Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD651 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 13 MILLION (US$20 MILLION EQUIVALENT) TO THE REPUBLIC OF YEMEN FOR THE MOCHA WIND PARK PROJECT February 11, 2014 Middle East and North Africa Region Sustainable Development Department 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 (Exchange Rate Effective December 31, 2013) Currency Unit = Yemeni Riyal (YR) US$1 = YR 215 US$1.54 = SDR 1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AfD French Agency for Development (Agence Franqaise de D6veloppement) AFSED Arab Fund for Socio-Economic Development AMF Arab Monetary Fund CAS Country Assistance Strategy CBY Central Bank of Yemen CCGT Combined Cycle Gas Turbine CDM Carbon Development Mechanism CERs Carbon Emissions Reductions CFE Carbon Fund for Europe COCA Central Organization for Controls and Audit DOE Designated Operational Entity EIRR Economic Internal Rate of Return ESIA Environmental and Social Impact Assessment FM Financial Management GDP Gross Domestic Product GEF Global Environment Facility GNR Government of National Reconciliation GOY Govemment of Yemen GWh Gigawatt hours HFO Heavy fuel oil ICB International CompetitiveBidding IDA International Development Association IFAD International Fund for Agricultural Development IFR Interim Financial Report IPF Investment Project Financing ISDB Islamic Development Bank ISN Interim Strategy Note LNG Liquified Natural Gas MAF Mutual Accountability Framework MENA Middle East and North Africa region MOEE Ministry of Electricity and Energy MOF Ministry of Finance NPV Net Present Value OFID OPEC Fund for International Development PEC Public Electricity Corporation PMU Project Management Unit PPP Private-Public Partnership 1 PSP Power Sector Project RAP Resettlement Action Plan REAP Rural Energy Access Project RPF Resettlement Policy Framework SPC Special Purpose Company TA Technical Assistance TCF Trillion cubic feet TPSD Transitional Program for Stabilization and Development WTP Willingness to Pay YR Yemeni Riyal Regional Vice President: Inger Andersen Country Director: Hartwig Schafer Sector Director: Junaid Kamal Ahmad Sector Manager: Charles Joseph Cormier Task Team Leader: Jianping Zhao H1 REPUBLIC OF YEMEN MOCHA WIND PARK PROJECT Table of Contents I. Strategic Context....................................................1 A. Country Context................. .................................... 1 B. Sectoral and Institutional Context ..................2..... .............2 C. Higher Level Objectives to which the Project Contributes ..........5......5 II. Project Development Objective .................7....... .................7 A. Project Beneficiaries ..................................... ........ 7 B. PDO Level Results Indicators ...................7..... .............7 III. Project Description...................................................7 A. Project components.............................................7 B. Project Financing...............................................8 C. Lessons Learned and Reflected in the Project Design ................9 IV. Implementation ....................................................11 A. Institutional and Implementation Arrangements .........................11 B. Results Monitoring and Evaluation.................. ................12 C. Sustainability .................................................12 V. Key Risks and Mitigation Measures......................................13 VI. Appraisal Summary.................................................14 A. Economic and Financial Analysis...................................14 B. Technical.................................................... 15 C. Financial Management.......................................... 16 D. Procurement.................................................. 17 E. Social...................................................... 17 F. Environment................................................. 18 Annex 1: Results Framework and Monitoring..................................21 Annex 2: Detailed Project Description........................................ 24 Annex 3: Implementation Arrangements...................................... 27 Annex 4 Operational Risk Assessment Framework (ORAF).........................40 Annex 5: Implementation Support Plan....................................... 43 Annex 6: Economic and Financial Analysis ...................16.... ...........46 Assumptions for Financial Analysis.................................. ....... 50 iii PAD DATA SHEET Yemen, Republic of Mocha Wind Park Project (P1 46055) PROJECT APPRAISAL DOCUMENT MIDDLE EAST AND NORTH AFRICA MNSEE Report No.: PAD651 Basic Information Project ID EA Category Team Leader P146055 B - Partial Assessment Jianping Zhao Lending Instrument Fragile and/or Capacity Constraints [ ] Investment Project Financing Financial Intermediaries [ ] Series of Projects [ ] Project Implementation Start Date Project Implementation End Date 07-March-2014 30-Jun-2019 Expected Effectiveness Date Expected Closing Date 01-May-2014 30-Jun-2019 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Charles Joseph Cormier Junaid Kamal Ahmad Hartwig Schafer Inger Andersen Borrower: Ministry of Planning and International Cooperation Responsible Agency: Ministry of Electricity and Energy Contact: Dr. Saleh Hassan Sumai Title: Minister Telephone 967-1-326191 Email: No.: Project Financing Data(in USD Million) ] Loan [ ] Grant [ ] Guarantee [] Credit [X] IDA Grant [ ] Other Total Project Cost: 144.00 Total Bank Financing: 20.00 Financing Gap: 0.00 1 Financing Source Amount BORROWER/RECIPIENT 19.00 IDA Grant 20.00 Arab Fund for Economic and Social Development (AFESI) 65.00 OPEC Fund for International Development (OFID 20.00 Saudi Arabia: Saudi Fund for Development (SFD) 20.00 Total 144.00 Expected Disbursements (in USD Million) Fiscal Year 2015 2016 2017 2018 2019 Annual 2.20 2.00 12.60 2.20 1.00 Cumulative 2.20 4.20 16.80 19.00 20.00 Proposed Development Objective(s) The development objective of the Project is to increase the supply of cost-effective renewable wind electricity. Components Component Name Cost (USD Millions) Physical Investment 18.00 Consulting Services and Market Development 2.00 Institutional Data Sector Board Energy and Mining Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Energy and mining Other Renewable Energy 100 Total 100 ZI certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Financial and private sector development Infrastructure services for private sector 50 development ii Environment and natural resources Climate change 50 management Total 100 Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [X] Does the project require any waivers of Bank policies? Yes [ ] No [X] Have these been approved by Bank management? Yes [ ] No [X] Is approval for any policy waiver sought from the Board? Yes [ ] No [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ] Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X Legal Covenants Name Recurrent Due Date Frequency Schedule 2, Section 1.2 (a) No 30 months after N/A effectiveness Schedule 2, Section 1.2 (b) 36 months after effectiveness Description of Covenant (a) The Recipient has established and operationalized the Special Purpose Company no later than 30 months after the effective date, ensuring independent ownership and operation of the Wind Farm. (b) The Special Purpose Company and the Public Electricity Corporation have not later than 36 months after the effective date executed and delivered a power purchase agreement in form and substance satisfactory to the Association. 111 Conditions Name Type Article V, 5.01 Effectiveness Description of Condition The respective Co-financing Agreements have been executed and delivered and all conditions precedent to the effectiveness of each Co-financing Agreement or to the right of the Recipient to make withdrawals under any Co-financing Agreement (other than the effectiveness of the Agreement) have been fulfilled. Team Composition Bank Staff Name Title Specialization Unit Banu Setlur Senior Environmental Environmental Specialist MNSEE Specialist Sydnella E. Kpundeh Senior Program Program Assistant ECSSD Assistant Chaogang Wang Senior Social Senior Social MNSSU Development Specialist Development Specialist Hayat Taleb Al-Harazi Program Officer Program Officer MNARS Edith Ruguru Mwenda Senior Counsel Senior Counsel LEGAM Maria Florencia Liporaci Senior Program Senior Program MNSSD Assistant Assistant Maiada Mahmoud Abdel Finance Officer Finance Officer CTRLA Fattah Kassem Andrianirina Michel Eric Finance Officer Finance Officer CTRLA Ranjeva Jamal Abdulla Abdulaziz Senior Procurement Senior Procurement MNAPC Specialist Specialist Nagwan Ahmed Sharhan Program Assistant Program Assistant MNCYE Moad M. Alrubaidi Sr Financial Financial Management MNAFM Management Specialist Specialist Non Bank Staff Name Title Office Phone City Locations Country First Location Planned Actual Comments Administrative Division iv I. Strategic Context A. Country Context 1. Yemen experienced far-reaching political unrest from February to November 2011, impacting an already fragile economic and social landscape. The economy contracted by 10.5 percent in 2011 from a growth of 7.7 percent in 2010. The turmoil, combined with fuel shortage and high commodity prices forced many into poverty. The number of people living below the poverty line increased by an estimated 12 percentage points in the two years of 2011 and 2012.1 Even prior to this latest crisis, Yemen was already one of the poorest countries in the world. The country has a Gross Domestic Product (GDP) per capita of US$1,160 (2010) compared with an average US$2,321 for lower middle-income countries and US$3,597 for the Middle East and North Africa (MENA) region. The population living below the national poverty line was 35 percent in 2005/2006, increasing to 54.5 percent by the end of 2011 with poverty more widespread and persistent in rural areas.2 2. Following a power transfer agreement, President Ali Abdullah Saleh stepped down after 33 years. A transition Government of National Reconciliation (GNR) was formed in early December 2011, elections took place in February 2012, and Mr. AbdoRabbo Mansoor Hadi assumed office as the new President. The GNR is in the process of undertaking constitutional reforms, preparing for the next general election, and working to stabilize the country's complex security and economic situation. In addition, the GNR has to respond to pressing social demand for better governance, equity, employment, and a more open society. 3. The transition is confronted with long-standing economic, political, and structural challenges. Currently, around 70 percent of those employed work in the informal sector with low productivity, and most of those formally employed work for the government, or government dependent entities. Economic and fiscal opportunities are impeded because a significant part of Yemen's industrial assets or economic activities is partially or fully state owned, including power sector assets. 4. The economy has started to recover, but remains weak. GDP is reported to have registered a slight growth in 2012, inflation decelerated substantially from 23 percent in 2011 to 5.5 percent in 2012, and the current account deficit narrowed in 2012 to about 3 percent of GDP compared to 4 percent in 2011. The Yemeni Riyal (YR) exchange rate came under high pressure in 2011 leading the Central Bank of Yemen (CBY) to adopt a number of policies and measures that included the reduction of its foreign reserves in response to the basic commodity import bill. However, since early 2012, the exchange rate has stabilized at around 214 YR/US$. 5. At the donor conference in Riyadh in September 2012, the international community committed to support Yemen in its recovery. Donor countries and agencies (Kingdom of Saudi Arabia, United States of America, Germany, United Kingdom, Netherlands, Switzerland, France, Spain, Arab Fund, Arab Monetary Fund (AMF), the World Bank, the 1 Joint Social and Economic Assessment, World Bank, UN, EU, Islamic Development Bank, and MOPIC, 2012 2 Ibid. 1 European Union (EU), Islamic Development Bank (ISDB), OPEC Fund for International Development (OFID), and International Fund for Agricultural Development (IFAD)) pledged US$6.372 billion towards the priorities of the Transitional Program for Stabilization and Development (TPSD). The subsequent Mutual Accountability Framework (MAF) committed both the GNR and donors to a set of specific actions towards recovery and growth. 6. Overall, the macroeconomic outlook during the transitional period 2013-14 will depend on a number of factors, in particular political and security uncertainties, and global economic growth. Yemen's economic growth is forecasted to be at around 4.4 percent for 2013.3The fiscal outlook for 2014 remains weak as increasing revenues depends on the restoration of hydrocarbon production, and the implementation of various reforms such as the increase in investment expenditures which is expected to be co-funded from the donor conference pledges. 7. Visible progress, such as increased accountability and transparency in government, civil society participation, and private sector development, will be important to boost the confidence in Yemen's economy over the next several years. Furthermore, efforts to improve service delivery will be important to empower individuals and communities so that they can take decisive steps for the betterment of their lives. Restoring and improving electricity service delivery features a key consideration in the MAF and GNR's efforts as it: (i) produces quick wins, where tangible results are felt by the public in the short-term; and (ii) provides a critical venue for private sector investment and growth which is the key to job creation and economic stabilization. B. Sectoral and Institutional Context 8. Yemen is the least electrified country in MENA. Despite the rapid growth in electricity supply for the decade prior to the 2011 crisis, Yemen remains an energy poor country with installed capacity at about 1,200 MW in 2010 and about half of the population with no access to electricity (75 percent in rural areas). Per capita electricity consumption was only 190 kWh in 2009, compared to a MENA average of 1,418 kWh and a world average of 2,751 kWh. 9. Until 2009, all electricity was generated through the combustion of heavy fuel oil (HFO) and diesel, when the first gas-fired Marib I power plant was commissioned. In 2010, HFO and diesel fired-power plants accounted for about 70 percent of grid-connected generation. In addition, there are millions of small diesel units owned by industry, commercial establishments and households to combat the frequent blackouts of the lack of access to the grid-connected electricity. The key feature of the HFO/diesel dominated power generation systems is the associated high electricity costs and heavy pollution. Despite an average consumer tariff of about US$8 cent/kWh, which is higher than the consumer prices in most MENA countries, it covers only about 25 percent of the economic cost of supply. Therefore, diversification of energy supply and gradually shifting to a less costly generation mix is vital to the long-term sustainable development of the energy sector. Several studies to determine the least cost generation expansion plan were carried out and the generally The 2013 growth estimate is subject to the resumption of all oil revenues, (IMF, December 2012). 2 accepted conclusion is that gas-based Combined Cycle Gas Turbine (CCGT) using locally produced natural gas is the most cost effective option. The government developed a long term vision for the power sector to ensure sustainable sector development in 2008. A key element of the strategy was to implement a gas-to power policy to significantly lower the cost of electricity generation and thus reduce government fuel subsidies. 10. However, to determine the scale and time frame of the gas-to-power program, the availability of natural gas both in amount and timing is required. As of 2011, certified gas reserves were reported to be 10.2 trillion cubic feet (tcf), of which about 9.2 tcf have been committed for exports as Liquefied Natural Gas (LNG). The Government has allocated 1 tcf of certified gas reserves for power generation. The amount is only sufficient to support the operations of the Marib I power plant at an 80 percent capacity factor over 25 years. While there are other proven gas reserves which have not yet been certified, the total current uncommitted reserves are reported to be only sufficient to support Marib I, as well as Marib II, currently under construction. This would support generation capacity of 1,000 MW for 20 years. This is far from sufficient to meet the required fuel demand for the required expansion of generation capacity. 11. Renewable energy can play an important role in resolving the country's energy supply constraints. Through a Global Environmental Facility (GEF) grant implemented by the World Bank, the Rural Energy and Renewable Energy Development Project carried out a detailed assessment of the potential of renewable energy resources in Yemen that could be exploited for grid and off-grid electrification. Resources assessed include wind, solar, geothermal, small hydropower and biomass. These resources have the potential to sustain large-scale commercial power development as well as small-scale decentralized systems to meet the energy needs of rural and remote communities. The studies indicated that almost all renewable technologies have lower dynamic unit cost than diesel power generation. The greatest potential for grid-connected power supply lies with wind power which accounts for about 60 percent of the total renewable potential. Grid-connected onshore wind power is also the least cost renewable energy option. While solar energy has huge potential, it is currently only economically competitive for off-grid Photovoltaic (PV) installations in remote areas in Yemen. 12. Prior to the political crisis, the Government made some headway in pursuing wind based generation. Despite the Government's ambitious wind development program and devoted efforts, achieving results on the ground is complex and timely, as evidenced in a number of developed and developing countries. There exist a large number of institutional, regulatory, financial and technical barriers to wind power development, particularly in the initial stages of the process. The development and implementation of the first 60 MW wind power at Mocha will seek to address these barriers with extensive support from donors and developers, and will be the basis for further expansion of wind power generation in Yemen. 13. The impact of the 2011 crisis was strongly felt in the power sector. Power supplies were cut in half, and the financially frail energy sector was further weakened. Transmission lines were damaged, and a lack of fuel seriously disrupted the operation of most power plants. The decline in service coupled with social instability resulted in a significant increase 3 in electricity theft and a decrease in the collection rate. The conflict put most construction activities on hold. The precarious financial position of the power sector further deteriorated. The disruption also delayed the implementation of ongoing and planned power generation, transmission and distribution projects, impacting the power supply situation over the coming years. In a business as usual scenario, consumers with access will continue to suffer from frequent and long hours of power shedding and new connections would have to be postponed. 14. In response, the transition government acted quickly to restore electricity supply services by repairing and rehabilitating damaged power generation and delivery facilities. It also resorted to using the fast-track but most expensive option of power supply - small rental diesel units. While increasing reliance on rental diesel units helped to quickly increase electricity supply to meet public expectations, it has devastating impacts on the sector's financial viability and the Government's fiscal sustainability. In 2012, the state-owned Public Electricity Corporation's (PEC) financial losses more than doubled and the Government's fuel subsidy amounted to about US$3 billion, of which about 50 percent went to the power sector. 15. It is therefore paramount that the Government refocuses its efforts on adding generation capacity with power projects which are part of the least cost generation mix, in addition to the policy reforms currently under consideration. Despite the long lead times required for the commissioning of power projects, such a strategy will help the sector move towards securing long-term supply and improving financial sustainability in the longer term. Rationale for Bank's Involvement 16. The Bank has been an important development partner in the energy sector in Yemen. During the three-year period prior to the political crisis in early 2011, the Bank assisted the Government to undertake several activities to identify the key issues and challenges in the energy sector, and to propose actions needed to move the sector towards fiscal sustainability. The key activities included: (i) an independent review of the legal, contractual, fiscal, and licensing terms and procedures associated with upstream oil and gas activities; (ii) an analysis of the potential options and distribution analysis for a possible energy subsidy reform, along with a potential roadmap; (iii) an analysis of options and recommendations on an investment program on gas-to-power and the related market structures necessary to ensure economic benefits of such a program; (iv) an analysis of power sector issues and proposed reform strategy to ensure sustainability; and (v) an analysis of wind energy potential and recommendations of actions needed to implement a wind power development program. Each of these activities addressed specific sub-sector issues, however, there has been limited progress by the Government of Yemen (GoY) in implementing some of the recommendations in large part due to the financial crisis. 17. A further and more important consideration is that the economic, social and political landscape in the country has changed dramatically since the political crisis in early 2011. It has become imperative to develop a well-coordinated energy sector strategy, which encompasses all the key segments of the energy sector, fully reflects the new landscape of the 4 country and is endorsed by the social and political groups of the new society. At the request of the Government, the Bank is currently assisting with the preparation and implementation of a comprehensive energy strategy. The Bank also seeks to work with other donors to support strategic investments in the energy sector that will ensure the supply of low cost energy and long term financial viability of the sector. Since 2006, the Bank has supported two lending projects in the power sector; the Power Sector Project (P086865) (PSP) to increase generation efficiency, strengthen the transmission and distribution system and promote financial viability; and the Rural Energy Access Project (P092211) (REAP) to extend electricity access to rural households and promote new models of rural electrification. Both projects have experienced implementation delays, partly because of design and implementation issues, and partly because of the political crisis in the country. Many lessons and experiences from these projects were incorporated in the design and preparation of the proposed project. 18. The Mocha Wind Power Project would be the first wind power project to be developed and implemented in Yemen, and will represent 5 percent of the installed capacity in the country. Its implementation success will have a huge demonstration impact on the future development of the wind power industry. Although wind power technology is very mature internationally, it is completely new in Yemen and experience has shown that international expertise is invaluable when this technology is first introduced in a country. Technical assistance was provided to prepare a wind resource measurement, the feasibility study, and the environmental and social impact assessment, which has helped mobilize US$122 million in co-financing from three other donors: the Arab Fund for Socio-Economic Development (AFSED), OFID and the Saudi Fund. The continued involvement of the Bank in the implementation stage is considered critical by both the Government and the other financiers. 19. The Bank's comparative advantage includes its technical expertise and experience in supporting similar projects in other countries in particular with regard to the procurement, installation, commissioning and maintenance of turbines consistent with best international practice and standards. The GOY and the co-financiers have very limited experience in the area of wind power procurement, construction and operation. In addition, the Bank has significant experience in building of commercially independent power generation companies governance structures and commercial arrangements to ensure transparency and accountability. Finally the Bank has experience to support the technical assistance component, which includes a long term wind measurement program, preliminary environmental and social impact assessments, and capacity building activities, which would help lay a solid foundation for Yemen to scale up its wind power development either through private financing or public-private partnerships. C. Higher Level Objectives to which the Project Contributes 20. The overriding objective of the World Bank Group's Interim Strategy Note (ISN)(Report 70943-YE) for FY2013-2014 discussed by the Board of Executive Directors in November 2012 is to "help the Government produce tangible results that stabilize the transition in the short-term, while laying the groundwork for medium-term reforms and 5 sustainable longer-term benefits". The ISN proposes to support this objective across three strategic pillars: (i) achieving quick wins and protecting the poor by creating short-term jobs, restoring basic services, improving access to social safety nets, and revitalizing livelihoods; (ii) promoting growth and improving economic management by helping maintain macro stability, strengthening fiscal policies and public financial management, and improving the enabling environment for private sector growth and competitiveness; and (iii) enhancing governance and local service delivery by supporting transparency, accountability, capacity building, institutional strengthening, and improved citizen engagement. 21. This project directly contributes to pillar (ii) by piloting the generation and provision of low cost renewable electricity which first and foremost contributes to promoting growth through the creation of an enabling environment for private investment, and improving economic management through reducing the need for energy subsidy. Numerous studies by the Bank and other agencies and practical experiences from the Bank's client countries demonstrate that affordable, reliable and sustainable energy supply is a critical element of an enabling environment for private sector growth and competitiveness. The project also indirectly supports pillar (iii)by supporting increased transparency and accountability in the flow of funds within the power sector through the design of the project, namely the creation of a commercially independent power generation company. Finally, the project is aligned with MENA's Regional Strategy supporting the pillar of Growth. 22. The project is in line with MAF which contributes towards the overarching goals set out by the GOY to restore political, security and economic stability and enhance state building. The project directly contributes to one of the pillars underpinning MAF: pillar (iv) increase effectiveness of key service sectors, and partnering with the private sector in Public Private Partnership (PPP). It also indirectly contributes to other pillars including pillar (ii) create employment opportunities and pillar (iii) promote good governance and rule of law. A recent survey (Enterprise Survey) of tens of thousands of firms indicates that more firms cited electricity as a major constraint to do business, a key element for job creation, than any other factor. The project is therefore expected to contribute to the national development priorities outlined in the MAF to facilitate Yemen's progress towards economic stability and prosperity. 23. At a higher level, the project will contribute to laying the groundwork for sustainable long-term benefits as the low cost electricity to be generated by renewable energy will help spur economic growth and reduce energy subsidy by Government. Moreover, the project will demonstrate the feasibility of wind power development in Yemen and will test the appetite of private investors to engage in the energy sector through a public-private partnership or a wholly-owned private investment. The project is aligned with the World Bank Group's twin goals as in the long term, the project will contribute to the development and supply of affordable and sustainable energy which is needed to end extreme poverty and promote shared prosperity. 6 II. Project Development Objective 24. The project development objective (PDO) is to increase the supply of cost-effective renewable wind electricity. A. Project Beneficiaries 25. The primary project beneficiaries are the existing and potential electricity consumers in Yemen who will have increased access to power supply to meet their current and growing demands. The additional electricity generated will improve the reliability of electricity service for already connected consumers and provide electricity access to new consumers. Although the project will benefit the general public which consists of 50% of men and 50% of women, women are likely to benefit more as women are often engaged in household work and home production activities. The access to electricity will improve the conditions for household work and reduce the need for labor work. Access to electricity creates job opportunities, often in low-skill or informal sector, in industries that favor female workers. Children could also benefit more as study conditions both at home and school are improved and more advanced healthcare equipment are made available. The GoY will also benefit from being able to limit the growth in the subsidies that it pays to Public Electricity Corporation (PEC) for electricity generated using HFO and diesel or purchased from private rental power. B. PDO Level Results Indicators 26. Achievement of the development objective will be assessed based on: (i) renewable energy capacity (wind) constructed; (ii) electricity generated from wind power; (iii) economic competitiveness of electricity generated from wind power; and (iv) the number of direct project beneficiaries. other performance indicators include the capital cost and the availability of the wind farm. A detailed results framework is presented in Annex 1. III. Project Description A. Project components 27. The proposed Project will consist of the following components: 28. Component 1 - Physical Investment (US$121 million, of which IDA US$18 million): The proposed component will support the construction of a wind farm at Mocha of approximately 60 MW generation capacity. The wind farm will be connected to an existing substation through a new 132 kV transmission line of about 2.5 km. The substation is part of the national grid which is owned and operated by PEC. The wind farm will be implemented by a Supply and Installation contractor. The selection of the contractor will be based on International Competitive Bidding (ICB) process. The unit size and number of wind turbines will be determined during the procurement of the Supply and Installation contractor. The contractor will be retained to provide full services for the wind farm for at least three years. This component will initially be implemented by a Project Management Unit (PMU) established under the Ministry of Electricity and Energy (MOEE). A Special Purpose 7 Company (SPC) will be created as a wholly government owned entity to own and operate the wind farm before it is completed and is operational. The precise form of the SPC and the timing of its creation are being investigated. An international engineering firm is being employed to assist with the procurement process of the Supply and Installation contactor and with supervision during the construction stage. 29. Component 2 -Consulting Services and Market Development (US$7.0 million, of which IDA US$2 million): The proposed component consists of the following sub- components: (i) an international engineering consulting firm employed to assist the PMU in the procurement and contracting of the supply and installation contractor and in the construction supervision of the project throughout the construction phase and the initial operation stage; (ii) an international consulting firm employed to assist MOEE to design tendering procedures and documents for competitive procurement of PPP wind projects and to assist MOEE with the tendering process; (iii) advisory service for SPC which would operate commercially with clear contractual arrangement with the electricity off-taker; (iv) advisory service and instruments for the implementation of regional long-term wind measurement program in three to five wind development zones; (v) consulting service for preliminary environmental and social impact assessments, grid connection planning for promising wind sites; and (vi) other consulting services as needed and capacity building activities, including external audit fees. 30. The Ministry of Electricity and Energy is taking into consideration Clean Development Mechanism (CDM) under the Kyoto Protocol, to provide additional financial sources. The MOEE intends to enter into an agreement with the World Bank to develop a CDM operation and sell part of the Certified Emission Reductions (CERs) resulting from the operation of Mocha Wind project to the Carbon Funds managed by the World Bank. The annual amount of CERs to be purchased by the Bank acting as Trustee and the time period for the purchase are yet to be discussed and agreed to. The price of the CERs will be determined based on the prevailing price of carbon at the time of agreement signing. In case the Bank is no longer in the position to purchase the CERs for the Carbon Funds it manages, the recipient will look for alternative buyers in the open market. 31. Payments of CER revenues will be made annually subject to verification by an independent Designated Operational Entity (DOE) accredited by the CDM Executive Board established under the Kyoto Protocol. The World Bank's Carbon Finance Unit will support MOEE financially and technically in project registration, verification and certification of CERs generated by the project. B. Project Financing 32. IDA funds to be provided for the proposed project will be in the form of an Investment Project Financing (IPF), which will be made available to the GoY as a grant. The IDA fund will initially be passed on to MOEE which will prepare and implement the new facility. An SPC will be created to own and operate the wind farm. The grant will be onlent by the Government to the SPC at terms and conditions acceptable to IDA once the SPC is created. 8 Project Cost and Financing 33. The total estimated project cost, including physical and price contingencies and interest during construction is US$144 million, including taxes and duties. IDA will provide a grant of US$20 million equivalent. Additional financing support for the project will be provided by AFSED, OFID, and the Saudi Fund. The GoY will provide the remaining funds from its own resources. Table 1: Cost by Local and Foreign Local Foreign Total Project Project Components ($m) ($m) Cost ($m) 1. Physical Investment 17.10 96.90 114.00 2. Consulting services & 0.00 6.90 6.90 market development 1. Operating costs 1.00 1.00 2. Taxes and Duties 16.00 16.00 5. Contingency 0.90 5.20 6.10 Total 35.00 109.00 144.00 Table 2: Project Cost Allocation by Financiers Project Components IDA AFSED OFID GOY Saudi Fund Total Project Cost USS m % of Total US$ m % of Total US$ m % of Total US$ m % of Total US$ m % of Total US$ m % of Total 1. Physical investment 17.00 15% 59.00 52% 19.00 17% 0.00 0% 19.00 17% 114.00 79% 2. Consulting services & capacity building 1.90 28% 5.00 72% 0.00 0% 0.00 0% 0.00 0% 6.90 5% Contingency 1.10 15% 1.00 14% 1.00 14% 3.00 42% 1.00 14% 7.10 5% Taxes and Duties 0.00 0% 0.00 0% 0.00 0% 16.00 100% 0.00 0% 16.00 11% Total 20.00 14% 65.00 45% 20.00 14% 19.00 13% 20.00 14% 144.00 100% C. Lessons Learned and Reflected in the Project Design 34. The proposed project is the third Bank-financed energy sector operation in Yemen since 2006, and the first wind power project in the country. As such, the project design has benefitted from lessons learnt from Bank projects in Yemen in the energy and other sectors, and similar wind projects financed by the Bank in other countries. The two energy projects, 9 both under implementation, are facing implementation difficulties and the lessons derived from the implementation experiences gained from these projects is presented below. 35. Procurement Delays. The PSP was restructured due to implementation delays, among other issues, arising mainly from the late start and prolonged procurement processing of three large contracts which account for more than 70 percent of the total project cost. Based on this experience, the procurement process of the supply and installation contractor under the proposed project, which accounts for more than 90 percent of the project cost, has already commenced. It is expected that the bidding process would have been launched by the time the project is presented to the Board for approval. In addition, the roles and responsibilities of the various government agencies in the procurement process were not clearly defined and streamlined. The roles and responsibilities of the various government agencies related to procurement of the proposed project have been streamlined so that the PMU, assisted by international consultant, will be fully responsible for the procurement activities. The Government will only review to ensure that government rules and procedures are followed. 36. Delays in Employing International Consultants and Implementing Technical Assistance (TA) Activities. Both the PSP and the REAP suffered significant delays in starting project implementation due to the prolonged process of procuring and mobilizing international consultants which were required to assist the PMU in the preparation of bid documents and the conducting of the bidding process for the major supply and installation packages. The procurement of such consultants was normally launched after Board approval or even grant/credit effectiveness. Based on this experience, the bid document for the main package for the proposed project was prepared with the assistance of an international consultant funded by Agence Franqaise de D6veloppement (AfD) funds. The procurement of the international consultant to assist in bidding process and construction management was launched in the early stage of project preparation and is expected to be selected shortly. There were also long delays under both projects in implementing the TA activities due to the weak institutional capacity of MOEE, PEC and PMUs in defining the scope of work and preparing Terms of Reference in a timely manner. Under the proposed project, an international wind specialist will be recruited to assist the PMU/MOEE to implement the TA activities. 37. Delays in Processing Counterpart Funds. Counterpart funds from the Government made up 30 percent of the PSP's total cost and activities financed under GoY's cost-sharing allocation were not provided in a timely manner, thus also impacting implementation aspects. Under the proposed project, the Government's contribution to project financing has been limited to taxes and duties plus a small amount of operating expenditures and has been extensively discussed and agreed with the Ministry of Finance. 38. Impact of Effectiveness Conditions. The REAP became effective on September 30, 2010, after a 16-month delay, and is currently rated Unsatisfactory. The project had seven conditions of effectiveness, of which two were instrumental in delaying effectiveness. One is related to the establishment of new institutions which have never been tested and the other is related to the loan effectiveness of a co-financer. The proposed project will reduce the 10 number of conditions of effectiveness by addressing such issues from the outset. For instance, the project does not mandate the establishment of the project company prior to grant effectiveness in order to allow for a flexible design based on sector and country context. The project team has coordinated very closely with other donors on the processing schedule of the project. As end of January 2014, the financing from all other three donors are secured with loan/credit agreements already approved by the Parliament of Yemen. 39. Procurement of Wind Power. The experience from successful and similar projects financed by the Bank in other countries indicates that good procurement arrangements and implementation is critical to the success of wind projects. Consistent with lessons learnt, the wind turbines will be implemented through a Supply and Installation contractor with a service contract of at least three years, which will be procured based on the delivered unit cost of electricity generated rather than total capital costs. This has proven effective in countries with poor institutional capacity. A pre-bid meeting will be held prior to bid submission as specified in the bid document, which will increase the chance for a successful procurement process. Other lessons and experiences from Bank-financed wind power projects will also be taken into consideration during the procurement process. IV. Implementation A. Institutional and Implementation Arrangements 40. The MOEE will be responsible for coordinating and supervising the implementation of the project as the Government Ministry of the power sector. For the implementation of Component I and the associated consulting services under component II, initially a PMU created by MOEE and the GoY has agreed to create an SPC to undertake all the activities. The SPC will own and operate the wind farm according to commercial principles. The precise form and organizational structure of the SPC is currently under review and the SPC dedicated to power generation will be created and made operational at least three months before the wind farm is put into commercial operation. Before the SPC is legally created and operational, a transitional arrangement has been put in place to implement the project. MOEE has established a PMU to undertake all the day-to-day management and operations of the proposed project. The PMU, which overseas several generation projects under preparation, currently has 30 staff, including a project director, a number of technical specialists, a procurement specialist and two procurement assistants, a financial specialist and two accountants, an environmental and social specialist, an internal auditor, and other service and support staff. Although the PMU is responsible for four generation projects, currently only the wind power project and Marib power project are active. The PMU director has the overall responsibility for project management and is supported by wind power specialists. Other specialists provide support as needed. The number of staff and their composition will be assessed from time to time based on project progress. Some of the PMU staff closely involved with Mocha Wind Power Project, including the technical specialist, financial specialist and accountant will be transferred to the SPC to be created. Once the SPC is operational, the ownership and operation of the Wind Farm and the obligations thereunder will be transferred to the SPC pursuant to a subsidiary loan and implementation agreement to be entered into between the MOF and SPC, under terms and conditions approved by IDA. 11 The SPC will operate as a legally independent company according to commercial principles with MOEE's oversight roles limited to sector policy and regulation aspects. 41. During preparation, international firms were contracted to prepare the feasibility study, the Environmental and Social Impact Assessment (ESIA) report, and the draft bidding documents. The MOEE has also started the process of procuring an international engineering firm to assist in the procurement, construction management and supervision of the Mocha Wind Power Project. The engineering firm is in the final stage of selection and the consulting contract is expected to be awarded by Board presentation of the project. An experienced international contractor will be procured to design, supply and install the wind farm and will provide full services for the wind farm for at least three years after commissioning. The staff of the PMU or future SPC will be trained on site and will take over the operation and maintenance of the wind farm thereafter. Other independent consultants will be employed to provide independent monitoring and evaluation of the implementation of the Environmental and Social Management Plan and any land acquisition and resettlement work if needed. 42. For implementation of the studies, consulting services and capacity building activities associated with the national wind policies and programs under Component II, MOEE will have direct responsibility. MOEE will be assisted by specialists in clearly defining the scope of work, preparing terms of reference for consulting services and procuring the consulting services. B. Results Monitoring and Evaluation 43. The MOEE, through the PMU/SPC, with the help of the implementation consultant, will monitor project progress against the agreed performance indicators listed in Annex 1. Data on actual project outputs and outcomes will be gathered, analyzed and included in quarterly progress reports to be submitted to the World Bank. 44. The PMU, with the help of the implementation consultant, will monitor the day-to- day project implementation of the physical components and contactor performance, including monitoring the implementation aspects of the ESIA and Resettlement Policy Framework (RPF). C. Sustainability 45. The proposed project represents a landmark step for Yemen in exploiting its vast renewable energy resources to meet growing energy demand, particularly taking into account its declining oil and gas production. Project sustainability is reliant on the ability of the MOEE/PMU to prepare, implement and operate the wind farm successfully. The high probability that the wind farm would be successful is assured by designing and implementing the wind farm according to internationally accepted technical criteria and standards. Moreover, implementation and initial operation would be contracted to experienced international firms, who will also be tasked with training MOEE/PMU staff. It is hoped that the success of the project could catalyze wind power development in Yemen by other private and public developers. The Mocha Wind Power project is likely to be economically viable 12 provided that the world crude oil price does not drop below US$35/bbl, which is unlikely for the foreseeable future. But the financial sustainability of wind power industry in Yemen would depend on PEC's financial viability and consequent capacity to pay for the wind electricity received from wind farm projects, which would depend on continued reform of energy pricing and the GoY's subsidy scheme. V. Key Risks and Mitigation Measures A. Risk Ratings Summary Table Risk Category Rating Stakeholder Risk Moderate Implementing Agency Risk - Capacity Substantial - Governance High Project Risk - Design Moderate - Social and Environmental Moderate - Program and Donor Moderate - Delivery Monitoring and Sustainability High - Other (Optional) - Other (Optional) Overall Implementation Risk High B. Overall Risk Rating Explanation 46. The design of the proposed project is simple and involves a proven technology. However it is the first wind power project to be developed and operated in Yemen. The project has been designed to minimize the risks associated with limited capacity and capability in designing, preparing, constructing and operating a wind farm project. The project objective is simple and does not require major policy changes by the GoY. This is particularly important given the institutional and political context in Yemen. 47. The overall project risk is rated High. Although measures have been taken to minimize the risks seen in the two on-going energy projects in Yemen, there are a few risks which are not easy to mitigate. The three main risks are: (i) the security situation in Yemen could deter many qualified international firms from participating in the bidding process, which could result in either much higher price for the Supply and Installation contractor or complete failure of the bidding process; (ii) the excessive involvement of multiple agencies in project and the general poor performance of government agencies could lead to significant delays in project implementation despite the agreed mitigation measures; and (iii) the poor financial position of PEC could affect its ability to make full payment to the project for the 13 electricity it purchased, although the payment is very likely to be sufficient to cover the operating cost of the wind farm. 48. Potential risks are summarized in the Operational Risk Assessment Framework (see Annex 4). Most risks identified are considered manageable, while others remain high even after realistic mitigation measures are applied. VI. Appraisal Summary A. Economic and Financial Analysis 49. Economic Analysis: The primary benefit of the Mocha Project is the incremental energy supplied to electricity customers in Yemen, which was valued at customer willingness to pay (WTP). A potential additional benefit was also counted in the form of carbon credits which could be claimed owing to the substitution of wind power for an equivalent amount of thermal generation. 50. Empirical data on household WTP for incremental electricity is heavily influenced by the urban residential tariff charged to customers connected to the PEC grid, which, at less than 2 US cents per kWh, barely covers the cost of transmission and distribution4. The weighted average WTP across all households is only 5.4 US cents per kWh , which is well below the incremental cost of new supply. Yet there are a number of areas of Yemen where households are connected to smaller grids (e.g. the PEC isolated grids or private and co- operative grids) where end-user tariffs are higher and the WTP is also demonstrably higher. Since these households have the same general income characteristics as households connected to the PEC grid, and consume approximately the same amounts of electricity relative to the hours of available service, it was decided to use the WTP of this restricted sample of consumers (9.8 US cents per kWh) as a proxy for the WTP of all households. The cost benefit analysis of the project yielded an Economic Internal Rate of Return (EIRR) of 10.5 percent and a Net Present Value (NPV) of US$3.4 million at a 10 percent discount rate. 51. While the distortions effected by the tariff subsidies justify basing household WTP on only a segment of the population, it was decided to also test the economic viability of the project on the basis of cost effectiveness, i.e. by comparing the cost of the wind farm to the cost of incremental sources of power generation, using costs associated with the plant recently constructed at Marib as a comparator. The analysis showed the long term average economic cost of power from the Marib plant as 7.3 US cents per kWh. More recent bids to construct a second phase of the Marib plant have come in at capital costs roughly double those of the initial plant. Based on these quotes, the expected cost of power from the Marib II plant is 9.3 US cents per kWh. The average economic cost of power from Mocha is estimated at 8.1 US cents per kWh, slightly higher than the cost of Marib I. Details of the analysis are provided in Annex 6. Given that gas is not a renewable resource, and that 4 The residential tariff was increased to 6 YR/kWh (approximately 2.5 US cents at current exchange rates) on July 1, 2010. 5 The calculations of household WTP are based on analysis of a comprehensive household survey of energy use carried out in Yemen in 2004. 14 developing the country's wind resources reduces the risk of reliance on fossil fuels (and vulnerable pipelines) for power supply, the Mocha project is economically justifiable on the basis of cost effectiveness. Furthermore, Yemen has a limited gas reserve which is not sufficient to meet the country's power generation needs, the cost of generation with alternate liquid fuels at current fuel prices (with crude oil in the neighborhood of US$100 per barrel)6 is two to three times the cost of wind power - 21.5 cents per kWh in the case of HFO and 31.2 cents per kWh in the case of diesel. 52. Financial Analysis: The financial analysis focused on the financial structuring of the SPC which will be established to own and operate the wind farm, including its working capital requirements and required tariff structure. Pro forma financial analysis for the implementation period and the first 10 years of operation are provided in Annex 6. Key findings of the financial analysis include: * During a three year preparation and construction period, the PMU will require approximately US$1 million in working capital (local currency), mainly to cover the staff salary of the PMU and miscellaneous expenditures for travel, office facilities. Any interest during construction will be directly paid by the government. * A tariff of 8.5 US cents per kWh (2010 dollars) will be sufficient to ensure profitable operations and generate sufficient cash flow to provide a satisfactory debt service coverage ratio. An average tariff of 2.0 US cents per kWh will be sufficient to ensure that the farm has adequate cash flow to maintain its operations. B. Technical 53. The project has been designed and will be implemented according to internationally accepted technical criteria and standards. The chosen technologies are proven as demonstrated by many completed and ongoing wind projects around the world, although wind power technology is new to Yemen. The engineering companies which carried out the feasibility study and prepared the bidding documents are very experienced. 54. Wind resource measurement data from a three year program as well as meteorological data from 1990 was analyzed. However, only one full year of data (1996) is considered reliable. Although this presents quite a bit of uncertainty as to whether data from 1996 is considered representative for multiple years, the use of single year data is considered to be reasonable for a public-financed project. Wind resources at the site were modeled at different heights using WASP software and the results show that there is sufficient wind for a wind farm at Mocha. The average wind velocity ranges from 7.5 m/s at a height of 40 m to 8.54 m/s at a height of 80 m, which are considered as favorable for wind power generation. The expected capacity factor has been evaluated in the range of 35 percent to 45 percent depending on the type of turbines used. 55. The 60 MW feasibility study calculated the gross Energy P50 values for a 60 MW wind farm depending on the wind turbines. The annual energy production varies between 194 GWh/year for 850 kW wind turbines and 231 GWh/year for 2 MW wind turbines. 6 The price of crude would need to drop below US$25/bbl for HFO thermal generation to be competitive with the proposed wind farm. See Annex 6 for details. 15 56. The site condition is assessed through analysis of boreholes and is found suitable for the recommended wind turbine design, although deep foundations are recommended for the construction of towers. The wind turbines can be transported to harbors not far from the wind farm site and then by road to the project site. The wind farm will be connected to the grid through a 132 kV overhead transmission in the free bay of the GIS of Mocha substation. A grid behavior analysis was performed to ascertain the impact of its connection on power flows, contingencies, short circuit flows and transient stability after the installation of the 60 MW wind farm. C. Financial Management 57. The newly established PMU under MOEE (Generation Management PMU) will be responsible for financial management aspect of project implementation. The financial management assessment has been conducted by the Bank and the overall Financial Management (FM) risk is determined to be high. It concluded that the project has three major FM risks: (a) the PMU in charge of managing the project and project reporting is newly established and it does not have well defined comprehensive formal procedures and controls applicable to the Project. It does not have an acceptable accounting system yet and is staffed with MOEE's civil servants with limited experience in the Bank's financial management and disbursement procedures; (b) the financing arrangement is a bit complex as the project's cost is financed by multiple donors and it requires a clear and segregated financial recording and reporting; and (c) there is the possibility of inadequate government funding, and delay in budget transfer of allocation which could cause delays in the availability of funds to the PMU and the project. The PMU has a financial officer, and an internal auditor, and two accountants selected by MOEE with limited experience with IDA-financed projects. 58. A set of actions to strengthen PMU's financial management capacity and mitigate the FM risks include the following: (i) training the appointed financial manager, internal auditor, and accountants on the Bank's financial management and disbursement guidelines; (ii) agreement with the MOEE on the procedures, controls and safeguards to be applied during project implementation including agreement on the format of the interim financial report acceptable for all donors, and documenting these controls and procedures in the Project's financial manual; (iii) installation of an automated accounting system following cash basis which will generate quarterly Interim Financial Reports (IFRs) capable of reporting sources and uses of funds, based on terms of reference acceptable to the Bank; and (iv) annual audit of the project financial statements by an independent external auditor, selected by Yemen's Central Organization for Controls and Audit (COCA) and acceptable to IDA. The FM Manual was submitted and reviewed and found acceptable. The PMU will use their existing automated accounting system to record and report on all project transactions. It is agreed the existing system will be further developed to meet the reporting format as per IDA's requirement and the FM Manual to include reporting on all sources and uses of funds by component, category, activity and donor. 59. The PMU will prepare the project's interim financial reports on a quarterly basis to be submitted to the Bank and donors within 45 days from the end of each quarter, and the 16 annual audited financial statements to be submitted not later than 6 months after the end of each calendar year. Annex 3 provides additional details on the financial management and disbursement arrangements. 60. The assessment has concluded that with the implementation of the above actions, the proposed financial management arrangements are adequate to provide the Bank with reasonable assurance, accurate and timely information on the status of the grant as required by the IDA. D. Procurement 61. An assessment of the capacity of the PMU and MOEE to implement procurement activities under the project was carried out. Although the PMU has hired a procurement specialist and its staff has general knowledge of the Bank's procurement policies and experience of procuring goods and materials for conventional power projects, it has limited capacity to carry out procurement activities related to the proposed project. The project will consist of procurement of high-value supply and installation contract for wind farm which is new to Yemen. MOEE has supervised the implementation of several IDA financed projects, but hardly any procurement capacity has been developed. In addition, most IDA financed projects have experienced challenges, particularly in the preparation of bidding documents for complex packages, the complex administrative system to review and approve procurement documents and decisions by the government. To mitigate the risk of delay and to ensure project readiness, the procurement process of the Supply and Installation contractor under the proposed project, which accounts for more than 90 percent of the project cost, has already commenced. The bid document for the package, prepared with the assistance of an international consulting firm, has been reviewed and approved by all financiers, which will jointly finance the contract. It is expected that the bidding process would be launched by the time the project is presented to the Board for approval. An international engineering firm is being employed to assist in bid clarification, bid evaluation and contract negotiation. The engineering firm will be selected and contracted prior to the launch of the bidding process. In addition, the roles and responsibilities of the various government agencies in the procurement process were not clearly defined and streamlined. The roles and responsibilities of the various government agencies related to procurement have been streamlined. 62. Risk mitigation measures have been discussed with PMU/MOEE and agreed. The procurement plan for the project (dated January 22, 2014) acceptable to the Bank for the first 18 months was agreed to. It will be updated at least annually (or as required) to reflect project implementation needs. A brief summary of the procurement capacity assessment and project procurement arrangements and risk mitigation measures is provided in Annex 3. E. Social 63. The overall social impact of the project is expected to be positive. It seeks to provide access to modern infrastructure and clean energy supply. Providing modem infrastructure would create the prospect for increased income-earning and investment opportunities in Yemen in general and in the project area in particular. Increased income and investment opportunities 17 would cultivate the path for a better quality of life. The project will create some employment opportunities for local communities and additional sources of income. During the construction and operation phase, the project will need to hire people to handle security aspects of its works and will create demand for agriculture products and food supply services. The additional and predictable income would substantially improve their quality of life and their livelihoods. 64. At current project design, none of the project activities would involve resettlement of local populations and/or the acquisition of privately-held land. In the unlikely event of the need for involuntary land acquisition, a RPF has been prepared in compliance with the Bank Policy on Involuntary Resettlement OP 4.12 and relevant government laws and regulation in Yemen in 2010.If involuntary resettlement and land acquisition is unavoidable, a Resettlement Action Plan (RAP), in line with the RPF, would be prepared and disclosed prior to the actual acquisition of the land. Since the preparation of the RFP, there has been no change to the nature and usage of the land for the project site. Therefore the previous RFP remains valid. 65. The project will use a participatory approach. The project is planning to involve wide range of stakeholders in the planning and implementation of the Environmental and Social Management Plan, disclosed in-country on July 15, 2013 and on the Bank's website on August 12, 2013. There is a plan to build the capacities of local authorities on the know-how of the project and, a comprehensive plan to ensure that stakeholders are sufficiently consulted and fully participating in the project. This will include the PMU, Local Councils and local NGOs. F. Environment Project Environmental Classification 66. The project is classified as Category B, according to the World Bank Operation Policy on Environmental Assessment (OP 4.01) requiring partial assessment. An ESIA report covering the wind farm and associated activities was prepared in 2010 by an independent third party consultant according to Terms of Reference that was reviewed by the Bank. The ESIA includes an assessment of the potential impacts of the project and the likely significance of such impacts and recommended mitigation measures. The ESIA also includes an Environmental and Social Management Plan (ESMP) outlining institutional settings, mitigation measures, and monitoring plan for the potential impacts expected during construction and operation phases of the project. The net environmental impact of the project will be positive as it is expected that the proposed wind farm will lead towards a reduction in air emissions. Since the preparation and disclosure of the ESIA, there has been no change to the social and physical environment surrounding the project site. The scope of the project remains the same as well as the environment and social risks as indicated in the 2010 ESIA. Therefore, the environmental classification also remains the same and the previously prepared ESIA and RPF are still valid. Public Consultation and Disclosure ofESIA and RPF 18 67. To ensure that the views and interests of all project stakeholders are taken into account, the borrower carried out public consultations and related activities during the period of May 2009 to June 2010-from the scoping stage through the preparation of the ESIA and ending with a workshop that discussed the draft report. Consultations included interviews, survey questionnaires, and focus group discussions with various stakeholder groups. A detailed description of these meetings as well as other consultation activities is presented in Section 8 and Annexes 1-4 of the ESIA. The English version of the full ESIA and RPF and the Arabic version of their Executive Summaries were disclosed at the World Bank Infoshop on June 13, 2011. In-country disclosure of both documents took place on May 15, 2011 at the PMU office and PEC website (www.pec.com.ye).As project processing was postponed due to the 2011 sociopolitical situation in Yemen, the English and Arabic version of the full RPF as well as the English version of the full ESIA and the Arabic version of the Executive summary, including the Bird Migration Risk Assessment, were re-disclosed locally on July 15, 2013 in country and at the World Bank's Infoshop on August 12, 2013. Main impacts and proposed mitigation measures 68. The ESIA presents an analysis of the potential positive and negative impacts of the proposed wind farm and related activities. It is expected that construction and operation phases of the wind farm and associated structures will have some negative impacts. During the construction phase, potential negative impacts expected are from construction related wastes, emissions of dust and pollutants to the air from construction vehicles and activity, construction noise and vibrations, effects of construction traffic on normal traffic flow in the area, risk of accidents to workers and inconvenience to normal freedom of movement of local inhabitants. However, any potential negative environmental impacts are expected to be minor, localized and temporary in nature, if the contractor does not comply at all times with the relevant health and safety guidelines. Adequate mitigation measures and monitoring activities are included in the ESMP, and these will be imposed as contractual obligations for the supply and installation contractor. The ESMP also includes procedures for chance finds, monitoring indicators for environmental and social impacts as well as reporting procedures. 69. During the operation phase, potential impacts include the effects of noise and impacts of shadow flickering from wind turbines on local residents, scrap and maintenance waste, and other impacts of minor significance including stability risks of the wind turbines, impacts of dust generation, electro-magnetic field impacts and visual impacts. The operation phase is expected to generate positive environmental and social impacts including a reduction in air emissions, job opportunities and household gains. Adequate mitigation measures to counteract the potential negative impacts are proposed in the ESMP. An additional concern during the operation of the wind turbines is the potential risk to birds. In this regard, 2 ornithological field investigations were carried out during autumn and fall seasons over 50 days of field observation. This was combined with literature review and consultations with locals and scientists to augment information collected in the field, and the results are summarized in the ESIA. As a result of the field investigations, a detailed report entitled, 'Assessment of Risk to Birds from Planned Wind Energy Development at Mocha' was prepared by the Client during July 2010, to serve as a complement to the ESIA. The assessment concluded that, 'the current proposed wind energy development at Mocha is 19 unlikely to have impacts on birds of catastrophic nature, and that the level of risk to migratory and local birds is within a 'tolerable' or 'acceptable' range; i.e. that the level of damage that could affect birds is expected to be limited and would not have significant conservation consequences to their populations if prescribed mitigation and precautionary measures are taken.' This conclusion assumes that the size of proposed development remains limited in scale, and does not deviate from the current proposal without further assessment; that existing man-made risk factors (solid waste dumps and cultivations) will be relocated to a safe distance from the proposed wind farm; and that the recommended mitigation measures are implemented. Accordingly, the Project will include as an activity, the closing down of the existing dumpsite and relocating it to a safe distance (at least 5kms) from the project site as a mitigation measure to reduce risk on birds, the cost of which is included in the overall cost for ESMP implementation. Environmental and Social Management Plan 70. Detailed tables outlining the ESMP are included in Table 7.6 of the ESIA. Within the project's context, while the PMU manager will have the overall responsibility for implementing and reporting on the ESMP, an environment specialist (Health, Safety and Environment (HSE) officer) will be assigned as part of the PMU for day to day implementation of the ESMP measures during the tendering and construction phase. Detailed tasks for the HSE officer are included in the ESMP. The environmental specialist will monitor the implementation of the environmental mitigation measures, monitoring plan, and training requirements of the ESMP, and will be responsible for environmental reporting within the PMU. It is recommended that the HSE officer/environmental specialist can be shifted from the PMU to the SPC, once it is established. Environmental Capacity Building 71. Training and capacity building activities will be provided to various stakeholders including the PMU, technical staff from the local councils, NGOs and community groups as outlined in Table 7.5 of the ESIA. Cost of ESMP Implementation 72. The estimated cost of ESMP implementation is US$465,000, which covers mitigation measures during the construction and operational phases, institutional aspects and training and the monitoring program as outlined in Table 7.6 of the ESIA. 20 Annex 1: Results Framework and Monitoring Country: Yemen, Republic Project Name: Mocha Wind Park Project (P146055) Results Framework Project Development Objectives PDO Statement The development objective of the Project is to increase the supply of cost-effective renewable wind electricity. These results are at Project Level Project Development Objective Indicators .Data Responsibility Cumulative Target Values Sore fo Source/ for Unit of .End Methodolog Data Collection Indicator Name Core Measure Baseline YR1 YR2 YR3 YR4 Et Frequency Measure Target y Economic El Competitiveness Amount(US Project of electricity 0.20 NA NA NA 0.12 0.12 N/A PMU/MOEE generated by wind power Electricity L Gigawatt- Project generated from hour (GWh) 0.00 0.00 0.00 0.00 10.00 180.00 Annual reports PMU/MOEE wind power Direct project . 920000.0 Project PMU/SPC/MO beneficiaries Number 0.00 0.00 0.00 0.00 0.00 Annual reports OE Female Percentage Project PMU/SPC/MO beneficiaries Sub-Type 0.00 0.00 0.00 0.00 50.00 50.00 Annual reports EE Supplemental 21 Generation Capacity of Renewable Project Energy (other Megawatt 0.00 0.00 0.00 0.00 60.00 60.00 Annual PMU/SPC than reports than hydropower) constructed Generation Capacity of Megawatt RenewableePrwjec Renewable Sub-Type 0.00 0.00 0.00 0.00 60.00 60.00 Annual Project PMU/SPC Energy Bekonreports constructed - Wind Intermediate Results Indicators .Data Responsibility Cumulative Target Values Sore fo Source/ for Unit of .End Methodolog Data Collection Indicator Name Core Measure Baseline YR1 YR2 YR3 YR4 Et Frequency Measure Target y Wind capacity Percentage 0.00 NA NA NA 97.00 97.00 Annual Project PMU/MOEE Availability Report Number of Staff Text 0.00 0.00 10.00 20.00 25.00 tAnnual PMU/MOEE trained month reports Wind Measurement Number 0.00 0.00 3.00 3.00 3.00 3.00 Annual rot PMU/MOEE masts installed Consulting services for market Yes/No No No Yes Yes Yes Yes Annual rot PMU/MOEE development performed Progress in Yes/No Yes Yes Yes Yes Yes yes Quarterly Project PMU 22 procuring reports engineering consultant Procurement L Percentage 0.00 0.00 100.00 100.00 100.00 100.00 Quarterly Project PMU/SPC Progress reports Construction l Percentage 0.00 0.00 10.00 100.00 100.00 100.00 Quarterly Project PMU/SPC Progress reports SPC created and Yes/No No No Yes Yes Yes Yes Quarterly Project MOEE/MOPIC operational reports 23 Annex 2: Detailed Project Description 1. The project development objective is to increase the supply of cost-effective renewable wind electricity. Component I: Physical Investment (US$121.0 million, of which IDA US$18 million) 2. The physical investment supports the construction of a 60 MW wind farm located in the coastal area in the western part of Yemen. It is about 4 km from the port city Mocha on the red Sea coast of Yemen. The altitude of the wind farm site ranges from 4 m to 14 m above sea level due to the location close to the coast. The average temperature recorded at the meteorological station in Aden Khormaksar is 28.60 C. 3. Wind resource measurement date from a three year program as well as meteorological date from 1990 was analyzed. But only the data of 2006 measurement was considered reliable. The resource assessment was done by taking data from a full year of wind measurement in 2006. Although this presents quite a bit of uncertainty on whether the wind resource data would represent the multiple year average, it is considered to be reasonable for a public project. Wind resource at the site was modeled at different heights using WASP software and the results show that there is enough wind for a wind farm at Mocha. The average wind velocity ranges from 7.5 m/s at a height of 40 m to 8.54 m/s at a height of 80 m, which are considered as favorable for wind power generation. The prevailing wind is almost unidirectional from the South to South- Southeast, with no wind obstacles for more than 20 km. Wind measurements indicate that turbines will be generating electricity for about 90 percent of the hours of the year. The expected capacity factor has been evaluated in the range of 35 percent to 45 percent depending on the type of turbines used. 4. The wind turbines can be transported to Yemen by ship and unloaded at Mocha port which is only 8 km from the Mocha Wind Farm site. Although it is a small harbor compared to other national ports, it could be used for transport turbine, even the biggest G90 model. The Mocha port lacks proper cranes for unloading heavy parts. A suitable truck crane needs to be deployed at the harbor, which will be procured as part of the Supply and Installation contract. Road configuration from the port to the site is suitable even for the largest turbine. There are access road between the port of Mocha and the wind farm site, with sufficient load carrying capability. Road construction on site is expected to be simple in the very flat and even terrain. 5. The site is directly adjacent to the Mocha power plant with its four 132 kV power lines and its electrical substation and switchyard. The neighboring power plant is owned and operated by the state-owned Yemeni electrical utility, the PEC. The proximity of the power station will minimize the electrical infrastructure requirements for the wind farm. Likewise, the local climatic and electro-technical issues related to construction and operation of a power plant in the area are well known to the PEC. 6. The Mocha wind farm will have a total installed capacity of approximately 60 MW comprising of a number of wind turbines with unit size ranging from 1 MW to 3 MW. The wind farm will be implemented through a Supply and Installation contractor which will be selected 24 through international competitive bidding process. The number and unit size of the turbines will be determined during the procurement of the contractor. The scope of work of the Supply and Installation contractor includes: * Civil works: detailed soil investigations on each wind turbine location; design of site specific foundations for the wind turbines including soil improvement measures or water drainages, if necessary; construction of park- internal and external roads; foundations and crane locations; * Electrical works and grid connection: park- internal and external cabling, construction of substation and grid connection; * Delivery, erection, commissioning and test run of wind turbines with a total capacity of 60 MW; * Operation and Maintenance: operation and maintenance of the wind farm during the first 3-5 years of operation under an operation and maintenance contract; * Capacity building: within first 3-5 years of operation local technicians and engineers of the PMU/SPC shall be trained in wind farm operation and maintenance. 7. During the feasibility study, the gross Energy P50 values for a 60 MW wind farm were calculated depending on the wind turbines. The annual energy production varies between 194 GWh/year for 850 kW wind turbines and 231 GWh/year for 2 MW wind turbines. 8. The proposed wind farm will initially be implemented by the MOEE through a PMU, and later on by a SPC to be established as a wholly government owned or through private-public ownership. A transfer tariff will be used by the SPC to sell electricity to the national utility, PEC. When the SPC is created, it will make the contract arrangements (Power Purchase Agreement (PPA), land lease, interconnection agreement) so as to simulate an Independent Power Producer (IPP) situation, which would enable the GoY to replicate part of the legal and regulatory work in subsequent wind IPP projects. The tariff is expected to be a fixed amount at about US$ 10 cents/per kWh, with incremental indexation based on inflation in the Operation and Maintenance (O&M) costs only. (O&M costs are typically less than 15-20 percent of the initial tariff). Component II: Consulting Services and Market Development (US$7.0 million, of which IDA US$2.0 million) 9. The consulting service and market development component consists of the following sub- components: (i) an international engineering consulting firm employed to assist the PMU in the procurement and contracting of the supply and installation contractor and in the construction supervision of the project throughout the construction phase and the initial operation stage; (ii) an international consulting firm employed to assist MOEE to design tendering procedures and documents for competitive procurement of PPP wind projects and to assist MOEE with the tendering process; (iii) advisory service for the creation of the SPC which would operate commercially with clear contractual arrangement with the electricity off-taker; (iv) advisory 25 service and instruments for the implementation of regional long-term wind measurement program in three to five wind development zones; (v) consulting service for preliminary environmental and social impact assessments, grid connection planning for promising wind sites; and (vi) other consulting services as needed and capacity building activities. 10. Component I directly contributes to the achievement of the development objective by generating renewable electricity from wind through the construction and operation of the wind farm. Component II indirectly contributes to the achievement of the development objective through supporting the implementation of the Mocha wind project, assisting in the preparation of future wind program, and strengthening the institutional capacity which would be required to promote and scale up investments in wind farms so that more wind farms could be built to generate electricity from wind. 11. The proposed IDA grant will be used to co-finance the Supply and Installation contract under component I with other donors, and finance items (ii), (iii) and (iv) under component II, and item (i) will be financed by Arab Fund. Government resources will mainly finance taxes and duties. 26 Annex 3: Implementation Arrangements 1. Project institutional and implementation arrangements 1.1 Project administration mechanisms 1. The MOEE will have the responsibility of coordinating and supervising the implementation of the project as the Government Ministry of the power sector. For the implementation of Component I and the associated consulting services under component II, initially a PMU created by MOEE and later on an SPC to be created will undertake all the activities. The SPC will own and operate the wind farm according to commercial principles. The precise form and organizational structure of the SPC is being studied and the SPC will be created and made operational at least three months before the wind farm is put into commercial operation. Before the SPC is legally created and operational, a transitional arrangement has been put in place to implement the project. MOEE has established a PMU to undertake all the day-to- day management and operations of the proposed project. The PMU, which overseas several generation projects under preparation, currently has 30 staff, including a project director, a number of technical specialists, a procurement specialist and two procurement assistants, a financial specialist and two accountants, an environmental and social specialist, an internal auditor, and other service and support staff. Although the PMU is responsible for four generation projects, currently only the wind power project and Marib power project are active. The PMU director has the overall responsibility for project management and is supported by wind power specialists. Other specialists provide support as needed. The number of staff and their composition will be assessed from time to time based on project progress. Some of the PMU staff closely involved with Mocha Wind Power Project, including the technical specialist, financial specialist and accountant will be transferred to the SPC to be created. Once the SPC is operational, the ownership and operation of the Wind Farm and the obligations thereunder will be transferred to the SPC pursuant to a subsidiary loan and implementation agreement to be entered into between the MOF and SPC, under terms and conditions approved by IDA. The SPC will operate as a legally independent company according to commercial principles with MOEE's oversight roles limited to sector policy and regulation aspects. 2. During preparation, international firms were contracted to assist in carrying out the feasibility study, in preparing the ESIA report, and drafting the bidding documents. The MOEE is currently in the final stage of procuring an international engineering firm to assist in the procurement, contracting and construction management and supervision of the Mocha Wind Power Project. The engineering is expected to be selected and contracted well before scheduled Board presentation of the project. A high quality contractor will be procured to Design, Supply and Install the wind farm and will provide full services for the wind farm for at least 3 years after commissioning. The staff of the PMU and future SPC will be trained on site and take over the operation and maintenance of the wind farm thereafter. Other independent consultants will be employed to provide independent monitoring and evaluation of the implementation of the environment management plan and any land acquisition and resettlement work, if needed. 3. Financially, the wind farm project will be ring-fenced with other activities MOEE has and the SPC, once created and operational, will have a PPA signed with the PEC. 27 4. For implementation of the studies, consulting services and capacity building activities associated with the national wind policies and programs under Component II, MOEE will have direct responsibility. MOEE will be assisted by specialists in clearly defining the scope of work and preparing terms of reference for consulting services. Within MOEE, the Directorate of Renewable Energy will be responsible for the day-to-day coordination, monitoring and reporting of the studies and capacity building activities. 2. Financial Management, Disbursement and Procurement Financial Management 5. This Annex documents the results of the FM Assessment for the proposed Project. The assessment was conducted by Bank staff in accordance with the policies and guidelines for assessment of FM arrangements in World Bank-Financed Projects. It takes into account the capacity and experience of the implementing agency and the project related risks. The overall FM risk is rate high. 6. The project's financial management arrangements, after the mitigation measures at the PMU, are acceptable to the Bank. The residual FM risk is still substantial. The project's implementation would make use of the country systems through the use of the Ministry' own staff to implement the project. Mitigation measures are agreed upon to enhance the PMU's capacity to meet the Bank's requirements. In general, public financial management in Yemen requires a number of reforms. Thus, the project will be implemented by the established PMU of the MOEE and follows a number of FM arrangements to mitigate the country and project risks. 7. The newly established PMU under MOEE (Generation Management PMU) will initially be responsible for financial management aspect of project implementation. All PMU's obligation and responsibility will be transferred to the SPC once operational subject to the Bank's assessment of SPC's capacity. The financial management assessment of the PMU has been conducted by the Bank and the overall FM risk is determined to be high. It concluded that the project has three major FM risks: (a) the PMU in charge of managing the project and project reporting is newly established and it does not have well defined comprehensive formal procedures and controls applicable to the Project. It does not have an acceptable accounting system yet and is staffed with MOEE's civil servants with limited experience in the Bank's financial management and disbursement procedures; (b) the financing arrangement is a bit complex as the project's cost is financed by multiple donors and it requires a clear and segregated financial recording and reporting; and (c) there is the possibility of inadequate government funding, and delay in transfer of budget allocation which could cause delays in the availability of funds to the PMU and the project. The PMU has a financial officer, and an internal auditor, and two accountants selected by MOEE with limited experience with IDA- financed projects. 8. A set of actions to strengthen PMU's financial management capacity and mitigate the FM risks include the following: (i) training the appointed financial manager, internal auditor, and accountants on the Bank's financial management and disbursement guidelines; (ii) agreement with the MOEE on the procedures, controls and safeguards to be applied during project 28 implementation including agreement on the format of the interim financial report acceptable for all donors, and documenting these controls and procedures in the Project's financial manual; (iii) installation of an automated accounting system following cash basis which will generate quarterly IFRs capable of reporting sources and uses of funds, based on terms of reference acceptable to the Bank; and (iv) annual audit of the project financial statements by an independent external auditor, selected by Yemen's COCA and acceptable to IDA. Prior to negotiation, the FM Manual was submitted and reviewed and found acceptable. The PMU will use their existing automated accounting system to record and report on all project transactions. It is agreed the existing system will be further developed to meet the reporting format as per IDA's requirement and the FM Manual to include reporting on all sources and uses of funds by component, category, activity and donor. Budgeting, Accounting System and Internal Controls Arrangements 9. The PMU will be responsible for the planning, budgeting, consolidating project information, and reporting on these activities to all stakeholders. Currently, manual accounting books and records are used at the PMU. To mitigate the risk of inadequate recording and reporting, the PMU will install an automated accounting system capable of: (a) recording the accounting transactions based on the cash basis accounting; and (b) generating the IFRs quarterly and the project financial statement annually; and (c). The accounting system will be ready prior to grant effectiveness. 73. There is agreement with the MOEE on the procedures, controls and safeguards to be applied during project implementation. The FM Manual was reviewed and found acceptable. The PMU will use their existing automated accounting system to record and report on all project transactions. It is agreed the existing system will be further developed to meet the reporting format as per IDA's requirement and the FM Manual to include reporting on all sources and uses of funds by component, category, activity and donor. Flow of Funds 10. A Designated Account (DA) will be managed by the PMU which will be denominated in US Dollar and will be opened at the CBY. The PMU will be responsible for the project funds. An authorized allocation of US$ 500,000 would be used as the DA's ceiling. Authorized signatories, names and corresponding specimens of their signatures would be submitted to the Bank prior to the receipt of the first Withdrawal Application (WA). Deposits into and payments from the DA will be made in accordance with the disbursement letter and Bank Disbursement Guidelines. The PMU will prepare withdrawal applications with the related supporting documents, signed by the designated signatories. Disbursements out of the DA are subject to the project's internal controls and will be subject to the annual external audits. No payments for goods or services other than those related to the Project would be made from the DA. 11. Given the risk of processing large payments to the Supply and Installation contractor in component 1, the PMU will apply the following mitigating measures: (i) a technical audit will be conducted by an international engineering firm to approve each payment request submitted by the EPC contractor, and (ii) the method of Direct Payments will be used in processing the 29 approved payment requests which require the PMU in preparing separate WAs attached with the supported documents and approvals to be sent to the Bank's Loans Disbursements Management. 12. In addition to the above FM risks and mitigation measures, there is a possible lack or delay of government funds to the project as seen in other projects which could cause delays in implementation. This is mitigated through agreement with the Ministry of Finance and the MOEE to ensure Government funds are made available to the project at the beginning of the year. Financial Reporting 13. In line with the Bank guidelines, the following reports will be required under this Project. 14. Quarterly: The Project will be required to generate quarterly Interim Financial Reports (IFRs), to be reviewed by the External Auditor and submit them to the Bank as part of the Project's progress report or separately. These reports will consist of the following: * Statement of sources and uses of funds by category of expenditure and statement of uses of funds by project component, indicating funds received, quarterly cash forecast, an expenditure report comparing actual and planned expenditures by activity, and DA's reconciliation statement. These reports will be generated through the accounting system and should be remitted to the Bank within 45 days from the end of the quarter. The proposed format of the reports will be agreed upon during negotiations. 15. Annually: Project Financial Statements (PFS) will be prepared annually following the cash basis of accounting with disclosure of the unpaid commitments at the report date, and will be subject to external audit and the audited PFS will be submitted to the Bank within six months from year-end. The PFS will include: * Statement of sources and uses of funds, indicating sources of funds received and project expenditures by category of expenditure; * Appropriate schedules classifying project expenditures by component, categories and donors, showing yearly and cumulative balances; * DA reconciliation statement reconciling opening and year-end balances; * Statement of payments made using Statements of Expenditures (SOEs) procedures as defined in the legal agreement; and * Statement of project commitments, i.e., the unpaid balances under the project's signed contracts. Auditing 16. The Project's financial statements will be audited by an independent private-sector external auditor, who will also review the IFRs quarterly. The external auditor should be acceptable to the Bank and COCA. The TOR will be prepared and submitted to the Bank for no 30 objection, at the beginning of the project's implementation. The external auditor report shall encompass all Project's components and activities under the Financing Agreement and shall be in accordance with internationally accepted auditing standards e.g., International Standards on Auditing (ISA) to be presented in English and Arabic Languages. The audit report and opinion will cover the Project's financial statements, reconciliation and use of the DA, use of direct payments, and withdrawals based on SOEs. In addition, the auditor is required to prepare a "management letter" identifying any observations, comments and deficiencies, in the system and controls, that the auditor considers pertinent, and shall provide recommendations for their improvements. Disbursement Agreement 17. The proceeds of the Grant will be disbursed in accordance with the Bank's disbursements guidelines as outlined in the Disbursement Letter. Transaction based disbursement will be used under this project. Accordingly, requests for payments from the grant account will be initiated through the use of Withdrawal Applications (WAs) either for Direct Payments, Reimbursements, and Replenishments to the Designated Account, or Issuance of Special Commitments, noting that the method of Direct Payments will be the main disbursement method used for component 1. All WAs will include appropriate supporting documentation including detailed SOEs for reimbursements and replenishments to the DA. Statement of Expenditures (SOE) 18. All applications for withdrawal of proceeds from the grant account will be fully documented, except for expenditures under contracts with an estimated value of (a) US$ 1,000,000 or less for civil works; (b) US$100,000 or less for goods; (c) US$50,000 or less for individual consultants, and (d) US$100,000 or less for consulting firms, as well as all training and operating costs which will be claimed on the basis of SOEs. The documentation supporting expenditures will be retained at the PMU and will be readily accessible for review by the external auditor and periodic Bank supervision missions. All disbursements will be subject to the conditions of the Financing Agreement and the procedures defined in the Disbursement Letter. Designated Account (DA) 19. To ensure that funds are readily available for project implementation, the PMU will open, maintain and operate a DA at the Central Bank of Yemen. The authorized ceiling of the Designated Account would be US$500,000. The amount to be advanced under the first application would be determined based on initial project needs. The PMU would claim the remainder of the advance when the project has reached a more advanced stage of implementation. The DA would be replenished monthly based on withdrawal applications supported by appropriate documentation, or more if necessary. 20. Chart A below summarizes the flow of funds from the Bank to the PMU's DA through WAs, to finance the Project's eligible expenditures. Payment requests from the DA for eligible expenditures will be approved by the PMU's FM Specialist and the Project's Director, and then the payment requests will be sent to the Ministry of Finance (MoF) for approval of payment from 31 the DA at CBY (Note: The PMU should use the MOF's LEGMIS electronic disbursement system). Payments from the DA will be made for eligible expenditures under the project. Chart A - Flow of funds through DA at CBY Grant USD DA Pmt req. for FM& Funds -CBY expenditure Director 21. Disbursement Category: The grant proceeds have been allocated to two categories as shown in the Table 3.1 below. Table 3.1: IDA grant disbursement categories Category Amount of the Grant Percentage of Expenditures Allocated to be Financed (exclusive of (expressed in SDR) Taxes and Duties) 1. Goods (including supply 11,700,000 100%* and installation), works, non- consulting services and consultants' services under Part A of the Project 2. Goods, non-consulting 1,300,000 100% services, consultants' services and Training under Part B of the Project Total 13,000,000 *Total IDA payment will not exceed the amount of grant allocated. 22. Corruption: Fraud and corruption may affect the project resources. The above fiduciary arrangements including ring-fencing, reporting and audit arrangements will reasonably tackle the risk of corruption. 3. Procurement Procurement Review Thresholds 23. Procurement for the proposed Project would be carried out in accordance with the World Bank's "Guidelines: Procurement of Goods, Works and non-consulting services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers" dated January 2011, and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers" dated January 2011, and the provisions stipulated in the Legal Agreement. 32 24. Prior-Review Thresholds. Prior-review and procurement method thresholds for the project are indicated in Table 3.2. Table 3.2: Procurement Thresholds Prior Review Thresholds roos Procurement Method Thresholds Proposed (USD million) Proposed (USD million) ICB NCB Shopping QCBS QBS CQS Least SSS Cost Goods 0.5 >0.5 <0.5 <0.05 Works 5.0 >5 <5 <0.2 Consulting 0.3 for firm >03 TBD <0.3 TBD TBD Services SSS: all 25. Procurement Plan and Procurement Arrangements. The draft Procurement Plan (Table 3.3) for the project (dated January 22, 2014), prepared by PMU, is found acceptable. This plan will be updated annually to reflect the latest circumstances. The Procurement Plan currently comprises of one main package for supply and installation of the wind farm and consulting services for engineering services. ICB procedures will be followed for the packages co-financed or solely financed by IDA. The entire wind farm will be procured in one package as this is the most economic and efficient way. The package will be jointly financed by the four financers. The World Bank Standard Bidding Document for Procurement of Supply and Installation of Plant and Equipment is used for the contract. The bidding documents for the package has been prepared, has been reviewed and cleared by the Bank and the other three financers. 26. Selection of Consultants. Consulting services are expected for engineering services to assist in procurement of the Supply and Installation contractor and provide construction supervision during construction stage. It will be financed by Arab Fund and the consultant will be procured following Arab Fund and the Government's policies and procedures. The Terms of Reference for the consultant services was reviewed and accepted by the Bank. Consulting services under the technical assistance component will be financed by IDA proceeds. The scope of the consulting services has been discussed and finalized. MOEE and PMU may use QCBS, QBS, Selection based on Consultants' Qualification, Fixed Budget Selection, Least Cost Selection, Single Source Selection, and Selection of Individual Consultants as appropriate, subject to approval by the Bank. Table 3.3: Procurement Plan Works and Goods 1 2 3 4 5 6 7 8 9 Ref. Contract Estimated Procurement Prequalification Domestic Review Expected Comments No. (Description) Cost Method (yes/no) Preference by Bank Bid- (US$ (yes/no) (Prior / Post) Opening million) Date 1 Design, 120 ICB NA NA Prior May Supply, 18,201 33 Installation 4 and Commission of 60MW Wind Farm Consulting Services 1 2 3 4 5 6 Ref. Description of Assignment Estimated Selection Review by Comments No. cost US$ Method Bank (Prior/Post) 1 Engineering service for 4.5 million QCBS NA Not-IDA procurement and construction financed management 2 International consultant for SPC 100,000 QCB Prior 3 Local consultant for SPC 20,000 Q Prior 4 International consultant for 300,000 QCBS Prior competitive procurement of PPP wind projects 5 Wind resource measurement 100,000 QCB Prior Risks and Mitigation Measures 27. Procurement risk for the project is assessed as "Substantial". The main risks identified are: the limited capacity and complex bureaucratic process in managing the procurement process of a large contractor in Yemen; (ii) the security situation in Yemen could deter many qualified international firms from participating in the bidding process (iii) the excessive involvement of multiple agencies in the procurement process. 28. The following measures were agreed to mitigate the risks: 34 * A draft Procurement Manual has been prepared by the PMU, which clarifies that Bank Guidelines should be followed in case of conflict between the procurement policies of GOY and the World Bank Guidelines in addition to the description of procedures to be followed based on the World Bank Guidelines, will be used for procurement using grant funds. * Procurement Committees, comprised of qualified members, preferably staff who have experience with procurement financed by international financing institutions, will be established by MOEE. The credentials and qualifications for committee members will be provided to the World Bank for information. * PMU will prepare a detailed schedule of procurement activities for monitoring progress by both MOEE and the World Bank. * Training will be provided to the PMU and committees for procurement of consulting services, civil works and equipment. * The engineering consultant will assist the PMU in all procurement process. 29. Bidders will be asked to attend pre bid meeting and will be briefed about the security situation in Yemen. This could be done by audio conference. In addition, potential bidders would be contacted and encouraged to participate in the bidding process. 4. Environmental and Social Safeguards Environmental Aspects 30. The proposed project is environmental category B as per the World Bank Operational Policy OP 4.01 on Environmental Assessment. Accordingly, an environmental and social impact assessment was carried out and an ESIA report was prepared by the Client. In addition, an, "Assessment of Risk to Birds from Planned Wind Energy Development at Mocha" was prepared as a complement to the ESIA during July 2010. 31. The ESIA, which covers the wind farm and associated activities, concluded that no large- scale, significant or irreversible environmental or social impacts can be expected from the project as planned, and it proposes mitigation measures, a monitoring program, and a training program in an ESMP which will be adequate to mitigate the potential risks from the project. A table of contents of the ESIA is provided in Table 3.4. The potential impacts and mitigation measures are included for both construction and operational phases of the wind farm in the ESIA. The ESIA recommends some specific activities to be undertaken during the pre-construction phase, prior to start of construction activities, as well as specific conditions that are to be included in the tender documents for selecting the Supply and Installation Contractor under Section 7.2. One of the pre- construction activities to be undertaken includes the closure and relocation of the existing waste dumpsite to a new site (further details in paragraphs below). Table 3.4: Table of Contents of ESIA Table # Table of Contents (in ESIA) 7.1 Environmental and Social Management Plan Matrix during Construction Phase 7.2 Environmental and Social Monitoring Plan Matrix during Construction Phase 35 7.3 Environmental and Social Management Plan Matrix during Operation Phase 7.4 Environmental and Social Monitoring Plan Matrix during Operation Phase 7.5 Proposed Training and Capacity Building Matrix 7.6 Estimated budget for Implementation of the ESMP 32. During construction, environmental and social impacts are expected in the form of construction waste, emissions of dust and pollutants to the air from construction vehicles and activity, construction noise and vibrations, effects of construction traffic on normal traffic flow in the area, the risk of accidents to workers and local inhabitants, and inconvenience to normal freedom of movement of local inhabitants. These impacts are expected to be localized, short- lived and reversible. Mitigation measures are recommended in the ESMP, and these will be imposed as contractual conditions on the EPC contractor. In addition, monitoring activities and reporting requirements are also included as part of the ESMP. The ESIA also includes brief methodology to be followed in case of Chance Finds of any culturally valuable objects and structures. 33. During operation of the wind farm and associated structures, one of the primary ecological concerns is the potential for negative impact on bird life. Experience from other parts of the world has shown that wind farms can be damaging to bird populations, when bird conservation issues are not properly addressed in the planning stages. Yemen is located along a primary bird migration corridor, where many thousands of soaring birds concentrate to cross the Straits of Bab Al Mandab to Africa. Wind energy development plans in the region adjoining Bab Al Mandab are thus of potential concern to biodiversity conservation. However, the potential risks to birds from the proposed wind energy project at Al Mocha is expected to be limited, based on the field observations that were undertaken during the autumn of 2009 and spring of 2010 over approximately 50 days. Results from the field observations, combined with extensive literature review and consultations with locals is summarized in the ESIA. In addition, a separate report entitled "Assessment of Risk to Birds from Planned Wind Energy Development at Mocha" was prepared as a complement to the ESIA during July 2010. The assessment concluded that "the current proposed wind energy development at Mocha is unlikely to have impacts on birds of catastrophic nature, and that the level of risk to migratory and local birds is within a 'tolerable' or 'acceptable' range; i.e. that the level of damage that could affect birds is expected to be limited and would not have significant conservation consequences to their populations if prescribed mitigation and precautionary measures are taken." This conclusion assumes that the size of proposed development remains limited in scale and does not deviate from the current proposal without further assessment; that existing man-made risk factors (solid waste dumps and cultivations) will be relocated to a safe distance from the proposed wind farm; and that the recommended mitigation measures are implemented. As a pre-construction measure to be undertaken, the ESIA recommends that construction activities should not commence at the project site before the existing waste dumpsite is closed (completely covered) and a new landfill site is identified and agreement is reached with all relevant stakeholders, possibly in the form of an Memorandum of Understanding (at least 5kms from the project borders). Furthermore, it recommends that the wind turbines should not be erected before the new landfill is operational. Some other recommendations proposed to minimize the risks to birds include: use of larger and fewer wind turbines; stop and remove any agricultural cultivations within and near the project site, with a minimal of three km. between cultivations and the nearest wind turbines; and engage 36 with local inhabitants. Other environmental and social impacts expected during the operation phase include the effects of wind turbines such as noise, disturbance effects of shadow flickering, scrap and maintenance waste, and other impacts of minor significance including stability risks of wind turbines (taking into account possible flooding due to rainwater from eastern highlands), and possible limitations of access for local residents. Adequate measures to mitigate these impacts are proposed in the ESMP. Mitigation measures and monitoring activities that are included in the ESMP will be imposed as contractual obligations for the installation and supply contractor. 34. A PMU has been setup under the MOEE-the implementing agency for the project. An environmental specialist (Health, Safety and Environment Officer - HSE) has been assigned as part of the PMU to address the environmental safeguards issues related to the project and oversee the implementation of the ESMP. The environmental specialist will be responsible for monitoring the implementation of the environmental mitigation measures, monitoring plan, and training requirements as outlined in the ESMP. Inputs from the environmental specialist will be included in the quarterly progress reports that the PMU will prepare and submit to the World Bank. In specific, information on the status of the closed waste dumpsite and cultivation in the 3km buffer zone will be reported in the initial project progress report. The monitoring for this particular aspect will be carried out in coordination with the local authority, which is the enforcing body and the Mocha Port Authority which is the generator of a majority of the waste. It is recommended that the HSE officer/environmental specialist can be shifted from the PMU to the SPC, once it is established. 35. The ESIA includes tables summarizing the main impacts, mitigation, and monitoring requirement for the construction and operation phases of the project. It also includes tables on institutional arrangements for ESMP implementation, and breakdown of the ESMP implementation cost. Below is information with names of the tables and page numbers as it appears in the ESIA that is disclosed in-country and at the Bank's Infoshop. Key Stakeholders and Consultations 36. The key stakeholders to the project include the MOEE and PMU, the Mocha Governmental Authority, the Mocha Thermal Power Plant, the Mocha Local Council, the Al Zahraa NGO for Women's Development in Mocha, the Alanwar Center for Human Development (NGO), as well as the residents of the Al Houlibi Village, Al Oksh Village, and Al Tobila Village located within the project boundaries. Relevant stakeholders were consulted with and participated in the project preparation. Such consultations will continue during project implementation. Numerous representatives of these stakeholder groups were consulted between the summer of 2009 and the summer of 2010 during the preparation of the ESIA. During the scoping period, several in-depth interviews, scoping sessions, semi structured interviews and survey questionnaires were completed with various types of stakeholders. Focus group discussions were also carried out with individuals from Al Houlibi village at the project site. A public consultation workshop was held at Mocha on Tuesday, June 8, 2010, to review the first draft of the ESIA. Different project stakeholders were invited to a plenary session to share their views about the project. Overall, the attendees emphasized the importance of the project and the 37 expected environmental and socioeconomic benefits. A detailed summary of the consultations is included under Section 8 of the ESIA. Social Aspects 37. At current project design, none of the project activities involve the resettlement of local populations and/or the acquisition of privately-held land. As the exact sites of substations, transmission lines, and the road may change during detailed construction design, which might involve land acquisition. A RPF has been prepared in compliance with OP 4.12. The policy framework establishes resettlement objectives and principles, organizational arrangements, and funding mechanisms for any resettlement operation that may be necessary during the implementation of the various components of the project. When and during implementation, there would be land acquisition and the extent of resettlement/land acquisition becomes known, site-specific RAPs will be prepared and disclosed prior to the actual acquisition of the land. Specific Impacts on Local Residents 38. The project site and its surroundings comprise houses distributed in three small settlements inside and near the four project borders. The calm conditions currently surrounding these settlements will change during the construction phase as the site will receive different sub- contractors and suppliers, the noise and dust emissions generated during construction will be temporary and could be managed through recommended measures in the ESMP while other incontinences are expected to be tolerated by local inhabitants if they will benefit from different services provided by the project such as better access roads, connection to electricity, job opportunities and capacity building programs. The expected environmental and social impacts on these settlements during operation are also expected to be manageable and within relevant standards if the recommended ESMP measures are implemented. It is not expected that involuntary resettlement for the local inhibitors will be required in light of the analyzed impacts, especially that micro-siting of wind turbines could be planned as far as possible from existing houses to avoid different impacts, except if security precautions during project operation will limit access of local residence in the area, or if some residents would not tolerate some inconveniences during the construction phase. Institutional Arrangements for Monitoring 39. A PMU has been established to have daily responsibility for coordinating the preparation and implementation of the wind farm component. The PMU director will have overall responsibility for coordinating the implementation of the ESMP and RFP. The PMU includes a number of technical specialists as well as an environmental specialist and social specialist (Health, Safety and Environment Officer - HSE) who will be responsible for the day to day implementation of the ESMP measures. Most of the mitigation measures during construction will be included as part of the responsibilities of the EPC contractor. Capacity building for the environment and social staff will include training on monitoring of ESMP implementation. 7 Which most likely will not happen if they gain suitable benefits during project operation 38 40. To ensure the environmental and social mitigations measures are implemented smoothly, both internal and external monitoring will be carried out during project implementation. In terms of the external monitoring, independent consultant will be employed to provide independent monitoring and evaluation of the implementation of the ESMP and any land acquisition and resettlement work as necessary. The findings, conclusions and recommendations from the monitoring will be recorded and reported to the PMU and Bank periodically. 5. Monitoring and Evaluation 41. The MOEE, through the PMU and with the help of the implementation consultant, will monitor project progress against the agreed performance indicators listed in Annex 1. Data on actual project outputs and outcomes will be gathered, analyzed and included in quarterly progress reports to be submitted to the World Bank. 42. The PMU, with the help of the implementation consultant, will monitor the day-to-day project implementation of the physical components and contactor performance, including monitoring the implementation aspects of the ESIA and RPF. 6. Role of Partners 43. The physical component of the project will be co-financed by several agencies, including AFSED, OFID, and Saudi Fund. As there will be only one contract for the project, the Supply and Installation contract will be jointly financed by all the participating agencies. All financiers have reviewed and cleared the bidding documents which was prepared following the World Bank's Procurement Guidelines and Standard Bidding Document and they will supervise the procurement process to ensure the procurement activity is carried out according to respective policies and procedures. They will make disbursement of their funds directly based on their procedures and the progress of contact execution. But the Bank will have the overall responsibility to supervise the implementation progress of all aspects of the project. 39 Annex 4 Operational Risk Assessment Framework (ORAF) Operational Risk Assessment Framework (ORAF) Yemen, Republic: Mocha Wind Park Project (P146055) Stakeholder Risk Rating Moderate Risk Description: Risk Management: Wind energy is generally perceived by both the Detailed economic analysis has been carried out to prove the economic robustness of the Government and the public, as more costly and wind power under various scenarios. Government ownership and commitment to the project are compromised. Environmental and social impact assessment has been carried to identify potential The construction and operation of wind farms could be adverse impacts and mitigation measures have been designed. Consultations were perceived to have negative environmental impacts and conducted during the preparation of the environmental and social documents to inform some NGOs and potentially affected people may oppose the public of the project's potential impacts. the project. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Completed Preparation Capacity Rating Substantial Risk Description: Risk Management: Inadequate technical and management skills and capacity International consultants were and will be hired to assist with feasibility study, bidding for project preparation, implementation and operation, document preparation, construction supervision. The EPC contractor will be retained to including, including financial management and operate the wind farm for at least 3 years and will train the local staff to take over the procurement capacity operation. Financial manuals will be prepared and staff will be trained adequately. International consultant will be employed to assist during the entire procurement cycle. The Bank will provide training and detailed guidance on Bank's procurement policies 40 and procedures. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both 31-Dec-2018 Governance Rating High Risk Description: Risk Management: The excessive involvement of multiple agencies with no The institutional arrangement clearly outlines the roles and responsibilities of each entity clearly defined roles, in all aspects of project development involved to ensure the successful implementation of this project. Agreement will be and implementation could lead to significant project reached with the Government on the clarity of roles by each agency throughout the implementation delay. project implementation period. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Both 31-Dec-2018 Risk Management: Direct contracting under this project will not be used and the Bank's procurement policies and procedures will be followed strictly and monitored closely to prevent possible fraud and corruption. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both 31-Dec-2018 Design Rating Moderate Risk Description: Risk Management: The technical design of the project is suboptimal International engineering firms are employed to assist in project preparation and design. The most updated, but standard technologies are adopted. The task team reviews the appropriateness of the technical design. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both Completed Preparation 31-May-2013 Social and Environmental Rating Moderate Risk Description: Risk Management: 41 The project may have limited adverse social and Environmental and social impact assessment reports covering the entire project have environmental impacts. been prepared and adequate mitigation measures developed as part of project preparation. Public and direct consultations with project stakeholders, as required by the Bank, are conducted. Monitoring institutions and mechanisms will be established to ensure the implementation of agreed mitigation measures. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both 3 1 -Dec-2018 Program and Donor Rating Moderate Risk Description: Risk Management: The involvement of several donors and possible difference Continued communication with all donors to ensure coordinated actions. in procedures could lead to implementation delay. Resp: Status: Stage: Date: Frequency: Resp:___Status:___Stage:_ Recurrent: {DecDae:Freuecy Both In Progress Both 31-Dec-2018 Delivery Monitoring and Sustainability Rating High Risk Description: Risk Management: Weak capacity for project management and supervision in Qualified international engineering firms are hired to assist in engineering, procurement PMU may compromise construction quality, thus project and construction supervision. MOEE will assign adequate staff and capacity to deliver sustainability. the project. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Both 31-Dec-2018 Overall Implementation Risk: Rating High Risk Description: The proposed project will be the first wind farm in Yemen. Although wind technology is well proven internationally, it still presents some challenges for successful implementation in Yemen. The overall implementation risk is rated high mostly because of the high country risks relating to political and social stability, high governance and institutional risks related to the perceived high corruption and the very poor performance of the Government and public institutions, and the high sector risk related to the poor financial position of PEC. However, appropriate mitigation measures are in place to address all the risks identified which will be monitored throughout implementation. 42 Annex 5: Implementation Support Plan Strategy and Approach for Implementation Support 1. The strategy for implementation support (IS) has been developed based on the nature of the project and its risk profile. It will aim at making implementation support to the client more flexible and efficient, and will focus on implementation of the risk mitigation measures defined in the ORAF. * Procurement. Implementation support will include: (i) reviewing of the Procurement Plan and providing suggestion; (ii) reviewing procurement documents and providing timely feedback; and (iii) monitoring procurement progress against the agreed Procurement Plan. The limited number of contracts to be managed is an advantage and will facilitate the interactions and reduce the work load of the PMU/MOEE. More intensive support will be provided during the first six months to ensure the timely procurement and contracting of the EPC contractor. * Financial. Supervision will review the project's financial management system, including but not limited to, accounting, reporting and internal controls. The Bank team will assist the PMU in improving financial management and reporting. * Environment. The Bank will provide support through the regular review of the quarterly environmental monitoring and evaluation reports and will follow up any issues with the PMU/MOEE and the independent consultant. Given the moderate risk rating, environmental site visit will be carried out once a year. * Social Aspect. The Bank will provide support through the regular review of the quarterly project progress report on social aspect, and the implementation of the resettlement action plan if required. Intensive support will be provided during project preparation stage and early construction stage. * Anti-corruption. The project is essentially about procuring the EPC contract. The Government has its own anti-corruption plan of action. Bank support will leverage the anti-corruption plan of the government and will also reinforce the preventive measures by reviewing main contracts and ensuring adherence to both Government and Bank procurement guidelines. * Implementation Progress. The Bank will closely monitor the overall progress of project implementation by reviewing the quarterly progress report, the execution of the Procurement Plan and the actual disbursement of the grant. The Bank will provide support through regular visits to the project, help identify arising issues which impede project progress and discuss and agree actions to resolve critical issues. * Other Issues. Sector level risks, such as electricity tariff, will be addressed at the portfolio level through policy dialogue with the Government and PEC. However, as they 43 are closely related to PEC's financial viability, the team will monitor them during project implementation. Implementation Strategy 2. Supervision of project financial management will be performed on a risk-based approach. The supervision will review the project's financial management system, including but not limited to accounting, reporting and internal control. The financial management supervision will be conducted by financial management specialists. Implementation Support Plan 3. In the first year, the FM team will continue to help PMU in capacity building needs to comply with the Bank's financial management requirements. It is estimated that around three staff-weeks will be required for the FM team annually. 4. Several of the Bank team members will be based in the Yemen country office and other country offices in the region to ensure timely, efficient and effective implementation support to the client. Formal supervision and field visits will be carried out semi-annually. Detailed inputs from the Bank team are outlined below: * Technical inputs. Wind power specialist inputs are required to review bid documents to ensure fair competition through proper technical specifications and fair assessment of the technical aspects of bids. During construction and commissioning, technical supervision is required to ensure technical contractual obligations are met. The team's wind specialist will conduct site visits annually throughout project implementation. * Fiduciary requirements and inputs. Training will be provided by the Bank's financial management specialist and procurement specialist before the commencement of project implementation. The team will also help MOEE/PMU identify capacity building needs to strengthen its financial management capacity and to improve procurement management efficiency. Both the financial management and the procurement specialist will be based in the country office to provide timely support. Formal supervision of financial management will be carried out semi-annually, while procurement supervision will be carried out on a timely basis as required by the client. * Safeguards. Inputs from an environment specialist and a social specialist are required, though the project's social and environmental impacts are very limited. Training is required on environment monitoring and reporting. On the social side, supervision will focus on the implementation of the agreed RFP. Field visits are required annually. * Financial review of PEC corporate finance. Input is required from a financial specialist for regular review of PEC's financial status to monitor its financial capability. This exercise will be combined with the supervision of other World Bank financed projects implemented by PEC through semi-annual review. 44 I. The main focus of implementation support is summarized below: Time Focus Skills Resource Partner Needed Estimate Role First twelve Monitor performance Procurement Monitor the supply months of procurement of Technical and installation the EPC contractor contract and the engineering procurement and consultant execution Monitor performance Social of land acquisition and resettlement activities if any 12-48 months Monitor performance Procurement of the supply and Technical installation contract Financial implementation Environmental Monitor performance of environmental management plan Technical/policy Monitor performance of the technical assistance activities II. Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments Procurement 4 field based Financial management 2 Field based Technical 8 2 Environment 2 1 Social 2 1 Operations 4 1 III. Partners Name Institution/Country Role AFSED Multilateral Cofinancing OFID Multilateral Cofinancing Saudi Fund Kingdom of Saudi Cofinancing Arabia 45 Annex 6: Economic and Financial Analysis Cost Benefit Analysis 1. The benefits of the Mocha Wind Project lie primarily in the ability to meet incremental demand for electricity by residential, industrial and commercial customers, which is normally measured by customer willingness to pay (WTP). Unfortunately in Yemen the observed WTP is distorted by the highly subsidized tariffs paid by residential customers connected to the main grid, who represent about 70 percent of total consumption. A recent study carried out under ESMAP financing8 analyzed household consumption of electricity and electricity substitutes and the associated prices paid. While WTP for lighting and entertainment was very high for small quantities, the total substitution benefit was extremely small. Observed WTP for additional lighting and entertainment, as well as for use of other appliances such as refrigerators, mixers, computers, and the like generally approximated the tariff, which at its subsidized level of 2 cents/kWh for urban consumers and 3.5 cents/kWh for rural consumers, was well below the cost of incremental supply. As a result, the weighted average WTP (the area under the household demand curve divided by the average household consumption) for residential consumers was only 5.4 cents/kWh. 2. Because of the distortion caused by the low tariffs, particularly those in urban areas, it was decided to restrict the WTP analysis for residential customers to those which did not receive the highly subsidized service provided to urban areas by the PEC national grid. These included areas serviced by PEC isolated grids, co-operative grids, and private grids. A review of the survey results for household WTP for electricity and electricity substitutes in these areas indicated that the distribution of household incomes was broadly similar to the national pattern. In addition, average household consumption of electricity and electricity substitutes was similar to national averages, after adjusting for the fact that most of the isolated grids provided less than 24 hours service. The analysis of consumption patterns of households in these areas (both use of substitutes and use of electricity) indicated an average household WTP equivalent to 9.8 cents/kWh. 3. WTP for commercial consumers is somewhat higher. This was estimated partly based on the cost of self-generation, calculated on the basis of a small petrol or diesel generator and partly based on the tariff. Commercial customers were assumed to be willing to pay the financial cost9 of petrol-based self-generation for 75 percent of their supply and the tariff for the remaining 25 percent. For industrial consumers, WTP was assumed to be the avoided financial cost of diesel self-generation. PEC is in a severe deficit position, and is largely unable to supply the industrial load, so virtually all industrial customers have access to back-up generation, and use it on a regular basis. 4. An additional potential benefit of the proposed Mocha project is carbon credits which can potentially be traded on international markets. Mocha will displace future fossil fuel generation, 8Report No. 53963-GLB, A New Slant on Slopes; Measuring the Benefits of Increased Electricity Access in Developing Countries, December 2010 ' The distinction between financial and economic cost of self generation is important because the GoY heavily subsidizes the domestic price of petrol and diesel. 46 and the GoY can apply for the right to sell the associated emission credits. Based on the year 2006 to 2008 data provided by MOEE, the emission factor for displaced fossil fuel in Yemen is calculated to be 797 tons/GWh. Generally about 70 percent of Mocha's carbon credit would be sold and carbon credits were valued at US$15 per ton, which was considered a reasonable value, although prices declined significantly in the last couple of years and could vary widely as do forecasts of future values. 5. The result of the Cost Benefit analysis was an estimated EIRR of 10.5 percent and an NPV at 10 percent discount rate of US$3.4 million. Details of the calculation are provided in Table 6.1. If carbon credits were excluded from the benefits stream, the EIRR of the project drops to 8.7 percent, and the NPV at a 10 percent discount rate would be minus US$8.8 million. Cost Effectiveness 6. In circumstances where project benefits are difficult to estimate, or where the adequacy of benefits data is suspect, Bank guidelines also permit the use of cost effectiveness analysis as a means of assessing the economic viability of a project. While the distortions effected by urban tariff subsidies justify ignoring observed national averages in evaluating WTP for household customers, the analysis in the previous section is not as robust as might be desired. It was therefore decided to also test the economic viability of the project on the basis of cost effectiveness; i.e. by comparing the cost of the wind farm to the cost of incremental sources of power generation, using costs associated with the plant recently constructed at Marib as a comparator. 7. Details of the Marib cost and operating statistics were obtained from the PMU in charge of implementation of the project. The main parameters, as well as the other assumptions used in calculating the costs of production, are summarized in Table 6.2 below. 8. Assumptions used in calculating the average economic cost of power from Mocha are summarized in the Table 6.3 below. 9. The analysis showed the long term average economic cost of power from the Marib plant as 7.3 US cents per kWh. The average economic cost of power from Mocha is estimated at 8.9 US cents per kWh. However, if carbon credits from Mocha are included in the analysislo, the cost drops to 8.1 cents per kWh - similar to the cost of Marib. Given that gas is not a renewable resource, and that developing the country's wind resources reduces the risk of reliance on fossil fuels (and vulnerable pipelines) for power supply, the Mocha project is also economically justifiable on the basis of cost effectiveness, even in comparison with the least cost available generation option. 10 Carbon credits were valued at US$15 per ton which approximates recent trading values under the CDM. Projections of future values range widely from as low as zero (equivalent to a lifting of all carbon emission restrictions) to as high as $50 per ton (the estimated cost of sequestration projects). 47 Table 6.1: Summary of Cost Benefit Analysis Costs (US$ million) Benefits (US$ million) Transmission and WTP WTP WTP WTP Carbon Total Net Cash Capital O&M Distribution Total Costs Households Commercial Industrial Mosques Offsets Benefits Flow 75% AGP*, WTP HH 25% tariff AGD* Tariff 2011 12.132 12.132 - - - - - - - 12.132 2012 54.565 54.565 - - - - - - - 54.565 2013 53.452 53.452 - - - - - - - 53.452 2014 - 1.802 4.418 6.220 12.752 4.044 4.773 0.075 1.906 23.548 17.329 2015 1.802 4.418 6.220 12.752 4.044 4.773 0.075 1.906 23.548 17.329 2016 3.119 4.418 7.536 12.752 4.044 4.773 0.075 1.906 23.548 16.012 2017 3.119 4.418 7.536 12.752 4.044 4.773 0.075 1.906 23.548 16.012 2018 3.119 4.418 7.536 12.752 4.044 4.773 0.075 1.906 23.548 16.012 2019 4.066 4.418 8.483 12.752 4.044 4.773 0.075 1.906 23.548 15.065 2020 4.066 4.418 8.483 12.752 4.044 4.773 0.075 1.906 23.548 15.065 2021 4.066 4.418 8.483 12.752 4.044 4.773 0.075 1.906 23.548 15.065 2022 4.066 4.418 8.483 12.752 4.044 4.773 0.075 1.906 23.548 15.065 2023 4.066 4.418 8.483 12.752 4.044 4.773 0.075 1.906 23.548 15.065 2024 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2025 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2026 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2027 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2028 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2029 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2030 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2031 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2032 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 2033 5.475 4.418 9.893 12.752 4.044 4.773 0.075 1.906 23.548 13.656 EIRR 10.50% Net Present Value 10% $3.37 million * AGP - autogeneration - petrol AGD- autogeneration - diesel 48 Table 6.2 Assumptions - Economic Costs of Marib Thermal Power Plant Total Capital Cost - installed 175.03 US million Plant Capacity - 85% of rated 292 MW Operating Life 25 years Discount rate 10 0 Annual Plant Factor 75 % GW.h/yr 1,918.28 Thermal Efficiency 32.5 % Natural Gas Consumption 11123.8 kj/kWh Economic Cost of Natural Gas $2.66 per MMBTU at the wellhead (Razavi, 2008) $3.00 per MMBTU delivered to Marib Cost of Gas 2.84 per kj delivered to Marib Fixed O&M 5% of capital cost per annum Variable O&M 0.025 per kWh Table 6.3 - Assumptions: Economic Costs of Mocha Wind Power Plant Total Capital Cost - installed 120.15 US million Plant Capacity 60 MW Operating Life 20 years Discount rate 10 0 Annual Plant Factor 40 % GW.h/yr 210 Variable O&M Years 1 - 2 0.78 Cents/kwh Years 3 - 5 1.35 Cents/kwh Years 6 - 10 1.76 Cents/kwh Years 11 - 20 2.37 Cents/kwh 10. Sensitivity Analysis: A sensitivity analysis was carried out to assess the effects of changes in capital costs and output on the cost per kWh of the proposed Mocha Wind Farm. In addition, contracts were recently finalized for a second power plant at Marib, at a capital cost of approximately US$1,100/kW as compared with the US$509/kW of Marib I, and the analysis looked at the impact of this higher capex on the cost of generation at the new Marib II plant. The results are summarized in Table 6.4 below. 11. The sensitivity analysis does not include the credit for potential carbon offsets associated with the Mocha plant - which would be equivalent to 0.8 cents per kWh under the full output scenarios and 0.6 cents per kWh under the reduced output scenarios. 49 Table 6.4 - Sensitivity Analysis Scenario Cost - cents/kWh Mocha - base case 8.1 Mocha - 20% increase in capital cost 9.4 Mocha - 20% reduction in annual output 10.2 Mocha - 20% increase in cost plus 20% reduction in output 11.8 Marib I - base case 7.3 Marib I - Marib II capital costs per kW 9.3 Comparison with Diesel and HFO 12. The above cost effectiveness analysis assumes optimistically that additional Yemeni gas resources can be developed to fuel new power plants while at the same time meeting commitments to existing power plants and to LNG exporters. However, the most recent available data indicate the proven gas reserve is far from adequate to meet the power generation expansion needs of Yemen. In the foreseeable future, the alternative generation options will be thermal plants fired either by diesel or by HFO. Based on recent prices for these fuels (in mid- October 2013, when international crude oil prices stood at approximately US$100/bbl), the likely fully allocated cost of generation would be US$0.20/kWh for HFO and US$0.28 for diesel - significantly higher than the projected cost of wind power from the Mocha Wind Farm. Crude oil prices would have to drop below US$30 per bbl in order for HFO thermal generation to be competitive with the expected costs of wind generation." Assumptions for Financial Analysis 13. Table 6.5 below summarizes the primary cost and operating assumptions used in the financial analysis of the proposed Project. Macro-economic assumptions used in the analysis are summarized in Table 6.6. Forecasts of Yemeni CPI and MUV are held constant after 2018. 14. It is proposed that a SPC will be established to own and operate the Mocha facility. The company will be wholly owned by the GoY, and the GoY will contribute, as noted above, approximately US$20 million in initial capital to fund equipment purchase and construction costs. Funds received from IDA and other donors were assumed to be on-lent to the SPC in dollars at a rate of 8 percent for 20 years including 5 years grace. The SPC would also be responsible for paying a commitment fee of 0.25 percent on undisbursed funds from the loans. At a crude price of $25/bbl, the estimated cost of thermal generation using HFO is 9.5 cents/kWh 50 Table 6.5: Assu ptions for Financial Analysis Item Unit Value Capital Cost US$ million 120.15 Construction period Years 3 Installed Capacity MW 60 Plant Capacity Factor percent 40 Average Annual Output GWh 231 Wholesale tariff $ per kWh - 2010 .085 Tariff escalation With MUV Index Financing of Capital Expenditures IDA $ million 35 Other Donors $ million 65 GoY $ million 20.15 Income Taxes percent 15 Accounts Receivable Days sales 60 Accounts Payable Days of O&M expenditures 45 Inventories Years of supplies and spares 2 Depreciation Rates Wind turbines Years 20 Cabling and S/S equipment 40 Depreciation method Straight line Dividends Percent of invested equity 12 15. The initial working capital requirements of the company were established through a process of trial and error, injecting sufficient additional funds to ensure that a positive cash flow was maintained throughout the implementation period. In total, US$10 million in working capital was needed during the three-year construction period, US$1 million in year 1, US$3 million in year 2, and US$6 million in year 3. Proposed Financial Indicators 16. The recipient will have a subsidiary agreement with the SPC once it is created. In addition to standard requirements for the annual submission of audited financial statements, it is proposed that the SPC is required to maintain a debt service coverage ratio (DSCR) of not less than 1.2, and a quick ratio of not less than 1. These ratios will be closely monitored and the GoY will be bound to do all in its power to ensure that these rations are met through the terms of the subsidiary agreement. 51 Table 6.6: Macro Economic Assumptions Macro-economic Assumptions 2010 2011 2012 2013 2014 2015 2016 2017 2018 YR per US$ - average 214.99 228.19 239.59 251.57 264.15 277.36 292.54 305.64 319.32 Year End 221.59 233.89 245.58 257.86 270.76 284.95 299.09 312.48 326.47 CPI - 2000 = 100 (average) 277.33 300.55 331.28 366.99 396.58 424.52 449.99 472.49 496.11 % Change (average) 9.25% 8.38% 10.22% 10.78% 8.06% 7.04% 6% 5% 5% MUV Index -% Change 0.00% -1.50% 0.00% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% MUV Index - 2010= 100 100.00 98.50 98.50 98.99 99.49 99.98 100.48 100.99 101.49 Sources - MUV Index - World Bank April 2010 - to 2015 Economic Data - I MF, WEO April 2010 - to 2020 52