Report No. PID9870 Project Name India - CFC Production Sector Gradual... Phase-out Project Region South Asia Sector Environment Project ID INPE69376 Implementing Agency Industrial Development Bank of India (IDBI) Environment Category B Board Date June 9, 2000 Appraisal Date December 6 1999 The project is aimed at assisting the Government of India (GOI) to meet its international obligations under the Montreal Protocol, which requires India to phase out both production and consumption of CFCs and other Ozone Depleting Substances (ODS) by the year 2010. The Bank is already assisting GOI through two previous MP operations, ODS I (closed) and ODS II (ongoing), as one of the Implementing Agencies for activities funded by the Multilateral Fund (MLF) for the MP, and the Trustee of the Ozone Trust Fund (OTF). ODS I and II have addressed the consumption side only. This project helps GOI address the phase-out of the CFC production sector. The project consists of two components: (i) compensation to four CFC producers for gradual phase-out of CFC production by the year 2010, and (ii) technical assistance component for ministry of Environment &Forests (MoEF) to monitor and supervise the project through a Project Management Unit (PMU). The following are important elements in project design: (a) Performance-based grant: The project is based on the premise of a performance-based grant for meeting the CFC production phase-out targets agreed between India and the Executive Committee of the Multilateral Fund (ExCom). This means that the disbursement of each year's grant tranche is subject to meeting performance targets, as opposed to disbursement against procurement of goods and services. The ExCom has stipulated penalties that will be imposed in case of non- compliance with agreed targets. In any case where annual national production has exceeded the target for a given calendar year, grant disbursement will be withheld until required corrective measures have been implemented and the subsequent year's national production level adjusted to bring production back within the target ceiling. In addition to resulting delays in disbursement, the amount of the annual grant tranche will be reduced by $1,000 per MT of CFCs in excess of the ceiling. (b) Performance verification: A verification process of national production targets (the main performance indicator) from the enterprise level to the national level has been agreed upon. The national production targets and annual program implementation will be verified by a performance audit conducted by an independent audit agency under the TA funding. A detailed reporting system will provide the Bank with sufficient indicators to monitor project progress on a continuous basis. In the case of non-compliance, established either through Bank supervision missions (twice a year), technical assessment (once a year by the Bank's technical consultants), performance audit, and reporting activities, the Bank will make no further deposit until adequate rectification is accomplished. (c) Production quota system: The production quota system was established on March 2, 2000, whereby MoEF issued a directive under which it will set annual production quotas to enterprises eligible to produce CFCs. For each calendar year, these annual production quotas for the four enterprises are announced in the Annual Program, which is submitted to the ExCom for approval and funding of that year's tranche. Should the enterprises decide to produce more or less than the assigned annual quotas, they are allowed to trade or auction the quotas amongst themselves as long as the national total quota is maintained. (d) Procurement and disbursement: Due to the special nature of the CFC production phase-out project, i.e., funds to be disbursed to enterprises for foregone profits due to phasing-out of production rather than funding goods and services, the project does not involve any discussions on procurement matters. Disbursement on a performance basis is already operational and working well in China for two ODS production sectors, halon and CFC. The same principle is being adopted for India; the difference is that in China, the Government is the recipient of the funds for foregone profits, whereas in India the funds are disbursed to enterprises directly, and GOI has no claim on such funds. The Executive Committee of the Multilateral Fund (MLF) approved the CFC Production Sector Gradual Phase-out Project at its 29th meeting in Beijing at the end of November 1999. This was the culmination of developments that lasted for almost twenty months. (See the World Bank's press release, attached.) In March, 1998, India had requested the ExCom to consider such a project, and had also requested that the World Bank be the implementing agency. A proposal for phasing out production of CFCs in India was originally prepared by the Indian producers, and in August 1998 MoEF started discussions with the Bank to review the proposal and requested that it be developed and submitted on their behalf to the ExCom for funding approval. In December 1998 a Bank team visited India and in close collaboration with MoEF and the CFC producers prepared a revised proposal, which was submitted to the 27th meeting of the ExCom of MLF in March 1999. Most of the guidelines relating to the production sector had not been agreed in final form by that time (reflecting in part the difference in perspectives between the various constituent interest groups). There were substantial differences in the assumptions between members of the production sector subgroup of the ExCom which was authorized to evaluate and recommend the funding level for India's proposal, on what is a fair calculation of the foregone profits and the amount of compensation for the four CFC producers. As a consequence, negotiations lasted for six months (March to September 1999), at the end of which the Production Sector Subgroup recommended a grant of $82 million for India. This amount was subsequently approved by the ExCom at its next meeting in November 1999. The grant is divided into $80 million for disbursement to the four CFC producer to phase-out CFC production in - 2 - accordance with the agreed phase-out schedule over a period up to 2010, and $2 million for technical assistance activities over the same period. The Grant Agreement between the Bank and IDBI is for $80.8 million, which covers the $80 million for disbursement to the four CFC producers, and a balance of up to $800,000 as IDB's agency fee which is set at lt of the compensation grant to be disbursed. This agency fee is funded from the agency fee that the Bank as an implementing agency of MP receives from MLF. The Project Agreement between the Bank and MoEF is for implementation of the CFC phase-out program; the $2 million allocation for TA is channeled through the United Nations Environment Program (UNEP). UNEP was designated, jointly by MoEF and the Bank, to help MoEF with implementation of activities under the TA component because of their comparative advantage in information dissemination and institutional strengthening capacity. The following non-standard procedures applied to this project: - Because of the special nature of MP operations, project processing has followed OP 10.21 (dated November 1993) which is tailor-made for Investment Operations financed by the Multilateral Fund for Implementation of the Montreal Protocol. - A formally designated appraisal mission was not required for two reasons. Firstly, the grant amount, project objectives, disbursement categories and implementation schedule had already been determined as part of the ExCom's approval, and could not be changed. Secondly, over the long period of negotiations, each aspect of implementation had been discussed in detail and agreed with MOEF. Contact Point The InfoShop The World Bank 1818 H St NW Washington, DC 20433 USA Tel 1-202-458-5454 Fax 1-202-522-1500 - 3 -