IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80640) ON A LOAN IN THE AMOUNT OF US$200 MILLION TO THE

Transcription

1 Public Disclosure Authorized Document of The World Bank Report No: ICR Public Disclosure Authorized Public Disclosure Authorized IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80640) ON A LOAN IN THE AMOUNT OF US$200 MILLION TO THE JOINT STOCK COMPANY THE STATE EXPORT-IMPORT BANK OF UKRAINE FOR THE ENERGY EFFICIENCY PROJECT September 26, 2017 Public Disclosure Authorized Energy and Extractives Global Practice Europe and Central Asia Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective September 16, 2017) Currency Unit = Ukraine Hryvnia (UAH) UAH 1.00 = US$0.038 US$1 = UAH FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CAR CAS CPS DSCR EBRD EDP EDP2 EEF EEP ERR EU FIL FRR GDP GHS GoU IBRD ICB ICR IFI IFRS IMF ISR IT O&M M&E MoF NPL PAD PDO PB PIU ROA ROE SAEE Capital Adequacy Ratio Country Assistance Strategy Country Partnership Strategy Debt Service Coverage Ratio European Bank for Reconstruction and Development Export Development Project Second Export Development Project Energy Efficiency Fund Energy Efficiency Project Economic Rate of Return European Union Financial Intermediary Loan Financial Rate of Return Gross Domestic Product Greenhouse Gas Government of Ukraine International Bank for Reconstruction and Development International Competitive Bidding Implementation Completion and Results Report International Financial Institution International Financial Reporting Standards International Monetary Fund Implementation Status and Results Report Information Technology Operation and Maintenance Monitoring and Evaluation Ministry of Finance Nonperforming Loan Project Appraisal Document Project Development Objective Participating Bank Project Implementation Unit Return on Assets Return on Equity State Agency of Ukraine for Energy Efficiency and Energy Conservation

3 SMEs UAH UAS UEB USD Small and Medium Enterprises Ukrainian Hryvnia Ukrainian Accounting Standards Joint Stock Company The State Export-Import Bank of Ukraine United States Dollar Senior Global Practice Director: Riccardo Puliti Practice Manager: Sameer Shukla Project Team Leader: Dmytro Glazkov ICR Team Leader: Dmytro Glazkov

4 UKRAINE Energy Efficiency Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives, and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3: Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAP OF UKRAINE... 61

5 A. Basic Information Country: Ukraine Project Name: UA - ENERGY EFFICIENCY Project ID: P L/C/TF Number(s): IBRD ICR Date: 09/26/2017 ICR Type: Core ICR Joint Stock Company Lending Instrument: Specific Investment Loan Borrower: The State Export - Import Bank of Ukraine Original Total Commitment: US$ million Disbursed Amount: US$ million Revised Amount: US$ million Environmental Category: F, Financial Intermediary Assessment Implementing Agencies: Joint Stock Company The State Export-Import Bank of Ukraine Cofinanciers and Other External Partners: Not applicable B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 09/30/2009 Effectiveness: 12/07/ /09/2011 Appraisal: 12/20/2010 Restructuring(s): 12/03/2015 Approval: 05/17/2011 Mid-term Review: 09/10/ /17/2014 Closing: 03/31/ /31/2017 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Low or Negligible Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Highly Satisfactory Implementing Agency/Agencies: Highly Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory i

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Performance any) Potential Problem Project Quality at Entry No at any time (Yes/No): (QEA): Problem Project at any Quality of Supervision Yes time (Yes/No): (QSA): DO rating before Satisfactory Closing/Inactive status: None None Rating D. Sector and Theme Codes Original Actual Major Sector/Sector Energy and Extractives/ Other Energy and Extractives Major Theme/Theme/Sub Theme Finance/Financial Stability/Financial Sector oversight and policy/banking regulation & restructuring Environment and Natural Resource Management/Climate change/mitigation Environment and Natural Resource Management/ Environmental Health and Pollution Management /Air quality management Environment and Natural Resource Management/ Environmental Health and Pollution Management / Water Pollution Environment and Natural Resource Management/ Environmental Health and Pollution Management / Soil Pollution E. Bank Staff Positions At ICR At Approval Vice President: Cyril E. Muller Laura Tuck Country Director: Satu Kahkonen Martin Raiser Practice Manager: Sameer Shukla Ranjit J. Lamech Project Team Leader: Dmytro Glazkov Gary Stuggins ICR Team Leader: Dmytro Glazkov ICR Primary Author: Alexey Morozov F. Results Framework Analysis ii

7 Project Development Objectives (from Project Appraisal Document) The Project Development Objective (PDO) is to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies by facilitating sustainable financial intermediation for the financing of energy efficiency investments. Revised Project Development Objectives (as approved by original approving authority) Not applicable. (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1: Volume of EE sub-loans Value (amount, US$, ,000,000 n.a. 200,000,000 custom) Date achieved 12/15/ /18/ /31/2017 Fully achieved. The indicator was calculated using the total amount of sub-loans Comments provided by both the Borrower and the participating banks. The volume of loans increased gradually in the initial years with the final years of the project s implementation witnessing a rapid rise in borrower interest and the indicator was fully achieved by the end of the project. Indicator 2: Projected lifetime fuel savings Value (MJ) 0.00 n.a. 25,120,800,000 27,800,000,000 Date achieved 12/15/ /18/ /03/ /31/2017 Comments Target exceeded. The indicator was included in the Results Framework during the restructuring in 2015 to fulfill the requirement of inclusion of core sector indicators. Indicator 3: Number of participating banks Value (number) n.a. 1 Date achieved 12/15/ /18/ /31/2017 Partially achieved. The political and economic crisis in Ukraine during (which caused considerable devaluation of the hryvnia and was followed by conflict in the Eastern part of Ukraine) affected the banking sector. Most potential participating banks could not fulfill the financial terms established by the project as entry conditions. Comments In , two banks signed Subsidiary Loan Agreements with Ukreximbank, namely, Megabank and Alfa-Bank. Alfa-Bank terminated the sub-loan agreement in the end of 2015 without disbursing funds to any of the subprojects due to its decision to freeze lending to the commercial sector and focus on other priorities. Only one participating bank stayed in the project by the closing date. However, even under these conditions, the projected volume of energy efficiency sub-loan disbursements was fully achieved due to the efficient and cooperative work of Ukreximbank and Megabank, iii

8 which were able to on-lend loan proceeds and accelerate disbursements in accordance with the project time line. Indicator 4: Extent of energy savings Value (toe) , , ,900 Date achieved 12/15/ /18/ /03/ /31/2017 Target exceeded. The target, calculated as estimated pro rata energy savings of Comments subprojects, was revised during the restructuring to reflect the actual and potential increase in energy savings, observed during 2015, as more evidence on the actual progress and expected outcomes of new beneficiaries sub-projects was collected. (b) Intermediate Outcome Indicator(s) Original Target Indicator Baseline Value Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1: The Borrower s loan commitments (Percentage, Custom) Value (percentage) n.a. 100 Date achieved 12/15/ /18/ /15/2017 Fully achieved. The Borrower has consistently demonstrated strong ownership of the project as well as the ability to adjust to the dramatic changes in the market Comments environment. Based on the analysis of the demand, the Borrower initiated the project s (including % restructuring and amendment of the sub-loan criteria, which at the critical stage of the achievement) project helped dramatically increase the level of commitments and arrive to its closing with 100% loan commitments. Indicator 2: The number of ESCO subprojects Value (number) Date achieved 12/15/2010 n.a. 12/03/ /15/2017 Comments (including % achievement) Target exceeded. The indicator enhances tracking of municipal type enterprises covered by the project. Signing two ESCO subprojects was estimated as a reasonable target, considering that legal framework, regulating ESCOs work was still in the making. However, owing to the active outreach work by Ukreximbank during the last year of the project s implementation, four ESCO subprojects were signed by the end of the project. Indicator 3: Extent of energy savings, gas Value (tcm) , , ,000 Date achieved 12/15/ /18/ /03/ /15/2017 Target exceeded. Based on the evaluation of results held before restructuring, the target was increased by 60 times. As the project picked up its pace and the number of Comments subprojects started growing, UEB and the World Bank witnessed an increase in demand for gas-related energy savings. This was due to the rapid growth of gas prices in Ukraine during the project s implementation, which increased the attractiveness of energy efficiency investments in gas savings. Indicator 4: The Borrower s loan disbursements Value (percentage) n.a. 100 iv

9 Date achieved 12/15/ /18/ /15/2017 Fully achieved. The Borrower has consistently demonstrated strong ownership of the project as well as the ability to adjust to the dramatic changes in the market Comments environment. Based on the analysis of the demand, the Borrower initiated the project s restructuring and amendment of the loan conditions which, at the critical stage of the project, helped dramatically increase the level of disbursements and arrive to its closing with 100% loan disbursed. Indicator 5: Extent of energy savings, electricity (GWh) Value (GWh) Date achieved 12/15/ /18/ /03/ /15/2017 Target exceeded. During the implementation period the Borrower witnessed an increase in demand for gas-related energy efficiency projects and a decline in the number of applications for subprojects with electricity energy savings. To address the dynamics, Comments the Borrower asked for a reduction of the electricity indicator, expecting the project pipeline to produce no more than 120 GWh of energy savings at the closing. The last year of the project, however, together with the increased overall demand for financing brought subprojects with high electricity savings and, as a result, the indicator was exceeded almost two times. Indicator 6: Number of Municipal Energy Efficiency Subproject signed Value (number) 0.00 n.a. 5 5 Date achieved 12/15/ /18/ /03/ /15/2017 Fully achieved. The indicator was introduced during the restructuring to reflect the Comments growing demand from municipal sector enterprises for energy efficiency subprojects. As a result, the World Bank, together with UEB and participating banks, decided to set the target of 5 municipal subprojects, which was fully achieved. G. Ratings of Project Performance in ISRs No. Date ISR Actual Disbursements DO IP Archived (US$, millions) 1 09/21/2011 Satisfactory Satisfactory /26/2012 Moderately Satisfactory Moderately Satisfactory /16/2013 Moderately Satisfactory Moderately Satisfactory /31/2013 Moderately Satisfactory Moderately Satisfactory /08/2014 Moderately Satisfactory Moderately Satisfactory /06/2015 Moderately Moderately Unsatisfactory Unsatisfactory /18/2015 Moderately Moderately Unsatisfactory Unsatisfactory /13/2015 Moderately Satisfactory Moderately Satisfactory /06/2016 Moderately Satisfactory Satisfactory /05/2017 Satisfactory Satisfactory /31/2017 Satisfactory Satisfactory H. Restructuring (if any) v

10 Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO IP 12/03/2015 MS S Amount Disbursed at Restructuring in US$, millions Reason for Restructuring and Key Changes Made The key changes included: (a) extension of the project closing date by 12 months, from March 31, 2016, to March 31, 2017; (b) updating of the project indicators and targets; and (c) revision of the debt service coverage ratio for subprojects. I. Disbursement Profile vi

11 1. Project Context, Development Objectives, and Design 1.1 Context at Appraisal Country and Sector Background 1. Until mid-2008, Ukraine showed strong economic growth and had an active banking sector, but signs of overheating were becoming increasingly apparent. Growth over averaged 7.5 percent, which was among the highest in Europe. Greater amounts of inflows, mainly through bank borrowing abroad, flowed into the country and, together with strong improvements in trade (due to high steel prices), fueled domestic demand. With a pre-crisis fixed exchange rate and pro-cyclical fiscal policies, buoyant international liquidity translated into higher inflation and growing current account deficits. 2. As a result of the financial crisis in 2008, banking sector lending came to a standstill, postponing necessary investment finance in the economy. During the crisis, tightening liquidity and increasing credit risks resulted in ceasing of bank lending to the economy and households. The economic recession, growing unemployment, and depreciation of the Ukrainian hryvnia resulted in a 5.5-fold increase in nonperforming loans (NPLs) from October 1, 2008, until January 1, 2009, and a 3.3-fold increase in The banking sector had stabilized in 2010 in line with the overall economic recovery, but lending activities remained limited. Banks loan portfolio decreased by 5.7 percent in 2009 and continued to shrink in the first half of 2010, even as growth in deposits resumed. Lending was slowly resuming in 2011; however, the economy continued to suffer from the absence of vital credit financing. Energy Efficiency 3. Ukraine was among the most energy-intensive economies in the world and continues to be so. At the project appraisal, Ukraine s energy intensity 1 exceeded that of Germany by a factor of 3.7 (0.45 kg of oil equivalent in Ukraine versus 0.12 kg in Germany) and more than double that of the EU-12 countries. Part of its energy efficiency problem was structural: Ukraine was an important source of heavy equipment manufacturing in the former Soviet Union. Nearly 20 years later, most of these assets were using the same technology. As a result, the Ukrainian industrial sector was labor and energy intensive, made viable due to the low cost of energy and labor. The industrial sector, particularly heavy industry, was expected to be one of the primary sources of energy savings. Other sectors such as chemicals, agriculture, and food production were equally estimated to have significant energy savings potential. Rationale for Bank Assistance 4. During , the World Bank played an active role in policy dialogue and technical assistance to support energy efficiency improvements. The World Bank had been supporting Ukraine to reform and restructure its energy sector through policy dialogue, technical assistance, and financing of adjustment and investment projects since the early 1990s. Because of 1 Energy intensity is measured herein as kilogram of oil equivalent of energy use per constant purchasing power parity (PPP) gross domestic product (GDP). Energy use refers to use of primary energy before transformation to other end-use fuels. PPP GDP is GDP converted to 2005 constant international dollars using PPP rates. 1

12 continuous involvement, the World Bank developed deep country and sector knowledge that placed the World Bank in a strong position to support energy sector reforms and development. 5. The Government of Ukraine (GoU) made it a strategic priority to reduce Ukraine s energy intensity. In 1996, the GoU developed an Energy Efficiency Program, where it outlined a strategy for decreasing energy consumption in the industrial, energy, and housing sectors. In its 2006 Energy Strategy looking out until 2030, the GoU set a target of improving Ukraine s energy intensity by 50 percent by In 2010, the National Agency of Ukraine for the Effective Use of Energy Resources, later the State Agency of Ukraine for Energy Efficiency and Energy Conservation, developed a Targeted Economic Energy Efficiency Program, which was approved by the Cabinet of Ministers. The program set a target of decreasing energy intensity of Ukraine s economy by 20 percent by In addition, the state agency prepared a complementary National Energy Efficiency Action Plan, designed to identify energy efficiency investments, barriers to implementation, and agencies responsible for implementation. 6. The World Bank assigned a high priority to supporting energy efficiency projects in Ukraine. The decrease in energy consumption was expected to contribute to addressing the fiscal deficit by lowering the cost for imported fuel. Increase in energy efficiency of its industries was expected to, not only contribute to increasing its competitiveness and resilience in an economic downturn by decreasing its operating expenses, but also to lead to sustainable growth opportunities for the economy as a whole. Furthermore, energy efficiency options were identified as the highest priority investment to enable the reduction of local, regional, and global (greenhouse gases [GHGs]) pollution. World Bank assistance was required to address the systemic political and regulatory constraints to creditworthiness of municipal Borrowers to facilitate the sustainable financing of energy efficiency projects for district heating companies and other municipal entities. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 7. The project development objective (PDO) was to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies by facilitating sustainable financial intermediation for the financing of energy efficiency investments. 8. The following key results indicators were selected to monitor the PDOs at the project approval: Extent of energy savings Volume of EE sub-loans Number of participating banks Projected lifetime fuel savings (was added as a core sector indicator). Revised Key Indicators 9. The Key indicator Extent of Energy Savings was increased, as indicated in Section F (a) pf the datasheet, to reflect the actual and potential increase in energy savings, observed during 2

13 2015 as more evidence on the actual progress and expected outcomes of potential beneficiaries energy efficiency activities was collected. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 10. The PDO was not revised. 1.4 Main Beneficiaries 11. The primary beneficiaries for this project were industrial and commercial companies, municipalities and municipal sector enterprises, and energy service companies (ESCOs). The Loan Agreement and the Operations Manual provided detailed eligibility criteria and evaluation guidelines for the beneficiary enterprises, subprojects, and sub-loans. 12. The secondary beneficiaries were the Joint-Stock Company The State Export-Import Bank of Ukraine (Ukreximbank, UEB) and the participating banks (PBs). Participation in the project was expected to: incentivize local banks to develop capacity for better risk management, procurement, and monitoring of safeguards required by loan covenants; help banks adopt sound business practices; develop new energy efficiency products for industrial and commercial companies, municipalities and municipal sector enterprises, and ESCOs; and attract new lines of credit financed by other international financial institutions (IFIs). 1.5 Original Components (as approved) 13. The project was designed to encourage the banking sector to play an important and sustainable role in meeting the financing needs for improving energy efficiency by the industrial and municipal sectors. It was expected to finance sub-loans up to US$30 million per sub-borrower, including investments in energy-intensive industries, such as metals, chemicals, building materials, and commercial enterprises. 14. The project consisted of one component that included the following list of energy efficiency subprojects to be financed out of the proceeds of the loan: (a) of inefficient and obsolete equipment and facilities; (b) installation of highly energy-efficient industrial equipment and processes for new production capacities, whose current energy use considerably exceeds current best practices; (c) utilization of waste gas and heat and excess pressure; (d) improvement of systems that involves a suite of measures to increase energy efficiency; (e) reduction of energy loss reduction in municipal sector enterprises; (f) preparation of energy efficiency-related studies and technical assistance; (g) reduction of energy losses in buildings; and (h) implementation of other energy efficiency subprojects satisfactory to the World Bank. 1.6 Revised Components 15. The Project components were not revised, however some of the intermediate indicators were amended as the Bank responded to fluctuations in the demand for the Project s funds (see Section F (b) in the datasheet and paragraph 18 below). 3

14 1.7 Other Significant Changes 16. The project was restructured once, in Dramatic events in Ukrainian political and economic landscapes in , including the second wave of banking sector crisis, had their toll on the project s implementation progress, causing a lack of demand for energy efficiency subproject financing. Businesses were mostly focusing on financing operational expenses and maintaining the financial status quo, rather than planning or implementing long-term investment programs. By the end of 2015, the economic situation began to improve and additional measures were taken by UEB and the World Bank to make the financing terms more attractive and to expand the project pipeline (will be covered below). As a result, witnessing an increasing interest in the credit line, UEB, together with the Ministry of Finance (MoF), decided that a 12-month extension of the closing date would enable full utilization of the remaining credit funds and achievement of the PDO. The World Bank agreed with the proposal and the closing date was extended from March 31, 2016, to March 31, 2017, in view of the impact of the crisis in , allowing more time to achieve full disbursement of funds and achievement of the project results. 18. In addition to the extension of the closing date, two new indicators were added to the project s Results Framework. A core sector indicator, projected lifetime fuel savings, measuring energy savings was added at the PDO level. The savings were calculated using annual benefits in energy consumption for each subproject converted into tons of oil equivalent and further using the conversion factor (from toe to MJ). The projected lifetime was calculated as the period from the date of the launch of each subproject up to the closing date of the Energy Efficiency Project (EEP). An intermediate results indicator was added to measure the number of ESCO subprojects that participated in the project. The indicator was added to promote using ESCOs as a tool for improving energy efficiency in the public sector and, specifically, in municipalities. Due to regulatory restrictions, which are described further in this Implementation and Completion Results Report (ICR), municipalities were facing difficulties directly borrowing funds for the purposes of energy efficiency improvements. The Project s intermediary indicators were also amended with 60-times increase of the gas savings indicator and reduction of the electricity savings indicator. This was done to address changes in the structure of demand for the credit line, since it turned out as the Project progressed that there were substantially more projects with gas savings potential, eligible for financing, that it was initially expected. 19. To accommodate the demands of potential sub-borrowers struggling with the Ukrainian financial crisis, the World Bank, on September 7, 2015, issued a temporary waiver of the debt service coverage ratio (DSCR) requirement until March 31, The project documentation initially required the DSCR to be at least 1.3:1 after receipt of the sub-loan based on a three-year moving average of investments throughout the life of the sub-loan. After the financial crisis hit Ukraine, local companies were struggling to maintain the DSCR required by the project, due to their increased debt burden and reduced cash flows caused by the financial crisis. As a result, a significant number of Ukrainian companies could not qualify for loan funds and demand for subprojects fell. The results of the temporary waiver proved effective in increasing the demand and no increase in NPLs took place, which prompted the appropriate amendments into project agreements during the project restructuring to formalize the reduction of the ratio from 1.3:1 to 1:1. 4

15 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design, and Quality at Entry Soundness of Background Analysis 20. Project preparation started in 2010 in response to a Government request. At the time of appraisal in 2011, the World Bank had almost twenty (20) years of experience providing active support to the Government s activities in the banking and energy sectors in Ukraine. 21. The project included an on-lending mechanism to other eligible financial institutions PBs that were willing to invest in eligible energy efficiency projects in the industrial and municipal sector. The PBs were supposed to make medium- or long-term investment loans to eligible companies and municipalities to improve their energy efficiency. 22. The project relied on the following lessons learned in previous World Bank engagements in Ukraine and energy efficiency projects, implemented by the World Bank across the world: Distributing funds for financing energy efficiency projects through a financial intermediary(ies) helps simultaneously address the country s energy efficiency challenges and improve the capacity of the banking sector. After analysis of possible design options, which included direct lending to entities with a Government guarantee, lending through the Government or Government-owned agencies or through a financial intermediary, the project was designed to be implemented by a financial intermediary, UEB. The World Bank based the project design approach primarily on the positive results of two World Bank energy efficiency financing projects (China Energy Efficiency Financing Project and Renewable Energy Project in Turkey), which used financial intermediaries to distribute funds to energy efficiency sub-borrowers. Strong implementing agencies familiar with the market and having a good grasp of project financing issues is a necessary condition for successful implementation of World Bank projects involving financial intermediaries. In addition to a number of Development Policy Loans 2 with financial sector conditionality, the World Bank had completed implementation of the Export Development Project (EDP) in 2005 through UEB and then EDP2 3 followed by EDP2 Additional Financing. As the official 2 Development Policy Loan 1 (2005, US$251 million) supported priority reforms in social and economic spheres of the Government's Action Plan for Meeting the People relating to (a) the investment climate, (b) public administration and public finance, and (c) social inclusion. Development Policy Loan 2 (2007, US$300 million) supported the national program aiming at (a) improving the investment climate to sustain growth, (b) creating fiscal space for growth through strengthened public finances and public sector reforms, and (c) improving service delivery and social inclusion. 33 Both Export Development Projects (EDP) served similar objectives, by developing UEB capacity and providing funds to Ukrainian enterprises through UEB a local financial intermediary. EDP (P044851) (1997, US$70 million) was aimed at developing Ukraine s emerging private sector export potential by: (a) supporting the production and marketing of goods, works, and services for export in all sectors of the economy; (b) providing an integrated package of information, technical assistance, and finance services to private and privatized exporters; and (c) developing the capacity of UEB through a comprehensive institutional development program. 5

16 agent of the GoU for the intermediation of IFIs credit lines, and having the benefit of EDP and EDP2 experience, UEB was well-positioned to be the implementing agency under EEP and had a solid industrial clientele and a strong team dedicated to developing energy efficiency financing projects. In particular, EDP assisted UEB with carrying out a comprehensive institutional development program and provided it with an integrated package of information and technical assistance. In addition, UEB had a proven track record in implementing energy efficiency projects under the credit line supported by the European Bank for Reconstruction and Development (EBRD) (Energy Efficiency Program (2007, 2008, and 2012). A careful approach is needed in achieving a balance between policy framework, institutional arrangements, training, and implementation effectiveness. The project did not include a specific policy component as UEB, being the main implementing agency, did not have the power to make national policy decisions in energy efficiency and wanted to keep the project focused on intermediary financing. This has turned out to be the right approach since the political crisis of shifted Government priorities and there would have been a high risk of delays with implementation of policy interventions. Energy efficiency policy advice was provided through other World Bank engagements in Ukraine, implemented beyond the Project s framework. For example, the Bank produced a Policy Paper, prepared with the help of ESMAP in 2015 on Facilitating Municipal Energy Finance in Ukraine. 4 Another example is a Concept note for Energy Efficiency Fund, 5 prepared in coordination with international donors by the Government of Ukraine in 2016, which became a basis for the Law On Energy Efficiency Fund approved by the Ukrainian Parliament in June A number of policy assistance interventions was provided through The District Heating Energy Efficiency Project (P132741), the preparation of which was combined with policy dialogue on tariff reforms. Focus programs to deliver real energy savings quickly (within one to two years) to build program credibility and learn from early implementation. A pipeline of subprojects was prepared and three subprojects were reviewed in detail before appraisal, two of which met the eligibility criteria. By the end of the second year of the project s implementation period, eight subprojects were signed and disbursements began. EDP2 (P095203) and the EDP2 Additional Financing (2006, US$304.5 million) served two objectives: (a) serve as a catalyst to support export and real sector growth in Ukraine during the EDP2 implementation period ( ) and beyond by providing medium- and long-term working capital and investment finance to Ukrainian private exporting enterprises; and (b) further improve the ability of the Ukrainian banking sector to provide financial resources to the enterprise sector, through further development of intermediation, by expanding its depth and breadth through more and better lending products. 4 Policy Paper. Ukraine: Facilitating Municipal Energy Efficiency Finance. October ESMAP// PUBLIC-EECI-Policy-Paper-Finalt-Clean v2-002.pdf. 5 Concept of Energy Efficiency Fund. 2016// 6

17 Assessment of Project Design 23. Project objectives. The project established a clear connection between its activities and the PDO. The subprojects, financed under the loan, directly contributed to the improvement of energy efficiency while disbursing the Bank s funds through local financial institutions indeed helped facilitate sustainable financial intermediation. 24. Project design and components. The project was designed to have one component, with clearly articulated types of activities to be financed from the loan proceeds. A similar onecomponent design was used in a similar project World Bank Energy Efficiency Finance Project (P112578), implemented in Turkey (closed in 2017). The project s proceeds were provided to UEB, a 100 percent state-owned joint stock company, which was to provide long-term loans to two types of clients: (a) subproject sponsors for eligible energy efficiency investments; and (b) PBs that would lend for eligible energy efficiency investments as well. UEB reviewed subprojects based on procedures established in the project s Operations Manual, which covered aspects such as eligibility, safeguards compliance, and monitoring requirements. UEB was also responsible for prequalification of commercial banks for the project based on eligibility criteria that were identical to the eligibility criteria of UEB, including full compliance with the National Bank of Ukraine (NBU) regulations. PBs had to agree to use the same criteria for on-lending for energy efficiency subprojects, as agreed with UEB. The project s design proved to be well tailored to the country context and agile enough for the project to survive one of the hardest economic crises in the modern history of Ukraine while achieving or exceeding most of its targets. 25. Adequacy of Government commitment. The Government was committed to the project s design and facilitated a smooth implementation of the project. Promoting energy efficiency was one of the top priorities of the Government at the time of appraisal and continued to be so up to the closing. In this project, UEB was the Borrower of the project s funds and the main implementing agency, whereas the Government provided sovereign guarantee to the World Bank for a guarantee fee of 0.05 percent. The Government also assisted UEB with regulatory and fiscal support, providing necessary liquidity during the banking crisis and developing legislation aimed at promoting energy efficiency policy both at the national and municipal levels. 26. Assessment and mitigation of risks. The project s risks were assessed correctly at the appraisal and no new risks materialized during implementation. At the time of the appraisal, the following risks were identified: macroeconomic risk (mitigated by the International Monetary Fund (IMF) program and World Bank Development Policy Loan program); political risk; and implementation risk. The political (or country) risk materialized during implementation in the form of a deep political crisis that took place in Overall implementation risk was assessed to be moderate and was addressed through the identification of a reliable counterpart (UEB), increased reliance on the private sector for project preparation and implementation, and early marketing of the project. A set of the following measures were adopted to accelerate disbursement from the outset of the project: (a) identification of a counterpart (UEB) with a successful track record on disbursing World Bank projects; (b) increased reliance on the private sector for project preparation and implementation; (c) marketing of the project early on during project preparation; (d) establishment of an indicative project pipeline about double the size of the loan to accommodate dropouts; (e) preparation of and joint review of at least three subprojects before appraisal; and (f) accommodating retroactive financing of up to 20 percent of the loan amount. 7

18 2.2 Implementation 27. The project was implemented under budget and was closed on March 31, 2017, reaching full disbursement and achieving or exceeding most of its targets. The factors that contributed to its successful implementation are detailed in the following paragraphs. 28. Simple and straightforward project design and realistic Results Framework. The Project included one component and was designed as a straightforward operation using financial intermediary mechanism (see paragraphs 13, 23, 24 above). The PDO, component activity and results indicators were well aligned with each other based on realistic assumptions. 29. Experienced Project Implementing Entity and Project Implementation Unit. UEB, the project implementing entity, has been working with the World Bank since the 1990s as an implementing entity for two export development projects (EDP and EDP2) and Additional Financing for EDP2. Over the years, UEB has demonstrated its reliability as a counterpart, with a highly competent Project Implementation Unit (PIU) and unique and in-depth knowledge of the local market and subsectors of the national economy. In addition, UEB developed internal capacity and systematically trained staff in its regional offices on specifics of work with the World Bank financing and with energy efficiency projects. UEB assigned day-to-day supervision and management over the project s daily operations to the PIU. Continued availability of adequate resources and skilled staff in UEB contributed significantly to successful project implementation. The technical and operational risks associated with energy efficiency investments required UEB to have a strong technical capacity to appropriately identify, appraise, and monitor the subprojects, since this was still a relatively new area for Ukrainian financial institutions. In addition to the PIU structure, UEB had an established Energy Efficiency Unit that had been evaluating energy efficiency projects under the EBRD loan that was implemented during the project s appraisal. The unit had staff qualified to work with technical aspects of potential energy efficiency investments. UEB also helped the PBs develop capacity in handling energy efficiency projects through active trainings, providing materials and advice. 30. Conditions of the sub-loans that beneficiaries found attractive, especially amid a volatile environment in the Ukrainian banking sector in and According to a survey carried out among the beneficiary enterprises, a combination of attractive loan maturities (up to 10 years and grace period up to 5 years) and interest rates (which varied throughout the Project) were among the main factors that attracted the sub-borrowers to the project. The project has also benefited from the credit line option of refinancing energy efficiency investments that were made by sub-borrowers before signing the sub-loan agreement, 6 if made within a certain period (as a result, around 40 percent of subprojects enjoyed such options). The combination of those loan terms was truly unique for the Ukrainian banking sector, especially during the banking crisis when the average loan maturity rarely exceeded a year and banks offered 6 The terms of the sub-loan agreement provided that no expenditures for a subproject by a PB or a beneficiary enterprise shall be eligible for financing out of the proceeds of the Project if such expenditures shall have been made earlier than 360 days before the date on which UEB shall have received the sub-loan application package, with the proviso that expenditures incurred one year before the date of loan signing up to an amount of 20 percent of the IBRD loan amount will also be eligible for financing. 8

19 double-digit interest rates. The project, however, faced a number of challenges, as described in the following paragraphs. 31. The financial crisis affected the pace of the project s implementation. The severe economic crisis, loss of control over Crimea, and conflicts in Donbass and Lugansk regions in Eastern Ukraine triggered massive local banking system losses, with total loss reaching UAH 53 billion in 2014 (reversing from the marginal profit of UAH 1.3 billion in 2013). Deep recession and national currency depreciation caused deposit outflows, rising levels of NPLs, and a large number of bank failures, which further reduced confidence in the economy. The number of lossmaking banks increased from 20 in 2013 to 52 in Against the heavy deposit outflows, banks offered increasing interest rates, and lending activity slowed to a standstill due to high economic and security risks. The few foreign banks that remained well capitalized through the crisis held mostly cash and were not lending to local enterprises. Thirty-eight banks failed during 2014 (out of 181 at the start of the year). As a consequence, the project did not disburse any funds between January and May However, timely reaction of UEB s team and the World Bank s close supervision helped handle the consequences of the financial crisis and restructure the project to increase demand. During the course of implementation in , when the disbursement rate stalled and the risk of cancellation of funds became apparent, UEB s team asked the World Bank to consider a temporary reduction of the DSCR from 1.3:1 to 1:1 to expand access of the businesses to the credit line. The severe economic situation shifted priorities of Ukrainian enterprises toward financing their operational expenses instead of considering investment programs. Over the months that followed, a combination of factors including the improving situation in the Ukrainian economy and a positive response to the reduced DSCR caused an increase in demand for the credit line and in 2015 UEB asked the World Bank to consider reducing the DSCR permanently and extend the closing date to March 31, Since the milestones that were established earlier by the World Bank as a precondition to restructuring were fulfilled, 7 the closing date was extended and as a result, the project achieved a 100 percent disbursement rate by the revised closing date. 33. The following table demonstrates the dynamics of signing subprojects throughout the implementation period and the positive impact of the measures undertaken by the World Bank and EUB during The World Bank required UEB to achieve the following milestones before the decision to proceed with restructuring was to be considered: (a) signing of an additional US$30 million of sub-loans; (b) disbursement of an additional US$20 million compared to June 1, 2015, levels; and (c) signing of one municipal energy efficiency subproject. 9

20 Table 1. Signing of Subprojects Year of Commitment Number of Subprojects As a result of the joint World Bank and UEB response, by the closing date, UEB had a solid pipeline of projects amounting to US$80 million, ready for further energy efficiency financing, including using new municipal financing mechanisms, introduced in 2016 through budget decentralization measures. 35. The project faced challenges in bringing PBs to the project. The political and economic crisis in Ukraine during considerably affected the banking sector. Most potential PBs could not fulfill the financial terms established by the project as entry conditions. In , two banks signed subsidiary loan agreements with UEB, namely, Megabank and Alfa-Bank. Alfa- Bank terminated the sub-loan agreement in the end of 2015 without disbursing funds to any of the subprojects due to its decision to freeze lending to the commercial sector and focus on other priorities. Only one PB stayed in the project by the closing date. However, even under these conditions, the projected volume of energy efficiency sub-loan disbursements was fully achieved due to efficient and cooperative work of UEB and Megabank, which were able to distribute funding and accelerate disbursements in accordance with the project time line. 36. The project faced difficulties in attracting municipal projects a problem that was resolved during the course of implementation. Among the difficulties the project was facing throughout the implementation period was the low number of municipal subprojects. During the midterm review, the following obstacles, which limited the participation of municipalities, were identified: (a) limited creditworthiness of municipalities or municipal utilities and lack of costrecovery tariffs for municipal utilities; (b) issues related to eligible collateral; (c) one-year budgeting processes by municipalities that did not correspond to the long-term investment funding requirements of energy efficiency investments; (d) market prices for loans in hryvnia are typically not affordable for municipalities or municipal utilities; (e) exposure to foreign exchange risk in the case of foreign currency loans; and (f) lack of institutional capacity to prepare bankable municipal energy efficiency projects. Despite these difficulties, the World Bank together with UEB and Megabank offered credit funds to municipal-type enterprises and ESCOs, which contributed to energy savings by municipalities. 37. UEB considered using leasing as an alternative disbursement channel, but such an option was found not feasible, considering the time needed to process the necessary legal amendments and, at a later stage, due to considerable project progress that eliminated the need for additional disbursement options. To increase the volume and the pace of disbursements without risking the quality of the project, the World Bank, together with UEB, was considering making funds available through alternative options, based on the needs of the enterprises and their financial standing. In 2015, UEB suggested that the World Bank consider provision of the loan proceeds through UEB s leasing subsidiary using leasing mechanisms. The World Bank agreed to 10

21 consider this option under the condition of making all Ukrainian leasing companies eligible for such financing. This necessitated an extensive discussion related to eligibility requirements and their respective controls/monitoring and required amending the project agreements. As a result, in light of the time pressure, UEB and the World Bank team were reluctant to reopen the discussion of legal amendments (including amendments to operational procedures, the eligibility criteria, provisions regarding adding several new counterparts, and so on), which would have required considerable time for review and approval. However, subsequent energy efficiency interventions by the World Bank in Ukraine could employ such schemes, since UEB noticed significant interest in such schemes from its clients, especially during the last two years of the implementation period. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 38. M&E design. The M&E framework was generally aligned with the PDO and consisted of indicators commonly used in energy efficiency projects. The established framework included a good combination of indicators, measuring both the financial progress of the project and the extent of energy savings achieved as a result of the project s implementation. 39. The PDO could have been worded in more general terms, without listing the types of enterprises, subject to financing. In a similar project, namely, China Energy Efficiency Financing Project (P113766), the PDO was worded more broadly: improve energy efficiency of selected medium and large-sized industrial enterprises in China. Such an approach better reflects the recurring need to adjust the project to fluctuations in demand from PBs and sub-borrowers. However, since the EEP s PDO did not directly require all of the mentioned entities to be the subborrowers of the Loan (the Project s objective was to contribute to the entities improved energy efficiency, but it didn t require the same entities to be the subject of financial intermediation), the task team considered this wording better reflecting the utilization of the energy efficiency benefits supported by the project. 40. M&E implementation. UEB in coordination with the MoF and PB submitted project progress reports on a regular basis and the data collected were used for the World Bank s implementation reviews and Implementation Status and Results Reports (ISRs). The data needed for monitoring selected indicators were of the type that were normally collected by UEB from subborrowers and thus were easily monitored. Progress indicators were instrumental in keeping track of and identification of problems in implementation progress. The quality and timeliness of the data collection and reporting were satisfactory and no issues were raised during the implementation phase. 41. M&E utilization. The intermediate indicators were instrumental in assessing the project s progress. Based on the information collected, the World Bank was able to make necessary adjustments to accommodate the requests from enterprises and increase the demand and disbursements without losing in overall quality of the project. As a result, few adjustments were made to the Results Framework. A core sector indicator project lifetime fuel savings, measuring energy efficiency in heat and power, was added at the PDO level. During restructuring in 2015 intermediate results indicators measuring the number of municipalities covered by the Project were added, measuring the number of ESCOs participating in the project (see paragraph 9) and the number of signed municipal type sub-projects. Other indicators were adjusted to reflect changes in the source of energy savings, as the Project resulted in more gas than electricity savings. 11

22 2.4 Safeguard and Fiduciary Compliance 42. Safeguards. Overall, safeguard and fiduciary compliance were satisfactory during the implementation phase. In accordance with the World Bank environmental assessment policies and procedures (OP/BP/GP 4.01), the project has been assigned Category F. UEB was responsible for ensuring that subprojects financed under the project undergo environmental screening to ensure their conformity with Ukrainian environmental legislation and regulations and the World Bank s safeguard policies and procedures. UEB also undertook environmental screening of the sub-loan applications to determine the appropriate environmental risk category for the subborrowers/subprojects. The sub-borrowers were responsible for carrying out environmental analysis and confirming that the proposed subprojects comply with national environmental guidelines and for obtaining the necessary clearance from the appropriate licensing authorities. The well-developed Operations Manual and experienced PIU staff, with qualified environmental and social experts, contributed significantly to ensuring the effective implementation of safeguards and fiduciary compliance. The World Bank conducted a regular environmental and social safeguard compliance monitoring and supervision of the project through regular reviews of subborrowers activities. The missions carried out by the World Bank contributed to an overall compliance of sub-borrowers with agreed environmental procedures. No environmental or social risks/issues related to safeguards were observed during the project s implementation. At the request of UEB, the World Bank provided training on environmental screening of subprojects on providing guidance to sub-borrowers with regard to preparation of environmental assessment/environmental management plans, environmental information sheet preparation, supervision, and reporting activities. 43. The World Bank s safeguard team initially did not include the option of Pesticide oversight in the project s safeguard documentation; however, as the project proceeded, the team updated the Operations Manual to ensure the proper PCB management in UEB s and PBs subprojects, when reconstruction of old utilities/buildings was financed, to make sure that PCBs were well managed and did not impose negative impact on workers. 44. Financial management. The World Bank s financial management team conducted regular monitoring of UEB s financial management systems, including accounting, reporting, budgeting, flow of funds, and staffing, and found that systems were overall satisfactory. The financial management and disbursement arrangements were well established and operated properly throughout the project: qualified staff was available, the project s Operations Manual and internal controls system were in place, the Designated Account was operational, and the authorized signatories were available. The automated accounting and reporting systems were in place and small modifications to enhance the system throughout the project s term were introduced by UEB. The project was in compliance with its quarterly interim financial reporting requirements. The entity audit reports were submitted on time and were properly disclosed by both UEB and the World Bank. The project audit reports were also submitted on time and clean audit reports were issued. No substantial weaknesses in internal controls were identified by the auditors. Staff of the PIU benefitted from participating in several seminars and workshops organized by the World Bank. 45. Procurement. The procurement reviews were made on a regular basis and have not revealed any irregularities in procurement aspects of the project implementation. The UEB PIU 12

23 closely monitored all procurement procedures with due diligence and in accordance with the Loan Agreement and Operations Manual provisions. The World Bank concluded that all procurement procedures were conducted in accordance with commercial practices and followed a competitive approach. UEB monitored the compliance of sub-borrowers to ensure that all contracted firms met the World Bank s eligibility criteria and ensured the check of all firms against the World Bank s list of debarred firms before awarding a contract. 2.5 Post-completion Operation/Next Phase 46. By the end of the implementation period, UEB indicated that it has prepared a strong project pipeline in the amount of US$80 million, representing a number of important sectors, including agriculture, food, plastic packaging, retail trade, timber processing, construction materials, energy, and municipal energy efficiency. If all subprojects were approved by the closing date, UEB would have had a significant financing gap using the EEP IBRD loan proceeds. Considering growing interest from the enterprises to use the credit line, UEB was interested in additional financing or launching a new project to meet the increased demand for energy efficiency financing and broaden the coverage of the energy efficiency credit line. However, based on factors beyond UEB s control, the World Bank took the decision not to proceed with additional financing. A modified reiteration of the project, however, could still be an option to consider at a later stage with the goal of scaling up the growing energy efficiency demand. 47. The need for long-term financing still persists in Ukraine as the local banking sector is only starting to adjust to new market conditions and enterprises continue to point to lack of affordable financing as the main constraint for their expansion. This constraint is particularly acute considering that Ukraine has only recently started to move out of economic and political turmoil, which all but cut off other possibilities for external financing for energy efficiency improvements. Among the most affected by this crisis are the country s small and medium enterprises (SMEs), which need financing to reduce dependence on expensive types of fuel and/or reduce consumption through efficiency improvements. 48. Energy efficiency is a top priority of the energy policy agenda for the Ukrainian Government. In 2015, the Government, following the Ministerial Council s adoption of Directive 2012/27/EU on energy efficiency in the European Union (EU), set energy efficiency targets for Ukraine, developed a number of laws including Energy Efficiency Law, Law on Energy Performance of Buildings, and Metering and Labelling legislation. In addition, the Cabinet of Ministers of Ukraine adopted on November 25, 2011, Decree No On National Energy Efficiency Action Plan until The legislation will help improve the regulatory environment in energy efficiency and will attract a wider range of enterprises, especially at the municipal level. 49. The project s considerable progress toward achieving its objectives and the level of expertise gained by UEB during the implementation (as well as during the implementation of other three lines of credit to UEB, totaling US$385 million) were the key factors enabling the World Bank to approve the Access to Long Term Finance Project in May 2017 to UEB in the amount of US$150 million. The project includes a line of credit component for UEB s lending to SMEs both directly and through other qualified financial institutions. This line of credit would further enhance the local capacity and will engage a wide range of SMEs. 13

24 50. Based on the above discussion, UEB and the MoF of Ukraine expressed their interest in developing a second EEP2 with the World Bank. The second project could build up on the success of the closed EEP and enhance energy efficiency in the municipal and industrial sectors, where financing is still lagging behind. If the potential project crystallizes, it could include a line of credit component for UEB s lending to industrial and municipal entities both directly and through PBs and a component supporting use of renewable energy technologies. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Relevance of Objectives Rating: High 51. The relevance of the project s objectives is rated high, based on the following. The PDO was relevant at the time of the appraisal and was aligned with the Country Partnership Strategies (CPS) for FY (namely, with a Core Program on improving energy efficiency of CPS Pillar 1 Sustaining Growth and Improving Competitiveness ) and for FY12 FY16 9 (Result Area 3 Improved energy efficiency, quality and governance of municipal infrastructure services, by involving municipal-type sub-projects and ESCOs and Result Area 5, Outcome 14 Improved energy efficiency in the public and private sectors ). The Project is relevant considering the Country Partnership Framework (CPF) for Ukraine for FY17 FY21 and its first Focus Area 1 objective of improving the quality of infrastructure services, particularly in energy and transport, which also supports [...] establishment of energy efficiency financing mechanisms. The Project was the first World Bank s project which offered Ukrainian entities energy efficiency financing mechanisms and experience gained during the operation will help to further develop and strengthen such mechanisms. The Project supports second CPF Focus Area 2 objective, namely, strengthening the financial sector and laying the basis for the sound credit growth. The Project reached out to a variety of local banks and provided a solid financial source which was one of the very few amidst the banking crisis Both UEB and participating bank further strengthened their expertise in working with energy efficiency projects and will continue further expanding their credit lines. 52. The PDO remains relevant and consistent with the current government priorities and conditions and is aligned with the Energy Strategy of Ukraine (which set a target of improving 8 World Bank Ukraine - Country partnership strategy for the period FY08-FY11. Washington, DC: World Bank 9 World Bank Ukraine - Country partnership strategy for the period FY12-FY16. Washington, DC: World Bank. Result Area 3 Improved energy efficiency, quality and governance of municipal infrastructure services, by involving municipal-type sub-projects and ESCOs and Result Area 5, Outcome 14 Improved energy efficiency in the public and private sectors. The PDO is specifically aligned with Result Area 5 Improving infrastructure for business activities, and specifically, Outcome 15 Improved performance of power sector. The project design reflected the identified financing constraints facing industrial and commercial companies, municipalities, municipal sector enterprises, and ESCOs by facilitating sustainable financial intermediation for the financing of energy efficiency investments. 14

25 energy intensity by 50 percent by 2030), 10 the Targeted Economic Energy Efficiency Program, and the National Energy Efficiency Action Plan. Relevance of Design and Implementation Rating: High 53. The project design was focused and gave due consideration to the country context. It was simple and established a clear relationship with the PDO. It had one component, listing the types of subprojects eligible for the World Bank s financing. Based on the experience with other World Bank projects in the energy sector, carried out in parallel in Ukraine (namely, the Hydropower Rehabilitation Project (P083702) and the Power Transmission Project (P096207), both closed in 2016), the Bank s and the Borrower s intent to avoid including technical assistance components addressing institutional issues in the project turned out to be a justified approach. In both the Power Transmission Project and the Hydropower Rehabilitation Project, technical assistance components included assisting the Government in power sector reform, however due to the unstable political landscape during the course of the projects implementation ( ), reforms were stalled for months. As a result, both projects faced difficulties with accounting for the success of the TAs (the Projects went through numerous restructurings, reducing the scope of supported legislative interventions, needed to complete power sector reform), mostly for reasons beyond the World Bank or implementing entities control (such as frequent changes of government). 54. The project design was based on the lessons learned during the previous World Bank engagements involving financial intermediaries in Ukraine. The design of the project was based on the framework used in Export Development Project (P044851) and Export Development Project 2 (P095203) by involving strong local banks and several PBs, channeling funds downstream to the subproject level. The project reached a reasonable balance between flexibility of the loan terms/loan eligibility criteria and considerations of selecting project participants with good financial standing. Although (as it was covered in paragraph 39) it mentioned the types of covered enterprises, EEP did not include restrictions for lending by sectors or currency, and it did not establish a fixed allocation between the sectors, the regions, or the technologies used to increase energy efficiency, enabling a more flexible approach to lending in changing circumstances. 55. The PDO indicators were well aligned with the project s objectives. The changes to the project s Results Framework, introduced during the project s term, were minor and did not affect the direction of the project. The terms and conditions of the sub-loans were well designed to attract a solid pipeline of subprojects. Lessons from earlier projects in Ukraine were used to make the project flexible enough to respond to the changing political and economic environment. 3.2 Achievement of the Project Development Objective Rating: Substantial 10 New Energy Strategy of Ukraine until Security, Energy Efficiency, Competiveness

26 56. The PDO was to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies by facilitating sustainable financial intermediation for the financing of energy efficiency investments. 57. Achievement of the PDO is measured against two specific objectives of the PDO statement: (a) to contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies; and (b) to facilitate sustainable financial intermediation for the financing of energy efficiency investments. The achievement of PDO indicators is summarized in Table 2. No PDO Indicator Volume of EE sub-loans (US$) Projected lifetime fuel savings (MJ) Number of participating banks Original Target 200,000,000 Extent of energy savings (toe) 500,000 Table 2. Achievement of PDO Indicators End Target Actual Actual % of Target 200,000, ,000, Fully achieved 25,120,800,000 25,120,800,000 27,800,000, Target exceeded Comments Target not achieved due to banking crisis in Ukraine during As a result of the crisis, only two participating banks qualified to participate in the project, with one of them canceling sub-loan agreement due to changed priorities. Both UEB and one PB which stayed until the Project s closing were able to disburse 100% of funds. 600, , Target exceeded 58. One PDO indicator was partly achieved, namely, the indicator requiring UEB to work with two PBs. This, however, should be viewed in light of the impact of a major banking crisis that took place in , which affected the pace of the project implementation and significantly reduced the number of banks which could potentially qualify for the Project; and the fact that there were two PBs at a certain point during the implementation period, with one PB dropping out for reasons beyond UEB s control (will be covered below). Objective 1: To contribute to improved energy efficiency by industrial and commercial companies, municipalities, municipal sector enterprises and energy service companies Rating: Substantial 59. The project surpassed the expected total volume of energy benefits and achieved remarkable results in the reduction of CO 2 emissions. At the closing date, initial estimates of expected energy savings and projected lifetime fuel savings were overachieved by more than ten percent with extent of energy savings totaling 663,900 toe per year (instead of the planned 600,000) and projected lifetime fuel savings of 27,800,000,000 MJ (instead of planned 25,120,800,000). The project has significantly contributed to annual savings in energy consumption, including in gas: 199 mcm; electricity: 213 GWh; and coal: 680,000 tons. 16

27 60. At project approval, the annual gas savings were supposed to equal 2.6 mcm. During the implementation phase, UEB and the World Bank task team realized that the subprojects being submitted by sub-borrowers were demonstrating much better annual gas savings and, as a result, the indicator was amended during the 2015 restructuring to account for 160 mcm. By the closing date, the project had overachieved the revised target, resulting in 199 mcm of annual gas savings, thus beating the initial estimates 60 times. While the target on natural gas was increased 60 times versus the initial project goal, the indicator on electricity savings was reduced to reflect the real sector response to the project: major savings under EEP were reached through natural gas and coal efficiency. The project s annual energy benefits exceeded 213 GWh and in 10 years the project is estimated to lead to benefits in the amount of 30 GWh. The project has also helped achieve significant GHG emission reductions by the closing date, the project resulted in a reduction of over 680,000 tco The project covered a wide range of industries and enterprises. As can be seen from Table 3, the project financed 121 subprojects and covered more than 7 industrial sectors with the largest number of subprojects in agriculture and food/beverages. According to UEB, around 45 percent of credit line funds were disbursed to SMEs, with large enterprises receiving the rest. 62. The Construction Materials sector, which comprises of cement industries, achieved the highest financial leverage (2.7), largest energy savings (2 million toe) and emissions reduction (7.2 million tco2e) over a 10-year assessment period (which has been chosen to enable comparability between the different investments which range in life from 10 to 25 years). However, the actual investment lifetimes have been taken into account in determining the economic rates of return (ERRs). For cement industries, equipment lifetimes range from 20 to 25 years, and over the lifetime of the equipment, this would account for significant addition to energy savings through continued reduction in consumption of coal, natural gas and heat. 63. The sector saw the largest number of subprojects (48) with a financial leverage of The energy savings (118 thousand toe) and emission reduction (349 thousand tco2e) are largely from of agricultural machinery and in some cases of natural gas with biomass (e.g., straw and wood waste). 17

28 Sector Breakdown Number of Subproject s Total Subprojects (US$, millions/percentage s) Table 3. Outcomes by Sector Total Investmen t (US$, millions) Energy Savings over 10 Years (thousan d toe) GHG Emission Reductio n over 10 Years (thousand tco2e) Financia l Leverag e Achieve d Cost of Energy Savings - 10 Years (US$ per KGoe) Cost of GHG Emission Reductio n - 10 Years (US$ per tco2e) % Food and beverages Consumer goods Glass production Construction materials Energy/heat supply Pharmaceutic s % % % % , , % % Other % Total , , Figure 1 shows the distribution of funds according to the project components. Most of the funds were spent on (i) of inefficient and obsolete equipment and facilities and (ii) installation of highly energy efficient industrial equipment (i. e. installation of new equipment). 18

29 Figure 1. Distribution of Project Funds by Component s Category 1.90% 0.20% 39.50% 2.20% 56.10% of inefficient and obsolete equipment and facilities; installation of highly energyefficient industrial equipment improvement of systems which involves a suite of measures to increase energy efficiency reduction of energy losses reduction in municipal sector enterprises implementation of other Energy Efficency Sub Projects satisfactory to the Bank 65. Five municipal type projects and four ESCOs received project financing, thus helping Ukraine continue enabling access of municipalities to the benefits of energy efficiency financing. The project initially faced considerable difficulties in attracting municipal-type projects due to a number of legal impediments. First, public entities in Ukraine have limited capacity to borrow money, and throughout the project s lifetime, municipalities avoided any type of credit. Second, public entities budgets were approved only for a one-year period, and municipalities could not provide sufficient assurances that there will be enough funds to repay the loan during subsequent years. Third, the distribution of funds between local and central budgets did not allow for municipalities to have free funds at their disposal. 66. Despite those difficulties, the World Bank, UEB, and PB were able to develop and offer working mechanisms and attract municipal-type energy efficiency subprojects. The project s target included five municipal energy efficiency subprojects. The project s Legal Agreements did not include the definition of the term municipal energy efficiency subproject and therefore the UEB and PB teams gave this term a broad interpretation, by which they were treating the privately owned companies providing services to municipalities as municipal energy efficiency subprojects since municipalities were the ultimate beneficiaries of such loans. For example, as a result of the financing, provided by the project, heat supply equipment was renovated at Gorodnya Central District Hospital in Chernigiv Region. In Vinnytsya Region, the credit line provided to an operator of the local district heating network resulted in of worn-out sections of the district heating pipeline (see Table 4 for details). 19

30 Table 4. Breakdown of Municipal Sub-Projects (ESCOs) Source Region Type of Business Sub-loan Amount (US$, millions) Megabank Chernigiv Municipal EE/ESCO Megabank Chernigiv Municipal EE/ESCO Energy (toe) Use of Proceeds 0.09 Reconstruction of heat supply equipment for local hospital ,270 (for both projects) Reconstruction of heat supply equipment for local school UEB Vinnytsya Municipal EE Replacement of worn-out sections of heat distribution pipeline UEB Vinnytsya Municipal energy efficiency/esco UEB Zaporozhzhya Municipal EE/ESCO ,393 Replacement of gas boilers with biomassfired boilers to replace gas consumption Reconstruction of heat supply equipment at local hospital CER (tco2e) 3,229 (for both projects ,048 Total ,429 39, Therefore, although no municipality was granted funds directly from the credit line due to the reasons mentioned above, municipalities were the ultimate beneficiaries of the Project, since they benefitted directly through lower heating costs via fuel switch, energy efficiency improvements (boilers/pipes/pumps, etc) and indirectly by provisioning of improved services. 68. The Results framework aimed at signing 5 municipal energy sub-project and 2 ESCOs. As it can be noted from the Table above, the Project closed with 1 non-esco municipal sub-project and 4 ESCOs sub-projects which, while being privately owned companies, were considered municipal-type sub-projects by the Bank, since they benefitted local municipalities by improving the energy efficiency of municipal facilities. Such an arrangement allowed the Project to promote ESCOs specifically, since due to the legal impediments mentioned above, they were one of the very few tools available for enabling energy efficiency investments at the municipal level. For this reason the Bank considered it possible to allow the inclusion of ESCOs in the list of municipaltype subprojects, hence, the Project accounts for 5 municipal-type subprojects, 4 of which were ESCOs. By the Project s closing UEB informed the Bank about the increased interest for energy efficiency investments from municipalities, which resulted in UEB signing a credit agreement in the amount of US$500,000 with Kryvyi Rig municipality for of the municipal heating capacity. In addition, UEB also informed the Bank that it was evaluating lending transaction for a municipality in Dnipropetrovsk Region, for conducting energy efficiency and reduce heat losses in generation and transmission. 1,404 20

31 Objective 2: To facilitate sustainable financial intermediation for the financing of energy efficiency investments Rating: Substantial 69. The project has become one of the most successful investment lending projects of such a scale implemented in Ukraine over the past several years. By the closing date, the total amount of the loan was fully disbursed to reach over 80 beneficiaries. By UEB s estimates, the total amount of investments accelerated by the project equals US$ million, thus creating more than 2.7 times leverage over the loan amount. The project has achieved a country-wide coverage, with subprojects being implemented in 20 out of 24 oblasts of Ukraine. Throughout the course of the implementation, the project became a key tool for energy efficiency finance in Ukraine. 70. The project s sub-borrowers benefited from the inflow of IFI-backed energy efficiency financing to Ukraine, accelerated by UEB and the Government and solidified by EEP. In particular, throughout the project s lifetime, sub-borrowers benefited from the IFI-backed sustainable energy financing facilities, including the EBRD Energy Efficiency Program (three credit lines totaling US$150 million), NIB Environmental Lending Program (US$50 million), GCPF sustainable energy facility (US$30 million), and facilitated carbon financing arrangements (Joint Implementation projects) with the MCCF under the United Nations Framework Convention on Climate Change (UNFCCC) Kyoto Protocol. Subprojects, financed under the listed facilities, included private sector energy efficiency improvements and small renewable energy investments. 71. The project strengthened UEB capacity as a financial intermediary. UEB managed to engage one PB against the appraisal target of two banks. However, given the extremely volatile environment in Ukrainian banking sector and Ukraine s economy overall between 2014 and 2017, it is highly doubtful that other commercial banks might have been better placed to intermediate the World Bank s funds. Throughout the project s lifetime, UEB systematically monitored local banks potential for participation in EEP and evaluated eligibility of a number of Ukrainian banks, which resulted in processing of over 20 subsidiary loan requests. During , the anticipated risks of increased exposure to a depressed banking system were so high that no other Ukrainian bank was able to join the project as a PB. 72. In 2014, the project achieved the target of having two PBs. During project implementation, continuous dialogue was carried out between UEB and Alfa-Bank, which resulted in Alfa-Bank becoming a second PB in Preliminary consultations on several potential energy efficiency subprojects were initiated by Alfa-Bank in However, the economic turmoil led to drastic changes in Ukraine s real sector and the financial market, and Alfa-Bank s management made a decision to cease investment lending, enhance their credit portfolio, and focus on acquisition of banking assets. 73. Although the PDO indicator to have two participating banks was only partly achieved by the closing date, UEB s efforts ultimately produced increase of interest from the local Banks to participate in subsequent World Bank s projects. By the project s closing, the situation in the national banking sector has started to change: according to the estimates by the NBU, there is now an overall positive dynamic in the banking sector, and a dozen mid- and large-size Ukrainian banks, including those experienced in World Bank projects such as Megabank, Alfa-Bank, and 21

32 Ukrgasbank, were successfully screened for participation in another WBG backed project in During the meetings in Kiev with the ICR team, Alfa-Bank expressed its willingness to participate in EEP2, should it materialize. 74. By facilitating financial intermediation, the project helped strengthen expertise of UEB and PBs in preparation and implementation of the energy efficiency projects, involving IFI financing, as well as their risk management capacity. During the implementation period, UEB strengthened its capacity to originate, promote, and supervise the World Bank s credit line by having access to World Bank energy efficiency assessment tools and expertise. Processing 121 subprojects required an upgrade of both UEB s and PBs internal systems for using the World Bank standards of financial management, procurement, environmental, and social safeguards. UEB maintained continuous dialogue with the PBs and provided numerous trainings to support PBs in preparation of sub-loan requests in accordance with the project requirements, including advising on ways to market the credit line, evaluation of energy benefits, and compliance with environmental and social, and procurement procedures. 75. Sustainability. The increased capacity of banks and beneficiaries in handling WB projects as well as improved economic and legal environment and solidified banking system have further increased demand for energy efficiency financing from the potential beneficiaries beyond the Project s life. By the Project s Closing Date UEB and PB had developed a pipeline of potential sub-projects in the amount of US$80 million, which if approved, would require additional financing, therefore creating a basis for EEP-2. However, even if EEP-2 never materializes, both UEB and Megabank would continue supporting energy efficiency investments, though on a lower scale, as months past the Closing Date demonstrate. Both UEB and Megabank continue working with the World Bank with UEB being an implementing agency of the Access to Long Term Financing Project (P156766) signed in The Project will provide a total of US$150 million to be intermediated by UEB, targeting export oriented SMEs. UEB will further on-lend to local private financial institutions, thus using its experience in engaging local banks. 76. The Project contributed to a better understanding of the needs of the Ukrainian banking sector and businesses in the energy efficiency information collected during the Project s implementation demonstrated a growing need for a variety of alternative approaches to energy efficiency financing, including leasing schemes and guarantees. The expected growing demand for energy efficiency financing from municipalities would favor designing subsequent energy efficiency projects, which in addition to financing, could include technical assistance components, helping the municipalities to prepare and implement such projects this, together with combined strengthening banking sector would favor even wider Bank s outreach. 3.3 Efficiency Rating: Substantial 77. Despite difficulties posed for the overall financial sector in Ukraine by weaknesses in the Ukrainian economy with low rates of growth, major devaluation of the hryvna, and the impact of the conflict situation in Eastern Ukraine and Crimea, the project was carried out efficiently with a delay of one year over the originally planned completion date. 78. The efficiency of the investments was assessed by the cost benefit of the investments, based on a representative sample of 20 subprojects accounting for 63 percent of the total project cost. 22

33 The post-completion assessment applies the same metrics that were used during project appraisal. Details of the post-completion assessment are provided in annex 3. The indicators used to assess the cost-benefit rate were (a) economic rate of return (ERR) and (b) financial rate of return (FRR). For the ERR, no minimum threshold was specified at appraisal. However, two prototype subprojects were reviewed to determine ERRs that may be expected for those types of subprojects. For the post-completion analysis, ERRs for the sampled subprojects were estimated for two cases, with and without carbon benefits. Details are given in Table 3.5. The ERRs range between 10.6 percent and 81.8 percent. Weighted average estimates for the sample as a whole are given in table 5. In all cases, the ERRs are higher than 10 percent and higher than the discount rates (6 8 percent) that are prescribed under the current guidelines in the World Bank for economic evaluation of investment projects. Table 5. Post-completion Economic and Financial Rates of Return (Weighted Average) FRR ERR 19.0% Without carbon benefits With carbon benefits 15.9% 21.7% 79. For the FRR, a minimum threshold rate of return of 10 percent (in real terms) was specified at appraisal as an eligibility criterion for the subprojects. For the sampled subprojects, the estimated FRRs are in all cases higher than the threshold rate and range from 11.6 percent to 76.0 percent, with a weighted average of 19 percent (table 5). Details for the sampled subprojects are given in Table Justification of Overall Outcome Rating Rating: Satisfactory 80. The project met its development objectives. The project resulted in significant energy savings, was fully disbursed, and provided much-needed energy efficiency finance to industrial and commercial companies, municipal sector enterprises, and ESCOs with maturity structures and flexibility that the project beneficiaries valued highly. It had a multiplier effect creating more than 2.7x financial leverage over the loan amount with total investments brought by the Project equaling US$539 million. For a number of months during the banking crisis, the project was the only available source for energy efficiency financing in Ukraine and by the closing date a number of other financial institutions started developing similar programs seeing an interest in the project from the clients. 81. The project, however, faced a few shortcomings in achievement of its objectives; in particular, the Borrower had difficulties (though often for reasons beyond its control) in attracting PBs and expanding the project to a wider base of municipalities. For these reasons, the project s overall outcome rating is rated Satisfactory. 82. No split evaluation of the outcomes was done since the only PDO indicator added was a Core sector indicator, which does not constitute a restructuring requiring split evaluation. 23

34 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 83. Gender Aspects. The project did not originally include any systematic analysis or indicators to measure social development outcome including gender aspects as the local population was not the direct beneficiaries of the intended interventions. 84. Social Aspects. The Project mostly focused on energy efficiency improvements by businesses, however 5 sub-projects, carried out at the municipal level, directly benefitted local communities. As a result of the Project, heat supply equipment was replaced in local hospitals and schools in Chernigiv and Zaporoshya Regions. In addition, parts of the district heating equipment were replaced in one of the municipalities of Vynnytsya region. The sub-projects were implemented during the last years of the Project and no exact estimates are available as to the effect of those investments. However, the team expects the social benefits of those investments to be considerable, both in terms of increased quality of services and public image/perception of those facilities by the local population, since the of the heat supply equipment was highly anticipated by beneficiaries of the local services. (b) Institutional Change/Strengthening 85. UEB achieved progress in skills upgrading and training in its PIU, thereby mobilizing additional foreign credit lines as a result of participation in EEP. UEB s PIU for EEP consisted of four to five full-time specialists with additional four to five part-time employees, who worked for the same department but were also engaged in other IFI-related credit lines implementation. UEB invested in training its staff to align with the World Bank standards for procurement, social risk management, environment safeguards monitoring, and monitoring of other loan covenants. This specialized training at the PIU improved UEB s capacity and attractiveness to other IFIs and foreign donors and multilateral projects. 86. Megabank, the project s PB has strengthened some aspects of its internal procedures as a result of working with the World Bank and UEB on the project. The project was only able to attract one PB, which was able to disburse the World Bank s funds. Megabank has been working with the IFC and several other IFIs for a number of years and for this Project the Megabank received additional training to work with IBRD requirements, focused mostly, on safeguards and procurement. Megabank used the training opportunities provided both by the World Bank and UEB and demonstrated commitment to enhancing its internal processes to increase its ability to develop and implement interventions in the energy efficiency area. (c) Other Unintended Outcomes and Impacts (positive or negative) None. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshop 87. After the closing date, the ICR team met with UEB and Megabank to discuss the possibility of distributing a survey to the beneficiaries. The survey s goal was to find whether the project had an additional value for the beneficiaries, whether the beneficiaries were affected by the events in 24

35 Ukraine in , and the areas where the credit line terms could be improved. As a result, 16 (out of 80) sub-borrowers have responded, with 15 out of 16 of them being the existing clients of UEB or Megabank before signing a sub-loan agreement. The key survey s findings are detailed in the following paragraphs. 88. Credit line terms. The team wanted to find out whether the project was the main motive for launching the energy efficiency activities by the sub-borrowers. It appears that out of 16 subborrowers, only for 6 the existence of the credit line was a key factor in launching their energy efficiency activities, whereas 4 were planning such activities even without World Bank funding and 5 used the credit proceeds to compensate for the costs that were incurred earlier (the credit line terms provided an option to finance such activities on retroactive basis). The majority of the sub-borrowers mentioned low interest rate and long maturity among the most attractive features of the credit line. A sub-borrower working in the agriculture industry mentioned the repayment schedule adjusted to the agricultural cycle as the loan s attractive feature. 89. Regulatory environment. Both UEB and PBs were significantly affected by the economic and political crisis of The team wanted to find out whether the same events affected the decision of sub-borrowers to apply for EEP credit funds, since increase of fuel prices, which took place around the same period, could potentially increase the demand for energy efficiency activities. For 15 out of 16 participants, the events of in Ukraine did not have a direct effect on their decision to participate in the credit line, neither did the change in the legislative framework in Ukraine. One company started implementing the energy efficiency measures out of its own funds during this period despite the uncertainties in the Ukrainian economy. It is quite possible that further discussion on the impact of the fuel prices fluctuations would have indicated it as a trigger for launching energy efficiency activities by sub-borrowers. 90. Areas for improvement. When asked which loan terms they would like to improve, the sub-borrowers referred to reduction of the DSCR (5 sub-borrowers) and/or the interest rate (4 subborrowers) and simplification of the credit application process and reducing the volume of the environmental documents (1 sub-borrower). Two sub-borrowers suggested introduction of the revolving terms of the credit line. 91. A number of questions addressed the economics of the subprojects and this information was used in calculations of the project s efficiency. 92. Overall, information received during the survey will help improve the subsequent World Bank interventions in the energy efficiency area in Ukraine. 4. Assessment of Risk to Development Outcome Rating: Low 93. Based on the above factors, the risk to development outcome is Low. At the time of the preparation of the ICR, Ukraine remains among the most energy-intensive economies in the Europe and Central Asia Region. Ukraine is undergoing major energy reforms, which causes businesses and municipalities to be more cost conscious and consider investing more in energy saving measures. 25

36 94. As a member of the Energy Community, Ukraine has committed to bringing its national energy efficiency legislation in compliance with Energy Community requirements. Currently, several laws are being considered in the Ukrainian Parliament: Energy Efficiency Law, Metering Law, Law on Peculiarities of Public Procurement of ESCO Services, and Law on Energy Performance of Buildings. If approved, these laws will create a legal framework, encouraging energy efficiency activities by commercial and noncommercial enterprises, including municipalities, thus substantially increasing the demand for energy efficiency financing. 95. In July 2017, the Ukrainian Parliament approved the law establishing Energy Efficiency Fund (EEF), which will serve as a technical and financial tool that will help enable the more efficient use of state budget funds and is intended to attract international aid. The EEF will act as an immediate catalyst for attracting investment in projects aimed at reducing energy consumption and developing a more energy-efficient infrastructure. 96. Even before the approval of the energy efficiency legislation, the GoU has adopted a number of measures aimed at creating conditions for implementation of energy efficiency programs by municipalities, and, as a result, new opportunities have crystalized for municipalities to turn to commercial lending for implementation of local municipal energy efficiency programs. Among those changes are the amendments to the Tax Code and Budget Code, introducing more decentralization in distribution of local revenues. As a result, local communities now have the capacity to spend part of their earnings on investments and local improvements. The new taxation regime caused an increase in the share of taxes that remain in the local budgets (100 percent of uniform tax, real estate tax, 60 percent of profit tax, and 25 percent of environmental tax now remain in the local budgets). This led to an increase in local income by over US$1.65 billon (+47 percent in comparison to 2015). Over 2016, municipalities accumulated bank deposits in the amount of US$550 million. According to the estimates of the State Agency on Energy Efficiency and Energy Saving of Ukraine, potential debt financing volumes for municipal sustainable energy development is estimated to exceed US$5 billion over the next several years. 97. Replicability. The core design of the credit lines in Ukraine has not changed substantially. In subsequent credit lines (for example, for the EEP, EDP, and SMEs) by the World Bank and other IFIs, some features might be tweaked to enhance performance, but at its core the basic model has been tried, and all parties have gained experience in ensuring its effectiveness. 98. Demand from the banking sector. The year preceding the project s closing date coincided with the period when the reforms in the energy and banking sector, carried out during , started taking effect and the Ukrainian economy started demonstrating sustainable growth. As a result, the local banking sector showed signs of revival and local enterprises expressed considerable enthusiasm for undertaking energy efficiency activities. One of the PBs, which terminated a sub-loan agreement with UEB in 2015, a year later has finalized its restructuring process, as a result of which it has acquired another local bank and thus considerably expanded its regional presence. By the time of the project s closing, it has expressed significant interest in partnering with UEB for the next phase of the EEP if such a project is approved. Both UEB and the PB, which stayed in the project until the closing, have confirmed the growing demand for the credit line. This is in addition to the fact that despite the improving situation in the economy and the banking sector, the local businesses still lack access to long-term financing for energy efficiency, which is why the continuation of the project interventions is important. 26

37 99. Sustainability. By the project closing, both UEB and Megabank continued to provide energy efficiency financing to their clients, showing commitment to the project s goals. Both banks admit that there is a potential to expand a pipeline of energy efficiency projects even further, and UEB is currently looking for more IFI financing to back its plans. Although UEB has expressed its readiness to finance energy efficiency investments from its own funds, if there is a good subproject, a reliable client, and relatively low risks, the IFI funds could provide sizable financing and assist the banks in taking riskier energy efficiency projects. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory 100. The project was built on the successful results and lessons of the previous World Bank projects involving financial intermediation in Ukraine. The World Bank, working in cooperation with UEB, was able to roll out a financial product on terms unique for the local market. The implementation period has shown that both institutional arrangements with a strong local bank partner and the terms of the credit line were attractive to the local enterprises and stimulated wider interest and leveraged financing in the area of energy efficiency. By the time of the project s effectiveness, several subprojects were already in the pipeline and the project has gradually taken off. (b) Quality of Supervision Rating: Highly Satisfactory 101. Throughout the implementation period, the World Bank consistently provided high-quality supervision support to the project, ensuring the presence of necessary skill mix of the World Bank staff in the field office, which enabled maintaining a constructive working relationship with UEB and PBs and quickly addressing any problems as they arose The World Bank s team effort was aimed at ensuring regularity of supervision missions (twice a year on average), providing timely responses to project issues, involving management when called for by the complexity of the project matters, and applying realistic project performance ratings. Implementation support missions often included field visits to beneficiaries in different regions; these visits included discussions with loan recipients on both the loan process and the effects of the energy efficiency financing on their business During the political and banking crisis of , the World Bank continued close monitoring of the situation and together with UEB worked on finding ways to continue the project and increase disbursements, which stalled for several months in The team was able to recognize the temporary nature of the negative factors affecting the development of the project and managed to address the risks of canceling funds by adopting a set of measures aimed at adjusting the project s terms to the pace of the changes. In particular, a number of milestones were established for UEB, upon which the continuation of the project depended. Among them are (a) committing a certain amount of sub-loans and achieving a certain commitment threshold by a deadline, (b) achieving a disbursement threshold, and (c) signing a minimum number of municipal 27

38 energy efficiency subprojects. To enable achievement of those milestones, the World Bank team, in cooperation with UEB, developed a number of amendments to the conditions of the credit line aimed at broadening the range of eligible enterprises and easing some of the terms. Owing to the constructive and creative approach to solving the project s problems, the World Bank s management was satisfied with the significant progress achieved by UEB during the last year of the project and extended the closing date, which allowed for successful completion of the project and full disbursement of the project funds. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 104. Considering the ratings of Quality at Entry and supervision, the overall rating for World Bank performance is Satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 105. The Government did not have a key role in the operational phase of the project, since UEB was both the project s borrower and the implementing agency. The project was designed such that it would provide UEB with enough operational discrepancy. During the banking crisis of , the MoF and the NBU took adequate measures to keep the banking sector afloat and both demonstrated high quality of supervision over the sector, by taking targeted actions and timely reacting to emergency situations. Both the MoF and the NBU paid close attention to the financial condition of UEB and during 2017, UEB was recapitalized to stay within the revised limits established by the NBU. Throughout the implementation period, there were no major changes in the staffing of the PIU, which created conditions for maintaining the institutional memory and avoiding time delays, which some other World Bank projects with less stable ministerial PIUs were facing in Ukraine At the policy level, the Government could have considered improving a regulatory environment encouraging municipalities to invest in energy efficiency activities. Both UEB and municipalities were pointing to the legal obstacles (including provisions of Tax Code and Budget Code) preventing municipalities from applying to the World Bank funds for carrying out energy efficiency activities. However, this has to consider the political environment during , when the Government had more pressing priorities to address. By the end of the implementation period, the Government has indeed introduced a number of significant changes to the legislation, which created surplus in local budgets and started building a solid foundation for a strong demand for energy efficiency projects from municipalities in the future. (b) Implementing Agency or Agencies Performance Rating: Highly Satisfactory 107. Overall, the performance of UEB was highly satisfactory. UEB has established a very constructive relationship with the World Bank team and was responsive to the team's requests throughout the implementation period. Over the past several years, UEB developed strong institutional capacity and market expertise and became a trusted partner of the World Bank in 28

39 Ukraine. UEB maintained continuous dialogue with the PBs to support preparation of sub-loan requests in accordance with the project requirements, including educating PBs on the ways to market the project, evaluation of energy benefits, and compliance with E&S and procurement procedures. Apart from initial EEP presentations (managerial, sales, and operations), consultations with the PBs were conducted on a regular basis, including the meetings within the frames of the World Bank missions. Comprehensive guidance on all EEP implementation aspects was regularly provided to lending and methodology departments to support subproject preparation normally one to two internal workshops and one distant training per year The UEB was sensitive to the concerns of the enterprises involved in the project and maintained a constant dialogue with the World Bank on the best ways of adjusting the project to the changing needs of the clients without risking its sustainability. As a result, the project s closing date was extended only for one year, despite the project going through one of the most severe banking crises in the modern history of Ukraine, and all the funds were fully disbursed. Throughout the implementation period, auditing and reporting were carried out on time and in a manner satisfactory to the World Bank. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory 109. Based on the ratings of the Government performance and of the implementation agency, the overall rating for borrower performance is Satisfactory. 6. Lessons Learned 110. Key lessons for the World Bank are detailed in the following paragraphs A broader wording of the PDO with high implementation risks will provide the Bank with more room when the need materializes to adjust the project terms to the evolving market conditions. The EEP PDO wording used a fairly detailed list of the types of beneficiaries, which reduced the Bank s room for flexibility when it became apparent that due to regulatory constraints one category of beneficiaries might not be motivated in applying for World Bank financing When designing a project, which is looking to developing intermediary financing (for example, through involving local PBs), it could be practical to initially include and appraise several participating financial institutions and build flexibility for funds allocation (for example, leaving some unallocated funds to a separate disbursement category, for whichever financial institutions disburse fastest). This can help build in contingency if there is a problem with one or more private financial institutions (PFIs) and encourage and benefit other PFIs to get into World Bank Group-financed projects When designing subsequent energy efficiency projects in Ukraine, it may be advisable to explore the option of having a renewable energy component, which would focus on promoting certain technologies, determined in cooperation with the Government and local businesses. The project did not pursue an objective of advancing renewable energy technologies or supporting renewable energy projects specifically, since it was the first energy efficiency financing project implemented by the World Bank in Ukraine and it was more important to pilot 29

40 the basic elements of the energy efficiency scheme. However, both banks (UEB and Megabank) expressed their interest in having energy efficiency and renewable energy instruments in the credit line in future. The next energy efficiency financing project in Ukraine may, therefore, explore further layers of the sophistication of the energy efficiency scheme. To reduce the risk of turning EEP2 into primarily a renewable energy project, a threshold could be established, by which 80 percent (or other agreed percentage) of the credit line would be used for energy efficiency and 20 percent for renewable energy projects In the project that pursues the goal of attracting additional sources of funding for the beneficiaries, it would be advisable to include the M&E tools, allowing to track both the leveraged amount and the progress of such leveraging. The only monitoring indicators available in the project at hand to measure the financing aspects of the project were the volume of energy efficiency loans and amount of commitments/disbursements within the loan amount. This significantly diminishes the possibility of adequate evaluation of the financing impact of the project and the added value of the respective financing product As the economy moves to sustainable levels of growth, the energy efficiency projects in Ukraine can be structured using partial credit risk guarantees or other types of leveraged financing. Partial risk guarantees enable banks to raise funds from the international markets with improved terms compared to what would have been possible by the bank on its own creditworthiness under market conditions. The structures allow the borrower to secure the muchneeded financing at reasonable costs while also minimizing transaction risk in a climate of volatility. Leveraged financing arrangements ensure that the participating financial institution complements borrowed funds with resources from its own balance sheet. In the face of limited IBRD resources, leveraging funds through such instruments should be encouraged whenever possible Introducing technical assistance components in the project design shall be measured against the country risk, since in the countries with evolving political environment, focusing on investment lending results in higher overall project performance at the closing. The project component in the EEP did not include any technical assistance or policy-related subcomponents except for trainings and capacity building. No policy reforms in energy efficiency financing or municipal sector were supported by the project, which, considering the political environment in accompanied by slowing down of a number of the reforms in the Ukrainian energy sector, turned out to be a well-founded decision The project could have benefitted from early-stage assistance to the financial intermediary in promoting the project among potential clients and developing a countrywide communication campaign. While UEB and the PB did carry out promotional campaigns to increase the demand for financing, the lack of specific experience in communicating the benefits of the energy efficiency financing played its role in lower than expected demand during the first few years of the implementation A strong local partner with a proven track record of implementation of World Bank projects and established clientele is a solid foundation for the project s success. The project built its successes on a foundation of extensive expertise and capacity of the local bank with more than a 10-year history of implementation of World Bank projects in Ukraine. During the banking 30

41 crisis, UEB, owing to its professional management and strong Government support, was able, in cooperation with the World Bank, to revive the project and finalize it by achieving the project s objective with minimum delay, considering the severe nature of the crisis. By having a partner with extensive client portfolio, the World Bank saved the project a considerable amount of time and guaranteed the maximum coverage and financial outreach The EEP could benefit from having a number of optional financing mechanisms embedded in the project s legal framework, to be activated based on specific preconditions. As the project develops into new iterations, there might be a demand for alternative financing options depending on the nature of beneficiaries and availability of capital in the market. Availability of a single financing option reduces the chance of maximization of the available market opportunities since adding alternative options often requires restructuring of the project and cannot be employed quickly. As far as the EEP is concerned, lack of mechanisms allowing introduction of leasing options deprived the project of additional dynamics at a time when such boost was needed. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing Agencies 120. The borrower s and implementing agency s comments were incorporated in the ICR. (b) Cofinanciers Not applicable. (c) Other Partners and Stakeholders Not applicable. 31

42 Annex 1. Project Costs and Financing (a) Project Cost by Component (in US$ Million Equivalent) Components Appraisal Estimate (US$, millions) Actual/Latest Estimate (US$, millions) Percentage of Appraisal Total Baseline Cost Component 1: Financing of EE Investments Total Project Costs Front-end fee IBRD Total Financing Required (b) Financing Source of Funds Type of Cofinancing Appraisal Estimate (US$, millions) Actual/Latest Estimate (US$, millions) Percentage of Appraisal Borrower IBRD Additional Data Indicators 12/31/2007 Table 1.1. Banking Sector Performance Indicators, /31/ /31/ /31/ /31/ /31/ /31/ /31/201 4 Number of licensed banks a 181 a 143 a Total Bank Enterprise Lending (UAH, 276, , , , , , , ,582 millions) Regulatory capital adequacy (sufficiency) (Н2), % Financial results of the banks activities (UAH, 6,620 7,304 38,450 13,027 7,708 4,899 1,436 52,966 millions) Return on assets, % Return on equity, % Source: NBU. Note: a. Of which one bank is licensed as a remedial bank that is a bad asset entity not taking deposits. 32

43 Table 1.2. Annual Growth (Decline) in Enterprise Lending, Ukraine Banks Total Bank Enterprise Lending (UAH, millions) Growth in Enterprise Lending (%) Source: NBU , , , , , , , ,

44 Annex 2. Outputs by Component The Project had one component, which included a list of types of energy efficiency subprojects to be financed out of the proceeds of the loan. The table below provides a breakdown by a number of sub-projects and the amount of sub-loans per each category. Table 2.1. Outputs by Component A number of US$mln sub-projects Modernization of inefficient and obsolete equipment and facilities Installation of highly energy-efficient industrial equipment and processes for new production capacities, whose current energy use considerably exceeds current best practices Improvement of systems that involves a suite of measures to increase energy efficiency; Reduction of energy loss reduction in municipal sector enterprises Implementation of other energy efficiency subprojects satisfactory to the World Bank. Total More detailed information on sub-projects can be found on p. 39 in Table 3.4 below. Below are some examples of Projects financed by EEP. Box 2.1. Ivano-FrankivskCement Figure 2.1. Energy Efficiency Improvements as Part of the EEP JSC Ivano-Frankivskcement was registered back in 1999 and is currently a leading Ukrainian cement producer and a major budget forming enterprise in the Ivano-Frankivsk Region, with 2.4 million tons per year cement production capacity (3.4 Mt per year after investment completion). High-quality products of the company are vastly used in the western regions of the country for infrastructural developments, utilities, and residential construction, as well as for road construction (including special cements only produced by dry facilities in Ukraine) and so on. Since 2006, the company has been implementing its strategic program, transition from the outdated wet method to the energy- and resource-efficient dry method of production. Its investment was supported by local financial intermediaries, major IFIs operating in the region (IBRD, the EBRD, and European Investment Bank [EIB]), and Europe and Central Asia funding; the plant also successfully implemented a joint implementation project under the mechanisms of the UNFCCC Kyoto Protocol ( JSC Ivano-Frankivskcement has successfully carried out two consecutive stages of the wet-to-dry transition and is currently implementing the third stage (estimated launch in the first half of 2018). The allowed Ivano-Frankivskcement to increase its cement production capacity from 0.5 to 2.4 Mt per year (3.4 Mt per year after completion of the third stage), as well as enhance efficiency of its energy consumption. Estimated energy benefits gained from implementation of the investment program (at full capacity) include over 580,000 toe per year coal (replaced with 470,000 toe per year coal sludge), 20 mcm per year natural gas, and 120,000 toe per year peat. Estimated environmental effect exceeds 1 million tco 2 e of GHG emission reduction. Total estimated cost of the transition is US$292 million; EEP financing of US$54 million ( no-objections to financing over US$30 million granted on October 19, 2015, and August 17, 2016) and equity investment of around US$106 million. Estimated project benefits: the plant s production capacity increased from 0.5 to 3.4 Mt per year; specific energy consumption to produce clinker reduced from 1,600 to 760 kcal per kg (over 50 percent); 300,000 toe per year 34

45 incremental savings; social benefits: over 50 percent increase in the company s budgetary payments and over 10 percent new jobs and over 30 percent increase in share of environment-friendly dry cement production in the local market. Estimated lifetime benefits: over 2 million toe energy and over 7.2 million tco 2 e GHG emission reduction. Box 2.2. Nibulon Agricultural Limited Liability Company Nibulon is a major Ukrainian agricultural operator, with activities ranging from growing crops and livestock to logistics services, including onshore and offshore transportation, grains storage, and exports. As of today, Nibulon aggregates, among others, a transshipment terminal for grains and oil crops, a shipping company, a ship-building/repair facility, grain elevator facilities, and 39 branches all over Ukraine. Since the beginning, the company has been investing in and scaling up of its activities, vertically and horizontally, with support of the IFIs (the World Bank, EBRD, EIB). Under the frames of the EEP, Nibulon partnered with UEB to support its investment project aimed at of its agricultural machinery, major shift from on-road to offshore grains transportation, and reconstruction of the shipbuilding/repair facility. Out of the US$47 million investment costs, US$30 million was granted through two sub-loans under the EEP. Estimated project benefits exceed 4,750 toe per year in energy consumption (natural gas and motor fuel) and GHG emission reduction by over 12,700 tco 2 e per year. Estimated lifetime benefits exceed 25,000 toe energy and 68,000 tco 2 e GHG. Box 2.3. Mayak - Municipal Sector/Utilities Energy Efficiency Mayak is a privately owned group of companies in the Vinnytsya Region involved in generation and distribution of heat, operation of heat mains and local networks, and supply of heat (hot water/steam) and electricity to consumers (households and businesses). Two companies of the group took part in the EEP: (a) TeploKommunEnergo Mayak LLC and (b) Subsidiary Enterprise TeploKommunEnergo Mayak. Under the frames of the EEP, the companies of the Mayak Group implemented (a) reconstruction of the local heating network, including of worn-out sections of pipes with hydro-insulated new ones to reduce heat losses, and (b) of the heat generation facilities and installation of three biomass boilers to reduce consumption of natural gas. The costs of the investment projects totaled US$308,000, including two EEP sub-loans of US$134,000. Estimated annual project benefits include 2.6,000 toe energy and GHG emissions reduction of 6,500 tco 2 e per year. Lifetime benefits include13,500 toe energy and over 34,500 tco 2 e GHG. Table 2.2. Beneficiary Enterprises and Loan Disbursement by Region Region No. of Subprojects Value Sub-loans Disbursed in Region (US$) Energy Efficiency Improvements per Region as Extent of Energy Savings of Total 602,200 toe per Year (%) Value of Projects Financed in Region as % of Total Projects Financed in the EEP Kyiv 4 12, Dnipropetrovsk 5 2, Zaporizhzhya 6 21, Poltava Kharkiv 17 10,

46 Region No. of Subprojects Value Sub-loans Disbursed in Region (US$) Energy Efficiency Improvements per Region as Extent of Energy Savings of Total 602,200 toe per Year (%) Value of Projects Financed in Region as % of Total Projects Financed in the EEP Mykolayiv 3 32, Odesa Lviv Kirovograd 7 8, Sumy 11 2, Vinnytsya 6 12, Cherkasy Zhytomyr 11 9, Ivano-Frankivsk 7 57, Khmelnytsky 10 15, Kherson 5 1, Ternopil 3 3, Other regions not included: Volyn, Zakarpattya, Luhansk, Rivne, Chernivtsi, Chernihiv 17 7, Total ,

47 Annex 3: Economic and Financial Analysis Economic and Financial Analysis at Appraisal 1. Subproject analysis. Since the project was a financial intermediary operation and actual subprojects to be financed were not known up front, the financial and economic analysis at appraisal focused on a review of prototype subprojects that could potentially be financed. The viability indicators determined at appraisal were the FRR and ERR. To be eligible for financing under the project, (a) subprojects had to have a minimum real FRR of 10 percent using energy savings only as benefits, and (b) the subproject implementing entities were required to have a minimum DSCR of at least 1.3. With regard to ERRs, while no threshold level was specified under the project, the analysis indicated levels of ERRs that may be expected for two different types of subprojects (see Table 3.1). Subproject Energy efficiency in cement production Energy efficiency/ in steel rolling plant Table 3.1. Economic Analysis of Selected Potential Subprojects Investment Cost (US$, millions) ERR (%) Coal Natural gas Electricity Natural gas Electricity Savings (year, average) 16,400 tons 19,280 tcm GWh 65.2 tcm GWh 2. Entity-level financial analysis. A financial assessment was carried out for UEB. No assessment was carried out for other PBs as no other PB had been identified at appraisal. Eligibility criteria were established for both UEB and PBs (see table 3.3). Post-completion Economic and Financial Analysis 3. A total of 121 subprojects were financed under the project, with a total investment cost of US$ million equivalent. The post-completion economic assessment was carried out of (a) cost benefit and (b) cost-effectiveness for a representative sample of subprojects. Benchmark comparisons could not be made for cost-effectiveness due to lack of relevant data. Therefore, the subprojects are only evaluated by a cost-benefit analysis in the following section. However, estimates for cost-effectiveness are reported both for the overall subproject portfolio and the subset of sampled subprojects in the relevant tables (see Table 3.4 and Table 3.5). 4. Cost benefit. A cost-benefit analysis was carried out for a representative sample of 20 subprojects, which represent 63 percent of total investment cost in the project. Subprojects in the sample were selected to represent the major subproject types in the portfolio and based on availability of adequate information for the post-completion analysis. The indicators used to assess costs and benefits were (a) the ERR and (b) the real FRR. 5. ERR. Costs considered in the ERR analysis include capital costs and incremental operation and maintenance (O&M) expenses. Benefits include the value of output estimated at economic prices. Taxes and duties are excluded for both costs and benefits. Economic benefits were valued for two cases: including and excluding CO2 reduction benefits. CO2 emission reduction benefits

48 were valued at US$30 per tco2 as indicated under the World Bank s currently applicable guidelines. Results are reported in Table 3.5. The ERR estimates are generally higher than the appraisal estimates. The weighted average ERRs for the sampled subprojects are 15.9 percent without carbon benefits and 21.7 percent with carbon benefits. Furthermore, all 20 subprojects exceed the ERRs (6 8 percent) that are recommended in the current World Bank guidelines (Discounting Costs and Benefits for the Economic Analysis of Investment projects, May 2016) for economic analysis of investment projects for economies growing at annual rates similar to Ukraine. 6. FRR. Costs considered in the FRR analysis include capital costs and incremental O&M expenses, including applicable taxes and duties. Energy savings were valued at the costs of energy including taxes and duties. Results are reported in Table 3.5. For FRR, a minimum threshold of 10 percent was defined at appraisal as an eligibility criterion for subprojects. All 20 sampled subprojects have FRRs higher than the stipulated threshold level. The weighted average FRR for the sample as a whole is estimated at 19 percent. 7. Cost-effectiveness. Indicators (investment costs per Tcal of energy savings and investment cost per tco2 reductions) are provided in Table 3.4. Results for the sampled subprojects are given in Table 3.5. Financial Assessment for UEB and Megabank 8. For a major part of the project implementation period ( ), the economy of Ukraine, including the financial sector, was seriously affected by a number of adverse developments. The issues arose from both external factors, including the continuing uncertainty and weakness in the global economy, and internal factors, particularly the conflict situation in Eastern Ukraine and the Crimea. The banking sector was affected by a number of issues arising from the following: Major devaluation of the exchange rate (the value of the hryvna deteriorated from UAH 7.9 per US$ in 2011 to UAH 27 per US$ in 2016), which increased debt service obligations arising from foreign debt. ( Deterioration in quality of assets and increase in NPLs. Disruption of lending business, including the impact of the situation in Eastern Ukraine and Crimea. Deterioration in the banks capital adequacy positions as a combined result of the adverse factors. 9. In early 2015, in consultation with the IMF and IFIs, the GoU adopted a Comprehensive Program for Financial Sector Development for Ukraine Until Under the program, the NBU required the banks to adopt programs for financial recovery. The NBU continues to review and monitor the implementation of the programs by individual banks. 38

49 10. The main financial indicators for UEB and Megabank during the project implementation period are summarized in table 3.2. Compliance with financial requirements set by the NBU and under the loan covenants are reported in table 3.3. Table 3.2. Financial Indicators for UEB and Megabank (UAH, millions) Indicator UEB Megabank Income statement items Interest income 7, , , , , Interest expense 4, , , , , Net interest income 3, , , , , Loan impairment 3, , , , , charge Net interest margin after loan ,165.5 (8,753.4) (7,933.1) (2,466.1) impairment charge Net noninterest income (225.8) (832.3) (3,688.4) (6137.4) (1,273.7) (88.4) (85.8) (93.5) (66.6) (124.6) Profit/loss (14, (12,441.8) before tax ) (1,192.4) Profit/loss (14, (11,249.3) after tax ) (977.3) Balance sheet items Total assets 87, , , , , , , , ,003.0 Total 69, , , ,042. liabilities 0 3, , , , ,257,5 Shareholder s equity 17, ,611.3 (3,060.3) 5, ,3 Ratios Capital adequacy ratio (CAR) - minimum 10% 29.18% 29.22% 22.55% 2.41% 9.89% 16.89% 14.59% 13.45% 12.58% 10.45% Liquidity ratios Quick - minimum 77.87% 54.74% 61.03% 64.68% 45.25% 51.42% 44.62% 54.51% 56.29% 49.71% 20% Current - minimum 90.68% 98.42% % % % 69,02% 61,94% 79.13% 49.62% 43.40% 40% Short term - minimum 60% 95.61% 97.47% % % % 94,02% 102,09% % % 87.36% 39

50 UEB Eligibility Criteria/Covenant Risk weighted CAR to be not more than 10% Single insider lending exposure should not exceed 5% of the bank s IFRS regulatory capital Aggregate insider lending should not exceed 30% of the bank s IFRS regulatory capital Single exposure per single borrower should not exceed 25% of the bank s IFRS regulatory capital Total large exposures should not exceed 8 times the bank s IFRS regulatory capital Liquidity ratios Full compliance with loan loss provisioning requirements Full compliance with all other NBU regulatory requirements Profitability - the bank should operate on a profitable basis Megabank Risk weighted CAR to be not more than 10% Single insider lending exposure should not exceed 5% of the bank s IFRS based regulatory capital Aggregate insider lending should not exceed 30% of the bank s IFRS regulatory capital Single exposure per single borrower should not exceed 25% of the bank s IFRS regulatory capital Total large exposures should not exceed 8 times the bank s IFRS regulatory capital Liquidity ratios Table 3.3. Compliance with Eligibility Criteria/Financial Covenants NBU Regulatory Requirements Minimum 10% Maximum 5% Maximum 30% Maximum 25% Maximum 8 times Quick - minimum 20%; current - minimum 40%; short term - minimum 60% Minimum 10% Maximum 5% Maximum 30% Maximum 25% Maximum 8 times Full compliance with loan loss provisioning requirements Full compliance with all other NBU regulatory requirements Profitability - the bank should operate on a profitable basis Note: IFRS = International Financial Reporting Standards. Quick - minimum 20%; current - minimum 40%; short-term - minimum 60% IFRS Minimum 10% Maximum 5% Maximum 30% Maximum 25% Maximum 8 times Minimum 10% Maximum 5% Maximum 30% Maximum 25% Maximum 8 times Compliance Complied with except in 2015 and 2016 Complied with Complied with Complied with except in 2015 and 2016 Complied with except in 2015 Complied with Complied with Complied with Complied with except in Complied with Complied with Complied with except in 2016 Complied with Complied with Complied with Complied with Complied with Complied with except in

51 Type of Business Cement production Poultry complex Sugar plant Cement production Ironing boards Confectionery Food industry Vegetable oil extraction Type of Investment Wet to dry process conversion Replacement of natural gas by straw fuel Plant Wet to dry process conversion Plant Equipment Machinery Machinery Machinery Machinery Equipment Machinery Machinery Machinery Gas to biomass fuel conversion Table 3.4. Subproject Economic and Financial Summary (Ex Ante as Appraised) Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) ,993 2,424, ,861 70, ,086 47, ,798 2,099, ,249 6, ,604 14, ,116 5, , , , ,002 2, ,241 5, , ,

52 Type of Business Glass plant Cable production Municipal heat supply Food industry Bathroom equipment Type of Investment Furnace Equipment Facility reconstruction Machinery Equipment Equipment Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) ,267 10, ,745 17, ,270 3, ,163 15, ,299 21, Vegetable oil Gas to biomass extraction fuel conversion ,075 17, Poultry complex Gas to biomass fuel conversion ,004 10, Grain elevator Reconstruction ,098 4, Heat supply Equipment Dairy production Fuel substitution Plastic packaging Facility ,160 13, Confectionery Equipment production ,823 20, Glass plant Furnace reconstruction ,661 6, Grain drying Facility reconstruction ,199 3, Machinery ,107 2, Machinery ,660 25, Dairy production Filtration unit ,022 6,

53 Type of Business Confectionery production Grain drying Corrugated box production Glass plant Livestock breeding Supermarket chain Cement production Dairy production Printing Pharmaceuticals Metal products machinery Wood processing Type of Investment Equipment Equipment Machinery Equipment Machinery Furnace reconstruction Heat supply Heat supply Wet to dry process conversion Heat efficiency improvements Elevator Equipment Heat supply Machinery Equipment Equipment Fuel substitution by biomass Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) , , , , ,807 9, ,911 9, ,674 10, ,229 32, ,798 17, , , ,168 77, ,896 7,

54 Type of Business Carpet production Wood processing Polyethylene film production Dairy production Food industry Dairy production Confectionery production Glass plant Plastic packaging Aircraft engines, gas turbines Type of Investment Equipment Machinery equipment Facility Equipment Machinery Machinery Machinery Equipment Refrigeration Equipment Equipment Machinery Machinery Machinery Equipment Equipment Equipment and process Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) ,797 11, , , , ,679 17, ,327 5, ,234 3, ,001 6, , ,089 2, ,343 21, ,659 66, , ,

55 Type of Business Polymer materials Carpet production Pharmaceuticals Pharmaceuticals Cardboard production Pharmaceuticals Poultry complex Pharmaceuticals Retail trade Heat supply Glass plant Heat supply Type of Investment Equipment Equipment Machinery Process and equipment Process and equipment Equipment Equipment Machinery Equipment Equipment Process and equipment Heat supply Gas to biomass fuel substitution Furnace reconstruction Machinery Heat supply reconstruction Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) , ,087 13, ,614 13, , , , ,273 8, , ,393 34, , ,

56 Type of Business Type of Investment Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) Polyethylene film Equipment , Equipment ,958 18, Machinery Food industry Refrigeration ,334 25, Food industry Packaging , Process and Industrial safety equipment gear , Poultry complex Incubator , Food industry Fuel substitution , Food industry Machinery ,699 4, Food industry Machinery ,078 2, Machinery , Wet to dry Cement process production conversion ,399 2,692, Furnace Glass plant ,684 8, reconstruction Construction Equipment materials Equipment Printing ,108 6, Polyethylene film Equipment , production Grain elevator

57 Type of Business Food industry Consumer goods production Energy generation logistics Polyethylene film production Retail trade Food industry Type of Investment Machinery Grain elevator Packaging equipment Equipment Machinery 5 MW cogeneration plant Road to rail transport conversion Machinery Equipment Machinery Machinery and transport conversion Machinery Machinery Equipment Equipment Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) , ,248 5, , , ,523 17, , ,092 42,967?? , , ,598 17,

58 Type of Business Quarry Total for all 121 subprojects Sub-project Type of Investment Transportation Total Investment (US$, millions) Sub-loan Amount (US$, millions) Approval Date Completio n Date 10-Year Energy Savings (toe) 10-Year Emission Reduction (tco2e) FRR (%) Cost- Effectiveness (US$/tCO2e) , ,498,018 8,560, Table 3.5: Post-completion Economic and Financial Viability Assessment for Sampled Subprojects Investment (USD million) 10 year energy savings (toe) 10 year CO2 emission reductions (tco2e) FRR (%) Cost- Effectiveness ERR (%) (tco2e/usd) Without carbon benefits With carbon benefits Cement production ,993 2,424, % % 23.6% Poultry farm ,861 70, % % 26.1% Sugar plant ,086 47, % % 31.0% Cement production ,798 2,099, % % 22.2% Confectionary ,604 14, % % 13.3% Vegetable oil extraction , , % % 39.0% Municipal heat supply ,270 3, % % 25.5% Vegetable oil extraction ,075 17, % % 81.8% Confectionary ,823 20, % % 58.8% ,660 25, % % 12.1% Glass works ,807 9, % % 14.0% 48

59 1.56 6,798 17, % % 36.5% machinery ,168 77, % % 32.7% Glass works ,343 21, % % 40.1% Aircraft engines, gas turbines , , % % 14.4% Pharmaceuticals ,614 13, % % 72./0% Poultry complex ,273 8, % % 14.8% Heat supply/energy generation , , % % 21.1% logistics ,523 17, % % 28.6% ,092 42, % % 10.9% Total /weighted average ,333,

60 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team Members Names Title Unit Responsibility/Specialty Lending Gary Stuggins Lead Energy Economist, Task Team Leader ECSS2 Task Team Leader Yadviga Semikolenova Energy Economist ECSS2 Energy economics Shinya Nishimura Financial Analyst ECSS2 Energy economics Feng Liu Senior Energy Specialist SEGES Energy efficiency Dmytro Glazkov Senior Energy Specialist (Task Team Leader) ECSS2 Task Team Leader Irina Babich Financial Management Specialist ECSO3 Financial management Knut Leopold Senior Procurement Specialist ECSO2 Procurement Astrid Manroth Senior Energy Specialist ECSS2 Energy Efficiency, Task Team Leader Rajeev Kumar Swami Senior Financial Management Specialist ECSO3 Financial Management Leiping Wang Senior Energy Specialist EASIN Energy Efficiency Bogdan Constantin Constaninescu Senior Financial Management Specialist ECSO3 Financial Management Rozena Serrano Program Assistant GEE03 Program Assistant Supervision/ICR Dmytro Glazkov Senior Energy Specialist GEE03 Task Team Leader Monali Raade Senior Energy Specialist GEE05 Irina Babich Senior Financial Management Specialist GG021 Financial Management Irina Shmeleva Senior Operations Officer OPSFM Procurement Juliana Victor Senior Operations Officer GEE08 Monitoring and Evaluation Hiwote Tadesse Operations Officer GEE03 Quality Kishore Laxsmikant Nadkarni Consultant GEE03 Energy economics Alexey Morozov Consultant GEE03 Primary author Dung Kim Lee Senior Program Assistant GEE03 Program assistance (b) Staff Time and Cost Stage of Project Cycle No. of Staff Weeks Staff Time and Cost (Bank Budget Only) USD Thousands (Including travel & Consultants Costs) Lending , ,258 Total: ,905 Supervision/ICR , , ,255 50

61 , , , Total: ,806 51

62 Annex 5. Beneficiary Survey Results The team has received filled-in questionnaires from 16 sub-borrowers, and the summary of the survey results is provided in Section 3.6 of the ICR. 52

63 Annex 6. Stakeholder Workshop Report and Results No stakeholder workshop was undertaken. 53

64 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Summary of Borrower s ICR 1. The final EEP ICR is being prepared by UEB in accordance with the requirements and methodology determined by the Procedure for Preparation, Implementation, Monitoring, and Closure of Socioeconomic Projects of Ukraine supported by the IFIs, as approved by the Resolution of the Cabinet of Ministers of Ukraine No. 70, dated January 27, A total of 121 subprojects, for a total amount of US$199.5 million, were implemented under the EEP, with over 75 participants across sectors from all over Ukraine (the territory controlled by Ukrainian authorities). Five municipal subprojects, including four ESCO type, were financed. Project Monitoring Indicators Table 7.1. Achievement of Project Monitoring Indicators Indicator Unit Value % Project Outcome Indicators Extent of energy savings Thousand toe Projected lifetime fuel savings Million GJ Volume of EE sub-loans US$, millions Intermediate Outcome Indicators ESCO subprojects Number Extent of energy savings Natural gas Million m Electricity GWh Coal Thousand tonnes 680 Motor fuel Thousand m 3 10 Ukreximbank loan commitments % Ukreximbank loan disbursements % Municipal energy efficiency subprojects As detailed earlier, the project monitoring indicators were fully achieved. More details on the dynamics of the project implementation are provided in figure

65 Figure 7.1. Project Indicators (energy, thousand toe, cumulative) 2,500 2,000 1,500 1, FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 FY10 Coal Natural Gas Electricity Motor Fuel 4. Implementation of the project was carried out during through on-lending to beneficiary enterprises and subsidiary lending to (PBs for financing of energy efficiency investments (subprojects). Figure 7.2. Energy Efficiency Project Implementation Subproject amounts Number of subprojects 5. The total amount of the EEP financing provided to subprojects equaled US$199.5 million, including financing of subprojects under the subsidiary lending in the amount of US$10 million. The number of financed energy efficiency subprojects totaled 121, including 11 subprojects through the PB. 6. The most active phase of the project implementation was during ; since the project effectiveness (November 9, 2011) and up to 2014 the number of subprojects equaled 17, 55

66 with the total amount of EEP finance of US$59.5 million. During over a hundred subprojects totaling US$140 million were implemented. Table 7.2. Project outcomes by Category No. Subproject Categories Number of Amount (US$ Subprojects millions) 1. Modernization of inefficient and obsolete equipment and facilities Installation of highly energy-efficient equipment and processes for new production capacities Improvement of systems that involves a suite of measures to increase energy efficiency Reduction of energy losses in municipally owned utilities Implementation of other energy efficiency subprojects satisfactory to the World Bank Total Financing of subprojects under the EEP was conducted throughout Ukraine (territory controlled by the Government), while in terms of the number of subprojects, Kharkiv, Zhytomyr, Sumy, and Khmelnytsky Regions were the most active, with around 50 subprojects and 19 percent of the total loan amount. Figure 7.3. Geographical Project Structure (number of subprojects) Other, 22 Kharkiv, 17 Kherson, 5 Dnipro, 5 Odesa, 6 Zhytomyr, 11 Cumy, 11 Zaporizhzhya, 6 Vinnytsya, 6 Rivn e, 8 Khmelnytsky, 10 Kropyvnytsky (ex.kirovograd), 7 Ivano Frankivsk, 7 8. At the same time, the following regions attracted the lion s share of the EEP funding: Ivano-Frankivsk, Mykolayiv, Zaporizhzhya, and Khmelnytskyi Regions over US$125 million. 56

67 Figure 7.4. Geographical Project Structure (sub-loan amounts) Kropyvnytsky (ex.kirovograd) 4% Zhytomyr 5% Rivne 2% Ternopil 2% Other 5% Kharkiv 5% Ivano Frankivsk 29% Kyiv 6% Vinnytsya 7% Mykolayiv 16% Khmelnytsky 8% Zaporizhzhya 11% 9. The sector breakdown indicates that agricultural enterprises were the most active project participants; around 50 subprojects for the amount of US$62 million were financed (over 30 percent of the total project amount). Agricultural machinery fleet renovation, improvement/optimization of processes at grain storage facilities were among the most typical items of investment in the agricultural sector. Figure 7.5. Sectoral Project Structure (number of subprojects) pharmaceutics, 5 other, 14 energy / heat supply, 5 construction materials, 5 agriculture, 48 glass production, 6 consumer goods, 15 food & beverages, Food processing enterprises and consumer products manufacturers have also been actively involved in the project modernizing their technological equipment and processes, improving supply of energy for their production needs and so on. 57

68 Figure 7.6. Sectoral Project Structure (sub-loan amounts) glass production 2% energy / heat supply 2% consumer goods 5% pharmaceutics 1% other 6% machine building 9% agriculture 31% food & beverages 16% construction materials 28% 11. The largest-scale investments supported by the project were initiated by agriculture (US$62 million), manufacture of construction materials (US$55 million), food processing (US$32 million), machine building (US$19 million), and manufacture of consumer goods (US$9 million). 58

69 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable. 59

70 Annex 9. List of Supporting Documents 1. Project Appraisal Document 2. Project Legal Agreements 3. Aide Memoires dated November 5 15, 2012 October 18, 2013 November 17, 2014 December 12 14, 2016 March 31, ICRs dated September 2011 June 8, 2012 May 2013 December 2013 March 2015 November 13, 2015 June 2016 December 2016 March Borrower s ICR, June Subprojects data sheet 7. Procurement Plan,

71 MAP OF UKRAINE 61