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PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB5032 Project Name Region Sector Project ID Borrower(s) Implementing Agency Environment Category Date PID Prepared Estimated Date of Appraisal Authorization Estimated Date of Board Approval I. Energy Efficiency for Industrial Enterprises EUROPE AND CENTRAL ASIA District heating and energy efficiency services (100%) P118737 GOVERNMENT OF UZBEKISTAN Ministry of Economy [ ] A [ ] B [ ] C [ X] FI [ ] TBD (to be determined) September 24, 2009 February 8, 2010 May 27, 2010 Key development issues and rationale for Bank involvement Uzbekistan has a fast growing economy and is a major producer and exporter of natural gas to Russia and Europe. With more than 12 GW of installed power generation capacity, Uzbekistan is the second largest producer of electricity in the central Asia region. At the same time, the country has one of the most energy intensive industries worldwide and is a major greenhouse gas emitter. One of the key contributing factors is inefficiency of energy usage by the industrial enterprises (IE) that operate old and outdated equipment and machinery. According to the latest WDI data (table below), Uzbekistan uses three times as much energy to add a unit of GDP as compared to the average of ECA countries and nearly double as compared to neighboring Kazakhstan. Further, the country emits much more CO2 per unit of GDP which makes it the 35th largest carbon dioxide emitter worldwide. In total, Uzbekistan emitted 200 million tons of CO2 which is estimated to double over the next decade as the economy grows. Uzbekistan ECA Kazakhstan Russia Germany GDP per Unit of Energy Use (2005 PPP $ per kg of oil equivalent) 1.2 3.5 2.4 2.7 7.6 CO2 emissions per unit of GDP (kg/2005 PPP $) 2.1 0.7 1.4 0.9 0.3 Source: World Development Indicators (WDI), 2009 Most of the energy consumed (in the form of electric power, natural gas and/or steam) to sustain their industrial processes is highly subsidized and is used for operating outdated machinery, equipment and furnaces that need replacement or retrofitting. A typical industrial plant pays approximately US$35-551 per thousand cubic meter (tcm) of natural gas when the country receives US$240-3002 by exporting the same quantity. There is a substantial upside potential for additional government revenues by exporting energy savings and the government has further encouraged EE investments by indicating that gas prices would be increased by 50 % for IEs in case they don’t shift to more efficient technologies. There is wide consensus within Government and industry that the potential for energy savings through implementation of EE measures in IEs in Uzbekistan is substantial. Typical energy intensive industries include brick manufacturers, large poultry and livestock farms, food and dairy processing industries, cement industries, cotton and textile industries. The share of energy consumption in total production costs can reach up to 40 percent for cement and brick factories and 15 percent for textile and wool industries. EE investments will make IEs more competitive by reducing overall production costs. Recognizing this, the Government of Uzbekistan (GoU) has declared improving energy efficiency (EE) of IEs as one of its key priorities and has passed several relevant decrees. The aim of these decrees is to improve productivity and reduce production costs through EE investments which will reduce GHG emissions, make Uzbek industry more competitive in international markets and free up energy savings (ie, natural gas and electricity) for exports. Uzbekistan has a relatively large number of banks that provide loans for certain types of IEs but long-term funds tend to be scarce and relatively expensive. However, they are not offering energy efficiency financing as a specific product line since they associate such funding with higher transactional costs as a result of their lack of experience with EE/Renewable Energy technologies and market opportunities, and the need for a more specialized approach. In the context of global financial crisis, the situation has further deteriorated with regards to access of long term funding at reasonable terms and conditions. The GoU has requested an IDA allocation of US25 million for a financial intermediary (FI) credit line to enable implementation of the measures undertaken by the Govt. in improving EE and cost reduction of IEs. GoU has also requested that this pilot project be developed speedily. If implemented successfully, the GoU indicated that the pilot project should be scaled up to include more Banks and enable a larger credit line for EE investments. II. Proposed Project Development Objectives The pilot project objective is to improve energy efficiency in industrial enterprises by designing and establishing a financing mechanism for energy saving investments. III. Preliminary Project Description Based on the initial discussions held with the GoU, it is envisaged that the World Bank would provide a credit line to a select few FIs (via Ministry of Finance) to on-lend to Industrial Enterprises to promote EE investments. The project does not envisage any restrictions on the 1 The cost varies with type of industries. As an example, the supply of gas to brick kilns is currently at a lower cost compared to most other industries. 2 The price of gas export to Russia is higher than exports to Tajikistan and Kyrgyzstan. type of IEs that will be eligible to apply for funds. However, it seems that brick producers, food processors, livestock and poultry farms among others will be the core applicants. The project could also cover supporting replacement of conventional energy sources with renewable technologies. The use of financial intermediaries to promote private sector development and address financing and other barriers to energy efficiency is an approach which has been successfully applied by the World Bank group in other client countries. This approach has not yet been used in Uzbekistan and it would seem suitable to initiate the development of energy efficiency financing business lines by local banks. The proposed project will have two components: EE Credit Line– In the pilot project, up to three banks will be selected as FIs. Ministry of Economy indicated that Uzpromstroi Bank, Asaka Bank and National Bank of Uzbekistan (NBU) should be considered. Only Uzpromstroi Bank was previously appraised under the Rural Enterprise Support Project (RESP I & II) and confirmed of having a good track record in corporate lending. Asaka Bank and NBU will have to be appraised to confirm eligibility as part of project implementation. We propose to start the pilot with the banks whose eligibility is established by appraisal. The remaining, if any, would join when their eligibility is established. A wide range of EE investments will be eligible for financing from the credit line, including replacement of machinery, furnaces and equipment. The maximum refinancing of the loan size per IE is proposed to be capped (say US$2 million) to ensure funds under the pilot will be spread widely. The credit line proceeds would be made available in two currencies, UZ Som and US Dollar. This is particularly relevant as specialized replacement equipment may have to be procured from outside Uzbekistan. The credit line could also be available for leasing transactions of some equipment. FIs will be responsible for identifying prospective borrowers, have full autonomy in subproject approval and determination of lending terms (such as the interest rate and repayment and grace periods) and will bear the lending risks. The intended IE beneficiaries are those with a commercially viable and bankable business proposal, adequate collateral, satisfactory rates of return and demonstrated repayment capacity. A Refinancing Agreement (RA) could be signed between Ministry of Finance (MoF) that specifies detailed eligibility criteria for sub-borrowers, terms and conditions for borrowing the credit proceeds. Further the RA will specify on-lending rates from MoF to FIs as well as foreign currency risk and related matters. Capacity and Institutional Development – Banks in Uzbekistan have wide experience in lending to IEs but lack expertise on how to deal with specific EE credit lines. A training program will be designed for FIs that will cover appraisal, risk assessment and monitoring of EE investment projects for IEs. In addition, training on environmental awareness and environmental impact assessment will be provided to IEs and FIs. A more detailed capacity and institutional development program will be discussed and prepared as part of project preparation. A suitable communication campaign for awareness of the EE fund shall also be designed and launched during project implementation. IV. Safeguard policies that might apply OP 8.30 – Financial Intermediary Lending OP 4.01 – Environmental Assessment Other safeguard requirements to be determined V. Tentative financing Source: BORROWER/RECIPIENT International Development Association (IDA) Total VI. Contact point Contact: Mr Franz Gerner Title: Senior Energy Economist Tel: (202) 473-5019 Email: [email protected] ($m.) 0 25 25