India - Reduction of Consumption of Ozone Depleting Substances Project

Document of The World Bank FOR OTICAL USE ONl Repwt No. 12446-IN DLTILATERAL FIUND FOR THE IMLEMENTATION OF THE MONTREAL PROTOCOL MEMORANDUM AND RECOMMENDATION Cl THE CHIEF OF COUNT OPERATIONS. INDUSTRY AND FINANCE DIVISION, COUNTRY DEPARTMT II, SOUH ASIA TO THE DIRECTOR OF THE COUR DEPARTMNT II, SOUTH ASIA ON A PROPOSED OZONE PROJECTS TRUST FUD GRANT IN THE AMOUNT EQUIVALENT OF US$1.252 M11LJION TO INDUSTRIAL DEVELOPMENT BANK OF INDIA FOR THE TECHNICAL SUPPORT AND INVESTMENT FOR THE REDUCTION OF CONSUMPTION OF OZONE DEPLETING SUBSTANCES PROJECT" JULY 26, 1994 Country Operations, Industry & Finance Division India Department MICROGRAPHICS South Asia Region This document has a restricted distnrbtion and thei official duties. content may not ot Repor 12446 IN  CURRENCY EOUIVALENTS Currency Unit = Indian Rupee (RS.) US$1.00=Rs. 31.37 (Exchange rate as of May 1994) UNITS AND MEASURES metric ton = Ton (T) = 1000 kg ACRONYMS CFC Chlorofluorocarbons CTC Carbon Tetrachloride GOI Government of India IDBI Industrial Development Bank of India MF Multilateral Eund MFEC Executive Committee of the Multilateral Fund for the Implementation of the MP MFMP Multilateral Fund for the Implementation of the Montreal Protocol MOEF Ministry of Environment and Forests MP Montreal Protocol on Substances that Deplete the Ozone Layer ODS Ozone depleting substance OTF Ozone Projects Trust Fund UNDP United Nations Development Program UNEP United Nations Environment Program UNIDO United Nations Industrial Development Organization FISCAL YEAR Government of India = April 1 - March 31 IDBI = April 1 - March 31  FOR OFFICIAL USE ONLY DIA TECHNICAL SUPPORT AND INVESTMEN9 FOR THE REDUCTION OF CONSUMPTION OF OZONE DEPLETING SUBSTANCES PROJECT Prolect and Grant Summaryp Financial Aaent: IDBI Executinu Arencies : Ministry of Environment and Forests Beneficiaries Shriram Refrigeration Industries Ltd. and Blue Star Ltd. Amount : US$1.252 million Terms Trustee to IDBI: Grant Re-lendincr Terms : IDBI to Beneficiaries: Grants Proiect Cost Summary Component US$ Thousand Shriram Ref. Ltd. 584 Blue Star Ltd. 483 Contingency 160 Financial Agent Fee 25 TOTAL 1,252 Economic Rate of Return Not applicable Staff Appraisal Report Not applicable. A Technical Annex has been prepared. jThis docuDt has a rese distonbo and may be ud by rcipiens ony in th pformnce of thi _ gcWtk ItcuwmyodnneWuwhutod=nb--zu- -_  MEMORANDUM AND RECOMMENDATION OF THE CHIEF OF THE COUNTRY OPERATIONS, INDUSTRY & FINANCE DIVISION, TO THE DIRECTOR OF COUNTRY DEPARTMENT II, SOUTH ASIA ON A PROPOSED OZONE PROJECTS TRUST FUND GRANT IN THE AMOOUNT EQUIVALENT TO US$1.252 MILLION TO INDUSTRIAL DEVELOPMENT BANK OF INDIA FOR THE TECHNICAL SUPPORT AND INVESTMENT FOR THE REDUCTION OF CONSUMPTION OF OZONE DEPLETING SUBSTANCES PROJECT 1. I submit for approval the following memorandum and recommendation on a proposed Ozone Projects Trust Fund (OTF) grant to Industrial Development Bank cf India (IDBI) for the equivalent of US$1.252 million to finance the Technical Support and Investment Project for the Reduction of Consumption of Ozone Depleting Substances (ODS) (hereafter the "Project"). This Project would be the first grant to India under the Multilateral Fund for the implementation of the Montreal Protocol (MFMP). 2. Backaround on Ozone Depletin_ Substanceg. In 1991 India produced and consumed approximately 10,400 metric tons of ODS. ODS per capita consumption is currently estimated to be 10 grams against 300 grams allowed under the Protocol. Most ODS consumption is in foams, refrigeration, air conditioning, aerosols and solvents in electronics and machine tools. India is self sufficient irn production of chlorofluorocarbons (CFCs) and is expected to be self sufficient in the production of halons. Large quantities of ODS are used as solvents in processing and manufacturing sectors. In addition to being used as solvents, carbon tetrachloride (CTC) is also used as a feedstock for CFC preparation, as well as process chemical for manufacturing. 3. India ratified the MP on Substances that Deplete the Ozone Layer in June 1992, and is eligible for grants from the Multilateral Fund (MF), which was established to provide support to eligible developing countries to meet their MP obligations. The Fund is managed by an Executive Committee of the MF for the Implementation of the Montreal Protocol (MFEC). The Bank is an implementing agency, jointly with the United Nations Development Program (UNDP), United Nations Environment Program (UNEP) and the United Nations Industrial Development Organization (UNIDO). Projects are channelled through the Bank's Ozone projects Trust Fund agreement with the MFEC. India has played an active role in MP affairs even prior to ratification, and undertook a National Study on ODS in 1990. India's Country Program on ODS Phase out, supported by UNDP, was approved at the 11th meeting of the MFEC held in Bangkok on November 10-12, 1993 as a first step in the development of a comprehensive phase out strategy subject to India preparing a revised document that would incorporate: (i) the substantive information that was included in the presentation made by India at the Eleventh Meeting of the MPEC; (ii) adjustments based on MF Secretariat's comments on the country program; and (iii) the results of a survey of the small and informal sector. In parallel, the Bank, at the request of Ministry of Environment and Forests (MOEF) undertook project preparation of operations for ODS phase-out. That work which is in line with ODS phase-out strategy outlined in the Country Program includes the first project containing two sub-projects (Shriram and Blue Star), which were approved by MFEC on June 28, 1993, and a larger second project which is currently under preparation. 4. India has a mature and growing industrial sector. Environmental issues are receiving increased attention in India, with the MOEF taking the lead. The Bank has in the past supported industrial development, providing financial and technical assistance to small and medium-scale enterprises and supporting policy changes aimed at increased competitiveness of industrial enterprises. The Bank is also supporting environmental program through the first Industrial Pollution Control Project that was appioved by the Bank in May 1991, and a second Pollution Prevention project which was approved in July 1994. 5. Project Obiectives. The objective of the proposed project is to support India's program to phase out ODS consumption by providing technical assistance, engineering and product development support to the Shriram and Blue Star sub-projects as detailed in An= 1.  6. Proiect Descrilt'on. The Project has two components: (a) Shriram Refrigeration Industries Ltd., to provide assistance for conversion of compressor manufacture from CFC-12 to HFC-134a designs; and (b) Blue Star Ltd. to support funding for substitution of CFC-ll refrigerant by HCFC-123 in Centrifugal Chillers. Both components are designed to assist the participating enterprises in switching from use of ODS to non-ODS materials and technology (Annex 1'. The sub-projects represent measures that must be taken early to enable India to develop a cost-effective program to phase out ODS consumption, and they require no policy actions to be taken. Project Summaries and appraisal reports for the two components are available in the Project File. Each sub-project includes technology (from established technology supply relationships), design, training, equipment and implementation of product and engineering development activities to enable each enterprise subsequently to convert to non-ODS technology. (a) Shriram Refrigeration Industries Ltd.. Phase one of this component, wnich has been funded by MF, will lead to conversion of an existing CFC-12 refrigeration compressor manufacturing facility at Shr'ram near Hyderabad to a facility which manufactures compressors operating with non-ozone depleting refrigerant HFC-134a. In phase one, 1200 compressors will be producea1 for test purposes. The full projecc when completed will provide a major indigenous source of HFC-134a compressors for use in the production of non-CFC domestic refrigerators. (b) Blue Star Ltd.. Phase one oi this component will provide technology, engineering assistance, and training to Blue Star, a major CFC-ll centrifugal chiller manufacturer located near Bombay, to manufacture equipment suited for use of HCFC-123 as the refrigerant. Phase two will provide for regular manufacture of HCFC-123 Chillers. Technology will be obtained from York International Corp (US) under terms of a technology transfer agreement signed in December, 1992, to expand the existing agreement to cover the technology for HCFC-123. An in-house test facility will be constructed for prototype testing and quality assurance. Capacity will be developed to support customers with subsequent retrofit of existing CFC-11 chillers installations to HCFC- 123 centrifugal chillers. Manufacturing facilities will also be modified for production of new HCFC-123 centrifugal chillers. over the life of the project, demand for 540 MT of CFC-11 will be eliminated for the charging and servicing chillers in large office buildings and hotels throughout India. 7. Proiect Costs and Financing Arrangements. Estimated Proiect costs for the two sub-projects including contingencies and financial agent's fee are US$1.252 million. Use of IDBI as financial agent has proven to be the most efficient and economical way of managing the implementation of the project including handling fund transfers. IDBI's fee of 2% oi grant amount is quite reasonable compared to the alternative, of Bank staff carrying out the same functions. During negotiations it was confirmed that IDBI's fee shall be 2% of actual sub-grant amount disbursed. Moreover, the use of a financial agent 's standard practice in other ODS phase-out projects. The financial agent fee has been approved by M.VEC. Grants equal to the sub-projects, incremental cost will be channeled from the OTF to the participating enterprises through IDBI. Funds for these projects have been transferred from the MFMP to the Banks's OTF. The two enterprise.s are receiving 100% of project costs as grants. The proceeds of the Grant will be allocated as follows: (a) Shriram Refrigeration Industries Ltd. $584,000 (b) Blue Star Ltd. $483,000 (c) Contingency $160,000 (d) Financial Agent Fee $ 25,000 Total S1.252.000  Estimated sub-project costs and financing plan are provided in Schedule A. Procurement methods and disbursement table are provided in Schedule B Incremental costs eligible for funding from OTF are defined as capital costs (excluding taxes) plus net present value of operating costs less benefits discounted at 10% p.a. in constant economic terms (for four years); and then multiplied by local equity portion.' S. Proiect Imolementation. MOEF is responsible for project coordination and consistency of operations with the Country Program, it will determine overall objectives and pol':ies, and promote ODS phase-out activities. IDEI will be responsible for sub-project implementation, including sub-project evaluation, supervision, procurement and disbursements. The Bank has completed the sub- projects technical appraisal, and IDBI, has completed the enterprise and financial/economic portions of sub-prcject appraisal. The Grant Agreement is between the Bank and the IDBI, and the subgrant agreements between the IDBI and the participating enterprises. Key conditions for the subgrant agreement would include: (i) the beneficiary to carry out and operate the sub-project with due diligence and efficiency and in accordance with sound technical, financial managerial, environment and ecological standards; (ii) iprocurement of goods, works and consultants services to be financed out of the proceeds of OTF grant would be in accordance with the Bank procurement guidelines ; fiii) the beaeficiaries shall maintain records and accounts of expenditures in accordance with soand accounting practices; and (iv) the beneficiaries shall take out and maintain risk and hazards insurance consistent with sound business practices. During negotiations, assurances were obtained from IDBI that: (i) sub-grant agreements with each participating enterprise will be acceptable to the Bank, (ii) IDBI shall prepare and provide semi-annual sub-project progress reports to the Bank as well as the MOEF, and (iii) IDBI shall prepare and provide annual audit reports. The Bank will supervise the overall implementation of the project. The Project is expected to be completed by September 30, 1996, and the Project closing date shall be March 31, 1997. 9. Procurement and Disbursements. Procurement of goods, works, and aervices will be in accordance with Bank Guidelines for lending through financial institutions. IDBI will satisfy itself that goods and services to be purchased are for the sub-projects and are reasonably priced, by ensuring that the grant recipient has canvassed main sources of supply and purchased from the most advantageous source. Consultants will be selected in accordance with Bank Guidelines for the "Use of Consultants by World Bank Borrowers and by the Bank as Executing Agency". A Special Account of US$200,000 equivalent (about four months of estimated expenditures) would be established for IDBI after the Grant Agreement becomes effective to facilitate disbursements. Withdrawals from the Special Account would be against full documentation except for expenditures under contracts valued below $200,000 for which the Bank will accept Statement of Expenditures (SOB). The expected disbursement schedule is: 50% in FY95, 40% in FY96 and 10% in FY97. Retroactive financing of up to 10% of grant amount is proposed for expenditures incurred after June 1992, when India ratified the Mp.2 Blue Star would be reimbursed for US$100,000 for the transfer of technology an eligible expenditure which is part of Blue Star's project cost of US$483,000 that was approved by MFEC, and has been procured according to the Bank procurement guidelines. 10. Proiect Sustainabilitv. The funds for this project are being provided on a grant basis to introduce new non-ODS technologies. The project will establish an efficient mechanism for developing and implementing sub-projects to compleL.e the ODS phase-out program. The Country Program will focus on strategies, policies, costs and actions to ensure compliance with ODS phase- out Tne eigibl incrmnal costs ame multpied by the pemage of local ownership to determine tbe amot o..OTV granL 2 Uinder MP guidelines die determinant eigibility ctfacr for retroactive financing is the dat of rtfication of die protocol.  targets in the medium and long term. The project will provide incentives to enterprises to start phase-out projects quickly. Grant funding will compensate for commercial and technical risks. 11. Rationale for Montreal Protocol Financinc. The project is consistent with MFEC's and the Bank implementation guidelines and criteria for the use of OTF funds. 12. Actions Agreed. Agreement was reached with IDBI on issues including: (a) A fee of 2W of actual sub-grants amount disbursed, to be paid to IDBI froix the proceeds of the grant (para. 7); (b) IDBI shall prepare and provide semi-annual progress report on Project Implementation to the Bank as well as the MORF (para. 8)' (c) IDBI shall prepare and provide annual audit repJorts (para. 8); and td) IDBI shall enter into a