CHINA Shaanxi Energy Transition and Innovation Demonstration in the Heating Sector Implementation Support Mission Aide-Mémoire Key Project Data Project Number P177841 Loan No. 9703-CN Closing Date 30�Jun�2029 Previous Board Approval 28-Jun-2024 Effectiveness Not yet January 2025 Mission IBRD Financing US$ 300 million Disbursement Not yet Project Development Objective: To increase heat supply capacity from renewable energy and low-carbon energy sources and pilot heating pricing reform in selected areas of Shaanxi province. Project Components: Three project components are included: (1) investment in renewable heating infrastructure, (2) investment for pricing reform pilot, and (3) technical assistance for pricing reform pilot and capacity building. Total project cost is US$ 585 million, including US$ 300 million of IBRD loan and US$ 285 million of co-financing. Introduction 1. A World Bank mission visited Xi’an from March 23 to 28, 2025 and met with key officials from the Project Management Office (PMO), and representatives from Shaanxi Provincial Department of Housing and Urban- Rural Development (DOHURD), Shaanxi Provincial Development and Reform Commission (PDRC) and Shaanxi Provincial Department of Finance (DoF). Before the mission, the deadline of project effectiveness has been extended from March 15, 2025 to April 29, 2025, in respond to the request of the Ministry of Finance (MOF) to allow additional time to complete the remaining condition of the project effectiveness, i.e. provision of the signed Project Agreement (PA) and legal certificate from the Shaanxi Provincial Government. In the mission, the discussions were focused on the project effectiveness and immediate actions to start the project implementation. The Mission would like to express its appreciation to all officials from DOHURD, DRC, DoF and the PMO for the hospitality and co-operation extended by all those met. The persons met and key mission members are provided in Annex 1. 2. This Aide-Memoire records the major findings of the mission and agreements reached to reach the key milestone of project effectiveness and actions to accelerate the project implementation. The Aide Memoire is endorsed by the Bank management. Summary of Project Implementation Progress 3. Delays have been experienced in the project effectiveness, and it has impacted the procurement of the project activities though it is still on track to meet the PDO, mainly (i) Two of the three project effectiveness conditions, i.e. signing of the Loan Agreement (LA) and adoption of Project Operating Manual (POM) have been met, but the 3rd condition to sign the PA is still pending, and the deadline of project effectiveness has been extended by 1.5 months till April 29, 2025; (ii) an updated project procurement plan has been agreed in the mission though no procurement activities have been launched yet – PMO expects to accelerate the project implementation after signing of the PA by the provincial government; and (iii) DoF agreed with the Bank team to withdraw IBRD loan in FY25 in fulfilling the fund needs of project activities to be implemented in the next six months, and PMO will provide the estimate to DoF the earliest after the project effectiveness. 1 Official Use Only 4. PMO and DOF are also making efforts to advance the signing of on-lending agreements, which will be completed after the project is effective. A follow-up discussion on the technical assistance activities is scheduled in May 2025, focusing on the heating pricing reform pilot under the Project. Project Effectiveness 5. Three effectiveness conditions are included in the legal agreements: (i) signing of LA, (ii) signing of PA, and (iii) PMO has adopted a POM acceptable to the Bank. The pending condition is signing of PA while the other two conditions are met. 6. Signing of LA - completed: The LA was signed by both the Bank and MOF on December 16, 2025, and a legal certificate was provided by the Ministry of Foreign Affairs on March 12, 2025 7. Signing of PA - pending: Both the PMO and DOF have clarified the internal approval process within Shaanxi Province to sign the PA. In the mission, the Provincial Government has clarified that DOHURD will seek the signing of PA from the Provincial Governor before April 29, 2025. In parallel, PMO will also coordinate the issuance of a legal certificate by the Department of Justice of Shaanxi regarding the due authorization and binding nature of the PA. 8. Bank’s No-objection on the POM - completed: the Bank team has reviewed the revised POM from the PMO and provided “no-objection� on March 12, 2025. The final formatted POM was submitted to the Bank for record in April 2025. Project Implementation 9. Technical Design. PMO has issued notice to encourage the project companies to start technical design and delegated approval of technical design to city-level local authorities. 10. Procurement of the Investment Sub-projects • Overall. The mission urged the PMO to issue general procurement notice and hire the procurement agent to facilitate the procurement process as soon as possible. The mission reviewed and agreed with the PMO and project companies on a revised Procurement Plan to be implemented in the next 18 months. The Bank team urged the PMO to submit the Procurement Plan to the Bank STEP after their careful review to incorporate the Bank procurement guideline (see paragraph below), and each project entity (PMO and three project companies) to complete their registration in STEP the earliest. The PMO agreed to start the process, aiming to initiate the procurement process the earliest after the project becomes effective. • Plan of Xi’an Xincheng District Reform Pilot. Xincheng Company aims to start its construction of one sub-project (Yangjia Village) in June and complete it in 2025 so the heat supply can be provided in the coming winter. The other three sub-projects are subject to change as the heating areas are still under development and they may consider other fund sources with lower interest. The mission required Xincheng Company to report it to the PMO and concerned government authorities (DRC etc.) for the anticipated changes and will discuss it further in the next mission. • Plan of Yulin Kechuang Science and Innovation City Reform Pilot. Kechuang Youneng Company plans to complete the construction for two sub-projects (municipal convention center and school campuses) in 2025 and start their heating supply in the coming winter, as promised to the municipality government. The project company has started technical design with their co-financing. • Plan of Yulin City District Heating Reform Pilot. Yulin Heating Company plans to complete the upgrade and renovation of old heating stations and the installation of intelligent balancing valves year 2 Official Use Only by year, starting in 2024. So their ongoing procurement to be funded by the WB fund will be started immediately after the project becomes effective. • Technical Assistance. The Bank will engage relevant experts to further discuss the heating pricing pilot with the PMO and relevant departments in May 2025. The agreed TA activities will be included in the procurement plan. 11. Disbursement. DoF confirms that an existing Designated Account (DA) will be used, and DoF will withdraw IBRD loan from the World Bank to meet the needs of six-month project implementation. To do so, MOF needs to sign an on-lending agreement with DoF, and the PMO needs to submit the fund requests to DoF, after the project becomes effective. Based on the updated procurement plan, an estimate of about US$ 5 million will be withdrawn before June 30, 2025 (FY25). 12. On-lending Agreements. After the project becomes effective, on-lending agreements will be signed between the financial departments of Xi’an and Yulin City with the three project companies respectively. The Bank reminds that draft on-lending agreements need to be submit for the Bank review before signing, to ensure the legal responsibility in both LA and PA will be included in the on-lending agreements. 13. Safeguards. The mission provided E&S training to the PMO, Project Implementation Units (PIUs) in both Xi’an and Yulin, and project companies, to get prepared for the coming project implementation. The mission was informed that the PMO had assigned an E&S focal point to coordinate the E&S management of the project. In view of project effectiveness middle of this year, the mission reminded that the remaining E&S staffing (an external environmental specialist and an external social specialist for the PMO and at least one dedicated E&S staff for each PIU) should be in place within one month after the effectiveness per the ESCP requirements, and the first semi-annual E&S monitoring report should be submitted to the Bank for review by August 2025 to reflect the status of E&S institutional arrangements and ESCP implementation along with the project progress. 14. Procurement. The mission provided procurement training to the PMO, both PIUs and project companies. An updated procurement plan was discussed in the mission, and the PMO is required to finalize the procurement plan to consider the following: • Scheduling: the minimum duration of NCB is 1.5-2 months from advertisement to contract signing, and 3 months for QCBS; • Prior and post review: the prior review threshold is USD10 million for works, USD4 million for goods, USD2 million for consultancy services (firms) and USD0.4 million for consultancy services (individual). Regardless of the above thresholds, the first contract in each category to be carried out by each PIU should be subject to prior review. • ICB/NCB: the threshold for ICB for works is USD40 million, for goods is USD10 million. • Procurement agent: the hiring of PA should be included in the plan as the first assignment to be procured based on our discussion yesterday. • Training/Study tour, in case it is confirmed that the PMO will engage a third-party company to organize the training/study tour, these activities need to be included in the procurement plan and supplement the information on selection method and scheduling. Otherwise, the activities can be included in the expenditure plan instead. 15. Financial Management (FM). The mission provided FM and loan management training to the PMO, PIUs and project companies. The loan agreement between the Bank and MOF was signed in Dec. 2024. And the project is supposed to be effective by April 29, 2025. The operational manual including financial management 3 Official Use Only manual, as the effectiveness condition has been finalized and acceptable to the Bank. The following aspects would draw attention to the PMO and DoF for further actions as advised. • Staff capacity: The project FM staffs working in the PMO and PIUs are required to pass the Bank’s e- learning training courses. And the certificates for passing the exam are required to be submitted to the Bank through PMO by the end of April 2025. • Project accounting: Some project expenditures have been incurred by the PIUs, the mission required that the PMO need to take lead and guidance for all the PIUs to set up project specific ledgers in a way of following a standardized concept so that the project financial statements could be easily consolidated. The project ledgers need to be set up by May 15, 2025. • Annual work plan, budget and disbursement plan: To ensure the project funds, the Bank loan and counterpart funds could be in place as planned, (i) the DoF need to coordinate with the PMO and PIUs to work out the disbursement plan for half year and one year and monitor the progress accordingly; (ii) the PMO need to review and consolidate the implementation and funding plans prepared by the PIUs as well. • On-lending agreements: Given MOF will initiate the on-lending process after effectiveness of the project, the mission therefore advised DoF to draft the provincial level on-lending agreement according to the provisions specified in the Project and to take pro-active action to seek the Bank’s no-objection. Agreed Actions and Next Steps N. Key Actions Responsibility Date Due 1. Sign the project agreement and submit the legal certificate DOHURD April 29, 2025 DoF 2. Submit the final Project Operations Manual to the Bank PMO April 15, 2025 (completed) 3. Sign on-lending agreements with project companies DoF, PMO, May 31, 2025 PIUs 4. Withdraw the first batch WB loan to DA DoF May 31, 2025 5. Update the Procurement Plan for the next 18 months and PMO April 30, 2025 upload it to Bank STEP 6. Select and hire a procurement agent PMO May 31, 2025 7. Prepare and submit the 2025 annual plan PMO May 30, 2025 8. Provide a template for the Financial Viability Plan WB April 30, 2025 9. Attend the relevant training on Financial Management, PMO April 2025 Procurement and Safeguards (completed) 10. Follow-up mission to discuss TA PMO, WB May 2025 4 Official Use Only Annex I. Persons Met in the Mission (to be updated by Helen) Name Ministry/Organization Title Ms. Yang Fan Shaanxi Provincial Department of Housing Chief Planner and Urban-Rural Development Mr. Xie Long Shaanxi Provincial Department of Housing Deputy Director, Planning and and Urban-Rural Development Financial Division Shaanxi Provincial Development and Director, Foreign Capital Ms. Liang Wei Reform Commission Utilization Division Shaanxi Provincial Development and Mr. Liu Jiang Reform Commission Mr. Yan Shaofeng Shaanxi Provincial Development and Deputy Director, Foreign Capital Reform Commission Utilization Division Ms. Liu Rui Shaanxi Provincial Finance Bureau Deputy Director, International Cooperation Division Mr. Yang Lu Shaanxi Provincial Finance Bureau Officer, International Cooperation Division Ms. Xu Yan Shaanxi Provincial Finance Bureau Officer, International Cooperation Division Guo Wei Xi'an Urban Management Bureau Deputy Director Sun Jiaqing Xi'an Urban Management Bureau Staff Xincheng District Urban Management Deputy Section Chief, Municipal Zhang Haoruo Bureau Affairs Section Executive Deputy General Yang Hao Xincheng District Project Company Manager Dai Huiying Xincheng District Project Company Financial Director Yang Jinlin Xincheng District Project Company Deputy General Manager Yang Bo Xincheng District Project Company Head of Finance Department Head of Technical Bidding Liu Baogang Xincheng District Project Company Department Yulin Development and Reform Wu Zhenmin Director Commission Yulin Housing and Urban-Rural Ma Sai Director Development Bureau Li Zhanqiang Yulin Heating Co., Ltd. General Manager Zhang Bo Yulin Heating Co., Ltd. 5 Official Use Only Yulin Ke Chuang You Neng Technology Zuo Ruitian General Manager Co., Ltd. Yulin Ke Chuang You Neng Technology Chen Fei Head of Materials Department Co., Ltd. Yulin Ke Chuang You Neng Technology Ai Fengfeng Accountant Co., Ltd. Other PMO Staff Mission Members Name Title Role Mr. Peng Ximing Senior Energy Specialist TTL Ms. Ma Chongxi Energy Specialist Co-TTL Ms. Zhang Fang Senior Financial Management Specialist FM Mr. Liu Zheng Senior Procurement Specialist Procurement Ms. Huang Xiaodan Senior Environmental Engineer Environmental Safeguards Ms. Sophia V. Georgieva Senior Social Development Specialist Social Safeguards Ms. Han Na Program Assistant Supporting 6 Official Use Only