject to, and compliant with, Bank policies on financial intermediary lending, Operational Policy EXIM Bank has completed all actions required to comply with the Corrective Action Plan under the CHEEF Project (which primarily address accounting and management weaknesses identified) which were agreed with the Bank in December The Bank team reviewed the documentation provided by EXIM Bank in relation to each of the issues of the Plan, and satisfied that EXIM Bank has met the requirements for the time-bound Action Plan. 21. Economic and Financial Analysis of the AF. Economic and financial analyses were carried out on two representative sub-projects, which are part of the first batch of sub-projects envisaged for financing under the proposed AF Project: EE rehabilitation in existing buildings; and waste heat recovery for power generation in a glass factory. The FIRRs and EIRRs are shown in Table 3. Both EIRRs exceeded the 12.0 percent economic discount rate that is normally applied to Bank projects in China. However, the EIRRs of the AF project investments are lower compared to the original project as: the investment costs of industrial EE renovations have shown an upward trend in China; and building EE retrofit projects tend to have much longer payback periods than industrial EE renovation projects. 5

12 Table 3. Economic and Financial Analysis of Representative Sub-projects Subproject 1: building EE rehabilitation Subproject 2: waste heat recovery FIRR (without carbon finance) FIRR (with carbon finance) EIRR 10.3% 11.2% 12.4% 32.9% 40.8% 42.9% 22. Technical. The Operational Manual, prepared by EXIM Bank and approved by the Bank, stipulates that the CHEEF Project team will include energy efficiency experts responsible for technical due diligence and measurement & verification of energy savings. EXIM Bank will ensure that sub-projects: are in compliance with Chinese technical policies and regulations for EE in the industrial and building sectors, as well as ESCO definition; fully satisfy the technical eligibility criteria; and are technically feasible. The PMO is responsible for reviewing and approving all subprojects, on behalf of the government, to ensure that they comply with the eligibility criteria in the OM. TA to build capacity for project technical due diligence will continue to be provided to EXIM Bank from the GEF Grant associated with CHEEF. 23. Procurement. Procurement capacity will be further strengthened, particularly for close supervision and timely guidance of sub-borrowers, through additional procurement training and by hiring individual consultants. The OM has been updated to incorporate Bank procurement requirements and procedures for Goods, and for Supply and Installation. Based on these arrangements, the procurement capacity in EXIM Bank is acceptable. Procurement for the proposed loan would be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and Credits dated May 2004 and revised in October 2006 and May 2010; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 and revised in October 2006 and May 2010, and provisions stipulated in the Legal Agreement. 24. Financial Management. The AF project will have the same financial management and disbursement arrangements as the ongoing CHEEF Project. No outstanding audit issues exist with the CHEEF project. The assessment for the AF project concluded that the project will continue to meet the Bank s minimum financial management requirements, as stipulated in BP/OP The Financial Management Framework in the OM has been updated to integrate the specific requirements of the AF. 25. Social. As in the case of the CHEEF Project, most sub-projects under the AF loan will be located within existing premises. However, a small number of sub-projects might involve limited land acquisition or resettlement. The Resettlement Policy Framework developed for such sub-projects specifies the procedures and responsibilities for identifying potential resettlement impacts, preparing and approving relevant resettlement instruments, and monitoring their implementation. Since EXIM Bank does not have previous experience with land acquisition and resettlement, all sub-projects that trigger RPF will require prior Bank review. 6

13 26. Environment. Sub-projects of the CHEEF Project did not indicate any major environmental issues. The updated EAF describes procedures to be followed by EXIM Bank and sub-borrowers (end-users or ESCOs) to satisfy both Chinese and World Bank EIA regulations and policies. EXIM Bank will hire additional qualified consultants and build inhouse capacity to handle the new responsibilities and the increased volume of safeguards work under the AF. 7

14 ANNEX 1: RESULTS FRAMEWORK AND MONITORING CHINA: Additional Financing for Energy Efficiency Financing Project Results Framework PDO Current (PAD) Revisions to the Results Framework Improve energy efficiency of medium and large-sized industrial enterprises in China, thereby reducing their adverse environmental impacts on climate. PDO indicators Current (PAD) Cumulative amount of incremental EE investments supported by the project (US$ million). Associated total annual energy savings (million tons of coal equivalent). Associated total annual reductions of GHGs (million tons of CO 2 ). Proposed Improve energy efficiency of selected energy endusers in key energyconsuming sectors, thereby reducing their adverse environmental impacts on climate. Proposed change* Revised from US$900 million to US$1,328 million. Revised from 2.07 Mtce to 2.66 Mtce. Revised from 5.05 Mt-CO 2 to 6.49 Mt-CO 2. New: Cumulative amount of incremental EE investments to ESCOs and building EE projects (US$ million): US$60 million. Comments/ Rationale for Change The AF intends to expand the targeted market segments from only the industrial sector under CHEEF to the building sector and beyond, and broaden the sub-borrowers from large and medium-sized industrial enterprises only under CHEEF to end-users of all sizes and ESCOs. Modified to reflect the additional financing of US$100 million of IBRD loans, US$ 200 million of EXIM s cofinancing, and US$128 million from sub-borrowers. Modified to reflect the additional EE investments of US$428 million supported by the AF Project. Modified to reflect the additional EE investments of US$428 million supported by the AF Project. Added to measure the expanded activities under the AF. 8

15 Intermediate Results indicators Current (PAD) 1.1. EE financing amount demanded by projects in the pipeline EE investment preparation procedures and financing modalities piloted EE investment monitoring and evaluation procedures developed Cumulative amount of EE lending of participating banks energy consumption avoided as a result of EE lending of participating banks avoided CO 2 emissions as a result of EE lending of participating banks NECC business plan and initial work program developed NECC established and becomes fully operational Mid-term review of 11 th FYP programs conducted and recommendations made. Necessary actions taken to enhance results Project targets and delivery schedule met. Proposed change* Continued. Continued. Continued. Revised from US$400 million to US$700 million. Revised from 1.58 Mtce to 2.17 Mtce. Revised from 3.84 Mt-CO 2 to 5.28 Mt-CO 2. New: Cumulative amount of incremental EE investments to ESCOs and building EE projects (US$ million): US$60 million. Continued. Continued. Revised to final evaluation of 11 th FYP programs conducted, and recommendations and inputs provided to the 12 th FYP. Continued. 9 Modified to reflect the additional financing of US$100 million of IBRD loans and US$ 200 million of EXIM s cofinancing. Modified to reflect the additional financing of US$100 million of IBRD loans and US$ 200 million of EXIM s cofinancing. Modified to reflect the additional financing of US$100 million of IBRD loans and US$ 200 million of EXIM s cofinancing. Added to measure the expanded activities under the AF. Target was met. Target was met. Because 2010 is the last year of the 11 th FYP, and 2011 is the first year of the 12 th FYP. * Indicate if the indicator is Dropped, Continued, New, Revised, or if there is a change in the end of project target value.

16 Core REVISED PROJECT RESULTS FRAMEWORK Project Development Objective (PDO): Improve energy efficiency of selected energy end-users in key energy-consuming sectors, thereby reducing their adverse environmental impacts on climate. PDO Level Results Indicators 1 1. Cumulative amount of incremental EC investments supported by the project. 2. Associated annual energy savings capacity. 3. Associated CO 2 emission reduction capacity. UOM 2 US$ million million tons of coal equivalent Baseline Original Project Start (10/08) Progress To Date (2011) 3 Cumulative Target Values million tons of CO 2 Frequency Data Source/ Methodol ogy Reports of banks and NDRC s Reports of banks and NDRC s. Reports of banks and NDRC s. Responsibi lity for Data Collection PMO PMO PMO Comments The investment costs of industrial EE subprojects are assumed as $290/tce under CHEEF and $405/tce under CHEEF II. Given the upward trend of investment costs based on CHEEF experience to date, and the pipeline for the AF Project, investment costs of EE projects under the AF Project are assumed as $606/tce for industrial subprojects and $3,463/tce for building EE subprojects. The estimates are based on the assumed factor of 2.44 CO 2 /tce. 1 Please indicate whether the indicator is a Core Sector Indicator (for additional guidance please see 2 UOM = Unit of Measurement. 3 For new indicators introduced as part of the additional financing, the progress to date column is used to reflect the baseline value. 4 Target values should be entered for the years data will be available, not necessarily annually. Target values should normally be cumulative. If targets refer to annual values, please indicate this in the indicator name and in the Comments column. 10

17 Core 4. Cumulative amount of EE lending to ESCOs and building projects. Beneficiaries 5 Project beneficiaries. Of which female beneficiaries. US$ million Number Number NA NA NA NA NA NA NA Reports of banks and NDRC s. Reports of banks and NDRC s. PMO PMO Estimates are based on the assumed average project size of $20 million. Intermediate Results and Indicators Intermediate Results Indicators Unit of Measur ement Baseline Original Project Start (10/08) Progress To Date (2010) Intermediate Result 1: Promotion of EE Financing Target Values Frequency Data Source/ Methodolo gy Responsibili ty for Data Collection Comments EE financing demand of projects in the project pipeline. EE investment preparation procedures and financing modalities piloted. EE investment monitoring and evaluation procedures developed. US$ million NA 1-2 pilot projects prepared 1-2 pilot projects completed NA Draft Final draft PFI records Project s Project s PFI PMO PMO 5 All projects are encouraged to identify and measure the number of project beneficiaries. The adoption and ing on this indicator is required for investment projects which have an approval date of July 1, 2009 or later (for additional guidance please see 11

18 Intermediate Result 2: EC Investment Lending Cumulative amount of EE lending of PFI. Cumulative amount of EE lending to ESCOs and building projects. energy consumption avoided from the EE lending of PFI. avoided CO 2 emissions from EE lending of PFI. US$ million US$ million million tons of coal equival ent million tons of CO 2 Intermediate Result 3: National Policy Support and Capacity Building PFI records PFI records PFI records PFI records PFI PFI PFI PFI Establishment and functional operation of NECC. NECC business plan and initial work program developed. Mid-term review of 11 th FYP programs conducted and recommendations made. Necessary actions taken to enhance results. NA NECC formed and staffed NA Final NA Final evaluation of 11 th FYP programs conducted and recommend ations and inputs provided to the 12 th FYP. NDRC documents Project s Project s PMO PMO PMO 12

19 Intermediate Result 4: Project Implementation Support and Reporting Project targets and delivery schedule met. NA NA Mid-term review completed. Semiannual. Project s. PMO 13

20 ANNEX 2: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF) CHINA: Additional Financing for Energy Efficiency Financing Project Project Development Objective(s) The Project Development Objective (PDO) is to improve energy efficiency of selected energy end-users in key energyconsuming sectors, thereby reducing their adverse environmental impacts on climate. PDO Level Results Indicators: 1. The amount of incremental EE investment supported and leveraged by the project. 2. The amount of energy saved through investments financed and leveraged by the project. 3. Associated reduction of green house gases. 4. The amount of incremental EE investment to ESCOs and building EE projects supported and leveraged by the project. Risk Category Risk Rating Risk Description Proposed Mitigation Measure Project Stakeholder Risks Low Likelihood/ Low Impact The CHEEF project s key stakeholders - the PFIs and their sub-borrowers - have supported the project. Government is encouraging energy conservation related bank lending to the new stakeholders - ESCOs and to the building and transport sectors. See Design below for mitigation measures to ensure adequate participation by the new stakeholders. Implementing Agency Risks High Likelihood/ Low Impact EXIM Bank, its branches, and subborrowers (particularly ESCOs) may not have enough capacity to identify, evaluate and supervise EE investments, safeguard procedures, procurement, and ineligible expenditures of sub-borrowers. This could lead to possible misuse of loan funds, loss of project assets, improper ing, and insufficient funds. EXIM Bank will conduct more training and hire consultants to improve capacity in technical, safeguards, procurement and financial management, and credit control. EXIM Bank plans to more actively engage the branches by requiring EE lending targets and link EE lending with performance evaluation. EXIM Bank headquarters plans to co-finance EE investments with the branches to share risks in order to improve portfolio quality. 14

21 EXIM Bank will conduct targeted market studies to broader market segments and build partnerships for more aggressive business development. An updated OM, including the FM and credit control arrangements, acceptable to the Bank, has been prepared by EXIM Bank and agreed by the Bank. It will be circulated to all branches that will execute the project and to project financial staff. project audit will be conducted as external monitoring mechanism to safeguard Bank loan proceeds and project assets. Project Risks Design Social and Environmental High Likelihood/ Low Impact Low Likelihood/ Low Impact EXIM Bank may not be able to provide sufficient lending to ESCOs and building EE investments. A few EE subprojects might have minor negative environmental impacts and require land acquisition. Sub-borrowers may not follow the safeguard procedures outlined in the frameworks. TA will be provided to EXIM Bank to conduct market studies and develop new financial products for ESCO lending and building EE investments. EXIM Bank has developed a pipeline for ESCO and building EE lending. The project sets a target of US$60 million of the total loan amount to ESCO lending and building EE projects. EXIM Bank will hire additional environmental experts and build in-house capacity for environmental safeguards. TA will be provided to EXIM Bank to strengthen its capacity and help it manage environmental and social risks of the EE lending program. All sub-projects that trigger the RPF will require Bank prior review. 15

22 Program and Donor N/A Delivery Quality Low Likelihood/ Low Impact EXIM Bank is committed to developing EE and green financing as one of its major business lines. Overall Risk Rating at Preparation High Likelihood/ Low Impact Overall Risk Rating During Implementation High Likelihood/ Low Impact Comments Much has been learned during the preparation and implementation of the CHEEF and CHEEF II Projects. However, the major challenge is whether EXIM Bank can provide lending to ESCOs and building EE. TA to EXIM Bank and setting a target of the loan amount to ESCO lending and building EE projects will mitigate this major risk. 16