$ Report No: RES00128 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF North Central Region Emission Reductions Program APPROVED ON 12-Oct-2020 TO Socialist Republic of Vietnam Environment, Natural Resources & the Blue Economy East Asia And Pacific Regional Vice President: Manuela V. Ferro Regional Director: Anna Wellenstein Country Director: Kathleen Anne Whimp Practice Manager: Mona Sur Task Team Leader(s): Dinesh Aryal, Thu Thi Le Nguyen The World Bank North Central Region Emission Reductions Program (P162605) ABBREVIATIONS AND ACRONYMS BSP Benefit Sharing Plan CATS Carbon Assets Tracking System ER Emission Reductions ERPA Emission Reductions Payment Agreement FCPF Forest Carbon Partnership Facility ISR Implementation Status Report MARD Ministry of Agriculture and Rural Development PDO Project Development Objective REDD+ Reducing emissions from deforestation and forest degradation, and enhancement of forest carbon stocks VVB Validation and Verification Body @#&OPS~Doctype~OPS^dynamics@restrhybridbasicdata#doctemplate BASIC DATA Product Information Operation ID Operation Name P162605 North Central Region Emission Reductions Program Product/Financing Instrument Geographical Identifier Investment Project Financing (IPF) Viet Nam Approval Date Current Closing Date 12-Oct-2020 31-Dec-2025 Original EA Category Partial Assessment (B) (PAD Approval Package-13 Nov 2023) Organizations Borrower Responsible Agency Socialist Republic of Vietnam Ministry of Agriculture and Rural Development i The World Bank North Central Region Emission Reductions Program (P162605) @#&OPS~Doctype~OPS^dynamics@restrhybridoperationstatus#doctemplate OPERATION STATUS Project Development Objective (DO) Original Development Objective The Development Objective of the Project is to make payments to the Program Entity for measured, reported and verified Emissions Reductions (ER) from reduced deforestation, forest degradation and enhancement of forest carbon stocks (REDD+) in the North Central Region of Vietnam and to distribute ER payments according to an agreed benefit sharing plan. Disbursement Summary (in USD million) Source of Funds Net Commitment Disbursed Balance % Disbursed IBRD -- -- -- 0 IDA -- -- -- 0 Grants 51.50 51.50 0.00 100.00 Policy Waivers Does this restructuring trigger the need for any policy waiver(s)? No @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate ii The World Bank North Central Region Emission Reductions Program (P162605) TABLE OF CONTENTS I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING ........................................................................................1 II. DESCRIPTION OF PROPOSED CHANGES ....................................................................................................................3 III. PROPOSED CHANGES ................................................................................................................................................4 IV. DETAILED CHANGE(S) ...............................................................................................................................................4 The World Bank North Central Region Emission Reductions Program (P162605) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Program Status 1. The Emission Reductions Program in the North Central Region of Viet Nam is an operation that provides results- based payments for measured, reported and verified emission reductions (ERs)1 generated from the program, through the Emission Reductions Payment Agreements (ERPA) signed between the World Bank (acting as ‘Trustee’ of the Forest Carbon Partnership Facility – FCPF) and the Government of Viet Nam, represented by the Ministry of Agriculture and Rural Development (MARD) (‘Program Entity’). The ERPA2 was signed on October 22, 2020 for a Contract Volume of 10.3 million ERs at a unit price of US$ 5 to be delivered by December 31, 2025. The Contract Volume under an ERPA is the amount of ER units that the ER program commits to deliver to the FCPF during the term of the ERPA and for the FCPF to pay for such amount at the unit price. The ERPA also has an agreed additional volume (‘Additional ERs’) of up to 5 million ERs at a unit price of US$5 (equivalent to US$25 million). Additional ERs are volumes generated by the ER program beyond the Contract Volume and can be paid for under the ERPA per the Call Option provision. Payment for Additional ERs is a right but not an obligation of the FCPF and the volume to be paid for is decided by the FCPF in consultation with the FCPF Carbon Fund Participants (donors). 2. The ERPA for the Viet Nam ER program has three reporting periods, during which the program can measure and report on ERs generated through an ER Monitoring Report and the ERs are verified by an independent third party (Validation and Verification Body – VVB) financed by the FCPF. The reporting periods are (i) February 1, 2018 – December 31, 2019; (ii) January 1, 2020 – December 31, 2022; and (iii) January 1, 2023 – December 31, 2024. For the first reporting period, an independent third-party validation is also conducted in addition to the verification of reported ERs.3 When the validation and verification are completed, the VVB issues the Validation and Verification Reports. Besides the reporting on ERs (which includes a confirmation on the ability to transfer title to those ERs to the FCPF), the ER Program also reports on non-carbon accounting aspects as part of the annexes to the ER Monitoring Report. The non-carbon accounting aspects include reporting on social and environmental safeguards, Benefit Sharing Plan (BSP) readiness and implementation, and non-carbon benefits, which are reviewed and cleared by the World Bank and documented in an Implementation Status & Results Report (ISR). Payment for the verified ERs can proceed 1 Each ER unit represents one metric ton of Carbon Dioxide Equivalent reduced, avoided, removed or sequestered within the ER Program Area. 2 The ERPA is structured as two separate legal agreements, one for each of the two tranches of the FCPF Carbon Fund. For simplicity, this document refers to both agreements jointly as ‘ERPA’. Specifically, tranche A is designed to be a commercial window that transacts on tradeable carbon assets, whereas tranche B is designed to provide results-based payments for verified ERs without a respective ER title transfer from recipient countries (tranche B has approximately 95% of the current fund capitalization). It is important to note that most commercial terms, notably the term and reporting period for the ERPA, are the same for both tranches of the ERPA and verification follows the same process. A key difference is whether ERs are retained by the Program Entity (e.g., to be accounted for as part of the NDC) or transferred to the Carbon Fund (for possible transaction in the future). 3 Validation is done on the carbon accounting aspects of the ER program particularly on updates made to the reference level, monitoring plan etc. since the ER Program Document was approved by the FCPF. Page 1 The World Bank North Central Region Emission Reductions Program (P162605) only after the Validation and Verification Reports are issued, and the ISR is approved. As per the PDO, payments made under the ERPA for the verified ERs are distributed by the Program Entity in accordance with the agreed BSP. 3. MARD, as Program Entity, submitted the ER Monitoring Report for the first reporting period (February 1, 2018 – December 31, 2029) in June 2021 and a total of 16,217,520 ERs were measured and reported. Validation and verification were conducted which confirmed and verified the reported ERs. The Validation and Verification Reports were issued on October 3, 2023. With this volume, the Program Entity fully delivered the Contract Volume of 10.3 million ERs, and also generated 5.9 million Additional ERs. Payment of US$ 51.5 million for the Contract Volume will be transferred to MARD which will then be distributed to beneficiaries of the ER program per the agreed BSP. Eighty (80) percent of this amount, i.e., US$ 41.2 million was transferred on August 8, 2023, against the monitored ERs. The remaining payment of US$ 10.3 million is being processed. 4. The Project has achieved the first part of the PDO, exceeding the target indicators on volume and payment (10.3 million ERs and $51.5 million, respectively) in the first of three reporting periods and generating 5.9 million surplus ERs. It is too soon for the team to confirm that the second part of the PDO and third indicator --- distribution of payments per the Benefit Sharing Plan (BSP) --- is also advancing. Viet Nam is still at the initial stages of implementation of its BSP, and, in accordance with the ERPA, will submit its first annual BSP implementation report six months after the first verified ER payment (in July 2024). B. Rationale for Restructuring 5. The proposed restructuring is required to reflect the additional payments for up to 1 million Additional ERs under the Call Option provision of the ERPA. These payments will also be shared with beneficiaries of the ER program per the BSP. On October 6, 2023, the Trustee issued a Call Option Exercise Notice for the first reporting period for an Additional ER volume of 1 million ERs at a unit price of US$5/Additional ER (equivalent to US$5 million). The ERPA stipulates the Parties have 90 calendar days from the date of the Notice to complete the transaction, which hinges upon this restructuring. On December 18, 2023, the Program Entity requested an extension of the Exercise Completion Date from January 6, 2024, to March 31, 2024 which was approved by the Trustee on December 21, 2023 as a one- time only extension. 6. The ERPAs remain effective and include a remaining Call Option Volume for up to 4 million Additional ERs. The Program Entity is required to issue ER Monitoring Reports for reporting periods 2 and 3 and the Trustee is required to provide corresponding independent Verification Reports. This provides the Trustee with the opportunity to purchase up to 4 million more Additional ERs in subsequent reporting periods through the exercise of Call Options (for up to US$20 million), or, if not exercised, provides the Program Entity with the opportunity to generate more Excess ERs that could be used by the country either towards its Nationally Determined Contribution or to monetize through third party transactions, including through bilateral agreements or conducting auctions. Additional payments beyond the US$51.5 million for the Contract Volume is a positive sign for the Government of Viet Nam in terms of proof of concept, sustainability of the ER program and livelihoods, and overall goals of Viet Nam towards a low-carbon growth. Page 2 The World Bank North Central Region Emission Reductions Program (P162605) II. DESCRIPTION OF PROPOSED CHANGES 7. The Additional ERs that have been generated and verified can be paid for under the ERPA up to the maximum amount of US$25 million (for 5 million ERs). For the first reporting period, up to 1 million Additional ERs will be eligible for payment under the ERPAs equivalent to US$5 million. At the time of project preparation, only the amount for the Contract Volume was included, i.e., US$ 51.5 million under the Tranche A (TF0B2967) and Tranche B (TF0B2966) ERPAs, respectively. The reason being that a commitment and payment for Additional ERs is subject to decision by the Trustee at the time when such Additional ERs are generated and verified, as stipulated in the ERPAs. Given that the Additional ERs have been generated and verified during the first reporting period, a restructuring is proposed to reflect an increase to the project amount by US$5 million, bringing the total project amount to US$56.5 million. It is important to note that the Additional ERs are those generated from the same activities as those that generated the ERs pertaining to the Contract Volume. 8. The restructuring does not require any change to the legal agreements and only the total project financing will be reflected with the increase. The legal agreements already include the provision for the Trustee to purchase up to 5 million Additional ERs at US$ 5/ER. As such, following the approval for restructuring, the changes that are required are limited to updates in the Bank system. This includes an increase of the total project cost to US$56.5 million which represents an increase to Tranche A and Tranche B trust funds by US$ 268,110 and US$ 4,731,890 respectively as shown in the table below. Particulars Tranche A Tranche B Total B2967-001 B2966-001 Original Allocation $ 2,575,000 $ 48,925,000 $ 51,500,000 Revised per Memo dated December 14, 2023 $ 186,555 $ (186,555) - Revised Allocation $ 2,761,555 $ 48,738,445 $ 51,500,000 Call Options Exercised $ 268,110 $ 4,731,890 $ 5,000,000 Total Revised Allocation $ 3,029,665 $ 53,470,335 $ 56,500,000 9. As the initial payment schedule was delayed due to the delay in effectiveness of the ERPA and completion of the validation and verification for the ER Monitoring Report for the first reporting period, the disbursement estimates will also need to be updated. With this and the potential payments for Additional ERs, it is proposed to update the disbursement estimates to include a payment of the Contract Volume and part of the Additional ERs in FY24, and any further payments for Additional ERs in FY25. @#&OPS~Doctype~OPS^dynamics@restrhybridsummarychanges#doctemplate Summary changes Page 3 The World Bank North Central Region Emission Reductions Program (P162605) III. PROPOSED CHANGES Operation Information Proposed Changes Operation Information Proposed Changes Disbursements Estimates Yes Loan Closing Date Extension No Development Objective No Loan Cancellations No Safeguard Policies Triggered No Reallocations No ISDS No Financial Management No MFD/PCE No Procurement No Results No Institutional Arrangement No Risks No Implementation Schedule No Legal Covenants No Conditions No Implementation Modalities No Disbursements Arrangements No DDO No Clients No Appraisal Summary No Components No @#&OPS~Doctype~OPS^dynamics@restrhybriddetailedchanges-disclose#doctemplate IV. DETAILED CHANGE(S) COSTS & FINANCING Private Capital Facilitation Is this an MFD-Enabling Project (MFD-EP)? Is this project Private Capital Enabling (PCE)? LOANS DISBURSEMENTS Page 4 The World Bank North Central Region Emission Reductions Program (P162605) Operation Dates & Projection Details Reasons to change the full Disbursement date and/or the projection Implementation Start Date Operation Closing Date 12-Oct-2020 31-Dec-2025 Projected Date for Full Disbursement 16-Aug-2027 Expected Disbursements (in US $) (Absolute) Original Estimation at Preparation Actual Year Revised Estimation (Approval Package – 13 Nov 2023) FY2021 887,087.50 0.00 0.00 FY2022 2,691,956.50 0.00 0.00 FY2023 3,619,780.50 0.00 0.00 FY2024 5,401,011.00 0.00 51,500,000.00 FY2025 9,251,872.00 0.00 0.00 FY2026 12,145,348.00 0.00 0.00 FY2027 14,280,486.50 0.00 0.00 FY2028 3,222,458.00 0.00 0.00 Page 5