The World Bank Kazakhstan Energy Efficiency Project (P130013) REPORT NO.: RES36023 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF KAZAKHSTAN ENERGY EFFICIENCY PROJECT APPROVED ON MAY 22, 2013 TO REPUBLIC OF KAZAKHSTAN ENERGY & EXTRACTIVES EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Lilia Burunciuc Senior Global Practice Director: Riccardo Puliti Practice Manager/Manager: Sameer Shukla Task Team Leader: Mitsunori Motohashi The World Bank Kazakhstan Energy Efficiency Project (P130013) ABBREVIATIONS AND ACRONYMS Bank The World Bank CO2 Carbon dioxide EA Environmental Assessment ECA Europe and Central Asia EE Energy Efficiency EEDI Energy Efficiency Development Institute ESCO Energy Service Company FY World Bank Fiscal Year July 1 -June 30 GOK Government of Kazakhstan GP Global Practice GWh Giga Watt-hours IP Implementation Progress JSC Joint Stock Company KZT Kazakhstan Tenge MIID Ministry of Industry and Infrastructure Development MW Mega Watt M&E Monitoring and Evaluation OM Operations Manual OP Operational Policy PAD Project Appraisal Document PDO Project Development Objective POM Project Operational Manual PMU Project Management Unit PIU Project Implementation Unit PPP Public Private Partnership RE Renewable Energy SDC Swiss Agency for Development and Cooperation TA Technical Assistance toe Tons of Oil Equivalent TF Trust Fund UNDP United Nations Development Program WBG World Bank Group The World Bank Kazakhstan Energy Efficiency Project (P130013) BASIC DATA Product Information Project ID Financing Instrument P130013 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 22-May-2013 31-Mar-2019 Organizations Borrower Responsible Agency Ministry for Investments and Republic of Kazakhstan Development,KazakhEnergoExpertise Project Development Objective (PDO) Original PDO The Development Objectives of the proposed project are to improve: (a) energy efficiency in public and social facilities; and (b) the enabling environment for sustainable energy financing. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-14185 18-Jun-2014 18-Jun-2014 01-Jun-2015 31-Mar-2019 21.76 12.88 8.89 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Kazakhstan Energy Efficiency Project (P130013) The World Bank Kazakhstan Energy Efficiency Project (P130013) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The Kazakhstan Energy Efficiency Project (the project) is one of two projects supported by the Swiss Single-Donor Trust Fund for the Energy Efficiency and Youth Corps Program (TF No. 071882). The Development Objectives of the project are to improve: (i) energy efficiency in public and social facilities; and (ii) the enabling environment for sustainable energy financing. The project activities are structured around two components: (i) Development and implementation of demonstration subprojects in public and social facilities (Component 1, cost US$18.5 million, including US$17.2 million from the World Bank and US$1.3 million from local co-financing), to finance energy efficiency (EE) investments (“sub-projects”) in public and social facilities; and (ii) Technical assistance (Component 2, cost US$4.56 million), aimed at providing technical assistance to help ensure effective project implementation, and support the broader policy dialogue and institutional/market development to ensure that project activities can be sustained. The Ministry of Industry and Infrastructure Development (MIID – former Ministry of Investments and Development) is the recipient of the project grant and is responsible for the overall project coordination and oversight. The implementing entity is the joint stock company “Electric Power and Energy Saving Development Institute (KazakhEnergoExpertise)” (EEDI), which has set up a Project Implementation Unit (PIU) to carry out day-to- day project implementation. 2. The project was approved by the World Bank on May 22, 2013. Initially, the project encountered significant delays mainly due to (i) a more than two-year delay of the government’s internal approval process, which delayed the project effectiveness until June 1, 2015; and (ii) lack of project implementation experience of the EEDI, the PIU, and the consultant and contractors recruited under the project. In late 2016, there was a change of the leadership in the EEDI and the PIU, and the MIID and the EEDI took the following actions to address the implementation issues: (i) improvement of outreach and consultations with potential competent contractors, (ii) increase of coordination efforts with the local administrations on subproject implementation and with the State Expertise on the subprojects design review process, and (iii) strengthened training and supervision of the consultant and contractors by closely involving the PIU’s international advisor. As a result, since 2017, the project has demonstrated steady implementation progress, and positive outcomes have been achieved. Subsequently, the project was restructured on June 12, 2017 to (i) extend the initial project closing date of June 30, 2017 by 21 months to March 31, 2019; (ii) reallocate US$750,000 grant funding from Category 1 to Category 2; and (iii) update the results framework. 3. After the first project restructuring, the project continues to demonstrate progress, especially under Component 1. The project has achieved approximately 302 gigawatt-hour (GWh) of lifecycle energy savings in the target public and social facilities as of December 2018, which corresponds to approximately 49 percent of the project target. With respect to the sustainable financing mechanisms, there have been several studies conducted to assess possible options. The project has disbursed US$12.88 million (approximately 59 percent of the total grant) that has contributed to retrofit works of 43 public and social facilities under the Batches 1 and 2 (out of four), covering 18 and 25 sub-projects respectively. In terms of the progress made under each component: a. Component 1: This component supports the implementation of EE measures in public and social facilities, which are selected in annual batches based on agreed criteria. Retrofit works for Batches 1 and 2 have been fully completed (43 public and social facilities in total); EE installation works for 29 sub-projects out of 31 under Batch 3 are to be completed by April 2019 and works for remaining two sub-projects are planned to be launched in early March 2019. For 10 sub-projects under Batch 4, energy audit and technical design works have been completed, nine of which were reviewed by the State Expertise and the last one currently under its review. For this Batch, it has been agreed that a public-private partnership (PPP) concept will be piloted where appropriate. The World Bank Kazakhstan Energy Efficiency Project (P130013) b. Component 2: This component supports the MIID and EEDI in implementation of the project and the broader policy agenda and institutional/market development to enhance the sustainability of the project activities. Five TA activities for scaling-up EE financing are ongoing, namely: (i) information awareness campaign on EE, (ii) market assessment of EE, (iii) development of PPP in EE, (iv) development of energy consumption standards, and (v) automated information system of the State Energy Registry. Rationale for the Proposed Restructuring: 4. As described above, a key priority for the project to achieve its PDO is to help design the enabling environment for sustainable energy financing. Monitoring of the projects completed up to date has shown a significant potential for energy savings and reduction of energy consumption by up to 50-55 percent. These investments have demonstrated the market potential for EE to the private sector and have also contributed to significant improvement in comfort and amenity of the social facilities. The project has increased interest of the general public in the issue of EE and conservation. For these reasons, local government authorities have requested the MIID to scale up similar EE investments in their respective municipalities. Following discussions with the Bank team and relevant stakeholders in Kazakhstan, the mechanisms to enable such scaled-up investments in energy efficiency have been developed, including on a PPP basis, as well as financing mechanisms. The PPP scale-up concept is expected also to help achieve the energy savings target value of the project. 5. Given that the scale-up concept is new to Kazakhstan, which would require carefully designing, examining, and probing the concept, the MIID sent a request for extension of the project closing date till end December 2020 in the letter dated November 26, 2018. This was followed by the submission of an updated project results framework and the concept of a financing mechanism involving PPPs in the letter dated January 15, 2019. While the Recipient officially requested to extend the project closing date till December 31, 2020, it is proposed to establish December 29, 2020 as the new closing date, which is in line with the current closing date of the Youth Corp Program implemented under the same Swiss single donor trust fund. Considering the recent accelerated implementation progress, it is expected that a 21-month extension with the proposed closing date of December 29, 2020 will be sufficient to achieve the PDO and to pilot the EE scale-up concept. 6. Prior actions for project extension. Following the regional portfolio management meeting in November 2018, the Bank team agreed with the MIID and the EEDI that four actions would be important to justify the proposed second extension of the project closing date: (i) agreement on the basic EE scale-up concept; (ii) completion of an additional due diligence review of the project fiduciary management (procurement and financial management); (iii) enhancement of a grievance redress mechanism (GRM) to ensure that complaints from project stakeholders are promptly reviewed and addressed by responsible units; and (iv) disbursement of all activities under the Batch 2 sub- projects are completed. The Bank team discussed these actions in the series of visits that took place between October 2018 and February 2019 and confirmed that all these actions have been met as of February 1, 2019. 7. As the project implementation period is longer than originally planned, more funding is required for project management, and some additional TA activities to ensure that the scale-up concept will be piloted. For this reason, US$750,000 grant funding from Category 1 will be reallocated to Category 2. There is no change of the PDO. 8. There is no outstanding audit report. Safeguards compliance is rated as “Satisfactory”, and the Recipient is in compliance with the Project’s Legal Covenants. This is the second restructuring request for the project and it requires RVP approval given that cumulative extension exceeds 24 months from the original closing date. The new extension period is within the parent TF’s current closing date. The World Bank Kazakhstan Energy Efficiency Project (P130013) II. DESCRIPTION OF PROPOSED CHANGES 9. This Restructuring Paper proposes the following changes: (i) extension of the project closing date to December 29, 2020, a 21-month extension from the revised closing date; (ii) reallocation of US$750,000 grant funding from Category 1 (for Component 1) to Category 2 (for Component 2); and (iii) updates on the Results Framework. Disbursement projections will be revised to reflect the extended implementation period. 10. The main proposed updates on the results framework include the following: Before revision Proposed revision by MIID/EEDI (January 2019) Indicator Name Indicator Name Comments PDO Indicators Energy efficiency in public and Energy efficiency in public and Reduction of target values for the indicator social facilities social facilities of quantified energy savings achieved - Quantified energy savings - Quantified energy savings following longer payback period. At the achieved (Gigawatt-hour (GWh)) achieved (Gigawatt-hour (GWh)) project restructuring, the target was set using the energy audits and EE measures End target – 690 GWh End target – 620 GWh selected for 18 subprojects under the batch 1 with the estimated annual energy savings per US$ invested is 2.49kWh. The actual monitoring results for Batch 1 sub- projects and further estimates revealed savings amount to 3.68 kWh/1USD invested, on average, for revised number of 85 sub-projects over a life cycle of 15 years. Additionally, the simple payback periods of EE investments in these buildings are significantly longer than what were estimated initially. The enabling environment for The enabling environment for No change sustainable energy financing sustainable energy financing - Development of sustainable - Development of sustainable energy financing mechanisms energy financing mechanisms End target - New financing End target - New financing mechanism has been launched mechanism has been launched Intermediate Results Indicators Number of subprojects Number of subprojects Given savings achieved under the project, commissioned in public and social commissioned in public and social 10 additional sub-projects were selected facilities facilities for which the PPP-EPC concept will be tested where appropriate End target - 75 End target - 85 Number of beneficiaries of Number of beneficiaries of Adjusted to reflect the 10 additional sub- subprojects subprojects projects End target – 42,900 End target – 48,620 Percentage of female Percentage of female Adjusted to reflect the 10 additional sub- beneficiaries of subprojects beneficiaries of subprojects projects The World Bank Kazakhstan Energy Efficiency Project (P130013) Before revision Proposed revision by MIID/EEDI (January 2019) End target – 21,450 End target – 24,610 Cumulative investments in public Cumulative investments in public Adjusted to reflect the proposed and social facilities (amount, US$) and social facilities (amount, US$) reallocation End target – 18,500,000 End target –16,450,000 CO2 emission reductions in CO2 emission reductions in Reduction of CO2 emission reductions in retrofitted facilities through EE retrofitted facilities through EE retrofitted facilities through EE investments (Metric ton in investments (Metric ton in investments as well as the updated material & equipment life cycle of material & equipment life cycle of emission factor from 485 gCO2 to 450 15 years) 15 years) gCO2 per kWh from electricity and heat generation based on the updated data End target – 310,000 End target – 199,550 from the International Energy Agency Development of legal, Development of legal, No change institutional and regulatory basis institutional and regulatory basis for setting up EE financing for setting up EE financing mechanisms mechanisms End target - Package of policies is End target - Package of policies is submitted for GoK approval submitted for GoK approval Number of local EE market Number of local EE market No change institutions (including ESCOs and institutions (including ESCOs and finance institutions) and co- finance institutions) and co- financing arrangements involved financing arrangements involved End target - 7 End target - 7 III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Loan Closing Date(s) ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ The World Bank Kazakhstan Energy Efficiency Project (P130013) Components and Cost ✔ Cancellations Proposed ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications TF-14185 Effective 30-Jun-2017 31-Mar-2019 29-Dec-2020 29-Apr-2021 OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed TF-14185-001 | Currency: USD The World Bank Kazakhstan Energy Efficiency Project (P130013) iLap Category Sequence No: 1 Current Expenditure Category: GO, W, Non-CS, CS - Part 1 17,200,000.00 7,797,140.88 16,450,000.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: GO, W, Non-CS, CS, TR, OC - Part 2 4,563,000.00 3,368,337.02 5,313,000.00 100.00 100.00 Total 21,763,000.00 11,165,477.90 21,763,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2013 0.00 0.00 2014 0.00 659,197.00 2015 0.00 1,141,137.00 2016 870,000.00 1,459,705.00 2017 1,200,000.00 2,232,750.00 2018 10,300,000.00 3,480,076.00 2019 9,393,000.00 4,409,207.00 2020 0.00 5,523,145.00 2021 0.00 2,256,773.00 . The World Bank Kazakhstan Energy Efficiency Project (P130013) . Results framework COUNTRY: Kazakhstan Kazakhstan Energy Efficiency Project Project Development Objectives(s) The Development Objectives of the proposed project are to improve: (a) energy efficiency in public and social facilities; and (b) the enabling environment for sustainable energy financing. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Energy efficiency in public and social facilities Quantified energy savings achieved (Gigawatt-hour 0.00 0.00 0.00 98.00 301.00 528.00 620.00 (GWh)) Action: This indicator has been Revised The enabling environment for sustainainable energy financing EE market Financing options Detailed Development of sustainable assessment selected; preparation arrangements for New financing New financing energy financing 0.00 completed; financing of framework financing mechanism mechanisms adopted mechanisms launched mechanisms (Text) options developed completed prepared Action: This indicator has been Revised PDO Table SPACE The World Bank Kazakhstan Energy Efficiency Project (P130013) Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Comp 1: Development and imlementation of demonstration subprojects in public and social facilities Number of subprojects commissioned in public and 0.00 0.00 0.00 19.00 44.00 75.00 85.00 social facilities (Number) Action: This indicator has been Revised Number of male and female beneficiaries of subprojects 0.00 0.00 0.00 12,600.00 25,100.00 42,900.00 48,620.00 (Number) Action: This indicator has been Revised Number of female beneficiaries of 0.00 0.00 0.00 6,300.00 12,550.00 21,450.00 24,610.00 subprojects (Number) Action: This indicator has been Revised Cumulative investments in public and social facilities 0.00 0.00 0.00 4,500,000.00 9,500,000.00 14,500,000.00 16,450,000.00 (Amount(USD)) Action: This indicator has been Revised CO2 emission reductions in retrofitted facilities through 0.00 0.00 0.00 26,500.00 60,000.00 152,000.00 199,550.00 EE investments (Metric ton) Action: This indicator has been Revised The World Bank Kazakhstan Energy Efficiency Project (P130013) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Comp 2: Technical assistance Development of legal, EE law, program in institutional and regulatory EE policy gap place; but no specific Relevant EE package Package submitted Package submitted for basis for setting up EE -- assessment -- provisions on EE prepared for GoK approval GOK approval financing mechanisms completed financing (Text) Action: This indicator has been Revised Number of local EE market institutions (including ESCOs and finance 0.00 0.00 0.00 0.00 3.00 5.00 7.00 institutions) and co- financing arrangements involved (Number) Action: This indicator has been Revised IO Table SPACE The World Bank Kazakhstan Energy Efficiency Project (P130013)