Document of The World Bank FOROFFICIAL USEONLY ReportNo: 33433-EG PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$20MILLION TO THE ARAB REPUBLIC OF EGYPT FORA SECONDPOLLUTIONABATEMENT PROJECT February27,2006 Water, Environment, SocialandRuralDevelopmentDepartment Middle East andNorthAfrica Region This document has arestricted distribution and may be usedbyrecipients only inthe performance o f their official duties. Its contents mav not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective 12/05/2005) Currency Unit = Egyptian Pound LE5.71 = US$1 FISCAL YEAR July 1 - June30 ABBREVIATIONS AND ACRONYMS AFD FrenchDevelopment Agency BOD Biological Oxygen Demand C A A Competent Administrative Authorities CAS Country Assistance Strategy CAP Compliance Action Plan CEA Country Environmental Assessment CFAA Country FinancialAccountability Assessment CIDA Canadian InternationalDevelopment Agency COD Chemical Oxygen Demand CPAR Country Procurement Assessment Report DANIDA Danish InternationalDevelopment Agency EC European Commission EEAA EgyptianEnvironmental Affairs Agency EEIS EgyptianEnvironmental Information System EER Energy-Environment Review EIA Environmental Impact Assessment EIB European Investment Bank EIMP Environmental Information and Monitoring Programme EMU Environment Management Unit EPAP EgyptPollution Abatement Project EPL Environment ProtectionLaw ER Emission Reduction ERPA EmissionReductionPurchase Agreement ESA Environmental and Social Assessment ESMP Environmental and Social Management Plan FIL Financial Intermediary Lending FEMIP Facility for Euro-Mediterranean Investment & Partnership FM FinancialManagement FMU FinancialManagement Unit FMR Financial MonitoringReport FMS FinancialMonitoring System FR FinancialReport FS Financial Statement FST Financial Support Team FSU Financial Support Unit GDI General Department for Inspection GDP Gross Domestic Product GOE Governmento fEgypt GOF Governmento fFinland GOFI General Organization for Industries ICB International Competitive Bidding IPPS Industrial Pollution Projection System IRR Internal Rate o fReturn ISA International Standard Auditing I S 0 International Standards Organization ISIC International Standard Industrial Classification JBIC Japan Bank for International Cooperation KfW Kreditanstalt fur Weideraufbau o f Germany LIB LimitedInternational Bidding LIBOR London Interbank Offer Rate M&E Monitoring and Evaluation MOE Ministryo fEnvironment MOIC Ministryo fInternational Cooperation MSEA Ministryo fState for Environment Affairs NBE National Bank o f Egypt NEAP National Environment Action Plan NPV Net Present Value ODA Official Development Aid O&M Operation and Maintenance PAD Project Appraisal Document PAF Pollution Abatement Fund PB Payback period PFS Project Financial Statement P M Particulatematters P M U Project Management Unit PP Procurement P1an RBOS Regional Branch Office SA Special Account SBD Standard BiddingDocument SC Steering Committee SDP Sustainable Development Premium SME Small and Medium Enterprise SOE Statement o f Expenses s o x Sulfur dioxides SPAP Second Pollution Abatement Project TA Technical Assistance TORS Terms o fReferences TSU Technical Support Unit TSS Total Suspended Solids FOROFFICIAL USE ONLY This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. TST Technical Support Team UNDP UnitedNationalDevelopment Program U S A I D United States Agency for InternationalDevelopment WHO World HealthOrganization VERs Verified Emission Reductions Vice President: ChristiaanPoortman Country ManagedDirector: Emmanuel Mbi Sector Director: Inger Andersen Sector Manager: Vijay Jagannathan Task Team Leader: Hocine Chalal EGYPT. ARAB REPUBLIC OF SecondPollutionAbatement Project Y CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 2 3. Higher level objectives to which the project contributes .................................................... 4 B . PROJECT DESCRIPTION ................................................................................................. 4 1. Lendinginstrument............................................................................................................. 4 2. Project development objective andkey indicators.............................................................. 5 3. Project components ............................................................................................................. 5 4. Lessons learned and reflected inthe project design............................................................ 7 5. Alternatives considered and reasons for rejection .............................................................. 8 C. IMPLEMENTATION .......................................................................................................... 8 1. Partnership arrangements.................................................................................................... 8 2. Institutional and implementation arrangements.................................................................. 9 3. Monitoringand evaluation o f outcomes/results................................................................ 10 4. Sustainabillty..................................................................................................................... . . . 10 5. Critical risks and possible controversial aspects............................................................... 11 6. Loadcredit conditions and covenants............................................................................... 11 D APPRAISAL SUMMARY . ................................................................................................. 12 1. Economic and financial analyses ...................................................................................... 12 2. Technical........................................................................................................................... 15 3. Fiduciary ........................................................................................................................... 16 4. Social................................................................................................................................. 18 5. Environment...................................................................................................................... 18 6. Safeguard policies ............................................................................................................. 18 7. Policy Exceptions and Readiness...................................................................................... 20 Annex 1: Country and Sector or Program Background ......................................................... 21 Annex 2: Major RelatedProjects Financed by the Bank and/or other Agencies .................26 Annex 3: Results Framework and Monitoring ........................................................................ 28 Annex 4: Detailed Project Description ...................................................................................... 31 Annex 5: Project Costs............................................................................................................... 37 Annex 6: Implementation Arrangements ................................................................................. 38 Annex 7: Financial Management and DisbursementArrangements ..................................... 42 Annex 8: Procurement Arrangements ...................................................................................... 51 Annex Sa: Procurement Arrangements .................................................................................... 55 Annex 9: Economic and Financial Analysis ............................................................................. 57 Annex 10: SafeguardPolicy Issues ............................................................................................ 64 Annex 11: Detailed arrangementsfor the Carbon Finance Component ............................... 68 Annex 12: Project Preparation and Supervision ..................................................................... 72 Annex 13: Documents in the Project File ................................................................................. 74 Annex 14: Statement of Loans and Credits .............................................................................. 75 Annex 15: Country at a Glance ................................................................................................. 77 Map IBRDNo .34217.................................................................................................................. 79 SECONDPOLLUTIONABATEMENT PROJECT PROJECTAPPRAISAL DOCUMENT MIDDLEEAST AND NORTHAFRICA Date: February 27,2006 Team Leader: Hocine Chalal Country Director: Emmanuel Mbi Sectors: Other industry (100%) Sector ManageriDirector: Narasimham Vijay Themes: Pollution management and Jagannathan environmental health (P) Project ID: PO90073 Environmental screening category: Financial IntermediaryAssessment LendingInstrument: Financial Intermediary Loan [XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 20.00 JAPAN: JAPANBANK FOR Borrower: Government o f Egypt, Ministryof International Cooperation 8 Adly Street Cairo Egypt, Arab Republic of, Fax: +20 -2- 391 2815 ResponsibleAgency: National Bank o f Egypt 1187 Corniche El Nil Cairo Egypt, Arab Republic o f Tel: +20-2-5749101 Fax: (202) 5747614 m-shawky@nbe.com.eg EgyptEnvironmental Affairs Agency 30 Misr Helwan Agri. Road, Maadi Cairo Egypt, Arab Republic o f Tel: +20- 2 526 14 19 / 21 maysounali@hotmail.com Project implementation period: Start September 1, 2006 End: August 31, 2011 Expected effectiveness date: July 1, 2006 Expectedclosing date: February 29, 2012 Does the project depart from the CAS incontent or other significant respects?Re$ PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Re$ PAD D.7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation?Re$ PAD D.7 [XIYes [ ] N o Project development objective Re$ PAD B.2, TechnicalAnnex 3 The proposed project's main development objective i s to demonstrate, inthe Egyptian context, the applicability o f market-based financialhechnical approaches inorder to be able to achieve significant pollution abatement in selectedhot spots areas inand around the Alexandria and Greater Cairo areas. The development objective outcome will be measuredby the decrease inpollution loads inthe selected hot spot areas. The target for this indicator will be the achievement o f at least 75% reduction inthe quantity o f pollutants emittedby the companies in each o f the targeted hot spots. The proposed project will also be a vehicle for supporting the Government o f Egypt to take advantage of the opportunities offered by the'emerging carbonmarket established after the entry into force o fthe Kyoto Protocol inFebruary 2005. Project description [one-sentence summary of each component] Re$ PAD B.3.a, TechnicalAnnex 4 The Bank and the Government of Egypthave agreed to implement an environmental program consisting of a project (Second Pollution Abatement Project) and a Carbon Finance sub-program. The Second Pollution Abatement project will be implementedwithin a time frame o f five years, while the CF sub- program will extend beyond the five year time frame but with no implications on the lending terms, as it will not be usingthe proposed loanproceeds. The Second Pollution Abatement Project: - Component 1:A line o f credit facility managed by an Apex Bank (National Bank o f Egypt) and financed from a loan from the World Bank (US$20 million), a concessionary loan o f about US$45 million from the European Investment Bank, subject to the approval o f their Board o f Directors and agreement with the Government o f Egypt, a concessionary loan from the Japan Bank for International Cooperation o f US$40 million equivalent. Other financiers (inparticular the FrenchDevelopment Agency) have expressed interest injoining the project. This component will focus on pollution abatement inmajor hot spots inthe Alexandria and Greater Cairo Governorates andwill target the industrialsector at large. - Component 2: Technical Assistance activities aimed at strengthening the capacity o f Egyptian Environmental Affairs Agency and other key stakeholders and provide project management support. This component will be financed by the in-kindcontribution o f the Government o f Egypt, a contribution from the National Bank o f Egypt and the Government o f Finland (a grant o f about Euros 900,000). Also, upon approval o f the European Investment Bank loan, the project will be able to access an additional grant (up to Euros 3 million to Euros 4 million) through the Facility for Euro-Mediterranean Investment and Partnership. The Carbon Finance Sub-program: This sub-program will assist the Government of Egypt's efforts to set up a sustainable pollution abatement program by usingportions o f the revenues fkom the sale to the World Bank and other buyers of emission reductions generated under the Kyoto Protocol's Clean Development Mechanism. The role o f the World Bank will be to monitor the use o f the revenues generated from the sales o f emissionreduction and ensure that pollution abatement activities are being implemented usingthe Second Pollution Abatement Project model. Which safeguardpolicies are triggered, ifany? Re$ PAD 0.6, Technical Annex 10 The only safeguards policy expectedto be applicable is the EnvironmentalAssessment Policy. However, the project has been selected as one o f the pilot projects for the testing o f the "country system" approach according to the Bank Policy 4.00. The assessment of the applicability o fthe "country system" approach to Egyptand to Second Pollution Abatement Project i s based on a two stage process: (i) an equivalence assessment, (ii) acceptability an assessment. These two stages concluded that the "country system" approach was applicable provided some minor adjustment to the environmental assessment procedure currently applied inEgypt. Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: Board Presentation: None Loanicredit effectiveness: On-lendingagreement betweenthe Government o fEgyptandNational Bank o f Egypt as the project financial intermediary and Apex bank. Covenants applicable to project implementation: none A. STRATEGIC CONTEXTAND RATIONALE 1. Country and sector issues Egypt's population increased from 36 million in 1973 to 66.4 million in 2002 and is expected to reach 86 million by 2020. The rapid population growth coupled with ambitious development and industrialization policies have put a heavy pressure on Egypt's natural resources in the form of severe air, water and soil pollution. As elaborated in the Country Environment Analysis (2005) and conservatively estimated in the Bank's Sector Note - Cost Assessment of Environmental (CEA) Degradation (2002), the cost o f environmental degradation inEgypt has been found to be, on average, in the order o f 4.8 percent o f Gross Domestic Product (GDP) (LE14.5 billion) for 1999, with an add on damage costs on global environment inthe order o f 0.6percent o f the Gross Domestic Product (GDP) (LE 1.9 billion). The scope and magnitude o f these social costs are likely to offset some o f the economic growth gains over time, and could undernine the ongoing ambitious economic reform program. To mitigate this risk, the Government o f Egypt (GOE) has taken the following measures. On the macroeconomic side, in2004-2005, GOE launched an ambitious program o f reforms. As a consequence o f this program, a sound monetary policy has been put inplace, taxes and custom duties were decreased, and the banking sector is being re-structured through mergers and privatization. The industrial public sector, organized into holding companies, is undergoing an accelerated process o f privatization in which environment liabilities (if any) have to be addressed. Finally, bold measures were taken to cut back on subsidies mainly in the energy and water sectors. On the environmental management side, significant improvements have been achieved since the preparation o f the first National Environmental Action Plan (NEAP), and the establishment and strengthening o f the institutional and legal framework during 1992-1994. An Environment Protection Law was enacted in 1994, and a Minister o f State for Environmental Affairs was appointed in 1997. The Egyptian Environmental Affairs Agency (EEAA) has gradually expanded its functions and responsibilities in all fields o f environmental management at the national, regional and local levels. Inparallel, GOE, through its budget and concessionary funding from international donors, has established funding mechanisms so that polluting enterprises would not be able to plead lack of information, resources or incentives to curtail pollution. An Environmental Protection Fund anchored in the Environmental Protection Law was also established and is operational with the objective "to stimulate environmental investments and support the environmental, social and economic policies in thepursuit of sustainable development". Such funding mechanism was designed and tested in the Bank's Egypt Pollution Abatement Project I(EPAP I)(1998-2005), which was co-financed by the Bank (US$35 million) and the Government o f Finland (GOF)(US$6 million equivalent). EPAP Ifinanced pollution abatement investmentsinthe industrial sector projects through 25 projects in21 companies. EPAP I,as well as similar programs financed by Kreditanstalt fur Weideraufbau (KfW), Danish International Development Agency (DANIDA), European Investment Bank (EIB), Canadian 1 International Development Agency (CIDA) and United States Agency for International Development (USAID) assisted GOE in establishing market-based instrument which resulted in five positive outcomes: (i) reduced the pollution loads at the plant levels; (ii) it it created a general awareness among the banking community about compliance with the environment protection law; (iii) it established a core o f expertise inthe banking sector for understanding and assessing environmental and pollution control investments; (iv) it increased competition among the different banks for managingthese funds; and (v) it enabled the local banking sector with the technical assistance (TA) provided, to market the environmental investments with its individual clients in order to move toward compliance with existing environmental regulations. The proposed project, Second Pollution Abatement Project (SPAP) will build on these outcomes to scale up further the pollution abatement investmentswhich would lead to improved ambient and air quality inselected hotspots. The above programs have focused primarily inthe energy and industrial sectors for the following reasons; (i) both sectors continue to inflict large health damage as point sources o f pollution. The Energy-Environment review undertaken by the Bank in Egypt in 2003, showed that in terms of air pollution, the industry contributes to 21 percent o f the damage costs, representing LE 1,4 billion (1999/2000) ahead o f transport contributing to 17 percent o f the damage costs and vegetative burningcontributing to 11percent o f the damage costs; (ii)both sectors are likely to generate "win-win" benefits o f energy reduction o f 2.8 MToe/year by the year 2010 and reduce both local damage costs by L.E. 1.3 billiodyear (2010) and global damage in terms o f Carbon Dioxide (C02) emission reduction o f 9.7 MT/year, by the year 2010; (iii) the demand for pollution control investments o f approximately LE 10 billion far exceeds the funds available from both GOE and international donors estimated inthe CEA to be LE 3.0 billion (1992-2002); and (iv) investments in pollution control at the plant level for clean technology generate financial benefits inaddition to increasing exports. Notwithstanding the above, enforcement o f the regulatory framework as well as the overall efficiency o f the institutional set-up still needs to be significantly improved. The challenges facing Egypt have been summarized in terms o f the 14 points in the Five Year Action Plan adopted by the Ministry o f State for Environmental Affairs (MSEA) for the period 2002-2007. Moreover, the financial sector still needs to be supported so that it can finance environmental projects, inparticular through addressing the following shortcomings: 0 lack of capacity inassessingthe fundamental risks and benefits o f these projects; 0 the inability to finance medium-term industrialpollution abatement projects; 0 the lack o f awareness in the benefit o f financing environmental projects in industries to improve capacity o fthe industrial sector to export; and 0 finally, the lack o f awareness that environmental liabilities need to be addressed inorder to maximize the market value o f an enterprise (incase o fprivatization and or takeover). 2. Rationale for Bank involvement The rationale for the Bank's involvement is predicated upon the necessity to builduponprevious efforts in assisting GOE to further improve its environmental management capabilities. This assistance will also be built on the successful collaboration both in terms o f policy work and 2 project investments (EPAPI) over the past several years, based on a comprehensive approach linking technical, environmental, social and economic considerations. The proposed SPAP draws on lessons learned from the recently concluded EPAP Ias well as on the conclusions and recommendations o f the Bank's CEA (April, 2005). The proposed intervention is also in alignment with the Country Assistance Strategy (CAS), (May 20, 2005) that called for supporting GOE's environmental strategy in order to be able to address the environmental risks that could accompany economic growth and thereby encourage increased private sector awareness and involvement. Finally, this intervention will further contribute to the promotion o f environmental performance o f the industrial sector due to the potential o f increasing export opportunities for industrial companies. The market based approach to be applied under SPAP would not lead to a reduction o f pollution levels and encourage the industryto move towards compliance ifit i s not accompanied by strong enforcement o f the regulation. An enforcement and monitoring framework was institutionalized inEgyptian Environment Affairs Agency (EEAA) only two years ago with the establishment o f the General Department for Inspection (GDI) which sets policies and conducts inspections based on procedures and guidelines developed during EPAPI. Additional technical support and training will be provided to GDIto establish a public environmental performance ratings system, particularly in the targeted "hot spots" in Alexandria and in Greater Cairo on the basis o f the Program for Pollution Control, Evaluation and Rating (PROPER) developed bythe Bank. As the proposed project will be using commercial banks as financial intermediaries, environmental and social issues are increasingly becoming business issues. Environmental regulations are relatively well developed in Egypt and the pressure on businesses to comply i s increasing. Many businesses export to the European Union, North America, and other developed regions where compliance with environmental standards i s a requirement and often constitutes an explicit non-tariff barrier. Furthermore, there are opportunities for environmental investments that range from remediation o f existing pollution to the development o f new products and services. Financial institutions inEgypt that take into account their own as well as their clients' environmental compliance status, can avoid the financial and reputational liabilities o f poor environmental performance and poor business risk management. They are becoming aware that sound environmental practices can help their clients take advantage o f new opportunities while expanding and strengtheningtheir own portfolios. Inaddition, the project's intervention inAlexandria and around Lake Mariout inparticular, will reinforce the likelihood of success o f the "Alexandria Growth Pole" Project currently under preparation. The proposedproject, with the support o f the Bank, aims at improving the economic opportunities inthe area through improvements o f social and urban infrastructure investments. SPAP will also be a vehicle for supporting GOE, taking advantage o f the opportunities offered by the emerging carbon market that has been growing steadily since the entry into force o f the Kyoto Protocol inFebruary 2005 (described in further detail inAnnex 11). Inconclusion, the proposedproject is based on a three-pronged approach: Firstly to demonstrate cost-effective solutions in environmental hot spots, through financing o f industrial pollution abatement subprojects. Secondly, further enhance the GOE's capacity in environmental management through strengthening the regulatory and management capacity as well as strengthening the innovative market-based instruments introduced through EPAP I.Lastly, to support Egypt's access to the emerging carbon market and its financing opportunities. 3. Higher level objectivesto which the projectcontributes The proposed project i s consistent with one o f the key objectives o f the GOE's, which i s to reconcile economic development with environmental and social sustainability as expressed by H.E. Hosny Mubarak, President o f the Arab Republic o f Egypt, in a landmark speech given in June 2004. Furthermore, it i s also in alignment with one o f the objectives expressed in the recent CAS o f M a y 20, 2005) for the Arab Republic o f Egypt, namely to ensure environmental sustainability along with economic growth supported by increasing involvement o f the private sector and the improvement o f public service provision, while boosting economic growth with one o f the three key strategic objectives, namely enhancing the provision o fpublic services, to be pursuedby the "World Bank Group" during the next four years (FY06-09). The proposed project will also support, as stated in the CEA, the two key principles that are essential for Egypt to engage inthe path of sustainable development, namely (a) the conservation and development o f its own natural resources (oil/gas, water and land); and (b) an agreement on a the sharing o f responsibilities between the State, the Producers (or Service Providers) and Beneficiaries inthe conservation and development o f these resources. B. PROJECT DESCRIPTION 1. Lendinginstrument SPAP will be implemented as a Financial Intermediary Loan (FIL) in accordance with OP/BP 8.30 (Financial Intermediary Lending), as the proposed project's main component is a line of credit for financing industrial pollution abatement projects managed by an Apex Bank. The main objective o f the project i s to improve availability o f financing for pollution abatement projects and to pass on a targeted subsidy to projects that deliver actual results. The project's design i s based on the successful EPAPI (ICR Report Number 33287) which used the same mechanism with good results, both in terms o f pollution abatement and credit allocation and repayment discipline. GOE's policy objectives for SPAP are aimed at pollution abatement rather than financial sector development. The project therefore does not have financial sector development objectives. However, based on experience with the EPAPI, the project's sound design as well as its small size relative to the commercial banking sector, minimizes any risk o f negative impact on the commercial banking sector. The subsidies included in the proposed project are fully transparent, targeted only at those projects that prove results through implementation and are capped to 20 percent o f project value. In addition, as proven by the experience with EPAPI, the Apex Bank is willing to give fund access to other commercial banks and as the economic analysis o f the project shows, the subsidies are economicallyjustified. The Borrower o f the World Bank loan will be GOE through the Ministry o f International Cooperation (MOIC). The MOIC will pass on the loan, on a back-to-back basis, to the National 4 Bank o f Egypt (NBE), which will act as an Apex Bank, and take on the credit risk, the foreign exchange risk as well as the responsibilityto reimbursethe loan to the World Bank. MSEA, through EEAA, will carry out, on behalf of NBE, the technical and environmental management and monitoring requirementsand due diligence o f the proposedproject. 2. Projectdevelopmentobjectiveand key indicators The proposed project's main development objective is to demonstrate, in the Egyptian context, the applicability o f market-based financial/technical approaches in order to be able to achieve significant pollution abatement in selected "hot spot" areas in and around the Alexandria and Greater Cairo areas. The development objective outcome will be measured by the decrease in pollution loads in the selected hot-spot areas. The target for this indicator will be the achievement o f at least 75 percent reduction in the quantity o f pollutants emitted by the companies ineach o f the targeted hot spots. The proposed project will also be a vehicle for supporting GOE inits effort to take advantage of the opportunities offered by the emerging carbon market established after the entry into force o f the Kyoto Protocol inFebruary 2005. The intermediate outcome indicators o f successproposed are: 0 A well-functioning monitoring and evaluation (M&E) system within EEAA that incorporates appropriate incentives for polluters to adhere to GOE environmental regulatory standards and guidelines. The target for this indicator i s that a computerized M&E system is inplace in Alexandria and Qalubya by end of year one o f the proposed project. 0 SPAP's instrument will be replicated or formally established at the end o f the project implementation. The target for this indicator i s that by project end a framework agreement will be established between the Environment Protection Fund (EPF) and at least one commercialbank. 0 EPF develops capacity to finance pollution abatement activities through the operationalization o f a "sustainable development premium" consistent with the principles set forth by the Clean Development Mechanism (CDM) introduced by the Kyoto Protocol. The target for this indicator is that by the end o f the project, the Bank purchases at least 7 million tons o f emission reductions. Details o f these indicators are available inAnnex 3. 3. Projectcomponents The Bank and GOE have agreed to implement an environmental program consisting o f a project (Second Pollution Abatement Project (SPAP)) and a Carbon Finance (CF) sub-program. SPAP will be implementedwithin a time frame o f five years, while the CF sub-program will extend beyond the five year time frame but with no implications on the lending terms, as it will not be usingthe proposed loanproceeds. 5 . The Second PollutionAbatement Project(SPAP): Component 1: A line of credit facility managed by an Apex Bank (NBE) and financed from a loan from the World Bank (US$20 million), and a concessionary loan o f about 45million from EIB, subject to approval by EIB's Board o f Directors and agreement with GOE. The Japan Bank for International Cooperation (JBIC) i s consideringjoining the project at a later stage with a concessionary loan of US$40 million equivalent. Other financiers (in particular the French Development Agency) have expressed interest in joining SPAP's program. This component will focus on pollution abatement inmajor hot spots in the Alexandria and Greater Cairo areas and will target the industrial sector at large. A small portion of the facility might be usedfor financing other bankable activities . related to environmental protection such as environmental services (manufacturing of equipment for environmental monitoring or pollution abatement). Component2: TechnicalAssistance (TA) activities aimed at strengtheningthe capacity of EEAA and other key stakeholders and provide project management support. This component will be financed by the in-kind contribution o f GOE, a contribution from the NBE (in the amount o f US$1 million equivalent) and GOF (a grant of about 900,000). .Also, upon approval o f the EIB's loan, the proposed project will be able to access additional grant (up to 3 million to 4 million) through the Facility for Euro- Mediterranean Investment and Partnership (FEMIP). The proposed list o f T A activities i s provided inAnnex 4-A o f this Project Appraisal Document (PAD). The Carbon Finance Sub-program: This sub-program will assist GOE's efforts to set up a sustainable pollution abatement program by using portions o f the revenues from the sale to the Bank and other buyers o f emission reductions (ERs) generated under the Kyoto Protocol's CDM. The Bank has already signed two Letters o f Intent (Onyx Project in Alexandria and AMA Project in Cairo) for purchasing ERs generated from the solid waste landfills in which at least 6 percent of the revenues will be allocated for financing pollution abatement activities and other legitimate sustainable development activities other than those programmed under SPAP'. The role o f the Bank will be to monitor the use o f the revenues generated from the sales o f ERs and ensure that pollution abatement activities are being implemented using the SPAP model. This component will be managed by the EPF2 instead o f SPAP Project Management Unit (PMU). EPF was established in 1995 under Law 4-1994 with the objective "to stimulate environmental investments and support the environmental, social and economic policies in the pursuit o f sustainable development". It i s expected that the proceeds generated by the sale o f ERs, together with the other resources o f EPF, will contribute to the financing o f environmental projects aiming at curbing pollution and improving the overall environment, in an accountable and transparent ' These two project developers have indicated their willingness to contribute voluntarily a percentage greater that the 6% required accordingto the rules establishedby the DesignatedNationalAuthority-DNA for CDM. * Inadditionto theproceedsfrom the sale of ERs, EPF will continueto receive funds fromthe regular budgetofthe government, fines levied and legal or agreed upon compensation for any damage caused to the environment including but not limited to pollution generatedby shippingaccidents, revenues generatedby the protected areas (mainly entrance fees imposed by Law 102 o f 1983 establishing a Nature Reserve Fund), aid and donations granted by national and/or internationaldonors and any other revenues to be accepted by the Board of the EPF (article 10 of Financial Regulations of the EPF dated May 16, 2000 which provide for appropriateaudit proceduresof the EPF). 6 manner. The CF sub-program will be processed in compliance with all relevant Bank Safeguard Operational Policies as appropriate. For example, the first two C D M projects (Onyx Project in Alexandria and AMA Project in Cairo) as well as all other future C D M projects, for which the Bank i s the purchaser of Emissions Reduction Units (ERUs), will be implemented in accordance with the relevant Bank environmental and social safeguards policies, namely OP/BP 4.01 on Environmental Assessment and OP/BP 4.12 on Involuntary Resettlement. Finally, a request for a GEF funded "Mariout Integrated Coastal Zone Management project" has been introduced by the World Bank with the GEF Secretariat. This activity will be implemented in parallel and complementarily with SPAP and will finance activities related to the conservation, protection and development o f Lake Mariout. This lake i s currently discharging a significant amount o f pollutants into the Mediterranean Sea near Alexandria. This GEF project will follow similar implementation arrangements as designed for the investment component of the SPAP project, which will synergize coordination and consistency between the two operations. 4. Lessons learned and reflected in the project design Lessons from implementing EPAP I,and similar projects carried out at the international level, can be summarized as follows: 0 SPAP builds on the experience o f EPAP Iand on the lessons learned as captured in the ICR (Report number 33287). 0 Demand for financing arises when an industry needs to meet Egyptian environmental standards by either `end o f pipe' investments in pollution abatement or modernizing the production process. A combination o f financial incentives, TA and better enforcement through EEAA worked to create both "the carrot and the stick" that persuaded large, financially-viable industries to seek financing from the project. The minimization o f transaction costs through the judicious use o f TA convinced polluting industries to request financing. 0 In SPAP, the focus on two well-known environmental hotspots of Alexandria and Qaliubya i s expected to increase the pressure on major polluters to seek financing from the project and meet the GOE's environmental standards. 0 By providing the banking sector with increased capacity and financial resources, and by increasing the environmental management capacity o f the environmental agency, it i s possible to develop the market for pollution abatement investments both from the supply and demand side. Therefore, marketing o f this instrumenti s critical for its success. 0 The investment component needs to be accompanied by a significant institutional and regulatory strengthening component so that environmental regulatory agencies develop institutional capacity through a "learning by doing" approach. The M&E system constitutes one o f the major features to be developed in order to increase environmental management capabilities. 7 5. Alternatives considered and reasons for rejection The proposed project builds upon the successful design o f EPAP Iand therefore will use essentially the same financial incentive approach. Other alternatives considered were based on: 0 "no project" option; 0 regular commercial loan at market rate; 0 subsidized interest rate loan; and 0 An upfront grant. The "no project" option meant failing to recognize that there was still a need to accompany the GOE and the environmental administration, inparticular MSENEEAA in solidifying the progress made during the last few years. Moreover, it would have meant foregoing the benefits from the demonstration effect achieved during EPAP I. Furthermore, the first option does not address the fact that existing environmental regulations by themselves are still not enough to improve the pollution abatement record of the industrial sector. This approach was therefore considered inappropriate. The two other approaches carried the risk o f introducing market distortion by encouraging "deadweight loss" (outcomes that would have happened even without the project) or "free rider" behavior (possibility for companies to take advantage o f the incentives without incurring a fair share o fthe costs involved). In order to minimize the above stated risks, the design chosen is based on an "output- based" approach in which eligible industries receive financing to invest in infrastructure that reduces pollution loads consistent with initial abatement targets, but need to repay only 80 percent o f the loan if the targets are achieved (which i s the grant element of the project). This approach i s not likely to introduce market distortions, while providing suitable incentives to the beneficiary companies for investinginpollution abatement. The level o f 20% (targeted grant component) is based on the experience o f EPAP Iand is commensurate with the estimated average costs incurred by the beneficiary companies for implementing pollution abatement projects as civil works, customs clearances and other related costs. This targeted grant can also be viewed as a contribution for paying the incremental cost o f the subprojects. C. IMPLEMENTATION 1. Partnershiparrangements The JBIC, EII3 and AFD are considering co-financing, along with the Bank, the investment component o fthe project. Inaddition to the loans to be provided by the above mentioned co-financiers for the purpose of the credit line facility to be established in the National Bank o f Egypt, grant resources will be provided for financing the T A component. GOF has committed to a grant o f 900,000 over a period o f three years to the Bank, acting as trustee. The grant will be earmarked for SPAP. This particular grant will be implemented by PMU for the purpose o f paying for TA services in relation to the project. Moreover, EIB i s expected to make available a bridging grant in the 8 amount o f 200,000 for consultant services during preparation. After signing o f its loan agreement, EIB will be able to mobilize resources o f an amount in the order o f 3 million to 4million through the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), to pay for the TA needs under SPAP. The final financing arrangements will be decided prior to negotiations. In all cases, the Apex Bank will draw funds from the Special Accounts (SAs) established for the funds provided by the co-financiers in proportion to their respective share o f the total amount o f the loans extended by them. The reimbursements from beneficiary companies will be used by the Apex Bank to reimburse the loans and also recover the 20 percent grant element that the Apex Bank will have to support during the first few years o f the reimbursement period to the co-financiers. Cross- reference in the respective loadproject agreements will ensure the conditions for disbursements of each loan are consistent with each other. 2. Institutionaland implementationarrangements The project will be based on the following implementation arrangements (see Figure 4 inAnnex 6): (a) A steering committee composed o f high level representatives from various concerned ministries and official entities which will meet twice a year to review the project progress andpropose remedial actions ifnecessary. (b) PMU within EEAA will be in charge o f managing the environmental and technical aspects o f the project and will be managed by a high level official reporting to the Chief Executive Officer o f EEAA. The PMU manager will be assisted by a deputy PMU manager. The PMU will consist o f a Technical Support Team (TST) and o f a Financial Support Team (FST). 0 The TST will be incharge o f reviewingthe technical and environmental eligibility of the sub-projects as well as ensuring that procurement is carried out by eligible companies in a manner appropriate and consistent with Bank's and other financiers' guidelines. The TST will also be incharge o f liaising with the relevant department of EEAA so as to ensure proper coordination and exchange o f information and in particular, for ensuring due diligence on the environmental safeguards based on the "country system" approach piloted by SPAP in agreement with the (EIA) department (see section D.6). The targeted Governorates (initially Alexandria and Qalubya) will be included in the Technical Support Unit through dedicated teams located in the relevant Regional Branch Offices. 0 The FSTwill be incharge o fthe overall financial consolidation andreporting aspects incoordination with NBE's project unit and the TST ofthe PMU. The FST will also be in charge o f the management o f the flow o f sustainable development premia generated by the sale o f emission reduction from the CF component o f the project. The FST o fthe PMUwill be composed o fEPF staff. (c) The Apex Bank will agree with other participating banks and pass on loan proceeds with a minimal interest spread covering its costs and risks. Together with participating banks, it will either identify eligible companies through their client base or consider projects identified by the PMU. The PMU will be in charge o f ensuring that the pipeline o f sub- 9 projects satisfies the requirements and eligibility criteria o f the proposed project. A formal agreement betweenthe Apex Bank and the Ministry o f Environment (MOE) will establish the responsibilities o f each party. The Carbon Finance Sustainable Development Premium (SDP) contributed by the project developers will be transferred to EPF. A separate account for the "sustainable development premium" proceeds will be established. These SDP revenues will first be transferred to an account inthe Central Bank o f Egypt, then transferred and maintained in an account located in a commercial bank in an arrangement similar to the on-going DANIDA-funded Environmental Support Project. Management o f this account, as well as proper compliance with the Bank's Safeguards requirementswill bemonitored as part o f SPAP's implementation arrangements. 3. Monitoring and evaluation of outcomes/results The P M U will establish a program to be implemented by the relevant RBOs and specialized department o f EEAA, for monitoring and evaluating the expected outcomes and results for the proposed project. A tentative indicator framework i s presented in Annex 3. These indicators will be aggregated and simplified so that public disclosure o f pollution emissions and pollution abatement information can be understoodby all stakeholders. M&E results will be continuously analyzed so that lessons learned are included in periodic progress reports submitted to EEAA, the Bank and other donors. The PMUwill beresponsible for creating a computer-based management system for the baseline data and will also be responsible for periodically updating the data and monitoring the situation with financing from the project's TA resources. It will also be responsible for maintaining the system as well as analyzing and verifying outcomes. The baseline data will be integrated as part of the Compliance Action Plans (CAPs) to be submitted by the beneficiary companies. The CAPs are simple documents which will introduced during EPAP Iand found useful and cost effective in setting up a time schedule for compliance with the country's standards and regulations betweenEEAA and industries. The M&E indicators will cover financial cost savings, employment generation and pollution abatement aspects for air and water pollution and will provide feedback for improving the cost effectiveness o f the project. The PMU will also be responsible for managing the M&E system related to the trading o f Carbon Emission Reduction credits. This M & E system will allow follow-up on the key success indicators as well as on the three intermediary outcome indicators mentioned inAnnex 3 o f this document. 4. Sustainability The elements o f sustainability of the proposedproject reside inthe following features: 0 The M&E system, which will also have a public disclosure function, will provide information on pollution abatement which has taken place in the general public, and thereby enhance accountability inall concerned agencies (industries, MSEA and EEAA). 0 The linkagebetween EPF and the banking sector for the financing o fpollution abatement projects will be reinforced through the project, thus ensuring that this relationship will extend beyond the lifetime o f SPAP. 10 0 Another element o f sustainability that the project will bring forth i s the generation of a stream o f revenues from the CF operation. The Bank would be entering into a Memorandum o f Understanding with the relevant Egyptian authority to support that a fraction o f the revenues resulting from carbon credits will be used over time by EPF to finance pollution abatement projects through an approach similar to EPAP I.This mechanism was explored with the Egyptian authorities during the project preparation phase as an innovative instrument consistent with the principle set forth in the Kyoto Protocol. Annex 11contains a more detailed discussion o f this instrument. 5. Critical risks and possible controversial aspects The analysis o f the critical risks concurrent to the project are summarized in the following matrix: Critical risks matrix: RiskRatingwith Risks RiskMitigationMeasures Mitigation To project developmentobjective The demand for financing from Ensure that proper marketing of the project M industrial companies i s low i s conducted and that enforcement o f environmental regulation i s stepped up. GOE support for arobust M& E _ _ IEnsure GOE buy-infrom the start at the M systemis not sustained technical as weli as managerial level and gradually introduce the benchmarking approach. The Carbon Finance window does An aggressive identification of CF M not generate sufficient resources opportunities will be carried out inorder to through the "Sustainable maximize the revenues that could be DevelopmentPremium" channeled though the EPF for financing pollution abatement projects. 6. Loadcredit conditions and covenants Considering that the PMU has already been established and that an agreement has beenpassed betweenNBE and EEAA, the main measure to be implementedprior to loan effectiveness is the signature o f on-lending agreement between GOE and NBE as the project financial intermediary and as the Apex Bank. 11 D. APPRAISAL SUMMARY 1. Economicand financial analyses Economic analysis: Due to the fact that the list of sub-projects proposed to be financed is not known ex-ante, the approach followed to evaluate the project in economic terms has been: (a) to provide indicative information on the project's economic merits, comparing benefits and costs on a per-unit-of abatement basis; (b) to aqalyze the impact o f emission reductions o f alternative modalities o f sub-project selection; and (c) to identify benchmarking criteria that would ensure, at implementation stage, efficient use o f project funds. Annex 9 contains detailed information on the approach and the data used. On the first point, indicative unit benefits for abating selected air pollutants (Sulphur Oxide (Sox) and Particular Matter (PM)) could be obtained by translating to Egypt (accounting for per capita income differences), European Union estimates o f the unit external costs of those pollutants (and hence o f the social benefits o f abating them). The unit costs o f abatement can be calculated from the sub-project pipeline identified during project preparation. This analysis suggests that over a very large portion of the abatement cost distribution, the Benefit-Cost ratio exceedsunity (very comfortably so for PM) (see Table 1below). Table 1. Estimatesof UnitHealthBenefitsand Costs ofAbatingSelectedAir Pollutants Unitabatement cost (median, LE' 000) Unitabatement cost (90" percentile, LE' 000) Benefit-cost ratio (median) Note: Detailed information on the methodology used and the interpretation of the above results i s contained inAnnex 9 On the second aspect, efficient use o f project funds, an exercise o f constrained optimization was conducted on the sub-projects included in the pipeline, for which sufficient information was weighted sum o ftons o f emission abated as objective function - was conducted separately for air available on quantity o f emission reduction and on abatement cost. The analysis - which used a pollution sub-projects (in the Qalubya Governorate) and for water pollution sub-projects (in Alexandria). A working hypothesis (55 percent for Qalubya and 45 percent for Alexandria) was usedon the distribution o fproject resources between the two governorates. The analysis suggests that taking into consideration, the wide variation o f abatement costs, project impacts could be very different depending on the way sub-projects are selected. When compared to a reference, "worst case scenario" inwhich the budget i s exhausted while the objective function i s minimized, 12 efficient sub-project selection results in efficiency gains o f 10 to 20 times in the case of air emissions abatement and o f up to 5 times inthe case o fwater pollution abatement. To maximize abatement benefits, criteria will be developed - by effectiveness- as part o f M&E sub-component, to assist in selecting sub-projects in an efficient manner. In particular, the information collected during preparation on the distribution o f unit abatement costs in the pipeline will be used to build benchmark ranges o f variation o f the cost o f sub-projects being considered for financing. For example, preference could be given to financing sub-projects which exhibit unit abatement costs not exceeding a given percentile (e.g., 75 percent) o f the distribution o f costs analyzed at appraisal: projects with higher abatement costs may be unlikely to lead to efficient use o f project resources (Le., maximization o f emission abatement for a given budget). Financial analysis: Contrary to EPAP I,SPAP will not limit the eligibility o f sub-projects based on their financial profitability. The eligibility o f sub-projects will be assessed through the following two criteria: 0 Creditworthiness o f the company (to beundertaken by the Apex/participating banks). 0 Cost-effectiveness o f proposed intervention (based on technical/environmental and economic assessments). The economic analysis presented in this PAD will provide the appropriate instrument for defining the cost-effectiveness criteria. This criterion will allow rejecting sub-projects that are outside a preset range o f unit abatement cost. This approach will aim at approaching as closely as possible the optimal allocation o f resources that will maximize pollution abatement for the given amount o f available financing. This approach will ensure that the Development Objectives are achieved while minimizing transactions costs and removing non-critical eligibility conditionalities, thus enhancing the marketability o fthe SPAP investmentprogram. Financial simulations have been conducted in order to assess the feasibility of the financial mechanism from the point o f view o f the Apex Bank. Three co-financing scenarios have been considered as shown inTable 2 and 3 below: 13 Table 2: Summary of Results Total Principal Collected 84 48 52 Total Interest Collected 107 65 34 Total PrincipalPaid 105 60 65 Total Interest Paid 31 20 22 JPY Hedging Cost 20 20 0 Apex Net profit at maturity 35 14 0 EndUser Cost ofFinancing (Maturity: 6 years including 2 years grace period) 1.78% 1.78% 1.78% The three scenarios are based on the following respective tentative lending conditions from IBRD,JBIC andEIB as shown inTable 3: Table 3: Tentative Lending Conditions Amount YY Amount ZZ Tenor (y) 40 Tenor (y) 20 Grace (y) 10 Grace (y) 5 Interest 0.750% Interest* 2.177% Margin 0.000A Margin Guarantee 0.1253; Guarantee 0 125% Commit. fee 0.000% Commit. fee 0.000% *Half LIBOR, Maximum reduction Ching 3% It is clear that inaddition to the IBRD loan, it is critically necessary to associate soft financing in order to allow the EPAP financing mechanism to be workable. The financing mix that would provide the most flexibility would be to have both JBIC and EIB co-finance the project together with the Bank. Duringthe last phase o f project preparation, the FrenchDevelopment Agency (AFD) expressed interest injoining SPAP. The terms and conditions to be offered by AFD are essentially similar to those o f EIB. Moreover, like EIB, AFD can provide a loan directly to NBE as it does not require a sovereign guarantee from the State. AFD has indicated its readiness to contribute up to 40 millions towards SPAP credit line. 14 2. Technical Analysis performed during project preparation shows that after Cairo, the selected areas (governorates) are indeed after Cairo the most problematic environmental areas in Egypt. This conclusion i s based on the acuteness o f the environmental degradation combined with the number of Egyptians potentially affected. The approach used to assess the pollution loads from industries in the different regions of Egypt i s based on the Bank (IPPS) model. This model gives crude yet indicative information o n the aggregate level of pollution o f industrial origin. In this particular instance, the aggregate level selected was based on the two-digit International Standard Industrial Code (ISIC) level. The model is based on correlations established between the pollution loads at different levels of aggregation with relevant parameters indicative o f the size o f the particular sector at the given aggregation level. In this case, the independent parameter selected i s the number o f employees, as it has been proven as the most robust correlation when using the model in developing countries. The model can also obtain pollution load at the given aggregate level by multiplying an emission factor by the corresponding value o f the independent parameter. The actual numbers obtained should be considered in the order o f magnitude and with only useful for relative comparisons o f the various governorates. The source o f the information i s the General Organization for Industries (GOFI). A summary o f this report i s presented in Tables 4 and 5 below: Governorates Workers TSP PMlO SO2 NOZ+VOC BOD TSS Cairo 303,895 29,532 21,019 122,046 88,631 14,321 339,959 Giza 175,081 20,528 14,738 56,506 56,256 9,646 113,608 Alexandria 192.213 16.036 9.881 61.771 59.801 11.079 72.559 fIISharkia 161,963 16.310 11.521 47.919 50.313 7.787 57- Kaliobia 151,273 13,434 9,421 49,853 44.450 5.885 103.626-1 Gharbia 11I 87,076 1II3,482 1II 1,721 1II 9,861 1II 12,587 11I2,865 11I 8.509 I Table 5. Emissions of Toxics and Heavy Metals from the Top Governorates - 2004 (tons) Governorates I ToxAir ToxWat ToxLand MetAir MetWat MetLand Cairo 20.898 3.708 II 42.739 11 510 11 72 II 13.698 I Alexandria 1I 13,423 2,777 I 27,462 I 179 I 38 1 4.870 1 Giza 1 11,106 II1I 2,190 I 21,626 123 I 29 3,197 1 I Sharkia 10.523 2.101 I 20.619 103 I 27 11 2.71 8 I Kaliobia 1I 10,302 1I 1.921 I 20,635 I 169 I 30 I 4 . 5 2 9 The same approach was used to assess the pollution loads within the governorates o f interest, namely Alexandria and Qalyubia. When the pollution loads of the companies identified in S P M pipeline are compared to the overall industrial pollution generated by enterprises in the 15 Alexandria area, it i s shown that the companies potentially eligible to SPAP contribute respectively 72 percent and 15 percent o f total BOD and TSS emissions whereas these companies constitute only 2 percent o f the number o f industrial companies in the Alexandria Governorate. Inthe case of Qalyubia, and on the basis ofthepriority candidate companies for SPAP, the same approach has been followed. The tentative list consists o f about 40 industrial facilities. The data collected for 33 o f the targeted plants showed that they employ about 28,900 workers representingonly 19percent o fthe number o fworkers but, while contributing significantly to air and water emissions e.g., PMlO (41 percent), SO2 (46 percent) and CO (47 percent), BOD (27 percent) and TSS (77 percent). Also, these plants contribute to hazardous emissions fi-om 32 percent to 62 percent. Parallel to the pollution abatement investments, the proposed project will ensure that the participating companies will also commit to improving their environmental performance in all areas of their operations on the basis on Country Assessment Papers agreed with the PMU. Moreover, adhesion to environmental management systems or I S 0 1,4000 certification will be promoted inparticipating companies. 3. Fiduciary FinancialManagement(FM): Based on the assessment o f FMcapacity o f the project's FMfunction (located within NBE as the Apex Bank and the proposed FST within the PMU), and the previous experience with EPAP I, certain measures will have to be put in place to strengthen FM system o f the project. To avoid having conditions of effectiveness that can delay project implementation and taking into consideration the size o f this project, NBE will put in place the following measures by Loan signing: 0 Reinforcing the existing Financial Management Unit (FMU) within NBE which would coordinate with the Financial Monitoring Section at PMU- with additional competent and skilled staff to handle the projects reporting function in addition to transaction recording and disbursements. 0 Implementing the accounting software for the project. The FMU will maintain its books and accounts using a computerized accounting system managed under its responsibility. 0 Preparinga FinancialManagementManualfor the projectacceptable to the Bank. 0 Launching the process to hire independent qualified external private auditor, in accordance with the Bank's procurement guidelines and with terms of reference (TORS) acceptable to the Bank, who would audit the project's financial statements. The above measurements requiredto be completed as soon as possible before effectiveness. To enable the project to effectively monitor its activities, the PMU's project is encouraged to apply for access to the bank's disbursement "Client Connection" website inorder to follow up on the status o f its withdrawal applications and to reconcile its records with those o f the Bank records once activities begin. 16 Moreover, the financial specialist o f the PMU will report quarterly on the status o f the funds received from through the transfer o f the "Sustainable Development Premium" generated by the CF operation attached to SPAP. The report will include a statement on the use o f these funds in accordance with the agreement betweenthe Bank and the project developers and MOE. Procurement The procurement arrangements under the proposedproject will be similar to those implemented under the first EPAP, but in addition, will have to be acceptable to other co-financiers so that only one set of procurement guidelines will be applied to the project. Inparticular, the provision allowing the use o f established private sector or commercial practices by sub-borrowers will be maintained. Experience under the first project indicates that public commercial entities generally used some form of competitive bidding, while private sector enterprises were more familiar with direct contracting or some form o f shopping. Experience shows that the private sector generally accepts competitive and transparent methods promoted by the project and, reportedly, acknowledged that these methods resulted in procurement o f goods o f the desired quality at competitive prices. In an attempt to improve and streamline the procurement process, the project has established a checklist of "Acceptable Procedures", comprising 12 criteridpractices (see Annex 8a) required to ensure broad compliance with the Bank's principles o f economy, efficiency, competition and transparency. The assessment o f the compliance o f the procedures o f a given sub-borrower, including recommended remedial measures, will be required as part o f the application for the sub-loan and subject to the review by the SC established to manage the project. The procurement method to be adopted, as well as the requirement for the Bank's prior review, will be agreed with the Bank at least at the beginning o f each program year during a periodic supervision mission. Limited International Bidding (LIB) i s expected to be the preferred method o f procurement by the majority o f the sub-borrowers, as a means to insure the desired quality, but International Competitive Bidding will be promoted whenever considered more suitable and for all contracts estimated to cost more than US$5 million. Standard Bidding Documents for the Supply and Installation o f Equipment and Plant, including those under turnkey conditions, based on the Bank's models will be adopted for the majority o f ICB, when applicable. Inthe case o f Small - Medium Scale Enterprise, who do not have any established commercial practices, the project will provide TA and promote the use o f less formal methods like Shopping, considered more suitable for small contract amounts (35% The size o f the SDP is inversely proportional to the contribution o f the technology to SD development and directly proportional to the technology's potential to generate an economic rent. Premiums are higher for projects that reduce Greenhouse Gases emissions from industrial processes such as N20 and HFCs, since these projects are very efficient at producing low-cost ER credits and do nothing for SD inthe host country. Based on USS6 million investment and generationof 9.9.million ERs in 2006-2012 at US$S/ER(data from actual N 2 0 projects), Based on US$10million investment and generation of 40 million ERs in 2006-2012 at USSS/ER. (data from actual HFC23 projects). - 69 - SustainableDevelopmentPremiumScheme -Approach Adoptedby the GOE and Quantification InOctober 2005, MOE adopted and made public an SDP scheme based on advice providedby the Bank. The scheme adopts premia that are considerably lower than those suggested by the Bank. Nonetheless, considering the seven Egyptian C D M projects identified as priority by the Bank, this scheme may generate resources amounting up to $13.7 million. Table 2 below provides a breakdown of the revenues that could become available through this scheme: Table 2: Estimatesof potentialrevenues and correspondingpremia for identifiedcarbon finance projects(based on adopted SDP rules established by the EgyptianDesignated NationalAuthority) -- Egyptalum 1.2 0.6 3.3 0.5 i 3.7 j 0.3 i 0.4 Onyx- Cairo ! ; j ! ! ~ ~ - - --,"-",,,~----+-*,,p-..I.I-. - ~ ! I _ _ _ - I " - - _ ~ - 7----1--- 2.8 1.4 7.7 i-----------l- 1.1 i 8.7 0.5 0.5 I __ AMA-Cairo I + 3-- 3.0 II i; 8 3 1 2 I 9 3 0 5 0 6 118 946 6.4 ---_I "I_ +----_^---- Total I 0 4 ; 152 836 1I ; 1I ----7.3 'At $5 I 1I 5/tC02-e At $8/tC02-e SDP values in accordance with GOE table Abu Qir,Delta, Kima, and Semadco= 8%,, Egyptalum= lo%, and Alexandna and Cairo= 6% of value of ERs sold According to the table above, it is assumed that the Bank would purchase 50% o f the potential ERs theoretically available from the seven above mentioned companies until 2014 or 15.2 million Verified EmissionReductions (ERs). One VER = one ton o f C 0 2 equivalent). The total value o f the purchases would be US$83.6 dollars assuming a price o f $5.5/VER. These purchases would generate SDP revenues available to the EPF for a total o f $6.4 million - 25% of which (or about $1.6 million) available upfront at the signature o f ERspurchase agreements and the rest in 9 equal yearly installments (2006-2014). Should these projects be approved by the Executive Board o f the CDM, the companies above would be able to sell the remaining ERs as Certified Emission Reductions (CERs) generated until 2012. Assuming a price o f $8/CER, these sales would generate US$94.6 million in revenues. Green premiumrevenues available from these sales to the EPF would amount to US$7.3 million. With regard to Cairo (project sponsor = Ama Egypt) and Alexandria (project sponsor = Onyx) the agreements negotiated thus far envisage that part o f the SDP revenues would be used to improve - 70 - the quality o f life of the Zabaleen communities in these cities, according to social development plans to be agreed by the municipalities o f Alexandria and Cairo, the Zabaleen communities in those cities, the companies and the World Bank, and implemented in collaboration with local NGOs. The other part o f these revenues would be used by EPF to finance a pollution abatement program similar to SPAP or to the DANIDA funded ESP project. - 71 - Annex 12: ProjectPreparationand Supervision EGYPT,ARAB REPUBLIC OF: Second PollutionAbatementProject Key institutions responsible for preparation o fthe project: 0 MinistryofInternational Cooperation, Egypt 0 MinistryofState for EnvironmentalAffairs, Egypt . Egyptian EnvironmentalAffairs Agency Environmental Protection Fund 0 National Bank o f Egypt Bank staff and consultants who worked on the project included: - 72 - Bank funds expended to date on project preparation: 1. Bank resources: US$222,842.93 2. Carbon Finance: US$15,250 3. Total: US$238,092.93 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$5,000 2. Estimatedannual supervisioncost: US$85,000 - 73 - Annex 13: Documents inthe ProjectFile EGYPT, ARAB REPUBLIC OF: SecondPollutionAbatement Project 1. ICR of EPAPI,September 1,2006. 2. Staff Appraisal Report, November 17, 1997. 3. Technical Reports (Alexandria and Qalubiya). - 74 - Annex 14: Statementof Loans and Credits EGYPT, ARAB REPUBLIC OF: Second PollutionAbatement Project Differencebetween expected and actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO82952 2005 EG-Early Childhood Education 20.00 0.00 0.00 0.00 0.00 20.00 0.50 0.00 Enhancement PO73977 2005 Integrated Irrig Improv. & M p t . 120.00 0.00 0.00 0.00 0.00 120.00 1.25 0.00 PO82914 2004 EG-AIRPORTS DEVELOPMENT 335.00 0.00 0.00 0.00 0.00 292.70 20.55 0.00 PROJECT PO49702 2004 EG-SKILLS DEVELOPMENT 5.50 0.00 0.00 0.00 0.00 5.41 2.11 0.00 PO56236 2002 EG-HIGHER EDUCATION 50.00 0.00 0.00 0.00 0.00 35.93 23.96 0.12 ENHANCEMENT PROG PO45499 2000 Egypt NATIONAL DRAINAGE I1 50.00 0.00 0.00 0.00 0.00 27.80 19.30 0.00 PO41410 1999 Egypt P. S. REHAB 111 120.00 0.00 0.00 0.00 20.00 43.77 63.77 0.00 PO40858 1999 EG - SOHAG Rural Dev 0.00 25.00 0.00 0.00 0.00 8.68 6.80 1.23 PO52705 1999 EG-SOCIAL FUND 111 0.00 50.00 0.00 0.00 0.00 0.69 -3.26 -3.07 PO50484 1999 EG Secondary Education Enhancement Proj 0.00 50.00 0.00 0.00 0.00 31.54 20.76 25.44 PO49166 1998 EG East Delta Ag. Sew. 0.00 15.00 0.00 0.00 0.00 9.51 8.24 2.71 PO45175 1998 EG-HEALTH SECTOR 0.00 90.00 0.00 0.00 0.00 56.00 48.55 -1.22 PO05169 1997 EG-ED.ENHANCEMENT PROG. 0.00 75.00 0.00 0.00 0.00 14.34 17.31 2.53 PO05173 1995 EG Irrigation Improvement 26.70 53.30 0.00 0.00 0.00 7.58 13.81 3.96 Total: 727.20 358.30 0.00 0.00 20.00 673.95 243.65 31.70 EGYPT, ARAB REPUBLIC OF STATEMENT OF IFC's Held andDisbursedPortfolio InMillions ofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1996 ANSDK 1.33 0.00 0.00 0.00 0.56 0.00 0.00 0.00 2004 Alexandria Fiber 8.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00 2001 Amreya 5.26 0.00 0.00 0.00 5.26 0.00 0.00 0.00 1999104 CIL 0.00 0.15 0.00 0.00 0.00 0.15 0.00 0.00 1992197/98100 Carbon Black-EGT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 CeramicaAI-Amir 3.75 0.00 0.00 0.00 3.75 0.00 0.00 0.00 2001 EFG Hemes 3.10 0.00 0.00 0.00 3.10 0.00 0.00 0.00 2004 EHF 0.00 1.70 0.00 0.00 0.00 1.70 0.00 0.00 2005 Egypt Factors 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 IT Worx 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 2004 Lecico Egypt 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1986188192 Meleiha Oil 0.00 13.00 0.00 0.00 0.00 0.00 0.00 0.00 2004105 Merlon Egypt 1.oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - 75 - 2002 Metro 13.50 0.00 0.00 0.00 13.50 0.00 0.00 0.00 1992 MisrCompressor 9.70 0.00 0.00 0.00 9.70 0.00 0.00 0.00 1996101 Orix Leasing EGT 1.36 0.00 0.00 0.00 1.36 0.00 0.00 0.00 2001 Port Said 42.52 0.00 0.00 139.88 42.52 0.00 0.00 139.88 2002 SEEM 4.78 0.00 0.00 0.00 4.78 0.00 0.00 0.00 2004 SPDC 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 2001 SUEZ GULF 41.92 0.00 0.00 136.78 41.92 0.00 0.00 136.78 1997101 UNI 2.44 0.00 0.00 0.00 2.44 0.00 0.00 0.00 2005 Wadi Group 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 193.66 19.85 0.00 276.66 152.89 3.85 0.00 276.66 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2004 ACB Acrylic 0.00 0.00 0.00 0.00 2000 ACB ExpansnI11 0.00 0.00 0.00 0.00 2004 Merlon Egypt 0.00 0.00 0.00 0.02 Total pending commitment: 0.00 0.00 0.00 0.02 - 76 - Annex 15: Country at a Glance EGYPT,ARAB REPUBLIC OF: SecondPollutionAbatement Project M . East Lower- POVERTY and S O C I A L & North middie- Africa income 1 Development diamond* 2004 Population, mid-year(millions) 294 2,430 GNI per capita (Atlas method, US$) 2,000 1.580 Life expectancy GNI(Atlasmethod, US$ billions) 589 3,847 - ' Average annual growth, 1998.04 Population(%) 18 18 1.0 PI\ Labor force (99) 3.0 -13 0.7 GNI Gross per +- primary M o s t recent estimate (latest year available, 1998-04) capita enrollment Poverty(%of populationbelownationalpovertyline) I7 Urbanpopulation (%of totalpopulation) 42 56 49 Lifeexpectancyat birth (years) 69 68 70 I Infant mortality(per~OO0Iivebirlhs) 33 45 33 Child malnutrition(%ofchildrenunder5) 9 11 Access to imDroved water source Access to an improved water source (%ofpopulation) 98 88 81 Literacy(%ofpopulation age 15+) 69 90 Gross primaryenrollment (%of school-age population) 97 x)O 114 Egypt,Arab Rep. Male I30 x)4 115 Lowr-middle-incomegroup Female 95 94 1u KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994 2003 2004 Economic ratios* GDP (US$ billions) 30.6 519 82.4 75.1 Gross capital formationiGDP 27.5 lj.6 Ii.1 i7.0 Exports of goods and servicesiGDP 22.4 22.9 217 25 5 Trade --{{[ T Gross domestic savingsiGDP 14.0 114 15.2 14.8 Gross nationalsavings/GDP .. 8.0 212 20.7 Current account balanceiGDP -8.2 0.8 2.3 2.8 Domestic Capital interest paymentsiGDP 2.7 2.2 0.8 0.8 savings formation Total debtiGDP D5.1 62.7 38.1 41.5 Total debt serviceiexports 21.4 U.6 P.8 9.4 Present value of debtiGDP 34.1 Present value of debtiexports uo.l Indebtedness 1984-94 1994-04 2003 2004 2004-08 (averageannualgrordh) GDP 3.9 4.6 3.2 4.3 5.3 Egypt,Arab Rep GDP per capita 1.6 2.7 14 2.5 3.7 Lower-middle-incomegroup STRUCTURE o f the ECONOMY (%of GDP) Agriculture Industry Manufacturing Services Householdfinal consumptionexpenditure General gov't final consumptionexpenditure 180 I33 P 5 a0 Importsof goods and services 358 281 236 277 GCF -GDP (averageannualgrordh) 1984-94 Igg4-O4 Agriculture 2 7 3 3 2a Industry 4 3 4 8 19 Manufacturing 4 9 7 5 Services 3 8 5 0 4 1 Householdfinal consumption expenditure 4 2 3 7 0 4 Generalgov't final consumption expenditure -12 3 2 2 9 Gross capital formation -57 5 5 -17 15 Imports of goods and services -14 0 2 0 2 11 -1- Exports -c--lnports - 77 - Egypt,Arab Rep. PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Inflation D o m e s t i c prices ( O h ) (%change) 8 - Consumer prices 9 0 Implicit GDP deflator 11.2 7 1 3.8 6.9 6 T Government finance 2 (%of GDP, includes current grants) Current revenue 23.4 28 2 20.3 20.8 Current budget balance -14.4 19 -2.5 -3.1 i Overall surplusideficit -22 6 -2 1 -6.2 -6.7 GDPdeflator --sl-CPI T R A D E 1984 1994 2003 2004 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 3,337 8,205 8,247 20,000 T Cotton 1,772 3,195 2.785 Other agriculture 84 199 201 15 000 Manufactures 1Q7 2,952 3,320 Total imports (cif) 13,647 14,821 25,038 10 000 Food 1,982 1521 1,647 Fueland energy 542 2,373 2,232 5 000 I Capital goods 2,349 3 , E 2,869 0 Export price index(2000=WO) 92 98 99 00 01 02 03 04 Import price index(2000=WO) 139 Exports 81 Imports Terms of trade (20OO=WO) 85 B A L A N C E o f P A Y M E N T S 1984 1994 2003 2004 (US$ millions) jCurrent account balance to GDP (%) Exports of goods and services 6,848 13,818 18,005 18,402 Imports of goods and services Q,287 14,332 19,568 20,031 ` T Resource balance -5,440 -3.514 -1,562 -1,629 Net income -1,021 422 -938 385 Net current transfers 4,046 4,383 3,924 Current account balance -2,504 413 1883 2,Q9 Financing items (net) 2,136 1,696 -1221 -2,183 Changes in net reserves 398 -2,136 -662 54 Memo: Reserves including gold (US$ millions) Conversionrate (DEC,local/US$) 0.9 3.4 5.0 6.2 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 (US$ millions) Composition o f 2004 debt (US$ mill.) Total debt outstanding and disbursed 32,203 32,523 31.383 31,255 IBRD 720 1411 539 503 A 503 B 1.465 IDA 744 961 1,386 1,465 G 3802 2 034 Total debt service 2,422 2,226 2,763 2,182 IBRD 1)s 306 131 99 IDA 6 19 47 50 Composition of net resourceflows Official grants 550 1192 552 Officialcreditors 1,741 560 -770 -868 Private creditors 546 -284 -635 -228 Foreigndirect investment (net inflows) 729 1256 237 Portfolio equity(net inflows) 0 0 37 E 22,365 World Bank program Commitments 4 P1 18 670 A - IBRD E- Bilateral Disbursements 307 199 62 1)O 6-IDA D-Othermltllateral F-Pllvate Principalrepayments 44 204 114 16 C-IMF G. Short-terr - 78 - MAP SECTION - 79 - IBRD 34568 Mediterranean Sea ARAB REPUBLIC OF EGYPT Area of map SECOND POLLUTION ABATEMENT PROJECT Cairo Nile TARGETED HOTSPOTS LIBYA ARAB R. SELECTED CITIES AND TOWNS REPUBLIC I I I I I CANALS GOVERNORATE CAPITALS OF EGYPT PERENNIAL RIVERS AND LAKES NATIONAL CAPITAL INTERMITTENT RIVERS AND LAKES GOVERNORATE BOUNDARIES MARSH INTERNATIONAL BOUNDARIES DELTA AREA CHAD SUDAN 0 25 50 75 KILOMETERS 30° 31° 32° Mediterranean Sea Baltim Lake Burullus Rosetta Damietta Nile PORT SAID R. DAMIETTA Abu Qir Lake (Rosetta KAFR EL SHEIKH Manzala Port Said Alexandria Lake Idku Shirbin I Branch) I Kafr ad Dawwar El Dikheila Kafr el Sheikh Branch) DAGAHLIYA I Suez I I Damanhur I I 31° I II El Mansura I Talkha 31° I I (Damietta Canal I I I I I I I I EL GHARBIYA I I I I I I Nubariya R. I I I Itya el Barud I I I I I I I I I Nile I Kafr el Zaiyat ICanal I I I I I Tanta I I ALEXANDRIA I I I SHARGIYAH I I I I I I I Zifta I BEHEIRA I I I Shibin el Kom IZagazig Ismailia I I I I I I I I I I I I I I I I I I I I I I I I I I MENOUFIYA I I I I I I ISMAILIA I Great I Benha I I QALIUBIY I I I I Bitter I I I I I Canal Lake I I I I I I I I I Ismailia I I I I I I I I I I I I I A I I I I I I I I 10th of I I I I I I Ramadan Imbaba IShubra el Kheima I (new city) Giza CAIRO 30° Suez 30° 6th of Tourah CAIRO October Helwan (new city) MARSA MATRUH Tebbin SUEZ Gulf GIZA of Suez Lake Oarun El Fayoum EL FAYOUM This map was produced by I the Map Design Unit of The I I I I I Beni Suef I I I I I I I World Bank. The boundaries, Arabah 29° colors, denominations and I I Wadi 29° any other information shown BENI SUEF I on this map do not imply, on I I the part of The World Bank I I Group, any judgment on the Beba I legal status of any territory, I EL BAHR EL AHMAR I or any endorsement or I a c c e p t a n c e o f s u c h I boundaries. 30° I 31° 32° I MARCH 2006