People s Republic of China: Guangdong Energy Efficiency and Environment Improvement Investment Program, Tranche 3 and Multitranche Financing Facility

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1 Completion Report Project Number: Loan Number: 2773 MFF Number: 0020 August 2015 People s Republic of China: Guangdong Energy Efficiency and Environment Improvement Investment Program, Tranche 3 and Multitranche Financing Facility This document is being disclosed to the public in accordance with ADB s Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS Currency Unit yuan (CNY) At Appraisal At Project Completion (11 May 2011) (31 December 2013) CNY1.00 = $0.147 $0.164 $1.00 = CNY6.80 CNY6.10 ABBREVIATIONS ADB Asian Development Bank PRC People s Republic of China CO 2 carbon dioxide EIRR economic internal rate of return EPC energy performance contract EPP efficiency power plant EPPPMO efficiency power plant project management office ESCO energy service company FFA framework financing agreement FIL financial intermediation loan FIRR financial internal rate of return GFB Guangdong Finance Bureau GFTC Guangdong Finance Trust Company GPG Guangdong provincial government IED Independent Evaluation Department LED light-emitting diode MFF multitranche financing facility M&V measurement and verification NO x nitrogen oxide SO 2 sulfur dioxide TA technical assistance TSP total suspended particulates WACC weighted average cost of capital WEIGHTS AND MEASURES MW megawatt GWh gigawatt-hour kwh kilowatt-hour MWh megawatt-hour t/y tons per year tce/y tons of coal equivalent per year

3 NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 31 December In this report, "$" refers to US dollars. Vice-President S. Groff, Operations 2 Director General A. Konishi, East Asia Department (EARD) Director H. Sharif, People s Republic of China (PRC) Resident Mission, EARD Team leader Team members X. Liu, Senior Project Officer, PRC Resident Mission, EARD H. Xia, Project Analyst, PRC Resident Mission, EARD N. Li, Environment Officer, PRC Resident Mission, EARD W. Zhu, Senior Project Officer (Resettlement), PRC Resident Mission, EARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 CONTENTS Page BASIC DATA i I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 5 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Consultant Recruitment and Procurement 7 I. Performance of Consultants, Contractors, and Suppliers 8 J. Performance of the Borrower and the Executing Agency 8 K. Performance of the Asian Development Bank 9 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Output 10 D. Preliminary Assessment of Sustainability 11 E. Impact 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 15 A. Overall Assessment 15 B. Lessons 15 C. Recommendations 16 APPENDIXES 1. Design and Monitoring Framework Chronology of Major Events Summary of Annual Energy Savings and Emission Reductions Project Cost and Financing Plan Projected and Actual Disbursements Organization Chart Status of Compliance with Loan Covenants Economic Reevaluation Financial Reevaluation Environmental Management Analysis Multitranche Financing Facility Design and Monitoring Framework Multitranche Financing Facility Cost and Financing Plan Multitranche Financing Facility Annual Energy Savings and Emission Reductions 60

5 i BASIC DATA I. Tranche 3 A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report People s Republic of China 2773-PRC Guangdong Energy Efficiency and Environment Improvement Investment Program, Tranche 3 People s Republic of China Guangdong Provincial Government $42.94 million PCR: PRC 1521 B. Loan Data 1. Consultation (appraisal waived) Date Started Date Completed 2. Loan Negotiations Date Started Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness In Loan Agreement Actual Number of Extensions 6. Closing Date In Loan Agreement Actual Number of Extensions 7. Terms of Loan Interest Rate Maturity (number of years) Grace Period (number of years) 8. Terms of Relending (if any) Interest Rate Maturity (number of years) Grace Period (number of years) Second-Step Borrower 11 May May June June 2011 Multitranche financing facility approved by the Board on 4 June 2008 Loan 2773-PRC approved on 5 September November February February December December ADB's London interbank offered rate-based lending facility % below the 6-month interest rate set by the People's Bank of China for lending by commercial banks Various

6 ii 9. Disbursements a. Dates Initial Disbursement 28 June 2012 Effective Date 20 February 2012 Final Disbursement 2 December 2013 Original Closing Date 31 December 2013 Time Interval Time Interval b. Amount ($) Category or Subloan Last Revised Allocation Net Amount Available Original Allocation Amount Changed Amount Disbursed Undisbursed Balance 001 4,410,000 4,410, ,410,000 4,410, ,030,000 10,230, ,000 10,230,000 10,230, ,440,000 5,440, ,440,000 5,440, ,350,000 7,350, ,350,000 7,350, ,710,000 14,710, ,710,000 14,710, ,000 (800,000) 800, ,000 0 Total 42,940,000 42,940, ,940,000 42,940,000 0 () = negative, ADB = Asian Development Bank, PRC = People s Republic of China C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost a Local Currency Cost Total Financing Plan ($ million) Cost Appraisal Estimate Actual ADB Loan Guangdong Provincial Government Subproject Entities Revolving Fund b c Total ADB = Asian Development Bank. a The exchange rate used at appraisal was $1 = CNY6.80 (11 May 2011), while the exchange rate used at project completion was $1 = CNY6.10 (31 December 2013). b During implementation of multi-tranche financing facility (MFF) tranches 1 and 2, some subborrowers gradually repaid their subloan principal, which formed an MFF investment program revolving fund pool to support additional energy efficiency and emission reduction subprojects. c The appreciation of the yuan against the US dollar during tranche 3 implementation created a $4.93 million shortfall between yuan subproject expenses and the ADB US dollar loan for tranche 3. The executing agency financed the gap from the MFF investment program revolving fund.

7 iii A. End User 3. Cost Breakdown by Project Component ($ million) Subborrower 1. Guangdong SGIS Songshan Company Subprojects Appraisal Estimate Actual Enhancing efficiency of waste energy recovery by upgrading energy management and monitoring system, including installation of computers, sensors, and telecommunications cables in the existing boilers and production lines. Recovery of low pressure saturated steam Subtotal (A) B. Middle Users (ESCOs/manufacturers) B. Middle Users (ESCOs) 1. Guangdong Cheria Energy Service Company Comprehensive energy efficiency retrofits for power plants, industrial factories and commercial buildings Subtotal (B1) Guangzhou Zhiguang Energy Promotion of high-voltage large-capacity Conservation Company variable-frequency motor control system Subtotal (B2) Subtotal(B) C. Middle Users (Manufactures) 1. Guangdong Rizhao New Promotion a of highly efficient composite coppertube generatrix Technology Company Subtotal (C1) Borch Machinery Company Promotion of energy-efficient automatic plastic injection molding machine Subtotal (C2) Guangdong Real Faith Promotion of LED lighting Lighting Technology Company Subtotal (C3) Subtotal (C) Subtotal (A+B+C) D. Implementation Cost b Total ESCO = energy service company, LED = light-emitting diode. a Promotion means that the subborrowers provided the equipment installed under the subprojects. b Implementation cost includes the cost of energy savings measurement and verification; feasibility evaluation; and steering committee meetings, workshops and project management. 4. Project Performance Report Ratings Implementation Period Development Objectives Ratings Implementation Progress 5 September 2011 to 12 December 2013 Satisfactory Satisfactory

8 iv D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person- Days Specialization of Members Consultation mission May a Loan inception mission May a, b Loan review and August a, c handover mission Loan review mission March c, d, e, f Project completion review January c, g a = energy specialist, b = project officer, c = senior project officer (energy), d = unit head (portfolio management), e = project analyst, f = staff consultant (environment), g = environment officer. II. Multitranche Financing Facility A. Facility Identification 1. Country 2. Facility Number 3. Facility Title 4. Borrower 5. Executing Agency 6. Amount of Facility People s Republic of China 0020-PRC Guangdong Energy Efficiency and Environment Improvement Investment Program People s Republic of China GPG $ million B. Facility Data 1. Date of MFF FFA 2. Date of Board Approval of MFF 3. Number of MFF FFA Amendments 4. Date of MFF FFA Amendment 5. MFF Availability Period 6. Actual Date of Final Disbursement 7. Actual Date of Last Tranche Execution 2 April June August 2011 In the original FFA, the last date on which any disbursement under any tranche may be made will be 31 December 2012, and the last financing tranche is to be executed no later than 30 June In the amended FFA, the last date on which any disbursement under any tranche may be made will be 31 December 2013, and the last financing tranche is to be executed no later than 31 December December November 2011

9 v 8. Number of MFF Changes in Scope 9. Nature of Scope Changes for the MFF 10. Actual MFF Completion Date 11. Implementation Arrangements 0 NA 12 December 2013 GPG was the executing agency responsible for overall implementation of the MFF investment program. GPG established the EPPPMO in January 2008 to implement the energy efficiency subprojects; in November 2008 GPG assigned GFTC the role of financial intermediary for onlending to subborrowers. An EPP steering committee was established to provide coordination and operational guidance and to approve subprojects. The EPPPMO selected third-party agencies through competitive bidding to perform independent M&V of EPP energy savings. 12. MFF Investment Plan ($ million) Cost Appraisal Estimate a Actual Tranche Subsequent Tranches a Tranche Tranche Implementation Cost Total ADB = Asian Development Bank, PRC = People s Republic of China, EPP = efficiency power plant, EPPPMO = efficiency power plant project management office, FFA = framework financing agreement, GFTC = Guangdong Finance Trust Company, GPG = Guangdong provincial government, MFF = multitranche financing facility, M&V = measurement and verification, NA = not applicable. a At MFF appraisal, the number of tranches had not yet been determined. 13. MFF Financing Plan ($ million) Source Appraisal Estimate Actual A. ADB Loan Tranche Subsequent Tranches a Tranche Tranche Subtotal (A) B. Guangdong Provincial Government Tranche Subsequent Tranches a Tranche

10 vi Source Appraisal Estimate Actual Tranche Subtotal (B) C. Subproject Entities Tranche Subsequent Tranches a Tranche Tranche Subtotal (C) D. Revolving Fund Tranche 1 Subsequent Tranches a Tranche Tranche Subtotal (D) 6.72 Total (A+B+C+D) ADB = Asian Development Bank, MFF = multitranche financing facility. a At MFF appraisal, the number of tranches had not yet been determined.

11 I. PROJECT DESCRIPTION 1. On 4 June 2008, the Asian Development Bank (ADB) Board of Directors approved a $100.0 million multitranche financing facility (MFF) to finance an efficiency power plant (EPP) 1 investment in Guangdong Province of the People s Republic of China (PRC), using the financial intermediation loan (FIL) modality. 2 The MFF Guangdong Energy Efficiency and Environment Improvement Investment Program (the MFF investment program) aimed to achieve demandside energy efficiencies that would create a virtual expansion of power generation capacity equivalent to 107 megawatts (MW), and annual energy savings of 532 gigawatt-hours (GWh). Energy savings were to be achieved by financing the retrofitting of existing power consumption systems with more efficient equipment, or the use of modern technologies to recover waste energy in consumer operations. These innovations were expected to reduce the need to construct and operate conventional coal-fired power plants. The MFF investment program is the first program in the PRC involving the establishment of a pilot energy efficiency project financing model, which could be scaled up or replicated in provinces with high energy consumption. The MFF investment program was to support retrofits using proven, energy-efficient technologies, including (i) motors and motor-drive systems; (ii) transformers and reactive power compensators; (iii) lighting; (iv) heating, ventilation, and air conditioning; (v) air compressors and pumping systems; (vi) recovery of waste energy from industry; and (vii) industrial boilers and industrial cogeneration, as well as other related energy efficiency improvement projects complying with national and Guangdong energy efficiency plans. 2. The intended impact of the MFF investment program was to improve energy security and environmental conditions in Guangdong. The intended outcome of the MFF investment program was improved energy efficiency in the province s industrial and commercial sectors. The expected outputs of the MFF investment program included (i) establishment of the EPP model for implementation of energy efficiency projects, (ii) development of the energy service company (ESCO) sector in Guangdong Province, (iii) development of capacity for promoting and assessing energy efficiency projects, and (iv) replication of the EPP model in other provinces. The Guangdong provincial government (GPG) was the executing agency for the MFF investment program. The GPG established the efficiency power plant project management office (EPPPMO) in January 2008 to implement the EPP subprojects and made the Guangdong Finance Trust Company (GFTC) the financial intermediary for onlending ADB loan proceeds to the subborrowers. The MFF investment program comprised three tranches. Tranche 1 of the MFF investment program constituted a loan of $35.0 million and was successfully completed by 31 December Tranche 2 of the MFF investment program constituted a loan of $ An efficiency or virtual power plant measures the extent to which investments in demand-side power conservation in certain areas, industry sectors, or enterprises reduce electricity load and improve power efficiency by retrofitting electrical equipment for power savings and encouraging customers to use new, more energy-efficient equipment and technologies. The impact of an EPP on power availability is in effect the same as that achieved by expanding or building an actual power plant. Investment recovery and gains come mainly from savings on electricity bills or other energy costs. The EPP concept has been extended from electricity to energy saving, aiming to achieve energy efficiency and emission reductions through retrofits and renewable energy technologies. 2 ADB Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility and Administration of Grant from Clean Energy Fund to the People s Republic of China for the Guangdong Energy Efficiency and Environment Improvement Investment Program. Manila (MFF 0020-PRC, $100.0 million, approved on 4 June). 3 Tranche 1 of $35 million (Loan 2426-PRC) was approved by ADB on 9 June 2008, signed on 29 September 2008, became effective on 9 January 2009, and closed on 3 February 2012 with full disbursement of loan amount. The completion report (ADB Completion Report: People s Republic of China: Guangdong Energy Efficiency and Environment Improvement Investment Program, Tranche 1. Manila) rated tranche 1 highly successful. The IED

12 2 million and was successfully completed by 31 December Tranche 3 of the MFF investment program (this project), with a loan of $42.94 million, was approved on 5 September The loan was signed on 14 November 2011, and became effective on 20 February The tranche 3 project was expected to develop EPP capacity of 65.9 MW and produce annual energy savings of 329 GWh by loan approval. The loan was fully disbursed and closed ahead of schedule on 12 December At completion, the tranche 3 project had delivered EPP capacity of 77.0 MW and annual energy savings of 385 GWh, exceeding the original estimates. Appendix 1 shows the framework for the tranche 3 project at appraisal and the achievements at completion. Appendix 2 sets out the tranche 3 project history. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 3. The heavy use of coal to produce energy causes substantial harm to the environment. The Government of the PRC recognizes that the predominant use of fossil fuels to produce energy is neither environmentally sustainable nor economically desirable. The government is strongly committed to improving energy efficiency and diversifying the energy supply mix by developing renewable energy sources, thereby cutting emissions, slowing global warming, and reducing the effects of climate change; the government has established mandatory targets and incentive-based policies to achieve these objectives. 4. ADB has made the energy sector a priority in the PRC since Strategy 2020, ADB s long-term strategic framework for , 6 identifies environmentally sustainable growth as a key goal and greater energy efficiency as a priority in the energy sector. ADB has increased its overall assistance for acquiring low-carbon technologies and implementing energy efficiency projects in its developing member countries. Its country partnership strategy, for the PRC emphasizes energy efficiency and clean and efficient technologies to reduce the country s greenhouse gas emissions. 7 This is consistent with the strategic priorities of both ADB and the PRC in the energy sector. 5. The government prioritized energy efficiency and environmental protection in its 11th Five-Year Plan for The 11th Five-Year Plan included mandatory targets to improve energy intensity by 20% and to reduce major pollutants by 10%. 8 These pollutants included sulfur dioxide (SO 2 ), which is emitted primarily by coal-fired power plants. These targets were in validation report (ADB Validation Report: People s Republic of China: Guangdong Energy Efficiency and Environment Improvement Investment Program, Tranche 1. Manila) rated tranche 1 successful. 4 Tranche 2 of $22.06 million (Loan 2611-PRC) was approved on 16 December 2009, signed on 30 March 2010, became effective on 28 May 2010, and closed on 8 October 2012 with full disbursement of the loan amount of $22.06 million. The completion report (ADB Completion Report: People s Republic of China: Guangdong Energy Efficiency and Environment Improvement Investment Program, Tranche 2. Manila) rated tranche 2 highly successful. The IED validation report (ADB Validation Report: People s Republic of China: Guangdong Energy Efficiency and Environment Improvement Investment Program, Tranche 2. Manila) also rated tranche 2 highly successful. 5 ADB People s Republic of China: Guangdong Energy Efficiency and Environment Improvement Investment Program (MFF)-Periodic Financing Request 3 Report, Manila (Loan 2773-PRC for $42.94 million, approved by ADB Management on 5 September). 6 ADB Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, Manila. 7 ADB Country Partnership Strategy: People s Republic of China, Manila. 8 Energy intensity is the measure of energy input per unit of output, with output measured in financial or physical terms. Energy efficiency improves when less energy is consumed per unit of output. The elasticity ratio of energy consumption is the ratio of the increase in energy consumption to the growth of gross domestic product.

13 3 turn distributed among the provinces. Guangdong s targets under the 11th Five-Year Plan were to improve energy efficiency by 16% and reduce sulfur dioxide (SO 2 ) emissions by 15% by The GPG developed a series of strategies in 2006 and 2007 to help achieve these goals. It established a policy framework to improve energy efficiency and reduce pollutants in key sectors, including (i) energy-intensive manufacturing industries, (ii) commercial and government facilities, (iii) building construction, (iv) electrical equipment manufacturing, and (v) transportation. Under the framework, the GPG encouraged local financial institutions to support projects that improved energy efficiency and reduced pollutants. The Guangdong Energy Conservation and Pollutants Reduction Plan required the GPG to expedite pilot testing of the EPP program and promote implementation of EPP subprojects, and develop a strong ESCO industry. The GPG viewed the MFF investment program as an integral part of the provincial strategy to achieve its energy intensity reduction target during the 11th Five-Year Plan. 6. Guangdong achieved its 16% target for reducing energy intensity under the 11th Five- Year plan and achieved the highest energy efficiency of any province by The PRC s 12th Five-Year Plan for aims to achieve an energy intensity reduction of 16% for the 12th plan period, which requires Guangdong to reduce its energy intensity by 18% from 2010 levels. The GPG is adopting measures to meet the challenging 12th Five-Year Plan targets, and the Guangdong EPP program established at the start of the 11th Five-Year Plan period will continue under the 12th and 13th five-year plans to ensure that investment in energy efficiency is sustained. The GPG established an energy conservation fund, which has funded energy conservation-related activities since The GPG s annual allocation from the provincial budget is CNY200 million; it is managed by the Guangdong Finance Bureau (GFB) and the Guangdong Economic and Information Technology Commission. 7. ADB provided technical assistance (TA) to the PRC in 2005 to develop a policy and regulatory framework to promote and implement EPP projects and to prepare the surveys and preliminary designs for a demonstration EPP project in Guangdong Province. 9 Additional ADB TA was provided to the GPG in 2006 to help prepare the overall MFF investment program, and detailed feasibility reports for the tranche 1 and tranche 2 projects. 10 The MFF investment program grant satisfactorily prepared the tranche 3 project for ADB financing. 11 B. Project Outputs 8. The expected project outputs included (i) implementation of energy efficiency projects with an equivalent EPP capacity of 65.9 MW, (ii) development of the ESCO sector in Guangdong Province, and (iii) the development of capacity for promoting and assessing energy efficiency projects. 9 ADB Technical Assistance to the People s Republic of China for Energy Conservation and Resource Management. Manila (TA 4706-PRC, $600,000, approved on 2 December). Part B: Prefeasibility Study of Energy Conservation and Resource Management Project in Guangdong. 10 ADB Technical Assistance to the People s Republic of China for Preparing the Energy Conservation and Resource Management Project. Manila (TA 4819-PRC, $300,000, approved on 12 July). 11 The Guangdong Energy Efficiency and Environment Improvement Investment Program included Grant 0109-PRC: Capacity Building for Energy Efficiency Implementation, for $2.0 million ($800,000 from the Clean Energy Fund and $1.2 million from the Climate Change Fund), which aimed to enhance the EPPPMO s capacity for (i) technical assessment of certain energy efficiency technologies, (ii) economic analysis of subprojects in accordance with ADB guidelines, (iii) measurement and verification of energy savings from subprojects, and (iv) development of Clean Development Mechanism projects. The grant became effective on 31 August 2009 and closed on 27 April 2015.

14 4 9. Tranche 3 of the energy efficiency subprojects. 12 The GPG established the EPPPMO to implement the energy efficiency subprojects and entrusted the GFTC to serve as the financial intermediary for onlending the ADB loan to subborrowers using a financial intermediary modality. 13 By enabling the revolving use of loan proceeds, the investment program supported the implementation of more energy saving and emission reduction projects than would have been possible otherwise under each loan tranche. 14 Tranche 3 energy efficiency subprojects were selected during implementation of MFF tranches 1 and 2; five subprojects with an estimated EPP capacity of 65.9 MW and 329 GWh in annual energy savings were identified and assessed during tranche 3 appraisal. During implementation, one subborrower sought and gained approval from the EPP Steering Committee for a replacement subproject, because the subborrower had completed the original subproject using its own funds. 15 The ADB subloan amount for the new subproject was $800,000 less than the original subproject, and the saved loan amount was reallocated to a new subborrower, as approved by the EPP Steering Committee. 16 In addition, one subborrower expanded the scope of the subprojects to be supported, which was also approved by the EPP Steering Committee Six subborrowers implemented subprojects under tranche 3: (i) Guangdong SGIS Songshan Company recovered low pressure saturated steam and established a 9 MW condensate turbine generating unit; (ii) Guangdong Rizhao New Technology Company installed 9,406 meters of energy-efficient composite copper-tube generatrix to replace existing inefficient generatrix in converting stations and production lines; (iii) Guangdong Cheria Energy Service Company completed 11 energy performance contracts (EPCs), covering energy efficiency retrofits for power plants, industrial factories and commercial buildings; (iv) Guangzhou Zhiguang Energy Conservation Company carried out four EPCs, using a variable-frequency motor control system to improve the motor s operational efficiency; (v) Borch Machinery Company installed 263 sets of energy-efficient automatic plastic injection molding machines to replace existing inefficient plastic injection molding machines; and (vi) Guangdong Real Faith Lighting Technology Company carried out light-emitting diode (LED) lighting retrofits for five end-users, mainly using EPCs. At completion, the tranche 3 project achieved an EPP capacity of 77.0 MW with annual energy savings of 385 GWh, exceeding the appraisal targets (65.9 MW 12 The $ million MFF investment program ultimately comprised 3 tranches. Tranche 3, for $42.94 million (Loan 2773-PRC, last tranche) was approved on 5 September 2011, signed on 14 November 2011, became effective on 20 February 2012, and closed on 12 December 2013 with full disbursement of the loan amount of $42.94 million. 13 The EPPPMO is responsible for day-to-day project management, and GFTC for financial management. The EPPPMO conducts technical appraisals of candidate subprojects (only proven technologies are supported). The EPPPMO take on no technology risk. GFTC conducts financial appraisals of subprojects and appraises the subborrowers; it takes on no loan repayment risk. In the event of repayment default from any subborrower, the Guangdong Finance Bureau remains responsible for repaying the ADB loan to the Government of the PRC. 14 Each loan tranche has a 15-year term with a grace period of 12 years, with an interest rate based on the London Interbank Offered Rate. The lengthy grace period was considered essential to maximize the benefits of the FIL by making the full amount of the loan available for rotation and relending to a greater number of industries, thereby generating maximum energy savings and emissions reductions. The loan is converted to CNY and onlent to subborrowers. To maximize the benefits from the revolving of the funds, the term of each subloan was limited to 3 5 years, including a grace period of 1 2 years. The recovered subloan will be revolved and onlent to more subborrowers within 15 years. The interest rate of the subloan is 10% below the 6-month interest rate set by the People's Bank of China for lending by commercial banks, which is about 20% less than the benchmark interest rate of 3-year PRC commercial loans, and 24% below that of 5-year loans. 15 The Guangdong SGIS Songshan Company s subproject at appraisal was an upgrade of its energy management and monitoring system, which changed to a low pressure saturated steam recovery subproject during implementation. 16 Guangdong Real Faith Lighting Technology Company was added, with an LED lighting promotion subproject. 17 Guangdong Cheria Energy Service Company expanded its subproject scope from retrofitting air conditioning systems at mobile phone base stations and promoting digitalized power plant control systems in existing power plants, to comprehensive energy efficiency retrofits for power plants, industrial factories and commercial buildings.

15 5 in EPP capacity, with 329 GWh of annual energy savings). A summary of annual energy savings and emission reductions is in Appendix Development of the energy service company sector in Guangdong Province. 18 ESCOs in the PRC are generally small or medium-sized light asset companies, with few collateral assets, and limited access to financing. These ESCOs require improvements in credit standing, financing and incentive mechanism support. The tranche 3 project successfully promoted ESCO sector development in Guangdong Province. 19 Two subborrowers of the tranche 3 project were ESCOs, and carried out major subprojects using the EPC model. The subloan efficiently eased the shortage of funds for the two subborrowers, and helped them promote EPC energy efficiency subproject implementation. 12. Promotion and assessment of energy efficiency projects. 20 During , the executing agency hosted seminars and workshops to promote the EPP program, and carried out training on measurement and verification (M&V) of energy savings, 21 financial management, and office capacity enhancement. These activities strengthened the executing agency s capacity to financially manage and evaluate energy efficiency projects in line with energy efficiency regulations. The executing agency also trained subborrowers in EPP investment, procurement, and disbursement. C. Project Costs 13. The cost of the tranche 3 project was $85.47 million, 8.12% more than the $79.05 million estimated at appraisal. The increase was mainly due to appreciation of the yuan and the changes in the selected subprojects. 22 In local currency terms, the actual project cost was CNY million, compared with an appraisal estimate of CNY million. Actual ADB financing was $42.94 million, GPG counterpart funding was $4.78 million, funding from subborrowers totaled $32.82 million, and funds from the MFF investment program revolving fund $4.93 million. 23 Counterpart funds were provided in a timely manner, ensuring smooth 18 The MFF investment program gives priority to small and medium-sized enterprises, including ESCOs. The low financing cost, flexible collateral and retained earning reward mechanism have encouraged ESCOs to use EPCs. 19 The PRC and the GPG have supported the development of ESCOs and have issued several favorable relevant regulations, including (i) a circular on promoting energy management contracts and improving the development of ESCOs, issued jointly by Ministry of Finance and National Development and Reform Commission in 2010; and (ii) interim measures for managing financial incentive funds for energy management contract projects and rules for managing financial incentive funds for energy management contract projects in Guangdong, issued in The need for capacity development within GPG and awareness raising through improved outreach to the industrial and commercial energy-user community in Guangdong was recognized at appraisal. The MFF investment program included Grant 0109-PRC: Capacity Building for Energy Efficiency Implementation, for $2.0 million. 21 ADB s Independent Evaluation Department released an evaluation knowledge brief on energy efficiency interventions in October The report reviewed dozens of ADB energy projects in various countries and concluded that the Guangdong EPP was the only energy efficiency intervention that had made significant progress, and the only one that had incorporated appropriate energy savings M&V. ADB Evaluation Study: Review of Energy Efficiency Interventions. Manila. 22 The exchange rate used at appraisal was $1 = CNY6.80 (11 May 2011), while the exchange rate used at project completion was $1=CNY6.10 (31 December 2013). The yuan appreciated by 6.40% during project implementation. 23 During implementation of MFF tranches 1 and 2, some subborrowers gradually repaid their subloan principal, which formed an MFF investment program revolving fund pool to support more energy efficiency and emission reduction subprojects. The appreciation of the yuan against the US dollar during tranche 3 implementation created a $4.93 million shortfall between yuan subproject expenses and the ADB US dollar loan for tranche 3. The executing agency financed the gap from the MFF investment program revolving fund. Actual counterpart funds from the tranche 3 subborrowers equaled CNY million.

16 6 project implementation. There was no material change in the financing between appraisal and completion. 14. Appendix 4 compares the detailed project costs by component and the summary financing plan at project appraisal and completion. D. Disbursements 15. Disbursements for the subprojects were required to follow the rules in the Guangdong ADB Loan Energy Efficiency and Environment Improvement Investment Program Financial Management Handbook (2009, as amended from time to time), developed by GPG and reviewed by ADB, which ADB considered consistent with its Loan Disbursement Handbook (2007, as amended from time to time). GFTC and the EPPPMO trained subborrowers regarding subloan withdrawal procedures. Withdrawals under the subloans were disbursed through the GFB account to GFTC s account, and then onlent to subborrowers. The loan proceeds were fully disbursed ahead of the loan closing on 12 December Overall, the disbursement was consistent with the physical implementation schedule and annual disbursement projections. Appendix 5 shows the actual disbursements. E. Project Schedule 16. The tranche 3 project did not encounter any delays in implementation. During appraisal it was envisaged that the tranche 3 project would be implemented for 23 months, from February 2012 to December Implementation of the tranche 3 project was consistently on track, with the tranche 3 project physically and financially completed by the end of December 2013, as envisaged at appraisal. The loan account was closed on 12 December 2013, with the loan amount of $42.94 million fully disbursed. F. Implementation Arrangements 17. Overall implementation arrangements for the MFF investment program remained largely as designed. The GPG was the executing agency and responsible for overall implementation of the MFF investment program. The GPG established the EPPPMO in January 2008 to implement the energy efficiency subprojects; in November 2008 GPG assigned GFTC the role of financial intermediary for onlending to subborrowers An EPP steering committee was established to provide coordination and operational guidance and to approve subprojects. 25 The EPPPMO was responsible for (i) marketing and promoting the EPP; (ii) reviewing and assessing EPP subproject applications, based on the 24 GFB entrusted GFTC to manage the ADB loan as a trust fund under the China Banking Regulatory Commission rules; each trust is a separate account and cannot be commingled with other trust accounts or proprietary GFTC investments. The trust fund management model has many advantages (e.g., sound legal protection, effective risk isolation, independent account management, a strict evaluation procedure and risk monitoring, and flexible collateral measures), and ensured the safety of the fund flows. 25 The EPP steering committee comprised senior officials from the Guangdong Economic and Information Technology Commission, the Guangdong Development and Reform Commission, GFB, and the Guangdong Stateowned Assets Supervision and Administration Commission. The Guangdong Economic and Information Technology Commission was responsible for coordinating the EPP steering committee. The Guangdong Development and Reform Commission undertook subproject feasibility review and approvals. GFB was authorized to manage loans and grants from international financial institutions. The Guangdong State-Owned Assets Supervision and Administration Commission was responsible for outreach and promotion of the investment program to provincial state-owned enterprises.

17 7 selection criteria and approval process for subprojects; (iii) overseeing implementation of subprojects; and (iv) overall MFF investment program monitoring, management, and reporting. The investment program performance and monitoring system was well established for measuring and verifying energy savings of the implemented subprojects. The EPPPMO selected third-party agencies through competitive bidding to perform independent M&V of EPP energy savings. Five M&V agencies measured and verified subproject energy savings in accordance with an energy-savings M&V handbook that set out M&V methods and standards for each subproject type. The M&V agencies assessed the potential for energy savings of the subprojects before implementation, verified their energy savings during or after implementation, and issued M&V reports. As the financial intermediary, GFTC was responsible for (i) assessing the financial capacity of subborrowers and the financial viability of the subprojects, (ii) disbursing funds and administering the subloan portfolio, (iii) managing the trust account, (iv) managing subloan collaterals and guarantees, and (v) taking action on nonperforming loans. 26 Periodic reviews by EPPPMO and GFTC were conducted under each subloan in accordance with the investment program performance and monitoring system to evaluate the scope, implementation arrangements, progress, and achievement of the reported energy savings and other subproject benefits. As of 27 December 2013, tranche 3 of the ADB loan was fully disbursed to subborrowers, and the energy savings achieved were much higher than the appraisal estimate. The overall EPP project management and onlending arrangement are shown in Appendix 6. G. Conditions and Covenants 19. All covenants were complied with, and no loan covenants were modified, suspended, or waived. Project progress reports and financial reports were submitted on a quarterly basis. The project audit was conducted by the Guangdong Provincial Audit Office, and annual audit reports were submitted on time. The audited project financial statements included both GFB and trust accounts. The audit opinions for each year indicated the audited project financial statements and notes complied with the financial covenants. The auditor expressed an unqualified opinion each year, pointed out some internal control problems, and provided suggestions for improvement. GPG accepted all the suggestions and rectified any issues in a timely manner. The reports were useful in identifying and correcting issues in project implementation. Appendix 7 shows the status of compliance with the loan covenants. H. Consultant Recruitment and Procurement 20. To comply with the requirements of framework financing agreement, and in accordance with ADB s procurement guideline provisions for financial intermediaries, the EPPPMO prepared a procurement management handbook that was approved by the EPP steering committee and agreed to by ADB. Counterpart funding from the GPG was used by the EPPPMO to engage a procurement agency to undertake procurement and select energy savings M&V agencies to measure and verify the energy savings of each subproject and to publish energy savings reports. 21. The procurement management handbook regulated procurement by the EPPPMO and subborrowers under the subloans. The procurement agency for the MFF investment program was recruited through competitive bidding, and was continuously engaged during tranche 3. Considering the technical scope of the tranche 3 subprojects, the procurement agency helped the EPPPMO select five third-party energy savings M&V agencies to measure and verify the 26 Acceptable subloan collaterals and guarantees included fixed-asset collateral, pledge of accounts receivable, shareholder and executive guarantees or asset collateral, group company or guarantee company guarantees, or a combination of the above.

18 8 energy savings of each subproject and to prepare the reports that formed the basis for the energy savings assessment (para. 18). The procurement agency also assisted the EPPPMO to select three consulting firms to provide consulting services to implement the grant associated with the MFF investment program (footnote 11) The handbook outlined procurement regulations for state-owned and private subborrowers. Subborrowers were required to comply with ADB s procurement guidelines for financial intermediaries. Private sector subborrowers were required to pay reasonable prices and encouraged to select eligible suppliers through competitive bidding or shopping. Stateowned enterprises were required to follow government procurement guidelines and procedures. Five out of six subborrowers under tranche 3 were private companies. The procurement guidelines were strictly followed by all the tranche 3 subborrowers. I. Performance of Consultants, Contractors, and Suppliers 23. The performance of the consultants, the procurement and energy savings M&V agencies, and the suppliers for the tranche 3 project was satisfactory. The procurement agency helped to conduct centralized procurement for the EPPPMO, and successfully selected third-party energy savings M&V agencies for the tranche 3 project, and consultants to implement the grant associated with the MFF investment program (footnote 27). The procurement agency also assisted EPPPMO in reviewing the subloan contracts and withdrawal application documents. The consultants and the energy savings M&V agencies fulfilled the terms of their service contracts with the EPPPMO and performed satisfactorily. J. Performance of the Borrower and the Executing Agency 24. The borrower and the GPG fully supported project implementation. 28 The Government of the PRC, the GPG, the GFB, and GFTC signed and delivered the onlending and trust agreements on time. The loan and project agreements became effective on 20 February 2012 as scheduled. Following loan effectiveness, the subproject and subloan agreements were signed between the EPPPMO, GFTC and the subborrowers on 18 March 2012, and the subloans were disbursed. Effective coordination by the EPP steering committee enabled efficient subproject selection and approval and issuance of interim management handbooks outlining guidelines for implementation of the MFF investment program. In December 2012, the GPG issued a retained earnings interim management handbook to use the retained earnings of the investment program as incentives for subprojects that achieved energy saving results. 29 The incentive scheme that commenced in 2013 required that 70% of retained earnings (if any) be 27 The grant was to build capacity for implementing the MFF investment program in the areas of (i) information sharing, training of trainers, and development of tools; (ii) appraisal of EPP applications, and monitoring of implementation and evaluation of energy savings; and (iii) evaluation of EPP potential, barriers, and new technologies, as well as the estimation and projection of energy savings. Three consulting firms were recruited by the GPG to implement the grant, in accordance with ADB s Guidelines on the Use of Consultants (2007, as amended from time to time). The consulting services e.g., developing energy savings M&V methods, evaluating financial risks, and researching policy mechanisms smoothed EPP program implementation, while training sessions, workshops, and study tours financed by the grant greatly improved the management efficiency. 28 The borrower was the PRC, acting through the Ministry of Finance. 29 According to the project design, subprojects that achieved the targeted energy savings were to be rewarded, subject to M&V by the independent M&V agencies. The rewards were taken from the retained earnings from the interest differential between the FIL onlending rate to the subborrowers and ADB s interest rate.

19 9 awarded to subborrowers that achieved estimated energy savings and repaid the subloan principal and interest on time The MFF investment program was carried out successfully. Tranche 1 was completed by 31 December 2011 and the Independent Evaluation Department (IED) validated it as successful (footnote 3). Tranche 2 was completed by 31 December 2012 and IED validated it as highly successful (footnote 4). Adequate counterpart funds were provided in a timely manner. In general, the performance of the borrower and the GPG as the executing agency was highly satisfactory. K. Performance of the Asian Development Bank 26. ADB s performance was satisfactory. It managed and administered the third tranche of the MFF investment program. During project processing, ADB provided grant funding for the feasibility study, and endorsed subproject selection criteria and evaluation. During implementation, ADB visited subproject sites to resolve project implementation issues and maintained close communication with the borrower and executing agency. ADB supported GPG efforts to promote the investment program and helped improve EPP management procedures. The borrower and the GPG acknowledged ADB s assistance and cooperation. III. EVALUATION OF PERFORMANCE A. Relevance 27. The project was closely aligned with the government s long-term strategic objectives, as well as those of the ADB country partnership strategy. The project s objective of promoting energy savings matched those of the PRC s energy saving and emission reduction strategy and policy. The project was put forward and designed during the PRC s 11th Five-Year Plan, which aimed to reduce energy intensity from 2005 levels by 20% nationwide and by 16% in Guangdong Province by The PRC s 12th Five-Year Plan set an even more ambitious energy efficiency improvement target for Guangdong, requiring an 18% reduction from 2010 levels by The project directly contributed to the achievement of these goals. The 12th Five-Year Plan has also identified the promotion of energy efficiency financing and the ESCO industry as a development objective. Although there were some changes to the subprojects during implementation of the tranche 3 project, this was to be expected in FIL loans, and the replacement subprojects met the selection criteria and contributed to project outputs; there were no significant changes in original project design, or the project scope. The strong ownership of the project by stakeholders and approval of Shangdong and Hebei projects based on a similar design further justifies the relevance of original design of the project (para. 46). The project was consistent with the priorities of the government and ADB at both appraisal and completion, and is therefore rated highly relevant. B. Effectiveness in Achieving Outcome 28. The tranche 3 project followed the EPP model established during tranches 1 and 2, which was tailored to conditions in the PRC. 31 All three tranches of ADB s MFF investment 30 Twenty percent of retained earnings will be reserved to supplement the risk-reserve fund, to mitigate risk related to interest and foreign exchange fluctuation or default. The remaining 10% of retained earnings will be used to offset management expenses incurred by EPPPMO and GFTC. 31 The Guangdong EPP model refers to the established MFF investment program implementation arrangements, under which EPPPMO was to implement energy efficiency subprojects and GFTC was entrusted to serve as the

20 10 program have been carried out, and the successful revolving of loan funds has supported additional energy efficiency subprojects. All six subprojects under tranche 3 were completed, and energy savings were measured and verified by the third-party agencies. It is estimated that the tranche 3 subprojects achieved annual energy savings of 385 GWh. 32 This avoided the consumption of 126,919 tons of coal equivalent per year and reduced emissions by 299,991 tons per year (t/y) of carbon dioxide (CO 2 ), 3,461 t/y of SO 2, 769 t/y of nitrogen oxide (NO x ), and 1,346 t/y of total suspended particulates (TSP). Savings in electricity costs from the subprojects could amount to $27 million annually from The tranche 3 project has fully achieved its expected results in terms of improved energy efficiency in selected industrial and commercial sectors in Guangdong Province, and exceeded its targets for energy savings and emission reductions. The tranche 3 project is therefore rated highly effective in achieving its outcome. C. Efficiency in Achieving Outcome and Output 1. Efficiency of Investments 29. The tranche 3 project s economic internal rate of return (EIRR) was reevaluated at project completion. The tranche 3 subprojects all had EIRRs above 18.41% when calculated without the environmental benefits, and above 35.75% when environmental benefits were included. The overall project EIRR was recalculated at 35.55% without environmental benefits (compared to the appraisal estimate of 27.65%), and 47.59% with environmental benefits (compared to the appraisal estimate of 39.23%). The higher EIRR calculated by the postcompletion evaluation is attributed mainly to the much higher-than-anticipated energy savings and environmental benefits achieved. A sensitivity analysis, based on a scenario in which the energy saving and environmental benefits are lowered by 50%, indicated that the EIRR would be 12.66% without environmental benefits and 15.82% with environmental benefits. This remains well above the social discount rate of 12%, making the tranche 3 project highly efficient economically. Details of the economic evaluation are in Appendix Efficiency of Process 30. ADB s internal processing and support during implementation was efficient and satisfactory. As this was the third tranche of the MFF investment program, the experience accumulated during implementation of tranches 1 and 2 was used by the executing agency to improve the existing regulation and operation handbooks for the MFF investment program, including by (i) amending and revising the financial management handbook and energy savings M&V handbook in a timely manner; (ii) issuing a retained earnings interim management handbook in 2012 to introduce incentive measures for companies to participate in the EPP program; and (iii) adopting flexible subloan guarantee and collateral measures for the subproject subborrowers (footnote 26), and providing financing services tailored to subborrowers. In addition, the Guangdong EPP website was established during tranche 3 implementation. Website functions include online subproject application, evaluation and approval; online withdrawal applications; and data collection; all of these greatly improved project implementation efficiency. GFTC served as the financial intermediary from the outset of the MFF investment program, and demonstrated sound, stable financial performance. During , the average total income of GFTC was about CNY500 million; its net profit rate is financial intermediary for onlending the ADB loan to subborrowers using a financial intermediary modality (para. 17 and Appendix 6 ). 32 According to the China Year Book 2014, the average annual electricity consumption for households in 2012 was 6,219 kwh. Annual energy savings of 385 GWh is equivalent to electricity consumption of over 60,000 households for one year.