China - Second Montreal Protocol Ozone Depleting Substances Phase Out Project

Document of The World Bank FOR OFFICIAL USIE ONLY Report No. 12884-CHA MULTILATERAL FUND UNDER THE MONTREAL PROTOCOL MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR FOR THE CHINA AND MONGOLIA DEPARTMENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE REGIONAL VICE PRESIDENT, EAST ASIA AND PACIFIC REGION ON A PROPOSED OZONE PROJECTS TRUST FUND GRANT IN THE AMOUNT EQUIVALENT TO $4.865 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND MONTREAL PROTOCOL OZONE DEPLETING SUBSTANCES PHASEOUT PROJECT MAY 27, 1994 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of January 1994) Currency Name =Renminbi (RMB) Currency Unit =Yuan (Y) = 100 Fen $0.11 =Y 1.00 $1.00 =Y 8.70 WEIGHTS AND MEASURES 1 meter (m) =3.28 feet 1 kilometer (km) =0.62 miles 1 hectare (ha) = 10,000 square meters = 15 mu 1 kilogram (kg) =2.204 pounds i metric ton (MT) =2,204.6 pounds ABBREVIATIONS AND ACRONYMS CIB China Investment Bank EIC Economic Information Center GOC Government of China ICB International Competitive Bidding LCB Local Competitive Bidding MPEC Montreal Protocol Multilateral Fund Executive Committee NEPA National Environmental Protection Agency ODS Ozone Depleting Substances OTF Ozone Projects Trust Fund PMO Project Management Office PPA Project Preparation Advance UNDP United Nations Development Program UNEP United Nations Environment Program UNIDO United Nations Industrial Development Organization USEPA United States Environmental Protection Agency FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY CHINA SECOND MONTREAL PROTOCOL OZONE DEPLETING SUBSTANCES PHASEOUT PROJECT PROJECT AND GRANT SUMMARY Recipient: People's Republic of China Beneficiaries: National Environmental Protection Agency (NEPA), China Investment Bank (CIB) and 10 Participating Enterprises Amount: $4.865 million Project Description: The Project would help China to implement its ozone depleting substances (ODS) phaseout program by (a) providing financing for ten subprojects based on reduced-ODS technology in foams applications; and (b) strengthening NEPA, the government executing agency, and CIB, the financial agent. Flnancing Plan: Component $ million Financing Requirements: Capital investment 4.270 Recurring cost 2.043 Technical assistance 0.061 Financial agent 0.058 Total 6.432 Financed by: Ozone Projects Trust Fund (OTF) 4.865 OTF Project Preparation Advance 0.600 Total OTF 5 465 Enterprise funds 0.967 Total 6.432 Economic Rate of Return: N/A This document has a restricted distribution and may be used by recipients only in the performance of their I official duties. Its contents may not otherwise be disclosed without World Bank authorization.   MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR OF THE CHINA AND MONGOLIA DEPARTMIENT TO THE REGIONAL VICE PRESIDENT EAST ASIA AND PACIFIC REGION 1. I submit for your approval the following memorandum and recommendation on a proposed Ozone Projects Trust Fund Grant to the People's Republic of China for $4.865 million to help finance a project to meet China's medium term target of maintaining 1996 ozone depleting substances (ODS) consumption at the 1991 level as required by its obligations under the Montreal Protocol. The total Grant funding for the Project is $5.465 million, including $0.6 million 1/ for the ODS II Project Preparation Advance (PPF02927) approved in August 1992. Background 2. China is the developing world's largest consumer and producer of ozone depleting substances (ODS). In 1991, China's ODS consumption was about 50,000 tons and production was about 30,000 tons. ODS consumption has been growing at an average rate of about 11 percent per year which, if unconstrained, would push consumption to 84,000 tons by 1996. The Government has agreed to reduce ODS consumption by 1996 to 50,000 tons, the 1991 level, and cap consumption at that level thereafter. China has initiated work to meet this commitment, but its efforts are hampered by lack of funds and access to technology. 3. The Govemment ratified the Montreal Protocol (MP) in June 1991 and is eligible for financing from the MP Multilateral Fund, which was created to provide support to eligible developing countries to meet their MP obligations. The Multilateral Fund is managed by an Executive Committee (MPEC) and implemented by the Bank, the United Nations Development Program (UNDP), the United Nations Environment Program (UNEP), and the United Nations Industrial Development Organization (UNIDO). Bank projects are channelled through its Ozone Projects Trust Fund (OTF) Agreement with MPEC, with the Bank acting as Trustee. The Chinese agency responsible for the ODS phaseout program is the National Environmental Protection Agency (NEPA), the head of the Leading Group for Ozone Layer Protection. NEPA has established a Project Management Office (PMO), which will be assisted by eight Leading Group member ministries and the China Investment Bank (CIB), to manage the ODS phaseout program. 4. With the help of the MP, China has launched a 15-year program to introduce new technology and phase out all ODS production and consumption by 2005-10. China's Country Program for the phaseout of ODS under the MP inclbdes policy, strategy, costs / 'The total approved amount of the Project Preparation Advance is $1.5 million, of which $0.9 million is estimated for project preparation of the ODS I Project approved in October 1993 and $0.6 million is for project preparation of this proposed project (ODS II).  -2- and an action plan to achieve ODS phaseout; external funding and technology support are required, however. It was prepared with UNDP support using MPEC-approved funds and Bank assistance and was approved by MPEC in March 1993. 5. China's ODS Country Program (summary in Annex 1) will cap rapid increases in ODS consumption while introducing ODS replacement technologies through a centrally administered regulatory policy approach. Policy initiatives, including regulation of supply (import and local production), controls or bans in certain subsectors, price changes, taxes and other incentives and penalties, are being developed and implemented. China has already banned new ODS-based production facilities in the fire protection and aerosol sectors (1990 and 1991, respectively) and complete bans on ODS use in these sectors are planned to coincide with the adoption of substitute technologies by local industries. 6. Compared with 1991 consumption, ODS phaseout targets are as follows: 1996-100 percent or less; 2000-50 percent or less; 2005-25 percent or less; and by 2010 complete elimination. Five industrial sectors account for most of China's ODS usage: foams (37 percent), refrigeration and air conditioning (27 percent), aerosols (18 percent), solvent cleaning (10 percent) and fire protection (8 percent). Rapid ODS phaseouts are planned for sectors where substitute technologies are widely available. Use in other sectors, including refrigeration and air conditioning, will be phased out more slowly. Production would be phased out on a schedule consistent with domestic consumption needs, to be completed by 2010. 7. In response to the need for a fast start on China's ODS phaseout program, the Bank approved the first ODS Phaseout Project in October 1993. This second Project was approved by MPEC in June 1993. Preparation of a third, larger project has already started. UNDP is providing technical assistance through institutional strengthening of the Project Management Office (PMO), demonstration ODS phaseout projects in solvent cleaning, foams and revision of fire codes and standards to support halon phaseout. UNIDO is assisting in the financing of projects in tobacco processing. UNEP is in the early stages of its involvement in funding ODS reduction subprojects. In addition, the United States Environmental Protection Agency (USEPA) is providing assistance to develop a national halon recycling program and will have 150 units in operation by the end of 1994. Canada is providing bilateral support for development of a project in the commercial refrigeration subsector in Sichuan Province. 8. This program is part of a larger Bank effort to help the Chinese reverse the environmental degradation stemming from rapid industrialization based upon obsolete technologies and a pricing system applied under central economic planning. Substantial progress has been made in creating a regulatory framework and in promoting environmental protection while pursuing sustainable development. The Bank has been actively involved in assisting China in developing its overall environmental policies and actions, and an environmental strategy paper has been prepared and discussed with the Government. A number of Bank-assisted environmental operations, such as the Environmental Technical Assistance Project, the Southern Jiangsu Environmental  -3- Protection Project and the Beijing Environmental Protection Project, are currently under implementation. Several additional environmental projects are now being prepared. Project Objectives 9. The Project is designed to (a) support the adoption and commercialization of 50 percent reduced ODS foam applications through the implementation of cost-effective priority projects; and (b) further develop the project implementation mechanism through local institutions. Project Description, Costs and Financing 10. The Project will finance the incremental costs of ten priority subprojects to support adoption and commercialization of 50 percent reduced ODS foam technology, which are consistent with China's ODS Country Program. OTF financing is provided for technology transfers, equipment purchase, training, trial runs and recurring incremental chemical costs for the ten project beneficiaries. The Project will continue to provide assistance in strengthening the PMO's project management capabilities and will also provide technical assistance to build up CIB's capability in project appraisal and supervision of ODS subprojects. Subprojects are based on commercially proven technology, including appropriate transfer arrangements. The 10 subprojects consist of support to one institute to supply foam technology, three enterprises to supply raw materials (one of which will also convert its foam manufacturing operations) and six foam producing enterprises to convert their manufacturing processes to reduced ODS formulations. Annex 2 provides a detailed description of subprojects. 11. Total project costs, including capital costs and four years discounted recurring incremental costs, are estimated at $6.432 million, of which capital costs are estimated at $4.270 million, including $1.825 million in foreign exchanke. Incremental costs for China are defined as total capital costs for each subproject plus net present value of incremental recurrent costs in constant domestic prices for four years, discounted at 12 percent per annum, taking into account savings and benefits. 12. Project financing includes an OTF Grant of $5.465 million, including $0.6 million from the Project Preparation Advance already approved, to cover (1) $5.346 million as eligible incremental costs for the ten subprojects (details in Schedule A); (2) $61,000 as technical assistance to NEPA and CIB; and (3) $58,000 as the financial agent fee to CIB. Grants equal to the subprojects' recurrent incremental costs will be channeled from the OTF to participating enterprises through CIB. The balance of capital costs required would be from enterprises' own resources ($0.967 million). Appropriate financing plans confirmed in subproject appraisal reports must be found acceptable by the Trustee prior to subgrant approvals. Providing recurrent incremental costs as grants to enterprises will give sufficient incentive for enterprises to proceed with the reduced-ODS foam application. Project costs and the financing plan are shown in Schedule A. During negotiations, assurances were obtained from the Government that funds for incremental costs will be channeled to the participating enterprises as grants through CIB and that  - 4 - financing plans for the balance of project costs will be confinned by CIB during its appraisal of the subprojects. Subproject Selection and Eligibility Criteria 13. The Project finances ten subprojects. Technical appraisals (including determination of incremental costs, technology selection and compliance to ODS reduction objectives, based on MPEC criteria) have been completed. Eligible incremental costs for individual subprojects for grant financing were endorsed by NEPA and approved by MPEC in June 1993. CIB will appraise the financial viability of the subprojects and the participating enterprises according to the Trustee criteria. The subprojects are consistent with the ODS Country Program and confirmed by NEPA as essential to the Country Program objectives. Subprojects included in the Country Program should meet the following criteria: (a) have a direct and demonstrable result in reducing ODS consumption in the country; (b) be cost effective and take into account the country's national industrial policy; and (c) be based on environmentally sound technologies, or on substitutes for the substances controlled by the Montreal Protocol. 14. Criteria for financial appraisal include determinations that (a) the OTF grant does not exceed the subproject's eligible incremental costs; (b) the beneficiaries' revenues would be sufficient to cover any operating costs not provided for by the Grant, and the greater of depreciation or debt service requirements; and (c) the beneficiary is financially viable, as measured by a projected debt service coverage of not less than 1.2 times upon completion of the subproject and attainment of full production capacity. The criteria for technical appraisal include an assessment of the impact of the proposed subprojects on ODS reduction and compliance with national and local environmental regulations. Appraisal reports for subprojects less than $500,000 in grant support would be prepared in a simplified subproject format as agreed with the Trustee. Project Implementation 15. NEPA is the local coordinating agency for the Project. It has established a Project Management Office (PMO) in October 1992 to manage the ODS phaseout projects and to coordinate ODS phaseout activities with all other relevant agencies and enterprises. The PMO is currently staffed with eight people, five of them full time, for the ODS operations. To manage the ODS phaseout projects and China's overall ODS phaseout program efficiently, during negotiations, assurances were obtained from the Government that NEPA will maintain the PMO, with adequate staffing, and with functions and responsibilities satisfactory to the Trustee. Relevant ministries will coordinate technical assistance components of the subprojects. Participating enterprises, assisted by design institutes, will be responsible for subproject implementation. CIB, the financial agent for the OTF Grant, is completing the appraisal of each subproject, with technical support from the Economic Information Center (EIC), a unit in the Ministry of Chemical Industry, to confirm the World Bank's technical appraisal. CIB will receive from the Grant funds a fee equal to $58,000 for subproject appraisals, supervision and Grant administration services. CIB would receive three fourths of the fee (0.75 percent)  -5- following approval of all subproject appraisal reports by the Trustee; of this, CIB will pay $13,400 to the EIC for its work in technical appraisal analysis. CIB would receive the remaining one fourth (0.25 percent) upon final disbursement of grants to all subprojects. The MPEC has previously approved $450,000 in institutional strengthening funds through UNDP for NEPA to establish a clearing house and to build up the overall capabilities of the PMO to manage and coordinate the country's ODS phaseout program and the overall coordination of the ODS phaseout projects. Under this Project, NEPA will receive about $11,000 additional in technical assistance to strengthen operation of the PMO, including training of staff in project management and equipment as required and agreed with the Trustee. In addition, CIB will receive $50,000 in technical assistance for training of its branch staff in appraising and supervising ODS subprojects. Subproject appraisal reports (including environmental impact assessment summaries) will be approved by the Trustee prior to disbursing grants for each subproject. Institutional arrangements, including the respective roles of NEPA, CIB, the ministries and enterprises, have been agreed. 16. The Grant Agreement between the Government and the Trustee, the Fund Management Agreement between the Ministry of Finance and NEPA, the Financial Agency Agreement between NEPA and CIB, and the subgrant agreements between CIB and the participating enterprises will describe the responsibilities of each party. 17. The subgrant agreement for each subproject will, inter alia, require each participating enterprise to complete the subproject satisfactorily and to maintain satisfactory financial viability using indicators as agreed with the Trustee. Signing of the Fund Management and Financial Agency Agreements, satisfactory to the Trustee, are conditions of effectiveness. During negotiations, assurances were obtained from the Government that subgrant agreements with each participating enterprise will follow a model subgrant agreement acceptable to the Trustee. The model subgrant agreement will be the same used under the ODS I Project. 18. The Trustee will supervise the Project, including approval of each subproject and monitoring NEPA, PMO and CIB's activities, as required under its Trustee obligations. The PMO/CIB will prepare semi-annual reports for submission to the Trustee. Subproject completions reports, approved by NEPA, will be furnished to the Trustee promptly upon completion of subprojects. Operation reports for subprojects receiving funds for recurring operations expenditures, also approved by NEPA, will be furnished to the Trustee one and two years after subproject completions. Audit reports on the Grant will be prepared according to standard OTF requirements. Procurement of goods will be on the basis of local competitive bidding for contracts over $250,000. Prudent shopping will apply for procurement packages of less than $250,000. Prior reviews of procurement contracts are not required and it is expected that all procurement packages will be below $250,000. However the choice of local or international shopping will be subject to the Trustee's approval as part of subproject approval. The MPEC approved up to $2.043 million for incremental recurrent costs to cover additional costs of chemicals associated with application of the reduced ODS foam technology. Funds were approved based on projections of future production levels for the seven foam producers over the first four years of subproject operation. To facilitate grant administration, funds for  -6- incremental recurring costs would be disbursed in tranches over the first two years of subproject operation based on actual production of reduced ODS units. The operating and implementation mechanisms for funds transfers are detailed in Annex 3. Project funds are expected to be fully disbursed by June 30, 1997. Procurement procedures and the disbursement schedule are given in Schedule B. The timetable for processing the Project is given in Schedule C. Project Sustainability 19. The proposed Second ODS Phaseout Project will be implemented within the institutional and policy framework described in China's ODS Country Program, and is considered sustainable. China is committed to the phaseout of ODS as required in its obligations under the MP. By adopting the comprehensive phaseout strategy laid out in its ODS Country Program-including establishment of a formal ODS phase out institutional implementation framework and gradual bans on all ODS use-China has demonstrated its commitment to those obligations. During negotiations, assurances were obtainedfrom the Government that NEPA will monitor implementation of the ODS Country Program and inforn the Trustee from time to time about such implementation. This second Project provides the necessary funding and technology for implementation of high priority operations identified in the ODS Country Program action plan. At the enterprise level, all participating firms must maintain financial viability as indicated by a debt service coverage of not less than 1.2 times when the project is completed. Environmental Aspects 20. The main objective of the Project is ozone layer protection. The technologies to be adopted for reducing ODS content in foam production are environmentally benign. In accordance with the Trustee's guidelines, satisfactory safety and environmental precautions have been incorporated into subproject design. Each subproject will be subject to an environmental impact assessment according to local regulations, summaries of which will be transmitted to the Trustee for approval as part of the subproject appraisal report. Project Benefits 21. The foam sector is the largest ODS user in China, accounting for 37 percent of total consumption. There are about one hundred small and medium sized foam manufacturers. The Project represents an important demonstration for the entire sector to show that 50 percent reduced ODS foam application is technically and commercially viable, and will be replicated in many of the remaining foam enterprises. The Project will also assist in transferring the technology development to local firms. Specifically, the Project will directly contribute to phasing out 400 tons of ODS annually. The Project will assist the Government in meeting its medium term target of maintaining 1996 ODS consumption at 1991 levels.  -7- Project Risks 22. Risks are reasonable. Subprojects are based on technology commercially proven outside China, and substantial technical support is being provided under the Project. Providing incremental costs as grants will ensure that enterprises will have a financial incentive to initiate action. Satisfactory subproject financing plans will be confirmed prior to subproject approvals. NEPA's PMO will be strengthened by both UNDP's Institutional Strengthening Project and the technical assistance component under this Project. The Bank has also provided continuous assistance in improving CIB's subproject appraisal capability. Lessons from Previous Bank Experience 23. Projects utilizing OTF resources are under simultaneous development in most Regions, including projects in Indonesia, Mexico, Malaysia, Thailand, Philippines, Turkey and Venezuela. No OTF project has so far been completed, but work to date indicates the needs for flexibility in project design, for well prepared and documented components at the preappraisal stage, and for training and institutional strengthening support. The experience gained thus far under the First ODS Project in China indicates that training is imperative to familiarize CIB branch level staff with the concepts of ODS reduction objectives, the Montreal Protocol, and the ODS Project processing procedures and to train them for efficient supervision. Rationale for Funding from the Montreal Protocol Interim Multilateral Fund 24. The Project is consistent with the Implementation Guidelines and Criteria for OTF funding established by the MPEC. Agreed Actions 25. At negotiations, assurances from the Government were obtained that: (a) funds for incremental costs will be channeled to participating enterprises as grants through CIB, and financing plans for the balance of project costs will be confirmed by CIB during its subproject appraisals (para. 12); (b) NEPA will maintain the PMO, with adequate staffing and with functions, and responsibilities satisfactory to the Trustee (para. 15); (c) subgrant agreements with each participating enterprise will follow a model subgrant agreement acceptable to the Trustee (para. 17); and (d) NEPA will monitor implementation of the ODS Country Program and inform the Trustee from time to time about such implementation (para. 19). 26. The following will be conditions of effectiveness of the Grant:  - 8 - (a) signing of a Fund Management Agreement satisfactory to the Trustee between the Ministry of Finance and NEPA that describes the responsibilities of NEPA and its PMO under the Grant Agreement (para. 17); and (b) signing of a Financial Agency Agreement satisfactory to the Trustee between NEPA and CIB that describes the responsibilities of CIB under the Grant Agreement (para. 17). Recommendation 27. I am satisfied that the proposed Grant would comply with the relevant provisions of the Ozone Projects Trust Fund in Resolution 91-5 of the Executive Directors, and I recommend that the Regional Vice President approve it. Nicholas C. Hope Director China and Mongolia Department East Asia and Pacific Region Attachments Washington, D.C. May , 1994  -9 - SCHEDULE A CBINA SECOND ODS PHASEOUT PROJECT PROJECT COSTS AND FINANCING (S'O00) Total financinz required Total funding ap- Recurrent proved by MP lb Financing Capital Cost /a incremental cost Total Droiect cost of which breakdown Local Foreign Total Local Foreign Total Local Foreign Total Total capital (i %) cost 1. Project Cost Subprojects Technology Liming 201 275 476 0 0 0 201 275 476 457 457 7.4 Polyol Shenyang 293 22 315 0 0 0 293 22 315 152 152 4.9 Wuxi 377 145 522 0 0 0 377 145 522 264 264 8.1 Panel Foam Chengde 17 117 134 29 0 29 46 117 163 163 134 2.5 Dalian 80 168 248 49 0 49 129 168 297 275 226 4.6 Tianjin 173 125 298 72 30 102 245 155 400 400 298 6.2 Refrigerator foam Qingdao 82 164 246 96 160 256 178 324 502 476 220 7.8 Xinfei 190 164 354 878 0 878 1,068 164 1,232 1,042 164 19.2 Shangling 261 271 532 316 187 503 577 458 1,035 958 455 16.1 Shuangyan 397 74 471 166 60 226 563 134 697 485 259 10.8 Total Base Cost 2 071 1 525 3 596 1606 437 2 043 3 677 1962 5 639 4 672 2 629 87.7 Contingency 374 300 674 374 300 674 674 674 10.5 Subtotal 2,445 1,825 4270 1,606 437 2043 4 051 2 262 6 313 5 346 3 303 9S. Technical Assistance NEPA 11 11 0.2 CEB 50 50 0.8 Financial agency fee 58 58 0.9 Total 6.432 5 465 100.0 II. Project FSnancing Plan OTF Resources 5,465 85.0 of which: PPA S600,000 600 Enterprise funds 967 15.0 Total 6 432 100j 0 /a Includes capital cost, working capital and interest during construction. /b Includes subproject technical assistance. Recurrent incremental cost eligible for MP financing is calculated on a discounted cash flow basis (12 percent per annum).  -10- SCHEDULE B CHINA SECOND ODS PHASEOUT PROJECT PROPOSED PRocuREMENT ARRANGEMENTS AND ESTIMATED DISBURSEMENT SCHEDULE PROPOSED PROCUREMENT ARRANGEMENT 1/ The procurement procedure for one-time capital costs will follow CIB's practices considered satisfactory to the Trustee. It will be substantially similar to other environmental projects in China, consisting at a minimum of the following: Goods (an aggregate amount of $1.824 million funds) (a) Contracts over $250,000 would be procured on the basis of local competitive bidding (LCB); and (b) Contracts below $250,000 would be procured on the basis of comparison of price quotations solicited from at least three qualified suppliers (all procurement is expected to be under this category). The choice of local or international shopping will be subject to the Bank's approval as part of subproject approval; Consultants (an aggregate amount of $0.266 million funds) Consultants shall be engaged on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and the World Bank as Executing Agency" dated August 1981. Estimated Disbursement Schedule 2/ ($ million) Bank Fiscal Year FY95 FY96 FY97 Annual 1.400 2.000 2.065 Cumulative 1.400 3.400 5.465 I/ Excluding $0.6 million from the Project Preparation Advance. Procurement under this Advance is governed by the relevant agreement. Z/ Incl iing $0.6 million from the Project Preparation Advance.  - 11 - SCHEDULE C CHINA SECOND ODS PHASEOUT PROJECT TIMETABLE OF KEY PROJECT PROCESSING EvENTs Preparation (time taken): 25 months Prepared by: NEPA and the Bank First Presentation to the Bank: February 1992 Departure of Bank Appraisal Mission: December 1, 1993 Date of Negotiations: March 14, 1994 Planned Date for Effectiveness: July 31, 1994 List of Relevant PCRs and PPARs: None Planned Completion Date: June 30, 1997 The project was prepared by the following: H. Chan (Operations Officer, task manager), D. Brown (Principal Industrial Specialist), J. Poppele (Ozone Operations Coordinator, Asia Region), and B. Veenendaal (Foam Specialist, Consultant). The Division Chief is R. S. Newfarmer and the Department Director is Nicholas C. Hope  -12- ANNEX 1 CHINA SECOND ODS PHASEOUT PROJECT SUMMARY OF CHINA COUNTRY PROGRAM FOR THE PHASEOUT OF OZONE DEPLETING SUBSTANCES UNDER THE MONTREAL PROTOCOL Strategy 1. The Government of China will strictly adhere to the provisions of the Montreal Protocol and undertake necessary measures for the phaseout of ozone depleting substances (ODS) production and consumption in China by the year 2010, provided that sufficient funds are made available and needed technologies are transferred in accordance with the provisions of the Protocol. China will speed up its ODS phaseout once cost- effective substitute technologies and sufficient financial assistance for implementing the technical changeover are obtained. ODS Situation in China 2. China's ODS consumption in 1991 was 48,239 metric tons (MT), of which 63 percent was produced domestically and 37 percent was imported. Seven types of ODS controlled by the Montreal Protocol are commonly produced and used in China: CFC-11, 12 and 113; halon-1211 and 1301; carbon tetrachloride (CTC); and methyl chloroform (TCE). The four substances accounting for most of the total ODS in 1991 were CFC-12 (48 percent), CFC-11 (34 percent), Halon-1211 (8 percent), and CFC-113 (8 percent). 3. In terms of ODS, the foams sector is the largest user in China, accounting for 37 percent of total consumption, followed by the refrigeration and air conditioning sector with 27 percent, aerosols with 18 percent, solvents with 10 percent, and fire extinguishing (halons) with 8 percent. Although halon usage is relatively small, halons have significant impact due to their greater weighted ozone depletion potential, and therefore merit special attention. Forecast of Unconstrained ODS Demand to the Year 2010 4. China's economy is growing rapidly, and ODS consumption is expected to increase at about 11 percent annually. ODS consumption, if not controlled, is expected to reach 84,000 MT by 1996, 116,900 MT by 2000, 173,700 MT by 2005, and 255,600 MT by 2010. Projected ODS consumption in 2010 can be broken down as follows:  - 13 - ANNEX 1 - CFC-11: 35,500 MT - Halon-1211: 19,200 MT - CFC-12: 138,500 MT - Halon-1301: 900 MT - CFC-113: 45,600 MT |- CTC: 3,100 MT - TCE: 12,900 MT I 5. Projected increases in ODS demand will span all sectors. Demand for rigid polyurethane (PU) foams used in domestic refrigeration is expected to increase at an annual rate of 8 percent until 1995 and at a rate of 3 percent after 1995. Demand for other foams should increase at a rate of 6 percent per year. Industrial refrigeration and air conditioning are expected to increase steadily at 8 percent per year, while commercial refrigeration is projected to grow at 18 percent per year up to the year 2000 and 15 percent per year thereafter. Mobile air conditioning (MAC) demands are expected to grow at an annual rate of 20 percent before 2000 and 10-12 percent after 2000. 6. Demand for Halon-121 1 fire extinguisher is expected to grow by 11 percent before 1997 and by 7 percent after 1997, and for extinguishing systems by 14 percent until 1997 and by 12 percent per year thereafter. Demand for Halon 1301 systems is expected to grow by 20 percent before 1997 and by 15 percent after 1997. 7. Demand for aerosols is expected to increase at 30 percent per year until 1995, at 9 percent during 1996-2000, and at 6 percent during 2001-10. Solvents used in electronics cleaning are expected to experience a demand growth rate of 11-16 percent through the year 2010. Institutional Framework 8. The Government of China has established a formal national institutional framework for ozone layer protection and for implementation of the Montreal Protocol. Within this framework, the Leading Group for Ozone Layer Protection is responsible for the implementation of Vienna Convention and Montreal Protocol provisions, the review of various implementation options, and strategic decision-making. The Leading Group comprises the National Environmental Protection Agency (Leader), the Ministry of Foreign Affairs, State Planning Commission, State Science and Technology Commission, and Ministry of Finance (vice-leaders), and eight current members (seven ministries 1/ and the General Administration of Customs). 1/ Members of the Leading Group on Ozone Layer Protection include the Ministry of Commerce (MOC), National Council of Light Industry (NCLI), Ministry of Public Security (MPS), Ministry of Aerospace Industry (MAI), Ministry of Chemical Industry (MCI), Ministry of Machinery and Building Industry (MMBI), and Ministry of Foreign Trade and Economic Cooperation (MOFTEC). The Ministry of Agriculture is also proposed as a member.  - 14- ANNEX 1 9. Three other entities report to the Leading Group: the Coordinating Group for Ozone Layer Protection, eight technical Sectoral Working Groups, and the Center for Environmental Sciences at Beijing University. The Coordinating Group has been entrusted with the following tasks: (a) concrete implementation of the Convention and the Protocol; (b) coordination of the production, import, export and consumption of controlled substances and their products; (c) financial analysis of the domestic and external funding needed for implementation of the Protocol; (d) proposing various options to the Leading Group; and (e) handling other affairs related to the Convention and the Protocol. 10. The Sectoral Working Groups formulate sectoral components of the Country Program as well as specific projects. The Working Groups represent aerosols, chemical substitutes, foams, halons, ODS recycling and recovery, refrigeration/AC/MACs, refrigerator manufacture, and solvents. The Center for Environmental Sciences at Beijing University is responsible for updating the Country Program. 11. Other institutions involved include the State Administration of Commodity Prices, which manages the prices of controlled substances and substitute technologies, and local environmental protection agencies, which are responsible for the implementation of environmental regulations at the local level. Policy Framework 12. China's policy framework to phase out ODS and encourage the use of substitute technologies consists of the following ten specific policies: (a) Production Management. A permit and quota system will be used to manage ODS production. Government permission will be required for ODS manufacture, based on environmental impact assessments. Enterprises must follow the ODS phaseout schedule in the Country Program. (b) Imports. Imports of ODS and their products will be restricted in order to promote local production of ODS substitutes. (c) Prices. Prices of ODS and ODS substitutes will be adjusted when appropriate to ensure a smooth transition. (d) Sales. Government will be the exclusive supplier for sales of ODS.  -15 - ANNEX 1 (e) Taxation. Tax rates on ODS and their products will be controlled or increased. Tax reductions/exemptions will apply to ODS substitutes and ODS recovery. (f) Investment. The government will encourage investment policies that promote ozone protection. (g) Incentives. The government encourages the development of technologies for ozone protection applicable to China, and will establish a fund for outstanding contributors to ODS phaseout. (h) Public Awareness. Public media resources will be used to raise public awareness of ozone issues. Technical training courses will increase skills of technicians and managers involved with ODS. (i) Green Labels. "Green labels" will be issued to products made with non- ODS and ODS substitutes. (j) Legal Policy. Regulations for managing ODS and ODS substitutes will be enhanced and finalized. Government and Industry Responses to the Protocol 13. China has already issued bans on new ODS-based production facilities in the fire protection and aerosol sectors (1990 and 1991, respectively). Other government and industry responses to the Protocol to date include the establishment of a state-level institutional framework and Ministry-level administrative institutions; the elaboration of industrial management systems for compliance; research into substitution technologies; the mobilization of funding for loans; the establishment of an assessment center for CFC substitution; various activities for the exchange of technical and policy information; and the publishing of various papers to raise public understanding. ODS Phaseout Implementation 14. The ODS phaseout implementation schedule is shown in the following table: Sector Description Phaseout date Aerosols Excludes medical applications 1997 Foams Excludes use in refrigerators and hard polyurethane boards 2000 Chemical substitutes Excludes Halons 2010 Industrial/commercial refrigeration 2005 Domestic Refrigeration Includes use in refrigerators and hard polyurethane boards 2000 Halons 2000/a Solvents n.a./b ODS recovery and recycling Construction of recovery/recycle networks/sites 2005 In Not completely phased out. By the year 2000, halons will be phased out for nonessential uses, production of halon and halon extinguishers will be halted, and halon storage and recycling equipment will be reinforced for storage of halons for essential uses. /b Promotion of non-ODS technologies through entire industry will be started in 1996. It is difficult to predict cormplete phaseout.  - 16- ANNEX 1 ODS Phaseout Costs 15. The current least-cost option for phasing out ODS in China by 2010 is estimated to have a direct net incremental cost of about $1.4 billion (not yet endorsed by the MPEC). Other incremental costs have not yet been calculated. The net administrative/management costs for implementation of the Government's Action Plan to implement the proposed strategy is $500,000 per year.  - 17 - ANNEX 2 CHINA SECOND ODS PHASEOUT PROJECT DESCRIPTION OF THE TEN SUBPROJECTS UNDER THE PROPOSED PROJECT 1. The ODS II Project is a 50 percent reduced ODS foam project with 10 subprojects. The project comprises one technology supplier; two polyol/polyol blend suppliers; and seven foam producers, one of which also manufactures polyol/polyol blend. The Liming Chemical Research Institute (LCRI)- ($457,000-the estimated project incremental cost) 2. The LCRI is a technology supplier. The use of reduced ODS foam formulations in China is impeded by a lack of domestic raw material suppliers. Specifically, reduced ODS compatible polyols are only available from pilot-scale manufacturers. LCRI has successfully developed polyols compatible with low ODS foam formulations, including laboratory scale production and blending processes which have produced finished polyurethane (PU) foams that meet national standards. This project will further demonstrate the new technology on the pilot level and facilitate the expansion of polyol production and blending processes to industrial capacity. The training component included in this project consists of on-site direction from foreign chemical suppliers, and technical exchange with domestic experts. 3. LCRI is a comprehensive PU foams research institute under the Ministry of Chemical Industry (MCI). The Department of Polyurethane Development was established to enhance China's domestic production of PU foam feedstocks and has consistently produced products comparable to those from developed countries. This project consists of the following eight stages: (a) LCRI will refine synthesis techniques for polyols and blended polyols compatible with reduced ODS foams. Synthesis techniques compatible with industrial manufacturing processes will be developed. (b) LCRI will establish 200 MT capacity pilot plants for the manufacture of polyether polyols compatible with reduced ODS foam formulation and the blending of these polyols. Trial production will begin. (c) LCRI will optimize polyol formulation and adjust the polyol blending process so that foaming characteristics, finished foam properties, repeatability of production and blending processes, and blended polyol shelf  - 18 - ANNEX 2 life will achieve 50 percent reduced ODS formulations currently manufactured in developed countries. Finished rigid PU foam products will also be tested for quality. (d) LCRI will cooperate with Shenyang Petrochemical Factory (SPF) to perform trial runs on SPF's production equipment. (e) Foreign and local experts will be brought to LCRI to further optimize industrial scale production methods and assist in training SPF's staff for the trial runs. (f) LCRI will begin work on manufacture of polyols and blended polyols compatible with reduced ODS foam for use in cold storage, ice cupboards, and panel insulation. (g) LCRI will conduct life test research on foam products manufactured with the reduced ODS compatible polyol and blended polyol. Formulations will be adjusted to achieve product quality in developed countries. (h) LCRI will expand development of ODS-free foam technologies, focussing on industrial scale manufacturing techniques for non-ODS blowing agents. The Shenyang Petrochemical Factory (SPF) ($152,000-the estimated project incremental cost) 4. SPF is a polyol/blended polyol producer. For this project, it will retool existing operations to establish a 2,000 MT facility for production of polyol and blended polyol feedstocks compatible with 50 percent reduced ODS foam. The blended polyol will be sold to household refrigerator and insulation panel producers. 5. SPF produces over 200 chemical products and is one of the primary commercial polyol producers in China. SPF's production line has an annual polyol production capacity of 15,000 MT, including a 10,000 MT facility imported from Germany. The factory also oversees the Shenyang Polyurethane Research Institute which has successfully developed industrially feasible production techniques for a variety of commercially significant feedstock polyols. Liming Chemical Research Institute will provide low ODS technology to SPF, and the conversion, including worker training, trial runs, and scale up to full production, will take place over 1994-96. The new technology requires the use of alternative raw materials, and new storage facilities will be needed to streamline blended polyol operations. The Wuxi KZ Foam Factory (WKZ) ($264,000-the estimated project incremental cost) 6. WKZ is a polyol/blended polyol producer. This project will convert a 5,000-MT facility for the production of blended polyol feedstocks compatible with  -19- ANNEX 2 50 percent reduced ODS foam. WKZ produces rigid polyurethane foam materials for household refrigeration, panel insulation, and in-situ spraying and is one of the primary commercial blended polyol producers in China. WKZ's production line has an annual production capacity of 5,000 MT with current production of 700 MT. The blended polyol will be sold to domestic household refrigerator producers. In 1992, WKZ entered into a cooperative agreement with the 510 Research Institute (510) to transfer 510's patented reduced ODS foam technology to WKZ and scale up production from pilot to full scale. WKZ and 510 agreed on a licensing fee to cover the costs of technology transfer and WKZ produced 150 MT of low ODS compatible blended polyol in 1992 and an estimated 250 MT in 1993. The new blend has been tested with satisfactory results by over 10 refrigerator manufacturers including batch production of 800 units by the Shuangyan General Refrigeration Factory. In addition, the WKZ's formulation has been tested by two panel manufacturers; and the Shanghai Refrigeration Equipment Factory now uses its reduced ODS formulation in all production. 7. For this project, WKZ will scale up low ODS compatible technology for industrial scale synthesis of polyether polyols and the blending of these polyols. WKZ will build a new preblend reactor facility and renovate their existing line for production of the new blended polyols. The preblend reactor is required as the new process includes addition of viscosity reducing additives. Equipment retrofitting will improve control over 50 percent compatible feedstocks. After the conversion, which will take place over 1994- 97, production capacity of the facility will be equal to the 5,000 MT existing capacity. The training included in this project consists of on-site direction from domestic experts, as well as training throughout China. The Chengde Conunercial Machinery Company (CCMC) ($163,000-the estimated project incremental cost) 8. CCMC is an insulation foam producer. This project will phase out about 30 MT of CFC- 11 annually by converting in-situ spray and a 160,000 m2 capacity rigid PU insulation panel operations to the use of 50 percent reduced ODS foaming techniques. CCMC is an enterprise under the Ministry of Commerce and its 1992 foam production totaled 180,000 m2 (consuming about 45 tons CFC-11) up from 100,000 m2 in 1991. CCMC exports products to countries in Europe, Asia, and Africa. CCMC's rigid PU insulating panel production line was imported from Finland and West Germany. Standard techniques are used for production of sandwich panels and spray foam operations. Cold storage facilities are the most common end-use. Customers select spray or panel application depending on individual requirements. Project conversion costs include new foaming equipment, testing instruments, trial runs, and training. However, OTF financing requests are limited to trial production, testing and training costs. CCMC will use domestic raw materials to demonstrate their performance. This project includes on-site training from foreign chemical suppliers and experts. CCMC's production line and in-situ foaming operations will be converted over the period 1994-97, resulting in annual ODS savings of 30 MT per year in the first year of full production.  - 20 - ANNEX 2 The Dalian Refrigerator Works (DRW) ($275,000-the estimated project incremental cost) 9. The DRW is an insulation foam panel producer. This project will phase out 15 MT of CFC-11 annually by converting a 110,000 m2 capacity rigid polyurethane insulation panel manufacturing facility to production of rigid PU insulation panels using 50 percent reduced ODS foam. DRW is an enterprise under the Ministry of Machinery Building Industry (MMBI) and is one of China's 500 largest enterprises. DRW has an annual production capacity of 110,000 m2 of rigid PU insulation panel and is one of the largest suppliers of rigid PU insulation panel in China. DRW's rigid PU insulating panel production line was imported from Japan. Project conversion costs include funds for new foaming equipment, quality control instruments, trial runs, and training. DRW will use domestic raw materials, including a special flame-resistant blended polyol, to demonstrate their performance. The training included in this project consists of on-site direction from foreign chemical suppliers. Production of models using reduced ODS foam will be phased in over 1994-97. Starting in 1997, 110,000 m2 of panels using 50 percent reduced foam will be manufactured, for annual ODS savings of 14 MT. The Tianjin Polyurethane Plastic Factory (TPPF) ($400,000-the estimated project incremental cost) 10. The TPPF is a polyol/blended polyol and insulation foam panel producer. This project will phase out about 31 MT of CFC-1l annually by converting TPPF's operations to production of feedstocks compatible with low ODS foam formulations and products with reduced ODS, including 2,000 MT capacity for polyol production, 3,300 MT capacity for blended polyol and 250,000 m2 capacity for panels. 11. TPPF produces rigid PU pipe sleeves and panels. Annual insulation panel capacity is 250,000 m2. TPPF also produces polyol and blended polyol feedstocks for these products. Annual polyol capacity is 2,000 tons while blended polyol capacity is 3,300 tons. TPPF's products are sold abroad to Hong Kong and Japan. TPPF will acquire production technology for polyether polyols compatible with reduced ODS foam formulations from The Liming Chemical Research Institute. TPPF will adapt this technology to their current polyol and blended polyol production operations, perform trial runs, and finally convert to production of polyol and blended polyol compatible with reduced ODS foam. This project will also convert TPPF's 250,000 i2 capacity insulation panel production line to the manufacture of rigid PU insulation panels with 50 percent reduced CFC-l 1 foam. The training included in this project consists of on-site direction from foreign chemical suppliers and domestic experts. Tianjin will reach full production of models using reduced ODS foam starting in 1994. 250,000 m2 will be manufactured, for annual ODS savings of 31 metric tons.  - 21- ANNEX 2 The Qingdao Haier Refrigerator Factory (QHRF) ($476,000-the estimated project incremental cost) 12. The QHRF is a household refrigerator foam insulation producer. This project will phase out about 60 MT of CFC- 1 annually by converting a 200,000 unit capacity production line at QHRF to the production of refrigerators using 50 percent reduced CFC-11 foam. 13. QHRF is one of China's largest household refrigerator manufacturers with production capacity of 600,000. The factory's facilities consist of three refrigerator production lines with three foaming lines. Eighty-three percent of QHRF's products are distributed in Northeast China and the remaining 17 percent are exported to more than 30 countries in Europe, North America, and Southeast Asia. QHRF has produced some models (mainly for export) with reduced ODS formulations since 1991 using imported materials. This project will extend use of reduced ODS formulations to whole production. Conversion will consist of prototype evaluation, batch production, trial runs, and finally full-scale production. Conversion costs include funds for new foaming equipment, training, and test instruments. QHRF will use domestic raw materials to demonstrate their performance. QHRF will reach full production of models using reduced ODS foam starting in 1995. The Henan Xinfei Electric Appliance Group (HXEAG) ($1,042,000-the estimated project incremental cost) 14. The HXEAG is a household refrigerator foam insulation producer. This project will phase out about 100 MT of CFC-1 1 annually by converting a 400,000 unit capacity facility at HXEAG for production of household refrigerators to the use of 50 percent reduced CFC-1 1 foam. 15. HXEAG produced over 150,000 refrigerator/freezer units in 1991, 230,000 in 1992 and expects to produce 400,000 units in 1993. HXEAG is the only modern household refrigerator manufacturer in Henan province. HXEAG's production line has an annual capacity of 400,000 units, was imported from IRE Co., Italy, and went into production in 1989. HXEAG will convert its 400,000 unit capacity assembly line to the production of refrigerators with 50 percent reduced CFC-1 1 foam. Conversion costs include funds for quality control instruments, trial runs to optimize formula and blowing technique, and batch production. Factories will use domestic raw materials to demonstrate their performance. The new foam formulation will be used with existing foam blowing equipment. The training for this project includes on-site direction from foreign chemical suppliers. Production of models using reduced ODS foam will be phased in over 1994- 1996.  - 22 - ANNEX 2 The Shanghai Shangling General Refrigerator Factory (SSGRF) ($958,000-the estimated project incremental cost) 16. The SSGRF is a household refrigerator foam insulation producer. This project will phase out about 100 MT of CFC-1 1 annually by converting a 400,000 unit capacity production line at SSGRF to production of household refrigerators using 50 percent reduced CFC-1 1 foam. 17. SSGRF's is one of China's largest household refrigerator manufacturers, producing 320,000 units in 1991 and 350,000 in 1992, and consuming about 210 tons of CFC-I 1. SSGRF's production line was imported from Mitsubishi Electronics (Japan) and has an annual production capacity of 400,000 units. Production of units with low ODS foam will be phased in over four years. Conversion will consist of prototype evaluation, batch production, trial runs, training, and finally full-scale production. SSGRF will renovate the mixing head on its existing HP foaming machine to produce quality foam with low ODS foam materials. Conversion costs include funds for new foaming equipment and modification of existing equipment, lost productivity during conversion, and batch production. Training consists of on-site direction from foreign chemical suppliers. The Shuangyan General Refrigerator Factory (SGRF) ($485,000-the estimated project incremental cost) 18. The SGRF is a household refrigerator foam insulation producer. This project will phase out about 30 MT of CFC-1 1 annually by converting a 250,000 unit capacity facility at SGRF for the production of household refrigerators using 50 percent reduced CFC-l 1 foam. 19. SGRF's production line has an annual production capacity of 250,000 units and was imported from Sharp Corporation, Japan. SGRF has been awarded many prizes from both the provincial and central governments for consistently exceeding national product standards. 1991 production was 80,000. It reached 100,000 units in 1992 and is expected to be 80,000 units in 1993. A limited number of SGRF's refrigerators are sold abroad to the newly independent states of the former USSR, Afghanistan, and Hong Kong. The 50 percent foam formulation, which requires a smaller increase in the amount of MDI required for reduced ODS formulations (traditional formula is 1.3: 1.0 MDI:polyol, under this project it will become 1.08: 1.0), will be based on technology produced by Wuxi in cooperation with 510 Research Institute. Conversion costs include funds for quality control instruments, trial runs to optimize formula and blowing technique, and batch production. This project will further demonstrate the performance of Wuxi's reduced ODS formulation based on domestic raw materials. The training included in this project consists of on-site direction from foreign experts. Production of low-ODS foam units will be 80,000 in 1994/95 and increase to 100,000 for 1996/97.  -23 - ANNEX 3 CHINA SECOND ODS PHASEOUT PROJECT IMPLEMENTATION MECHANISM OF THE ODS II PROJECT Overall Responsibilities 1. The Project Management Office (PMO). The PMO under NEPA will have responsibility for coordinating the implementation of subprojects, ensuring their consistency with the ODS Country Program and eligibility criteria for subprojects financed by the OTF. 2. The China Investment Bank (CIB). The CIB will be responsible for subproject appraisals, procurement and disbursement of grants to participating enterprises, and the supervision of subproject implementation. CIB will be assisted by the Economic Information Center (EIC) of the Ministry of Chemical Industry to prepare the technical subproject appraisals. CIB will administer funds allocated by the Bank from the OTF to the subprojects. Processing Steps Prior to MPEC Approval 3. Subproject Preparation. Enterprises, with the Bank's support, prepared preinvestment studies with guidance from the PMO and ministries included in the Leading Group for Ozone Layer Protection. CIB calculated incremental costs for subprojects endorsed by NEPA using the agreed methodology. 4. Government Endorsement. NEPA endorsed each subproject and incremental cost to ensure that the subproject proposals conform to priorities established under the ODS Country Program. 5. Technical Review and Bank Endorsement. The Bank oversaw reviews of subproject proposals and endorsed each subproject to ensure consistency with guidelines for the OTF projects. MPEC Approval 6. The Bank submitted the 10 subproject proposals under the ODS II Project to MPEC for approval in June 1993 and approval was obtained.  - 24 - ANNEX 3 Processing Steps Following MPEC Approval 7. Subproject Appraisal. CIB will prepare subproject appraisal reports in accordance with the agreed Subproject Appraisal Report format. CIB headquarters will ensure that all appraisal reports conform to the agreed format and are of acceptable quality. PMO will review appraisal reports and submit them to the Bank for approval. Subgrants can only be awarded to subprojects for which the Bank has approved appraisal reports (there is no free limit in accordance with guidelines for OTF projects). 8. Grant Agreement. The Grant Agreement between the Government of China and the Bank will be signed based on the Grant amount approved by MPEC. Upon signature of the Grant Agreement, funds will be available for disbursement as outlined below. 9. Subsidiary Agreements. Signing of a Fund Management Agreement between the Ministry of Finance and NEPA, and a Financial Agency Agreement between NEPA and CIB, both satisfactory to the Bank, are conditions of effectiveness. 10. Subgrant Agreements. After subproject appraisal reports-including confirmed financing plans and environmental assessments-are approved by the Bank, CIB will prepare Subgrant Agreements (based on model subgrant agreement that is agreed with the Bank under the ODS I Project), which will commit the participating enterprises to utilize subgrants for activities agreed upon in the subproject proposals to achieve the stipulated ODS reduction or phaseout. 11. Disbursement. (a) Between the Bank and CIB-Once the Grant Agreement is signed, a disbursement letter from the Loan Department of the Bank will be sent to MOF with details on disbursement procedures. (b) Special Account-CIB will open a Special Account with an initial deposit of $400,000. It would be replenished monthly or whenever the Special Account is drawn down to 50 percent of its initial deposit, whichever occurs first. (c) Statement of Expenditures (SOEs) and Direct Payment-Disbursements for contracts under the agreed amount of $200,000 would be made on the basis of SOEs to be certified by NEPA's PMO. The PMO would retain documents supporting the SOEs for institutional strengthening and the documentation of subprojects would be retained by CIB; these documents would be made available for inspection and review by the Bank supervision missions. All other disbursements will be made against fully documented expenditures.  - 25 - ANNEX 3 (d) Recurrent Incremental Chemical Expenses-Disbursements for the agreed recurrent incremental chemical expenses will be paid in tranches over the first two years of project operation based on actual production levels for reduced ODS products. Annual operations reports including production levels will be prepared by enterprises and submitted to CIB for review and submission to NEPA and the Bank. 12. Procurement. The participating enterprises will be responsible for procurement under the Project. Items financed with Grant funds will be procured as follows: (a) For Procurement of Goods- (i) Contracts over $250,000 would be procured under local competitive bidding (LCB) procedures; (ii) Contracts below $250,000 would be procured on the basis of comparison of price quotations solicited from at least three qualified suppliers (all procurement are expected to be under this category). The choice of local or international shopping will be subject to the Trustee's approval as part of subproject approval; and (b) For Recruitment of Consultants (including those from local institutes)- Consultants under the Project would be recruited in accordance with the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency," published by the Bank in August 1981. Prior reviews of procurement contracts are not required. All procurement will be reviewed ex-post, on the basis of random sampling during supervision missions. Participating enterprises will, with assistance from technical consultants provided for in the Grant, arrange procurement (international and local) for the packages in each subproject. Bidding documents will be prepared based on model bidding documents which the Bank has agreed with MOF. CIB will review compliance with the agreed procedures. 13. Subproject Implementation. The participating enterprises are responsible for subproject implementation in accordance with the Subgrant Agreement. 14. Subproject Supervision. CIB will be responsible for supervising implementation of subprojects. Its responsibility for subproject supervision ends after full disbursement and approval by NEPA of (a) the subproject completion report and for subprojects receiving funds for recurring operations expenditures, (b) operations reports one and two years after project completion. PMO has the right to monitor the progress  - 26 - ANNEX 3 of OTF-funded subprojects in fulfillment of its overall responsibility for the implementation of the ODS Country Program. 15. Reporting Requirement. (a) Semi-annual Reports-CIB will submit semi-annual reports to the PMO for transmittal to the Bank which will cover the status of the grant disbursements and the progress of the subprojects until the Grant is fully disbursed. (b) Audit Reports-NEPA and CIB would coordinate and arrange an annual audit of the project account (including PMO and Grant utilization), and Special Account and SOEs to be prepared by an independent auditor acceptable to the Bank. The audit of the project account would be a project- specific financial statement with details on cash receipts and disbursements for the project for the year and on a cumulative basis. All audits should be submitted to the Bank within six months of the end of CIB's fiscal year.