Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 54343-IN

PROJECT APPRAISAL DOCUMENT

FOR A

PROPOSED GRANT FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND

IN THE AMOUNT OF US$ 2.25 MILLION TO

BUREAU OF ENERGY EFFICIENCY, REPUBLIC OF INDIA

AND A PROPOSED GRANT FROM THE

GLOBAL ENVIRONMENT FACILITY TRUST FUND IN THE AMOUNT OF US$ 9.05 MILLION TO

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

IN SUPPORT OF

THE FINANCING ENERGY EFFICIENCY AT MSMEs PROJECT

April 30, 2010

Environment and Water Resources Management Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS 46.7 Rs =1 US$ (February 8, 2010)

(1 lakh=100,000, 1 crore=100 lakh=10,000,000)

FISCAL YEAR July 1 – June 30

ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank JICA Japan International Cooperation Agency ASTAE Asia Sustainable Energy Program KfW Kreditanstalt für Wiederaufbau BEE Bureau of Energy Efficiency MDG Millennium Development Goal CAS Country Assistance Strategy MoEF Ministry of Environment and Forests

CDM Clean Development Mechanism (under the Kyoto Protocol)

MOU Memorandum of Understanding M&E Monitoring and Evaluation

CER Certified Emission Reduction M&V Monitoring and Verification

CGTMSE Credit Guarantee Fund Trust for Micro and Small Enterprises MTR Mid Term Review

CO2e Carbon Dioxide Equivalent MSME Micro Small and Medium Enterprises CQS Consultant Qualifications NCB National Competitive Bidding DEA Department of Economic Affairs O&M Operations and Maintenance DFID Department for Int. Development, UK PCC Program Coordination Committee DPR Detailed Project Report PDO Project Development Objective DPS Designated Procurement Specialist PIP Project Implementation Plan EA Environmental Assessment PMU Project Management Unit EE Energy Efficiency RBI Reserve Bank of India EHS Environmental Health Safety RE Renewable Energy EIRRs Economic Internal Rates of Return RFP Request for Proposals EMP Environmental Management Plan SBD Standard Bidding Documents EOI Expression of Interest SBI State Bank of India ESCOs Energy Services Companies SME Small and Medium Enterprise

ESMF Environmental and Social Risk Management Framework SMEFD SME Financing and Development

FI Financial Intermediary SIDBI Small Industries Development Bank of India

FIRRS Financial Internal Rates of Return SRRM Steel Re-Rolling Mills GAAP Governance and Accountability Action Plan SSI Small-Scale Industry GEF Global Environmental Facility SSS Single Source Selection GHG Greenhouse Gas STAP Scientific & Technical Advisory Panel GoI Government of India TA Technical Assistance GDP Gross Domestic Product TBSE Technology Bureau for Small Enterprises

IBRD International Bank for Reconstruction and Development TOE Tons oil equivalent

IA Industry Association UNDP United Nations Development Program ICR Implementation Completion Report UNEP United Nations Environment Program

IDA International Development Association UNFCCC United Nations Framework Convention on Climate Change

IFB Invitation for Bids UNIDO United Nations Industrial Development Organization

IP Indigenous Peoples USAID United States Agency for International Development

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INDIA

FINANCING ENERGY EFFICIENCY AT MSMEs PROJECT

PROJECT APPRAISAL DOCUMENT

SOUTH ASIA

SASDI

Date: April 30, 2010 Team Leader: Charles Cormier Country Director: N. Roberto Zagha Sector Manager: Gajanand Pathmanathan Project ID: P100530

Sectors: District Heating and Energy Efficiency Services (100%) Themes: Climate Change (P), Other Environment and Natural Resources Mgt (S)

Lending Instrument: GEF Grant Environmental screening category: Partial Assessment

Project Financing Data [] Loan [] Credit [ ] Grant [ ] Guarantee [ x] Other: Global Environment Facility(GEF) For Loans/Credits/Others: US$11.3 m from GEF Total Bank financing (US$11.3m.): US$ 11.3 m Proposed terms: Grant

Financing Plan (US$m) Source Local Foreign Total

BORROWER/RECIPIENT 0.2 0 2.0 GEF 0 11.3 11.3 DFID 0 0.06331 Multilateral Agencies: IBRD See footnote Private Sector: Financing raised by MSMEs

462 0 46

Total: 46.2 11.3633 57.5633 Borrower: Government of India Responsible Agencies: Bureau of Energy Efficiency, Ministry of Power, India Small Industries Development Bank of India (SIDBI) Ministry of Environment & Forests, India 1 DFID grant of US$63,300 mobilized through ongoing DFID grant funds to SIDBI by SIDBI 2 Private Sector Financing includes potential IBRD sources provided under Additional Financing for SME Financing and Development Project P102767

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FY 11 12 13 14 Annual 2 3.5 3 2.8

Cumulative 2 5.5 8.5 11.3

Does the project depart from the CAS in content or other significant respects? Ref. PAD I.C.

[ ]Yes [x] No

Does the project require any exceptions from Bank policies? Ref. PAD IV.G. Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

[ ]Yes [x] No

[ ]Yes [ ] No [ ]Yes [x] No

Does the project include any critical risks rated “substantial” or “high”? Ref. PAD III.E.

[ ]Yes [ x ] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD IV.G.

[ x]Yes [ ] No

Project development objective Ref. PAD II.C., Technical Annex 3

The Proposed Development Objective of the Project is:

To increase demand for energy efficiency investments in target micro, small and medium enterprise clusters and to build their capacity to access commercial finance.

Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4 Component 1: Activities to Build Capacity and Awareness This component will focus on increasing awareness of energy efficiency at the cluster and plant level on a large scale through the implementation of outreach efforts, dissemination of information on successful projects and building capacity of various stakeholders through trainings and other related activities. Component 2: Activities to Increase Investment in Energy Efficiency This component shall contribute to the growth of energy efficiency investments in the Indian MSME sector that are financed from local commercial financing sources through project development support and through deployment of performance linked grants for demonstration purposes Component 3: Knowledge Management The knowledge management effort will include the provision of resources and manpower for broad GEF program evaluation and analysis of cross cutting energy efficiency issues with the goal of ensuring effective implementation and replication of not just this individual project, but of the Bureau of Energy Efficiency (BEE)’sentire GEF funded programmatic effort. Component 4 Project Management Support This component will provide support for the two PMUs within BEE and the Small Industries Development Bank of India (SIDBI) that will jointly implement the project.

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Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 Environmental Assessment (OP/BP/GP 4.01) Significant, non-standard conditions, if any, for: none Ref. PAD III.F. Board presentation: May 27, 2010 Loan/credit effectiveness: Execution and delivery of GEF Grant Agreements with GOI/BEE and SIDBI, and provision of a legal opinion on the Grant Agreements Covenants applicable to project implementation:

Table of Contents I.  STRATEGY CONTEXT AND RATIONALE _________________________________ 6 

A.  Country and Sector Issues _______________________________________________ 6 

B.  Rationale for World Bank Involvement ____________________________________ 9 

C.  Higher level objectives to which the project contributes ______________________ 10 

II.  PROJECT DESCRIPTION _______________________________________________ 11 

A.  Lending instrument (Financial Modality) __________________________________ 11 

B.  Project development objective and key indicators ___________________________ 12 

C.  Project Global Environment Objectives and Key Indicators __________________ 13 

D.  Project Components ___________________________________________________ 13 

E.  Lessons Learned and Reflected in Project Design ___________________________ 16 

F.  Alternatives Considered and Reasons for Rejection _________________________ 19 

III.  IMPLEMENTATION ____________________________________________________ 20 

A.  Partnership Arrangements ______________________________________________ 20 

B.  Institutional and Implementation Arrangements ____________________________ 20 

C.  Monitoring and Evaluation of Outcome/Results ____________________________ 22 

D.  Sustainability and Replicability __________________________________________ 23 

E.  Critical Risks and Possible Controversial Aspects ___________________________ 24 

IV.  APPRAISAL SUMMARY ________________________________________________ 25 

A. Financial and Incremental Cost Analyses ___________________________________ 25 

B.   Technical ____________________________________________________________ 26 

C.   Fiduciary __________________________________________________________ 27 

D.   Environment and Social ______________________________________________ 28 

E.  Safeguard Policies _____________________________________________________ 29 

F.   Policy Exceptions and Readiness _________________________________________ 30 

Annex 1: Country, Sector and Program Background _______________________________ 31 

A.  Country Background __________________________________________________ 31 

B.  Significance of the Indian SME sector _____________________________________ 32 

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ________ 41 

Annex 3: Results Framework and Monitoring ____________________________________ 42 

B.  Arrangement for Results Monitoring _____________________________________ 43 

Annex 4: Detailed Project Description __________________________________________ 44 Component 1: Activities to Build Capacity and Awareness _______________________________ 44 Component 2: Activities to Increase Investment in Energy Efficiency _______________________ 46 Component 3: Program Knowledge Management and Sharing _____________________________ 47 

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Component 4: Project Management Units _____________________________________________ 48 

Annex 5: Project Costs ________________________________________________________ 50 

Annex 6: Implementation Arrangements _________________________________________ 51 

Annex 7: Financial Management and Disbursement Arrangement ___________________ 53 

Annex 8: Procurement Arrangements ___________________________________________ 67 Table 8.1 Procurement Plans for first 18 months ________________________________________ 74 Appendix 2 to Annex 8: Procurement disclosure Requirements as per Bank’s Guidelines ________ 78 

Annex 9: Economic/Financial and Incremental Cost Analysis _______________________ 80 

A.  Financial Analysis _____________________________________________________ 80 

B.  Incremental Cost Analysis ______________________________________________ 80 

Annex 10: Safeguard Policy Issues _____________________________________________ 86 

Annex 11 : Market Assessment ________________________________________________ 89 

Annex 12: Governance and Accountability Action Plan (GAAP) _____________________ 95 

Annex 13 : GEF Comment Review ____________________________________________ 103 

I Guidance from STAP ____________________________________________________ 103 

II Comments from Government of Switzerland ________________________________ 104 

III Clarifications and Responses _______________________________________________ 105 

Annex 14: Project Preparation and Supervision __________________________________ 106 

Annex 15: Documents in the Project File _______________________________________ 108 

Annex 16: Country at a Glance _______________________________________________ 109 

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India: Financing Energy Efficiency at MSMEs Project

I. STRATEGY CONTEXT AND RATIONALE

A. Country and Sector Issues

1. Accelerating and maintaining a high rate of economic growth is key if India is to meet its Millennium Development Goal (MDGs) and poverty reduction targets. However, the country currently suffers from a significant demand-supply mismatch in the power sector –the overall energy deficit was estimated at 10 % and peak exceeded 17 % in 2007) – and this lack of a reliable supply of energy is recognized as a key constraint to achieving continued economic growth. In the 11th Five Year Plan and the Integrated Energy Policy of the National Planning Commission, the Government of India (GoI) fully recognized the need to add additional power supply capacity and to improve efficiency to address current shortfalls and mitigate the constraints on the system of future demand growth.

2. The GoI estimates that meeting the MDGs (even without improving energy services to urban and commercial customers and supporting economic growth) alone implies an increase of about 18% in energy use from the current level, and an additional 133 million metric tons of CO2 emissions per year. This translates to a 12% increase in total emissions from 2004 levels. By 2030 India will need to increase available power supply by a factor of at least five times if it is to meet its stated economic growth target of 8%, which will increase national emissions of greenhouse gases by a factor of four or more compared to current levels. India’s future demand for oil will more than double by the year 2025 per the Best Case Scenario of India Vision 2020 or triple according to India Hydrocarbon Vision (IHV) 2025, with a matching increase in coal demand. Energy consumption in the Indian industrial sector is relaetively large compared to other sectors, as it consumed 4,771 petajoules (PJ) of energy in 2005, which represents more than 35% of total final energy consumption in the country. Improving the efficiency of energy transformation and use in this sector is an extremely important tool to allow the country to meet its energy, climate change and growth challenges.

3. India ratified the UNFCCC on 1 November 1993 and the Kyoto Protocol on 26 August 2002. The Government issued a National Action Plan on Climate Change in June 2008, which presents a set of eight missions, including one dedicated to energy efficiency, and announced its intention to voluntarily reduce India’s carbon intenstiy by 20 to 25 % by 2020 compared to 2005 levels..

4. Prior to the issuance of the National Action Plan, the GoI had initiated and implemented numerous activities to improve energy efficiency (EE) in previous years, most importantly the passage of the Energy Conservation Act (2001) which established the Bureau of Energy Efficiency (BEE) as a statutory body under the

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Ministry of Power to facilitate and coordinate EE initiatives at the central and state levels. The primary goal of BEE is to reduce the energy intensity in the Indian economy, and its mission is to institutionalize EE services, enable delivery mechanisms in the country and provide leadership to the key players involved in energy conservation activities. The 11th Five Year Plan of the GoI includes a target of increasing energy efficiency by 20 percent by 2016-17 through the implementation of a set of EE interventions across a variety of sectors.

5. India has nearly three million small and medium enterprises (SMEs)3 which constitute more than 80 % of the total number of industrial enterprises in the country, contributing 45% to industrial production, 17% to GDP4 and representing 40% of India’s exports. . . Per the Ministry of Small and Medium Enterprises, the SME sector is also the largest single employment sector after agriculture, constituting about 45% of industrial sector employment. The SME sector in India also plays a significant role in terms of balanced and sustainable growth, deployment of entrepreneurial skills, and represents the greatest potential to create new high wage employment opportunities.

6. The 2006 Integrated Energy Policy Report of the Planning Commission noted that lowering the energy intensity of GDP growth through higher energy efficiency including in the industrial secytor is an important element for meeting India’s future energy challenges and ensuring its energy security. India currently consumes 0.16 kg of oil equivalent (kgoe) per dollar of GDP expressed in purchasing power parity terms, and its carbon intensity per GDP (adjusted for PPP) has actually shown a slight decline over time and is on par with the global average. Numerous sector-specific studies have confirmed that energy intensity in industry can be further reduced with the widespread adoption of commercially available technologies to improve energy efficiency, producing significant aggregate impacts and global benefits from reduced emissions of greenhouse gases, and that there is an especially high unrealized potential for improvement in the Indian SME sector.

7. As per backgound papers prepared for the World Bank Study “Energy Intensive Sectors of the Indian Economy: Options for Low-Carbon Development” total Indian industrial primary energy consumption has increased at a slower rate than the sector’s value added during the last decade plus, primarily attributable to improvements in energy efficiency. Despite these recent reductions in overall energy intensity, the SME sector has fallen behind larger Indian industry benchmarks in terms of productivity, technology upgradation and energy efficiency. While there is a lack of available aggregate data on total Indian industry energy consumption share by SMEs, analysis of certain highly consuming subsectors such as iron and steel or pulp and paper indicate that the small scale and medium industry share of total energy consumption can exceed

3 Defined per Reserve Bank of India as an enterprise where investment in plant and machinery is between 25 lakh and 10 crore. 4 Associated Chambers of Commerce India (ASSOCHAM) had calculated in 2008 that the direct contribution of SMEs to Indian GDP would rise from 17% to 22% by 2012. Other estimates attribute approximately 60 percent of the country’s GDP to the SME sector when including indirect contributions.

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33-75 percent depending on the sub-sector, meaning that improvements in SME energy efficiency can have a significant total impact on total industrial sector energy consumption for the country as a whole.

8. The Indian SME sector is facing high and rising energy costs, unlike certain other sectors of the economy such as agriculture that benefit from subsidized energy prices, whereas export-oriented Indian SMEs are facing increased global competition. Price and cost pressures are of high and increasing importance to enterprise owners. Many Indian SMEs are energy-intensive, employing inefficient and outmoded technologies and operational modalities that endanger their competitiveness and future growth. Investments in cost-effective EE measures would improve their productivity and bottom-line profits.

9. SMEs, especially those for whom energy costs represent a large portion of total production costs, can reap especially high direct economic benefits from improving efficiency of energy conversion and reduction of energy losses. In the past, wide-ranging governmental programs of fiscal incentives and other interventions have been offered to SME units to address technology improvements and performance efficiency, Despite the financial attractiveness of these types of investments and several efforts to support the development of EE investment projects and Indian technical capacity to deliver EE solutions, only a small number of projects have actually been implemented and there has been limited adoption of efficient technologies and replication of best practices, due to the existtence of numerous barriers and market failures.

10. These barriers include not just market barriers typically seen in energy efficiency projects globally, but additional India-specific constraints in SME access to finance which have held back the establishment of small units, their overall growth and development, and their eventual graduation to medium sized enterprises. Indian SMEs typically face constraints in accessing adequate and timely financing on competitive terms, particularly longer tenure loans, but also, in the context of the 2008/2009 financial crisis, working capital loans. The Reserve Bank of India (RBI) statistics show that the year-on-year growth rate of local Indian bank credit to SMEs fell from 35.6% in 2007 to 7.4% in 2008, even while the overall year-on-year growth rate of bank credit to industry (including large corporations) increased from 24.9% to 30.2% over the same period.

11. A central barrier, is the current gap in understanding between energy auditors and EE practitioners who prepare technical proposals for SME clients and the local banks who evaluate loan proposals as opposed to technical studies. EE investments usually do not generate additional revenues, but rather contribute to bottom line earnings through a reduction in energy expenditures. This can make it difficult for banks to identify and capture cash flows from such projects, to assess their delivery risks, and to treat energy savings as assets of sufficient market value to justify a loan, despite the overall benefits which will accrue to the borrower if implemented. This

9

often results in either rejection of EE loan applications or offering of unattractive financial terms due to high risk perceptions. As the EE components of SME loans are often small, they also carry higher transaction costs as a percentage of investment when compared to large loans, making them less attractive to the banks as a specific lending product. There is also a lack of information among banking sector stakeholders on the potential market for lending and the portfolio benefits in terms of improving asset quality which can be achieved by increasing their own lending for EE to existing clients. Despite several pilot efforts by the GOI and donors, imperfect information about EE among SMEs still persists, representing another barrier preventing increased adoption of efficient technologies. Many of the previous Government and donor programs were focused on outreach and preparation of energy audits, with limited translation of these initial audits into actual investments and replication by non-participants. SME units also remain generally unfamiliar with the performance of readily available efficient equipment in Indian conditions. Finally, top tier vendors of energy efficient equipment frequently give lower attention to individual SMEs due to their small size and the perceived difficulties in working with this customer class.

B. Rationale for World Bank Involvement To enhance synergies and improve effectiveness of the Global Environment Facility (GEF) portfolio of programs, the World Bank took the lead in working with the GoI, key Ministerial stakeholders, and GEF implementing agencies (UNDP and UNIDO) to develop a Programmatic Framework for Energy Efficiency in India, which defined a wide program of assistance for GEF support to the GoI under the current Resource Allocation Framework for India. This Programmatic Framework aims at increasing market penetration of energy efficient technologies in buildings, SMEs and railways sectors through implementation of five distinct GEF projects, including this project. . The programmatic framework was approved by the GEF Council in 2008.

12. The World Bank’s comparative advantage for GEF projects lies with its position as a leading international financial institution with strong experience in investment lending focusing on institution building, infrastructure development and policy reform, across all the focal areas of the GEF (GEF C31.5, May 2007). In the context of this project, the World Bank has specific experience in India that is directly relevant in the areas of financing, energy efficiency, and financing lending programs for SMEs through local financial intermediaries, most notable through the SME Financing and Development Project with SIDBI. This current GEF project represents critical follow-up support which is needed to ensure that the interest of the local banking sector is maintained and that uptake of this financing option by SMEs expands considerably beyond current levels.

13. Given the existing market barriers observed in India, it was concluded that there is a need to systematically support development of a large number of EE investment proposals under a programmatic approach to aggregate demand for EE investment in

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SME industrial clusters5 and to create a sustainable mechanism for identifying, preparing and financing these proposals at the local level. This particular project builds upon the success of the recently completed World Bank Global Technical Assistance Project "Developing Financial Intermediation Mechanisms in China, India and Brazil" (the Three Country EE Project) which led to the launching of five pilot lending schemes for EE at SMEs by Indian banks and the World Bank ongoing engagement with SIDBI, where this GEF project will complement the additional finance currently provided by IBRD to SIDBI for SME lending.

14. The World Bank is currently providing support to GOI through the provision of Additional Financing for the SME Finance and Development Project, which includes $400 million as a follow-up to the original $120 million dollar project to improve SME access to finance (including term finance) and business development services, thereby fostering SME growth, competitiveness and employment creation. The additional financing will facilitate an increased flow of working capital and term lending to the SME sector and energy efficiency lending is included as an eligible expense, although it has had little uptake so far. Over the longer term, this project will assist in addressing remaining policy and regulatory issues, institutional weaknesses and capacity constraints that have distorted bankers’ risk-return signals in SME financing and hampered the efficient functioning of Indian SME credit markets. While it is acknowledged that the GEF project alone cannot overcome broader SME finance sector issues, deployment of GEF resources as an explicit complement to the IBRD Additional Financing may effectively overcome certain EE-specific barriers present in the market for financing energy efficiency in the target sectors while simultaneously increasing long term demand for SIDBI’s lending products—thus the two projects can be considered mutually complementary.

15. The project will contribute substantially to the GoI agenda of improving SMEs productivity, particularly with respect to energy use, as presented in more detail below. Since the energy efficiency improvement initiatives at SME cluster level would also facilitate some of the micro enterprises to graduate to small or medium enterprises, the SME reference relates with Micro, Small, and Medium Enterprises (MSMEs)

C. Higher level objectives to which the project contributes

16. The MSME EE project is part of the GEF Programmatic Framework for Energy Efficiency in India whose objectives are to:

5 In the context of this project, a cluster is defined as a group of end-users who share similar energy use characteristics. It will include both a specific sector and technology focus and a geographic focus for grouping units, and may include several industrial categories which share similar potentials for specific technical interventions. End user eligibility will not be limited to GoI definition of medium, rather it shall be set based upon alternative thresholds developed with local industry associations, SIDBI and BEE, including annual turnover.

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i). Promote EE in buildings through increased market penetration of EE technologies, practices, products, and materials in the residential and commercial building markets;

ii). Increase deployment of EE technologies and support adoption of energy-saving practices in the small and medium industrial sector (SMEs); and

iii). Implement EE technologies and measures in Indian railways.

17. While the objective of this project is well coordinated with the overall program objective, it will be implemented as a stand-alone project without any direct implementing agency linkages with other projects supported under the GEF Programmatic Framework. However, the increased FI capacity and knowledge built by this project as well as lessons learned would have direct benefits to the project on “Promoting Energy Efficiency and Renewable Energy in selected MSME Clusters in India” to be implemented by UNIDO. Furthermore, the knowledge management component of this project will encompass BEE’s overall effort on EE supported by the GEF, and the resources provided under this component shall assist BEE in evaluation and cross-cutting analysis of the full GEF program, including the projects of UNDP and UNIDO.

18. The project directly supports the GoI EE program and is consistent with its goal of increasing energy efficiency by 20% by 2016-17 through the implementation of a set of EE interventions, spearheaded by the BEE. This GEF project also supports broader GoI development goals for the MSME and SSI (Small-Scale Industry) sector, particularly increasing access to finance by these small industries, making the sector more competitive, and facilitating increased productivity.

19. Finally, the project has a direct linkage to the Bank’s Country Assistance Strategy (CAS) for FY09-12, specifically the pillar on sustainable growth, whereby the Bank will assist the GoI to access additional funding for measures that further reduce GHGs. The robust programmatic monitoring and evaluation efforts supported under the knowledge management component shall also strengthen the Bureau of Energy Efficiency as the leading institution for energy efficiency in India. Finally, this project will also address the objectives of the GEF’s Operational Program #5: Removal of Barriers to Energy Efficiency and Energy Conservation, while achieving substantial leverage from mobilization of commercial finance.

II. PROJECT DESCRIPTION

A. Lending instrument (Financial Modality)

20. The project is a GEF stand-alone Grant instrument which shall support activities to increase awareness and capacity for EE, activities to increase EE investment, and knowledge management activities.

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B. Project development objective and key indicators 21. The Proposed Development Objective of the Project is:

To increase demand for energy efficiency investments in target micro, small and medium enterprise clusters and to build their capacity to access commercial finance.

22. The proposed GEF project would realize this PDO through the achievement of the following intermediate outcomes:

(1) The project will create increased demand for EE investments by adopting a cluster approach to facilitate the development of customized EE products and financing solutions in five targeted industry clusters, and will build the capacity of identified apex organizations to assist MSME6 units in identifying additional EE projects in the future, aiding in widespread replication. (2) The project will raise the quality of EE investment proposals from a technical and commercial perspective, and will increase capacity of both project developers and bank loan officers and branch managers to help shrink the gap between project identification and successful delivery of commercial finance. (3) The project will expand use of existing guarantee mechanisms for better risk management by banks to catalyze additional commercial finance for energy efficiency. (4) The project will establish a monitoring and evaluation system for the targeted clusters, which could be of use to BEE’s program.

23. The project has significant scope for replication and sustainability as it will develop and implement an approach that bridges the gap between the techno-economic and financial-institutional aspects related to EE investments. The capacity built in apex institutions and among key stakeholders will also support increased investment in efficiency in the 25 BEE clusters, and will support replication well beyond the closing date of this project as MSME units become more cognizant of the ultimate financial returns available from soft cost expenditure for EE investment identification and subsequent project commissioning.

24. The following key quantifiable indicators will be used to monitor the progress toward the PDO, namely:

i). Development of 500 Detailed Project Reports developed identifying

potential investment options for SME units, ii). Total Investment in EE goods and services in targeted MSME Clusters from

units receiving TA support, estimated to exceed US$46 million including mobilized commercial finance, and

6 The project activities and actions defined under the project will be applicable to MSME sector and hence any reference to SME will also include micro enterprises,

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iii). Anticipated annual and cumulative total energy savings expressed in kWh and tons oil equivalent (TOE) resulting from EE measures that successfully access commercial finance.

25. The project design includes an exhaustive monitoring program to measure the above quantifiable indicators, the details of which are presented in Annex 3.

26. Additional indicators, which are not as easily quantifiable and will not be measured as part of the normal M&E activities include: reduction of local pollution, improvement in MSME product quality, improvement of banks’ asset quality, and employment impacts from increased demand for EE goods and services and increased competitiveness of participating MSME units. Investment resulting from indirect impacts of the project, specifically EE investments and resulting energy savings in the 25 BEE clusters, will be measured.

C. Project Global Environment Objectives and Key Indicators

27. The Project Development Objective (PDO) supports the global environmental agenda of stabilizing atmospheric concentrations of greenhouse gases (GHG) through an increase in EE investments and resulting energy savings.

28. The key indicator which shall be reported is CO2 emission reductions resulting from energy savings in the designated MSME clusters. It is anticipated that the project will support EE investments which will reduce global emissions of CO2 by 7 million tons over the lifetimes of the equipment installed.

D. Project Components

29. The project would be implemented as part of the larger SME EE program of the BEE. .

It will address the current gap in understanding between energy auditors and bank loan officers and demonstrate a viable mechanism of synergic tie up between SMEs, energy auditors, financial consultants/chartered accountants, local industrial or SME associations and local bankers. The project will engage in focused efforts in energy-intensive SME sectors and/or clusters to increase the demand for EE products and services and mobilize a large group (several hundred) of “decision-ready” units in partnership with local associations and chambers of commerce and leading vendors of EE equipment. , These EE investment demand creation activities will then be linked with the lending programs of the lead and other active banks in the specific cluster. Based on the findings of project-supported energy audits, enlisted units shall receive support in preparation of application documentation in a format acceptable for the banks to process the loan applications under current or new lending schemes and hand-holding support in reaching financial closure for identified investments. In order to ensure sufficient focus and significant intensification of impact, the project will identify and

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work in five energy intensive SME clusters across the country. Selection of the target clusters by the BEE and the World Bank was based upon a variety of factors, including: number of units, energy usage and intensity, EE potential and availability of proven EE technologies, SME financial health and ability to access finance, strength of potential apex organizations, and replication potential. The project shall directly work in forging, foundry, limekiln, chemicals and one mixed industry cluster. It shall also provide additional broader support to industrial associations and local financial sector stakeholders active in the additional group of 25 clusters which shall receive BEE co-financed consultancy support to generate a total of 375 additional detailed project reports as part of BEE’s EE in SMEs program. The project comprises the following four main components: 30. Component 1: Activities to Build Capacity and Awareness For EE : This component would focus on increasing awareness of EE at the cluster and plant level on a large scale through the implementation of outreach and mobilization efforts, dissemination of information on successful projects and packaging potential investment proposals in EE for financing by local banks or other sources in five designated clusters (see Table 1).7 This cluster-focused TA would also encompass the SME EE efforts of BEE by leveraging BEE contracted work in preparing EE project proposals for a limited number of units in 25 additional clusters.8 With the support of the GEF project, the BEE effort will be able to scale up local capacity and increase success rates of financial closure for identified investments, which shall be tracked as an indirect project impact. Efforts would also be made to increase the capacity of energy auditors, financial consultants/chartered accountants, vendors and service providers to improve project development capability, service delivery, and the quality and acceptability of initial and investment grade audits and loan applications. This component will also include the provision of customized support to local banks for scaling up demand for existing schemes for EE financing, national and local marketing support to increase awareness of current schemes and loan offerings, detailed training support through Indian Bank Training Institutes of local branch offices and head units to identify and appraise EE projects, and widespread dissemination of success stories and impacts of EE project implementation. Efforts will be made to formalize the participation of local banks in the project, either through their participation in the training programs, other efforts to build internal capacities, or project-executed consultancies supporting banks’ own efforts in EE lending. This component will also support uptake of existing risk mitigation instruments such as guarantees which are currently available in the Indian market.

Table 2.1: Characteristics of World Bank supported MSME clusters

Cluster Number of units

Main fuel Apex Organization

7 The five clusters are Pune, Kolhapur, Tirunelveli, Ankleshwar, and Faridabad, but target market may be modified during implementation based on local market conditions. 8 Annex 11 contains the complete list of BEE clusters.

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Kolhapur Foundry 350 Coke Kolhapur Engineering Association

Pune Forging 160 Furnace oil Association of Indian Forging Industry

Tirunelveli Limekilns 100 Charcoal Nellie Lime Manufacturers Association

Ankleshwar 1200 Gas/electricity Ankleshwar Industry Association

Faridabad Mixed 20009 Electricity/oil Faridabad Small Industries Association

Source:Based on Winrock 2008, ECPL 2009, and World Bank internal analysis.

31. Component 2: Activities to Increase Investment in EE: This component , will provide grant support to cover the ‘soft costs’ of an initial pipeline of ~500 projects, including at least 1000 initial project assessments, and funding for a limited number of incentives for demonstration projects/early adopters of appropriate EE technologies where required. The average investment envisaged in individual MSME units is expected to be in the range of INR 2 million to 4.2 million (~US$44,000 to 93,000) with a simple payback period of less than 2 years. Activities to increase use of risk mitigation instruments include expanding outreach and uptake of existing schemes such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE, see section F. Alternatives and Annex 1).

32. The primary source of financing for the identified EE investments in the target five clusters will be the local commercial finance sector, calculated to be $46 million, including MSME equity contributions. Decisions about the sources of finance shall be completely demand driven: the MSME units will be free to utilize their own resoures, new loans from their existing banks or lines of credit for EE available from the Small Industries Development Bank of India (SIDBI), other local banks interested in increasing their EE lending portfolios, or governmental sources. The World Bank SME Financing and Development Project approved in April 2009 includes additional IBRD financing of $400 million for SIDBI, and EE lending is explicitly included as an eligible item which can be financed. However, these funds are not listed as formal IBRD contribution in this GEF project document as these funds are untied and will only be utilized for EE lending if appropriate demand exists. SIDBI has also recently launched a $300 million line of credit from JICA (see section D) to finance EE projects in the micro and SME sector, and it is expected that some cluster units will avail themselves of this new financing source. The project emphasis on increasing deployment of local commercial finance at prevailing market terms for EE investments is a key focus, and the untied financial nature of the TA provided by the GEF project allows for maximum flexibility in achieving financial closure for identified projects.

33. Component 3: Program Knowledge Management: This component consists of a broad Programmatic EE Knowledge Management effort, which was explicitely requested by the BEE to include resources and manpower provision to BEE for

9 Faridabad includes over 18,000 units, many in the micro and small size. The estimated number which are of sofficient size to be covered in the WB effort is 2000, primarily engaged in in the business of forging, casting, light engineering, fabricating, and electroplating.

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monitoring and evaluation, collection of best practice examples, dissemination, and policy development functions with the goal of ensuring effective implementation and replication of not just this individual project, but of BEE's entire EE effort implemented with GEF support. The knowledge management element will provide key cross-cutting inputs to help better inform GoI policy making and implementation of the entire GEF programmatic effort on improving EE in India.

34. Component 4: Project Management will provide support for the two PMUs that will jointly implement the project within BEE and SIDBI. A new PMU would be established in BEE to oversee implementation of the proposed project. The previously developed structures at SIDBI10 are functioning very effectively and a PMU will be established under the existing Project Management Department (PMD) to implement the cluster-focused activities of this GEF project.

35. The primary beneficiaries of the project will be the participating MSME units who will realize the financial benefits from EE improvements. Participating financial sector stakeholders will also benefit from the increased business opportunities associated with increased EE lending and their increased capacity to take advantage of these opportunities. EE service providers and vendors of EE equipment will benefit from the increased demand for their services, and the reduction in the use of and demand for energy will produce additional global and local environmental and other indirect benefits.

36. This project will closely coordinate its activities with the activities of other donor-supported projects, particularly the two credit lines at SIDBI from JICA and IBRD due to the SIDBI role as a joint implementing agency. The JICA EE credit line is a nationwide program for equipment financing with concessional rates. It is accompanied by limited outreach activities, but the TA activities of this project will be coordinated so as to avoid duplication and to leverage impacts, and will ultimately lead to a substantially increased uptake of overall EE project borrowing activities by SMEs. Also relevant is the DfID technical assistance provided in parallel to the SME Financing and Development project, which supports the IBRD line of credit by helping banks enhance the quality of their SME loan portfolios, strengthening business development services and build market linkage programs. The UNIDO project under the GEF Programmatic Framework for EE in India: “Promoting EE and Renewable Energy in selected MSME Clusters in India,” is expected to be implemented in parallel to this project with the Ministry of SMEs as the main implementing agency, and will be carried out in 10 different clusters to further increase the demand and ultimate uptake of EE goods and services.

E. Lessons Learned and Reflected in Project Design 37. Recent reviews of the experience with global EE financing projects, such as the World Bank – UNEP Three Country EE project (2008), the World Bank GEF EE

10 Under P086518 SME Financing & Development

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Portfolio Review (2004) and EE projects implemented in India, particularly the World Bank Renewable Energy II project with IREDA11 and the UNDP/GEF project EE in steel re-rolling mills (SRRMs)12 emphasize the following lessons and key principles which are reflected in the design of this proposed project:

EE financing projects need to incorporate, in a balanced way, a function that

efficiently packages project design including marketing, development, and technical scoping with a financing function. This GEF project seeks to bridge the current gap between those two functions, providing support to actors on both sides to enable successful delivery of financing for identified EE investments.

EE financing projects should be based on commercial principles, investment-driven and avoid unduly distorting the market (e.g., lending to one sector, supporting only certain transaction/ESCO models, providing subsidized credit, providing only a directed line of credit). Program structures should carefully consider cost-recovery, leveraging commercial financing and maximizing private sector participation and local competition. Appropriate fees for GEF products and risks should be adopted to ensure market incentives guide end-user decision making. The use of technical assistance is most effective when focused on transactions and targeted to creditworthy end-users.

Marketing of EE to SMEs is not easy, as EE investments are not typically high on SMEs’ priority lists of capital uses. Achievement of a high penetration rate of EE investments in SME clusters therefore requires a large, holistic TA effort delivered over a longer term to truly build a sufficient level of knowledge, acceptance, trust, and ultimate demand for EE goods and services.

Technical assistance to commercial financial institutions is an important element of building institutional capacity to mainstream knowledge regarding clean energy market development: In order to adequately scale up EE lending, the local banking sector must be an active participant. TA support can increase knowledge of the technical, policy and regulatory aspects of this market to allow improved understanding of sector risks when providing debt financing for such projects. Therefore, awareness and capacity building of commercial financial institutions for clean energy market development projects should be incorporated into initial project designs.

A comprehensive and holistic market assessment is a key project pre-condition required for the early identification of a robust pipeline of projects to be financed. A comprehensive survey of the SME sector in India with selection of the most appropriate technologies and geographical areas was completed during project preparation, the results of which are presented in the Annexs.

11 India Renewable Resources Project ICR910, World Bank, 09/30/2008 12 UNDP GEF Project ID 1240

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EE loans are typically small, particularly when potential clients are from the SME sector. This poses major challenges to keep transaction costs reasonable. Mechanisms for reducing those costs include the use of ESCOs or geographical and industry-specific clustering approaches in the SME sector which can reduce transaction costs through standardization and enhanced familiarity by key stakeholders of identified EE investments among units with similar characteristics.

Robust monitoring and evaluation plans should be created upfront, incorporating periodic project review. Allowing for flexibility in program design is important so that project components that do not work in practice are detected early and can be adjusted during implementation if necessary to ensure achievement of development objectives.

38. The recently completed World Bank India Renewable Resources II project concluded that smaller EE projects identified for the SME sector face additional market barriers and may be best financed by local banks. Larger industrial companies with enhanced access to information, technical consultants and finance typically find it less difficult to implement EE projects from a variety of funding sources when compared to the SME sector. Many SMEs have strong existing lending relationships with their local banks, including hypothecation of existing assets to secure previous term loans, and therefore obtaining loans from outside (new) centralized sources can sometimes prove difficult. At project Implementation Completion Review (ICR) stage, it was observed that future efforts designed to finance EE at SMEs should work through local financing institutions with strong local presence as they may be better placed to expand EE lending to this sector.

39. Of direct relevance to this project are the lessons learned from the UNDP GEF project “EE in steel re-rolling mills” which was designed to promote widespread adoption of EE technologies and practices in a SME dominated energy-intensive subsector. As highlighted in the 2007 UNDP mid-term review, this project was characterized by a slow take-up of investments for EE technologies due to the ‘wait-and-see’ approach that many SMEs adopted for the following reasons:

o With the steel market in India booming and production rising, many units are

quite profitable and feel less urgency to invest in energy-efficient and clean technology (despite their favorable rates of return)

o Some units may fear that changing their production line implies idle time and thus revenue foregone due to reduced sales

o There has been some confusion in the past with some units that expected that the UNDP project would fund part of the investment

o Most units are family-run businesses, in which consensus on the need for new technology requiring high investment is sometimes hard to reach

o Smaller units s especially in the MSME sector are not interested in expensive state-of-the-art technology even if investment costs can be recovered quickly. Many units seem to be reluctant to invest in excess of Rs 10 million.

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40. In general, the SRRM industry showed lukewarm interest in implementing capital intensive measures promoted by the UNDP project. Failure to trigger wide-spread market response and active participation was attributed to lack of foresight about current attitudes regarding solutions to EE. Often, developing trust among the key actors (eg energy auditor, vendor, and enterprise) was not given adequate attention at the program design stage. Confidence-building measures involving the users and service providers are of considerable importance for the ultimate success of the project, i.e., actual implementation of EE investments and realization of energy savings and emission reductions.

41. These lessons learned were further explored during project preparation, and a series of meetings with stakeholders at the national and global levels were conducted by the BEE and the World Bank to obtain additional relevant inputs for current project design from SMEs and their associations in several clusters, as well as sociliting input from several Indian banks. Pilot assessment studies were also undertaken during project preparation in Pune, Kolhapur, Faridabad and Ankleshwar, and the findings from these efforts confirm many of the lessons above, and have been incorporated into the final design of this proposed project.

F. Alternatives Considered and Reasons for Rejection

42. The alternative approaches considered include: Line of credit. Providing dedicated lines of credit is a widely used mechanism to support EE financing in situations where credit is not available from commercial lenders or non-banking financial institutions. However, this is not the case in India where numerous local banks have large and expanding portfolios of standard SME loans which can accommodate EE investments. While overall term lending for SMEs is less frequently utilized than other finance options, five banks (State Bank of India, Canara Bank, Union Bank, Bank of Baroda and the Bank of India) have supported new dedicated term lending schemes for EE in recent years. Furthermore, there are several credit lines now made available with SIDBI which focus on EE or explicitely include it as eligible, including the $400 million in IBRD additional finance. SIDBI and competing Indian commercial banks with their extensive local branch networks and existing relationships to SMEs will be well placed to expand commercial financing for EE with demand generation support from the project TA activities. It is the conclusion of the task team that additional lines of credit are not currently required based upon current offerings available in the Indian market. Support for ESCOs. Internationally, many projects that promote EE investments have used ESCOs as a delivery mechanism. In the Indian context, this mechanism has not achieved widespread success, especially in the MSME sector. ESCOs in India face a number of constraints which are exacerbated in the SME market due to high risk perceptions in dealing with these smaller clients. Many SMEs are tax-oriented in their

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reporting, and are extremely reluctant in having ‘outsiders’ (ie the ESCO) collect detailed operational and performance information as part of their energy analysis work. The ESCO component in the UNDP/GEF project “EE in Steel Re-Rolling Mills” was canceled when prospects for success were judged to be very limited, and the task team agrees with this assessment of ESCO SME market prospects.

Guarantee facility. Analysis carried out as part of the Three Country EE project13 indicated that given the current barriers and current bank lending behaviors to SMEs, establishing a new credit guarantee scheme would not by itself significantly contribute to increasing EE investment in India. Furthermore, a risk sharing facilty already exists to mitigate certain risks of bank lending for smaller sized loans to the Indian SME sector. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is currently operating as an associate institution of SIDBI14, and it is judged that expanded support for this existing instrument will be more beneficial in mainstreaming EE lending at participating banks than developing and capitilizing a new dedicated energy efficient guarantee product. TA available under this GEF project would be used to expand the use of the current existing CGTMSE to EE investments for smaller SMEs.

III. IMPLEMENTATION

A. Partnership Arrangements

43. BEE, as the overall nodal agency for India EE, will take the lead in coordinating relevant efforts by bilateral/multilateral stakeholders, and will chair a quarterly meeting for key stakeholders including GEF implementing agencies, MSME representatives, NGOs, etc to share information on ongoing and planned EE initiatives in the MSME sector to improve coordination and partnership efforts amongst the various agencies and organizations active in this field, including UNIDO and JICA. The first such meeting was held in April 2009, and subsequent meetings have taken place as per the released schedule of the BEE.

B. Institutional and Implementation Arrangements

44. The national institutional framework for implementation of the project includes the following:

i). The GEF Empowered Committee, chaired by Secretary, MoEF, functions as an

empowered body to establish national priorities, approve and endorse project proposals before submission to GEF and facilitate implementation of approved projects. It includes members from thematic divisions of MoEF, Department of Economic Affairs (DEA) of the Ministry of Finance, BEE and Planning Commission. As the GEF Focal Point for India, MoEF is responsible for

13 Risk Analysis and Follow-up Definition of Possible India Guarantee Fund Requirements, Mechanisms, and Potential Key Features, SVK-CDM Technologies, 2006. 14 Detailed presentation of this mechanism is presented in Annex 1.

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overall GEF portfolio monitoring for this project, reverting to the GEF Empowered Committee as required.

ii). The Bureau of Energy Efficiency (BEE) was established under the Energy Conservation Act of 2001 to implement the provisions of the Act, and spearhead the improvement in energy efficiency of the economy through various regulatory and promotional measures. BEE is responsible for integrating and coordinating the GEF Programmatic Framework for Energy Efficiency into the GoI national energy conservation and efficiency strategy, and contributing to the energy efficiency mission of the National Action Plan on Climate Change. The DG of BEE will chair the National Steering Committee for the full GEF program, and BEE will act as the primary implementating agency (a.k.a. the national project director) for this GEF project. As part of implementation of the Programatic Framework Project for EE in India, BEE established a Program Coordination Committee (PCC) chaired by DG, BEE, involving World Bank, UNIDO, and UNDP. The PCC will promote synergies wherever possible, for instance through the delivery of joint national workshops, formalize the sharing of lessons learned across the program and ensure that activities undertaken by each implementing agency are complementary.

iii). The Small Industries Development Bank of India (SIDBI) is the designated apex-level financial institution responsible for MSME financing and development in India. It is responsible for several funds and donor projects, including $400 million additional financing for the IBRD project for SME Financing and Development and a dedicated EE credit line from JICA. SIDBI will take lead responsibility for implementaiton of certain cluster-focused project activities through its existing Project Management Department (PMD).

IBRD shall enter into a grant agreements with Government of IndiaDepartment of Economic Affairs and SIDBI. These grant agreements shall also govern fund flow into established separate Special Accounts for subsequent disbursement for project activities.

45. A Memorandum of Understanding (MOU) will be signed signed between BEE and SIDBI, no later than one month after the project effective date, which governs implementation and reporting responsiblities for both institutions and identifies areas of cooperation for implementation of this project.

46. A project management unit (PMU) has been established in BEE to oversee overall implementation of the proposed project. Certain project implementation tasks will also be taken up by a PMU within the existing PMD at SIDBI.15 This SIDBI PMD has demonstrated strong capacity in implementation of the IBRD project and the complementary Technical Assistance provided by DfID and has good familiarity with World Bank FM, procurement and safeguard procedures under the existing IBRD project. This capacity, combined with strong SIDBI local branch office presence in

15 This PMD is responsible for implementation of P102767 Additional Finance for SME Financing & Development Project.

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numerous project clusters, represents a good resource which will be deployed to aid implementation of the GEF project. Joint implementation responsibility will also further strengthen the linkages between this project and the SME Financing and Development Project with SIDBI as potential issues with financing identified projects in the clusters can be addressed directly by the PMD and local branch offices of SIDBI.

Implementation Responsibilities 47. BEE will retain overall implementation responsibility for the project, and will directly implement activities such as project oversight, reporting and evaluation, implementation of certain national level outreach and capacity building activities, and cross cutting knowledge management activities. BEE will maintain implementation responsibility for certain targeted capacity building efforts, such as programs designed to improve technical capacity of energy auditors, etc.

48. SIDBI will assume implementation responsibility for the remaining project components, with a focus on the cluster specific activities. SIDBI will provide reports on implementation progress to BEE, who is lead agency with overall responsibility for GEF Programmatic Framework Project for Energy Efficiency. The detailed presentation of specific implementation responsibilities is presented in Annex 6..

49. As BEE is a statutory body under Ministry of Power, the Project funds will flow from World Bank to GOI in a Special Account opened by CAAA at RBI. GOI / MoP will pass on these funds to BEE based on interim unaudited financial reports (IUFRs). For SIDBI, as presented in the Grant Agreement with the Bank, Bank funds will flow directly to a bank account designated by SIDBI for receiving disbursement from the World Bank. As in case of BEE, SIDBI will request funds based on IUFRs and withdrawal application. The FM assurance on the project will be sought on the basis of Audit Reports, IUFRs and Alternate Assurance arrangements as detailed in Annex 7.

50. To guide the two agencies during project implementation, Project Operations Manuals will be prepared by both BEE and SIDBI, and agreed to by the Bank prior to project effectiveness. These manuals will include operational principles giving details of all guidelines and procedures agreed with the World Bank for the implementation, supervision and monitoring/evaluation of the project, including procedures for the identification and selection of beneficiaries of financial incentives, and details of the Governance and Accountability Plan. It will include a procurement plan, financial management plan and agreements on the institutional framework required for implementation.

C. Monitoring and Evaluation of Outcome/Results

51. Monitoring and evaluation (M&E) of the project will be undertaken at two levels, both at the cluster activity level and the general project level. Activities at the MSME level will be monitored by participating partner industry associations (IA) with

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overall monitoring responsibilty undertaken by SIDBI which will collect and review the IA and consultant output reports. Appropriate M&E forms and protocols will be developed as part of the Project Implementation. Industry associations will report to SIDBI PMUs at agreed intervals. This M&E information will be aggregated to analyze overall program impacts and may provide the basis for the development of success stories, to be used in outreach activities and in the knowledge management component.

52. At the general project level, the two PMUs at BEE and SIDBI will be responsible for M&E of project activities and results. All data for the project outcome and results indicators will be coordinated by the PMUs and reported to IBRD and GoI MOEF as chair of the GOI GEF Empowerment Committee on a regular basis, as agreed and presented in the Project Operations Manuals.

53. To facilitate the use of data in assessing the project’s effectiveness during implementation and after project completion, BEE and SIDBI will regularly disseminate project M&E data to the IBRD, GoI and other concerned stakeholders through reports and stakeholder workshops. BEE and SIDBI management will assume overall responsibility and accountability for project monitoring and outcomes.

54. Bank Supervision: The World Bank supervision will include field visits to clusters and prospective participants, and discussion with relevant stakeholders, including MSME owners, industry associations, banks, energy auditors, and vendors. A project mid-term review will be carried out in 2012.

D. Sustainability and Replicability

55. The project has built-in features to ensure both sustainability and replication. The key driver for sustainability of individual projects is the inherent cost-effectiveness of EE investments themselves (see section IV.A). Another important aspect contributing to sustainability is the fact that the project relies on the local banking sector that traditionally serves MSME clients for the financing of EE investments and does not set up a specialized financial facility. The project includes several capacity building components (for industry associations, banks, energy auditors and financial consultants/chartered accountants) that will increase the knowledge and ability of those institutions and individuals to support MSMEs not directly included in the proposed project in the development and financing of EE projects. Initially, the impacts of this replication shall be visible in the penetration rates of EE investments in the BEE supported 25 clusters, but the impacts shall continue well beyond project closure as MSME units become increasingly aware of the ultimate financial benefits achievable through upfront expenditure on EE project identification by energy auditors.

56. The project has an inherent replication modality through the direct involvement of industry associations, energy auditors, financial consultants/chartered accountants and local banks which will be able to provide their services to additional MSME units in the cluster (i.e. intensification of efforts) and in similar industry clusters in other

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parts of the country. Demonstration projects and dissemination of success stories will further help to mainstream EE investments for MSMEs.

E. Critical Risks and Possible Controversial Aspects

57. Based on experience with EE financing projects in India and in many other countries, there is an intrinsic risk that ultimate unit level demand for EE goods and services supported by the program may not be as high as anticipated or may materialize very slowly. A shortfall in projected demand may be the result of an insufficient market assessment, a deficient project design, or changes in macro-economic conditions. It may be exacerbated by the current global financial crisis, as banks may reduce their lending exposure to MSME clients in the near term and/or individual units defer invetments to conserve cash resources. The detailed market assessment carried out during preparation (see Annex 15) shows a very large number of potential host enterprises which can cost-effectively upgrade to less energy-intensive technologies. The project design contains a variety of components designed expressedly for the sake of generating a large sustained demand for EE goods and services. The risk of lower demand is mitigated by the inherent properties of EE projects in the MSME sector which are shown to have very robust benefits under a variety of energy cost regimes, and which could be adapted to react to changing circumstances. The current global financial crisis may indeed slow down demand by MSMEs for EE investments and may require a broader outreach within the MSME sector. However, several firms see an opportunity for upgradation and improvement in the current global downturn, as the costs of lost production associated with modernization are minimized. The longer term engagement of the BEE and World Bank will help mitigate these risks by building trust and support for EE over a longer time period, which will further support acceptance and ultimate demand for EE goods and services.

58. Another key project risk is ensuring that the identified EE projects are actually financed and implemented. This will be addressed through the TA program which includes a variety of components designed to ensure that the gap between technical assessment and financial closure is narrowed. Maintaining the interest of the commercial banks and the end-users to implement EE measures over time to ensure replication is another risk which will also be addressed in the TA component. Another key risk is that changing macroeconomic conditions may alter the financial attractiveness and riskiness of the identified portfolio of loans for EE investments, although the estimated rates of return of identified EE investments are fairly robust, and investments remain cost effective under a wide range of scenarios. Technical risk of EE savings shall be addressed through utilization of BEE energy auditor certification programs to ensure that energy audits meet quality concerns and through proper commissioning of equipment. Technical performance risk of installed equipment risk shall be covered by provision of O&M warranties by vendors.

59. As the potential beneficiaries under the project are going to be numerous, a proper FM and internal control framework has been developed. Project preparation

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and supervision shall include focus on ensuring that adequate staffing and financial management arrangements are in place and maintained at BEE and SIDBI. A detailed procurement plan covering major consultancies has been developed, and additional support shall be given by the Bank to the BEE to improve institutional capacity in procurement and FM.

F. Loan/Credit Conditions and Covenants

60. Effectiveness Conditions. Execution and delivery of GEF Grant Agreements with GOI/BEE and

SIDBI, and provision of a legal opinion on the Grant Agreements.

61. Legal Covenants: BEE and SIDBI shall maintain a Project Management Units with adquate

staffing to oversee the implementation of the Project activities and to be responsible for providing Project oversight, reporting and evaluation, implementation of selected outreach and capacity building, and cross-cutting knowledge management activities.

BEE and SIDBI shall, no later than one month after the effective date, enter into a Memorandum of Understanding, satisfactory to the World Bank, clarifying areas of collaboration and ways for cooperation for implementing Project Activities.

SIDBI and BEE shall carry out Project Activities in accordance with the guidelines, criteria, rules and procedures described in their respective Project Operations Manuals.

No disbursment shall be made under component 2.2 (Performance linked Grant of USD 500,000) unless conditions specified under Sub-component 2.2, Annex 4 of this PAD are complied with

Compliance with standard reporting and financial management and audit requirements, including Annual Reports by SIDBI and BEE.

SIDBI shall comply with Environmental and Social Risk Management Framework (ESMF) as part of preparation of investment grade proposals for EE investments

BEE shall furnish to the Bank, its entity Financial Statements for each fiscal year of the BEE. The audited Financial Statements for each such period shall be furnished to the World Bank not later than six months after the end of such period.

IV. APPRAISAL SUMMARY

A. Financial and Incremental Cost Analyses

62. The project will support MSME renovation and rehabilitation projects whose primary financial benefits will be derived from energy savings. In a few cases process changes may be a more cost-effective solution, which shall also be eligible for support under the project. Analysis shows that the majority of EE investments identified in energy audit reports are financially justified, especially at current energy prices which

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are expected to prevail or increase in the medium-term. As coal, fuel oil or primarily coal-based grid power are the dominant energy sources for the target industry units, the economic justification for energy efficiency investment is even stronger because of the significant environmental benefits expected from EE investments, resulting in economic internal rates of return (EIRRs) that are higher than the estimated financial internal rates of return (FIRRs).

63. Based on analysis carried out during the market assessment (see Annex 11) and on the results of investments previously financed by IREDA and other financial institutions, EE investments in SMEs routinely achieve FIRRs of 30% and above. Simple payback periods range from 2 months for low-cost measures to 2 years for more capital-intensive interventions. This confirms that these projects are worthwhile to be carried out from the point of view of an individual enterprise. Beyond the quantifiable benefits associated with the above financial analysis, there are non-quantified benefits which shall occur, including: reduction of local pollution, improvement in SME’s product quality, improvement of banks’ asset quality and improved energy security. Details of the financial and economic analysis are provided in Annex 9.

64. The project will remove barriers to implementing an increased number of locally financed EE investments by MSMEs. It is expected that in the absence of this project, some EE investments in the target clusters will be carried out as part of normal baseline MSME capital stock replacement and modernization efforts which shall be further increased due to ongoing TA and funding activities such as by JICA, UNDP and others. It is assumed that EE investments in the selected project clusters will amount to US$9 million in the baseline (ie no project) case. The comprehensive TA support for EE stakeholders and soft cost investment provision for MSME EE projects in the five World Bank supported clusters will increase penetration rates in the World Bank as well as in the BEE-supported clusters and will increase total investment as more comprehensive solutions are identified for units within the clusters. The implementation of the project will also improve the willingness of financial institutions to provide EE financing to MSME clients and thus will further raise EE investment levels over the baseline case. Stepped-up engagement of EE stakeholders will also improve penetration and ultimate adoption of identified EE measures in the 25 BEE supported clusters. This is anticipatd to increase EE investments to a total of US$ 46 million and reduce CO2 emission by an additional 4 million tons in the five clusters directly supported by the project, result in incremental GEF costs of US$ 2.84 per ton of CO2 emissions avoided. When the indirect impacts of the project in the 25 BEE clusters are included, total carbon emissions increase to 4.5 million tons and GEF costs reduce to GEF$2.37/ton

B. Technical

65. A screening and review of 11 energy-intensive SME subsectors was undertaken (see Annex 11) which found a large number of cost-effective EE improvements which can be achieved through the deployment of technologies that are well established,

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technically sound, and commercially available in the Indian market. In some industries, process changes for EE rather than EE equipment retrofit measures have been identified as most appropriate, in the lime kiln cluster. Such measures would not only improve efficiency per unit of output produced, but would also dramatically improve environmental performance. This intial analysis was reconfirmed by the findings of the pilot studies undertaken in Pune and Kolhapur during project preparation (see Table 11.4 in Annex 11).

66. Energy audit experts will be involved in identifying customized EE measures in MSME units and preparing detailed project reports (DPRs), ensuring that investments will be properly scoped, technically feasible and that the design of the projects will be technically sound.

C. Fiduciary Financial Management:

67. The project will be implented by BEE and SIDBI) using approximately 30 consultancy packages. The overall FM arrangements at these entities is judged to be adequate, to account for and report on the project resources and expenditures accurately. The Bank team has assessed FM arrangements at BEE and SIDBI, and reached agreement on actions to be taken to further strengthen FM arrangements as detailed in Annex 7.

68. While SIDBI (through its PMD) has experience in implementing Bank-funded projects, the current project will be the first Bank funded project implemented by BEE. However, BEE has experience in working with external donors such as UNDP, GTZ, USAID, ADEME-France and GAP-Japan, and has been generating periodic reports and MIS to the satisfaction of these agancies. For better control over funds received and disbursed, BEE will open a separate bank account for the project. A new project management unit has been established at BEE which is scheduled to be fully operational by Grant effectiveness. The PMU shall have adequate staffing which will include a contracted financial management specialist, whose ToR shall be discussed with the Bank in advance of BEE procurement. Additional capacity building of BEE staff for understanding and implementing Bank procedures will be undertaken prior to project effectiveness.

69. Disbursements will be made by the Bank on the basis of separate quarterly Financial Monitoring Reports (IUFRs) following pre-agreed formats, which will forecast the expenditures for two quarters and report the actual expenditures for the past quarter as well as cumulative expenditures to date. In addition to entity level audit report for BEE, the two agencies will also submit audited project financial statements which will report contractual progress and provide assurances on the usage of the proceeds under the project. The statutory auditors of BEE and SIDBI will be responsible for audit of project financial statements. While the internal audit

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arrangements at SIDBI are adequate, BEE has agreed to undertake actions to strengthen its internal audit arrangements.

Procurement: 70. The major procurement under the project will be the procurement of consultants for cluster specific tasks including energy audit under the second project component.

71. Hiring of consultant services will follow the World Bank’s standard RFP documents and Guidelines for Selection of Consultants. Shortlists of consultants for services estimated to cost less than US$ 500,000 equivalent per contract may be comprised entirely of national consultants in accordance with the provisions of the consultant guidelines.

72. An assessment of the capacity of BEE and SIDBI to implement the procurement arrangements was undertaken by the Bank procurement team and included (a) a review of the organizational structure for implementing the project, and (b) interaction with the concerned procurement staff. Most of the issues/risks concerning the procurement components for implementation of the project have been identified in Annex 8.

D. Environment and Social Environment:

73. The proposed project will facilitate energy efficiency improvement through capacity building in MSME clusters and provision of grant support for preparing investment grade proposals for EE improvements. In addition to reductions in direct energy consumption, the implementation of potential EE improvements can produce additional positive environmental impacts from reduced combustion of fossil fuels. However, environmental concerns could possibly arise from negative baseline environmental management practices and consequent non-compliance with existing regulatory norms by participating MSME units. In the clusters covered under this project, potential environmental issues could occur in the following areas: water and air pollution; noise levels; and handling and disposal of solid and hazardous wastes. While the World Bank project will, by definition, support investments that will improve environmental conditions through improved efficiency, there are potential safeguard and reputational concerns associated with the provision of Bank technical assistance to units whose total facility may not be in compliance with GoI norms.

74. Interventions to address potential environmental liablity issues in the project will be undertaken at in the initial assessment and during preparation of investment grade proposals. At the first level, all EE walkthrough audits supported under the project will examine current environmental regulatory compliance by the candidate MSME unit. This will form one of the essential criteria for selection of MSMEs for conducting unit level detailed EE audits, preparation of DPRs and investment proposals. At the second level, the EE audits themselves will include: (a) review the level of regulatory

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compliance with reference to conditions of “Consent to Operate”; (b) identification of environmental measures, including environmental health and safety (EHS) aspects that are complimentary to EE improvements – essential measures could form part of EE improvement proposals; and (c) documentation of environmental benefits of EE options with relevant quantified data wherever feasible. The above referred scope forms part of preliminary and detailed EE audits ToRs. This process will also be applied to the units that will receive performance linked grants or other financial benefits from the project. Annex 10 provides details on applicable environmental regulations, environmental measures as part of implementation of different project components.

75. There may be isolated cases where an MSME included in the potential clusters for EE improvement is in non-compliance with current environmental regulations. However, such units could be eligible for support under this project if implementation of EE retrofit measures could lead to achievement of environmental compliance. In all such cases the project would facilitate: (a) conducting preliminary energy and environment due diligence and will document basic minimum interventions that will improve EE as well as achieve environmental regulatory compliance; and (b) conducting detailed EE audits and preparing investment grade proposals only if the proposed EE measures are projected to bring the unit into environmental compliance.

Social:

76. No specific, project-induced, social impacts have been identified with respect to involuntary resettlement and indigenous peoples. While the project components are unlikely to cause any adverse social impacts, there might be outstanding social issues arising from the current practices of participating units, and units may be in noncompliance with country legislation, specially applicable labor laws. Hence, it would be important to confirm that the participating MSME units are in complience with relevant national laws as demonstrated by clearances obtained under the Factories Act. This aspect will be covered as part of ToRs for selection of MSMEs for conduct of EE walk through audits and subsequent detailed EE audits and preparation of DPRs.

E. Safeguard Policies

77. The project is classified as Environment Category B, according to World Bank Environmental and Social Safeguard review procedures. The Project has triggered World Bank’s OP/BP 4.01 on Environmental Assessment (EA). No social safeguard policies have been triggered.

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X]

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Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] F. Policy Exceptions and Readiness

78. The project is ready for implementation as of February 8, 2010. The Project Operations Manuals for both BEE and SIDBI include a procurement plan, financial management plan and the institutional framework required for implementation of this project which have been clearly defined and can be put in place relatively quickly.

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Annex 1: Country, Sector and Program Background

India: Financing Energy Efficiency at MSMEs Project A. Country Background India is currently the sixth largest emitter of GHGs in the world, and contributes 4% of total worldwide GHG emissions. However, it is important to note that India is both a low per capita emitter of GHGs as presented in the following table, and can be characterized as a low carbon economy, as its emissions intensity is on par with the world average.

It is estimated that under a business as usual scenario, emissions will grow by a factor of four or more by 2030 if India is to meet its economic growth target of 8%, which was calculated as the required growth level to attain their Millennium Development objectives. The GOI has implemented a number of initiatives to curb growth of emissions of GHGs including several efforts to further improve levels of energy efficiency in the country. In the 11th Five Year Plan (2008 - 2012), the GoI has stated that it will seek to increase EE by 20% by 2016-17 through the implementation of a set of EE interventions. Energy Efficiency is also the focus of one of eight missions identified in the National Action Plan on Climate Change issued in June 2008. The foundation for recent GoI efforts in energy efficiency was built with the passage of The Energy Conservation Act (2001). This Act mandated the targeted reduction of energy use in the economic process and set up the Bureau of Energy Efficiency (BEE) as

19

Tons

CO

2 pe

r ca

pita

Per Capita EmissionsVary Greatly

32

a statutory body under the Ministry of Power with the primary objective to reduce energy intensity in the economy. BEE is mandated to 'institutionalize' EE services, enable delivery mechanisms in the country and provide leadership for EE in all sectors of the country. BEE has launched programs such as a CDM-based efficient lighting program for households, voluntary standards for EE in appliances and building codes, demand-side management initiatives, mandatory energy audits for energy-intensive industries, and a large EE program for small and medium enterprises (SMEs). Their strategy is to interweave the sectors with high energy efficiency potential and interventions into a comprehensive and integral program with deliverables defined for the short, medium and long term. B. Significance of the Indian SME sector The 2006 Integrated Energy Policy Report of the Planning Commission noted that lowering the energy intensity of GDP growth through higher energy efficiency is an important element for meeting India’s future energy challenges and ensuring its energy security. Currently, India consumes 0.16 kg of oil equivalent (kgoe) per dollar of GDP expressed in purchasing power parity terms, and its CO2 intensity per GDP (adjusted for PPP) has shown a slight decline over time. The Indian industry sector is particularly energy intensive, and consumed 4,771 PJ of energy in 2005, representing more than 35% of total final energy consumption. Numerous sector-specific studies have confirmed that energy intensity in industry can be further reduced with the widespread adoption of commercially available technologies to improve EE, producing significant aggregate impacts and global benefits from reduced emissions of GHGs, and that there is an especially high unrealized potential for improvement in the Indian SME sector. Based on the “Micro, Small and Medium Enterprise Development Act” of 2006, medium-sized enterprises (MEs) are defined as units whose investment in plant and machinery (original cost) exceeds the SSI limit but not Rs 100 million. The corresponding limit for Small enterprises and Micro enterprises is INR 50 million and INR 2.5 million, respectively. This Act represented an important shift from previous governmental policies for the sector which primarily supported only SSIs through preferential treatment and targeted loans at subsidized interest rates which actually created certain disincentives for SSI growth and graduation to medium size. While the landscape for SME development has improved in recent years, certain factors such as specific product reservations, priority lending policies and preferential tariff and tax treatment continue to distort the market and inhibit the overall growth and development of the sector. However, from a macro perspective, the SME sector in India plays a significant role in terms of balanced and sustainable growth, employment generation, development of entrepreneurial skills and contribution to export earnings. The nearly 3 million SME units constitute more than 80% of the total number of industrial enterprises in the country,

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contribute 45% of industrial production, 17% to GDP16 and 40% of India’s exports. Per the Ministry of Small and Medium Enterprises, the SME sector is also the largest single employment sector after agriculture, constituting about 45% of industrial sector employment. SME industrial organization in India can be characterized by concentration in different parts of the country in the form of clusters. A cluster is defined as a local agglomeration of enterprises, which are producing and selling a range of related and complementary products and services. They also share similar inputs, in particular similar energy use characteristics, which is important in the context of this project. A cluster can include both a specific sector and technology focus and a geographic focus for grouping units, and may include several industrial categories which share similar potentials for specific technical interventions. There are several reasons for the growth and formation of these clusters, including both market based and local regulatory and policy-driven reasons. It is estimated that there are between 350-400 SME clusters in India. Compared to larger Indian industrial enterprises, the SME sector is characterized by lower productivity and general high use of outmoded technologies and resulting lower EE and worse energy intensity figures. Price and cost pressures are areas of high and increasing importance to SME units in the current environment of increased global competition. Unlike agriculture and some other sectors, energy prices are not explicitely subsidized for SMEs, and these units face high energy costs for electricty and fossil fuels. The extreme price volatility witnessed in India in 2008 has significantly increased SME awareness of the importance of managing energy expenditures, especially for those industries where energy is a significant portion of production costs. In the past, wide-ranging governmental programs of fiscal incentives and other interventions have been offered to SME units (primarily SSI units only) to address technology upgradation and productivity improvements, but they have not resulted in large scale replication. SMEs, especially those for whom energy costs represent a large portion of total production costs, can reap especially high direct economic benefits from improving efficiency of energy conversion and reduction of energy use, yet numerous barriers and market failures have prevented widespread adoption. Despite recent Indian reductions in overall energy intensity, the SME sector has fallen behind larger Indian industry benchmarks in terms of productivity, technology upgradation and EE. C. Previous India Experiences with Cluster Lending and Energy Efficiency Activities in SME Clusters17

16 Associated Chambers of Commerce India (ASSOCHAM) has calculated in 2008 that the current direct contribution of SMEs to Indian GDP would rise from 17% to 22% by 2012. Other estimates attribute approximately 60 percent of the country’s GDP to the SME sector when including indirect contributions. 17 These concepts are further discussed in Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond, World Bank 2008.

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Lending to SMEs is a government-set priority for Indian banks because of SMEs’ importance in generation of economic growth, employment, and exports. The cluster lending strategy for reaching SMEs has been under implementation since the late 1980s, and was initially begun for other reasons than energy efficiency alone. To service the energy efficiency financing needs of this hard-to-reach class of customers, State Bank of India (SBI) adapted a unique cluster lending strategy (Project Uptech), and several banks followed with their own versions of the approach. “Cluster lending” refers to lending operations targeted at certain clusters of industries that are co-located for some economic (or policy) reason. The objectives of cluster lending programs include lending for investments to increase SME competitiveness through technology upgradation, cost reduction (through reduced wastage and increased operational efficiencies), increased productivity, and (in some cases) improved product mix. As implemented thus far, SME cluster lending in India has focused either upon (i) a specific sector or technology group, or (ii) upon a geographically grouped cluster that includes several industrial categories but is concentrated on a few technical interventions as a way of minimizing assessment and appraisal costs. Many variations have subsequently been tried, with the overall objective of finding a readily acceptable and workable solution that would make it possible for commercial banks to bring cluster lending into the mainstream of their operations. Essentially two types of cluster lending programs have been attempted thus far:

those aimed at upgrading technology and improving overall performance in a holistic fashion (with energy efficiency improvements as an integral component of this improvement without being the sole objective)

those where energy efficiency improvement is the core lending objective

The Indian financial sector has initiated two significant programs of special relevance: SBI, India’s largest public sector bank, set up a technology upgradation (Project

Uptech) program for SMEs across all industrial categories in 1988. This was very different from the previous industry specific programs that were targeted at somewhat larger enterprises.

With the passage of the Small Industries Development Bank of India (SIDBI) Act, 1989, SIDBI was set up in April 1990. In keeping with its charter, SIDBI has emerged as the principal financial institution to promote, finance, and develop the small-scale sector and medium-scale enterprises.

The approaches taken by SBI and SIDBI had similarities as they clearly recognized the following:

High transaction costs in relation to loan transaction size made it necessary to find solutions that reduce the cost per enterprise and/or per transaction.

Improvement in energy efficiency usually is a direct consequence of technology upgradation and need not be the sole objective of lending.

Technology solutions for SMEs are seldom (if ever) readily available off the shelf, even if a large number of SMEs need the same or similar solutions.

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As a result, SMI and SIDBI took various measures to support some of their technology development work:

SBI contracted external industry experts and (where necessary) research-demonstration-development organizations.

SIDBI created a specialized agency, the Technology Bureau for Small Enterprises (TBSE).18

SBI’s Project Uptech coordinated with various government agencies including the Centre for Development of Glass Industry and the Central Glass and Ceramic Research Institute. Several training programs and seminars were conducted as well as SME-level studies that covered more than 20 percent of the registered SMEs in the cluster. The focus was on appropriate technologies for process improvement, energy efficiency, pollution abatement, low-cost automation, introduction of management information systems, and above all, creation of an improved working environment. Likewise, SIDBI appointed the National Productivity Council to work on reducing heat losses from locally fabricated furnaces in more than 1,000 aluminum, brass, and steel utensil manufacturing units in Jagadhari (Haryana). The cluster utilized wood and fuel in poorly designed and inefficient furnaces that had been fabricated by local masons, with the entire cluster having virtually the same furnace designs. Replacement furnaces designed by the National Productivity Council helped the companies to realize energy savings of upwards of 20 percent. The combined experience from SBI’s Project Uptech and SIDBI helped provide a good base for the Indian banking community to launch energy efficiency–focused cluster lending programs. The trend was reinforced with the joint policy directive of the government and the Reserve Bank of India of August 2005, which urged banks to increase credit to SMEs. Prompted and encouraged by the World Bank-UNEP Three Country Energy Efficiency Project, five banks formulated and launched energy efficiency schemes targeted at SMEs. In chronological order of the date of scheme sanction, the banks are as follows:

State Bank of India Canara Bank Union Bank of India Bank of India Bank of Baroda

The rationale for attempting to reduce transaction costs and for adopting the cluster lending approach for energy efficiency is supported by all five banks. Having been launched in 2003, the SBI energy efficiency scheme was the first to make significant progress in lending for energy efficiency. However, borrower demand for these new schemes was lower than projected. It has been determined that insufficient attention was

18 TBSE was a joint venture between SIDBI and the United Nations Asia Pacific Center for Transfer of

Technology.

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paid to demand generation activities in the clusters themselves, where numerous market barriers beyond access to bank finance still prevail. Numerous other initiatives have been supported by GoI from internal resources or with donor/bilateral support targeting improvements in industrial EE, including in the SME sector, with mixed results. Large number of energy audits by NPC, donor funded lines of credit including with IDBI (ADB, USAID), ICICI (USAID) and IREDA (World Bank REII project) or with KfW, or specialized technical assistance such as the SDC/TERI program on glass clusters, UNIDO and UNDP work, and other USAID efforts have produced numerous pilot successes, but not widespread replication. The UNDP GEF project “India – Removal of Barriers to Energy Efficiency Improvement in Steel Re-Rolling” was designed to promote widespread adoption of EE technologies and practices in a SME dominated energy-intensive subsector with the support of concessionary financing from the steel institute. After a slow start, the project has recently begun to show some progress in implementation of actual investments, and it was reported that 5 out of 30 (16.6 %) identified ‘model’ units have implemented ‘eco-tech’ win-win EE options by June 2008. Six more projects were under implementation at the time of the last available progress report. This project is expected to close in September 2009. Although the Bank funded SMEFD project does not directly support financing for energy efficiency improvements in SMEs, the project has significantly contributed to development of SME financing as well as overcoming certain SME access to financing barriers. Throughout the implementation period, the project has consistently performed with effective disbursement of Credit Facility, which is financed by US$115.0 million of Bank funds and a risk sharing facility, which is financed by US$5.0 million of Bank funds. The key results achieved by the project to date include:

On-lending to SMEs has now covered 927 SME units spread across 10 Indian states at rates of disbursement significantly higher than originally projected.

Nearly two thirds of the SMEs receiving loans under the project upgraded their technology to dramatically increase productivity by about 50% (from Rs.0.27 million to Rs.0.41 million in sales per employee). Surveyed SMEs also reported impressive compliance with environmental clearances and practices under the project.

The TA component of the project, financed by DFID has established India’s first commercial credit bureau, provided capacity building to financial institutions – especially in improving/simplifying SME loan appraisal mechanisms; and provided Business Development Services (BDS) for SMEs in 18 clusters.

Recent evaluations revelat that the SMEFD project has helped support an increase in SME lending by SIDBI and SIDBI's project-funded branches of 53% and 72% respectively. The high growth rates are indicative of SIDBI's vital counter-cyclical

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lending role played over the last year, which was otherwise characterized by a slowdown in lending to SMEs from the commercial banks, The Bank project has helped SIDBI provide much needed financial crisis-related lending support by undertaking receivable financing to 150 SMEs which provided much-needed liquidity support for these SMEs as they coped with longer inventory cycles and longer payment cycles from their customers. SIDBI has also begun to increasingle diversify its offered SME loan products. While Term Loans still represent the majority of the additional IBRD financing disbursed to date, working capital (WC) loans and working capital term loans (WCTL) now form 11% of the total loan disbursed. This is a response to local demand for working capital that increased in the aftermath of the financial crisis and the growth in such loans (and SIDBI's overall lending) which, as mentioned, represents a logical local counter-cyclical response to the crisis. D. Current Relevant Efforts on EE in SME Sector and Complementarity with the Proposed World Bank GEF Financing Energy Efficiency at SME Project To enhance synergies and improve effectiveness of the GEF portfolio of programs, the GoI developed a Low Carbon Programmatic Framework for Energy Efficiency. This Programmatic Framework is designed to increase market penetration of energy efficient technologies in buildings, SMEs and railways. It was developed through a multi-year collaborative process between the Government of India (GoI) Empowered Committee on GEF chaired by Ministry of Environment & Forests (MOEF), the World Bank, UNDP, UNIDO and key ministerial representatives. At the request of the GoI, the full Programmatic PIF was developed by the World Bank and was submitted to the GEF Council for Pipeline Entry in February 2008. The Council endorsed the full objectives of the Program during the April 2008 meetings, and requested that future full-sized project PIFs to be financed under these programmatic approaches be included in work programs submitted to the GEF Council for approval. The World Bank “Financing EE at SMEs” project is a key component of this framework, and was accepted by the GEF for World Program entry in Fall 2008. The World Bank project will complement the UNIDO executed component of the Programmatic Framework Project, entitled “Promoting Energy Efficiency and Renewable Energy in Selected SME Clusters in India.” The main objective of this UNIDO effort is to assist India in reducing its GHG emissions through EE measures and increased use of renewable energy (RE) sources to replace fossil fuels (fuel switching) in selected energy intensive Small and Medium Enterprises (SMEs) in India.19 It will facilitate the development of creditworthy EE projects leading to increased overall lending for EE by domestic financial institutions. The project preparation grant for this work was approved by the GEF in March 2009, and preparation work is underway. This UNIDO component will benefit from the national level capacity building efforts for FIs to be supported by the World Bank Project, and will also be covered in the national level knowledge management activities included in Component 3 of this project. 19 There will be no overlap in selected clusters for the UNIDO effort, which are still being selected.

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Included in the World Bank GEF project is BEE’s counterpart contribution representing the BEE-led efforts to improve EE in 25 SME clusters, the impacts of which shall be tracked as indirect project outcomes. This work is designed to build SME EE awareness by funding contractor-led studies and preparation of model DPRs. The program will include capacity building of local service providers and entrepreneurs/managers of SMEs. It is anticipated that the BEE work will ultimately lead to the preparation of energy audits and 375 DPRs which will be presented for financing to the lead banks in the clusters in 2010. The Word Bank GEF project will encompass this cluster-focused effort and will link the BEE-implemented cluster DPR prepration work with enhanced local FI capacity for EE lending as included in the TA program to facilitate financing and ultimate commissioning of the energy saving measures. The following table presents the clusters included in the BEE effort.

Table 1 List of SME clusters for intervention in the BEE SME programme

Sl. No.

Cluster Product Name State/UT Name No. Units surveyed

1 Morbi Ceramics Gujarat 442

2 Bhubhneshwar Brass Orissa 33

3 Solapur Textiles Maharashtra 175

4 Bangalore Machine tools Karnataka 54

5 Warangal (Rice Milling) Rice Milling Andhra Pradesh 115

6 Bhimavaram (Ice Plants) Ice Block / Cube, Non-edible Andhra Pradesh 28

7 Vellore (Rice Milling) Rice Milling Tamil Nadu 49

8 Ganjam (Rice Milling) Rice Milling Orissa 205

9 Howrah (Galvanizing / Wire Drawing) Galvanizing / Wire Drawing West Bengal 57

10 Jamnagar (Brass) Brass Gujarat 846

11 Cochin (Sea food processing) Sea food Kerala 35

12 Surat (Textiles) Textiles Gujarat 415

13 Jagadhri (Brass Utensils) Utensils, Brass Haryana 91

14 Vapi (Chemicals) Chemicals Gujarat 180

15 Jorhat (Tea Gardens) Tea Gardens Assam 60

16 Pali (Textiles) Textiles Rajasthan 357

17 Varanasi (Brick Kilns) Brick Kilns Uttar Pradesh 122

18 Batala (Casting & Forging), Jalandhar (Foundry)

Casting & forging, Pipe & Fittings, Cast Iron

Punjab 431

19 Alwar & Sawai Madhopur (Oil Mills) Oil Mills Rajasthan 65

20 E&W Godavari Refractories Andhra Pradesh 44

21 Gujarat Dairy Gujarat 22

22 Muzzaffarnagar Paper Uttap Pradesh 18

23 Orissa Sponge Iron Orissa 45

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24 Jodhpur & Bikaner (Limestone) Limestone Rajasthan 78

25 Ahmedabad (Chemical Industries) Process industries Gujarat 395

This World Bank Financing EE at SME project seeks to mobilize $46 million in local finance for identified investments in the five target clusters, which can be drawn from a variety of commercial sources ultimately decided by the individual SME units themselves. These funds can come from their own equity, expansions of existing lines of credit with their current banks, additional withdrawls under specialized lending schemes for EE, or even special government target incentive funds if available. However, if financing is an issue, the units may make applications to the IBRD credit line facility at SIDBI. There is a $400 million in IBRD additional financing line of credit to SIDBI for the SME Financing and Development (P102767), which was approved by the World Bank Board in April 2009. This line of credit explicitly includes energy efficiency lending as an eligible item provided demand is sufficient. However, as the ultimate decision about financing choice is up to the participating SME enterprise, this IBRD loan is not listed as formal IBRD contribution for the GEF project, as it will only be drawn from if demand is sufficient. However, it is clearly complementary, and shall be closely coordinated due to SIDBI’s role as joint implementing partner. The SMEFD additional financing project is providing additional SME credit market benefits, including: (i) increases in geographical coverage through enhanced outreach to clusters; (ii) innovative SME loan products, including loans to smaller SMEs (downscaling) and wholesale loans through participating financial institutions; (iii) support for the expanded coverage of the Risk-Sharing Facility; and (iv) expansion of Business Development Services (BDS) to additional clusters which will provide another window for increasing demand for EE improvement. Participating SME units may also benefit from the newly launched JICA “Micro, Small and Medium Enterprises Energy Saving Project.” This line of credit, launched in 2009, will promote energy-savings measures among the final beneficiaries—micro, small, and medium enterprises—by providing them with the mid- and long-term financing necessary for energy-saving measures. JICA will provide up to 30 billion Yen (about US$ 300 million) to SIDBI, which will on-lend to units for certain types of eligible energy saving equipment at a fixed interest rate of 9.5-10% for up to 7 years terms. Asset coverage for this scheme will be lower than normally required, and the program is rolled out on a nationwide basis. However, initial demand for this line of credit has been lower than expected, and this World Bank project is expected to improve the ultimate JICA line of credit uptake by engaging in focused efforts to increase demand and improve EE implementation capacity of key stakeholders. A risk sharing facilty already exists for bank lending to the Indian SME sector, created in 2000 when the GoI and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (remaned CGTMSE in 2006) as an associate institution of SIDBI. This facility enables micro and small enterprises to access credit from Member Lending Institutions (currently 104 participating banks) without having to provide any collateral security and/or third party guarantees. All micro and small enterprises are eligible, the

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scheme covers a maximum of 80% of the credit extended, and the maximum ceiling has gradually increased to ~USD $208,000 million (INR 10 million). Loans exceeding this amount may still be covered under the scheme, but the guarantee cover will be extended for credit assistance only up to the maximum ceiling of allowed guarantee coverage. In case of default, the loss is shared on a 3:1 basis between CGTMSE and the Member Lending Institution. This mechanism can serve as a key product to increase local bank lending for EE in SMEs, although the eligibility limits are set such that larger industries (ie those exceeded GOI definition of “Small”) will not be able to avail of this mechanism. Cumulatively, as of January, 2010, over 200,000 loan proposals representing more than Rs.9,200 crore have been guaranteed by CGTMSE. This is a relatively small amount compared to the overall credit requirements of the sector and while rate of utilization has significantly increased in the last year, there remains significant opportunities to increase awareness and uptake of this existing financing mechanism. While this current scheme will not benefit larger sized energy-intensive SMEs whose EE investments may require loans in excess of what is covered under the CGTMSE or who are not elegible per RBI definitiaon as a small scale enterprise, increased deployment of this guarantee will overcome certain barriers preventing access to finance for smaller entities, and will directly benefit smaller industries focusing on certain types of investments in equipment retrofit, etc. The TA under this World Bank project would be used to expand the use of the CGTMSE to EE investments for smaller SMEs. CGTMSE has also signed an MoU with SBI for launching a new credit guarantee product (Portfolio Credit Guarantee Scheme for Micro and Small Enterprises) under which the entire portfolio of collateral-free credit up to Rs.1 crore extended by SBI to Micro and Small Enterprises (MSEs) would be guaranteed by CGTMSE. The MoU could exponentially increase the number of MSE unit getting collateral-free credit while reducging the member instutiton cost and processing time to access guarantee coverage for this loan class. Finally, initial capacity building and project identification work has already been completed in four target clusters of the World Bank Project supported by a grant from the Asia Sustainable Energy Program (ASTAE) of the World Bank. This grant funded initial cluster mobilization and pilot unit level audit and investment grate project report preparation in Pune, Kolhapur, Ankleshwar and Faridabad. Eight projects representing more than US$2.9 million in EE and fuel switching investment with payback periods ranging from 5-20 months have already been identified, and the units are now proceeding with detailed specification analysis with vendors and financing mobilization activities.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

India: Financing Energy Efficiency at MSMEs Project Project ID

Project Name Development Objectives Rating

Financed by World Bank P100584 India Chiller

Energy Efficiency Accelerate the replacement of centrifugal chillers with efficient non-CFC-based centrifugal chillers in order to promote deployment of energy efficient technologies and products to reduce GHG emissions, and support the phase-out of CFCs.

NA

P086518 & P102767

India SME Financing and Development & Additional Finance

Improve SME access to finance (particularly longer term financing) and business development services, thereby fostering SME growth, competitiveness and employment creation.

Satisfactory

P049770 India Second Renewable Energy

a) Augment power supply through environmentally sustainable small hydro investments; b) Mobilize private sector investments in renewable energy projects; and c) Promote energy efficiency and demand side management investments.

Satisfactory

P098151 Bangladesh Clean Air and Sustainable Environment

Improve air quality and safe mobility in Dhaka through the implementation of demonstration initiatives in urban transport and brick making.

NA

P084874 China Energy Efficiency Financing

Improve energy efficiency of selected medium and large-sized industrial enterprises in China. The project will reduce adverse environmental impact of Chinese medium and large-sized industrial enterprises on climate.

Satisfactory

P035693 China Efficient Industrial Boilers

Reduce greenhouse gas emissions, as well as other emissions through: (a) the development of affordable energy- efficient and cleaner industrial boiler designs; (b) the mass production and marketing of the improved boiler models that have successfully met performance criteria; and (c) broad technology dissemination throughout China.

Satisfactory

P090119 Argentina Energy Efficiency

To reduce greenhouse emissions by removing the regulatory, financing and informational barriers that prevents activities and investments in energy efficiency and energy conservation.

Moderately Unsatisfactory

P078131 Tunisia Energy Efficiency Program / Industrial Sector

Overcome barriers to the development of a sustainable market for energy efficiency products. In addition to the removal of institutional and capacity-related barriers, the project aims to establish energy services companies (ESCOs) as the main vehicle to guarantee a sustainable energy efficiency market.

Satisfactory

P104266 Tunisia Energy Efficiency and Renewable Investment

Scale up industrial energy efficiency investments, and thereby contribute to the Government's new Four-year Energy Conservation Program

NA

Financed by UNDP UNDP-1240

Energy Efficiency Improvement in Steel Rerolling Sector in India

1) Design suitable energy efficient packages for the steel rerolling sector in India; 2) Suggest measures to overcome the barriers for adoption of the proposed energy efficient packages; and 3) Prepare a full project proposal for GEF for technology upgrading in the steel rerolling sector through implementing the energy efficient packages.

NA

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Annex 3: Results Framework and Monitoring

A. Results Framework

Table A3.1 Results Framework

PDO

Outcome Indicators

Use of Outcome

Information Results Indicators

for Each Component Use of Results

Monitoring Component One: Activities to build Capacity and Awareness in MSME clusters

Number participants from MSME units reached through cluster-focused outreach/capacity building/training efforts Number energy auditors trained Number of FI personal participating in training programs

Marketing and outreach efforts can be redesigned as required Capacity building efforts can be redesigned to ensure sufficient participation

Component Two: Activities to Increase Investment

Number DPRs prepared Number units implementing EE projects in 5 target and in 25 BEE clusters Aggregate level and number of EE investment made Finance sources for implemented EE investments Annual, cumulative and estimated lifetime energy savings resulting from EE investment (kwh and TOE) Anticipated annual, cumulative and e lifetime carbon reductions resulting from EE savings

Key indicators to monitor intermediate and final outcomes Robust M&E; project review; supervision undertaken. M&E will be undertaken at two levels: 1) at cluster level; and (2) General project level.; Activities monitored at two levels: a) by local Industry Associations (IAs) and at a cluster level by BEE/SIDBI

Component Three: Knowledge Management

Number of knowledge products and evaluation reports produced Regular tripartite briefing of WB, SIDBI and BEE

Component Four: Project Management

Reporting & Monitoring on project implementation progress.

B. Arrangement for Results Monitoring

Outcome Indicators Baseline

Target Value Data Collection and Reporting

YR1 YR2 YR3 YR4 YR5 Frequency

and Reports Data Collection

Instruments Data Collection Responsibility

Number of participants from MSME units reached through outreach/

marketing/ training efforts 0 100 200 200 400 400 Annual

IA/Consultant reports/Report From REEC

IAs/SIDBI

Number energy auditors trained

0 50 150 150 150 Annual Post-training Evaluation

BEE

Number FI sector personnel participating in training sessions

0 100 200 400 300 - Quarterly Consultant reports

SIDBI

Number DPRs prepared (WB Direct)

0 50 100 200 150 Quarterly Consultant Report, cross-checked with IA

SIDBI

Number units implementing EE projects in target clusters

- 25 50 125 200 100 Quarterly Consultant report, cross checked with IA

SIDBI/BEE

Aggregate level of EE investment made (million) – 5 clusters

- 1.3 4.6 12.5 18.4 9.2 Annual

BEE and SIDBI reports from DPRs and IA annual reports

SIDBI/BEE

Aggregate level of EE investment made (million) – 25 clusters

0.4 1.3 3.6 5.2 2.6 Annual BEE and SIDBI reports from IA annual reports

SIDBI/BEE

Source of Finance for Implemented EE Investments

(debt, equity, other) -

No target specif

- - - - Annual BEE and SIDBI reports

SIDBI/BEE

Annual, cumulative and estimated lifetime energy savings resulting from EE investment (Rs, kWh,

TOE)

- No

target specif

- - - - Annual BEE and SIDBI reports from EE audits and DPRs

BEE

Annual, cumulative and estimated lifetime Carbon reductions resulting

from EE savings (incremental)

- - - - -

4.8millifetime ERs

At mid term

and final evaluation

BEE and SIDBI reports

BEE

Number of knowledge products and evaluation reports produced

0

No target specif

ied

- - - - Annual BEE BEE

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Annex 4: Detailed Project Description

India: Financing Energy Efficiency at MSMEs Project

The project will be implemented as part of the larger SME EE program of the BEE. It consists of the following four main components: (a) Technical Assistance (TA) and Capacity Building in MSME clusters, (b) Investment and Risk Mitigation Instruments for investment by participating banks, (c) Program Knowledge Management, and (d) Project Management.

Component 1: Activities to Build Capacity and Awareness The TA component would focus on increasing awareness of EE at the cluster and plant level on a large scale through the implementation of outreach efforts, dissemination of information on successful projects and packaging potential investment proposals in EE for financing by local banks or other sources. Initially, 1000 units will receive support for assessment studies, and 500 of them will be targeted over a period of five years for DPR completion and investment. This cluster sub-component will encompass ongoing EE efforts by BEE in individual clusters. Efforts will also be made to increase the capacity of energy auditors, financial consultants/chartered accountants, vendors and service providers to improve project development capability, service delivery, and to improve the quality and acceptability of initial and investment grade audits and loan applications. This component will also include provision of major support for the existing and new schemes for EE financing by Indian banks. Sub-component 1.1: Marketing and Outreach effort to clusters and capacity building at industry associations (US$ 1,496,978) (a) Industry associations (IAs) of the five selected clusters will receive training that will enable them to carry out outreach activities in their respective clusters. They will also perform the necessary M&E on the project activities in their clusters. In this way, industry associations will be able to provide additional valuable services to their members and to contribute to the sustainability and replicability of the project. (b) The project will also support industry association capacity building in the 25 additional clusters included in the BEE SME effort tailored to maximize effectiveness of the BEE cofinanced efforts. (c) Every year a national level workshop (five total) will be held to bring together the individual cluster IAs to share lessons from implementation experience and ideas for further success. (d) Marketing and general outreach on EE schemes shall be undertaken to support dissemination of information about the MSME EE schemes and its project development and financing activities in national, regional and industry-specific media. (e) A central hotline will be set up to enable MSMEs and other stakeholders to quickly and easily access web-based information about the project, experiences of completed EE projects in MSME cluster units, referral to energy auditors, vendors, and similar information. (f) Capacity building programs will also be offered to units on improving their capacity to manage environmental and social issues.

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Sub-component 1.2: TA to energy auditors: training, BEE certification, enlistment (US$350,000) Energy auditors play a crucial role in the Indian MSME EE effort through their technical support of MSME EE projects. They need training, however, to ensure that the services in project identification and assessment which they provide are of high quality, and meet the requirements of clients and financiers, containing a minimum level of financial information. As an additional quality improvement, the project will also support their certification within BEE’s general energy auditor certification scheme and their enlistment within the project.

Sub-component 1.3: Specialized support to Financial Intermediaries (US$1,050,000) To reach their MSME clients, bank staff in branch offices shall be better informed about EE options and trained in enhanced analysis of presented EE project applications from prepared DPRs. This subcomponent shall support expanding outreach and uptake of existing schemes such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE, see section F. Alternatives) through awareness campaigns among potential users and workshops with relevant stakeholders. Several banks have developed EE financing schemes for SME clients under the 3 Country EE Project, but overall demand for these schemes has been low. To increase the uptake of those schemes among SMEs, activities that would improve uptake of the banks’ schemes shall be undertaken. Detailed training support through Indian Bank Training Institutes to increase capacity at local branch offices in identifying and appraising EE projects shall be provided under this component for at least 1000 FI participants, and widespread dissemination of success stories and impacts of EE project implementation on improving asset quality shall be presented. Efforts will be made to formalize the participation of local banks in the project, either through their participation in the direct training programs, stakeholder capacity building efforts via conferences, building internal capacities, or project-executed consultancies supporting banks’ own efforts in EE lending. Finally, this subcomponent shall also support pilot green rating system for SMEs through a focused consultancy activity to develop green rating models for different sectors and also to create awareness about green rating amongst SME stakeholders. This activity will support and align with the ongoing green rating initiatives taken by SMERA, SIDBI’s associate organization. .

Sub-component 1.4: Unit-level support to MSMEs in accessing finance (US$572,432) MSMEs in the selected clusters will receive support in accessing finance for the previously identified and assessed EE investments. For this purpose financial consultants/chartered accountants working with those MSMEs will receive relevant training and a sufficient number of them will be enlisted for use in the project. More detailed knowledge of financial assessment of EE investments and of banks’ requirements will provide value added to financial consultants/chartered accountants and further contribute to the sustainablity of the project.

46

Sub-component 1.5: Vendor outreach, enlistment and support, REEC (US$440,000) Major manufacturers of EE equipment usually are not considering SMEs as valuable clients and are not in contact with them. The project will carry out an assessment of the relevant EE equipment manufacturers and vendors and will support appropriate outreach activities. The project will also provide support in attracting vendors of EE equipment to participate actively in program efforts in the clusters. These markets are primarily served by so-called “second-tier” manufacturers due to the smaller aggregate market demand in the clusters for these specific products. It may be possible to attract first-tier manufacturers into subsequent program activities if sufficient tie-in with new demand generation is pursued. The project shall also engage a regional energy efficiency center of excellence for specialized technical capacity building activities for targeted SME clusters in the area of furnace optimization.20

Component 2: Activities to Increase Investment in Energy Efficiency The objective of this project is to contribute to the growth of EE investments in the Indian MSME sector that are financed from local commercial financing sources. Experience in many EE financing projects has shown that development of a firm project pipeline is a major challenge. This component will provide support in the development of this pipeline that goes beyond the TA support of Component 1 by decreasing the risks associated with such investments. On the demand side, MSMEs are unable to prepare EE projects but are also reluctant to spend any money on the preparation of a bankable proposal by a third party, particularly if this is an unfamiliar activity in the industry. Similarly fraught with risks and uncertainties is the initial use of unfamiliar technologies. This component will therefore cover the costs of developing an initial pipeline of about 500 projects and, if required, of performance-linked grants for the first demonstrations of EE technologies in each cluster. Sub-component 2.1: Energy efficiency project development support (US$5,282,896) This component will provide grant support to cover the ‘soft costs’ of an initial pipeline of 500 projects total from the five selected clusters for project development and final handholding support. Those costs will include

o Conducting pre-assessment studies in 1000-1500 units to assess the possibility of cost effective low/medium investment oriented projects

o Preparation of at least 500 investment grade detailed project reports (DPR) o Facilitation with local banks for arranging the loans, if so required and desired by

the units

20 Improving the efficiency of small furnaces has been identified as a cross cutting technology of high potential in most of the target SME clusters. A new Regional Energy Efficiency Center (REEC) is being established at Nagpur with USAID support devoted to increasing awareness on options to improve efficiency in furnaces and increasing penetration rates of efficient alternatives.

47

o Developing a vendor identification document to assist in procurement of identified measures based upon initial examination and implementation experience from provision of advisory services

o Advisory services to units throughout the implementation of the project, including commissioning.

Sub-component 2.2: Performance linked grants for demonstration of efficient technologies (US$585,000) MSMEs are very reluctant to employ technologies they are unfamiliar with and that they consider potentially disruptive. However, it has been shown that MSMEs are willing to adopt those technologies once they have been demonstrated to work and to be advantageous in similar circumstances. This component shall provide a performance linked grant to be disbursed through a conditional cash transfer mechanism as an additional financial incentive for actual achievement of energy savings from implemented EE measures to encourage the demonstration effect from an estimated 25 early adopters. It includes the cost of third party verification. Conditions for perfomance-linked grant payment include:

(a) the Sub-Grant shall be obtained through application to SIDBI; (b) the Sub-Grant shall be available to Beneficiaries participating in the Project, and

receiving energy technical audit and follow up support by the consultants appointed under the Project; and

(c) the Sub-Grant shall be a one-time cash payment of up to 900,000 Indian Rupees, at 75% of capital expenditure upon demonstration of achievement of actual energy savings as defined in the SIDBI Operations Manual.

The procedures for implementation of performance linked grants are further elaborated in the SIDBI Project Operations Manual, and include the requirement of third party verification of achieved energy savings. Private Sector Financing mobilized by MSME units (US$ 46 million) This figure includes the expected final investment in energy efficiency goods and services ultimately made by the participating MSME units in the five target clusters resulting from project related activities. As previously noted, MSMEs shall be free to moblize financing for identified investments from a variety of sources, including their own equity, additional loan from their existing bank, new term loan from another bank, the line of credit extended by the IBRD to SIDBI for the SME Financing and Development project, or other sources. Component 3: Program Knowledge Management and Sharing (US$ 1,000,000) This component will support not only the MSME EE program, but – at the request of BEE - the overall Programmatic Framework Project for Energy Efficiency in India which is headed by BEE, covering the sub-projects managed by the World Bank, UNIDO, and UNDP. This is a strategic framework to put in place an appropriate regulatory and market

48

transformation regime, addressing numerous market failures and promoting the widespread adoption of EE products and technologies. The Indian EE program is, however, characterized by a multitude of activities, actors and donors and this broad KM component is required to provide comprehensive coordination of the numerous efforts underway. The programmatic EE knowledge management will draw from GEF projects managed by the World Bank, UNIDO, and UNDP. The effort will include: (a) provision of resources and technical human resources for converting outputs of

different components of Programatic Framework Project in to knowledge. The human resources will include Knowledge Management Coordinator, Energy Specialist (SMEs), Energy Specialist (Building), and an expert agency for preparing media products (case studies for EE awareness, web based products, dissemination of information international EE benchmarks by sector, etc.);

(b) GEF program evaluation, and analysis of cross cutting energy efficiency issues in Indian context and collection of best practices and successful EE case studies from GEF and other programs. The Knowledge Management component will draw from experience of implementation of sub-component 2 above as well as from EE implementaiton in BEE and UNIDO clusters. Such efforts will be disseminated by establishing databases on on international EE benchmarks by sector, EE technologies in Indian context;

(c) conduct of annual national level knowledge sharing workshops including dissemination of relevant information on EE programs and projects, involving stakeholders including SME clusters. First national workshop was orgnized by BEE during November, 2009 involving GEF program agencies; and

(d) , policy development functions with the goal of ensuring effective implementation and replication of not just this individual project, but of BEE's entire effort implemented with GEF and other donor and GoI support. The knowledge management element will provide key inputs to help better inform GoI policy making and shall also serve the function of informing the local state designated agencies of ongoing progress and best practices, leading to more effective implementation of GoI energy efficiency and conservation policies and programs at the local level.

Among other coordination responsibilities of Programmatic Framework Project for EE in India, the Program Coordination Committee (PCC) headed by DG, BEE will provide quarterly review and oversight on implementation of knowledge management component. Component 4: Project Management Units (US$ 522,694) This component will provide support for the two PMUs that will jointly implement the project, within BEE and SIDBI. The previously developed PMD structure at SIDBI is functioning very effectively and the PMU will be formed under this existing PMD which

49

will be used primarily for implementation of the TA and investment components of the GEF project focused on the clusters. A new PMU would be established in BEE. Since BEE has only very limited administration staff, the project will finance BEE’s incremental operating costs during the period of project implementation, including local consultants.

50

Annex 5: Project Costs

India: Financing Energy Efficiency at MSMEs Project

Project Components (GEF expenditure) US$

BEE/SIDBI21 cofinance22 and

in kind Component 1: Activities to Increase Awareness and Build Capacity

1.1 Marketing and Outreach effort to clusters, capacity building at industry associations

1,496,978 200,000

1.2 TA to energy auditors: training, BEE certification, enlistment

350,000

1.3 Support to FI Sector 1,050,000

1.4 Support to MSMEs in accessing finance/Capacity building

572,432 39,832

1.5 Vendor outreach, enlistment and support 440,000

Sub-Total $3,909,410 239,832

Component 2: Activities to Increase Investment

2.1 Project Development Support 5,282,896

2.2 Performance Linked Grant 585,000

Sub-Total $5,867,896

Private Sector: Finance mobilized by MSMEs $46,000,000

Component 3: Knowledge Management23

Sub-Total $1,000,000

Component 4: Project Management Units

4.1 BEE PMU 103,022

4.2 SIDBI PMU 419,672 23,468

Sub-Total $522,694 23,468

Total for GEF funds $11,300,000 263,300

Total including Private Sector Contribution

US$57.5633M .

21 Cofinance reflected in the table includes: US$ 200,000 by BEE for Awareness/capacity building and US$63,300 for Component 1.4 and 4.2 is mobilized by SIDBI through their ongoing DFID grants for MSME cluster development activites. 22 The cofinance presented in the table do not include additional: (a) cofinance mobilized by BEE from its own resources covering US$ 1,135,250 for ongoing capacity building in the 25 clusters, which will be extended to 5 clusters once the WB Project is effective; US$ 4,047,000 for developing EE investment projects in 25 clusters; US$ 350 through sharing of professional staff and IT resources for knowledge management; and US$ 272,250 towards project management relating to above referred capacity building and KM in 5+25 clusters and EE investment proposals in 25 clusters; and (b) SIDBI cofinance of US$ 241,700 cash in kind towards SIDBI staff time for project activities, provision of IT Hardware, IT support, incidental costs, and admin support 23 The Knowledge Management component managed by BEE will be common for the three projects managed by the World Bank, UNIDO, and UNDP under the Programmatic Framework Project for EE in India. BEEs co-financing to facilitate this component under UNIDO and UNDP sub-projects is not reflected as these sub-projects are still under preparation.

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Annex 6: Implementation Arrangements

India: Financing Energy Efficiency at MSMEs Project The project will systematically support development of a large number of EE investment proposals under a programmatic approach to aggregate demand for EE investment in selected MSME industrial clusters and will work to create a sustainable mechanism for identifying, preparing and financing these proposals at the local level. The above initiative envisions supporting certain specific industrial clusters in India through provision of assistance for undertaking investment grade energy audits, preparation of DPRs and support in mobilization of financing from the Indian local banks to ensure that the identified EE measures are implemented. The ultimate goal of the project is to support development of a large portfolio of EE projects in the selected MSME clusters, and help improve market acceptance (both by MSMEs and local banks) for this type of product. A project management unit (PMU) would be established in BEE to oversee overall implementation of the proposed project. Certain project implementation tasks would also be taken up by the existing PMU at SIDBI. Joint implementation responsibility would also strengthen the linkages between the GEF project and the MSME Financing and Development Project with SIDBI, currently under implementation. Legal Agreements. Grant Agreements to channel funds from GEF to India will be signed between GOI and the World Bank and between World Bank and SIDBI. Project Implementation Arrangement: BEE will retain overall implementation responsibility for the project, and will directly implement activities which support its mandate. These would include project oversight, reporting and evaluation, implementation of certain national level outreach and capacity building activities, and cross cutting knowledge management activities. BEE will maintain implementation responsibility for certain targeted capacity building efforts, such as programs designed to improve technical capacity of energy auditors, etc, and disbursement of grant support to Industry Associations for monitoring, verification and widespread dissemination of success stories. SIDBI shall assume implementation responsibility for the following key project components

(a) Mobilization activities in WB-nominated clusters for Demand Generation This will include procurement and supervision of:

consultancy services for outreach and education of EE technologies and existing GOI schemes and incentives

consultancy services for energy audits and DPRs

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support to empanelled Industry Associations for providing outreach services to MSME units, arranging seminars, facilitation meetings with local banks etc,

consultancy services for transactional support in obtaining finance outreach to vendors to address potential supply chain issues

(b) Capacity Building Support to participating financial institutions

This will include supervision responsibility of the following activities

Consultancy services for design and implementation of learning programs on Energy Efficiency lending for Bank officers through Bank training institutes

Targeted Marketing and awareness building at lead banks in identified clusters (WB-nominated and the 25 BEE clusters) on existing schemes, EE program, and availability of risk mitigation options such as the SIDBI-implemented Credit Guarantee Trust program.

Consultancy services for tailored assistance to participating banks on their existing schemes-if requested

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Annex 7: Financial Management and Disbursement Arrangement

India: Financing Energy Efficiency at MSMEs Project The following FM Assessment has been prepared to account for separate funds flow and Grant Agreement for the two implementing agencies – BEE and SIDBI.

I. Introduction: The objective of the India-MSME Energy Efficiency Project is to improve efficiency and reduce GHG emissions through commercial investments in energy efficiency goods and services in target Small and Medium Enterprise clusters. The project will be implented by Bureau of Energy Efficiency (BEE) and Small Industries Development Bank of India (SIDBI) using about 30 consultancies.

II. The Implementing Entities

This project will be implemented by following two entities: Bureau of Energy Efficiency(BEE): BEE is a Statutory body set up by Government of India on 1st March 2002 under the provisions of the Energy Conservation Act, 2001. The mission of the Bureau of Energy Efficiency is to assist in developing policies and strategies with a thrust on self-regulation and market principles, within the overall framework of the Energy Conservation Act, 2001 with the primary objective of reducing energy intensity of the Indian economy. Small Industries Development Bank of India (SIDBI): Established on April 2nd 1990, SIDBI is the Principal Development Financial Institution for promotion, financing and development of industries in the small scale sector who also coordinates the functions of other institutions engaged in similar activities. SIDBI is already involed in execution of Bank funded SME financing and development project and additional financing for this effort. III. Implementation Arrangements BEE A new project management unit (PMU) has been established at BEE that will be responsible for the implementation of the project components for which BEE is responsible. The staffing of the PMU has already started and the hiring of the financial management specialist will be completed before effectiveness. The ToR of the contracted Financial Management Specialist will be discussed with and approved by the Bank. Although it is the first time that BEE will be implementing a Bank funded project, BEE has experience in working with external donors such as UNDP, GTZ, USAID, ADEME-

54

France and GAP-Japan, and has been generating reports and MIS to the satisfaction of these agencies. Additional capacity building of BEE staff for understanding and implementing Bank procedures will be undertaken in February 2010. For better control over funds received and disbursed, BEE will open a separate bank account for the project. SIDBI A Project Management Division (PMD) exists within SIDBI, at New Delhi, withinwhich a PMU has been formed to implement the specified GEF project components. This PMD is already implementing the IBRD SME financing and Development project, and are well aware of the Bank’s procedures. They will retain responsibility for all reporting requirements. For assessment of this GEF project, inputs were taken from the above SME financing project and the Microfinance project 24 (under prepration) for which a corporate governace review of SIDBI was completed.

Project Components

The split of components across the two implementing agencies is provided below.

India: Financing Energy Efficiency at MSMEs Project

Project Components (GEF expenditure)

Expenditure category

No of consulta

ncies

Total US$ Implemented by

BEE US$ SIDBI US$

Component 1: Activities to Increase Awareness and Capacity

1.1 Marketing and Outreach effort to clusters, capacity building at industry associations

Consultancy / Training

4 1,496,978 796,978 700,000

1.2 TA to energy auditors: training, BEE certification, enlistment

Consultancy / Training

3 350,000 350,000

1.3 Support to FI Sector Consultancy / Training

4 1,050,000 1,050,000

1.4 Support to MSMEs in accessing finance/Capacity building

Consultancy 6 572,432 572,432

1.5 Vendor outreach, enlistment and support

Consultancy 3 440,000 440,000

Sub-Total $3,909,410 1,146,978 2,762,432

Component 2: Activities to Increase Investment

2.1 Project development support, including PAS, DPR

Consultancy 7 5,282,896 5,282,896

2.2 Performance linked grants Consultancy& Grants

1 585,000 585,000

Sub-Total $5,867,896 5,867,896

24 Project ID : P119043

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Component 3: Knowledge Management

Consultancy

Sub-Total 3 1,000,000 1,000,000

Component 3: Project Management Units

4.1 BEE PMU Operating Cost

1 103,022 103,022

4.2 SIDBI PMU Operating Cost

1 419,672 419,672

Sub-Total 522,694 103,022 522,694

Total 33 11,300,000 2,250,000 9,050,000

Component 1: Activities to Build Capacity and Awareness Sub-component 1.1: Marketing and Outreach effort to clusters and capacity building at industry associations (US$ 1,496,978) Consultancy / Training: Industry associations (IAs) of the five selected clusters will receive training that will enable them to carry out outreach activities in their respective clusters. Consultancy: The project, through a consultancy contract will also support industry association capacity building in the 25 additional clusters included in the BEE SME effort tailored to maximize effectiveness of the BEE efforts. Consultants will hold workshops, engage in marketing and general outreach on EE schemes, maintain a central hotline to enable SMEs and other stakeholders to quickly and easily access web-based information about the project, experiences of completed EE projects in SME cluster units, referral to energy auditors, vendors, and similar information and engage in capacity building programs focused on improving capacity to manage environmental and social issues. Sub-component 1.2: TA to energy auditors: training, BEE certification, enlistment (US$350,000) Consultancy to facilitate training and certification of energy auditors.

Sub-component 1.3: Specialized support to Financial Intermediaries (US$1,050,000) Consultancy: To increase the uptake of EE lending by banks through enhanced training and information to build internal confort and capacity and to support revitalization of specialized EE lending schemes. Consultancy / Training / Grant : Detailed training support through Indian Bank Training Institutes to increase capacity at local branch offices in identifying and appraising EE projects. Efforts will be made to formalize the participation of local banks in the project,

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either through their participation in the training programs, or project-executed consultancies supporting banks’ own efforts in EE lending.

Sub-component 1.4: Unit-level support to SMEs in accessing finance (US$572,432) Consultancy / Training : Use of consultancy to train financial consultants/chartered accountants and sufficient number of them will be enlisted for use in the project. These services will be coordinated by senior level energy efficiency expert under the guidance of SIDBI PMU

Sub-component 1.5: Vendor outreach, enlistment and support, REEC (US$440,000)

Consultancy : Consultacy to carry out an assessment of the relevant EE equipment manufacturers and vendors and support outreach activities and enlist them if appropriate. The project will also provide support in attracting vendors of EE equipment to participate actively in program efforts in the clusters. The project shall also provide support for a regional energy efficiency center of excellence for technical capacity building on improving efficiency in the cross cutting area of furnaces. Component 2: Activities to Increase Investment in Energy Efficiency Sub-component 2.1: Energy audits and DPRs for 500 cluster units (US$5,282,896) Consultancy : Using consultancies, support will be provided to SMEs to cover the ‘soft costs’ such as (a) Preparation of 500 investment grade detailed project reports (DPR) (b) Conducting pre-assessment studies (PAS) in 1000 units to assess the possibility of cost effective low/medium investment oriented projects. Sub-component 2.2: Performance Linked Grant (US$585,000) Consultancy / Conditional Cash Transfer: This component includes conditional cash transfer mechanism for achievement of verified energy savings for a select number of early adopters. Conditions for perfomance-linked grant payment are defined in the SIDBI Project Operations Manual. A consultantcy for verificaiton of the savings achieved will be issued.

Private Sector Finance mobilized by SME units (US$46 million): Investment by industry units for energy efficiency technologies by way of own funds or loan / debt raised from financial institutions. Component 3: Program Knowledge Management and Sharing (US$ 1,000,000) Consultancy: Consultants will be used to support for broad programmatic EE knowledge management effort.

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Component 4: Project Management Units (US$ 522,694) This component will provide support for the two PMUs that will jointly implement the project, within BEE and SIDBI. The project will finance incremental operating costs during the period of project implementation, including hiring of consultants and other items as defined in the respective grant agreements.. IV. FM Risk rating Previous

Risk Assessment

Risk Mitigating Measures

Residual Risk

Inherent Risks Country level (India)

M India country level rating relevant only to the extent of guarantee from GoI

M

Entity level (BEE and SIDBI)

S Action plan to improve financial management arrangements at BEE and SIDBI as needed will be agreed.

M

Project level S The process of setting up a new PMU at BEE has already started and a FM specialist will be hired before grant effectiveness. SIBDI already has an existing PMD which is involved in execution of SME project. Staffing at the PMU and PMU under the SIDBI PMD will be adequate in terms of quality & quantity. SIDBI and BEE have revised the draft OM for the project which was accepted at the conclusion of appraisal.

M

Overall Inherent Risk M Control Risks Budgeting M A reporting and budgeting system is already operational in

BEE and SIDBI PMD. Their respective budgeting system will cover activities related to the project.

L

Accounting S BEE The books of account are prepared as prescribed in EC Act of 2001. A PMU set up within BEE will implement the project using mainstream accounting systems of BEE. SIDBI SIDBI has implemented accrual system of accounting and is required to follow the accounting standards as issued by the Institute of Chartered Accountants of India mandated under clause No. 23 o f the listing agreement that SIDBI has signed.

M

Internal Controls H Internal control arrangements of BEE and SIDBI will be clearly laid out in their respective Operation Manuals.

S

Funds flow S BEE Funds will be received by BEE though GoI, DEA, CAAA. Efforts will required to be made to avoid any possible delays in receipt of funds into the designated account opened for the project SIDBI Funds can be disbursed by the Bank directly to the designated

M

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Previous Risk Assessment

Risk Mitigating Measures

Residual Risk

account opened for the project Financial Reporting

S FOR BEE AND SIDBI Individual project financial statements will need to be prepared. The IUFRs will include physical, contractual, and procurement progress with additional reconciliations with the books

M

Auditing S BEE CAG is the statutory auditors for BEE. In addition to the entity audit report, the project financial statements will also be audited by the statutory auditors as per the agreed ToR. SIDBI It is proposed that the project will be audited by an independent Auditor under a ToR agreed with the Bank.

M

Overall Control Risk M Residual Risk Rating Moderate

V. Financial Reporting and Monitoring The reporting framework for the project will include two quarterly financial monitoring reports (called IUFRs or interim unaudited financial reports) prepared by BEE and SIDBI, in a format which would give up-to-date details on the project expenditure incurred along with projection in respect of funds utilization in the coming two quarters, distinguishing the requirement in respect of various project components. The project expenditure figures will include GEF grant funded activities and the co-financing by BEE and SIDBI. Any interest earned on the designated account funds shall also be reported in IUFR. BEE and SIDBI have adequate FM systems and capacity to prepare these IUFRs, which will be prepared (on cash basis with separate details of accrued expenditure) for the project every quarter and forward it to the Bank within 45 days of the end of the quarter. IUFRs will be prepared from information generated from BEE’ and SIDBI’s mainstream FM and MIS systems. These IUFRs then would be submitted by BEE and SIDBI to IBRD. The annual project financial statements, which would be similar to the format of the quarterly IUFRs, would also be submitted under the project. VI. Accounting Policies and Procedures BEE Energy Conservation Act 2001, chapter VII mentions the FINANCE, ACCOUNTS AND AUDIT OF BUREAU (BEE). As per para 25 (1) of the Act, “The Bureau shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in such form as may be prescribed by the Central Government in consultation with the Comptroller and Auditor-General of India.” Annual statement of accounts prepared by

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BEE include balance sheet, income and expenditure account and receipts and payment account in the prescribed format on accrual basis. SIDBI The formats of balance sheet and the profit and loss accounts of SIDBI are prescribed by the SIDBI Regulations, issued under the SIDBI Act. SIDBI has implemented accrual system of accounting and is required to follow the accounting standards as issued by the Institute of Chartered Accountants of India mandated under clause No. 23 of the listing agreement that SIDBI has signed. All project costs and expenditures will be paid for and recorded in the books of SIDBI and BEE as per the established policies and procedures using their existing accounting software. To facilitate quarterly reporting and to identify project related transactions, it is recommended that SIDBI and BEE create a separate code or tag within their existing software. VII. Budgeting and fund flow Budgeting BEE BEE prepares its budget on cash basis as per GFR. BEE prepares two types of budgets (a) for the MoP schemes implemented by BEE (the figures for these schemes for 11th 5 year plan are available) (b) administrative budget of BEE. The following year budgets are prepared during October / November of current year and during the same time the revised estimates are issued for the current year. These budgets are approved by Executive committee. Monitoring of these budgets is done on quarterly basis and a report comparing budget vs. actual figures is submitted to Executive committee. To get details on the project level budget for the Bank funded activities, new codes as needed will be created by BEE. SIDBI At SIDBI, the budgeting process begins with breaking down of broad groups of project components into different heads / activities. These are further broken into sub activities / tasks. Costs are allocated to these activities within overall budget ceilings on the basis of previous experience / market check. Contracts are issued, wherever applicable, with definite timelines and payments linked to outputs / achievements of the milestones etc. The activities are drawn on a time scale with proportionate costs allocated for each activity. This provides quarterly / half yearly and annual budget of expenditures. Invoices received from the respective agencies are checked for the milestone achieved as per the signed agreement. Budgets are redrawn every quarter to record the expenditure made against the projections and to look into the reasons for variations in the utilization, if any. If required, future projections are revised to portray accurate position of future utilization. The budget charts are reported to delegated authorities on quarterly basis for reviewing

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and monitoring purposes. The established budgeting process will be used by SIDBI to monitor budget for this project. Funds Flow: BEE Since BEE is a statutory body under Ministry of Power, the Project funds will flow from World Bank to GOI. In line with normal practices, an appropriate budgetary line item will be established by MoF to record external aid (GEF) and on the expenditure side, within MoP’s budget a budget line allocation will be made available to BEE. Similarly, a Designated Account will be opened by CAAA at RBI wherein funds will be disbursed by the World Bank. GOI / MoP will pass on these funds on a timely basis to ensure quick and speedy implementation of the project. BEE will request funds based on IUFRs along with withdrawal application. SIDBI The Grant Agreement shall be between the Bank and SIDBI, and hence GEF funds would flow directly to a bank account designated by SIDBI for receiving disbursement from the World Bank—without routing the funds through the Controller of Aids Accounts and Audit in the Department of Economic Affairs as in case of BEE. SIDBI will request funds based on IUFRs along with a withdrawal application.

VIII. Policy and Manuals BEE

World Bank

GOI/MOP

BEE

Consultants / Vendors

SIDBI

Consultants / Vendors

Conditional Cash Transfer

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The Energy Conservation Act of 2001 and the subsequesnt rules issued under the Act provide details of the establishment and operation of BEE. Although BEE complies with provisions of Energy Conservation Act 2001, and the related rules, Government Finance Rules and any other reporting requirements of Ministry of Power, Bank recommends that BEE should document the applicable provisions and fill in the gaps (if any) in the form of Finance manuals. Operation Manual (OM): BEE has prepared an operation manual for the project. Amongst other details, the manual clearly details how the project will be implemented and the staff responsible for the activities specified. SIDBI The operational framework of SIDBI is captured in the various policy documents and manuals which are revised from time to time to capture the evolving needs of the business and also to meet the regulatory framework, including RBI guidelines as applicable to the Financial Institution. The business and accounting procedure manual (BAPM) is hosted on the intranet to facilitate usage. The internal audit manual lays down the procedures for conducting and reporting on internal audit of various departments and the follow up procedures thereafter. Some of these manuals are currently under revision to capture the evolving business needs of the corporation. It is intended that an operation manual will be prepared for the project. IX. Audit Arrangements and Alternate Assurance External audit BEE The audit arrangements for BEE are described in Energy Conservation Act 2001, chapter VII. Para 25 (2) of the Act states that the accounts of the Bureau shall be audited by the Comptroller and Auditor-General of India. Accordingly, Principal Director of Audit- Economic and Service Ministries (a wing of CAG) is the statutory auditor for BEE. On basis of accounts submitted by BEE (by June), the CAG audit team visits BEE once for the audit of financial statements (during July), then for the transaction audit (during October / November). Based on the above, an audit certificate is issued by the auditors (around December). The final accounts are placed before Executive committee of BEE for approval. The Annual report of BEE including the audited accounts will be submitted to the Bank within 6 months from the end of financial year. It is intended that the project financial statements will be audited by the independent and acceptable statutory auditors as per the ToR agreed with CAG for the Bank funded projects.. SIDBI SIDBI’s statutory auditor is appointed at the Annual General Meeting (AGM) of its shareholders under Section 30(1) of the SIDBI Act 1989 (as amended in 2000). The auditor is selected by the Reserve Bank of India (RBI) and approved by SIDBI’s Board.

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It is proposed that the project will be audited by an independent auditor acceptable under the ToR agreed with the Bank. The annual audit report of the project financial statements for both agencies would separately identify each component under the project, its progress and the funding sources for each of the components. The audit of the project accounts would also include an assessment of (a) the adequacy of the accounting and internal control systems, (b) the ability to maintain adequate documentation for transactions and (c) the eligibility of incurred expenditures for Bank financing. The following audit reports will be monitored in Audit Reports Compliance System (ARCS): Agency Audit Report Audited by Due Date BEE Project audit (including audit

of IUFRs submitted for disbursement)

CAG 30th September

BEE Designated Account maintained by RBI

CAG 30th September

SIDBI Project audit (including audit of special Account and the IUFRs submitted for disbursement)

Statutory Auditors

30th September

Alternate Assurance for quantifying financing from prvivate sources : (non GEF funded) For Project Component 2, Private Sector finance mobilized by SME units for adoption of energy efficienency technologies, an assurance on indicator reports provided by Industry associations on total finance mobilized by participating units will be obtained through retention of an independent technical consultant following an agreed ToR or bundled into other project M&V tasks. The Independent consultant will take a reasonable sample to verify the actual investment made by SME units and provide a report on the above. X. Internal control BEE As per EC Act of 2001, general superintendence, direction and management of the affairs of BEE vest in Governing Council (appointed by central government; maximum 26 members). In addition to the heads of various government organizations, the council includes representatives of CII, equipment and appliances manufacturers, architects and consumers. A sub-committee called Executive Committee, comprising members from the Governing Council manages responsibilities as delegated by the Governing Council. The internal control at BEE includes Delegation of Powers document which is currently pending for approval at MoP. The segregation of duties for the procurement and approval of payments will be documented in the operation manual.

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SIDBI SIDBI’s intemal control framework is considered adequate for a financial corporation of its size, and is currently in the process of being upgraded through several measures (IT consolidation, Risk Management Department, Business process re-engineering). The internal control framework includes an audit committee constituted by three independent members of the board. The audit committee of the board provides direction and oversees the working of the internal audit and interacts with the statutory auditors during the year to resolve any issues and take corrective action on systemic issues brought to its notice. Internal audit department: BEE Internal audit at BEE is carried out by a chartered accountant (CA) firm. The CA firm is single sourced by BEE. The CA firm issues quarterly and annual reports. These reports are reviewed and responded to by the Secretary- BEE and the Finance and Accounts officer of the BEE. To strengthen the internal audit function within BEE it is recommended that an internal audit framework is prepared and implemented by June 2010 in consultation with the Bank. Amongst others, the said framework will document (a) Terms of Reference for the internal auditor (b) Reporting of Internal Auditor (currently internal auditor reports to DG through Secretary) and (c) the method of selection of the internal auditor. (currently, a CAG empaneled auditor is selected) SIDBI Internal Audit in SIDBI is an independent appraisal function established within the organization to examine and evaluate the performance and function of Zonal/ Regional / Branch Offices as also various Departments at Head Office. Internal audit department reports directly to ED/DMD / Audit Committee of the Board and plays a significant role in evaluating the effectiveness of the SIDBI’s internal control systems. The basic objective of audit is to identify weak areas of operations, catalyze timely corrective steps and improve upon the systems and procedures. Various kinds of Audits being carried out in SIDBI are (a) Management Audit: which covers areas of human resources, business development and analysis of portfolio from a larger perspective, and (b) Operational Audit: which is an independent, objective, systematic and continuous evaluation of internal controls in the form of various policies, procedures, systems and activities with a view to provide an assurance to operating managers, senior management, and Audit Committee of Board that internal controls are commensurate with identified business risks and the organization's control environment. The other types of audits include Credit Audit by credit and legal officers and Concurrent audit. The internal audit department will also audit the project and its reports would be available to the Bank, on request. Staffing BEE

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Currently, there are four staff in the accounts department. The department is headed by F & A officer and supported by an accountant and two consultants. For purposes of this project, a FM specialist shall be assigned /appointed. At the entity level, BEE has received a sanction for two additional finance staff at Accounts Officer and Accountant levels. SIDBI The existing project management depertment has adequate financial management staff. For purposes of the current project, an additional FM consultant will be hired by SIDBI for the period of the grant. XI. Disbursement Arrangements Disbursements would be made by IBRD on the basis of quarterly IUFRs25, which would forecast the expenditures for two quarters and report the actual for past quarter and cumulative till date. Supporting documentation of actual project expenditure including bills/invoices, acknowledgement/proof of payment, completion reports, certificates and other documentation will be retained by the entities and made available to the Bank during project supervision missions. These documents will be subject to internal as well as annual project audit. Since, the expenditure under the grant shall be in INR, it is proposed that the designated accounts to be opened at BEE and SIDBI are denominated in INR. Any interest26 earned by SIDBI using the spare funds available in the designated account shall be used for the purposes of this project.. In addition to the IUFR based disbursement, direct payment method is also available under the project which may be used with prior approval of Bank. BEE A designated account (denominated in INR) will be established in Reserve Bank of India (RBI) by Government of India to receive the Bank funds which will be operated by the CAAA, DEA Ministry of Finance. In addition, BEE intends to open separate bank account for the receipts and expenditure for the project. SIDBI SIDBI shall also open a designated account for the purposes of the project. Disbursement categories Category Schedule - BEE Category No.

Category Description Amount in US$

1 Training and Services 2,146,978 2 Incremental Operating Cost 103,022

25 The suggested formats have been provided. 26 In case a separate fixed/term deposit account is opened, it will require similar clearances and follow same guidelines as required for designated account.

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Total 2,250,000

Definition of Incremental Operating Cost includes compensation for consultants hired by BEE, operational travel of BEE staff and consultants, Communication expenses, workshop/seminar and vehicle hire for purposes of the project. Category Schedule - SIDBI Category No.

Category Description Amount in US$

1 Training and Services 8,130,328 2 Performance Linked Grant (*) / Sub-Grants for Sub-

Projects 500,000

3 Incremental Operating Cost 419,672 Total 9,050,000

(*) – Disbursement condition will be set up for this category as detailed in Operational Manual. Definition of Incremental Operating Cost includes compensation, operational travel and capacity building of incremental staff and consultants. Further, it will also include office rent and furnishings, utilities, office supplies, communication expenses, and audit costs for the purposes of this project. XII. Retroactive Financing: BEE For payments made prior to the date of Grant Agreement, except that withdrawals up to an aggregate amount not to exceed $180,000 equivalent may be made for payments made prior to this date but on or after February 19, 2010, for Eligible Expenditures under Categories (1) and (2). SIDBI For payments made prior to the date of Grant Agreement, except that withdrawals up to an aggregate amount not to exceed $10,000 equivalent may be made for payments made prior to this date but on or after February 19, 2010., for Eligible Expenditures under Categories (1), (2) and (3); and XIII. Web disclosure BEE and SIDBI are already hosting their annual entity audit reports on their respective website. The IUFRs and the Project Financial Statements for the project will also be avilable on their website. XIII. Adequacy of FM arrangements

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Based on the arrangements descibed above and the following action plan, the overall financial management arrangements for the above project are considered adequate. Action Plan

Action Timeframe

BEE:

Prepare and Implement internal audit strengthening Plan SIDBI:

No further action required

By June ’10

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Annex 8: Procurement Arrangements

India: Financing Energy Efficiency at MSMEs Project I. General The Project envisages mostly the procurement of consultancy services though some small value non-consultancy services may also be procured, if required, during the implementation of the project. Some small value goods will be procured by beneficiaries of performance linked grants. All the contracts issued under the project will follow the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 as updated in October 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 as updated in October 2006 and the provisions stipulated in the Financing Agreement (FA). No procurement of Goods or Works is envisaged by SIDBI or BEE. II. Implementing Agencies handling procurement All the procurement under the project will be handled by SIDBI and BEE. The details of items to be procured by these two agencies are indicated in Appendix 1 to this Annexure. III. Assessment of the Procurement Capacity of the Implementing Agencies SIDBI Established in April 2,1990, SIDBI is the principal development financial institution for promotion, financing and development of Industries in the small scale sector and Co-ordinating the functions of other institutions engaged in similar activities. SIDBI is already involed in execution of Bank funded SME financing and SME additional financing projects. A Project Management Department (PMD) exists within SIDBI, at New Delhi, which will implement the current project. This PMD contains a procurement staff, though additional capacity building/ training may be needed for procurement of consultancy services. SIDBI has adequate delegation of power and all the procurement related decisions will be taken by PMD. SIDBI also has an existing procurement manual, which documents detailed procedure to be used for its corporate procurement. Internal Audit in SIDBI is an independent appraisal function established within the organization to examine and evaluate the performance and function of Zonal/ Regional / Branch Offices as also various Departments at Head Office. Internal audit department reports directly to ED/DMD / Audit Committee of the Board and plays a significant role in evaluating the effectiveness of the SIDBI’s internal control systems. The basic objective of audit is to identify weak areas of operations, catalyze timely corrective steps and improve upon the systems and procedures. The internal audit department will also audit the project and its reports would be available to the Bank, on request. BEE BEE is a Statutory body set up by Government of India on 1st March 2002 under the

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provisions of the Energy Conservation Act, 2001. The mission of the Bureau of Energy Efficiency is to assist in developing policies and strategies with a thrust on self-regulation and market principles, within the overall framework of the Energy Conservation Act, 2001 with the primary objective of reducing energy intensity of the Indian economy. BEE Though it has never handled Bank-financed procurement and, BEE has experience in working with external donors such as UNDP, GTZ, USAID, ADEME-France and GAP-Japan. BEE will set up a new PMU for this project. BEE will be required to recruit a procurement consultant before project effectiveness. As per EC Act of 2001, general superintendence, direction and management of the affairs of BEE vest in Governing Council (appointed by central government; maximum 26 members). In addition to the heads of various government organizations, the council includes representatives of CII, equipment and appliances manufacturers, architects and consumers. A sub-committee called Executive Committee, comprising members from the Governing Council manages responsibilities as delegated by the Governing Council. The internal control at BEE includes Delegation of Powers document which is currently pending for approval at MoP. The segregation of duties for the procurement and approval of payments will be documented in the operation manual. Internal audit at BEE is carried out by a chartered accountant (CA) firm. BEE has adequate delegation of power and all the procurement related decisions will be taken by BEE itself Broader procurement related policies The Constitution of India (Seventh Schedule) lists specific subjects in which the Union Government or the State Government alone can make laws and concurrent subjects in which both the Union and State governments can make laws. Procurement falls in the concurrent list. Procurement by centre and the State Governments (except for Tamil Nadu and Karnataka, who have passed their own procurement legislations) is regulated mainly by the General Financial Rules (GFR), 2005; State Finance Rules, Indian Contract Act 1872 as amended to date and the Sales of Goods Act. Other policy interventions such as Central Vigilance Commission and the Right to Information Act also potentially impact government procurement systems. Country Procurement Assessment A Country Procurement Assessment Report (CPAR) was prepared in 2001, which provides an understanding/overview of GoI’s National Procurement System. The existing basic framework of public procurement rules and procedures in India requires open tenders to all qualified firms without discrimination, use of non-discriminatory tender documents, public bid opening, and selection of the most advantageous contractor/supplier. However, CPAR revealed significant weaknesses and lack of compliance with the basic framework of rules and procedures. These included the absence of: a dedicated policy making department, a legal framework, credible complaint/ challenge/ grievance procedures, and the standard bidding documents. The assessments also highlighted cases of preferential treatment in procurement, delays in tender processing and award decisions, use of two envelope system and incidents of inappropriate negotiations. Subsequent to CPAR, the GOI modified its General Financial

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Rules (GFR) in 2005, which addressed many of the problems noted in CPAR. IV. Major Risks related to procurement and Mitigation Plan The following table lists major procurement related risks and the mitigation plan. The risk ratings have been decided based on both the probability of occurrence of various risk factors as well as their likely impact. Based on this and other risk factors, the overall residual procurement risk rating for the project is proposed as “Moderate”.

Table 8.1: Procurement Risk and Mitigation Plan

Risk Factor Initial Risk Mitigation Measure Completion Date Residual RiskInefficiencies and delays in procurement process

Substantial • Use of trained procurement staff• Adequate delegation for

procurement related decision making

• Use of standard RFP documents• Use of e-communication for

communication with the Bank • Monitoring through

procurement plan • Advance contracting for the

critical assignments • Use of Operation Manual to

guide the procurement staff

Continuous Moderate

Inadequate competition resulting in possibility of collusion and poor quality of consultancy services

Moderate • Disclosure of Procurement plan and procurement related information/documents on website

• Providing adequate time to consultants for preparation of proposals

• Appropriate handling of complaints

Continuous Low

Overall Risk Substantial Moderate

V. Agreed Procurement Arrangements Procurement Plan For each major contract to be financed by Bank, the applicable procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame as agreed between the Borrower and the Bank project team will be indicated in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. It will also be available in the Project’s database and in the Bank’s external website. BEE and SIDBI have prepared the procurement schedules for consultancies to be taken up during the first 18 months of the project, which are attached at Appendix 1. This will also be published on BEE/SIDBI website.

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Advance Contracting BEE and SIDBI have initiated the procurement process for several consulting contracts. Bank financing for the advance contracting would be available only if the Bank decides to finance the project, agreed procurement procedures are used, and the procurement falls under eligible expenditure, as agreed to in the project documents. Retroactive financing provisions have been made under the Project. Procurement Methods Table 8.2 given below gives highlight of the various procurement procedures to be used for the project. These along with agreed thresholds would be reproduced in the procurement plan. The thresholds indicated in the following table is for the current implementing agencies and in case another implementing agency is used in the future, the thresholds may be revised for such agencies.

Table 8.2: Procurement Methods to be used for the Project

Category Method of Procurement Threshold (US$ Equivalent)

Goods Commercial Practices (only to be used by the beneficiaries of performance linked grants)

Up to US$ 20,000 (which is upper ceiling for grant amount)

Non-consultancy Services

NCB >50,000

Shopping Up to 50,000

DC As per para 3.6 of Guidelines

Consultants’ Services

CQS/LCS Up to 100,000

SSS Up to 50,000

Individuals Up to 50,000 (as per para 5.2 to 5.4 of Guidelines)

QCBS

(i) International shortlist

(ii) Shortlist may comprise national consultants only

QCBS (or QBS/FBS if agreed with Bank) for all other cases

>500,000

Up to 500,000

Bank’s Standard RFP will be used for all procurement under the project except for consultancy services below US$200,000 in value for which simplified RFP as agreed between the Borrower and the Bank will be used. National Competitive Bidding (NCB), if required, will be conducted in accordance with paragraph 3.3 and 3.4 of the Guidelines and the following provisions: - Only the model bidding documents for NCB agreed with the GOI Task Force (and as

amended for time to time), shall be used for bidding;

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- Invitations to bid shall be advertised in at least one widely circulated national daily newspaper, at least 30 days prior to the deadline for the submission of bids;

- No special preference will be accorded to any bidder either for price or for other terms and conditions when competing with foreign bidders, state-owned enterprises, small-scale enterprises or enterprises from any given State;

- Except with the prior concurrence of the Bank, there shall be no negotiation of price with the bidders, even with the lowest evaluated bidder;

- Extension of bid validity shall not be allowed without the prior concurrence of the Bank (i) for the first request for extension if it is longer than four weeks; and (ii) for all subsequent requests for extension irrespective of the period (such concurrence will be considered by Bank only in cases of Force Majeure and circumstances beyond the control of the Purchaser/Employer);

- Re-bidding shall not be carried out without the prior concurrence of the Bank. The system of rejecting bids outside a pre-determined margin or "bracket" of prices shall not be used in the project;

- Rate contracts entered into by Directorate General of Supplies and Disposals will not be acceptable as a substitute for NCB procedures. Such contracts will be acceptable however for any procurement under the Shopping procedures;

- Two or three envelope system will not be used. - Any discount received from the bidders after bid submission deadline will not be

considered either during the bid evaluation or the contract award - Bids received from foreign bidders will not be rejected BEE and SIDBI both will prepare separate Operation Manuals, which will also have a section on procurement. In case of any inconsistency between the Operation Manual and the Bank Guidelines, the latter will prevail. Commercial Practices to be used by beneficiaries of performance linked grants will be described in SIDBI’s Operation Manual. Procurement MIS A manual system of collecting contract data would be put in place. The format and frequency for collecting the contract data would be agreed with the Bank based on the post review plans. IUFRs will also capture the details of the contracts where expenditure has been incurred. Procurement Staff SIDBI will maintain a procurement staff/consultant throughout the duration of the project. In case of BEE, as most of the procurement will be completed in first two years, the procurement consultant will be maintained for this duration. These consultants will also be required to be deputed to appropriate training program. Till these consultants are appointed, existing staff (DFID procurement consultant in SIDBI and KM Coordinator in BEE) will handle the procurement.

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Disclosure A General Procurement Notice (GPN) will be published in UNDB and dgMarket on or before February 28, 2010. The advertisement for calling of Letters of Expression of Interest (EOI) for short listing of consultants for services costing more than $200,000 equivalent will be published in UNDB and dgMarket. Apart from this the Bank’s disclosure requirement as listed in Appendix 2, will be applicable for the project. BEE and SIDBI will also disclose contract opportunities, bid documents and contract award information on their website (these agencies are already disclosing procurement related information/ documents on their websites). Complaint Handling Mechanism On receipt of complaints from consultants/potential service providers, immediate action will be initiated to redress grievances. All complaints will be dealt with at levels higher than that of the level at which the procurement process was undertaken. If the compliant is received prior to award of the contract, the compliant shall be taken into account while considering the award of the contract. If, after contract award, a protest or complaint is received from bidders, it would be examined and if necessary, the contract award will be reconsidered. Sanction/Debarment/Blacklisting In case of noticing any corrupt or fraudulent practice during the procurement process, BEE or SIDBI will take action against the involved parties as per their respective administrative procedure. In addition, the Bank could also initiate appropriate action including sanction/debarment of involved parties as per the Procurement/Consultant Guidelines. Misprocurement The goods or services that have not been procured in accordance with agreed procurement procedure, as the case may be, shall be treated as misprocurement. The Bank will cancel that portion of the Grant allocated to the items that have been misprocured. Procurement Supervision The frequency of supervision missions will be as per the existing guidelines and the Designated Procurement Specialist (DPS) will be part of the implementation supervision missions. It is estimated that the contracts worth approximately US$ 8.00 Million will be subject to prior review by the Bank while the remaining (with cumulative value of US$ 2.9 Million including 0.50 Million allocated for performance linked grants) will be post

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reviewed. The prior review and post review arrangements are described in the following paragraphs. Prior Review

Thresholds for prior review by the Bank are:

Services: All contracts more than US$ 0.3 million equivalent (other than consultancy) Consultancy Services: > US$100,000 equivalent for firms; and > US$30,000 equivalent for individuals

First 3 contracts to be issued by both BEE and SIDBI will be subject to prior review by the Bank irrespective of the value. In addition, all consultancy contracts to be issued on single-source basis exceeding US$ 30,000 in value to consultancy firms shall be subject to prior review. In case of prior review contracts to individuals, the qualifications, experience, terms of reference and terms of employment shall be subject to prior review. These thresholds are based on the assessed risk rating of the current implementing agencies, which is considered to be “Moderate”. In case, other procurement agencies/implementing agencies also handle the procurement in future, the prior review thresholds shall be adjusted based on the risk ratings assessed for such agencies. The prior review thresholds shall also be indicated in the procurement plan. Post Award Review by the Bank

All contracts below the prior review threshold procured will be subject to periodic post review (in accordance with Paragraph 5 of Appendix 1 to the Bank’s Procurement Guidelines) on a sample basis. These reviews are meant to ensure that the agreed procurement procedures are being followed. The percentage of the contracts to be reviewed shall be based on the risk rating (10% based on the current “Moderate” risk rating of the project but may change in future if risk rating is revised) and the sample shall be representative viz. various procurement methods and sizes of the contracts shall be proportionally included in the sample to the extent possible. The sample size may be increased or decreased based on the findings of the post reviews. The ex-post review by the Bank will be conducted either by Bank staff or by consultant hired by the Bank. BEE and SIDBI will implement a document management and record-keeping system to ensure that the data and documentation pertaining to all the contracts are kept systematically by the implementing agencies and are provided to Bank in a timely manner. For procurement of small value goods under the performance linked grants, the oversight arrangements will include the third party verification audit by a consultant to be hired by SIDBI, who will also check the compliance to agreed procurement arrangements

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Table 8.1 Procurement Plans for first 18 months

India: Financing Energy Efficiency at MSMEs Project Implementing Agency: BEE

PROCUREMENT PLAN FOR CONSULTANCY SERVICES Package No.

Description Method of Selection

Estimated Cost (INR Million)

TOR, EOI notice drafted

Publication of EOI notice in UNDB and Newspapers

No Objection of Bank for Shortlist and RFP document

Issue RFP to short listed consultants

Receipt of proposals and opening technical proposals

Evaluation of technical proposals and submission of report to the Bank

Bank's No Objection to technical evaluation report

Opening of financial proposals and financial evaluation

Bank's no objection to contract award recommendations

Contract Signed

Contract Completed

CS-1 Knowledge Management Coordinator

individual 11.92 Selection Completed

01.12.09 30.12.2014

CS-2 Energy & Environment Specialist (SMEs)

Individual 8.65 14.01.10 N.A 23.01.10 N.A 15.02.10 28.02.10 N.A N.A 05.03.2010 15.03.2010 30.12.2014

CS-3 Energy & Environment Specialist(Building)

Individual 8.65 14.01.10 N.A 23.01.10 N.A 15.02.10 28.02.10 N.A N.A 05.03.2010 15.03.2010 30.12.2014

CS-4 Procurement Specialist (2 Years period)

Individual 2.088 14.01.10 N.A 23.01.10 N.A 15.02.10 28.02.10 N.A N.A 05.03.2010 15.03.2010 31.01.2012

CS-5 Finance Management specialist

Individual 2.246 14.01.10 N.A 23.01.10 N.A 15.02.10 28.02.10 N.A N.A 05.03.2010 15.03.2010 30.12.2014

CS-6 Manager-Media/Awareness

Individual 2.118 14.01.10 N.A 23.01.10 N.A 15.02.10 28.02.10 N.A N.A 05.03.2010 15.03.2010 30.12.2014

CS-7 Agency for Marketing & General Outreach on EE Schemes(Awareness program)

QCBS 17.5 20.01.10 30.01.10 20.02.10 25.02.10 25.03.10 15.04.10 20.04.10 25.03.10 10.04.10 15.04.10 30.09.2014

CS-8 Agency for Activities pertaining to Media(hot-line, web-based information, etc)

QCBS 17.5 20.01.10 30.01.10 20.02.10 25.02.10 25.03.10 15.04.10 20.04.10 25.03.10 10.04.10 15.04.10 30.09.2014

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Package No.

Description Method of Selection

Estimated Cost (INR Million)

TOR, EOI notice drafted

Publication of EOI notice in UNDB and Newspapers

No Objection of Bank for Shortlist and RFP document

Issue RFP to short listed consultants

Receipt of proposals and opening technical proposals

Evaluation of technical proposals and submission of report to the Bank

Bank's No Objection to technical evaluation report

Opening of financial proposals and financial evaluation

Bank's no objection to contract award recommendations

Contract Signed

Contract Completed

CS-9A Agency for conducting energy auditors training program (Indian)

SSS 7.5 15.01.10 N.A. 25.01.10 05.02.10 15.03.10 25.03.10 N.A. N.A. 14.04.10 20.04.10 30.12.2014

CS-9B Agency for conducting energy auditors training program (International)

QCBS 10.00 20.01.10 30.01.10 20.02.10 25.02.10 25.03.10 15.04.10 20.04.10 25.03.10 10.04.10 15.04.10 30.09.2014

CS-10 Agency for Project Evaluation(Mid Term)

QCBS /CQS

0.5 25.12.12 05.01.12 N.A 15.01.12 25.02.12 05.03.12 15.03.12 25.03.12 05.04.12 15.04.12 15.08.2012

CS-11 Agency for Project Evaluation(Final)

QCBS /CQS

0.5 10.09.14 20.09.14 N.A 01.10.14 10.11.14 20.11.14 01.12.14 10.12.14 20.12.14 30.12.14 30.04.2015

TOTAL (INR) 89.172

TOTAL (US$ M) 1.90

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India: Financing Energy Efficiency at MSMEs Project Implementing Agency: SIDBI

PROCUREMENT PLAN FOR CONSULTANCY SERVICES

Package No.

Description Method of Selection

Estimated Cost (US$)

TOR, EOI notice drafted

Publication of EOI notice in UNDB and Newspapers

No Objection of Bank for Shortlist and RFP document

Issue RFP to short listed consultants

Receipt of proposals and opening technical proposals

Evaluation of technical proposals and submission of report to the Bank

Bank's No Objection to technical evaluation report

Opening of financial proposals and financial evaluation

Bank's no objection to contract award recommendations

Contract Signed

Contract Completed

CS-1 IA 1 – Capacity Building SSS 47,500 15.03.10 N.A. N.A. 15.04.10 15.05.10 25.05.10 N.A N.A N.A. 01.07.10 30.11.14 CS-2 IA 2 – Capacity Building SSS 47,500 15.03.10 N.A. N.A. 15.04.10 15.05.10 25.05.10 N.A N.A N.A. 01.07.10 30.11.14 CS-3 IA 3 – Capacity Building SSS 47,500 15.03.10 N.A. N.A. 15.04.10 15.05.10 25.05.10 N.A N.A N.A. 01.07.10 30.11.14 CS-4 IA 4 – Capacity Building SSS 47,500 15.03.10 N.A. N.A. 15.04.10 15.05.10 25.05.10 N.A N.A N.A. 01.07.10 30.11.14 CS-5 IA 5 – Capacity Building SSS 47,500 15.03.10 N.A. N.A. 15.04.10 15.05.10 25.05.10 N.A N.A N.A. 01.07.10 30.11.14 CS-6 Monitoring and

Verification of 25 BEE clusters (capacity building and workshops)

SSS 350,000 15.03.10 N.A. N.A. 15.04.10 15.05.10 25.05.10 N.A N.A N.A. 01.07.10 30.11.14

CS-7 Capacity Building of 5 clusters on E&S issues

QCBS 112,500 10.03.10 20.03.10 10.04.10 15.04.10 15.05.10 25.05.10 30.05.10 05.06.10 20.06.10 01.07.10 30.11.14

CS-8 CGTMSE scheme awareness

QCBS/SSS

100,000 15.04.10 N.A. 20.04.10 05.05.10 15.06.10 25.06.10 N.A N.A 04.07.10 20.07.10 30.11.14

CS-9 Consultancy to define activities that will improve uptake of Bank's schemes + development of new products - 3 Banks

QCBS 400,000 20.06.10 30.06.10 20.07.10 25.07.10 25.08.10 15.09.10 20.09.10 25.09.10 10.10.10 15.10.10 30.11.14

CS-10 Training in Indian Bank Training Institute + Case Study Preparation

QCBS 450,000 10.03.10 20.03.10 10.04.10 15.04.10 15.05.10 25.05.10 30.05.10 05.06.10 20.06.10 01.07.10 30.11.14

CS-11 Support for Green Rating QCBS 100,000 15.04.10 N.A. 20.04.10 05.05.10 15.06.10 25.06.10 N.A N.A 04.07.10 20.07.10 30.11.14

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Package No.

Description Method of Selection

Estimated Cost (US$)

TOR, EOI notice drafted

Publication of EOI notice in UNDB and Newspapers

No Objection of Bank for Shortlist and RFP document

Issue RFP to short listed consultants

Receipt of proposals and opening technical proposals

Evaluation of technical proposals and submission of report to the Bank

Bank's No Objection to technical evaluation report

Opening of financial proposals and financial evaluation

Bank's no objection to contract award recommendations

Contract Signed

Contract Completed

CS-12 Support to Regional EE Centre, Nagpur

SSS 100,000 15.04.10 N.A. 20.04.10 05.05.10 15.06.10 25.06.10 N.A N.A 04.07.10 20.07.10 30.11.14

CS-13 Agency for attracting vendors of EE equipment to participate/capacity building

QCBS 340,000 10.03.10 20.03.10 10.04.10 15.04.10 15.05.10 25.05.10 30.05.10 05.06.10 20.06.10 01.07.10 30.11.14

CS-14 Cluster Work – I (3 Clusters)

QCBS 3,225,000 10.03.10 20.03.10 10.04.10 15.04.10 15.05.10 25.05.10 30.05.10 05.06.10 20.06.10 01.07.10 30.11.14

CS-15 Cluster Work - II (2 Clusters)

QCBS 2,150,000 10.03.10 20.03.10 10.04.10 15.04.10 15.05.10 25.05.10 30.05.10 05.06.10 20.06.10 01.07.10 30.11.14

CS-16 Third party verification for performance linked grant

QCBS 5,85,000 20.04.10 30.10.10 30.11.10 05.12.10 05.01.11 25.01.11 30.01.11 05.02.11 20.02.11 25.02.11 30.11.14

CS-17 Senior Energy Efficiency Expert

Individual 128500 Existing expert under DFID’s MSMEFDP to be shared till October 2011, This expert will be absorbed under the Project in Nov 2011 and will continue till the end of the Project

Oct 2011 31.12.14

CS-18 Energy Efficiency Expert Individual 68,932 23.03.10 N.A 23.04.10 N.A 15.05.10 24.05.10 N.A N.A 01.06.2010 01.07.2010 31.12.14

CS-19 Procurement Expert Individual 54,087 Existing expert under DFID’s MSMEFDP to be shared till October 2011, This expert will be absorbed under the Project in Nov 2011 and will continue till June 2013

Oct 2011 30.06.2013

CS-20 Office Manager Individual 36,594 23.03.10 N.A 23.04.10 N.A 15.05.10 24.05.10 N.A N.A 01.06.2010 01.07.2010 31.12.14 CS-21 Office Support Individual 10,246 23.03.10 N.A 23.04.10 N.A 15.05.10 24.05.10 N.A N.A 01.06.2010 01.07.2010 31.12.14

TOTAL (US$ Million) 8.45

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Appendix 2 to Annex 8: Procurement disclosure Requirements as per Bank’s Guidelines 1. Contract Awards for NCB: Within two weeks of receiving the Bank’s No Objection to the recommendation of contract award, the Borrower shall publish on its website the results identifying the bid and lot numbers and the following information: (a) name of each bidder who submitted a bid; (b) bid prices as read out at bid opening; (c) name and evaluated prices of each bid that was evaluated; (d) name of bidders whose bids were rejected and the reasons for their rejection; and (e) name of the winning bidder, and the price it offered, as well as the duration and summary scope of the contract awarded. In the publication of Contract Award referred above, the Borrower shall specify that any bidder who wishes to ascertain the grounds on which its bid was not selected, should request an explanation from the Borrower. The Borrower shall promptly provide an explanation of why such bid was not selected, either in writing and / or in a debriefing meeting, at the option of the Borrower. The requesting bidder shall bear all the costs of attending such a debriefing. If after publication of the results of evaluation, the Borrower receives protest or complaints from bidders, a copy of the complaint and a copy of the Borrower's response shall be sent to the Bank for information. If as result of analysis of a protest the borrower changes its contract award recommendation, the reasons for such decision and a revised evaluation report shall be submitted to the Bank for no objection. The Borrower shall provide a republication of the contract award. 2. Contract Awards for Direct Contracting: After the contract signature, the Borrower shall publish in UNDB on-line, in dgMarket and on its website the: (a) name of the contractor (b) price (c) duration, and (d) summary scope of the contract. This publication may be done quarterly and in the format of a summarized table covering the previous period. 4. Contract Awards for Consultancies: After the award of contract, the borrower shall publish in UNDB on-line, in dgMarket and on its website the following information: (a) the names of all consultants who submitted proposals; (b) the technical points assigned to each consultant; (c) the evaluated prices of each consultant; (d) the final point ranking of the consultants; (e) the name of the winning consultant and the price, duration, and summary scope of the contract.

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The same information shall be sent to all consultants who have submitted proposals. 5. Contract Awards for Selection Based on the Consultants’ Qualifications (CQS) and Single Source Selection (SSS): The Borrower shall publish in UNDB on-line, in dgMarket and on its website the (a) name of the consultant to which the contract was awarded, (b) the price (c) duration, and (d) scope of the contract.

This publication may be done quarterly and in the format of a summarized table covering the previous period.

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Annex 9: Economic/Financial and Incremental Cost Analysis

India: Financing Energy Efficiency at MSMEs Project This Annex presents the financial and incremental cost analysis of the project. It should be read together with the market assessment Annex, which forms the basis for analysis presented in this chapter. A. Financial Analysis Based on analysis carried out during the market assessment (see Annex 11), the implementation of grant-funded pilot studies in four clusters (Kolhapur, Pune, Faridabad and Ankaleshwar) and on the results of investments previously financed by IREDA and other financial institutions as reported in World bank supervision reports and the Three Country EE project reports, EE investments in SMEs routinely achieve internal rates of return of 30% and above. Simple payback times range from 2 months for low-cost measures to 2 years for more capital-intensive interventions.27 This confirms that these projects are worthwhile to be carried out from the point of view of an individual enterprise. Table 11.2 in the market assessment Annex shows the results of the energy audits in cluster units of six industries with payback times ranging from 0 to 49 months. With financing from ASTAE, several demonstration studies were undertaken to test the approach of the project. Based upon energy assessments in five units each in the Kolhapur foundry cluster and the Pune forging cluster, and in the more detailed DPR data these pilot sutdies reconfirm the findings of the initial assessment of EE cost-effectiveness in cluster units. B. Incremental Cost Analysis Main barriers to implementation of EE investments by SMEs Indian SMEs lag behind larger industrial companies in productivity in general and in EE in particular. Recent attempts of several Indian banks to introduce financial products aimed at increased lending for SMEs’ EE projects have met with little success. The main barriers preventing an uptake of EE investments in energy-intensive SMEs include the following:

(a) A central barrier, which will be the primary target area of the proposed project, is the current gap in understanding between the energy auditors and EE

27 See, for example, the 50 case studies of actually implemented EE projects in Indian industries, assembled under the Three Country EE Project, http://www.3countryee.org/public/EECaseStudiesIndustriesIndia.pdf

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practitioners who prepare technical proposals for SME clients and the local banks who evaluate loan proposals, not technical studies. EE investments usually do not generate additional revenues, but rather contribute to bottom line earnings through a reduction in energy expenditures. This can make it difficult for banks to identify and capture cash flows from such projects or treat energy savings as assets of sufficient market value to justify a loan, despite the overall benefits which will accrue to the borrower if implemented. This often results in either rejection of EE loan applications or offering of unattractive financial terms due to high risk perceptions.

(b) As the EE components of SME loans are often small, they also carry higher transaction costs as a percentage of investment when compared to large loans, making them less attractive to the banks as a specific lending product. Appraisal processes need to be simplified, both on the creditworthiness and technical assessment side.

(c) There is also a lack of information among banking sector stakeholders on the potential market for lending and the portfolio benefits in terms of improving asset quality which can be achieved by increasing their own lending for EE to existing clients.

(d) Despite several pilot efforts by the GOI and donors, imperfect information about EE among SMEs still persists. Even though investment projects incorporating the adoption of efficient technologies would have high rates of return, SMEs are still worried about additional costs such as disruption of their production process, need for training of employees, and so on. Many of the previous GOI and donor programs were focused on outreach and preparation of energy audits, with limited translation of these initial audits into actual investments and replication by non-participants.

(e) SME units themselves remain generally unfamiliar with the performance of readily available efficient equipment in Indian conditions. This is partially due to a divided market where first-tier manufacturers and vendors of EE equipment focus on larger industrial companies and SMEs are mainly served by second tier suppliers.

(f) Lack of conducive policies for EE at the national level and inadequate information and awareness about EE, especially among state designated agencies, are causing the proliferation of unfocused initiatives and ineffective implementation of programs and projects, not just in the SME sector but more generally.

Baseline Scenario In the absence of the project, EE investments in SMEs would continue to be limited during the next five years. It is expected that in the absence of this project, some EE investments in the target clusters will be carried out as part of normal baseline capital stock replacement and modernization efforts by SMEs which shall be further increased due to ongoing TA and funding activities such as by JICA, UNDP and others. The JICA project will fund some limited TA, such as an initial awareness campaign and a web-

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hosted effort including a list of eligible EE equipment. This dedicated credit line does not have sectoral or geographical restrictions and will be disbursed nation-wide. The five World Bank clusters include mor than 3800 potentially participating units. It is calculated that 260 units would implement low-cost EE measures with an average size of US$ 30,000 under the baseline (ie no project) case. BEE’s directly implemented activities for improving EE in SMEs in 25 clusters has just started operations. It is assumed that 15% of the 4362 units surveyed in BEE’s 25 clusters would implement EE projects with an average size of US$ 30,000 (Rs 1.5 million) during the next five years under the base case scenario. Investments in the baseline case would tend towards the lower cost measures. This figure for base case investment was determined by WB consultants drawing upon their previous experience in BAU-planning of SMEs for EE, certain non-public documentation, and direct communications with energy auditors and banks active in the clusters. Total investments in the baseline case would thus total US$ 9 million in the five target clusters and US$ 22 million in the 25 BEE clusters, with approximate annual energy bill savings of US$ 27 million total. Assuming that the SME clusters use a mix of coal/lignite (50%), electricity (25%) and furnace oil (25%), and applying the relevant prices of energy inputs, savings figures, expressed in kWh and units of fossil fuel, can be derived and translated into carbon equivalent utilizing Indian grid emissions factors and IPCC default values as appropriate. Further assuming that the average economic lifetime of the investments would be 10 years, cumulative CO2 emission reductions of 2.4 million tons would be achieved in the baseline case for the 5 WB clusters and the 25 BEE clusters. This figure includes the results of the UNDP GEF Steel project, the JICA project, and the other related efforts in the target and BEE project clusters. GEF Project Alternative and Barrier Removal Activities The proposed project will remove the above barriers through targeted TA activities and specific investment support. The details are described in Table 9.1. Table 9.1: Barrier removal activities, effects and outcomes Barrier-removal activities Effects and outcomes Activities to Increase Awareness and Capacity (Component 1)

Addressing barriers (a-e)

1. Outreach effort to clusters, capacity building at industry associations, marketing and general outreach on EE schemes, media, dissemination of success stories

Addressing barrier (d), the activity will provide information about EE to SME units through their industry associations and enlist them in the project. This will result in a pipeline of EE investment projects at decision-ready enterprises. In addition, industry associations will be equipped to perform value-added services to their members in the future, enhancing the replicability of the project approach, both within the target clusters and to other similar clusters nation-wide. Addressing barriers (a-e), a more general outreach effort on EE schemes to various EE stakeholders, partially based on the dissemination of success stories, and more easily and comprehensively accessible information on EE will increase the probability of implementing EE investments.

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2. TA to energy auditors: training, BEE certification, enlistment

Addressing barrier (a), energy auditors will be enabled to provide high quality EE services to clients that also fulfill the need of financing institutions. It will also increase the trust of both SME clients and banks in auditors’ qualifications and contribute to improved uptake of EE investments.

3. Specialized support for bank’s EE schemes, capacity building on EE for banks and outreach on guarantee scheme

Adressing barriers (a-c), banks will receive support to better market their existing (and new) EE financing schemes to their SME clients and thus increase EE lending. Training of bank staff in local branches will enable banks to recognize the benefits of EE investments in improving asset quality, improve appraisal proceses, and increase engagement with their clients on financing of EE investments. Remaining lending risks could be partially addressed through increased the use of existing CGTSME guarantee schemes.

4. Support to SMEs in accessing finance

Addressing barrier (a), financial consultants/chartered accountants play a significant role in shaping SMEs’ investment proposals. Educating them in the financial benefits of EE investments and in the specific requirements of banks will improve the likelihood of SMEs successfully accessing financing for EE investments.

5. Vendor outreach, enlistment and support

Addressing barrier (e), vendors of EE equipment not previously active in the SME market will be encouraged to enter this market and provide improved EE technologies to clients in this sector

Activities to Increase Investment (Component 2)

Addressing barriers (a-e)

1. Soft cost investment provision

Addressing barriers (a, c and d), this component will aid in providing the information about EE investments to make banks comfortable with providing financing and SMEs to go forward with investment decisions. In addition to supporting energy audits at 1000-1500 SMEs and 500 DPRs, support for the specification and procurement of the necessary equipment and works will significantly increase the total investment amounts due to successful implementation of EE investments.

2. Demonstration of new technologies

Addressing barrier (e), the use of appropriate EE technologies by Indian SMEs will be encouraged by providing partial grant funding, where required, for a limited number of demonstration projects through a performance linked grant mechanism.

Knowledge Management (Component 3) Cross cutting analytic work, collation of best practices and successful case studies of relevance for India, information on international EE benchmarks by sector, EE technology databases, dissemination of relevant information on EE programs and projects, and policy development functions

Addressing barrier (f) A broad programmatic EE knowledge management effort will improve implementation of this project as well as BEEs entire EE program. It will provide key inputs to help better inform GOI EE policy making, reduce duplication and improve coordination of efforts. Information of the local state designated agencies of ongoing progress and best practices will lead to more effective implementation of GOI energy efficiency and conservation policies and programs at the local level.

GEF financing for project management is also proposed (Component 4). This will ensure efficient implementation of the proposed project and defray part of the costs of the administrative services for project management.

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Domestic Benefits, Global Environmental Benefits and Incremental Costs The World Bank/GEF project will provide TA and specific investment support to SMEs in five clusters and training, capacity building and marketing to SMEs in other clusters and their associations, banks, financial consultants/chartered accountants and others. This will increase investment in EE technologies and accordingly energy savings and CO2 emissions under the project scenario. It is expected that the penetration rate increases to 40% in the five clusters supported directly by the project, increasing the number of investing units to 500. Due to the direct support provided, SMEs are expected to invest in more comprehensive, higher cost EE measures with average investments of US$ 92,000, resulting in total EE investment in the five clusters of US$ 46 million. In addition, the 25 clusters supported by BEE receiving the benefits of GEF project-related capacity building will access increased investment of US$ 13 million, with an expected increase in penetration rates from 15 to 25% on average. When including both direct and indirect impacts of the project, the incremental EE investment of US$ 59 million catalyzed between 2010/11 and 2014/15 will reduce CO2 emissions by 4.8 million tons over the lifetime of investments. The increment attributable to the project is summarized in the final column of Table 9.2. Under the project case, the global environmental benefits consist of the avoided CO2 emissions attributable to the energy savings from EE investments induced by the project. Initial estimates from analytical work undertaken indicate that the project would incrementally displace over 4.8 million tons of CO2 emissions over the lifetimes of the EE investments implemented. With GEF costs of US$ 11.3 million, the cost effectiveness of GEF funds is expected to be US$2.37/ton of CO2 emission reduction when including the impacts of the project on the 25 BEE clusters, and $2.84 when only including the direct impacts in the five target clusters.

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Table 9.2 Incremental Cost Matrix Baseline (without

project) Alternative (with

project) Increment

Domestic Benefit

Some investments in energy efficiency by SMEs (US$ 31 million in 30 clusters), resulting in moderate total energy savings from smaller sized, shorter duration options.

Increased level of energy efficiency investments (US$ 46 million in target 5 clusters, $90 million in 30 total clusters) with annual energy bill savings of US$72 million

US$46 million of EE investments in target 5 clusters, US$59 million total

Global Environment Benefit

CO2 emissions reductions of 2.5 million tons over 10 years

Avoidance of 7.3 million tons of CO2 emission over 15 years

Reduction of 4.8 million tons of CO2 emissions

Costs (US$ million) (1) Capital costs of investments (2) Technical Assistance and Soft Cost Support

(1) US$ 31 million (2) US$ 0

(1) US$ 90 million (2) US$ 17.6128 mil Total: US$107.61mil Of which GEF: US$ 11.3 million

(1) US$ 59 million (2) US$ 17.61 million Total Increment: US$ 76.61 million

Cost to GEF US$ 11.3 mil

$2.84 GEF$/incremental ton avoided for 5 WB clusters only $2.37 GEF$/incremental ton avoided for direct and indirect impacts in 30 clusters

28 Refer Project Costs, Annex 5, including footnote No. 23

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Annex 10: Safeguard Policy Issues

India: Financing Energy Efficiency at MSMEs Project The project is classified as Environment Category B, according to the World Bank Environmental and Social Safeguard review procedures. The Project has triggered World Bank’s OP/BP 4.01 on Environmental Assessment (EA). No social safeguard policies have been triggered. Environment Applicable Regulations: The project will facilitate energy efficiency improvement through capacity building in SME clusters and provide grant support for preparing investment grade proposals for EE improvements. In addition to EE improvements, the proposed EE measures when implemented by the SMEs are expected to lead to environmental benefits. However, environmental concerns could possibly arise from the current environmental management practices and status of regulatory (non) compliances, if any, including potential environmental liability associated with water and air pollution; noise levels; and handling and disposal of solid and hazardous wastes. The relevant regulatory compliances include: Sl. No Requirements under Indian Environmental Legislations

Clearance from MoEF (EIA Notification - 2006) Consent for Establishment and Consent for Operation (EPA, 1986) Valid Air Consent (Air Act, 1981) Valid Water Consent (Water Act, 1974) Hazardous waste authorization (EPA, 1986) Payment of Water Cess (The Water Cess Act, 1977) Safety reports to concerned authorities (Manufacture, storage and import of

hazardous chemical rules, 1989) On-site emergency plan (Manufacture, storage and import of hazardous

chemical rules, 1989) Public liability Insurance (Public Liability Insurance Act) Submission of environmental statement (EPA,1986)

Environmental Compliance: Interventions to address potential environmental liablity issues in the project will be undertaken at project stage of initial assessment and during preparation of investment grade proposals. At the first level, the walkthrough audits will focus on the current environmental regulatory compliance by the candidate SME unit. This will form one of the essential criteria for selection of SMEs for conducting unit level EE audits, preparation of DPRs and investment proposals. At the second level, the EE audits will include: (a) review the level of regulatory compliance with reference to conditions of “Consent to Operate”; (b) identify environmental measures, including Environmental Health and Safety (EHS) aspects that are complimentary to EE improvements – essential measures could form part of EE improvement proposals; and

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(c) document environmental benefits of EE options with relevant quantified data wherever feasible. The above referred scope forms part of preliminary and detailed EE audits ToRs. This process will also be applied to the units that will receive performance linked grants or other financial benefits from the project Implementation: The proposed TA supports “soft costs” for preparation of investment grade proposals with the prior consent of the candidate SME units, such that the entrepreneurs would be in a position to comply with the loan processing requirements of different commercial banks and financial institutions. The financing choice of selecting EE options will rest with the SME units and as a result Bank has no implementation supervision responsibility or requirement as much of the investment will be financed from non-IBRD sources. However, as part of the proposed project component on capacity building, efforts will be made to sensitize the SMEs on energy and environment co-benefits of the project. Further, efforts will be made to sensitize banks/FIs to integrate environmental compliance as part of SME loan processing and appraisal. Such effort will draw from SIDBI’s loan appraisal mechanism of using Environmental and Social Risk Management Framework (ESMF) for Bank funded project “P102767 – SME Financing and Development – Additional Financing.” Capacity Building: The capacity building activities at national level and SME cluster level will be focused to build awareness on EE improvement benefits including improved environmental performance. The capacity building efforts would address three key stakeholders – (i) SME Industry units and associations; (ii) Banks and FIs; and (iii) Energy Auditors. The industry focus will be on importance of implementing EE improvement measures and co-benefits of minimizing environmental regulatory risks, and resource conservation which in turn would minimize pollution and improved community image. In case of banks and FIs, and energy auditors the capacity building emphasis will be on: (i) the need for conducting parallel environmental due diligence along with energy audits to assess the environmental compliance levels, and possible improvement of environmental performance; and (ii) risk mitigation benefits of integrating simple environmental due diligence mechanisms in to investment appraisal process Knowledge Management: Under the knowledge management component, amongst other efforts on EE aspects, the key knowledge management on safeguards would include: (i) document the specific environmental benefits such as resource conservation, improved regulatory compliance, pollution/emission reduction and thereby reduction in consent fees, etc. As far as possible, such efforts will be classified for specific SME sectors and clusters; (ii) prepare dissemination notes in the form of best practice dossiers on environmental benefits of EE; and (iii) possible policy interventions to improve energy and environmental aspects of SMEs. Institutional Capacity: The institutional capacity for safeguards management was assessed at two levels: (i) TA implementing agencies – BEE and SIDBI; and (ii) SMEs and their associations. As part of the project implementation, BEE and SIDBI will establish Project Management Units with necessary staff resources with domain expertise

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on energy and environment. In case of SIDBI, institutional mechanisms are well established under Bank financed SME Financing and Development Project. With regard to BEE, the safeguards inputs will be limited to capacity building activities. In case of SME associations and the SME units, the institutional capacity would be limited to regulatory compliance. The proposed capacity building and knowledge management component of the project will facilitate enhancing the implementation capacity. Social No specific, project-induced, social impacts have been identified with respect to involuntary resettlement (IR) and indigenous peoples (IPs). While the project components are unlikely to cause any adverse social impacts, there might be outstanding social issues arising from the current management practices and noncompliance with country legislation, specially applicable labor laws, among the participating SMEs. Hence, it would be important to ensure that the ‘participating’ SME units are reviewed for compliance with national labor/factory laws that are applicable to SMEs, as demonstrated by clearances granted under the Factories Act. This aspect will be covered as part of ToRs for selection of SMEs for conduct of EE walk through audits and subsequent detailed EE audits and preparation of DPRs. The Knowledge Management and Capacity Building activities will utilize SIDBI’s existing environment and social management framework to improve the awareness and performance of SMEs on operationally relevant social issues. The socially compliant status of the SMEs will be monitored through the DPRs and EE investment proposals prepared under the project, site visits and bank supervision missions which may also examine compliance with local labor laws including prevention of child and forced labor, payment of minimum wages, and other social security/welfare measures applicable to SMEs.

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Annex 11 : Market Assessment

India: Financing Energy Efficiency at MSMEs Project This project supports the financing of EE projects in the SME sector in India. It is directed towards five SME clusters where focused interventions will be carried out through technical assistance (capacity building, fund facilitation, and hand-holding support). It will also cover TA measures to enhance BEE’s SME program in 25 additional clusters and the SIDBI lines of credit for SME lending. SME energy consumption Analysis was undertaken to determine which industry sectors are most dependent on energy consumption for production, and thus would most benefit from implementation of EE investments. The following table lists 41 SSI dominated industrial sectors that have either a high share of energy costs in production costs or a high absolute energy consumption due to the large number of units in the sector. By improving their EE, SME competitiveness would be improved through cost reduction, while at the same time minimizing environmental degradation. Many previous studies and initiatives carried out in various SME clusters have concluded that cost-effective EE investments in Indian SME clusters could lead to very significant improvements in efficiency and consequent financial savings at the unit level. Market survey A total of forty-one energy intensive industry sub-sectors under the 4-digit NIC (National Informatics Centre) code were initially screened as part of a market survey conducted during the preparation of this project. More than 30,000 SSIs belong to these 41 subsectors. Totals for the sectors do not include medium and larger enterprises, for which data is not available in aggregate form, althogh these larger units would be covered in the full project. The annual production value reaches almost US$ 950 million and annual energy costs about US$ 35 million. This amounts to an average share of energy costs in production costs of 3.7%. Some of these sectors have a very high share of energy costs in total production costs (see highlights in Table 11.1), reaching more than 30% in one case.

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Table 11.1: Energy -intensive small-scale industries in India 4 digit NIC Code Name of industry sub-sector

Total no.

units

Total energy consumption

(000 Rs)

Total production

(000 Rs)

Share of energy

cost

2021 Artificially dehydrated fruits 55 2,618 49,820 5.25%

2023 Fruit juice concentrate 217 5,576 210,601 2.65%

2026 Canned fruit and vegetables 41 980 66,029 1.48%

2100 Hydrogenated oil 166 13,954 453,554 3.08%

2110 Other edible oils and fat 16,400 313,443 20,015,998 1.57%

2200 Industrial alcohol and blended spirit 39 7,950 289,318 2.75%

2311 Spinning and weaving of cotton textiles 641 26,250 1,552,097 1.69%

2320 Dyeing and bleaching of cotton textiles 64 12,366 192,982 6.41%

2420 Spinning/weaving/finishing of wool & silk 138 119 12,116 0.98%

2520 Dyeing/printing/bleaching of jute textiles 2 72 4,914 1.47%

2674 Artificial leather 2 159 3,324 4.78%

2749 Industrial goods 143 1,208 67,109 1.80%

2801 Pulp (machine made) 5 559 6,120 9.13%

2802 Paper (machine made) 283 9,132 214,059 4.27%

2903 Industrial leather 207 6,357 546,195 1.16%

2909 Other leathers 35 549 17,736 3.10%

3002 Tire and tube for cycles 54 13,208 294,400 4.49%

3101 Heavy inorganic chemical 940 138,768 3,659,312 3.79%

3106 Basic organic chemicals 133 14,358 438,791 3.27%

3141 Toilet Soap 111 1,853 197,335 0.94%

3169 Fiber glass material 76 1,061 61,490 1.73%

3181 Explosives 20 447 39,566 1.13%

3201 Fire bricks 122 27,953 123,681 22.60%

3204 Clay tiles 1015 149,739 718,980 20.83% 3220 Earthenware 306 3,379 64,385 5.25%

3231 Chinaware 550 83,069 260,858 31.84%

3232 Sanitary ware 111 16,253 81,553 19.93%

3233 Insulators 84 6,195 47,260 13.11%

3311 Castings and forged iron 5547 768,421 12,647,128 6.08%

3316 Tools 111 2,169 118,439 1.83%

3317 Misc. foundry and forged products 289 8,965 325,258 2.76%

3341 Brass articles 90 2,377 178,784 1.33%

3380 Metal scraps 356 71,093 2,308,250 3.08%

3391 Melting and refining of other metal 120 3,094 308,418 1.00%

3433 Locks 565 4,724 268,528 1.76%

3451 Cutlery 273 1,618 62,731 2.58%

3718 Parts and accessories of locomotives 92 1,688 99,213 1.70%

3728 Parts and accessories of wagons 276 8,630 342,246 2.52%

3746 Automobile parts 367 12,934 796,853 1.62%

3761 Bicycles and frames 82 847 70,973 1.19%

3762 Cycle rickshaws 92 115 27,964 0.41%

Total Rs 30220 1,744,250,000 47,244,368,000 3.69%

US$ 34,885,000 944,887,360

10 subsectors with more than 5% energy cost share in Rs 7,859 1,070,552,000 14,192,767,000 7.54%

In US$ 21,411,040 283,855,340

26.01% 61.38% 30.04% Source: Winrock 2007

These 41 sub-sectors were then screened to prioritize them for additional market assessment analysis. Screening criteria included energy intensity, absolute energy

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consumption, replication potential, energy saving and CO2 abatement potential, competitive threat, financial health of the sector, and availability of proven/commercial technologies. This resulted in the selection of 11 subsectors for further follow-up analysis: lime kilns, foundry, glass, pottery, paper, rolling, forging, edible oils, rice, brick, and brass. Figure 11.1 shows the locations of the geographic clusters within the 11 industries. It also lists the main organizations supporting various interventions in the clusters. Previous interventions consist mostly of support for technology upgradation and in a few instances also involve some financial institutions. Figure 11.1: Comprehensive map of energy-intensive clusters and respective interventions

Source: Winrock 2007 The following criteria were used to further narrow down the list to prioritize five sectors and within them particular clusters for further analysis on impacts of specific potential EE investments: Number of units in the cluster, existence of ongoing complimentary initiatives in the cluster, value of products manufactured, responsiveness of entrepreneurs, presence of a strong industry association. The resulting five regional and industry clusters ultimately selected are listed in the following table. In each cluster unit a detailed energy audit was carried out to identify low/medium-cost energy saving

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measures, as well as more capital-intensive energy-efficiency technologies (see Table 11.2). This study revealed that simple payback times for low/medium cost measures ranged from 2 to 46 months, those for higher-cost measures from 0 to 49 months. Table 11.2: Potential investments and average payback times (months) in certain clusters Cluster Low/medium cost EE measures Higher-cost EE measures Khurja pottery Well-designed combustion system (7)

Better insulation (14) Waste heat recovery (6)

Change from tunnel kiln to roller hearth kiln (24)

Ferozabad glass - Pot furnace

Waste heat recovery (2) Improved insulation (16) IRR for both measures: 56%

NA

Ferozabad glass - Tank furnace

Excess air regulation (5) Improved insulation (12) IRR for both measures: 78%

NA

Kolhapur foundry Better operational practices (NA) Waste heat recovery (5-12) Lighting energy controller (15-24) Power quality improvement (16-22)

Divided blast cupola furnace (5-12) Energy cost reduction through producer gas (7-12) Producer gas fired DG set (38-49)

Tirunelveli limekilns

Vertical shaft kiln (VSK) (15) Fuel change from charcoal to producer gas (20)

Pune / Raigarh paper

Pumps (6)and vacuum pumps (14) in kraft paper Pumps (5) and vacuum pumps (8) in writing/printing section Variable frequency drives on air compressors (12) Boiler and steam network: reduce excess air level (2), maximize condensate recovery (8), reduce steam losses due to leakages (5)

Substitute 30% bagasse for coal (0)

Pune Forging* Lighting energy controller (18-46) Power factor improvement (9-11)

Waste heat recovery (11-27) Fuel change to producer gas (7-21) Furnace oil fired DG set (20-50)

Source:Based on Winrock 2008 and ECPL 2009 for Pune Forging Cluster and Kolhapur foundry cluster Note: Pune Forging Cluster was not included as one of the five selected clusters for market analysis, but subsequently chosen as one of the two clusters where demonstrations of proposed project interventions were carried out, see below.

In Table 11.3, it was assumed for calculation purposes that every unit would carry out investments as described in Table 11.2. The following results could be expected: With investments totalling of US$ 36 million, fuel savings totaling US$ 770 million over the lifetime of the equipment could be generated. This would amount to annual CO2 emission reductions of 440,000 tons, totaling more than 5 million tons over the life time of the investments. With lower penetration rates, lower energy savings and GHG emission reductions would result.

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Table 11.3: Investment results depending on penetration rate Khurja

pottery (retrofit)

Khurja pottery (kiln change

Ferozabad glass (pot units)

Ferozabad glass (tank units)

Kolhapur foundry

Tirunelveli limekilns (V. shaft kiln)

Tirunelveli limekilns (VSK+ gasifier)

Pune/ Raigarh paper

Number of units

125 125 80 20 120 300 300 15

Investment (Rs mill)

75 375 124 8 240 300 600 57

Fuel savings (t/y)

3,507 5,969 10,480 1,692 26,280 36,000 54,000 13,040

Monetary savings life time (Rs mill)

1,112 187 76 12 600 36,000 351 112

GHG reduction (t CO2/y)

11,237 19,100 28,320 4,568 47,304 118,800 178,200 36,110

GHG life-time (t CO2)

113,672 286,500 199,200 18,420 709,560 1,782,000 1,782,000 361,100

total Total Total Number of units (with investments) 660 330 99 Penetration rate, % 100 50 15 Investment Rs US$

1,779,000,000 35,580,000

889,500,000 17,790,000

266,850,000 5,337,000

Fuel savings: tons/year 150,968 75,484 22,645 Monetary savings over life time Rs US$

38,450,200,000 769,004,000

19,225,100,000 384,502,000

5,767,530,000 115,350,600

GHG reduction tons/y 443,639 221,820 66,546 GHG reduction over life time 5,252,452 2,626,226 787,868

Source: Based on Winrock 2008

Two clusters, the Kolhapur foundry cluster and the Pune forging cluster, were selected in early 2009 for demonstrating the approach of the full GEF project and reconfirming unit level EE potential. This support included energy audits, DPR preparation, vendor identification and handholding to close financing. Five units in each cluster received potential assessment studies and two units in each cluster received detailed DPRs. Table 11.4 provides an overview of investments opportunities and estimated benefits of measures identified with payback times of less than two years as identified by the initial assessments. Exact savings and CO2 emission reductions will be confirmed based on measurements carried out during the commissioning stage of the pilots. These initial results clearly demonstrate the highly beneficial nature of EE investments for the host enterprises.

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Table 11.4: Opportunities for EE investments in SMEs in foundry and forging clusters unit Energy Bill (Rs/year) Investment (Rs)* Savings (Rs/year) Payback, months Kolhapur Foundry S.B. Reshellers

50,000,000 17,350,000 26,484,000 7.9

Melting Centre

11,320,000 10,150,000 10,530,000 11.6

Saroj 21,724,000 12,025,000 12,706,000 11.4 Shriram 31,300,000 26,410,000 35,637,000 8.9 Sound Casting

35,000,000 26,370,000 18,784,000 16.8

Pune Forging Trishul 4,500,000 1,465,000 848,000 20.7 Trinity 150,000,000 16,650,000 14,580,000 13.7 Poona 12,000,000 2,900,000 2,470,000 14.1 Mallikarjun 6,700,000 2,900,000 1,725,000 20.2 Laxmi Agni 40,000,000 5,500,000 4,978,000 13.3 Source:Based on ECPL 2009 Note: Only investments with simple payback times below 24 months are included.

De facto a much larger market could be tapped, as is evident from Table 11.1 of the 41 energy-intensive industries.

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Annex 12: Governance and Accountability Action Plan (GAAP)

India: Financing Energy Efficiency at MSMEs Project GAAP Objective and issues:

1) The objective of the GAAP is to identify the critical areas and measures to enhance the transparency, accountability and performance of the project, and thus achieving project results and higher development impacts. Broadly, the key governance and accountability issues in the project are two-fold:

i. Issues that arise from the innovative unit-focused nature of the project, and the

management of flow of funds and TA services for a large number of small SME units –which includes, on one hand, ability of units to implement EE programs and banks to finance same, and on the other hand, ability of the Project Management Unit (PMU) to provide adequate guidance, supervision and monitoring;

ii. Issues that arise from the institutional capacity of the implementing agencies to effectively manage and communicate with a number of external auditors and key stakeholders. The implementing agency responsible for cluster based activities will also be challenged to maintain a high standard for internal decision making framework, sound financial management and compliance with procurement requirements.

To address key governance risks at this stage, critical mitigation measures are: a) Joint implementation accountability of two government apex institutions/

agencies 1) Bureau of Energy Efficiency (BEE); and 2) Small Industries Development Bank of India (SIDBI). BEE is the apex central Government agency responsible for implementing energy efficiency related policies and programs and will have overall supervision responsibility for the project; SIDBI provides national level financing for SMEs and is currently implementing a WB led multi-agency project on financing and development of SMEs; and will have primary responsibility for implementation of the cluster-level activities This mechanism of Joint Implementation significantly reduces governance risks because of i) increased technical expertise and ii) high level of experience working with international agencies such as World Bank by SIDBI. Additional joint coordination issues are mitigated through execution of the MOU developed between the two agencies governing coordination for implementation of the Project;

b) Multi-stakeholder coordination mechanism established to provide single window communication to stakeholder program activity, and alignment of project at programmatic level with on-going Government of India and other development partner EE initiatives for the SME sector;

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2) These and other implementation issues are outlined in the table below: Table 12.1: Key issues identified

Project cycle Issues/ Risks Eligibility Criteria Weak oversight by implementing agencies (BEE/SIDBI) to ensure that selected SME units meet eligibility

requirements including minimum estimated investment size and subsequent energy savings; Biased selection of participating units by local Industry Association; Probability of FIs not to find DPRs submitted by SMEs bankable and/or not to buy-in into energy savings and

business case projected by DPRs. Procurement Delay in procurement of external energy auditors/consultant which would impact success of program;

Limited competition due to problems in TOR or the selection process. Project Execution and Contract Management

Delay in implementing SME EE programs; Lack of appropriate communication to public and communities on results; Weak Transparency and Performance indicators in place; Lack of capacity in SME unit to implement identified measures; Delays in hiring energy auditors; Inability of auditors to provide quality and independent opinion; PMU and referenced government agencies not committed to Right to information (RTI) legislation; Poor supervision of contracts by PMUs; Weak adherence by selected units to established corporate governance practices.

Financial Management System and Internal Controls

Inadequate FM arrangements such as (information and incomplete reports by implementing agencies); Compliance with MOU to ensure coordination between BEE and SIDBI on overall reporting for the project.

Monitoring and Evaluation Achievement of PDO adversely affected by poor M&E framework;

Achievement of PDO affected by inability to apply checks and balances and to implement mid-term corrections; Absence of mid-term review of M/E framework.

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Table 12.2: Governance Accountability Action Plan

Item Issues/Risk/

Rating Mitigating Actions Responsibility Timeline Early warning indicators

Weak eligibility / selection criteria for SMEs (Weak oversight by implementing agencies (BEE/SIDBI) to ensure that selected SME units meet eligibility requirements) (M) Biased selection of participating units by local Industry Association; (L)

Poor market assessment leading to inadequate identification of potentially viable ee projects; (L)

Weak selection processes in place that restricts eligible SME units to participate; (M)

Concerns of SMEs and/or other stakeholders not being responded adequately, biased influence over their participation being exercised by apex industry association; (L)

Lack of financial accountability leading to reduced ownership of project funds at the SME

Transparency and accountability in the selection process through strengthened capacity of PMU; clear eligibility criteria and clearance process for selection of beneficiaries;

Dissemination of information (Knowledge Management) on performance of early EE program winners to be used as a significant component of marketing strategy;

A grievance handling mechanism to be set and the results of which will be monitored during review missions;

Feedback mechanism set up for units to convey issues;

Capacity building of apex institutions including the PMU by availing and services of qualified and certified consultants to facilitate selection of viable

1) BEE will establish a Project Management Office (PMU) for supervision of the subcomponents which it is implementing, similarly, SIDBI, through its existing PMU, shall maintain responsibility for its subcomponents;

3) Close involvement of Industry Associations; Energy Auditors; and local FIs such as SIDBI (local

Y-1 onwards

Formal/informal feedback from IAs / SMEs / and/or from PMU(s);

Task team assessment and supervision missions;

Poor uptake of program and poor turnout at the periodic IA workshops;

Communication and consultation plan not put in place and/or utilized by key stakeholders.

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Item Issues/Risk/

Rating Mitigating Actions Responsibility Timeline Early warning indicators

level (L)

Weak pipeline of SMEs ready to undertake EE investments (M)

demonstration projects;

Multi-stakeholder consultation and communication plan to ensure consistency of message and smooth communication protocol between different stakeholders.

branch)

Poor understanding financial and economic gains resulting from simple EE investments

Better marketing through workshops;

Capacity building of PMUs;

TA and Knowledge management component;

Alignment with Government of India schemes for SMEs through BEE led consultation meetings;

Central one-window website

BEE/PMU;

SIDBI/PMU;

Slow uptake of TA for the initial 1000 units; feedback from IAs

Project execution and contract management

Weak Transparency and resulting Performance due to inadequately equipped staff to supervise and monitor implementation of projects; (M)

Agreement on Dedicated Project Management Units (PMUs) to be established with the implementing agencies;

Joint project implementation mechanism with Industry Associations / PMUs, Energy

BEE/SIDBI

IAs/

Y-1 onwards

Negative feedback about project management understanding; processes; reporting structure;

Delays in bid

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Item Issues/Risk/

Rating Mitigating Actions Responsibility Timeline Early warning indicators

Lack of sound management expertise in typically family-run SME operations; (L) Poor supervision of contracts and bid evaluation; (L)

Consultants; local FIs and local vendors included in participatory planning and decision making process;

A hands-on TA component involving five SME clusters has been initiated; which includes Institutional capacity building; and skill development of local vendors; SMEs and local FIs;

System for accurate record-keeping and management for all documents with data of EOI, and bids to be managed by PMUs;

Developing ownership of IAs and their member SME units.

evaluation;

Missing documentation; contract management records;

Lengthy time between bid opening and award;

Number of request for extensions of bid validity exceeds the acceptable standards

Submission of forged documents to qualify for bid contracts; high collateral limits; (M)

Warning in contract that any forgery is liable to prosecution; grievance mechanism; immediate follow-up etc.

IAs/PMU Y-1 Submission of information known to be incorrect based upon PMU knowledge of sector

Inadequate demand and lack of financing for EE projects due to; a) Technical assistance not targeted to transactions

Follow up on any indicators of fraud / malpractices;

Follow up deployment of central government schemes

SIDBI Y-1 Feedback from SMEs/IAs/local banks

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Item Issues/Risk/

Rating Mitigating Actions Responsibility Timeline Early warning indicators

and credit worthy SME units and ; b) potential misuse of relationship lending (M)

like CGTSME mechanism to overcome security issue for bank asset based lending for small projects.

Financial Management System and Internal controls

Inadequate FM arrangements and lack of internal controls (M);

Coordination between BEE and SIDBI on overall reporting for the project (S).

Training and capacity building of the PMU (s) to ensure adequate transparency; training and compliance with required FM procedures. BEE and SIDBI will assign required FM staff to their respective PMUs before project effectiveness;

Operations manual will be drafted that will lay down internal control and policies;

BEE and SIDBI should agree on the process and the people responsible to ensure better coordination between the two agencies.

BEE / SIDBI Y-1 Onwards – agreement during Appraisals/ negotiations

Potential complaints; need for arbitration;

Inadequate, incomplete and late financial reporting (including IUFRs);

Observations in internal and external Audit reports

Monitoring and evaluation

Achievement of PDO adversely affected by poor M&E systems in place; (L)

Knowledge component of the Project provides support for resources for PMU for M&E

WB and BEE Mid-term corrections

M&E feedback; Reporting formats not able to capture objective assessment;

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Item Issues/Risk/

Rating Mitigating Actions Responsibility Timeline Early warning indicators

Achievement of PDO affected by inability to apply checks and balances, and monitor whether the units actually implemented the EE measures; (M)

of the project.

Quarterly and annual verification reports to be maintained and updated by PMU and submitted to Bank capturing proper due diligence of expenditure of funds, results, achievements, and mid-course corrections. Strategic review and verification of monitoring and evaluation framework – include a relevant 3rd party oversight at mid-term review

Irregular reporting;

Clearly defined Results Agreement for monitoring key project development indicators

Defined mid-term reviews of M/E frameworks.

Achievement of PDO adversely affected by poor incentives to maintain installed/ recommended EE measures (L)

Regular reporting and quarterly feedback mechanism on a sustained basis

Large number of poor performance against the rated performance standards;

Overall risk. L

Note: H =High; M= Moderate, L= Low

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Annex 13 : GEF Comment Review

India: Financing Energy Efficiency at MSMEs Project

The following section reprints the comments presented as part of the October 2008 review of the PIF by the GEF scientific and technical advisor and the comments of the Government of Switzerland Review at the Council Work Program of GEF/C34. Responses to the issues raised are presented below. I Guidance from STAP STAP consents to the project “Financing Energy Efficiencies at SMEs” from India, which is a part of the Climate Change Strategic Programme to Industrial Energy. It is also a part of the Programmatic Framework project for Energy Efficiency in India. It is a well prepared project identifying the key barriers and incorporating the relevant Components and activities to overcome the barriers. STAP has the following suggestions for consideration in the development of the project brief: 1. Technological Intervention and innovation: The project aims to improve Energy Efficiency to reduce GHG emissions from SMEs utilising increasing commercial financing. It also attempts to bridge the gap between the energy auditors and bankers.

The project focuses on the central barrier of lack of synergy between these two agents. Part–II of the project states, the existence of the numerous barriers and market failures for widespread adoption. Thus it is desirable to consider the other potential barriers and device activities to overcome them.

The focus of the project seems to be on Energy Intensive SME sectors or clusters. In addition to this factor it may be desirable to consider the cost-effectiveness in terms of energy conservation achieved per $ of investment, barriers and benefits to the industries.

2. Baseline Scenario: It is desirable to consider the baseline projection of the spread of Energy Efficiency improvements in the SMEs, in the absence of the GEF project, since there are other efforts ongoing. 3. Control Groups: It may be desirable to have control groups of SMEs for monitoring impacts of the project activities on energy conservation and GHG emission reduction. 4. Risks: The proposal states that, the Energy Efficiency investments do not generate additional revenues (or significant savings), thus there is a risk of lack of demand for the proposed programme. The risk of incremental investment cost to increase the Energy Efficiency, in relation to the savings achieved needs to be considered.

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II Comments from Government of Switzerland Overall Commentaries The proposed project addresses a very important issue. The diagnosis is correct as it is true that small scales industries have not been so far in general successful in reducing on a large scale their specific energy consumption. Experience over the last 10 years in India in this sector shows that projects have been successful only in a few niches like foundries (energy efficient cupola now becoming exponentially reproduced), glass industries (bangle industry in Firozabad with over 60% of energy efficient furnaces equipped with heat recovery) and brick industries. The cluster approach has proven successful, even though the development across national industrial body like the IIF (Indian Institute for Foundrymen) may allow national level dissemination of energy efficient systems. Over the last 10 years, due to the globalization and the exposure of many of the SMEs sectors, one could see a shift from a very short-sighted reasoning in SMEs to a more professional approach toward modernisation and preparation for international competition. Environmental pressure has also played a major role. Therefore this project comes at the right time, when SMEs are ready for investments for the future. Questions, Concerns and Challenges for the further Project Preparation If one wants to attain significant energy savings in the SMEs, one has to go much beyond what regular energy auditors who do not consider the system as a whole usually perform, but the different components and their individual performances (e.g. boilers, pumps, blowers, etc.). The main challenges, as we understand them, are of different natures and are mentioned at different levels in the proposed project document. We stress here which are the main challenges beyond purely financial aspects: (1) For many SMEs still using centuries’ old technologies, and not large enough to adopt OECD countries’ technologies, there is usually no off-the-shelf solution. Identification and development of technology packages, which do not address the energy efficiency alone, must also integrate production quality. It is in nature more complex than usual to gain energy efficiency by simply substituting blower, pumps, etc … by more efficient equipment. The design of the system itself must be questioned, including the technology of the process. (2) Confidence in developed solutions SME: industrialists need to see the demonstration of the solutions that are proposed in similar units with numbers obtained in real operation. Here the main issue is to get early adopting industrialists ready and willing to share their experience with competitors. (3) Generally energy auditors do not have a sufficient grasp of the global issues in the sector. There is a need to train the auditors to be able to analyse and propose solutions which go beyond the simple change of blowers. (4) Supply chain for technology support, quality control and delivery: once a technology package has been developed and is well defined by tight specifications for a cluster of similar SMEs, the manufacturers must have assistance/support for quality control during fabrication and installation. The units must also get support while testing the new equipment. (5) Time scale: bankers are usually not used to realising and understanding the duration of the

105

development process (no off-the-shelf solution) and the need for a long maturation until actual projects can be replicated on a large scale in clusters. The proposed time scale may be too short for the cycle of such a project.

III Clarifications and Responses STAP Comments

1. A detailed discussion on the barriers and ways that they are addressed by this project is presented in Section 1A and Annex 9, with in depth analysis presented in Annex 9 table 9.1. Presentation on cost effectiveness and simple payback periods for EE investment is presented in Annex 9, Annex 11 and in the detailed calculations for Incremental Cost determination.

2. The baseline scenario is presented in Annex 9 and 11, and encompasses the related efforts that are underway in India, including the JICA line of credit with SIDBI.

3. While specific control groups of non-participating SMEs are not included in the monitoring plan, the increased penetration rates expected through project-specific interventions will be monitored. Analysis of the investment uptake in the 25 BEE clusters and comparison to the 5 clusters receiving direct support under this project shall also be undertaken.

4. Detailed discussions of project risks are presented in Section 3E. The key determinate of incremental investment to achieve additional savings is the underlying cost-effectiveness of this investment itself.

Government of Switzerland Comments

1. The need for customized solutions and responses to other barriers are presented in Section 1A and Annex 9.

2. The project includes support for demonstration as presented in Annex 4, Project Component 2.2, which will be a key factor in increasing SME unit acceptance of new technology or processes.

3. The project includes a capacity building program for energy auditors as detailed in Annex 4, Project Component 1.2.

4. The Project includes support for vendors and for the Regional Centre on Energy Efficiency, as detailed in Annex 4, Project Component 1.5.

5. The project is a culmination of numerous ongoing efforts with local bank participants, and initial mobilization efforts financed by grant resources are currently underway. A slower than expected pace of market uptake and financing is an acknowledged project risk which shall be mitigated through the design and possible modification of certain TA activities depending on local market conditions.

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Annex 14: Project Preparation and Supervision

India – SME Energy Efficiency Project Planned Actual PCN Review 08/05/08 09/04/08 Initial PID to PIC 09/22/08 10/01/08 Initial ISDS to PIC 09/22/08 10/03/08 Appraisal 01/06/10 16/01/10 Negotiations 02/10/10 Board/RVP approval 03/30/10 Planned date of effectiveness 05/30/10 Planned date of mid-term review 01/31/12 Planned closing date 12/31/14 Bank staff and consultants who worked on the project included: Name Title Unit Charles Cormier Country Sector Coorinator, TTL SASDI Jeremy Levin Senior Technical Specialist, TTL SASDI Addepalli Sita Ramakrishna Environment Specialist SASDI Ruma Tavorath Sr. Environmental Specialist SASDI Manoj Jain Sr. Financial Management Specialist SARFM Shanker Lal Sr. Procurement Specialist SARPS Anke Meyer Consultant ETWES Sunil Kulkarni Consultant SASDI Saurabh Yadav Consultant SASDE Sonalal Datta Consultant SASDI Chandra Govindarajalu Sr. Energy Specialist MNSSD Robert Taylor Lead Energy Specialist EASTE Richard Hosier Sr. Environment Specialist ENVGC Varun Singh Social Specialist SASDI Savinay Grover Financial Management Analyst SARFM Ramola Bhuyan Financial Management Analyst SARFM Genevieve Maria Dutta Program Assistant SASDO Priya Chopra Program Assistant SASDO Madhu Phillips Program Assistant SASDO

Bank funds expended to date on project preparation:29 1. Bank resources: US$ 306,653 2. Trust funds (057088): US$ 98,933 3. Total US$ 405,586 Estimated Approval and Supervision Costs:

29 Including multi-year cost of Developing GEF Programmatic Framework Document

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1. Remaining cost to approval: US$50 2. Estimated annual supervision cost US$100,000

Project Supervision Plan The following strategy will be applied during project supervision:

(i) Implementation: Staff/consultants with an experience with Bank project implementation will undertake regular supervision missions.

(ii) Governance and accountability risks: The Bank team will monitor risks as

identified in the GAAP (See Annex 16). During supervision the team will check progress against early warning indicators of the GAAP.

(iii) Financial management: FM arrangements will be supervised in the

following ways: a) Review of quarterly IUFRs within 45 days of the close of each quarter b) review of audited annual report and financial statements c) on-site supervision review of FM and disbursement arrangements to ensure compliance with FM requirements. (see Annex 7). The supervision will be undertaken by a Bank accredited FM Specialist, who will participate in supervision missions, review project documentation and identify FM issues and agree on follow up actions.

(iv) Procurement: In addition to prior review supervision to be carried out by the

Bank, there will be field visits to carry out post review of procurement actions twice a year. (See Annex 8) The supervision of procurement related issues will be carried out by a Procurement Accredited Staff, who will participate in supervision missions, review project documentation and identify Procurement issues and agree on follow up actions.

(v) A MTR workshop will be organized to take stock of the issues and restructure

the design of project components as required. Prior to launching the preparation of the ICR, field level surveys will be undertaken.

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Annex 15: Documents in the Project File

India: Financing Energy Efficiency at MSMEs Project Integrated Energy Policy Report of the Planning Commission, 2006 National Action Plan on Climate Change, Government of India, Prime Ministers Council on Climate Change, 2008 Database of Primary Clusters for Energy Efficiency Interventions in India, Winrock India, August 2007 Market Assessment for Energy Efficiency Interventions at SME Clusters In India, Winrock India, July 2008 World Bank Global Technical Assistance Project "Developing Financial Intermediation Mechanisms in China, India and Brazil" (the 3 Country EE Project), India Country Report, May 2006 Risk Analysis and Follow-up Definition of Possible India Guarantee Fund Requirements, Mechanisms, and Potential Key Features, SVK-CDM Technologies, 2006 GEF Programmatic Framework for Energy Efficiency in India, PIF, February 2008 PIF-GEF SME EE, November 2008 GEF Financing EE at SME Financial and Incremental Cost Analysis, World Bank, 2009 Energy Intensive Sectors of the Indian Economy: Options for Low-Carbon Development, 2009

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Annex 16: Country at a Glance

India: Financing Energy Efficiency at MSMEs Project

Lo wer-P OVER T Y and SOC IA L So uth middle-

India A sia inco me2007Population, mid-year (millions) 1,123.3 1,520 3,437GNI per capita (A tlas method, US$) 950 880 1,887GNI (Atlas method, US$ billions) 1,069.4 1,339 6,485

A verage annual gro wth, 2001-07

Population (%) 1.4 1.6 1.1Labor force (%) 1.8 2.1 1.5

M o st recent est imate ( latest year available, 2001-07)

Poverty (% of population below national poverty line) .. .. ..Urban population (% of to tal population) 29 29 42Life expectancy at birth (years) 64 64 69Infant mortality (per 1,000 live births) 57 62 41Child malnutrition (% of children under 5) 44 41 25Access to an improved water source (% of population) 89 87 88Literacy (% of population age 15+) 61 58 89Gross primary enro llment (% of school-age population) 112 108 111 M ale 114 111 112 Female 109 104 109

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1987 1997 2006 2007

GDP (US$ billions) 276.0 410.9 916.3 1,171.0

Gross capital formation/GDP 22.0 23.9 36.0 38.2Exports o f goods and services/GDP 5.7 10.8 22.1 21.3Gross domestic savings/GDP 20.6 22.6 33.0 35.1Gross national savings/GDP 20.9 24.7 35.3 37.2

Current account balance/GDP -1.9 -1.4 -1.1 -2.1Interest payments/GDP 0.7 1.1 0.7 ..Total debt/GDP 20.1 23.0 16.7 ..Total debt service/exports 29.7 21.6 7.5 ..Present value of debt/GDP .. .. 12.7 ..Present value of debt/exports .. .. 48.5 ..

1987-97 1997-07 2006 2007 2007-11(average annual growth)GDP 5.5 6.9 9.7 9.0 8.5GDP per capita 3.5 5.3 8.2 7.7 7.2Exports o f goods and services 11.5 15.4 18.9 7.5 13.8

ST R UC T UR E o f the EC ON OM Y

India

Lower-middle-income group

D evelo pment diamo nd*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enro llment

India

Lower-middle-income group

Eco no mic rat io s*

Trade

Indebtedness

Domesticsavings

Capital formation

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1987 1997 2006 2007(% of GDP)Agriculture 29.4 26.1 18.3 17.8Industry 26.3 26.8 29.3 29.4 M anufacturing 16.4 16.4 16.3 16.4Services 44.3 47.1 52.4 52.8

Household final consumption expenditure 67.1 66.0 56.7 54.8General gov't final consumption expenditure 12.3 11.4 10.3 10.1Imports o f goods and services 7.1 12.1 25.1 24.4

1987-97 1997-07 2006 2007(average annual growth)Agriculture 3.5 2.7 3.8 4.5Industry 6.3 7.2 11.0 8.5 M anufacturing 6.6 6.8 12.0 8.8Services 6.8 8.5 11.1 10.8

Household final consumption expenditure 5.5 5.8 10.3 7.3General gov't final consumption expenditure 4.2 3.9 6.2 5.5Gross capital formation 6.8 11.0 14.3 13.3Imports o f goods and services 12.3 14.8 24.5 7.7

Note: 2007 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bo ld) compared with its income-group average. If data are missing, the diamond will be incomplete.

0

10

20

30

02 03 04 05 06 07

GCF GDP

Gro wth o f capital and GD P (%)

0

20

40

60

02 03 04 05 06 07

Exports Imports

Gro wth o f expo rts and impo rts (%)

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