Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD832 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 7.3 MILLION (US$11.25 MILLION EQUIVALENT) AND A PROPOSED CREDIT IN THE AMOUNT OF SDR 8.9 MILLION (US$13.75 MILLION EQUIVALENT) TO THE KYRGYZ REPUBLIC FOR AN ELECTRICITY SUPPLY ACCOUNTABILITY AND RELIABILITY IMPROVEMENT PROJECT June 23, 2014 Sustainable Development Department Central Asia Country Unit Europe and Central Asia Region 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 February 28, 2014) Currency Unit = KGS 52.44 KGS = US$1 US$ 1.55 = SDR 1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS CMS Commercial Management System kWh kilo Watt hours CRMS Corporate Resource Management System kV kilo Volt CPS Country Partnership Strategy LCS Least Cost Selection CQS Consultants’ Qualification Selection M&E Monitoring and Evaluation CRI Cash Recovery Index MIS Management Information System DC Direct Contracting MTD Material and Technical Department DPO Development Policy Operation MW Mega Watt ECA Europe and Central Asia NCB National Competitive Bidding EIRR Economic Internal Rate of Return NESK National Electricity System of Kyrgyzstan EMP Environmental Management Plan NPV Net Present Value EPP Electric Power Plants NSDS National Sustainable Development Strategy FBS Fixed Budget Selection O&M Operation and Maintenance FESTI Fuel and Energy Sector Transparency OP Operational Policy Initiative FIRR Financial Internal Rate of Return PCB Polychlorinated Biphenyl FM Financial Management PDO Project Development Objective GDP Gross Domestic Product PER Public Expenditure Review GWh Giga Watt hours PIE Project Implementing Entity IBRD International Bank for Reconstruction and PIU Project Implementing Unit Development IC Individual Consultant PRAM Procurement Risk Assessment and Management System ICB International Competitive Bidding PSC Project Steering Committee IDA International Development Association QBS Quality Based Selection IFAC International Federation of Accountants QCBS Quality and Cost Based Selection IFC International Finance Corporation RAP Resettlement Action Plan IFI International Finance Institution SAIDI System Average Interruption Duration Index IFR Interim unaudited Financial Report SAIFI System Average Interruption Frequency Index IFRS International Financial Reporting Standards SBD Standard Bidding Document IRMS Incidents Recording and Management System SE Severelectro ISA International Standard on Auditing SOE Statement of Expenditure JSC Joint Stock Company SSS Single Source Selection KfW Kreditanstalt fuer Wiederaufbau VAT Value Added Tax KGS Kyrgyz Som WB World Bank KM Kilometer WBG World Bank Group Regional Vice President: Laura Tuck Country Director: Saroj Kumar Jha Sector Director: Laszlo Lovei Sector Manager: Ranjit J. Lamech Task Team Leader: Ani Balabanyan ii KYRGYZ REPUBLIC Electricity Supply Accountability and Reliability Improvement Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ............................................................................................................ 1 B. Sectoral and Institutional Context................................................................................. 2 C. Higher Level Objectives to which the Project Contributes .......................................... 5 II. PROJECT DEVELOPMENT OBJECTIVE ..................................................................6 A. PDO............................................................................................................................... 6 B. Project Beneficiaries ..................................................................................................... 6 C. PDO Level Results Indicators ....................................................................................... 7 III. PROJECT DESCRIPTION ..............................................................................................8 A. Project Components ...................................................................................................... 8 B. Project Financing .......................................................................................................... 9 C. Lessons Learned and Reflected in the Project Design .................................................. 9 IV. IMPLEMENTATION .....................................................................................................10 A. Institutional and Implementation Arrangements ........................................................ 10 B. Results Monitoring and Evaluation ............................................................................ 10 C. Sustainability............................................................................................................... 11 V. KEY RISKS AND MITIGATION MEASURES ..........................................................12 A. Risk Ratings Summary Table ..................................................................................... 12 B. Overall Risk Rating Explanation ................................................................................ 12 VI. APPRAISAL SUMMARY ..............................................................................................12 A. Economic and Financial Analysis ............................................................................... 12 B. Technical ..................................................................................................................... 14 C. Financial Management ................................................................................................ 14 D. Procurement ................................................................................................................ 15 E. Social (including Safeguards) ..................................................................................... 16 iii F. Environment (including Safeguards) .......................................................................... 17 G. Other Safeguards Policies Triggered .......................................................................... 17 Annex 1: Results Framework and Monitoring .........................................................................18 Annex 2: Detailed Project Description .......................................................................................25 Annex 3: Implementation Arrangements ..................................................................................31 Annex 4: Operational Risk Assessment Framework (ORAF) .................................................42 Annex 5: Implementation Support Plan ....................................................................................48 Annex 6: Economic and Financial Analysis ..............................................................................51 Annex 7: Procurement Plan ........................................................................................................63 iv . PAD DATA SHEET Kyrgyz Republic Electricity Supply Accountability and Reliability Improvement Project (P133446) PROJECT APPRAISAL DOCUMENT . EUROPE AND CENTRAL ASIA ECSEG Report No.: PAD832 . Basic Information Project ID EA Category Team Leader P133446 B - Partial Assessment Ani Balabanyan Lending Instrument Fragile and/or Capacity Constraints [ ] Investment Project Financing Financial Intermediaries [ ] Series of Projects [ ] Project Implementation Start Date Project Implementation End Date 16-Jul-2014 30-Jun-2019 Expected Effectiveness Date Expected Closing Date 31-Dec-2014 31-Dec-2019 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Ranjit J. Lamech Laszlo Lovei Saroj Kumar Jha Laura Tuck . Borrower: Kyrgyz Republic Responsible Agency: Severelectro OJSC Contact: Mr. Iskender Kadyrkulov Title: Deputy General Director Telephone 996312333393 Email: severpiu@mail.ru No.: . Project Financing Data(in USD Million) [ ] Loan [X] Grant [ ] Guarantee [X] Credit [ ] IDA Grant [ ] Other Total Project Cost: 25.47 Total Bank Financing: 25.00 Financing Gap: 0.00 . v Financing Source Amount BORROWER/RECIPIENT 0.00 International Development Association (IDA) 25.00 Free-standing TF for ECA 0.47 Total 25.47 . Expected Disbursements (in USD Million) Fiscal 2015 2016 2017 2018 2019 2020 0000 0000 0000 Year Annual 1.00 2.00 5.00 8.00 8.50 0.50 0.00 0.00 0.00 Cumulati 1.00 3.00 8.00 16.00 25.00 0.00 0.00 0.00 0.00 ve . Proposed Development Objective(s) The proposed development objective is to improve the reliability of electricity supply in the project area and strengthen the governance of Severelectro’s operations. . Components Component Name Cost (USD Millions) Distribution Infrastructure Strengthening 16.00 Customer Service and Corporate Management System 7.00 Improvement Institutional Strengthening and Project Implementation 2.47 Support . 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 Transmission and 80 100 Distribution of Electricity Energy and mining Energy efficiency in 20 100 Heat and Power Total 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. . vi Themes Theme (Maximum 5 and total % must` equal 100) Major theme Theme % Public sector governance Other accountability/anti-corruption 50 Urban development Other urban development 50 Total 100 . Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [ X ] respects? . 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 Institutional Arrangements 31-Dec-2014 Description of Covenant The institutional arrangements are in place as set forth under Section I. A of Schedule 2 to the Financing Agreement. Name Recurrent Due Date Frequency Subsidiary Agreement 31-Dec-2014 vii Description of Covenant The Subsidiary Agreement is in place as set forth under Section I. B of Schedule 2 to the Financing Agreement. Name Recurrent Due Date Frequency Safeguards X Yearly Description of Covenant Safeguards provisions are implemented as set forth under Section I. D of Schedule 2 to the Financing Agreement. Name Recurrent Due Date Frequency Financial Covenants X Yearly Description of Covenant Financial covenants are met as set forth under Section V of Schedule 2 to the Financing Agreement. . Conditions Source of Fund Name Type IDA Subsidiary Agreement Effectiveness Description of Condition The Subsidiary Agreement has been executed on behalf of the Recipient and Severelectro (Article V, 5.01 (a)) Source of Fund Name Type IDA Operational Manual Effectiveness Description of Condition The Operational Manual satisfactory to the Association has been adopted. Team Composition Bank Staff Name Title Specialization Unit Adam Shayne Lead Counsel Legal LEGLE Aliya Kim Financial Management Financial Management ECSO3 Analyst Arcadii Capcelea Senior Environmental Environment ECSEN Specialist Ani Balabanyan Senior Energy Specialist Team Lead ECSEG Asli Gurkan Social Development Social Safeguards ECSSO Specialist Pedro Antmann Lead Energy Specialist Energy Specialist AFTG1 Nagaraju Duthaluri Lead Procurement Procurement ECSO2 Specialist Irina Goncharova Procurement Specialist Procurement ECSO2 viii Regina Oritshetemeyin Senior Program Financial Analysis ECSSD Nesiama Assistant Natalia Manuilova Sr Financial Financial Management ECCAT Management Specialist Dung Kim Le Program Assistant Program Assistant ECSSD Zhanetta Baidolotova Program Assistant Program Assistant ECCKG Kathrin Hofer Energy Specialist Energy ECSEG Zamir Chargynov E T Consultant Operations ECSEG Non Bank Staff Name Title Office Phone City . Locations Country First Location Planned Actual Comments Administrative Division ix I. STRATEGIC CONTEXT A. Country Context 1. The Kyrgyz Republic, with a multi-ethnic population of around 5.5 million, is one of two low-income countries in the Europe and Central Asia (ECA) region. The economy remains characterized by significant informality 1, reliance on few sectors (gold, agriculture, and re- exports), and remittances. Such structure amplifies the impact of economic and political shocks which have abounded in recent years and have affected growth and stunted poverty reduction. Average growth rate during 2009-2013 was less than four percent, including recessionary -0.5 percent in 2010 following political and social disturbances of that year. The latest shock, a landslide at the country’s largest gold mine, Kumtor, resulted in a 0.1 percent contraction in 2012 and an exceptionally strong 10.5 percent growth rate in 2013 as the mine returned to normal operations. Around 38 percent of the population lived below the national poverty line in 2012. Still, growth in the non-gold economy has been robust, with growth rates in the range of five to six percent in the last three years, while the bottom 40 percent of the population appears to benefit more from growth; the consumption of the bottom 40 percent of the population increased by 5.8 percent during 2006-2011 compared to a 2.5 percent growth rate of consumption of the mean. 2. Prospects for the medium term remain favorable, especially if the neighboring countries in the region continue growing. GDP growth is expected to moderate at five percent during the next few years, as remittances, credit to private sector and strong investments continue to fuel domestic demand. Remittances and exports will benefit from the slight recovery in Russia’s growth rate and the robust expansion in Kazakhstan, while the banking sector remains sound and should be able to support growth in case opportunities emerge. At the same time, China is becoming an increasingly important source of investment, including in transport and energy, estimated to reach around US$3 billion over the next few years. The stronger capital inflows will finance the current account deficit, which is expected to remain relatively high. Inflation is estimated to remain between five and seven percent for the next few years. Still, strong reliance on few sectors keeps risks elevated, including from a slowdown in key partners, lower gold prices as well as global food and energy price spikes. 3. Improving efficiency of government spending will be critical for growth, inclusion, and stability. The budget deficit averaged above 4.5 percent of GDP during 2009-2013, one of the highest in the ECA region, as the authorities attempted to offset the effects of volatile growth. Current trends are not sustainable and the medium-term fiscal framework envisages a gradual reduction in the deficit to below three percent of GDP by 2016. Tax policy and administration reforms may strengthen revenues; however, most of the adjustment needs to come from expenditures. Meanwhile, public investments need to remain high to address infrastructure bottlenecks, and social inclusion policies need to be promoted to strengthen cohesion. These competing priorities can be tackled through improved efficiency of public expenditure. The World Bank’s Public Expenditure Review is providing recommendations that could generate savings, while improving quality of public services in education, health, pensions, social 1 According to “Shadow economies all over the world – new estimates for 162 countries from 1999 to 2007” – WB PRWP 5356, the informal economy in the Kyrgyz Republic between 1999 and 2007 hovered around 40 percent. 1 protection, and energy as well as cross-cutting themes such as the wage-bill and public investment management and intergovernmental relations. 4. Poor governance, especially corruption and lack of voice in governing institutions, was the fundamental cause of political upheavals in 2010. Improving governance and enhancing transparency and accountability in the public sector are strongly demanded by the general public and are at the heart of the National Sustainable Development Strategy 2013-17 (NSDS) of the Government. Given the significant role of the energy (particularly power) sector in the Kyrgyz economy, improving the management in energy enterprises and enhancing transparency of their activities is a key reform area under the NSDS. B. Sectoral and Institutional Context 5. The power sector in the Kyrgyz Republic is largely state-owned and operated by six joint stock companies that are responsible for power generation, transmission and distribution. The companies consist of one generation company, the Electric Power Plants, one transmission company, the National Electricity System of Kyrgyzstan, and four regionally divided distribution companies: Severelectro (SE), Vostokelectro, Oshelectro and Jalalabatelectro, providing 52, 22, 20 and five percent of total domestic consumption respectively. 6. The power sector is relatively large and has significant growth potential. It accounts for about four percent of GDP and 16 percent of industrial production, and its performance is critical for the growth of the Kyrgyz economy. The sector has a significant unrealized potential for export. Other advantages of the power sector are relatively low cost of power generation, reliance on clean sources of energy, and the near universal access to power supply. 7. However, the sector faces a number of key challenges that need to be addressed in order to sustain growth and macroeconomic stability. These challenges include: (i) power supply reliability; (ii) financial viability; and (iii) governance in the sector. 8. Poor supply reliability and service quality: Assets in the power sector are dated and in poor condition due to insufficient investments and severe under-spending on maintenance and rehabilitation. Most generation assets are on average 34 years old, and are near or beyond the end of their useful lives. Fifty percent of the transmission substations are more than 25 years old, and 18 percent of the lines are more than 40 years old. The four distribution companies reported that 28 percent of their 0.4-10 kV power lines were in poor condition and SE reported that 85 percent of its low voltage distribution lines and electrical equipment was in urgent need of repair. 9. In addition, the significant increase in power consumption in 2009-2012 has begun to strain the capacity of power sector assets. The growth in consumption is especially significant in winter months when demand is highest. From 2009 to 2012, winter consumption grew 62 percent, while summer consumption grew 16 percent. In recent years, there have been frequent emergency shut-downs of transmission and distribution facilities because of equipment congestion and overloading, especially in Bishkek. Without major investments and sector 2 reforms, 2 the situation is expected to aggravate in the near future. Deficit between peak (winter) demand and available generation capacity could emerge in 2015 and grow to 650 MW by 2020, 900 MW by 2025 and 1,300 MW by 2030 (World Bank, Power Sector Note for the Kyrgyz Republic, 2013). 10. The condition and strained capacity of power sector assets result in poor supply reliability and quality. The four distribution companies combined reported an average of 43 outages per day between 2009 and 2012. SE alone reported an average of 20 outages per day during the winters of 2010 to 2012, and 15 outages per day on an annual basis. The poor condition of assets also causes voltage and frequency fluctuations. The fluctuations affect end-users in a number of ways ranging from poor quality of lighting (from low voltage), to damaged electrical appliances (from fluctuating or excessive voltage). 11. Lack of sector financial viability: The financial condition of the power sector has improved in recent years, but there is still a large gap between costs and cash collected. Costs per kWh of gross generation have consistently been higher than cash collected per kWh in recent years. From 2007 to 2012, the sector’s actual costs incurred per kWh (not adjusted for under- spending on maintenance) were, on average, 35 percent higher than the average cash collected from domestic end-users. The gap between costs and cash collections is predominantly the result of exceptionally low tariffs, which fail to reflect recurrent expenses let alone the full cost of power supply. The revenue-expenditure gap also has significant fiscal and economic consequences for the country. In 2012, the quasi-fiscal deficit of the sector accounted for 2.1 percent of GDP. 12. Some portion of the gap between tariffs and cost of power supply is attributable to high levels of technical and non-technical losses. Reported total losses were 22 percent of net generation in 2012, and the actual losses were likely higher (due to lack of metering and poor management information systems). In the distribution network, total reported technical and non- technical losses accounted for 18 and four percent respectively of power injected to the distribution network in 2012. Total losses in SE amounted to 1,300 GWh (or 22 percent) of net injected power in 2012. 13. Poor sector governance: Underlying the sector challenges are the weak governance of the sector and the lack of transparency and accountability in its operations. At the sectoral level, some of the key governance issues include: (i) overlapping roles and responsibilities in sector policy-making, ownership and regulation; (ii) sub-optimal contractual and settlement arrangements, which impede transparency and accountability of flow of funds and electricity, and undermine incentives for sector companies to improve operational and financial performance; (iii) unpredictable expenditure planning, which is done on a year-to-year basis, and largely in a reactive manner rather than by prioritizing investments based on transparent criteria and forward-looking sector planning; and (iv) an ambiguous regulatory environment, including absence of clearly defined and transparent mechanisms for setting tariffs. At the company level, manifestations of poor governance include deficient internal control systems, inadequate corporate resource management and customer information systems, which are largely based on 2 The assessment assumes no improvement in losses and no investments in new generation capacity other than the capacity currently being constructed. 3 manual entry and are not integrated, aggravating issues related to lack of accountability, transparency and data reliability. 14. The Government recognizes the importance of addressing these challenges in the power sector and has adopted a Power Sector Development Strategy for 2012-2015. Key measures of the strategy include: (i) further improvements in efficiency and transparency of sector operations; (ii) development and adoption of a medium-term tariff policy that would need to be accompanied by properly designed social protection schemes; and (iii) a number of important energy investments. In order to operationalize the implementation of the strategy and coordinate donor support in the sector, the Government has also developed a more detailed Action Plan for Reforming the Energy Sector in 2013-14. In addition, the Government has started implementing some modest governance improvement measures, such as the opening of an escrow account for power export proceeds in 2011, and the establishment of the Fuel and Energy Sector Transparency Initiative (FESTI) in 2011 in an attempt to improve management and governance within the sector by ensuring greater public participation and transparency. 15. The proposed Electricity Supply Accountability and Reliability Improvement Project will help address these three sector challenges by: (i) improving power supply reliability in the service area of SE through investments in strengthening of the distribution infrastructure and resulting reduction of losses and power outages; (ii) enhancing the quality of services to customers through providing SE with better information management tools for faster and more effective response to service interruptions and customer complaints; (iii) improving the financial viability of SE through reduction of technical and non-technical losses in its service area; and (iv) strengthening governance and internal controls in SE through provision of access to real time and reliable corporate and commercial information and institutional strengthening. 16. The proposed project will enhance citizen engagement by strengthening customer orientation and responsiveness of SE. The incorporation of management information systems and business process re-engineering will facilitate customers’ communication with SE through a single 24/7 customer call center, and ensure that the customer inquiries and complaints are executed in a timely, accountable and transparent manner while minimizing the risk of mistakes and intentional wrongdoings. In addition, launching of customer satisfaction surveys will provide feedback on customers’ perception of service quality and help to continuously improve customer orientation in business operations. 17. By focusing on the service area of SE, the project ensures that benefits accrue to the largest share of customers, given that SE is the largest distribution company serving more than 40 percent of all residential customers in the country and delivering more than 50 percent of total electricity consumption. 18. The project will leverage the World Bank Group’s engagement in the energy sector of the Kyrgyz Republic, which is focused on helping the Kyrgyz authorities to strengthen governance and accountability in the sector, and enhance its financial viability (see Box 1). 4 Box 1: The World Bank Group Engagement in the Energy Sector of the Kyrgyz Republic The World Bank Group (WBG) is engaged in the sector through investment financing operations, policy dialogue under Development Policy Operations, analytical and advisory activities, and (planned) transaction advisory support aimed at addressing power sector principal challenges. The Electricity Supply Accountability and Reliability Project will build on the ongoing WBG engagement, as explained below. Energy Chapter of the Public Expenditure Review (PER) and Power Sector Note: The PER and the Note analyze the key challenges in the power sector of the Kyrgyz Republic and identify a comprehensive package of measures to overcome them. The project supports several of the priority measures identified in the PER and the Note, including implementing carefully prioritized investments, improving business processes and incorporating Management Information Systems. Development Policy Operations (DPOs): The policy actions under the DPOs are focused on strengthening governance, transparency and accountability of the energy sector. To that end, under the DPO 1 the Government adopted a comprehensive Action Plan. The project will support implementation of some of the actions in the Action Plan, including strengthening of SE’s procurement system and financial reporting and accountability mechanism and carrying out audits according to the International Financial Reporting Standards. Under the DPO 2 the Government issued a decree setting up a performance monitoring framework for the power sector and mandating periodical publication of key performance indicators. The project will support implementation of the decree by enabling reliability and timeliness of performance indicators of SE. Technical Assistance on Tariff Setting Methodology: The technical assistance supports the Regulatory Department with establishing a clear and predictable tariff setting methodology for the power sector companies and end-users, assessing the distributional impact of tariffs, designing mitigation measures and conducting a communication campaign to generate consensus for tariff reforms. The establishment of an adequate tariff setting methodology will allow SE to better plan and recover its capital and maintenance expenses and will improve its overall financial standing thereby enhancing the sustainability of the project. IFC Transaction Advisory Support for a Management Contract: The Government is considering obtaining IFC’s transaction advisory services to attract qualified management contractor(s) in the largest two distribution companies- SE and Oshelectro. The project will support the engagement of a management contractor or other forms of private sector participation in SE by establishing an enabling environment through improved governance and accountability of SE. C. Higher Level Objectives to which the Project Contributes 19. Poor reliability of power supply has severe repercussions on the living conditions of the Kyrgyz Republic’s population, particularly the poor, and has significant economic costs. By helping improve power supply reliability and service quality in the service area of the largest distribution company, SE, the proposed project supports the Bank’s twin objectives of reducing poverty and promoting shared prosperity in the following ways: (a) Improving the living standards of the poor: Due to near universal access of the population to electricity and lack of access and/or affordability of other sources of energy (gas, district heating, etc.), electricity is the major source for lighting, cooking and heating in the Kyrgyz Republic. This is especially true for the poor; according to the Integrated Household Survey (2012) one-third of the poor use electricity for heating and over three-quarters use it for cooking. Yet, despite the importance of electricity for the poor, about 93 percent experience a large number of outages per year. The reliance of the poor on electricity is likely higher in SE’s service area, which covers the northern regions of Bishkek, Chui and Talas. In total, about 18 percent of the population in Bishkek, 29 5 percent in Chui and more than half of the population in Talas live below the national absolute poverty line. While providing benefits to all the population in SE’s service area, the project will particularly improve the living standards of the poor who, unlike the non- poor, cannot afford to resort to back-up options for electricity (e.g. diesel generators) and are therefore forced to receive low-quality/insufficient power supply or switch to lower quality solutions, such as firewood and manure, with resulting negative environmental and health consequences. (b) Improving the business environment: According to the Business Environment and Enterprise Performance Survey (2014), businesses surveyed identified electricity as the fifth largest obstacle to do business in the Kyrgyz Republic; more than a third of survey participants ranked electricity as a major or severe obstacle. In terms of ease of getting electricity, the country ranked third worst in ECA and among the worst ten countries worldwide (IFC Doing Business Index, 2012). By improving the reliability of power supply and strengthening governance of SE, the project will improve the business environment in the project area. (c) Reducing significant economic costs of unmet demand: According to the estimates of the Ministry of Energy and Industry, unmet demand was equal to 36 percent of consumption in 2007 and 20 percent of consumption in 2011 with related economic costs of US$370 million and US$610 million respectively. By reducing the duration of outages, the project will reduce the significant economic costs associated with unmet demand. 20. The proposed project is also aligned with and supports the new Country Partnership Strategy (CPS) for 2013-2017, which recognizes governance as the key development challenge in the country. Specifically, the CPS also identifies maintenance of scarce natural resources and physical infrastructure, including energy, as one of the three areas of focus in 2013-2017. Furthermore, the project will also support the Government’s sector strategy and action plan by improving efficiency and transparency of the sector and supporting identified key investments in the distribution network. II. PROJECT DEVELOPMENT OBJECTIVE A. PDO 21. The project development objective is to improve the reliability of electricity supply in the project area and strengthen the governance of Severelectro’s operations. B. Project Beneficiaries 22. The proposed project is expected to provide direct added value to the following project beneficiaries: 23. Customers of SE: The key beneficiaries of the proposed project are the customers of SE who will benefit from improved service quality, supply reliability and grievance redress mechanisms. Specifically, the new Management Information Systems (MISs) supported under the project will help SE to adopt a more customer-focused approach by allowing the company to provide faster and more effective response after service interruptions (i.e. reducing the duration 6 of power outages), address client requests more accurately with real-time reliable information available for each customer (e.g. billing, payments, reconnection times, etc.), and provide 24/7 one-stop-shop. All 527,000 customers (504,000 residential and 23,000 non-residential customers) of SE in Bishkek city, and Chui and Talas regions will benefit from the expected improvements in services quality following the operationalization of the company-wide MISs. The evolution of customers’ perception of SE’s services will be measured through customer satisfaction surveys before project effectiveness, six months after incorporation of the MISs and at project closure. In addition, customers of SE will benefit from improved supply reliability due to targeted infrastructure investments, which will help to decrease the number and frequency of power outages, reduce losses in SE’s service area, and lower voltage fluctuations. 24. SE: The proposed project will benefit SE by helping the company to improve the efficiency of its operations addressing all business areas, including network operations for provision of electricity services, commercial functions (e.g. metering, billing, collection, disconnection/reconnection, attention of customer requests), as well as planning and management of corporate resources. By allowing proper supervision and monitoring enabled by real-time access to reliable commercial and corporate information, the proposed project will also strengthen the internal controls of the company, enhance accountability of staff in all operations, and improve corporate governance. The comprehensive approach involving infrastructure investments, incorporation of company-wide MISs and institutional strengthening, will help SE reduce technical and non-technical losses and increase billed power delivered to its customers. Consequently, the project is expected to lead to better operational and financial performance of SE and contribute to its long-term sustainability. C. PDO Level Results Indicators 25. The key outcome indicators include: (a) Total electricity losses per year, disaggregated by the share of technical and commercial losses: this core sector indicator measures enhanced operational and financial performance of the company, and reflects improved metering, billing and governance (e.g. reduced errors in accounting and record-keeping, improved billing rates); (b) Duration of outages per 1,000 customers: this indicator measures the duration of outages at medium voltage level to assess improvements in service quality (i.e. faster restoration of power supply after outages); (c) Availability of reliable operational and financial data to the management of SE and key external stakeholders: this indicator measures progress towards enhanced internal (company management) and external (government, regulator and customers) accountability and good governance, enabled through the availability of reliable real-time operational and financial data. The timeliness and reliability of data will be ensured through the incorporation of well-proven MISs covering all core business areas of SE that will automate collection of data under an integrated platform. (d) Increase in the share of customers satisfied with SE’s services: measuring the evolution of customer satisfaction levels during project implementation is expected to reflect perceived improvements in supply reliability and service quality, which are the two critical areas for customer satisfaction. The surveys will be designed to provide disaggregated results by gender and by income levels. 7 III. PROJECT DESCRIPTION A. Project Components 26. The project will achieve the development objective through a holistic approach that integrates the following three components: (i) distribution infrastructure strengthening, (ii) customer service and corporate management system improvement, and (iii) institutional strengthening and project implementation support. 27. Component 1 – Distribution infrastructure strengthening (estimated cost of US$16.0 million): This component will help improve power supply reliability and reduce losses in the distribution network by supporting priority investments to strengthen the distribution infrastructure of SE. The targeted assets are part of a comprehensive investment plan prepared during the project preparation, and are selected based on their potential for reducing losses and improving power supply reliability. The selected investments include construction of new medium-voltage substations in Bishkek, and replacement of meters for high-consumption customers in Chui region. 28. Component 2 – Customer Service and Corporate Management System Improvement (estimated cost of US$7.0 million): This component will provide SE with information tools to improve quality of services provided to its customers (power supply and commercial matters), and to enhance overall efficiency of its performance in all business areas. To that end, the component will finance supply, installation and commissioning of selected MISs, training for SE employees on how to use them, and limited investments into hardware to support the MISs. The MISs will be set-up company-wide and capture all three key areas of SE’s operations: commercial management, corporate resources management, and power network planning and operations. The specific MISs and their technical and functional specifications will be determined based on ongoing assessments and will likely include incorporation of a Commercial Management System (CMS), an Incidents Recording and Management System (IRMS), and a Corporate Resource Management System (CRMS). 29. Component 3 – Institutional Strengthening and Project Implementation Support (estimated cost of US$2.47 million, including US$0.47 million from the ECA Capacity Development Trust Fund): This component will support two key activities for the smooth implementation of the project and sustainability of project outcomes: (i) implementation support for project management, including monitoring and evaluation and incremental operating expenses of the Project Implementation Unit (PIU) under SE; and (ii) technical assistance to SE to improve its business processes, strengthen its governance and make the company more customer focused. The technical assistance will include strengthening of SE’s procurement system and financial reporting and accountability mechanism, and improving SE’s business processes. 8 B. Project Financing 30. The project will be financed by a US$11.25 million IDA grant and US$13.75 million IDA credit extended to the Kyrgyz Republic. The Ministry of Finance will on-lend the funds to JSC Severelectro. Table 1: Project Cost and Financing Project Components Project cost IDA Financing % Financing 1.Distribution Infrastructure 16.00 16.00 100% Strengthening 7.00 7.00 100% 2. Customer Service and Corporate Management System Improvement 2.47 2.00 81% 3.Institutional Strengthening and Project Implementation Support 25.47 25.00 98% Total Costs Total Project Costs 25.47 25.00 98% Front-End Fees - - - Total Financing Required 25.47 25.00 25.47 C. Lessons Learned and Reflected in the Project Design 31. The project design has benefitted from the World Bank’s vast experience and analytical work in improving operational and financial performance of power sector utilities, as well as from the successful experiences of improving performance of distribution companies (both state- owned and private) in Latin America, India and other developing countries. The project also takes into account the results of the recently completed Power Sector Note in the Kyrgyz Republic (World Bank, 2013). Conclusions and lessons learned reflected in this project include: (a) Reduction of losses is a low-cost measure for improving power supply reliability: When technical and non-technical losses are high in a country, investments should prioritize loss-reduction measures for the distribution sector in order to improve sector operational performance, including reliability of power supply, in a sustainable manner. This lesson learned is consistent with the findings of the Power Sector Note for the Kyrgyz Republic. Specifically, the Note estimated that a two percent reduction in total losses, complemented by a five percent increase in nominal tariffs, could reduce the expected winter power supply deficit by 45 percent in 2020 and thereby enhance power supply reliability in a cost-effective manner. (b) Availability of real-time and accurate data is key for improving governance: Access to reliable and timely data is the foundation of good governance, transparency and accountability. To that end, the incorporation of the MISs in the core business areas – commercial management, corporate resources management, and power network planning and operations – supplies distribution companies with adequate information and customer management tools that provide reliable and transparent information within the company as well as to the government and other external stakeholders. 9 (c) Institutional strengthening is important for sustainability: To achieve sustainable results, infrastructure investments and incorporation of MISs need to be accompanied by re- engineering of key business operations and strengthening of human capacity. (d) Strong preparation, commitment and ownership by the company are essential for successful implementation: Advanced project preparation, including bidding documents for procurement of goods and works, are important to speed up project implementation. Other key factors for successful implementation are strong commitment and ownership of the company to prepare, implement and maintain technical solutions and information management tools. Solid technical assistance and training for staff is required to properly operate information management tools supported under the project. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 32. The project implementation arrangements are designed to balance the need for proper oversight and accountability with the need to avoid complex and heavy arrangements that will delay project implementation. Additional details on project implementation arrangements and procedures are provided in Annex 3 and further specified in the Operational Manual. 33. SE will be the Project Implementing Entity (PIE). Within SE the day-to-day project implementation will be conducted by the existing Project Implementation Unit (PIU). The core staff of the PIU has been appointed based on terms of references approved by the Bank. Throughout the implementation of the project, the PIU will also draw on relevant experts of SE (engineers, IT staff, service quality centers’ staff, etc.). 34. The project will be overseen by the Project Steering Committee (PSC), which has been established by the order of the Ministry of Energy and Industry on November 1, 2013. The PSC is chaired by the deputy Minister of Energy and Industry, and includes the General Director of SE, a representative from the State Property Fund and a member of the FESTI advisory council. The PSC has overall oversight for project and its key responsibilities include: (i) approval of the Operational Manual and amendments to it; (ii) approval of members of the tendering committee; (iii) periodic monitoring of project implementation progress and achievement of its objectives; and (iv) facilitation of project implementation. B. Results Monitoring and Evaluation 35. The PIU will be responsible for results monitoring and evaluation (M&E) activities, including the submission of a semi-annual implementation progress report to the World Bank. A simple management information system for M&E will be developed by the PIU to measures progress towards achievement of the PDO. The key results indicators are specified in Annex 1. 36. For most of the indicators, the PIU can use its existing company system for measuring, evaluating and reporting technical and commercial indicators. However, in the absence of adequate MISs, the reliability of baseline data and associated target values remains a key challenge (e.g. technical and commercial electricity losses, duration of outages). Therefore, the baseline data and target values may need to be revised during project implementation and/or after 10 installation of the MISs. Disaggregated data on customer satisfaction levels will be based on surveys conducted by a qualified company to measures changes before, during and after project implementation. The availability of reliable data and related incorporation and operationalization of the MISs will be assessed by an independent auditor. More detailed information on M&E is provided in Annex 3. 37. Overall, technical experts in the PIU have existing capacity to collect and process data required for the M&E system. In addition, the World Bank team will supervise implementation progress at least twice a year, including results indicators defined in Annex 1 as well as additional financial management and procurement aspects of project implementation. A comprehensive evaluation of project results will be conducted during the project’s mid-term review and at completion. C. Sustainability 38. The long-term sustainability of the proposed project will ultimately depend on the overall operational and financial sustainability of the power sector. As highlighted in Box 1, the World Bank is also providing technical assistance targeting improved governance, accountability and financial viability of the broader power sector, which will help to enhance the overall sustainability of the project. Relevant additional support includes in particular the ongoing technical assistance for the creation of a performance monitoring framework for sector entities, including SE, and for the establishment of a clear and predictable tariff setting methodology. The technical assistance aims to enable power sector companies to recover reasonable recurrent and capital expenses, which will in turn improve overall sustainability of power sector companies, including SE. 39. At the project level, sustainability beyond the project’s lifetime will be ensured through a number of actions: (i) implementation of company-wide MISs, which will help to improve operational performance of SE in all business areas (commercial, network planning and operations, management of corporate resources); (ii) institutional strengthening of corporate procurement and financial management, which will help to improve transparency, efficiency and accountability within the company in these areas; (iii) improvement of customer feedback mechanisms and availability of timely and reliable information, which will increase SE’s accountability towards outside stakeholders; (iv) provision of adequate training to properly operate, maintain and use the new information management tools provided under the project; and (v) assurance that SE is able to service debt and meet its liabilities as they come due, by requiring that SE maintains an adequate debt service coverage ratio of 1.5 and a current ratio of one 11 V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Risk Category Rating Stakeholder Risk Moderate Implementing Agency Risk Substantial - Capacity Substantial - Governance Substantial Project Risk Moderate - Design Moderate - Social and Environmental Moderate - Program and Donor Low - Delivery Monitoring and Sustainability Substantial Overall Implementation Risk Substantial B. Overall Risk Rating Explanation 40. Overall implementation risk is rated "substantial" due to significant risks associated with the operating environment, implementation capacity, fraud and corruption, governance as well as with project sustainability. Most of the operating environment risks cannot be mitigated at the project level but will be closely monitored and project design will be adjusted, as needed. Governance and project sustainability risks will be mitigated by implementing a comprehensive package of information management tools by providing institutional strengthening, including adequate training for staff, and by establishing adequate oversight mechanisms, including the PSC as well as regular Bank supervision and implementation support. VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 41. Economic analysis: The project’s economic impact is assessed based on benefit-cost method for Components 1 and 2. The economic benefits of the project are limited to significant quantifiable benefits and therefore the results regarding the economic net present value (NPV) and the economic internal rate of return (EIRR) should be seen as lower bounds relative to the actual economic benefits. The economic analysis of the project yielded economic NPV equivalent to US$5.3 million and EIRR of 18.5 percent. A summary of results for the economic valuation of the project base case is indicated below. 12 Table 2: Summary of Results for Economic Evaluation of the Project Present Value of Costs US$28.3 million Present Value of Benefits US$33.6 million Net Present Value US$5.3 million EIRR 18.5% 42. The main quantifiable economic benefits of the project include reduction of technical losses, reduction of energy not served due to improved reliability of power supply, and savings of reduced consumption due to reduction of non-technical losses. The economic costs of the project include investment costs, incremental operation and maintenance (O&M) costs associated with the investments, and welfare loss from reduced consumer surplus as a result of reduction of non-technical losses. 43. The key parameters, which may significantly affect the economic viability of the project, are the estimated reduction in technical losses and the investment costs. A sensitivity analysis was conducted to assess the impact of eliminating 20 percent less technical losses from the project target, increasing the investment cost by 20 percent, and the joint impact of these two parameters. The results of the sensitivity analysis are summarized in Table 3. Table 3: Sensitivity Analysis of Economic Returns Base case 20% Lower 20% increase 20% Less Technical losses + Reduction in base in Investment 20% Higher Investment Cost Technical losses Cost NPV (million 5.3 0.53 2.5 -2.3 US$) EIRR (%) 18.5 10.9 13.5 6.5 44. Financial Analysis: the financial analysis is carried out from the perspective of SE. The financial analysis of the project yielded financial NPV equivalent to US$11.9 million and Financial Internal Rate of Return (FIRR) of 13.6 percent. A summary of the results for the financial analysis of the project base case is indicated below. Table 4: Summary of Results for Financial Evaluation of the Project Present Value of Costs US$23.8 million Present Value of Benefits US$35.6 million Net Present Value US$11.9 million FIRR 13.6% 45. The main financial benefits of the project for SE are the savings from lower power purchase costs as a result of loss reduction and additional sales from the portion of non-technical losses that will be converted to additional billing. The main financial costs of the project are the capital investment costs and incremental O&M costs, both estimated inclusive of applicable direct taxes. 13 46. The financial condition of SE has been inconsistent with variable profitability in the past. The cash flows of the SE have been also instable; however the company has had adequate cash flows to meet its current liabilities as well as long-term debt obligations. Going forward, the cash flows of the company should improve as a result of reduced losses and increased billing. . In turn, this should improve the financial standing of the company, including its profitability, liquidity and solvency. B. Technical 47. During project preparation, SE commissioned a number of studies and assessments with the support of the ECA Capacity Development Trust Fund grant in order to ensure sound technical solutions for the proposed project. Specifically, the investments identified to strengthen the distribution infrastructure under Component 1 rely on SE’s investment plan, which includes urgent investment needs of the company for the upcoming five years and was prepared by a qualified international consultant. Component 1 includes investments selected from the plan on the basis of their potential for loss reduction and/or improved supply reliability and service quality per US$ invested. 48. The MISs financed under Component 2 will support a more efficient development of the core business functions of SE, including commercial management, corporate management, and network planning and operations. The technical and functional specifications of the MISs will be defined based on the ongoing assessments conducted by qualified international consultants. These assessments also include detailed reviews of existing business processes of SE and recommendations for changes in the organizational structure and process reengineering, aimed at improving efficiency of all core functions with the support of the MISs. 49. The equipment and technologies for implementation and operation of the project are commercially proven, have been widely used by utilities in developed and developing countries worldwide, and will be implemented according to internationally accepted technical standards and practices. The investment costs were estimated by international consultants hired for the above referenced assessments and based on the costs of similar projects in both developed and developing countries, and specific market conditions in the Kyrgyz Republic. There are, however, implementation risks related to lack of capacity and inadequacy of business processes, which will be mitigated through business process reengineering and provision of substantial technical assistance and training to SE staff to properly implement and operate the MISs. In addition, qualified international consultants will be recruited to assist SE in supervising implementation of investments under Components 1 and 2. C. Financial Management 50. The project’s Financial Management (FM) assessment concluded that the existing FM arrangements within SE’s PIU generally meet the World Bank requirements, since the company already implemented the actions recommended under the ECA Capacity Development Trust Fund grant, including adequate staffing of FM functions and documentation of FM arrangements in the FM Manual, which is a section of the Operational Manual. The FM arrangements, including budgeting and planning, internal control procedures, and staffing of the FM function are adequate. With respect to accounting and reporting, it has been agreed that the project will use an Excel based system as an interim solution and before the decision is made with respect to 14 the Company’s software to be used under Component 2 (as part of CRMS). Under this Component, a detailed review of the current accounting software will be conducted and recommendations provided to either upgrade or replace the existing system to fully integrate the separate programs into a single platform and eliminate the extensive manual entry that currently exists. 51. The annual audit of the project financial statements will be provided to the Bank within six months after the end of each fiscal year, and also at project closing. The Recipient has agreed to disclose the audit reports for the project within one month of their receipt from the auditors, by posting the reports on SE’s website. Following the Bank's formal receipt of these reports from the Recipient, the Bank will make them publicly available according to World Bank Policy on Access to Information. As part of the project implementation support and supervision missions, quarterly interim unaudited financial reports (IFRs) will be reviewed and regular risk-based FM missions will be conducted. More details on the FM arrangements and Disbursements are provided in Annex 3. 52. Given that currently SE does not prepare and has no capacity to prepare financial statements compliant with International Financial Reporting Standards (IFRS), and that capacity building activities, including compliance with IFRS and audits based on International Standards on Auditing (ISA) under Component 3 will require some time, the Consolidated Entity’s Financial Statements will become due only within 6 months after the financial year ending December 31, 2018. 53. The project includes under Component 3 technical assistance targeted at strengthening SE’s capacity in accounting and FM functions. Such technical assistance aims to improve the company’s financial accountability and reporting transparency through implementation and compliance with IFRS, and by equipping SE’s staff with knowledge and expertise in financial reporting, enhancing institutional functions and reporting lines, assisting the company in addressing qualifications in the previous years’ audit reports, and assisting SE in preparations for the audit based on ISA for the financial year ending December 31, 2018. D. Procurement 54. The procurement for the project will 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 (Procurement Guidelines), "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines) and the provisions stipulated in the Financing Agreement. The World Bank Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants dated October 15, 2006 and revised on January 2011, will also apply. 55. SE is responsible for overall project implementation, including the project’s fiduciary functions. Within SE, the PIU is responsible for overall project implementation; the Material and Technical Department of SE will also be closely involved in procurements under the project. A procurement capacity and risk assessment of the PIE (SE) was conducted in November, 2013. 15 56. This is the first World Bank financed project implemented by SE and considering the scope of procurement planned, the procurement risk for the proposed project is rated “substantial”. To mitigate the procurement risks, SE will implement the following agreed measures: (i) allocation of adequate human resources to the project’s fiduciary functions, including hiring an individual procurement consultant; (ii) intensive training for the designated procurement staff on the Bank’s Plant Design, Supply and Installation type bidding documents and procedures prior to project effectiveness; (iii) hiring of international consultants to assist preparation of technical requirements, evaluation and implementation of the MIS package; (iv) preparation of a project Operational Manual with a detailed chapter on procurement, including procurement decision making processes; this chapter could be later used as Procurement Manual for SE; (v) ensuring quality preparation and review of technical specifications/terms of references, Bid Evaluation Reports and final deliverables; and (vi) establishing an efficient contract monitoring mechanism designed to maximize overall value for money of contracting activities. Detailed findings of the assessment, the proposed procurement arrangements, and measures to address the identified risks are presented in Annex 3. 57. The draft Procurement Plan covering the first 18 months of project implementation was prepared and is attached in Annex 7. E. Social (including Safeguards) 58. The project triggers two safeguards policies of the World Bank: Environmental Assessment (which by definition includes social assessment as well) and Involuntary Resettlement. The involuntary resettlement is triggered due to limited resettlement impacts associated with one of the new substations that will be constructed under the project. The PIU has prepared a Resettlement Action Plan (RAP) for this substation site and screening reports for the other two substation sites to avoid, minimize and mitigate potential adverse social impacts that may be caused by construction of new substations under the project. The RAP was disclosed in the country and consultations were held on February 13, 2014. The final RAP was disclosed in the World Bank Infoshop (February 28, 2014) and posted on SE’s website (March 2, 2014). 59. The project will also support additional social accountability measures, such as: (i) setting up a system for Service Quality Centers in the project area for documenting, categorizing and resolving complaints; (ii) assisting SE to carry out consumer satisfaction surveys; and (iii) strengthening information-sharing and communication techniques of the company via various media outlets. The project is also gender-informed in the sense that the consumer satisfaction survey will be designed and implemented to capture disaggregated satisfaction rates of male and female customers, and the strengthened complaints handling system for the service quality centers will favorably benefit women as the majority of customers using the SE hotline are elder women. 60. Specific gender activities are not deemed necessary to achieve the project objective. By addressing the energy needs of households (improved service quality and supply reliability) the project will be especially beneficial for people who spend most of their time at home such as the elderly, children and women as well as those who have the primary responsibility for cooking and cleaning, typically women. The training aspects will equally benefit women and men 16 employees of SE, though it is recognized that female employees might need more encouragement to attend. F. Environment (including Safeguards) 61. The safeguards issues under the project are expected to arise from Component 1 (distribution infrastructure strengthening), which will support construction of three new substations. These constructions are of very small-scale (facilities with the size of about 20x20 meters) and would use so-called “sandwich panels” technology, and thus the potential environmental impacts will be associated only with removing asphalt and soil, constructing foundations and installing new electrical equipment. Overall, the project is expected to bring social and economic benefits, such as improvements in social conditions through better quality and availability of power supply and reductions of power losses. At the same time, construction of the substations may generate some adverse environmental impacts, such as: (i) dust and noise: these impacts occur during the construction activities; (ii) waste handling and spill response: the construction activities will generate some solid and liquid wastes, including machine oil, paints, and solvents. Minor spills of fuel and other materials are likely to occur during the course of civil works. Improper handling of on-site wastes and response to spills could result in adverse effects on the local environment, including groundwater and soil; (iii) health and safety risks could occur while implementing construction activities and installing electrical equipment, etc.; and (iv) traffic disturbance could occur in the vicinity of the construction sites. All these impacts are site specific, short term and could be easily avoided or reduced by applying relevant preventive or mitigation measures as well as best construction practices, which are well known and applied in the country and detailed in the Environmental Management Plan (EMP). 62. The risks specified above are minor and the project was classified as Category “B”. The project accordingly follows simplified safeguards procedure, using the “Checklist EMP” template, which was designed for projects involving simple, low-risk construction works. Such EMP Checklists have been prepared for all three substations to be constructed under the project. They cover typical preventive and mitigation approaches to common civil works contracts with localized impacts, specifying also monitoring and implementing arrangements. The draft EMPs were disclosed in the country on February 19, 2014 and publicly consulted on February 26, 2014. The final version of the EMPs were disclosed in the World Bank Infoshop (February 28, 2014) and posted on SE’s website (March 2, 2014). The EMPs will be used by the client during the project implementation. G. Other Safeguards Policies Triggered 63. The project has triggered the safeguards policy on Involuntary Resettlement, Operational Policy (OP) 4.12 to avoid, minimize and mitigate potential adverse social impacts. In one of the sub-stations, there will be resettlement impacts, primarily affecting an entrepreneur and his small number of employees, who have been leasing the project site to use it as a parking lot. As part of OP 4.12, the project has prepared a RAP for this site, which was finalized and disclosed both in the World Bank Infoshop (February 28, 2014) and SE’s website (March 2, 2014) prior to Appraisal. 17 Annex 1: Results Framework and Monitoring . Country: Kyrgyz Republic Project Name: Electricity Supply Accountability and Reliability Improvement Project (P133446) . Results Framework . Project Development Objectives . PDO Statement The proposed development objective is to improve the reliability of electricity supply in the project area and strengthen the governance of Severelectro’s operations. These results are at Project Level . Project Development Objective Indicators Data Responsibility Cumulative Target Values Source/ for Unit of End Methodolog Data Collection Indicator Name Core Baseline 3 YR1 YR2 YR3 YR4 Frequency Measure Target y Electricity losses per year Percentage 22 22 22 22 20 18 Annually SE SE/PIU in the project area Megawatt Total net hour (MWh) injected 5817000 6001000 6061000 6120000 6222000 6099000 Annually SE SE/PIU Sub-Type generation Supplemental 3 At the absence of adequate MISs, the reliability of baseline data, and therefore related target values is uncertain (as highlighted in Annex 3) and may need to be revisited during project implementation. In particular, baseline data on the level and disaggregation of electricity losses are likely to be higher than reported. 18 Electricity Percentage losses per year Sub-Type 18 18 18 18 17 16 Annually SE SE/PIU in the project Supplemental area- Technical Electricity losses per year Percentage in the project Sub-Type 4 4 4 4 3 2 Annually SE SE/PIU area- Non- Supplemental Technical Duration of outages per Hours 21 22 22 22 20 18 Annually SE SE/PIU 1,000 customers reduced Data generate d through MISs available Data to SE Reliable generate manage operational and d ment, financial data through regulator available to the Independent Text n/a n/a n/a n/a MISs y Annually SE/PIU management of audit available authority SE and key to SE and external manage Govern stakeholders ment ment; selected data available to customer s 19 Share of customers Baseline, SE/PIU/ satisfied with Percentage 0 0 0 0 5 10 interim and Social SE/PIU SE's services completion Surveys increased Share of female customers Percentage Baseline, SE/PIU/ satisfied with Sub-Type 0 0 0 0 5 10 interim and Social SE/PIU SE’s services Supplemental completion Surveys increased Share of customers from low income Percentage Baseline, SE/PIU/ groups satisfied Sub-Type 0 0 0 0 5 10 interim and Social SE/PIU with SE’s Supplemental completion Surveys services increased . Intermediate Results Indicators Data Responsibility Cumulative Target Values Source/ for Unit of End Methodolog Data Collection Indicator Name Core Baseline YR1 YR2 YR3 YR4 Frequency Measure Target y Kilovolt- SE/PIU/ Semi- Capacity added Ampere 0 0 0 0 14000 54000 commission SE/PIU annually (kVA) ing reports SE/PIU/ Semi- Meters installed Number 0 0 2000 6000 12000 20000 Commissio SE/PIU annually ning reports MISs Installati MISs MISs in MISs in SE/PIU Contract incorporated and Text None on of installed use as use as Annually (first four SE/PIU awarded operational MISs and staff evidence evidence years) and 20 launched trained d by d by Independent 75% of: 95% of: auditor (last (i) (i) two years) customer customer s s metered metered and and billed billed using using CMS; CMS; (ii) (ii) commerc commerc ial ial complain complain ts ts attended attended using using CMS; CMS; and (iii) and (iii) complain complain ts for ts for outages outages using using IRMS IRMS Direct project Semi- Number 0 0 2000 6000 527000 527000 SE/PIU SE/PIU beneficiaries annually Percentage SE/PIU/offi Female Semi- Sub-Type 0 0 52 52 52 52 cial SE/PIU beneficiaries annually Supplemental statistics Accounti Alignme Accounti Accounti Financial ng nt of ng ng Statemen Semi- policies accounti policies policies ts are in annually/ IFRS applied Text None SE/PIU SE/PIU reviewed ng aligned aligned accordan Annually and staff policies with with ce with for audit trained with IFRS IFRS IFRS 21 IFRS and staff and staff and started trained trained audited and staff by trained independ ent private auditor acceptab le to the Bank Tenders Tenders through through e-Gov. e-Gov. Procure Procure ment ment issued, issued, and 100 and 100 Tenders % of % of through invitatio invitatio Standard e-Gov. n for bid n for bid Bidding Transparency Procure and and Docume and fairness in SBDs ment contract contract Text None nts Annually SE/PIU SE/PIU procurement adopted issued award award (SBD) improved and SE results results develope website (followin (followin d improve g g d competit competit ive ive tenders) tenders) are are publishe publishe d on d on SE’s SE’s website website . 22 Annex 1: Results Framework and Monitoring Country: Kyrgyz Republic Project Name: Electricity Supply Accountability and Reliability Improvement Project (P133446) Results Framework . Project Development Objective Indicators Indicator Name Description (indicator definition etc.) Electricity losses per year in the project area This indicator is calculated by dividing total electricity losses (i.e. the sum of technical and non-technical losses) by the total net injected generation in the project area. The baseline is the actual electricity losses in the project area at the beginning of the project. Total net injected generation No description provided. Electricity losses per year in the project area- No description provided. Technical Electricity losses per year in the project area- Non- No description provided. Technical Duration of outages per 1,000 customers reduced This indicator measures duration of outages at medium voltage level to assess improvements in service quality (i.e. faster restoration of power supply after outages). Reliable operational and financial data available to This indicator measures progress towards enhanced internal and external accountability of the management of SE and key external stakeholders SE and improved governance as a result of incorporation of the MISs. Progress will be assessed through the availability of real-time reliable operational and financial data to the management of company and its external stakeholders (the regulatory authority, the government and customer). Reliability of data will be measured through the use of data generated through the MISs, covering all core business areas of SE (commercial management, corporate resources management and power network planning and operations). Selected data available to the public will involve data associated with agreed key performance indicators in the performance contract between SE and the regulatory authority. The monitoring of this outcome indicator will be conducted through independent audits of the records of MISs on an annual basis after their incorporation. Share of customers satisfied with SE's services This indicator measures progress towards improving customer satisfaction in the project increased area through targeted surveys (i.e. percentage improvements compared to the baseline). The baseline survey to measure customer satisfaction will be conducted prior to effectiveness; a 23 mid-term survey will be conducted after installation of the MISs and a final survey before project completion. Improved customer satisfaction levels are expected to reflect both improvements in supply reliability and services quality. Share of female customers satisfied with SE’s This supplemental indicator measures progress in improved satisfaction of female services increased customers with SE’s services. Share of customers from low income groups This supplemental indicator measures progress in improved satisfaction of the bottom 40 satisfied with SE’s services increased percent of population in SE’s service area. . Intermediate Results Indicators Indicator Name Description (indicator definition etc.) Capacity added This indicator assesses implementation progress under Component 1 and improvements in supply reliability by measuring added capacity from substations. Meters installed This indicator measures progress in installing meters financed under Component 1. MISs incorporated and operational This indicator measures implementation progress in installing and using the company-wide MISs, including CMS, IRMS, and CRMS that will help to strengthen both governance and service quality of SE. After the incorporation of the MISs, the use of MISs will be verified through an independent audit. Direct project beneficiaries Direct beneficiaries are people or groups who directly derive benefits from an intervention (i.e., children who benefit from an immunization program; families that have a new piped water connection). Please note that this indicator requires supplemental information. Supplemental Value: Female beneficiaries (percentage). Based on the assessment and definition of direct project beneficiaries, specify what proportion of the direct project beneficiaries are female. This indicator is calculated as a percentage. Female beneficiaries Based on the assessment and definition of direct project beneficiaries, specify what percentage of the beneficiaries are female. IFRS applied This indicator measures progress towards strengthening financial reporting function in SE through training of staff, aligning SE’s accounting policies with IFRS, and implementation of IFRS. Transparency and fairness in procurement improved This indicator measures improvements of the institutional framework for procurement through adoption of SBD, the use of e-Government Procurement and publication of key procurement data on SE’s website. 24 Annex 2: Detailed Project Description KYRGYZ REPUBLIC: Electricity Supply Accountability and Reliability Improvement Project Background 64. SE is the owner and operator of the 35-10-6-0.4kV distribution network for the city of Bishkek, Talas and Chui regions, and is divided into seventeen regional distribution units. It serves a total of 527,000 customers, including 504,000 residential customers representing approximately 42 percent of the total 1.2 million residential customers in the Kyrgyz Republic. 65. Power consumption in SE’s service area has increased by around 8.6 percent annually during the last five years (2007-2012) largely driven by a 62 percent increase in residential consumption. During the same period, the number of residential consumers increased by 11 percent, mainly due to the migration of the population from rural to urban areas. As a result, distribution networks in cities are becoming increasingly overloaded. This is particularly true for Bishkek, where migrants often settle in city outskirts without access to natural gas for cooking and district heating. Consequently, with an increasing share of residential consumers relying on electricity for heating and cooking purposes, annual residential consumption in Bishkek has increased by more than 45 percent over the past three years. Table 2.1: Billed Consumption of SE in 2012 Total Consumption Non-Residential Residential (GWh) Consumption (GWh) Consumption (GWh) Total 4,489 1,666 2,823 Bishkek 2,041 914 1,127 Chui 2,097 663 1,434 Talas 351 89 262 66. Like the rest of the power sector, the infrastructure of SE is aging, poorly maintained and reaching the end of its useful economic life. About 50 percent of the substations are more than 25 years old. Similarly, 35 percent of 35kV overhead lines, 25 percent of 10-6 kV and 61 percent of 0.4 kV overhead lines are older than 50, 40 and 20 years, respectively. Overall, almost 50 percent of SE’s assets are more than 30 years old, will reach the end of their useful life within the next few years and need to be upgraded and/or replaced. 67. The growing demand and lack of investment in infrastructure result in poor reliability of power supply and high losses in SE’s service area. Total losses of SE were 22 percent in 2012, of which four percent were commercial losses and the rest technical losses. From 2010 to 2012, SE reported an average of 20 outages per day during winter and 15 outages per day on an annual basis. This corresponds to around 360 hours without electricity supply per year or an annual undersupply of 8,300 MWh in SE’s service area. More than 66 percent of outages in 2012 were due to equipment failures, followed by outages due to inclement weather (19 percent). In 25 addition, based on the results of a recent customer survey4, around 75 percent of customers suffer from low voltage and/or voltage fluctuations in Bishkek. Table 2.2: Outages in SE’s Service Area Number of Unplanned Outages Losses (share of power purchased by SE) 2011 2012 2011 2012 Bishkek 2,624 2,283 23.7% 23.0% Chui 2,402 1,783 23.1% 20.9% Talas 1,733 1,104 25.5% 21.1% Total 6,759 5,178 23.7% 22.2% 68. The existing inadequate business processes of SE and outdated management information systems supporting them also contribute to the poor service quality and high losses of the company. SE has already undertaken certain measures to improve the existing systems. To better trace performance of inspectors, the company has modified the responsibilities of inspectors trusted with collecting consumption data from consumers. Each inspector is now responsible for billing and collection of a dedicated area (medium voltage feeder) in SE’s distribution network. In addition, SE is installing in a phased manner a Communication and Data Management System to establish remote communication with substations and customers’ premises where electronic meters with remote controlling capability are installed under the ongoing KfW-financed project (see Annex 3 for further details). Nevertheless, other management information systems are technologically out-of-date and have very limited and precarious functionalities, impeding efficient management of SE on a commercial basis, and delivery of acceptable levels of customer service. Specifically, the existing billing system of the company does not provide end-to-end data integrity, and its reliance on manual entry of all customer and consumption data at various dispersed entry points significantly increases the risk of error, manipulation and fraud in the critical regular metering and billing cycle. 69. The existing system of handling consumer inquiries, which relies on manual recording of the inquiries by Service Quality Center representatives of SE without tracking of past service history and of the internal process to address each inquiry, inherently lacks efficiency, transparency and accountability. Similarly, the existing information systems for management of corporate resources, including procurement, logistics, human resources, accounting and finances excessively rely on manual entry and are not integrated. For example, the company uses several programs for its general accounting, payroll and billing purposes. The systems are not integrated, and data is manually transferred from sub-systems to the general ledger. The seventeen regional offices at SE are not connected to the accounting system of the headquarters. The fragmented system represents a significant challenge for transparency, accountability and efficiency in managing corporate resources and processes in SE. Project Scope 70. The proposed project aims to improve the reliability of electricity supply in the project area and strengthen the governance of Severelectro’s operations. To this end, the project adopts 4 Analysis of Electricity Distribution and Consumption System in Kyrgyzstan, CF Unison, 2013 26 an integrated approach and involves the following three components: (i) investments in target segments of the distribution infrastructure, (ii) incorporation of MISs, and (iii) institutional strengthening. 71. Component 1 – Distribution infrastructure strengthening (estimated cost of US$16.0 million): This component will help to reduce technical losses and improve power supply reliability by supporting investments that strengthen the distribution infrastructure of SE. The scope of this component is defined based on SE’s five year investment plan, which identifies a comprehensive set of investments in high-, medium- and low- voltage cables, overhead lines, substations, power transformers, circuit breakers, meters and other assets of the power distribution infrastructure operated by SE. The plan includes investments in new assets to eliminate overloads, as well as rehabilitation and upgrading of existing assets with a total estimated cost of around US$ 40 million. Component 1 supports priority investments included in the investment plan and identified based on the following criteria: (i) potential for reducing losses and/or power outages; and (ii) absence of alternative sources of financing (KfW funding and own funding of SE). Table 1.3 summarizes priority investments identified for financing under Component 1. Table 2.3: Description of Investments Financed Under Component 1 Description of Works Investment Rationale Cost (mln. USD) 1. Construction of a new 5.0 The construction will provide 40,000 kVA additional capacity 110/10 kV substation to help reduce the overload of the following substations: Bishkek 110/35/6-10 kV Karagachevaya, 35/6 kV Central-4, 35/6kV Central 2, 35/ kV Jute, and 110/35/6/kV Eastern. The construction of a new substation is expected to result in 62 GWh additional power supply per year. 2. Construction of a new 3.5 The area is facing a demand deficit of 32 MW, which will be 35/6-10 kV substation eliminated by the construction of a new substation with two Orto-Say transformers (2x16 MVA) and will reduce the overload of the existing substation Abdykalykova (110/35/6kV) by 10MW. The new substation is expected to add 8,000 kVA of capacity and allow an additional power supply of 35 GWh per year. 3. Construction of a new 3.5 The construction of a new substation with two transformers 35/6-10 kV substation (2x16 MVA) is necessary to meet the existing and projected Sport and 3.5-4km two demand, and reduce the overload at the existing substations 35kV lines Central-1 and Central-2 by 3,000 kVA each. The added capacity amounts to 6,000 kVA and the additional power supply provided is estimate at 27 GWh per year. 4. Replacement of meters 4.0 To reduce losses, meters for residential and non-residential for customers with high customers with an estimated annual consumption above consumption in the largest 12,000 kWh will be replaced in the largest cities in Chui. The cities in Chui investment is expected to finance replacement of about 20,000 meters and reduce losses by 1,200 kWh annually. The investments focusing on Chui region will complement the KfW-financed project, which supports replacement of meters for high consumption customers in Bishkek. 27 Component 2 –Customer Service and Corporate Management System Improvement (estimated cost of US$7.0 million): This component will provide SE with management information tools to improve quality of services provided to its customers (electricity supply and commercial matters), and to enhance overall efficiency, transparency and accountability of its performance in all business areas. To that end, the component will finance supply, installation and commissioning of the MISs and training of SE staff to apply them. The MISs will be set-up company-wide and will cover all three key areas of SE’s operations: commercial function, corporate management, and power network planning and operations. The incorporation of the MISs will be accompanied by reengineering of relevant business processes of SE in all key areas, aimed to maximize the use of functionalities provided by the new management tools, make the company operations more customer-oriented and efficient, and their execution transparent and accountable, both internally and to external stakeholders. The scope, and technical and functional specifications of the MISs will be determined based on the findings and recommendations of the ongoing assessments and will likely include: (a) Commercial Management System (CMS) – The CMS will be available in all seventeen existing customer service centers of SE, as well as any other centers that the company may create in the future, and will allow: (i) integrated management of the commercial cycle (metering, reading, billing, collection, and receivables accounting); (ii) on-line management of a customer database; (iii) management of customer service orders, including registration of all activities performed for each client (e.g. service disconnection due to debts, reconnection, meter replacement, new connection, etc.); (iv) execution and monitoring of SE’s energy balance, including evolution of losses. Incorporation of the new CMS will also involve building, maintaining, and regularly updating a reliable customer database. The CMS will provide an integrated single platform for commercial processes and activities, and fully eliminate the unaccountable manual execution of key process (e.g. meter reading, transfer of data for billing, etc.). As a result, the CMS will help to: (i) minimize the risk of mistakes and intentional wrongdoing (e.g. enable detection of billing errors and fraudulent behavior), (ii) maximize efficiency and transparency of key processes and activities; (iii) ensure accountability of staff by allowing full monitoring and supervision of operations; and (iv) facilitate quick and efficient response to clients’ requests (e.g. general and account information requests, contracting, service requests, claims, etc.). The scope and functionalities of the CMS will be closely coordinated with the ongoing Improvement of Efficiency of Distribution Network Project financed by KfW. Further details are provided in Annex 3, paragraph 103. (b) Incidents Recording and Management System (IRMS) – The IRMS (also known as Outage Management System) will be integrated with the CMS, and support better network operations, in particular aimed at ensuring good quality in power supply to customers. Specifically, the IRMS will allow the existing Service Quality Centers of SE to better respond to client claims and complaints related to outages and other anomalies in electricity supply, and ensure better quality of power supply by automating the detection of distribution faults. Setting up of the IRMS will be accompanied by the establishment of a network assets and supply database, which will include data on medium and low voltage networks and on each customer’s connection to the corresponding transformer station. The system will allow a centralized, reliable, 28 continued (24 hours a day, 7 days a week), transparent and accountable management of customers’ claims. It will enable centralizing reception and collection of all existing information on each claim, linking claims with network installations and grouping complains by affected area, ensuring targeted dispatch of field workers to the incident area, and keeping customers updated on the status of each incident, including the estimated repair time. Accordingly, the IRMS will help to minimize the response time between reception of a customer claim and restoration of regular supply, that is, the duration of each interruption, which is a critical dimension of power supply quality. The IRMS will also allow compiling statistics of outages (by hourly interval, duration, affected people), and therefore identifying equipment requiring specific repair, maintenance or replacement due to high rate of failure. This will enable effective monitoring and controlling of the overall quality in power supply. (c) Implementing a Corporate Resource Management System (CRMS) – The CRMS, usually identified as Enterprise Resource Planning system, is a non-utility specific information tool that will provide support for efficient and transparent execution of processes and activities related to the following corporate functions: accounting; asset management; financial management (e.g. budget, treasury, receivables, payments); human resources (e.g. administration, payroll, organizational structure, occupational health and safety, training); procurement and logistics (e.g. warehouses, etc.); project management; business planning and intelligence; and information management. The CRMS will complement the CMS and IRMS by integrating the management of all corporate processes and resources of SE under a single technological platform that eliminates erratic processes and extensive manual entry. The CRMS will help optimize management of corporate resources and, at the same time, maximize transparency and enhance corporate governance in SE. 72. Component 3 – Institutional Strengthening and Project Implementation Support (estimated cost of US$2.47 million, including US$0.47 million from the ECA Capacity Development Trust Fund). This component will support two key activities for the smooth implementation of the project and sustainability of project outcomes: (i) implementation support for project management, including monitoring and evaluation of project results and incremental operating expenses of the PIU under SE; and (ii) technical assistance to SE to strengthen company-wide procurement and financial management capacity, improve the business processes of SE and make it more customer-focused. The technical assistance will complement the incorporation of the relevant MISs, help to improve governance within SE and include: (a) Strengthening the institutional framework and performance related to corporate procurement functions, including: (i) a detailed review of the current institutional structure and procurement skills of the Material and Technical Department of SE to develop a targeted plan for strengthening the procurement capacity within SE; (ii) Preparation of Design, Supply and Installation Standard Bidding Document (Single Stage and Two stage) in line with the Public Procurement Law; and (iii) capacity building support to SE to get ready for implementing the e-Government Procurement developed by the Ministry of Finance and expected to be applied by all budgetary units by the end of 2014. 29 (b) Strengthening SE’s capacity in accounting and financial management functions. The sub- component will aim to improve the company’s financial accountability and reporting transparency through implementation and compliance with the IFRS, equipping SE’s staff with knowledge and expertise in financial reporting, enhancing institutional functions and reporting lines, assisting the company in addressing qualifications in the previous years’ audit reports, and assisting SE in preparations for the audit based on ISA for the fourth year of the Project implementation (financial year ending December 31, 2018). This sub-component will feature three main focus areas: (i) improving SE’s internal policies and procedures, aligning its accounting policies with IFRS, introducing internal control system and building segregation of duties in line with good international practices; (ii) raising SE’s accountability through external audit and financial statements publication, as well as working with the company to prepare it for full ISA based audit for the financial year 2018; and (iii) establishing sustainable financial reporting functions through strengthening of accounting and FM staff capacity via training in IFRS, and promoting good international practices through study tours to countries with strong governance and established financial reporting frameworks. (c) Business process improvements related to the commercial management function of SE to ensure “customer oriented” execution of all the commercial activities. The extent of business process re-engineering will be finalized based on the ongoing assessment that reviews the commercial processes currently adopted by SE and will identify areas for improvement that would need to accompany the incorporation of the CMS. Overall, the commercial process re-engineering will be driven by the concept that each kWh supplied by SE should be metered, billed and collected. 30 Annex 3: Implementation Arrangements KYRGYZ REPUBLIC: Electricity Supply Accountability and Reliability Improvement Project Project Administration Mechanisms 64. The project will be implemented by SE, which will contribute to strengthening the in- house capacity of the company, ensure commitment to the proposed business process reengineering, and enhance sustainability of investments supported. SE is a state-owned open joint stock company, established in 1998 as a result of the unbundling of the vertically integrated power utility KyrgyzEnergo (Government Decree N38 dated January 21, 2000). According to its license, SE is responsible for purchase, distribution and sale of electricity in the city of Bishkek, and Chui and Talas regions. SE owns, operates and maintains 35/6-10/0.4kV lines in its service area. The company has seventeen regional electricity networks. 65. The day-to-day project management will be conducted by the existing PIU, which is currently implementing the Distribution Network Improvement Project financed by KfW. The PIU staff consists of a director, financial manager, procurement specialist, disbursement specialist and an assistant. The PIU director has extensive experience in implementing donor- funded projects, including projects financed by the World Bank. The PIU has recently strengthened its capacity by hiring a qualified financial manager and a procurement specialist based on terms of references agreed with the Bank. The Material and Technical Department within SE will support the PIU for procurements under the project. Throughout project preparation and implementation, the PIU will also draw upon relevant staff of SE (engineers, IT staff, service quality centers’ staff, etc.). Overall, the PIU has adequate implementation capacity, including qualified staff and access to other experts within SE, as well as experience in implementing other donor-funded projects. 66. Project implementation will be overseen by the PSC created by the Order of the Ministry of Energy and Industry on November 1, 2013. The PSC is composed of the deputy Minister of Energy and Industry (representative of the policy making body), the coordinator for power sector companies from the State Property Fund (representative of the major shareholder of SE), the co- chair of the Supervisory Council for the FESTI (civil society representative), and the General Director of SE. The PSC is chaired by the deputy Minister of Energy and Industry. The main responsibilities of the PSC include: (i) approval of the Operational Manual and amendments to it; (ii) approval of members of tendering committees; (iii) periodic monitoring of implementation progress and achievement of project objectives; and (iv) facilitation of project implementation. The PSC will convene at least once every two months to discuss progress of implementation works and any outstanding issues. Organization of the PSC meetings and record of minutes is carried out by the PIU. Detailed responsibilities and decision-making procedures are further specified in the Operational Manual. 31 Financial Management, Disbursements and Procurement Financial Management 67. Implementing Entity: The PIU of SE, which is currently implementing the ECA Capacity Development Trust Fund grant, will continue to be responsible for implementing the FM function of the project, including the flow of funds, budgeting, accounting, reporting, internal controls and external audit. FM arrangements are assessed to be overall satisfactory to the Bank. The inherent risk of the project is rated as “substantial”, while the Control Risk and the overall residual FM Risk are considered to be “moderate”. 68. Strengths and Weaknesses: A major weakness identified relates to the fact that the company’s audit is currently conducted by an auditor that is not acceptable to the Bank and the audit reports are not in compliance with the ISA. The significant strengths that provide basis for the reliance on the FM system include the fact that during the implementation of the ECA Capacity Development Trust Fund grant the PIU completed the following actions: (i) hiring of an experienced FM Consultant on the terms of reference agreed with the Bank, and thus, bringing the FM staffing into compliance with the Bank’s requirements; and (ii) documenting FM arrangements, including internal control procedures, in the FM Manual that was cleared by the Bank. No further actions are recommended for this project. 69. Budgeting and Planning: The PIU has adequate planning and budgeting capacity in place. The PIU will follow the existing budgeting process of SE. Once approved, annual budgets will be split into quarters and used for monitoring of actual expenditures against those budgets. 70. Accounting and Reporting: Cash basis of accounting will be applied for project accounting. The PIU will maintain its accounts in Excel, and interim and annual reports will also be prepared in Excel, as an interim arrangement before the decision is made with respect to the company’s accounting software to be supported under Component 2 (CRMS). IFRs will be prepared and submitted to the Bank within 45 days after the end of each quarter in the format agreed with the Bank. Annual audits of project financial statements will be provided to the Bank within six months after the end of each fiscal year and at project closing. The Recipient will need to disclose audit reports for the project at the agreed public venue within one month after receipt of these reports from auditors; the Bank will make them publically available according to the World Bank Policy on Access to Information. As part of project implementation support missions, quarterly IFRs will be reviewed and regular risk-based FM missions conducted. 71. Internal Controls: Internal control procedures followed by the PIU are very comprehensive and well documented in the FM Manual of the project Operational Manual that was approved by the Bank. 72. Staffing: FM functions are covered by two people, including a FM Consultant and a Disbursement Specialist. This staffing arrangement is considered to be adequate. 73. External Audit: The proposed company and project audit will be conducted (i) by independent private auditors acceptable to the Bank, on terms of reference acceptable to the 32 Bank, and selected by the PIU; and (ii) in accordance with the ISA issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants (IFAC). The terms of reference will include activities covering: (i) audits of financial statements; (ii) assessments of the accounting system; and (iii) a review of the internal control mechanisms. The following table identifies the required audit reports that will be submitted by the PIU and specifies the due date for submission. Table 3.1: Company Audit and Financial Statements Audit Report Due Date Continuing company financial statements SE entity audited financial statements will become due only starting for the year ended December 31, 2018, within six months of the end of each fiscal year (in line with Component 3 on strengthening accounting and financial management function). Project Financial Statements Within six months of the end of each The Project Financial Statements include Sources and Uses fiscal year of the Recipient or within six of Funds, Uses of Funds by Project Activity, Designated months of the end of the disbursement Account Reconciliation Statement, Statement of deadline date. Expenditure (SOE) Withdrawal Schedule, and Notes to the financial statements 74. The audited financial statements will be disclosed to the public in a manner acceptable to the Bank. Following the Bank’s formal receipt of these statements from the Recipient, the Bank makes them available to the public in accordance with the World Bank Policy on Access to Information. 75. Strengthening financial reporting and accountability: current accounting procedures and practices of SE heavily rely on manual processing and repetitive work of staff accountants, technical operators and cashiers. As part of the project, many of the financial functions are expected to be significantly improved by reducing low value-added work, increasing use of automation, enhancing internal controls and improving speed of information delivery. Specifically, under Component 3, the following areas are expected to be analyzed and improved, as needed: (a) Financial function organization: as part of the project, the company’s financial function organizational structure will be analyzed and benchmarked against good international practices in order to optimize the reporting lines and functionality of the accounting and finance departments; (b) Accounting procedures: the company’s existing accounting policies will be evaluated in detail and compared to applicable IFRS to ensure proper IFRS application, as required by local legislation; (c) Internal controls: the company’s internal control system will be tested in order to identify and eliminate weaknesses. Specific attention will be paid to revenue recognition and cash 33 collection/recording procedures, which currently involve a significant amount of manual processing; (d) Financial statement closing: accounting procedures analysis will be used to design optimized processes, guidelines and closing calendars to manage the overall monthly/quarterly/annual closing process in a time-efficient manner; (e) Preparation for SE audit: as part of Component 3, the project will finance the engagement of an accounting firm to assist with preparatory steps for full ISA based audit for the fiscal year 2018. The task will cover preparatory steps that need to be taken by the company to prepare IFRS based financial statements, including proper inventory stock count as of the balance sheet date as per IAS 2; reconciliation of accounts receivable and payable with respective counterparts; recognition and correction of qualifications in 2012 audit report. (f) Corporate Resource Management System: as part of Component 2, the Project will finance installation and commissioning of three MISs. Under Component 2, the project will ensure that the new/upgraded system properly integrates all accounting inputs, including regional accounting units presently functioning separately of the company’s main general ledger, and builds timely and informative financial reports. (g) Capacity of financial personnel and management: as part of the project, the company’s financial staff and management will be trained on IFRS, including those specifically applicable for energy distribution companies (i.e. IAS 16 “Fixed Assets”, IAS 18 “Revenue”, IAS 36 “Impairment of Assets”). To demonstrate and encourage the implementation of good international practices, the project will finance study tours for the key personnel within accounting and financial reporting function to a peer energy distribution company in the ECA region country with strong governance and established financial reporting frameworks. Disbursements 76. Disbursements from the IDA Credit Account will follow the transaction-based method, i.e., traditional Bank procedures including advances to the designated account, direct payments, Special Commitments and reimbursement (with full documentation and against SOEs). The separate designated account will be opened in a commercial bank acceptable to the World Bank. For payments above the minimum application size, as will be specified in the Disbursement Letter, SE may submit withdrawal applications to the Bank for payments to suppliers and consultants directly from the Credit Account. Disbursement arrangements will be detailed in the Disbursement Letter. Procurement 77. Procurement for the proposed project will 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 & Grants by World Bank Borrowers" dated January 2011 (Procurement Guidelines); and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011 (Consultant Guidelines) and the provisions stipulated in the Financing Agreement. The World Bank Guidelines on 34 Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants dated October 15, 2006 and revised on January 2011, will also apply. 78. The Procurement Plan, agreed between SE and the Bank for the first 18 months, specifies for each contract to be financed by the IDA Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time-frame. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement Capacity and Risk Assessment 79. Overall, the public procurement environment in the country is improving as the Public Procurement Methodology Department of the Ministry of Finance is revising the Public Procurement Law and establishing an Independent Public Procurement Regulatory Body and an Independent Procurement Complaint Review Commission. SE follows the Public Procurement Law. 80. At the company level, SE has two responsible departments for procurement: (i) the Material and Technical Department (MTD), which is responsible for procurement undertaken through state funds; and (ii) the PIU, which is responsible for procurements through financing provided by International Finance Institutions (IFIs). Both departments have existing procurement capacity that can be used for the proposed project: MTD is composed of nine employees with considerable experience in public procurement; this includes in particular a Procurement Specialist responsible for procurements following open tenders (e.g., around eighty procedures in the current year) with previous work experience as part of the PIU and very good knowledge on procurement following IFI procedures. In order to build sustainable procurement capacity within SE, it was agreed that the MTD will be closely involved in procurements under the project with the support of and in close coordination with the PIU. 81. Summary of Risks and Risk Mitigation Measures: Procurement capacity and risks were assessed using the Procurement Risk Assessment and Management System (PRAMS), and the Procurement Capacity Assessment Report has been filed in the PRAMS. The key issues and risks concerning procurement for implementation of the project include: (i) potential risk of delays in the implementation of the project due to the complexity of procurement processes and decision-making within SE; (ii) inadequate capacity to conduct procurements based on World Bank Procurement and Consultant Guidelines; (iii) insufficient contract monitoring and management skills; (iv) inadequate accountability and oversight for procurement decisions in SE; and (v) lack of credible complaint handling mechanism within SE. Given the findings of the assessments, the initial overall procurement risk under the project is assessed as “substantial”. 82. To mitigate the identified procurement-related risks, the following mitigation actions are suggested: 35 Actions Deadline 1. Allocation of adequate human resources for the project’s Appraisal/ fiduciary functions by the MTD and the PIU responsible for the Negotiations for the day-to-day project coordination and procurement 2 Hiring an international consultant(s) to support preparation of By effectiveness the MIS package, including definition of technical specifications 2. Training of staff involved in the project procurement activities By effectiveness in Bank’s Procurement and Consultant Guidelines 3. Preparation of a project Operational Manual with a detailed By effectiveness chapter on procurement, including detailed description of procurement decision making processes and accountability for procurement decisions 4. Preparation of a detailed procurement plan for the first 18 Appraisal and agreed months of the project and submission of updates as required by Negotiations 5. Preparation of the bidding documents, terms of references and Negotiations/first draft request for proposals for the first year of project months of implementation to facilitate the initiation of procurement as per implementation the agreed Procurement Plan 6. Ensuring quality review of the both technical specifications/ Ongoing terms of references, Bid Evaluation Reports and the final deliverables 7. Putting in place an efficient contract monitoring mechanism Ongoing designed to maximize overall value for money of contracting activities 8. Establishing review of procurement decisions and Resolution of By effectiveness Complaints and publication on SE’s website 9. Regular procurement support during project implementation by Ongoing Bank procurement staff. 83. It is expected that, after the above measures have been taken, the risk would be reduced to “Moderate”. Procurement Implementation and Arrangements 84. Procurement Arrangement: As indicated above, it was agreed that procurement responsibilities will be entrusted to the MTD in order to build procurement capacity within SE. The department will be responsible for procurement under the project and will work in close coordination with the PIU. To assist the MTD, the PIU will hire a procurement consultant. 85. Procurement of Works and Goods: Procurement under the project will include construction of new medium- voltage substations (three lots/packages) and installation of meters using Supply and Installation Standard Bidding Documents (SBD); as well as supply and installation of MISs, including training using Supply and Installation of IT Systems (Single Stage) SBDs. The MISs are likely to include a CMS, IRMS and a CRMS. Further, there will be procurement of office equipment and IT equipment if required. 36 86. The Bank’s most recent version of the SBD for Procurement of Plant Design, Supply, and Installation and Supply and Installation of IT Systems will be used for all International Competitive Biddings (ICBs). If there is any National Competitive Bidding (NCB), then bidding documents acceptable to the Bank will be used. 87. Selection of Consultants: Consultant services for the project will include consultancies to improve FM, procurement and safeguards, international consultants to prepare technical requirements and supervise implementation of the MIS, financial auditors and some individual consultants for project management and supervision. The short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 88. Procurement thresholds: Procurement under the project will include the following categories: Civil Works, Goods and Consulting Services. The thresholds for procurement methods and Bank prior review applied for procurement are presented below. The procurement thresholds may be adjusted during project implementation to reflect the increased capacity of SE. Table 3.1: Thresholds for Procurement Methods and Bank Prior Review Expenditure Contract Value Bank Prior Review Procurement Method Category (USD) >= 1, 000 000 ICB All ICB contracts < 1, 000,000 NCB First two contracts Civil Works <100 000 Shopping First contract NA DC All >= 200 000 ICB All ICB contracts <200,000 NCB First two contracts Goods <100 000 Shopping First contract NA DC All DC contracts NA QCBS, QBS, FBS, LCS All contracts >= USD 200,000 for Consultant and CQS* firms; all contracts >= USD 100,000 Services NA SSS for individuals; and all SSS NA IC contracts. Notes: ICB – International Competitive Bidding NCB – National Competitive Bidding DC – Direct Contracting QCBS – Quality and Cost Based Selection QBS – Quality Based Selection FBS – Fixed Budget Selection LCS – Least Cost Selection *CQS – Selection Based on Consultants’ Qualification below $300,000 depending on the nature of assignment SSS – Single (or Sole) Source Selection IC – Individual Consultant selection procedure NA – Not Applicable 37 89. Procurement Plan: The Procurement Plan for the first 18 months of the project’s implementation will be agreed upon prior to the project’s negotiations. The draft Procurement Plan is attached in Annex 7. 90. The Procurement Plan will be updated annually or as needed to: (i) reflect progress in project implementation; (ii) accommodate changes that should be made; and (iii) add new packages necessary for the project. Each update will be subject to Bank’s prior review. The Procurement Plan will be published on the World Bank website. Procurement under the project will be carried out in accordance with the agreed Procurement Plan and as updated. The General Procurement Notice has been published on March 4, 2014. 91. Project Operational Manual: The procurement chapter of the project Operational Manual will cover all procurement aspects under the project such as: procurement implementation arrangements, procurement plan and reporting, procurement methods and thresholds, responsibilities of procurement staff and evaluation committees, procurement process including contract monitoring, procurement control procedures and complaints handling procedure. 92. Post-review by the Bank: Contracts not subject to prior-review will be subject to post- review as per procedures set forth in Paragraph 5 of Appendix 1 of the Procurement Guidelines and Consultant Guidelines. The Bank will carry out procurement post review on an annual basis with a sampling rate of initially fifteen (15) percent. This rate will be adjusted periodically during project implementation based on the performance of SE. 93. Disclosure: The following documents shall be disclosed on the SE website: (i) procurement plan and updates, (ii) invitation for bids for goods and works for all ICB and NCB contracts, (iii) request for expression of interest for selection/hiring of consulting services, (iv) contract awards of goods and works procured following ICB/NCB procedures, (v) list of contracts/purchase orders placed following shopping procedure on quarterly basis, (vi) short list of consultants, (vii) contract award of all consultancy services, (viii) list of contracts following DC, CQS or SSS on a quarterly basis, (ix) monthly physical and financial progress of all contracts, and (x) action taken report on the complaints received on a quarterly basis. The supply and installation bidding documents shall include a clause to put up a notice board in the construction site disclosing the contract details (description, contractor name and contract amount, starting date, completion date, physical progress and financial progress). 94. The following details will be sent to the Bank for publishing on the Bank’s external website and UNDB: (i) invitation for bids for procurement of goods and works using ICB procedures, (ii) request for expression of interest for consulting services with estimated cost more than $300,000, (iii) contract award details of all procurement of goods and works using ICB procedure, (iv) contract award details of all consultancy services with estimated costs above $300,000, and (v) list of contracts/purchase orders placed following SSS, CQS or DC procedures on a quarterly basis. 38 Environmental and Social (including safeguards) 95. Environmental: SE and the PIU have safeguards capacity built through implementation of donor-funded projects in the past that have involved rehabilitation works, including the Word Bank financed Power and District Heating Rehabilitation Project (environmental category B). The responsibilities of the PIU with respect to safeguards issues will include the following: (i) ensuring that the requirements of the World Bank safeguards policies as well as national environmental laws and regulations are met and that all measures set out in the EMPs are implemented; (ii) ensuring that Project environmental and social commitments of the construction contractors are fulfilled; and (iii) reporting on the status of EMPs’ implementation to SE and the World Bank. 96. During the construction phase, monitoring of the implementation of the EMPs will be funded as part of incremental operating costs under Component 3. The construction works contracts will include a provision requiring implementation of mitigation measures stipulated in the EMP during the civil works, and will be the responsibility of the firm selected to execute these works. The provisions of the EMPs will be used for the following: (i) inclusion of the environmental requirements in the project Operational Manual; (ii) inclusion of the environmental requirements in the construction contracts, for both the technical specifications and bills of quantities; the contractors will be required to include relevant costs in their financial bids; (iii) defining the responsibility of the PIU to ensure compliance with the EMPs; (iv) specifying mitigation and avoidance measures during implementation of the proposed activities; and (v) monitoring and evaluating mitigation/avoidance measures identified in site-specific reviews and in the EMPs. 97. The project implementation will be periodically supervised by the PIU, and by the local construction inspectors. The PIU will report on implementation of the EMPs and on environmental performance of the construction of substations as part of the semi-annual Progress Reports to be presented to the WB. 98. Social: The project has triggered the safeguards policy on Involuntary Resettlement, OP 4.12 to avoid, minimize and mitigate potential adverse social impacts. Limited resettlement impacts will be caused by construction of a substation in one of the sites, which is currently used as a parking lot by a private entrepreneur, leased from the municipality. As part of OP 4.12, SE prepared a site-specific RAP and screening reports. The objective of the RAP is to help identify the profile of individuals that would be impacted, and to describe the actions that would be used to address impacts in terms of involuntary resettlement, termination of lease, job and income losses. Under OP 4.12 policy, information disclosure, periodic consultations, and setting up a robust grievance redress system to document and monitor social impacts (not only on resettlement, but also other issues caused by the project-funded activities) throughout the implementation are required. The RAP findings were consulted in the country on February 13, 2014. The final RAP was disclosed in the country on March 2, 2014, and in the Infoshop on February 28, 2014. 39 Monitoring and Evaluation 99. The PIU will be responsible for results M&E activities, including submission of semi- annual implementation progress reports to the World Bank. A simple information management system for M&E will be developed by the PIU to track progress towards achievement of the PDO. The key results indicators are specified in Annex 1 and were selected taking into account the availability of baseline data. 100. For most of the indicators, the PIU can use the existing company system for measuring, evaluating and reporting technical and economic indicators. Specifically, SE currently collects data on electricity losses, disaggregated by technical and commercial losses, as well as the duration and number of unplanned outages at medium voltage level (6-10 kV). However, at the absence of adequate MISs, the reliability of baseline data and associated target values remains a key challenge. For instance, based on various expert estimates, actual losses in the distribution networks, including SE’s, are likely to be higher than reported losses due to the lack of and/or unreliability of metering, and governance issues of the sector (e.g., disincentives for adequate reporting combined with the lack of tools/mechanisms to adequately monitor and verify reporting on performance). Similarly, the number and duration of outages are only measured at medium voltage level, relying on manual entry of data based on the reports of 17 regional offices, and do not include monitoring of data on the number of people affected. Therefore, baseline data and associated target values may need to be revised during project implementation and/or after installation of the MISs. 101. The installation and use of MISs, as proposed under this project, will allow SE to improve the overall timeliness and reliability of key operational and financial indicators during implementation, and to accurately measure additional key performance indicators, such as the System Average Interruption Frequency Index (SAIFI) and the System Average Interruption Duration Index (SAIDI). Eventually, these key performance indicators will allow to measure achievement of the PDO through accurately recorded values of the Cash Recovery Index, SAIDI and SAIFI after installation of the MISs. As reflected in the Operational Manual, SE will start reporting on these indicators once the MISs are installed. During implementation, the framework for M&E within SE is also expected to benefit from other ongoing technical assistance activities supported by the World Bank that aim to establish a sector-wide framework for monitoring, reporting and verification of key performance indicators, including: defining calculation methods for indicators, determining baselines values and establishing target values for performance contracts, improving procedures for collecting and verifying information, and providing related trainings for staff. 102. To monitor the outcome indicator related to customer satisfaction, three rounds of targeted surveys will be conducted by qualified companies. The baseline survey will be conducted before project effectiveness, a second survey is expected to be done six month after installation of the MISs, and a third survey will be conducted before project completion. The surveys will be designed and implemented to capture disaggregated satisfaction rates by gender and by income levels of customers (aiming to depict the satisfaction levels of the bottom 40% of population in service areas of SE). The terms of reference for the baseline survey has been agreed with the Bank Team and a qualified local firm will be hired to conduct the baseline 40 survey by effectiveness. In addition, to monitor the outcome indicator related to the availability of reliable operational and financial data to the management of SE and key external stakeholders, and the intermediate results indicator related to the incorporation and use of MISs, annual independent audits will be conducted to measure progress related to these two indicators after the MISs are incorporated. 103. Overall, technical experts in the PIU have existing capacity to collect and process data required for the M&E system. In addition, the World Bank Team will supervise implementation progress at least twice a year, including results indicators defined in Annex 1 as well as financial management and procurement aspects of project implementation. A comprehensive evaluation of project results will be conducted during the project’s mid-term review and at completion. Role of Partners 104. Overall, the project has strong support from other development partners who prioritize strengthening of power sector governance. The project will complement the ongoing KfW- financed Distribution Network Improvement Project for Bishkek. The KfW-financed project focuses on areas in Bishkek that do not have access to district heating and account for about 40 percent of consumption in SE’s service area. The project includes replacement of 110,000 customer connections and installation of advanced meters in protected boxes (with remote reading and remote disconnection/reconnection functionalities) to prevent electricity theft, limited replacement of conventional (bare) conductors in low voltage networks by aerial bound conductors to prevent illegal connections, and the establishment of a billing system for the targeted 110,000 customers in Bishkek. Subject to availability of funding, the coverage of the KfW-financed billing system may be expanded to include the entire customer base in Bishkek, and potentially also in Chui and Talas Oblasts. As the billing system is one module of the CMS supported under Component 2 of the proposed World Bank project, the specific scope of the CMS will be adjusted according to the coverage of the KfW project (i.e. only missing modules and/or coverage of the CMS will be included in the tender documents for the three MISs and the contractor will be required to establish an interface with the KfW supported billing systems). In addition, KfW and the Bank are exploring possibilities to procure all three MISs under a single contract whereby KfW would finance the billing module and the World Bank-financed project would cover the remainder of the contract amount. If for timing reasons (the KfW project is expected to close in 2015), combined procurement is not feasible, KfW committed to ensure that the billing system is not proprietary (i.e. relies on an open protocol) and therefore will be compatible with different types of electronic meters and associated head-end systems. 41 Annex 4: Operational Risk Assessment Framework (ORAF) KYRGYZ REPUBLIC: Electricity Supply Accountability and Reliability Improvement Project . . Project Stakeholder Risks Stakeholder Risk Rating Moderate Risk Description: Risk Management: There may be stakeholders that do not share the priorities The project has the strong support of all the key stakeholders - the Government, of the energy sector reform program or consider that the development partners and civil society organizations. It will support the implementation project unfairly excludes them. of several key reform measures outlined in the Energy Sector Reform Action Plan of the Government (approved in July 2013), which has the support of the key development partners. It is also strongly supported by the civil society organizations, which consider governance the highest priority issue that should be addressed in the power sector. Given the strong emphasis of the project on better quality of service and supply reliability of consumers, the project is expected to be supported by the broader public. The focus on SE’s service area aims to ensure that the expected benefits of the project occur to the largest share of customers (40% of residential customers are served by SE) and to demonstrate the benefits of proposed MIS for future replication. To mitigate possible stakeholder risks in the future, information, coordination and consultation of key stakeholders will continue during project preparation and implementation. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both Quarterly Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Substantial Risk Description: Risk Management: Despite the experience of implementing the World Bank The PIU is staffed with experts who have experience implementing various donor- financed Power and District Heating Rehabilitation funded projects (World Bank, the Asian Development Bank, KfW, etc.) and has access Project and the ongoing KfW financed project, the PIU to other qualified experts within SE. To ensure proper execution of FM functions, the may lack adequate capacity to implement the project PIU includes a Disbursement Specialist as well as a qualified FM Specialist, who was according to Bank policies and procedures. recently hired on terms of reference acceptable to the Bank. To mitigate procurement risks, the MTD (with qualified and experienced experts) together with the PIU will be 42 responsible for procurements, and an additional procurement consultant will be hired to further strengthen capacity. In addition, the ECA Capacity Development Trust Fund Grant supported further strengthening of the PIU capacity by financing trainings for PIU staff and development of an Operational Manual (including Procurement and FM Manuals) that clearly specify the implementation procedures for the project. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Preparation Quarterly Governance Rating Substantial Risk Description: Risk Management: Governance is weak throughout the power sector, The project will strengthen management information systems and corporate including in SE. The company does not operate based on governance/transparency through the establishment of the CMS and CRMS. To mitigate commercial principles. Its management information governance risks related to procurement and FM, the project will specifically support systems are inadequate and so are the company-wide strengthening transparency, efficiency and accountability of SE’s procurement system as accounting, procurement and FM systems. well as the company’s financial reporting and accountability mechanisms. In addition, the Bank team will closely oversee the implementation of the project to ensure full compliance with Bank procedures, including FM and procurement guidelines, bidding documents and terms of references. The external audit will be performed by an independent, qualified audit firm and will cover the audit of the project and the company (starting from the third year of implementation). Resp: Status: Stage: Recurrent: Due Date: Frequency: Client Not Yet Due Both Quarterly Risk Management: The establishment of the CMS and CRMS for SE will help to identify the areas of high losses and revenue leakages, and increase transparency and accountability of SE’s operations. Also, the accountability for transparent and efficient project implementation will be strengthened through: (i) the establishment of a multi-stakeholder PSC that has strategic oversight over project implementation and approves members of tendering committees; and (ii) the strengthening of consumer feedback and grievance redress mechanisms supported through the installation of the MISs. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client Not Yet Due Implementation Quarterly 43 Project Risks Design Rating Moderate Risk Description: Risk Management: The project design requiring integration of existing and Overall, the project has a simple design and clearly specified outputs. The ECA planned information management and corporate systems Capacity Development Trust Fund Grant helped SE in preparing an investment program, as well as the proposed implementation arrangements may including priority investments based on transparent and justified criteria, and supports risk delaying project implementation. The substantial SE in specifying sound technical and functional specifications of the three MISs, amount of funding allocated for implementation of including their integration with existing systems and preparation of the procurement adequate MIS and institutional strengthening may also be packages for both the MISs and construction works. Combined with strong Bank questioned at political as well as company level. preparation and implementation support and a detailed Operational Manual specifying detailed responsibilities and procedures for all key actors involved, this preparation support helps to ensure project readiness and mitigate the risk of delays during implementation. In addition, the project components, including allocation of funds, were agreed with SE’s Management, the Ministry of Energy and Industry, the Ministry of Finance, were approved by the PSC, and contribute to/ are aligned with the priorities defined in the NSDS and the Power Sector Development Strategy. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Preparation Quarterly Social and Environmental Rating Moderate Risk Description: Risk Management: Construction activities may cause environmental, health To address these risks, the PIU has prepared Checklist EMPs for all three substations to and safety incidence that are related to: (i) dust and noise: be constructed under the project; the EMPs cover typical preventive and mitigation these impacts occur during the construction activities; (ii) approaches to common civil works contracts with localized impacts, and also specify waste handling and spill response: the construction related monitoring and implementing arrangements. Implementation of the EMPs is the activities will generate some solid and liquid wastes responsibility of the PIU with sufficient safeguards capacity due to previous including machine oil, paints and solvents. Minor spills of implementation experience with donor-funded projects that also involved rehabilitation fuel and other materials are likely to occur during the works, including the Word Bank-financed Power and District Heating Rehabilitation course of civil works. Improper handling of on-site wastes Project (environmental category B). The provisions of the EMPs will be used for the and response to spills could result in adverse effects on the following: (i) inclusion of environmental requirements in the project Operational local environment, including groundwater and soil; (iii) Manual; (ii) inclusion of environmental requirements in construction contracts, for both health and safety risks that may occur while implementing the technical specifications and bills of quantities; the contractors will be required to construction activities and installing electrical equipment, include related costs in their financial bids; (iii) defining the responsibilities of the PIU 44 etc.; and (iv) traffic disturbance in the vicinity of the in ensuring compliance with the EMPs; (iv) specifying mitigation and avoidance construction sites. measures during implementation of the proposed activities; and (v) monitoring and evaluating mitigation/avoidance measures identified in site-specific reviews and in the Social risks relate to construction activities that may lead EMPs. The implementation progress of construction works will be periodically to resettlement which are not properly mitigated. Other supervised by the PIU, and by the local construction inspectors. social risks include possible frustration/tension/protest of communities who will not be benefiting from project With the support of ECA Capacity Development Trust Fund Grant, the PIU prepared activities. social screenings reports for all substation sites and a RAP for one site that involved limited involuntary resettlement. The RAP identifies adequate mitigation measures to manage potential resettlement and other social impacts that may occur during implementation of Component 1. In order to alleviate potential community tensions between those who would be covered under the project versus those who will not, the project will strengthen grievance redress mechanisms through the establishment of MISs. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Implementation Quarterly Program and Donor Rating Low Risk Description: Risk Management: Implementation of the KfW financed Distribution While the proposed project will benefit from and further enhance the sustainability of Network Improvement Project for Bishkek may slow the KfW financed project, its success does not rely on the completion or timing of the down or get canceled. In addition, other donors may KfW project. The incorporation of the CMS is the only investment that may be impacted initiate projects with SE that overlap or are not by the KfW project since the KfW project covers one of the modules of the CMS, the complementary with the project. There is also a risk that billing system. However, the functionalities of the CMS can be adjusted to other Bank activities in the sector may get stalled or accommodate changes or timeliness of implementation of the KfW project. The funding canceled causing difficulties for project implementation. allocated for the CMS is sufficient for incorporation of a full-fledged CMS, including installing a company-wide billing system. Should the KfW project support the billing system (company-wide or only in Bishkek), the savings under CMS (Component 2) will be reallocated to Component 1. The Bank will continue to closely coordinate with other development partners in the country, in particular with the Energy Sector Donor Group (including representatives of USAID, KfW, ADB, and other donors active in the sector). There are also no critical path dependencies between this project and other Bank operations; successful implementation of other Bank operations will enhance project outcomes and sustainability, but their slow implementation or cancellation will not jeopardize the achievement of the project development objective. 45 Resp: Status: Stage: Recurrent: Due Date: Frequency: Bank In Progress Both Quarterly Delivery Monitoring and Sustainability Rating Substantial Risk Description: Risk Management: Severelectro may lack capacity to ensure adequate The overall implementation capacity of SE is being strengthened under the ECA contract administration and monitor the delivery of the Capacity Development Trust Fund Grant and substantial funds have been allocated project. In addition, sustainability of the project will be under Component 3 to enhance implementation capacity. The incorporation of the MISs jeopardized if SE does not adequately operate the MISs will be accompanied by extensive training to ensure that SE staff is able to properly and in particular the CMS due to lack of capacity or more operate and use it. Finally, while the Bank support for designing and implementing tariff importantly due to vested interests. Since the CMS will setting methodology should help address the financial viability of SE, the legal reveal areas of biggest losses and revenue leakages there agreements include financial covenants (i.e.. minimum debt service coverage and may be parties interested in the failure of the project. current ratios) to ensure that SE has sufficient earnings to service debt and maintain the Finally, SE may lack funds to properly maintain the assets investments. that will be rehabilitated under the project. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both Quarterly Other (Optional) Rating Risk Description: Risk Management: Resp: Status: Stage: Recurrent: Due Date: Frequency: Other (Optional) Rating Risk Description: Risk Management: Resp: Status: Stage: Recurrent: Due Date: Frequency: Overall Risk Overall Implementation Risk: Rating Substantial 46 Risk Description: Overall implementation risk is rated 'substantial' due to significant risks associated with the operating environment as well as with project sustainability. Most of the operating environment risks cannot be mitigated at the project level but these risks will be closely monitored and the project design will be adjusted, as needed. Governance and project sustainability risks will be mitigated by envisaging a comprehensive package of institutional strengthening and by establishing adequate oversight mechanisms. 47 Annex 5: Implementation Support Plan KYRGYZ REPUBLIC: Electricity Supply Accountability and Reliability Improvement Project Strategy and Approach for Implementation Support 105. The implementation support strategy is based on the risks and mitigation measures identified in the ORAF (Annex 4) and aims to provide flexible and effective implementation support to SE. The strategy will combine technical advice with supervising implementation progress and evaluating results on the ground. The key focus of the implementation support will be on: (a) Procurement and Financial Management: Implementation support for procurement and financial management provided by the project team will follow a risk-based approach and include: (i) guidance on World Bank fiduciary requirements as well as trainings and other capacity building support to SE in the areas of procurement and financial management; (ii) timely support in addressing procurement and financial management issues during implementation; (iii) technical support in preparing and reviewing bidding documents; and (iv) implementation support to strengthen the company-wide procurement, financial reporting and accountability mechanisms in SE. (b) Technical aspects: Support on technical aspects will consist of both technical advice as well as supervision activities, including: (i) advice on monitoring project results and optimizing the project implementation schedule (e.g. coordination among contractors, suppliers, and consultants); (ii) facilitating integration of existing and new management information systems, and utilizing data/information to improve commercial and operational efficiency and transparency; and (iii) technical implementation support for construction works and for incorporation of the MISs. (c) Environmental and social safeguards: Implementation support related to environmental and social safeguards will focus on supervising implementation of the EMP and the RAP, and provide guidance on World Bank requirements, as needed. Implementation Support Plan 106. The project team will provide timely and effective implementation support through regular missions (i.e. within six months from the project effectiveness date, and then at appropriate intervals), recurrent monitoring and evaluation of project results, facilitating implementation of risk mitigation measures identified in the ORAF (Annex 4) and providing technical advice to SE on fiduciary requirements, safeguards, operations and technical aspects to support project implementation. The project team consists of both headquarter and country office based staff to ensure an appropriate mix of sectoral, operational, country and fiduciary experts. The team will conduct an extensive mid-term review and provide the following implementation support through a combination of field visits and regular exchanges using different communication channels (e.g., videoconferencing, phone, email, etc.): (a) Technical support: the technical support of the project team to SE will focus on: (i) supporting preparation of technical specifications for bidding documents; (ii) 48 implementation and utilization of the MIS tools, including optimizing the use of data/information collected; and (iii) supervising infrastructure rehabilitation works. (b) Financial management: During project implementation, the project team will supervise the project’s financial management arrangements in the following ways: (i) review the project’s quarterly IFRs as well as the project’s and Entity annual financial statements, the auditor’s management letters and remedial actions recommended in the auditor’s management letters; and (ii) during the Bank Team’s on-site missions, review the following key areas: project accounting and internal control systems; budgeting and financial planning arrangements; disbursement arrangements and financial flows, including counterpart funds, as applicable; and any incidences of corrupt practices involving project resources. As required, a World Bank-accredited financial management specialist will participate in the implementation support and supervision process. (c) Procurement support: the project team will conduct risk-based implementation support and supervise procurement arrangements in the following ways: (i) providing detailed guidance on the Bank’s Procurement Guidelines to SE; (ii) providing training to relevant company staff, as well as its consultants: (iii) prior and/or post-review of procurement documents, including timely comments and suggestions for improvements; (iv) monitoring procurement progresses against the procurement plan; and (v) supporting improvement of the company-wide procurement system, in particular through providing support and advice for optimization of the procurement processes and development of model bidding documents for the company. (d) Environmental and social safeguards: The project team will regularly monitor environmental and social safeguard aspects during project implementation, including supervising the implementation of the EMP and precautionary RFP, and providing guidance to SE to address any safeguard related issues that may arise. 107. The staff skill mix and focus in terms of implementation support is summarized in the tables below. 49 Table 5.1: Focus of implementation support Time Focus Skills Needed Resource Estimate First twelve Task management Sr. energy specialist 8 SW months Technical review of the bidding Sr. power engineer 4 SW documents Support supervision of rehabilitation 4 SW works Project implementation guidance and Sr. energy specialist/ Sr. power 2 SW advice engineer Support with project supervision and Energy specialist 4 SW implementation coordination Procurement review of bidding Procurement specialist 3 SW documents Financial management and disbursements Financial Management 3 SW specialist Support and implementation of project’s Sr. Financial Management 2 SW institutional strengthening in accounting/ specialist financial management Environmental supervision Environmental specialist 2 SW Social supervision Social development specialist 2 SW 12-48 months Task management Sr. energy specialist 8 SW Project implementation guidance and Sr. energy specialist/ Sr. power 8 SW advice engineer Support with project coordination Energy specialist 8 SW Review of procurements Procurement specialist 8 SW Financial management and disbursement Financial management 6 SW specialist Support and implementation of FM Sr. Financial Management 6 SW institutional strengthening specialist Environmental supervision Environmental specialist 4 SW Social supervision Social development specialist 2 SW Table 5.2: Skills Mix Required Skills Needed Number of Number of Trips Comments Staff Weeks Task team leader 40 Field trips as required Headquarter based Senior power engineer 20 Field trips as required Headquarter based Energy specialist 20 Field trips as required Headquarter based/ country office based Procurement specialist 11 4-6 Regional country office based Financial management 11 4-6 Regional country office based specialist Sr Financial management 8 4-6 Regional Satellite office based (Vienna) specialist Environmental specialist 6 4 Headquarter based Social development 9 4 Regional country office based specialist 50 Annex 6: Economic and Financial Analysis KYRGYZ REPUBLIC: Electricity Supply Accountability and Reliability Improvement Project 108. This section sets out the economic and financial analysis of the project. The economic analysis is based on the incremental benefits and costs of the project from the perspective of the Kyrgyz economy. The financial analysis is conducted based on the cash flows of SE to assess the project financial sustainability. Table 6.1 summarizes the key assumptions underlying the economic and financial analysis. Table 6.1: Key assumptions of economic and financial appraisal Average annual exchange rate 50.44 KGS/US$ Marginal cost of power generation 0.02 US$/kWh Incremental transmission cost 0.002 US$/kWh Technical loss in distribution w/o project in 2013* 18% Technical loss in distribution w/ project in 2025* 14% Commercial loss in distribution w/o project in 2012* 4% Commercial loss in distribution w/ project in 2025* 1% Undersupply from outages without project (2013) 8.4 GWh Undersupply from outages with project (2025) 4.4 GWh Willingness to Pay 0.069 US$/kWh Share of commercial loss reduction converted to billed power supply 60% Estimated generation tariffs (VAT inclusive) 0.004 US$/kWh Estimated transmission tariff (VAT inclusive) 0.003 US$/kWh VAT rate 12% Economic discount rate 10% Financial discount rate 2.5% Assessment period 10 years (2015 – 2025) 109. The different components of the project contribute to economic and financial benefits as described below: (a) Component 1 – Distribution infrastructure strengthening will support priority investments in rehabilitation and upgrading of SE’s infrastructure with two key economic benefits: (i) reduction of technical losses in SE’s distribution network and (ii) improvement of power supply reliability for customers by reducing the frequency and duration of power interruptions. These economic benefits translate into financial benefits to SE through savings in power purchased to meet the present demand and through increased billing. Other economic benefits of this component include reduced damage of electrical appliances of customers due to the reduction of outages and voltage fluctuations, resource savings due to the reduction of customers’ claims and related field interventions as a consequence of rehabilitation and reinforcement of SE’s distribution network. (b) Component 2 – Customer Service and Corporate Management System Improvement will provide SE with information tools to address losses and revenue leakages in its operations and improve efficiency and quality of services to its customers. 51 This component will reduce commercial losses in SE’s service area with resulting two economic effects: (i) economic savings due to reduction of customer consumption as a result of price elasticity of power demand; and (ii) reduction of consumer surplus due to reduced power consumption. These economic effects will translate into financial benefits in the form of savings in power purchased and increased sales. The MISs will also have other economic benefits associated with improved customer service as a result of improved experience of billing and SE’s handling of incidents and as a result of reduced duration of outages. (c) Component 3 – Institutional Strengthening and Project Implementation Support to provide technical assistance to SE to enhance its institutional capacity and support project implementation. This component has economic benefit of strengthening governance, raising the accountability and ensuring project sustainability. However, since the benefits are varied and difficult to measure, their quantification was not attempted as part of the economic and financial analysis. Project Economic Analysis 110. Project’s development impact: The project’s economic impact is assessed based on benefit-cost method for Components 1 and 2. The economic benefits of the project are limited to significant quantifiable benefits. The economic benefits associated with reduced damage to customers’ electronic appliances, improved customer service from improved commercial management and handling of customer incidents, and resource savings from reduced field interventions are not quantified in the economic analysis due to lack of reliable information. The economic benefits associated with reduced greenhouse gas emissions due to reduction of commercial and technical losses and resulting lower power generation to meet the demand are not quantified since these benefits are not significant in the Kyrgyz Republic, where hydro power plants account for about 93 percent of power generation. Therefore, the results regarding the economic net present value (NPV) and the economic internal rate of return (EIRR) should be seen as lower bounds relative to the actual economic benefits. 111. The economic analysis of the project yielded economic NPV equivalent to US$5.3 million and EIRR of 18.5 percent. A summary of the results for the economic valuation of the project base case is indicated below. Table 6.2: Summary of Results for Economic Evaluation of the Project Present Value of Costs US$28.3 million Present Value of Benefits US$33.6 million Net Present Value US$5.3 million EIRR 18.5% 112. The quantified economic benefits associated with Component 1 (infrastructure rehabilitation) include: (a) Economic savings from reduction of technical losses: Power dissipation in components of SE’s distribution networks (lines, power transformers, customers ‘connections) is the source of technical losses. Investments in rehabilitation, reinforcement and upgrading of 52 currently undersized and/or overloaded distribution networks to be carried out under the project will allow for reduction of technical losses from 18 percent of power supply to SE to 14 percent. During the project evaluation period of 10 years, this reduction of technical losses results in cumulative reduction of power generation by 2,441 GWh and cumulative reduction of transmitted power by 2,380 GWh. The power generation reduction is valued at the marginal cost of power generation, which is assessed at US$0.02/kWh. The reduction of power transmitted is assessed at the incremental power transmission costs of US$ 0.002/kWh. (b) Improved reliability of power supply: The infrastructure rehabilitation is expected to reduce undersupply as a result of power outages by 55 percent, which will result in an increase of power available to SE’s customers as they will be able to consume power during periods in which they currently suffer interruptions in supply being forced to resort to reduce consumption or to use alternative energy sources. The economic value of this energy not served can be valued according to the principle of customers’ willingness-to-pay for power supply based on the observed demand, which is assessed at US$0.069/kWh. Alternatively the energy not served can be valued at the cost of back up energy sources, which is considered to be diesel at the cost of US$0.24/kWh. The economic analysis takes conservative approach and uses the lower value (derived based on willingness-to-pay) of energy not served. 113. The quantifiable economic effects associated with Component 2, include: (a) Economic savings from reduced consumption: The installation of MISs and strengthening of governance is expected to reduce commercial losses from 4 percent of power supply to SE to 1 percent. The global 5 and regional experience of power sector reforms indicates that about one third of commercial loss reduction becomes reduced power consumption. With this assumption, during the project evaluation period the reduction of commercial losses will translate to cumulative reduction of power generation by 446 GWh and cumulative reduction of transmitted power by 434 GWh. The power generation reduction is valued at the marginal cost of power generation, which is assessed at US$ 0.021/kWh. The reduction of power transmitted is assessed at the incremental power transmission costs of US$ 0.002/kWh. (b) Welfare loss: The reduction of power consumption results in a welfare loss associated with the reduced consumer surplus. The reduced consumption is valued at consumers’ willingness to pay assessed at US$0.069/kWh. 114. The main economic costs of the project are associated with tax exclusive investment costs, incremental operating and maintenance expenses associated with the investments made in SE’s infrastructure and welfare losses as detailed above. 73. The key sensitivities, which may significantly affect the economic viability of the project, are the estimated reduction in technical losses and the investment costs. A sensitivity analysis was conducted to assess the impact of eliminating 20 percent less technical losses from the project target and increasing the investment cost by 20 percent. The project remains 5 Pedro Antmann (2009). Methodology described in “Reducing technical and non‐technical losses in the power sector” - background paper for the World Bank Group Energy Sector Strategy. 53 economically viable when one of the parameters changes and becomes economically non-viable in the unlikely event if both parameters change simultaneously. A switching-value sensitivity analysis indicates that the investment cost would need to increase by 111 percent or the reduction in base technical losses would need to decrease by 43 percent for the project to reach break-even economic return. Table 6.3: Sensitivity Analysis of Economic Returns Base case 20% Lower 20% increase 20% Less Technical losses + Reduction in base in Investment 20% Higher Investment Cost Technical losses Cost NPV (million 5.3 0.53 2.5 -2.3 US$) EIRR (%) 18.5 10.9 13.5 6.5 116. Rationale for public sector financing: The power sector assets are predominantly state owned and in poor condition due to the old age and years of under-maintenance. The sector has sizable investment needs (rehabilitation needs only estimated to be in excess of US$850 million) and will need to rely on both public and private sector financing in the future to satisfy investment needs. The experience in the world as well as in the region indicates that the private sector participation can be important not only for covering the investment needs but also for improving operational performance of distribution companies. However, the private sector participation is successful when the overall regulatory and institutional environment is adequate (including existence of multi-year tariff-setting procedures and reliable performance monitoring framework) and provides the right incentives. The project will finance the urgent investment needs of the largest distribution company and will also support creation of the enabling environment for private sector participation in the future by strengthening the governance and accountability of SE. 117. Value-added of Bank support: The Bank has an established track record with similar distribution projects worldwide, as well as in Central Asia. The project will draw on the experience and lessons learnt from these projects, which call for a comprehensive approach to the utility management focused on addressing technical and commercial losses and combining distribution infrastructure investments with institutional strengthening. Additionally, the project will leverage on the Bank’s sizable engagement in the energy sector of the Kyrgyz Republic through investment lending operations, development policy operations, as well as analytical and advisory activities, which is focused on helping the Kyrgyz authorities address two fundamental and inter-linked challenges of strengthening the sector governance and accountability and enhancing its financial viability. In particular, the project will leverage on the governance reforms (including establishment of a performance monitoring framework and periodic collection and publication of key financial and operational performance indicators) that the Government has committed to implement under the development policy operations; as well as on the ongoing technical assistance provided for Tariff Setting Methodology, which will help enhance the financial performance of SE, and improve transparency and accountability in the broader power sector. 54 Project Financial Analysis 111. Financial Analysis: the financial analysis is carried out from the perspective of SE. The financial analysis of the project yielded financial NPV equivalent to US$11.9 million and Financial Internal Rate of Return (FIRR) of 13.6 percent. A summary of the results for the financial analysis of the project base case is indicated below. Table 6.5: Summary of Results for Financial Evaluation of the Project Present Value of Costs US$23.8 million Present Value of Benefits US$35.6 million Net Present Value (NPV) US$11.9 million FIRR 13.6% 112. The project will have two main financial benefits for SE: (i) savings as result of lower power purchases from the generation company lower power transmitted by the transmission company to meet the power demand valued at generation and transmission tariffs; and (ii) additional cash collected due to increased sales from the portion of commercial losses that will be converted to additional billing valued at the weighted average end user power tariff and from improved collections. 113. The main financial costs of the project are the capital investment costs and incremental O&M costs, both estimated inclusive of applicable direct taxes. 114. Analysis of Financial Performance of SE: This section assesses the financial performance of SE based on the analysis of the financial statements- income statement, cash flow statement and balance sheet- for the last three years (2011-2013) and financial statement projections for 2014-2018. Financial statement projections are conducted incorporating the revenues and expenses and cash flows that would be associated with the project. As part of the financial analysis, key ratios are assessed to examine the profitability, liquidity and solvency of SE. Table 6.6: Ratio Analysis of SE 2011 2012 2013 2014 2015 2016 2017 2018 2019 Net Profit Ratio 2% 10% -6% -4% -3% -2% 0% 1% 2% Gross Profit Ratio 21% 31% 8% 20% 20% 20% 20% 21% 21% Quick Ratio 0.4 0.1 0.2 0.1 0.5 0.8 1.1 1.4 1.7 Current Ratio 2.7 0.6 0.9 0.8 1.2 1.5 1.8 2.1 2.4 Interest Coverage Ratio 20.3 51.2 19.9 16.5 13.3 13.0 14.2 15.4 16.0 Debt Service Coverage Ratio 9.0 14.8 8.9 4.7 4.6 3.4 3.6 4.0 4.4 55 115. The financial performance of SE has been overall satisfactory. The company has recorded positive net income and operating cash flows in 2011 and 2012 and adequate level of liquidity and solvency. The true financial standing of the company is likely worse than what is reported as the company has been under-spending on O&M of infrastructure due to low level of tariffs. 116. The financial statements of SE have been projected incorporating the proposed project as well as assuming timely implementation of the ongoing investment projects financed by different donors and SE’s own funds. The projections assume 8% annual tariff increase both for the end- users as well as for power generation and transmission. With these assumptions, the financial standing of the company is projected to improve during the project life as it achieves reduction of technical and commercial losses and increase of billed sales. Specifically, the company is projected to have adequate profitability and cash flows, which should allow it to meet both current liabilities as well as to service the existing and new debt. 117. Sensitivity analysis was conducted to ascertain the effect of no tariff increase and a 20% increase in investment cost on the financial viability of the project. The result of this analysis showed that the project will remain financially viable even for simultaneous change of these two variables with a NPV of US$6.1 million and an FIRR of 7.7%. The result of the sensitivity analysis is presented in Table 6.7 below. Table 6.7: Sensitivity Analysis of Financial Returns Base case -8% Tariff 20% increase -8% Tariff Increase + 20% (8% increase) Increase in Investment Higher Investment Cost Cost NPV (million 11.9 10.3 7.7 6.1 US$) FIRR (%) 13.6 12.3 8.9 7.7 56 Table 6.8: Severelectro Balance Sheet (2011 – 2019) 000, soms 2011 2012 2013 2014 2015 2016 2017 2018 2019 Non Current Assets Fixed Assets 2,374,079 2,819,966 11,640,537 11,402,445 11,117,778 10,880,442 10,218,663 9,718,921 9,323,467 Intangible Assets 2,112 2,210 1,603 7,008 6,868 6,697 6,555 6,157 5,857 Accounts Receivable 8,156 6,425 6,627 7,394 7,910 8,647 9,431 10,286 11,472 (Long Term ) Non Current 454 401 415 474 518 565 616 687 715 Investments Total Non Current 2,384,801 2,829,003 11,649,182 11,417,320 11,133,074 10,896,350 10,235,265 9,736,051 9,341,511 Assets Current Assets Inventory 334,466 364,284 895,478.30 593,426 648,684 707,526 771,632 855,934 881,151 Trade and other 439,162 495,861 440,421.20 513,005 560,774 611,642 667,060 743,998 774,818 accounts receivable Other current assets 7,787 160,595 155,611.80 120,841 144,076 157,130 175,253 182,513 132,093 Cash and cash 113,544 88,658 135,860.80 126,007 2,276,719 3,133,322 3,869,002 equivalents 791,003 1,478,512 Total Current Assets 894,958 1,109,398 1,627,372 1,353,280 2,941,757 3,872,541 4,908,508 5,707,484 2,132,554 TOTAL ASSETS 3,279,759 3,938,401 13,276,554 12,770,600 13,265,628 13,838,107 14,107,807 14,644,559 15,048,995 EQUITY AND LIABILITIES Equity Share Capital 454,575 454,575 454,575 454,575 454,575 454,575 454,575 454,575 454,575 Reevaluation of 9,030,843 8,507,899 8,015,237 7,551,103 7,113,846 6,701,908 6,313,825 Reserves 57 000, soms 2011 2012 2013 2014 2015 2016 2017 2018 2019 General Reserves 28,776 33,181 54,053 54,053 54,053 54,053 54,053 54,053 54,053 Retained Earnings 109,024 497,224 450,779 339,567 251,653 190,989 181,580 236,923 347,624 Other Reserves (255,690) (392,647) 440,558 1,143,054 1,400,656 2,236,862 3,014,995 Total equity 592,374 984,979 9,734,560 8,963,447 9,216,076 9,393,774 9,204,710 9,684,321 10,185,072 Non-Current Liabilities Loans 388,198 502,771 1,106,780 1,507,899 1,600,086 1,793,153 1,978,654 1,763,535 1,551,172 Deferred Tax 53,509 38,623 38,623 38,623 38,623 38,623 38,623 38,623 38,623 Liabilities Deferred Income 459,859 524,565 555,490 574,348 627,829 684,780 746,825 832,963 867,467 Other Liabilities 1,458,982.30 Total Long Term Liabilities 2,360,547.80 1,065,959.00 1,700,893 2,120,869.89 2,266,537.78 2,516,555.70 2,764,101.68 2,635,120.86 2,457,262.16 Current Liabilities Trade and other 69,285 1,497,435 1,501,935 1,142,258 1,248,621 1,361,884 1,485,279 1,647,547 1,696,086 accounts payable Short Term Loans - 67,703 53,216 158,609 160,013 160,013 218,019 215,119 212,363 Taxes payable 37,019.80 41,609 7,993 31,665 50,378 63,290 65,293 51,462 51,462 Other Liabilities 220,533 280,716 277,958.80 353,751 324,004 342,590 370,405 410,988 446,750 Total Current 326,838 1,887,463 1,841,102 1,686,283 1,783,015 1,927,777 2,138,995 2,325,116 2,406,661 Liabilities Total Liabilities 2,687,385 2,953,422 3,541,994 3,807,153 4,049,553 4,444,333 4,903,097 4,960,237 4,863,923 TOTAL EQUITY 3,279,759 3,938,401 13,276,554 12,770,600 13,265,628 13,838,107 14,107,807 14,644,559 15,048,995 AND LIABILITIES 58 Table 6.9: Severelectro Income Statement (2011 – 2019) Actual Forecast 2011 2012 2013 2014 2015 2016 2017 2018 2019 Revenue 3,754,151 4,022,114 4,161,819.90 4,452,597 4,867,205 5,308,713 5,789,714 6,457,492 6,724,988 Cost of Sales 2,966,662 2,775,907 3,819,066.30 3,559,168 3,890,583 4,243,502 4,627,987 5,133,602 5,284,843 Gross Profit 787,490 1,246,207 342,753.60 893,429.15 976,621.59 1,065,211.87 1,161,726.21 1,323,890.91 1,440,145.30 Sales Expense (344,356) (385,945) (339,954) (723,170) (720,687) (722,602) (700,024) (686,470) (682,719) Depreciation (180,233) (213,530) (753,432) (751,867) (752,056) (756,817) (737,338) (728,089) (726,062) Administrative (260,090) (391,752) (425,659) (399,186) (436,356) (475,939) (519,062) (578,929) (602,911) Expense Other Expense (156,696) (119,483) (29,640) (132,215) (153,531) (167,960) (177,030) (193,157) (202,698) Interest Expense (14,486) (13,200) (26,373) (38,314) (50,887) (56,006) (54,932) (56,975) (60,875) Financial Income 711 6,593 5,680.60 4,740 5,181 5,651 6,163 6,874 7,159 Other Income 72,465 93,898 191,129.60 196,773 202,582 208,563 214,721 221,060 227,587 Profit before tax 99,525 449,518 (255,689) (159,629) (126,189) (87,075) (13,506) 93,269 186,563 Income Tax 11,432 32,071 - - - - - 13,831.10 27,665.92 Net Profit 88,093 417,447 (255,689) (159,629) (126,189) (87,075) (13,506) 79,438 158,897 59 Table 6.10: Severelectro Cash Flow Statement (2011-2019) 2011 2012 2013 2014 2015 2016 2017 2018 2019 Operating Activities Cash Receipts from Sales 3,952,300 4,325,634 4,574,794 4,398,105 4,872,400 5,314,060 5,795,556 6,465,838 6,727,487 Cash Payments to Suppliers (2,931,350) (2,884,887) (3,197,958) (4,220,896) (3,728,963) (4,071,395) (4,440,487) (4,887,031) (5,211,088) Other Cash Payments (735,533) (984,432) (1,081,628) (446,281) (375,241) (460,311) (509,562) (577,895) (595,330) Cash Payments of Taxes (164,352) 273,247) (222,357) - - - - (13,831) (27,666) Net Cash Flows from Operating 121,066 183,068 72,851 (269,072) 768,196 782,354 845,507 987,081 893,403 Activities Investing Activities Cash Receipts from Interest - 7,300 5,703 4,740 5,181 5,651 6,163 6,874 7,159 Income Other Cash Receipts 96,500 - 230,000 196,773 202,582 208,563 214,721 221,060 227,587 Cash Payments to Acquire Fixed (45,500) (85,029) (33,866) (501,321) (546,217) (100,709) (252,058) (352,682) (403,220) Assets Other Investments (96,528) (60,000) (170,000) 34,712 (11,296) (12,029) (13,105) (18,194) (7,288) Net Cash Flows from Investing (45,528) (137,730) 31,838 (265,097) (349,750) 101,476 (44,279) (142,942) (175,762) Activities Financing Activities Cash Payments to Shareholders (31,622) (24,306) (19,855.60) 48,418 38,275 26,411 4,096 (24,095) (48,196) (Dividends) Other Cash Payments (Loan and (32,762) (45,651) (58,623.30) (133,406) (145,979) (214,615) (213,541) (216,988) (220,888) Interest Repayments) Net Cash Flows from Financing (64,384) (69,958) (78,479) (84,988) (107,704) (188,204) (209,445) (241,083) (269,084) Activities Foreign Exchange Differences - (267) (495.80) Net Cash Flows for the Year 11,154 (24,886) 25,714 (619,157) 310,742 695,626 591,784 603,056 448,557 Cash and Cash Equivalents, 102,390 113,544 88,658 14,372 (504,785) (194,043) 501,583 1,093,367 1,696,423 Beginning of Year 60 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cash and Cash Equivalents, End of 113,544 88,658 114,371.80 (504,785) (194,043) 501,583 1,093,367 1,696,423 2,144,980 Year Operating Activities Net Income (159,629) (126,189) (87,075) (13,506) 79,438 158,897 Interest Expense 38,314 50,887 56,006 54,932 56,975 60,875 Financing Income (4,740) (5,181) (5,651) (6,163) (6,874) (7,159) Adjustments for non-cash items: Depreciation 723,170 720,687 722,602 700,024 686,470 682,719 Change in Receivables (73,350) (48,285) (51,605) (56,203) (77,792) (32,006) Change in Payables (359,676) 106,362 113,264 123,395 162,269 48,539 Change in Inventory (302,052) 55,257 58,843 64,106 84,302 25,217 Deferred Income 18,858 53,481 56,951 62,045 86,138 34,505 Cash from Operating Activities 121,066 183,068 72,851 (119,105) 807,019 863,334 928,630 1,070,926 971,587 Investment Activities Acquisition of Fixed Assets (495,917) (546,357) (100,880) (252,200) (353,080) (403,520) Acquisition of Intangible Assets (5,404) 139 171 142 398 300 Financing Income 4,740 5,181 5,651 6,163 6,874 7,159 Other Investments 34,712 (11,296) (12,029) (13,105) (18,194) (7,288) Cash From Investment Activities (45,528) (137,730) 31,838 (461,869) (552,332) (107,087) (259,000) (364,002) (403,349) Financing Activities Loans Received 677,102 518,013 119,466 338,021 390,763 436,526 61 2011 2012 2013 2014 2015 2016 2017 2018 2019 Loan Repayments (interest and (133,406) (145,979) (214,615) (213,541) (216,988) (220,888) principal) Dividends Paid 48,418 38,275 26,411 4,096 (24,095) (48,196) Cash from Financing Activities (64,384) (69,958) (78,479) 592,114 410,310 (68,737) 128,576 149,680 167,442 Net Cash Flows for the Year 11,154 (24,619) 26,209 11,140 664,996 687,509 798,206 856,603 735,680 Cash and Cash Equivalents, 102,390 113,544 88,658 114,868 126,007 791,003 1,478,512 2,276,719 3,133,322 Beginning of Year Cash and Cash Equivalents, End of 113,544 88,925 114,868 126,007 791,003 1,478,512 2,276,719 3,133,322 3,869,002 Year 62 Annex 7: Procurement Plan KYRGYZ REPUBLIC: Electricity Supply Accountability and Reliability Improvement Project Table 7.1: Goods and Works Component Plan vs Procu. WB Review Item № Reference as Contract Ref. № Contract Description Actual Method (Prior/ Post) per PAD Design, Supply and Installation of New sub-station in three lots Lot#1:Construction of a new 35/6- Plan 10kV substation Bishkek; 1 Component 1 IDA-ESARIP-ICB-CW-2014-1 Lot#2: Construction of a new 35/6- ICB Prior 10kV substation Orto-Say; Lot#3:Construction of a new 35/6- Actual 10kV substation Sport and 3,5-4km two 35kV lines Design, Supply and installation of Plan meters for customers with high 2 Component 1 IDA-ESARIP-ICB-CW-2014-2 ICB Prior consumption in the largest cities in Actual Chui Design, Supply and installation of Plan 3 Component 2 IDA-ESARIP-ICB-MIS-2014-1 Information Systems: (CMS), (IRMS), ICB Prior (CRMS) Actual 63 Table 7.2: Consulting Services Component Item Plan vs Firm or Select. WB Review Reference as Contract Ref. Contract Description № Actual Individual Method (Prior/ Post) per PAD IDA-ESARIP-IC- Consultant for improving Institutional Plan Ind. IC Prior 1 Component 3 2014-1 framework Actual Ind. Prior IDA-ESARIP-IC- Plan Ind. IC Post 2 Component 3 Construction supervision consultant 2014-2 Actual Ind. Post Plan Ind. IC Post IDA-ESARIP-IC- Consultant for supervision of supply 3 Component 3 2014-3 & installation of MIS contract Actual Ind. Post Plan Ind. SSS Prior IDA-ESARIP-LC- 4 Component 3 Senior Procurement consultant 2015-1 Actual Ind. Prior Plan Ind. SSS Prior IDA-ESARIP-LC- 5 Component 3 Financial consultant 2015-2 Actual Ind. Prior Plan Firm LCS Prior IDA-ESARIP-LSC- 6 Component 3 Project Audit 2014-4 Actual Firm Prior 64 IDA-ESARIP-CQ- Impact assessment (customer Plan Firm CQS Post 7 Component 3 2017-1 satisfaction) Actual Firm Post Plan Firm LCS Prior IDA-ESARIP-LSC- 8 Component 3 Entity Audit 2018 and 2019 2018-1 Actual Firm Prior IDA-ESARIP-CQ- Accounting Firm, Severelectro Audit Plan Firm CQS Prior 9 2017-1 Preparedness Actual Firm Prior IDA-ESARIP-IC- Accounting Policies and IFRS Plan Ind. SSS Prior 10 2016-3 Reporting Consultant Actual Ind. Prior 65 72E 74E 76E 78E 80E K A Z A K H S TA N 44N KYRGYZ REPUBLIC To To Ushtobe Burylbaytal To Panfilov Chu BISHKEK ts. u M Kara-Balta Tokmok ata Tyup Kirov ey -Al Cholpon-Ata To Shymkent T Talas alas CHUI K ung Karakol Balykchi Lake Issyk-Kul Peak Pobedy TA L A S Tunuk ISSYK-KUL 7439 m Barskaun Enilchek 42N 42N tkal ha Toktogul Toktogul C Chaek Reservoir Shyirak JALAL-ABAD T i Lake Sonkul a n n S h a Kara-Kul Kara-Say N a ry n Tash-Kumyr Nar yn Naryn U Z B E K I S TAN NARYN At-Bashy To Tashkent Jalal-Abad say Ak Lake 0 25 50 75 100 Kilometers Charyi-Kel' Kurs hab Osh 0 25 50 75 Miles 78E 80E Gul'cha To Kyzyl-Kiya Bukhoro 40N Sulyukta OSH 40N Batken KYRGYZ REPUBLIC B AT K E N Sary-Tash To Daraut- K yz yl Suu Hotan CHINA SELECTED CITIES AND TOWNS Korgan OBLAST CAPITALS NATIONAL CAPITAL RIVERS TA J I K I S TA N MAIN ROADS To Murghab This map was produced by the Map Design Unit of The World Bank. RAILROADS SEPTEMBER 2004 IBRD 33430 The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank OBLAST BOUNDARIES Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. INTERNATIONAL BOUNDARIES 70E 72E 74E 76E