The World Bank SREP-Supported Extended Biogas Project (P131592) REPORT NO.: RES37225 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SREP-SUPPORTED EXTENDED BIOGAS PROJECT APPROVED ON AUGUST 27, 2014 TO MINISTRY OF FINANCE, GOVERNMENT OF NEPAL ENERGY & EXTRACTIVES SOUTH ASIA Regional Vice President: Hartwig Schafer Country Director: Idah Z. Pswarayi-Riddihough Regional Director: Guangzhe Chen Country Manager: Faris H. Hadad-Zervos Practice Manager/Manager: Demetrios Papathanasiou Task Team Leader: Subodh Adhikari The World Bank SREP-Supported Extended Biogas Project (P131592) ABBREVIATIONS AND ACRONYMS The World Bank SREP-Supported Extended Biogas Project (P131592) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P131592 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 27-Aug-2014 31-Dec-2019 Organizations Borrower Responsible Agency Ministry of Finance, Government of Nepal Alternative Energy Promotion Center (AEPC) Project Development Objective (PDO) Original PDO The project development objective is to promote large off-grid biogas energy generation in Nepal. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-16552 24-Nov-2014 24-Nov-2014 24-Nov-2014 31-Dec-2019 7.90 1.94 5.96 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank SREP-Supported Extended Biogas Project (P131592) Note to Task Teams: End of system generated content, document is editable from here. I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project History and Summary 1. The Project was approved on August 27, 2014 and became effective on November 24, 2014. The project’s objective is to support Nepali private sector entrepreneurs, as well as institutions, municipalities and communities who are interested in investing in large-scale biogas business in Nepal (above 12 m3/ day of gas generation capacity (dggc)). This project supports the adoption of new and advanced bio-gas generation technologies that have been successful elsewhere. 2. The Project consists of three components: (1) technical assistance, (2) financing of investments and (3) project management support. Component 1: technical assistance, among others, includes partial financing support for design/feasibility studies and third-party verification support for the selected biogas sub-projects. Component 2: financing of investments provides partial reimbursement of subsidy paid by AEPC -- as per the prevailing Government of Nepal (GoN) subsidy policy and subsidy delivery mechanism -- to the selected sub-projects. Such reimbursement is limited to maximum of 20% of the total project capital cost. Component 3: project management support provides for the provision of staff/resources support and capacity development support to AEPC on different aspects of project management, implementation, including monitoring and evaluation. 3. The Project has already been restructured twice. The first restructuring was completed on September22, 2016. This restructuring was aimed at providing support for technical studies for bio-gas potential assessment, outreach, and capacity development; deployment of technologies currently unavailable in Nepal through demonstration sub-projects and provide additional support to the Project Implementation Unit by covering the cost of contract staffs and specific external consultants. This was primarily done by creating additional component part 3: Project Management Support, and reallocating funds among the components. 4. The second restructuring was completed on August 28, 2019. This restructuring was aimed at streamlining overall sub-project approval process by having a common set of specialists and experts that are acceptable to both the Implementing Agency and the World Bank. This precluded the need for separate sets of approval from both IA and WB and reduced the approval time. Secondly, the reallocation of funds from component 2 to component 1 was done to further cover for the costs for training, capacity development, and outreach. B. Current Project Implementation Status 5. The latest Project Implementation Review (IR) was carried out on September 18-23, 2019. The Project status and its implementation progress has been detailed in the Aide Memoire (AM) attached in the Annex 1 of this memo. 6. The project implementation progress was slow during the initial years; however, recently, the project implementation has picked up. As of September 2019, 160 number of sub-projects were commissioned. This includes, six larger1 sized sub-projects that were commissioned in the last one-year period. These large sub-projects alone accounted for more than 45% of the total disbursement and gas generation. Currently 147 number of sub-projects are under construction– including seven larger sized projects2. With the increasing implementation rate of the larger sub-project, both the PDO indicators have exceeded their targets. In addition, the increased interest from the sub-project developers has also helped build a substantial pipeline of sub-projects – particularly of the larger sized ones (please see the attached AM), which are ready to move into the construction phase. 7. The disbursement rate has also picked. Until a year ago, overall disbursement was about 14% (since the project effectiveness – during the overall 4-year period)- this rate jumped to nearly 11% during the last year period to approx. 25%. However, it is 1 Larger sized sub-projects include bio-gas plants generating more than 100 m3/day of gas 2 Capacity ranging from 500m3/dggc to 3500m3/dggc The World Bank SREP-Supported Extended Biogas Project (P131592) still not commensurate with the project’s physical implementation progress. This is due to current Project design, which allows for disbursement only after the full commissioning of individual sub-projects. This has created a mismatch between disbursement figures and sub-project’s physical progress 8. The key project data and ratings from the recent review are reproduced in the Table 1 below. Due to continued success in achieving the gas generation target, the rating for progress towards achieving the PDO is retained as “Satisfactory.” In addition, due to improvement in the sub-project implementation progress, the overall implementation raring has been upgraded to “Moderately Satisfactory” in this review period. Table 1: Project Data and Ratings Project Data Summary Ratings Previous Current Trust Fund Approval: August 27, 2014 Progress towards S S achievement of PDO Effectiveness Date: November 24, 2014 Overall Implementation MU MS Closing Date: December 31, 2019 Progress Financial Management MS MS Grant amount: US$7.9 million Project Management MS MS Amount Disbursed Counterpart funding S S (as of September 20, 2019) - US$1.94 million (or Procurement MS MS 24.59% of the total committed amount) Safeguards MS MS Monitoring and MS MS Evaluation Notes: S-Satisfactory; MS-Moderately Satisfactory; MU –Moderately Unsatisfactory C. Rationale for restructuring 9. Time extension: A request letter for time extension from the GoN has been received by the Bank on May 12, 2019 (attached as Annex 2). This letter requests the extension of the project closing date to August 31, 2021 from the current date of December 31, 2019. 10. Going forward, in order to allow for the completion of the sub-projects in the pipeline, sustain and expedite the project implementation pace, and enhance disbursement, the Project’s time extension is necessary. Time extension will also be essential to compensate for the initial delays that the Project faced. Two major earthquakes of April 2015 and the Nepal India border blockade from September 2015 to February 2016 had significantly slowed down the implementation progress. Besides, for the larger sized sub-projects, the technology, implementation mechanisms, financing provisions were all new to Nepal. Thus, despite the subsidies offered, the take up rate for these sub-projects was very slow during the early stages. As such, the task team had to spend substantial amount of up-front time in sensitizing and developing the capacities of the implementing agency, potential sub-project developers, financing agencies, technology providers to build their confidence in investing in these sub-projects. Only after the successes of two large projects – in Bhairawa and Syangja3 districts in mid-2018 – there has been marked increase in the interest from the private developers and municipalities to invest in waste to energy ventures. Since then the interest among the developers to develop the sub-projects has increased substantially and the Project has built a substantial sub-project pipeline. 11. Currently four municipal solid waste to energy projects are also under construction (of the seven under construction larger sized projects). One of such projects is expected to be commissioned by late November. The team and implementing agency are of the view that due to the “demonstration effect” of this MSW to energy sub-project, the number of other MSW to energy sub-project in the pipeline is expected to increase significantly. Besides, partly based on the success of this Project, 3 Projects of more than 3500 m3/day of gas generation capacity were implemented in Both Bhairawa and Syangja The World Bank SREP-Supported Extended Biogas Project (P131592) the Government has considered waste to energy project as of strategic importance and has envisioned to develop 500 larger sized bio-gas sub-projects under the current 5-year plans (FY 18/19-22/23), hence proposed the project time extension to support materialize its strategy. Thus, in order to facilitate the implementation and completion these sub-projects, project time extension is required. 12. Each of these larger sized sub-projects are of substantial undertakings. These sub-projects are of complex design involving large scale civil construction, moderate to heavy electro-mechanical installations, and optimized bio-chemical arrangements. As such, in order to implement these sub-projects, strong mix of technological and management skills and resources are required. Larger scale bio-gas plant is relatively new to Nepal and the stakeholders’ skills and knowhow in this area are still evolving. Based on the task team’s experience, the average implementation time for one of these sub- projects is about 8 to 10 months in Nepal (from the design finalization to commissioning). Thus, in order to complete the under construction sub- projects and implement the ones referenced in the pipeline (and any potential future addition), the team is of the view that requested duration of the Project extension is appropriate. 13. Further Project restructuring: During the last review mission, the team had discussed with the GoN regarding the need for further project restructuring to further expedite implementation progress. This restructuring would mainly include: a) the revision of the disbursement conditions to make it commensurate to the Project’s physical progress; b) request for reallocation for certain amount of funds to partially support PIU for the extended project duration; and c) upward revision of the PDO indicators’ target values. 14. During the review mission, the GoN and Implementing Agency (IA) informed the Bank that the request for further restructuring would be forwarded to the Bank through the Ministry of Finance (MoF). The Bank furthermore indicated that it would process requests for both the project extension and restructuring simultaneously. Still, such restructuring request is being prepared by the GoN. During the latest follow up discussion with the task team, the MoF requested the Bank to initiate the Project extension process at the earliest as the closing date is approaching fast. It further mentioned that the further restructuring request is still under preparation and would be finalized soon. Based on the feedback from the MoF and considering the impending project closure, the team has now decided to initiate the process for project extension. Further Project restructuring request will be processed by the team as soon as it is received from the GoN. II. DESCRIPTION OF PROPOSED CHANGES 15. In order to affect the changes, the grant agreement will be updated as per below in this restructuring: A. Time extension 16. The Grant Agreement (GA) needs to be updated to change the project closing date. Following change will be made in the Schedule 2, Section IV.B.2 of the GA: Current provision in GA Proposed provision in GA B. Withdrawal Conditions; Withdrawal Period B. Withdrawal Conditions; Withdrawal Period The World Bank SREP-Supported Extended Biogas Project (P131592) 2. The Closing Date referred to in Section 3.06(c) of the 2. The Closing Date referred to in Section 3.06(c) of the Standard Conditions is December 31, 2019. Standard Conditions is August 31, 2021. (underlined parts will be revised.) The World Bank SREP-Supported Extended Biogas Project (P131592) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. III. SUMMARY OF CHANGES Changed Not Changed Loan Closing Date(s) ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ The World Bank SREP-Supported Extended Biogas Project (P131592) IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications TF-16552 Effective 31-Dec-2019 31-Aug-2021 31-Dec-2021 .