China, People's Republic of: Hebei Energy Efficiency Improvement and Emission Reduction Project

Sovereign Project | 44012-013

Summary

The project is designed to provide a suitable financing mechanism and finance energy efficiency projects in selected energy-intensive industries and ESCOs. The Hebei provincial government (HPG), through Hebei Provincial Finance Bureau (HFB), will establish a revolving escrow fund (REF) account at the selected financial intermediary to finance eligible energy efficiency subprojects. The subprojects are expected to have a loan repayment period of 5 years including the grace period. The repayment of subloans, from these subprojects, will be revolved by relending to future batches of energy efficiency subprojects through the REF. It is expected that the REF will be fully revolved two times before ADB's loan is repaid. The subsequent batches would be selected in accordance with the selection criteria mentioned in the project administration manual (PAM). All subprojects approved before the loan closing is subject to receiving no objection from ADB.

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Procurement Documents


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Project Name Hebei Energy Efficiency Improvement and Emission Reduction Project
Project Number 44012-013
Country China, People's Republic of
Project Status Approved
Project Type / Modality of Assistance Grant
Loan
Source of Funding / Amount
Loan 2835-PRC: Hebei Energy Efficiency Improvement and Emission Reduction Project
Ordinary capital resources US$ 100.00 million
Grant 0364-PRC: Hebei Energy Efficiency Improvement and Emission Reduction Project
Global Environment Facility US$ 3.65 million
Strategic Agendas Environmentally sustainable growth
Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Private sector development
Sector / Subsector Energy - Energy efficiency and conservation
Gender Equity and Mainstreaming No gender elements
Description The project is designed to provide a suitable financing mechanism and finance energy efficiency projects in selected energy-intensive industries and ESCOs. The Hebei provincial government (HPG), through Hebei Provincial Finance Bureau (HFB), will establish a revolving escrow fund (REF) account at the selected financial intermediary to finance eligible energy efficiency subprojects. The subprojects are expected to have a loan repayment period of 5 years including the grace period. The repayment of subloans, from these subprojects, will be revolved by relending to future batches of energy efficiency subprojects through the REF. It is expected that the REF will be fully revolved two times before ADB's loan is repaid. The subsequent batches would be selected in accordance with the selection criteria mentioned in the project administration manual (PAM). All subprojects approved before the loan closing is subject to receiving no objection from ADB.
Project Rationale and Linkage to Country/Regional Strategy

The PRC has experienced a rapid increase in energy consumption in tandem with sustained economic growth, especially since 2000. By the end of 2010, the primary energy demand in the PRC increased to more than 3,050 million tons of standard coal equivalent (mtce), compared with 1,390 mtce in 2000. The PRC relies heavily on carbon-intensive coal, which provided about 70% of its primary energy in 2010. The Government of the PRC has recognized the challenges posed by the rapid rise in energy consumption and associated emissions. It has committed to achieve 40% 45% carbon intensity reduction by 2020 compared with 2005, primarily by targeting energy intensity reductions. During the Eleventh Five-Year Plan, 2006 2010, the energy intensity was reduced by 19.06% compared with a target of 20%. The Twelfth Five-Year Plan, 2011 2015, has set a target of a further 16% energy intensity reduction.

More than three fourths of the PRC's electricity and about half of its primary energy are consumed by the industrial sector. The 1,000 Key Enterprises Program was launched during the Eleventh plan to target the 1,000 most energy-intensive enterprises, which consumed about two-thirds of the total industrial energy consumption. During the Twelfth plan, the ongoing program will be extended to cover all industrial enterprises with annual energy consumption of 10,000 tons of coal equivalent (tce) and higher. It will involve some 16,000 enterprises in the country, primarily among nine energy-intensive industries, including iron and steel, nonferrous metal, coal, power generation, petrochemicals, chemicals, building materials, textile, and pulp and paper.

Hebei Province ranks second in energy consumption among all the provinces, with a total energy consumption of 267 mtce in 2010, or 8.7% of the national consumption. During the Eleventh plan, Hebei's energy intensity reduced by 20.11% to 1.58 tce, which is still much higher than the national average of 1.034 tce. This is mainly due to the presence of many energy-intensive industries, such as iron and steel, electricity and heat production, cement, and petroleum and petrochemical. Most of these industrial plants operate at much lower energy efficiency levels than international best practice as a result of underinvestment in energy efficiency. Hebei has set a target of a further 17% energy intensity reduction during the Twelfth plan, which will be challenging unless targeted investments are significantly scaled up in these energy-intensive industrial plants.

The key barriers for energy efficiency investments are (i) lack of familiarity with the latest energy efficient technologies, combined with the enterprises' perception of production interruptions and/or loss of revenues; (ii) difficulties for commercial banks to assess cash flow benefits and forgo collateral for such investment projects, which do not generate additional revenues; and (iii) lack of capacity for evaluation and risk assignments for energy conservation investments by commercial banks, thereby limiting debt financing. Limited market-based incentive mechanisms to reward investors for reducing emissions through energy efficiency also discourage investors. These market imperfections warrant targeted public interventions.

Several measures have been adopted in designing this project to address these barriers. Accordingly, the FIL modality was chosen to (i) allow multiple turnover of the Asian Development Bank (ADB) loan, thus providing larger investments for energy efficiency over the loan tenor; (ii) build the knowledge and capacity of the provincial government and selected financial intermediary in evaluation and risk assignments for energy efficiency transactions; (iii) reduce transaction complexities and costs owing to familiarity and experience gained by the project management office (PMO) and the financial intermediary from the initial subprojects; and (iv) enhance governance and improve safeguard compliance for energy efficiency investments beyond the first batch of subprojects.

The ESCOs have been developing slowly since 2000 in Hebei Province. Most of the existing ESCOs in Hebei Province have limited registered capital, assets, and employees. The ESCOs are unable to obtain commercial debt financing because of the banks' perception of risks and the lack of meaningful collateral, which limits their involvement to only small-scale energy efficiency projects with limited investment and short paybacks. The proposed project addresses this barrier by including an ESCO in the project design.

The project design also includes the participation of a joint stock commercial bank (Huaxia Bank) as a financial intermediary to address key capacity and related issues (para. 6), which will catalyze more commercial bank financing in next batches of energy efficiency investments in the industrial sector. This FIL approach is similar to previous ADB loans for energy-intensive provinces of Guangdong and Shandong. The financial intermediary has been selected pursuant to a transparent and competitive process, and the onlending terms have been proposed in a manner consistent with the prevailing commercial banking practices to avoid market distortions. Prior experience in financing energy efficiency projects and participation in other international financial institution funded projects was one of the key criteria in selecting the financial intermediary.

The lessons learned from previous ADB's energy efficiency projects in PRC have been taken into account, especially with respect to the selection of a commercial bank as financial intermediary through a competitive process and its capacity development which can support additional efforts to mobilize commercial bank financing to the energy efficiency sector. The possibility of establishing a credit guarantee facility using the cash accumulated caused by the interest difference between the ADB lending rate and subloan interest rates will also be explored during project implementation. A complementary grant to be financed by the Global Environment Facility is under preparation to address the broader capacity issues in the commercial banking sector for energy efficiency financing (footnote 2). The scope of the grant-financed activities include (i) energy efficiency and emission reduction technology identification, dissemination, and design of market-based policy incentives; (ii) capacity building of commercial banks in Hebei Province on energy efficiency project appraisal, including pilot testing of the credit guarantee facility for ESCO implemented projects; and (iii) capacity building of ESCO industry, and monitoring and verification agents in Hebei Province.

The project is closely aligned with Strategy 2020, which identifies moving developing member countries onto a low-carbon growth path by improving energy efficiency as one of the key means of achieving environmentally sustainable growth. The country partnership strategy, 2008 2010 and country operations business plan, 2011 2013, identifies environmental sustainability as one of the three pillars of ADB assistance to the PRC. Consistent with the Strategy 2020 goals, the project encourages private sector investments. In the first batch, seven of the eight selected subprojects are private enterprises. The emphasis on selecting innovative technologies, in the selection of the first batch of subprojects, is expected to be maintained and intensified for future subprojects. The project design includes measures (para. 20) for leveraging additional private investments.

Impact Improved energy efficiency and emission reduction in Hebei Province
Project Outcome
Description of Outcome Increased investments and enhanced capacity to improve energy efficiency in the industrial sector in Hebei Province
Progress Toward Outcome

The Project implementation is on track. To date, eight subloan/subproject agreements have been signed for a total of $100.0 million with $97.45 million disbursed. One subborrower (Julu Country Changsheng Textile Co., Ltd. has decided to cancel its subproject with subloan amount of $2.0 million and reallocate the same loan amount to another subborrower (Hebei Yufeng Enterprises) thereby increasing its subloan from $15.0 million to $17.0 million. The request was approved by ADB on 1 March 2013. Seven of the subprojects have completed the installation and completed commissioning.

A subproject, the China Resources Cangzhou Co-generation Co. Ltd, advised that it will reduce its withdrawals by $2.2 million (this amount was expected within 2014 but projected in 2015) and reallocate to other subprojects. The subloan agreement and payment schedules will be revised. The new subproject is being finalized by the PMO.

Additional grant financing of $ 3.65 million has been approved on 9 Oct 2013 and the Grant Agreement was signed on 17 Dec 2013 and the grant was declared effective on 21 Jan 2014. The project implementation consultants to provide management advisory for GEF grant project have been recruited and the imprest account advance of $365,000 was disbursed on 30 Sep 2014.

Implementation Progress
Description of Project Outputs

1. Industrial energy efficiency projects implemented

2. ESCO projects implemented

3. Dissemination of innovative industrial energy saving technologies

4. Capacity building of third party M&V agencies in Hebei Province

5. Demonstrating smart grid technologies to achieve electricity savings in the industrial sector

Status of Implementation Progress (Outputs, Activities, and Issues)

1. Subprojects are under implementation. Seven subprojects including the sub project implemetned by an ESCO have completed commissioning. REF has been established.

2. Completed.

3. Consultants have been recruited.

4. The third party M&V agency to be supported have been selected.

5. Technical specification are being prepared.

Not yet started.

Ongoing.

Ongoing.

Geographical Location
Safeguard Categories
Environment FI
Involuntary Resettlement FI
Indigenous Peoples FI
Summary of Environmental and Social Aspects
Environmental Aspects

The project is categorized as financial intermediary category B for the environment in accordance with ADB's Safeguard Policy Statement (2009). The identified subprojects, under components 1 and 2, have been screened in accordance with ADB's environment screening procedures. All the identified subprojects except Hebei Qianjin Iron and Steel Group Co. Ltd. and Hebei Guangyuan Solar Energy Technology Co. Ltd. have been categorized as category B and the above mentioned two projects have been categorized as category C. All category B subprojects have been approved by Hebei Provincial Environment Protection Agency based on environmental impact assessment forms prepared by subborrowers as required under domestic requirements. Separate initial environmental examination (IEE) reports have been prepared for category B subprojects in accordance with ADB's SPS and summarized in the draft project IEE (PIEE).The PMO is responsible for ensuring the provisions of PIEE and especially the EMP is implemented by each subborrower during subproject construction and subsequent operation. The PMO has established the Environtment and Social Management System (ESMS) and annual enviorntment monitoring reports have been disclosed.

In addition, an environmental and social management system (ESMS) will be established and maintained as part of HPG's overall management system, in relation to the ADB loan project, in order to meet national laws and ADB environmental and social safeguard requirements for FIL as per ADB's SPS. The ESMS guidance document has been prepared. It guides the PMO as PMO takes on its responsibility of appraising and approving the future subprojects under the FIL. HPG and PMO has (i) agreed to adopt ESMS prior to loan effectiveness, including the funding and recruitment of a full time staff position for an environmental and social safeguards manager in the PMO to help ensure that the final ESMS be enforced throughout the 15-years tenure of this FIL; (ii) committed to enforce the PIEE including the EMP; and (iii) agreed to update the EMP as appropriate during the project implementation to include any new subprojects included in the future.

Environmental and social performance will be evaluated on an annual basis. The PMO will ensure that the subproject company prepares and submits an environmental and social safeguards monitoring report, including an update of the EMP, and will review and assess the subproject's performance on environmental and social safeguards issues. Outline for a subproject environmental and social safeguard monitoring report is provided in the ESMS.

Based on the review of the monitoring reports for environment category B projects prepared by the subproject companies, the safeguards manager will prepare an annual ESMS implementation report, and submit it to ADB.

Grievance redress mechanism is addressed through separate arrangement by PMO for the whole project by setting up a formal web-based platform to provide a systematic, transparent and timely process for receiving, evaluating and addressing affected peoples project-related complaints and grievances. The grievance redress mechanism will be open to all project affected people, regardless of the nature of their complaint and should be gender responsive, culturally appropriate, and readily accessible to all segments of the affected people at no costs and without retribution.

Involuntary Resettlement The project is categorized as financial intermediary category C for involuntary resettlement in accordance with ADB's Safeguard Policy Statement (2009). The subproject selection criteria explicitly exclude subprojects having (i) any land acquisition or housing demolition, and (ii) subprojects having adverse impacts on ethnic minorities. The PMO is required to ensure that this requirement is met during the screening of the subprojects to be identified as required in the ESMS. The identified subprojects do not have any social impacts related to ADB's involuntary resettlement and indigenous peoples policy requirements.
Indigenous Peoples The project is categorized as financial intermediary category C for indigenous peoples in accordance with ADB's Safeguard Policy Statement (2009). The subproject selection criteria explicitly exclude subprojects having (i) any land acquisition or housing demolition, and (ii) subprojects having adverse impacts on ethnic minorities. The PMO is required to ensure that this requirement is met during the screening of the subprojects to be identified as required in the ESMS. The identified subprojects do not have any social impacts related to ADB's involuntary resettlement and indigenous peoples policy requirements.
Stakeholder Communication, Participation, and Consultation
During Project Design

Consultation with central government agencies. The National Development and Reform Commission and the Ministry of Finance have been consulted to ensure the project is aligned with the government's development strategies and priorities.

Consultation with provincial government agencies. The HPG will be the executing agency for the project. Hebei Provincial Development and Reform Commission, Hebei Provincial Finance Department, and Hebei Provincial Department of Environmental Protection are the partners for the project, and have been participating in all steps for the project design and subproject selection. They are also the main constituent entities of the project management office. Hebei Power Demand Side Management and Instruction Center has been actively involved in the project preparation as the project management office.

Nongovernment and private organizations. Experts from industrial associations and research institutions have been invited to workshops or engaged as advisors for the project. Interviews and site visits were conducted with more than 20 large energy consuming enterprises, energy service companies, and high-efficiency equipment manufacturers.

Local communities. Consultations were conducted to gauge support for the project from local communities and employees who will be the direct beneficiary groups of the project.

During Project Implementation Stakeholders will be consulted and the report and information obtained during the course of the implementation will also be shared with them.
Business Opportunities
Consulting Services Based on the readiness of the initial subprojects, in the first batch of the FIL, there is no need for implementation consultants. If there is a need for consultants to undertake due diligence, for subsequent batches subprojects to be financed by REF, and prepare the operating guidelines for CGF for the third component, they will be recruited by the PMO using the counterpart funds. However, if there is a need during loan implementation to recruit consultants, using the loan proceeds, any recruitment would be undertaken in accordance with ADB's Guidelines on the Use of Consultants (2010, as amended from time to time).
Procurement

Procurement will be done in accordance with ADB's Procurement Guidelines applicable to FILs, and adopt appropriate procedures, including (i) payment of reasonable prices, and (ii) fair canvassing when selecting suppliers. Procurement must be from ADB member countries. Subborrowers will be encouraged to procure goods through competitive bidding or shopping when such procedures are most appropriate in the interest of economy and efficiency. A procurement manual has been prepared to describe the special procurement method (FIL/national competitive bidding) that will be used for contract packages having a value less than $10 million. The procurement activities need to follow the approved procedure outlined in the procurement manual for the procurement activities undertaken under the special procurement arrangements provided for FIL. For contract packages not covered by the special procurement method (FIL/national competitive bidding), the standard procurement methods as described in ADB's Procurement Guidelines will apply. In cases of noncompliance, with procurement manual and ADB's Procurement Guidelines, the PMO and Huaxia Bank are required to refrain from financing the contract package.

The subborrowers are required to retain tendering agents approved by PMO and acceptable to ADB. The first contract package bided out for goods and works are subject to prior review by ADB and the bidding documents acceptable to ADB. The contract packages, in excess of $10 million, will be subject to international competitive bidding procedures and prior review by ADB. The subprojects, to be financed under component 2, is not required to follow the procurement manual as subborrowers (ESCO) are acting as the service providers to third parties.

Responsible ADB Officer Pradeep Perera
Responsible ADB Department East Asia Department
Responsible ADB Division Energy Division, EARD
Executing Agencies
Hebei Provincial GovernmentHebei Provincial Finance Bureau
48 South Zhonghua St Shijiazhuang 050051
Hebei Province, People's Rep of China
Timetable
Concept Clearance 15 Mar 2011
Fact Finding 29 Aug 2011 to 09 Sep 2011
MRM -
Approval 14 Dec 2011
Last Review Mission -
Last PDS Update 27 Mar 2015

Grant 0364-PRC

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
09 Oct 2013 17 Dec 2013 21 Jan 2014 30 Jun 2017 - -
Financing Plan Grant Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 3.65 Cumulative Contract Awards
ADB 0.00 09 Oct 2013 0.00 0.45 12%
Counterpart 0.00 Cumulative Disbursements
Cofinancing 3.65 09 Oct 2013 0.00 0.37 10%
Status of Covenants
Category Sector Safeguards Social Financial Economic Others
Rating Satisfactory Satisfactory - - - -

Loan 2835-PRC

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
14 Dec 2011 06 Mar 2012 20 Jun 2012 30 Jun 2017 - -
Financing Plan Loan Utilization
Total (Amount in US$ million) Date ADB Others Net Percentage
Project Cost 179.60 Cumulative Contract Awards
ADB 100.00 14 Dec 2011 97.80 0.00 98%
Counterpart 79.60 Cumulative Disbursements
Cofinancing 0.00 14 Dec 2011 97.80 0.00 98%
Status of Covenants
Category Sector Safeguards Social Financial Economic Others
Rating Satisfactory Satisfactory - - - -

Evaluation Documents

See also: Independent Evaluation

No documents found.


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