Document of The World Bank FOR OFFICIALUSE ONLY Report No: 30961-LA PROJECT APPRAISAL DOCUMENT ON A PROPOSED IDA GRANT INTHE AMOUNT OF SDR 7.0MILLIONOJS$lO MILLIONEQUIVALENT) AND A PROPOSEDGRANT FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND IN THE AMOUNT OF US$3.75 MILLION TO THE LAO PEOPLE'S DEMOCRATIC REPUBLIC FOR A RURAL ELECTRIFICATIONPHASE I PROJECT IN SUPPORT OF THE RURAL ELECTWICATION (APL)PROGRAM March 27, 2006 Energy and Mining Sector Unit Infrastructure Department East Ada and Paeifi Region This documenthasa resmcted distribution and may be usedby recipientsonly m the performanceof their official duties. Its contents may not otherwisebe disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective July 31,2005) Currency Unit = Lao Kip (LAK) LAKl1,205 =US$1 US$1= SDR 0.684 SDR 1=US1.44534 MIH: October 1- September 30 FISCALYEAR EdL: January 1- December 31 ABBREVIATIONSAND ACRONYMS AFMS Accounting and Financial Management System M&E Monitoring and Evaluation APL Adaptable ProgramLoan MIH Ministryof Industry andHandicraft ASTAE Asia Sustainable & Alternative Energy Program MMPS Material Management andProcurement System BAS Billing and Accounting System MoF Ministry ofFinance B O Branch Office NDF Nordic Development Fund DOE Department o fElectricity NGPES National Growth andPoverty Eradication Strategy DSM Demand Side Management NORAD Norwegian Agency for Development Cooperation EdL Electricit6 duLaos NPV Net PresentValue EGAT Electricity Generating Authority ofThailand NT2 NamTheun2 EMP EnvironmentalManagement Plan PDIH Provincial Department o f IndustryandHandicraft EPDP Ethnic People's Development Plan PDP Power Development Plan ESCOs Electrification Service Companies PHRD Policy andHumanResourcesDevelopment Fund(Japan) ESMAP Energy Sector Management Assistance Program PMU Project Management Unit FMR Financial Monitoring Report PSDP Power Sector Development Plan FW Financial RecoveryPlan QCBS Quality and Cost-Based Selection GDP Gross Domestic Product RAP Resettlement Action Plan GEF Global EnvironmentalFacility RE Rural Electrification GHG GreenhouseGas REF Rural Electrification Fund GIS Geographic InformationSystem REP Rural Electrification (APL) Program GoL Government o f Lao PDR REP I RuralElectrification PhaseIProject GS Generating Sets SA Special Account GWh Gigawatt hour SHS Solar Home Systems HHPC Houay H o Power Company SOE Statement o f Expenditure ICB International Competitive Bidding SPC State Planning Committee IPP IndependentPower Producer SPRE Southern Provinces Rural Electrification Project IT Information Technology STAP Scientific and Technical Advisory Panel (GEF) JICA Japan International CooperationAgency Te Ton equivalent kV Kilovolt THPC Theun-HinbounPower Company Lao PDR Lao People's Democratic Republic UNDP UnitedNations Development Programme LNCE Lao National Committee for Energy VEM Village Electricity Manager LV Low Voltage VH Village Hydro _- Acting Regional Vice President: Jeffi-ey S. Gutman CountryDirector: IanC. Porter Sector Manager: JunhuiWu Task Team Leader: Jie Tang LAO PEOPLE'S DEMOCRATIC REPUBLIC Rural ElectrificationPhase I Project of the Rural Electrification(APL) Program TABLE OF CONTENTS A. STRATEGIC CONTEXT AND RATIONALE ........................................................ 1 1. ....................................................................................... 1 2. 2 3. Rationale for IDA and GEF Involvement............................................................... Country and Sector Issues Higher Level Objectives to which the Project Contributes .................................... 3 B PROJECT DESCRIPTION . ........................................................................................ 4 4 2. 1. LendingInstrument................................................................................................. Program Objective andPhases................................................................................ . . 4 Project Development Objective andKeyIndicators............................................... 5 4. 3. Project Components................................................................................................ 6 5. LessonsLearned andReflected inthe Project Design............................................ 7 6. Alternatives ConsideredandReasons for Rejection............................................... 8 C IMPLEMENTATION . ................................................................................................. 8 Partnership Arrangements....................................................................................... 8 2. 1. Institutional andImplementationArrangements .................................................... 9 3. Monitoring andEvaluationof OutcomesResults ................................................. I O 4. 10 11 Loadcredit Conditions and Covenants................................................................ Critical Risks andPossible Controversial Aspects ............................................... Sustainability andReplicability ............................................................................ 6. 5. 12 D APPRAISAL SUMMARY . ........................................................................................ 12 1. Economic .............................................................................................................. 12 2. Financial................................................................................................................ 12 14 4. 3. Technical............................................................................................................... 14 5. Fiduciary ............................................................................................................... 14 Environment.......................................................................................................... Social..................................................................................................................... 6. 15 7. SafeguardPolicies................................................................................................. . . 15 8. PolicyExceptions and Readiness.......................................................................... 15 ANNEXES Annex 1: Country andSector Background............................................................................ 16 Annex 2: Major RelatedProjects Financed bythe IDA and/or other Agencies.................... 22 Annex 3: Results Framework and Monitoring ...................................................................... 23 Annex 4: Detailed ProjectDescription.................................................................................. 27 Annex 5: Project Costs .......................................................................................................... 37 Annex 6: ImplementationArrangements............................................................................... 40 Annex 7: Financial Management and Disbursement Arrangements ..................................... 50 Annex 8: Procurement Arrangements ................................................................................... 55 Annex 9: Economic andFinancial Analysis.......................................................................... 62 Annex 10: Safeguard Policy Issues ......................................................................................... 85 Annex 11: Project Preparation and Supervision...................................................................... 91 Annex 12: Documentsinthe Project File................................................................................ 93 Annex 13: Statement of Loans and Credits ............................................................................. 96 Annex 14: Country at a Glance ............................................................................................... 97 Annex 15: IncrementalCost Analysis ..................................................................................... 99 Annex 16: World BankTeam Response to STAP Reviewer Comments .............................. 112 Map: IBRD33762 LAO PEOPLE'S DEMOCRATICREPUBLIC Rural ElectrificationPhase I Projectof the Rural Electrification(APL) Program PROJECT APPRAISAL DOCUMENT EASTASIA AND PACIFIC EASEG Date: March 27,2006 Team Leader: Jie Tang Country Director: Ian C. Porter Sectors: Power (90%); General public admin sector (10%) SectorMangerDirector: Junhui Wu Themes: Rural services and infrastructure (P); Project ID: PO75531 Regulation and competitionpolicy (S) LendingInstrument: Grant Environmental screening category: B Safeguardscreeningcategory: S2 Global Supplemental ID: PO80054 Team Leader: Jie Tang LendingInstrument: Grant Sectors: Power (100%) Focal Area: Climate Change Themes: Rural servicesand inhastructure(P) Supplement FullyBlended?: Yes Project FinancingData- Phase I ---I_ - [ ] Loan [] Credit [XI Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (uS$m.): 10.0 Proposedterms: Standardfor IDA Grant :T A T FWlRONMENT FACILITY 3.75 3.75 P f L F T N A N r l N G MOR A n ) i n nn 10.00 Total: 12.52 23.75 36.27 Cumulative 0.30 I 1.80 I 3.00 j 3.50 I 3.75 I Project development objective Re$ PAD B.2;Annex 3 The development objectives of the Phase IProject are to: (i) access to electricity of rural households increase invillages oftargetedprovinces; and(ii) improve financial performance of the power sector. Global Environmental Objective Ref:PAD B.2;Annex 3 Global environmental objectives: ed L ne I Ied !2W L T Q I L I I c, 0 I I 0 W I I nL .CI I T Annex 7: FinancialManagementandDisbursementArrangements LAO PEOPLE'SDEMOCRATICREPUBLIC Rural Electrification Phase I Projectof the Rural Electrification(APL) Program 1. SummaryofFinancialManagementAssessment The Country FinancialAccountability Assessment of 2002 assessedthe overall fiduciary risk inLaoPDR as high, despite elaborate built-incontrols withinthe government financial management system. The key findings ofthe assessmentindicatedthat there was insufficient transparencyrelatedto publicfinances and the general attitude towards fiscal discipline was weak; the general permissive environment and lack of incentives for complying with rules and regulations were compounded by an inadequate awareness of modem practices o f internal controls in the public sector; the budget process was not transparent and public access to government financial information is limited; while an elaborate control system was in place, involving extensive pre-approval and checking processes, it was not effective or efficient; the government had introduced a decentralization initiative without putting in place a sufficiently robust institution fkamework that clearly defined the new responsibilities at lower levels and technical capacity of staff at these levels needed to be strengthened; oversight functions and the National Auditor Office's independencewere weak; and the accounting and auditing profession and institutions were undeveloped. To address these challenges, the Government has developed a public financial management strengthening program and is implementingseveral recommendations of the Public Expenditure Review and Country Financial Accountability Assessment. The proposed Financial Management Capacity BuildingProject as well as government initiatives supported by ADB are expected to make the fiduciary risk more acceptable. At the project level, the financial management system for externally-funded projects remains weak and needs substantial improvement. A number of key issues and weaknesses regarding the Bank funded projects were identified: (i)-inconsistent and inadequate financial management standards, procedures and software in each PMU; (ii) in project implementation resulting from management of SAs by delay Ministry of Finance (MoF); (iii)delayed audit and lack of consistent external audit standards and procedures; (iv) PMU accounting departments that have been poorly staffed and equipped at start-up of the Project; (v) poor internal controls and absence of internal audit function inline agencies; and (vi) lack of financial managementcapacity at provincial and district levels. An assessment of the REP Ifinancial management arrangements covered the two agencies: (i) a EdL, revenue generating utility and a separate legal entity, and (ii) MIH, whose accounting personnel, who involved inthe recently closed SPRE project, have been appointed to be involved inthe REP I, and will maintain the REP Ibooks and accounts. The assessment indicates that with the implementation of a financial management action plan to address weaknesses, the financial management arrangements are acceptable for the Project. The full financial management assessmenti s inthe Bank's project files. The associatedrisks inthe proposed Project, which is rated as moderate, are mitigated by the following measures: (i) andMIHwill ensure that staffhiredor assignedfor this Project haveproper EdL qualifications in procurement, program management and financial management, that proper and regular training i s provided, and that experienced and highly motivated personnel who have worked on the previous Bank-funded projects are to be appointed to be involved in implementing the Project; (ii) all payments will be duly authorized; (iii) a Financial Management Manual will be developed for MM to make sure that proper guidance will be provided in case of staff turnover; (iv) quarterly financial managementmonitoring reports will be presented to IDA; (v) there will be segregation of duties among the Project coordination staff, i.e. the functions of implementing and overseeing will not reside with the 50 same staff; and (vi) an external independent auditor acceptable to IDA will be appointed to audit the Corporate Financial Statements and Project Financial Statements. 2. Audit Arrangements An external Auditor, satisfactory to IDA, will be requiredto audit: (i) annual Corporate Financial EdL's Statements; and (ii) the consolidated Project Financial Statements of all components implemented by EdL and MM, in accordance with International Standards on Auditing, under term o f reference satisfactory to IDA. The auditor will be required: (i) express an independent opinion on the financial statements for to the year(s) then ended and from inception o f the Project to the present, in accordance with agreed accounting standards; and (ii) to assess the extent o f compliance with the provisions o f the underlying fundingagreements. A separateManagement Letterwill alsobe submittedwhich will report on: material weaknesses in accounting and internal control; the degree o f compliance of financial covenants o f the funding agreements; and any matters that have come to the .attention o f the auditors which might have a significant impact on the implementation o f the Project. The audit will be financed from the Grants. The audit reports will be submitted to IDAwithin six months after the end of each fiscal year. EdLhas engaged PriceWaterhouseCoopers as its external auditor since year 1997 to conduct the audit of EdL annual financial statements and the Project's financial statements of the recently closed SPRE project. The audit reports were acceptable to IDA for purposes of EdL's full compliance with the audit requirements o f the funding agreements. The table below summarizes the audit reporting requirements for the Project. Table 1: Audit ReportRequirement ImplementingAgency RequiredAudit Report EdL II(1) EdLCorporate Financial Statements (2) Consolidated ProjectFinancial Statementsof all components MIH Audited underConsolidated Project Financial Statementsof all components 3. DisbursementArrangements The proceeds o f the Grants will be disbursed using the traditional method: (i)fromthe SAswith reimbursements made based on full documentation or against SOEs; and (ii) payments from the direct Grant accounts. Three SAs will be established for EdL and MM as indicated in the table below. MIH will help process the disbursements for EdL's activities (technical assistance to D S M and energy efficiency) funded by GEF under MMGEF-SA. Table 2: DisbursementArrangement ImplementingAgency DisbursementArrangements EdL I[IDA-SA; For GEFfunded activities, EdLwill disbursevia MIHGEF-SA MIH . IDA-SA ; GEF-SA 4. Allocationof GrantsProceeds The IDA Grant of US$lO.O million and the GEF Grant of US3.75 million will be disbursed over a 4- year period. The REP Ii s expected to be completed by September 2009, and will close on March 31, 2010. Disbursement of the proceeds of the Grants would be made against expenditure categories as shown inTable 3. 51 Table 3: Allocation of Grant Proceeds Expenditure Category IDA Grant GEFGrant Financing Percentage 1. Goods 100% 5. Use of Statement of Expenditures Expenditures for: (i) (ii)consulting firm; (iii) goods; individual consultant; (iv) training; and (v) incremental operational cost, under contracts costing less than the amounts set out inthe table below will be paid from the SAs and detailed in SOE supporting withdrawal applications for replenishment of SAs. Withdrawal applications for expenditure exceeding the SOE thresholds set out below would be made in accordance with respective procurement guidelines and provisions in the Grant Agreements with submission o f filldocumentation and signed contracts. Table4: Use of Statement ofExpenditures ~ ExpendituresCategory Contracts less than US$Equivalent IDA Credit GEF Grant Goods 100,000 100,000 Consulting firms 100,000 100,000 Individual consultants 50,000 50,000 Incremental operational cost Not Applicable All through SOE Both EdL and MM would retain documentation supporting SOE disbursements during the life of the Project and for one year after the receipt o f the audit report for the year in which the last disbursement was made to IDA. These documents would be made available for review by the auditor and IDA supervision missions. Should the auditors or IDA supervision missions find that any disbursements that are notjustified by supporting documentation, or are ineligible, IDA may withhold further deposits to the SAs until the Recipient will: (a) either refund the amount involved; or (b) submit evidence o f other eligible expenditures that offset the ineligible amounts. 6. SpecialAccounts To facilitate disbursements from the Grants, EdL will maintain a separate US dollar SA at the National Bank o f Lao, and MIH will maintain two separate U S dollar SAs at the same bank (one for IDA-SA, another one for GEF-SA), on terms and conditions satisfactory to IDA including appropriate protection against set off, seizure and attachments. The EdLIDA-SA,which will cover the IDA share ofeligible expenditures inall disbursement categories, will have an authorized allocation of US$1.O millionwith an initial deposit of US$0.5 million. When the 52 amount withdrawn from the Grant account totals US$2 million equivalent, the initial allocationwould be increasedto the authorized allocation. The MM IDA-SA and GEF-SA will have authorized allocation of US$200,000 and US$300,000 respectively. The SAs will be replenished regularly, preferably monthly (but not less than quarterly) or when the amounts withdrawn equal to 20 percent of the initial deposit, whichever comes first. All replenishment applications will be accompaniedby reconciledbank statements from the depository bank showing all transactions inthe SAs. The SAs will be audited annually by independentauditors acceptable to IDA. 7. FinancialManagementand ReportingArrangements Funds FZow. IDA Grant will be provided to GoL. The government will on-lend the Grant proceeds to EdLunder a Subsidiary FinancingAgreement. The on-lending terms will consist of 80 percent grant and 20 percent loan comparable to IBRD terms and conditions, in line with other recent RE projects in the region and inrecognition o fthe continuingneedfor capital subsidies for REoperations. IDA funds will be channeled either through the SAs to the EdL and MMor through direct payment for project expenditures. EdL counterpart funds will be channeled through normal EdLpayment procedures. Government (MM) counterpart funds are expected to be mobilized from the reflow payments associated with ongoing REactivities. These payments currently flow into areflow account, contributingto the REF to co-finance IDA investment. With extensive experience inprojects funded by IDA and ADB, EdL will maintain the EdL IDA-SAby itself. The withdrawals from the SA will require the signatures from two persons within EdL - the General Manager and the Accounting Manager. However, the withdrawal applications will be approved byMoF prior to forwarding to IDA and will require two signatures-one fromEdLand one fromMoF. With limited experience in financial and disbursement arrangements, the MIH and MoF will jointly maintain the MM IDA-SA and GEF-SA. The Project Manager, with the assistance of the Project Accountant, will be responsible for administration of the SAs and all Grant disbursements related to transactions of the Project. Two signatures will be required on any withdrawal from the SAs and on withdrawal applications -one from MIHand one from MoF. Accounting Organizationand Staffing. The financial managementarrangementswould be: (i)EdL-the appointedProject Accountant willberesponsible for project accounting for EdL Components, including accounting functions and reporting activities. The currently installed AFMS have been modified for REP Ito capture the transactions by project activities, disbursement categories and sources of funds for producing of FMRs. The Project Accountant will also: (i)ensure that the accounting transactions are consolidated with the corporate accounting transactions to produce the consolidated Corporate Financial Statements at year end; and (ii) consolidated Project Financial Statements at year endfor independent audit; and prepare (ii) -theappointedProjectAccountantwillberesponsibleforprojectaccountingfortheMM MM Component and the GEF-funded technical assistanceactivity o f the EdL Component. Extensive training will be provided to the Project Accountant in: (i) preparation o f SOEs and Withdrawal Applications; (ii) maintaining of accounting books; and (iii) preparation of FMRs. MM has tracked and monitored financial transactions of the recently closed SPRE project, by using an in- house developed simple access software based accounting program, which with some modifications, would well serve the requirements of REP I.The mission reviewed the program modified by the Project Accountant and found it acceptable. The Project Accountant was 53 requested to develop the Financial Management Manual to guide for operating the in-house developed accounting program and for guidance to MM staff in case of staff turnover in the future. Internal Audit. EdL's Internal Audit Department currently has four internal audit staff, mostly with strong operational backgrounds. The missionnoted that internal audit staff has no involvement innewly implemented computerized BAS and AFMS. The early-stage involvement of the internal ,auditor in system development, which will reviewthe adequacy o f the built-ininternal controls, should help reduce the risk of system modification at the later implementation stage. The technical assistance under REP I will be provided for on-the-job training with EGAT and will be supported by training courses related to internal controls and internal audit functions inan IT environment. Monitoring and Reporting. EdL and MIHboth will provide IDA with FMRs in accordance with the Bank Guidelines. The FMRs will include: (i) Management Assessment of Project Progress; (ii) Project Balance Sheet; (iii)Statement of Sources and Uses of Funds by Disbursement Categories; (iv) Statement of Uses of Funds by Project Activities; (v) Output Monitoring Report; and (vi) Procurement Status Report. The reports will link expenditures with physical progress. The FMR formats have been agreed upon with EdL and MM duringthe Project negotiations. The FMRs would be submitted to IDA on a quarterly basis within 45 days of the end of each quarter starting the quarter following the Project's first disbursement. Additional output monitoring and performance indicators would be developed to suit project needs duringimplementation. Financial Management Action Plan. The implementing agencies will carry out a time-bound action plan to strengthen the financial managementsystem, as per table below. Actions Responsibility CompletionDate Design and agree on Project FMRs. I `dL/MIH Completed during Negotiations ~ Modify the computerized accounting systems (newly EdLMIH Completedduring installed AFMS at EdL and the in-house developed Negotiations simple accounting programat MJH)to be capable of producingFMRs andannual financial statements. Preparation and adoption o fthe final Financial MIH Completed during Management Manual for MM. Negotiations - Training to be providedto the Project Accountant for IDA DuringProject Launch the Bank's policies and procedure on financial Workshop management and disbursement arrangements. I Appointment o f an independent auditor to audit the EdL September 30,2006 Project Financial Statements and EdLCorporate Financial Statements. 54 Annex 8: ProcurementArrangements LAO PEOPLE'S DEMOCRATICREPUBLIC Rural Electrification Phase I Project of the Rural Electrification (APL) Program 1. General Procurement for REP Iwill be carried out in accordance with IDA'S"Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreements for REP I.The various items under different expenditure categories are described ingeneral below. For each contract to be financed by both the IDA and GEF Grants, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreedbetween the Recipient and the IDA ina Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementationneedsandimprovements ininstitutional capacity. Procurement of Works. The installation & erection works will be performedby EdL's own construction force (or subcontracted by EdL to qualified local contractors). No works are expected to be financed by the Grants. Procurement of Goods. Goods procuredunder REP Iwill include: (i) distribution equipment and power materials such as overhead conductors, transformers, meters, poles and associated fittings & accessories; (ii)field work vehicles andconstruction equipment, special installationtools; (iii) hardware and IT software, office equipment; (iv) loss-reduction-needed equipment such as meters, calibration & testing equipment, monitoring instrument, substation spot metering equipment; (v) SHS units including installations; and (vi) VH and GS including installations. All packages would be procured through ICB procedures with the following exceptions: (i) contracts with estimated costs not exceeding US$lOO,OOO per contract may be procuredthrough NCB procedures. However, concrete poles and cross arms will be procured through NCB procedures irrespective of their value, since a number of local suppliers are available and these items are unlikely to attract any foreign suppliers; and (ii) small contracts (less than US$50,000) for tools, loss-reduction equipment and office equipment, etc. may be procured following the Shopping procedures. All the ICB procurement will be done usingthe IDA'Slatest StandardBiddingDocuments for Procurement of Goods. Procurement of nun-consultingservices. Not expected. Selection of Consultants. For EdL, consulting services would be required for: (i)support to implementation and supervision of the physical investment activities; (ii) support to DSM program inception, including capacity building for a DSM Cell within EdL, developing a comprehensive energy end-use database for DSMplanning, screening and design of DSMPrograms, and uiidertakmg an energy audit for Government departments and agencies and other pilot projects for high-priority target markets; (iii)technical assistance inimplementation of loss reduction measures; (iv) IT system, including financial management capacity building; (v) tariffreform; and (vi) capacity building within EdL. For MJH, consultant serviceswill be engagedto: (i) undertake administration of the off-gridprogram; (ii) apply off-gnd technologies other than SHS under the off-grid program for RE and advice to provincial ESCOs on pico-hydro safety improvement; (iii) establish a quality assurance function to inspect and evaluate off-grid program operations at all levels; (iv) support establishment of the legal, regulatory and institutional arrangementsand a Secretariat for the REF; (v) develop aregulatory framework insupport of 55 alternative RE delivery mechanisms, and support planning and implementationof alternative RE delivery arrangements and pilot programs, including pilot of private sector participation in distributed supply and distribution systems; (vi) develop a RE Database and undertake RE Master Planning for the Lao PDR with gird and off-grid options coordinated; (vii) undertake assessment of the existing micro-hydro schemes for rehabilitation and the potential micro/mini hydro resources in Southern and Central areas for new development; (viii) perform assessment of biomass energy potentials available for RE and pilot biomass energy utilization; (ix) study on country specific income generation linkage to REto guide future REplanningandto scale upimpacts ofRE; (x) formulate sector financing strategiesandprepare standard solicitation documents for concessioning small hydropower projects to IPPs; (xi) assist DOEo f MIH in implementation of a DOEorganizational strengthening program; and (xii) assist the PMU for REP Iin financial management and procurement; The above services will be provided by consulting firms or individuals. No short lists of consultants (firms) are expected to compose entirely of national consultants in accordance with the provisions of paragraph 2.7 o f the Consultant Guidelines. All consultants will be selectedthrough QCBS, QBS, or CQ procedures depending on the specific consulting assignment; single-source selection (SSS) procedures may be followed ifjustified in line with the Consultant Guidelines. At this stage, SSS is expected to follow to engage the 17 provincial ESCOs--one in each province-to provide planning, installation and support services for the off-grid investment in view of their unique experience and position; the total budget for the 17 contracts is about US$0.452 million, thus each contract would be very small. Individual consultant will be selectedcompetitively or through single-sourcing ifjustified. The consulting firms for project preparation & implementationand for loss reduction have been selected following QCBS procedures duringthe Project preparation (the former was financed under SPRE Credit, and the latter was financed by the PHRD Grant for REP Ipreparation). The Request for Proposals and Terms o f References were designed to include possible continuations of services during project implementationsubject. Since the consultants' performance are fully satisfactory, it has been agreedthat they will be awarded the respective contract directly for additional services which represent natural continuation o fthe assignmentsthat they performedduringproject preparation. The Project implementationconsultant is requiredto commence the additional services inadvance of IDA Grant approval and signing. As such, it i s agreed that retroactive financing shall be applied for related eligible expenditures incurred after July 1,2005 andupto an amount o fUS$300,000 equivalent. Operational Costs. No operational costs are expected to be financed by the IDA Grant. The proposed GEF Grant would finance operational cost for the off-grid electrification program for an amount up to USD75,000.00. Others. Significant support from trust funds including PHRD and ASTAE hasbeen mobilized to support project preparation. Efforts will be made during project implementation to obtain additional ASTAE or other suitable trust funds to support some o f the technical assistance activities, such as resource inventory studies (especially renewable resources) associatedwith the REMaster Plan development. 2. Assessment of the Agency's Capacityto ImplementProcurement Procurement activities will be carried out by EdL (a wholly state-owned enterprise) for the EdL Component and by MM(a central government ministry) for the MMComponent. For implementation, EdL has established a Project Office at its head office and Project Offices at the five southern provincial BOs. The Project Office at the head office includes three people who have gained practical procurement experience through the previous IDA supported projects. This arrangement i s 56 being reviewed by the consultants and would be strengthened ifnecessary. MIH Off-gnd Promotion Office, the unit responsible for the off-grid component under the recently closed SPRE project, will continue implementation of the MIH Component with support of expatriate and local consultants. Implementation o f the off-grid electrification program has been transferred to the Management Contractor. An assessment o f the procurement capacity of the ImplementingAgencies was carried out by IDA procurement staff in accordance with relevant guidelines. The assessment report i s available in the Project files. Two mainrisks are identified: (i) non-transparent andcollusive practices -though no specific cases have been reported under EdL/MM: sponsoredprocurement, given the general weak procurement environment inthe country, the issue still warrants attention; and (ii) procurement delays. To mitigate the latter risk, bidding documents have been prepared for most of the on-grid packages and an international consulting firm is on board to assist EdL's PMU with procurement. For the off-gird component, an individual procurement consultant has been hired to review the technical specifications and prepare bidding documents, and the Management Contractor will also support the preparation ofprocurement. The overall procurement risk i s rated as "average", because: (i) which has extensive experience in EdL, IDA funded ICB procurement, will handle the majority of procurement; (ii) international consulting an firm (witha senior procurement specialist) is on boardto assist EdLinprocurement; (iii) has well MIH handledthe QCBS consultant selection for three PHRD financed studies for the preparation of REP I, and one ICB procurement o f equipment under the SPRE. Its limited ICB experience will be mitigated by appointing an individual procurement consultant to train its staff on ICB procedures and assist in preparation o f ICB bidding documents; and (iv) overall procurement under previous IDA financed projects was conducted by MIHand EdLwithout major problems. 3. ProcurementPlan The EdL and MIHhave developed a Procurement Plan with detailed procurement arrangements. This plan has been reviewed by IDA agreed at the negotiations. The agreed plan is made available at EdL Project Office and MIHP M U as well as the IDAproject file. Itwill be available inthe Project's database and in IDA'Sexternal website. The Plan will be updated in consultation with IDA, annually or as required, to reflect changesinimplementationneeds and improvements ininstitutionalcapacity. 4. FrequencyofProcurementSupervision Inadditionto prior review supervision by IDA offices, the Procurement Capacity Assessment Reporthas recommended twice a year procurement supervision missions for post review of procurement activities and discussiodsolutionsofprocurement relatedissues. 5. ComplaintsHandlingProcedures According to the Government Procurement Implementation Rules and Regulations (dated March 12, 2004), the following procedures should be followed to handle procurement complaints: (i)written complaints with proper evidence should be filed with the Chairman of Procurement Committee; (ii) Procurement Committee should respond to the complainant within 14 working days, and if necessary, contract awardmay be suspended, and all bidders are informed accordingly; (iii) bidders may refer to the MoFkocurement Monitoring Office if no proper resolution has been received from the Procurement Committee (a resolutioddecision should be given within 14 working days); (iv) in principle, contract award should be withheld until a complaint is satisfactorily solved. However, the Chairman of 57 Procurement Committee may justify continuation of the procurement process by reasons of urgent necessity. The justification must be sufficiently supported and notified to the complainant within seven working days; otherwise, the contract award decision will be considered as null and void; and (v) complaint after contract award will be reviewedby the Procurement Committee and a report should be submitted to the State Inspection Authority in the Prime Minister's Office and MoFProcurement Monitoring Office. Disputes resolution procedures and court proceedings are also provided in the government procurement rules and regulations. The following sanctions are also provided: (i) breaching of procurement rules and regulations will be subject to warnings, administrative and disciplinary actions according to the civil service rules and relevant laws; (ii) criminal proceedings will take place if the misconduct i s so warrant (such as falsification of documents; abuse of authority, negligence in performance of duties); (iii)collusion and manipulation of contract award will be subject to court proceedings andpunishment according to the law; (iv) contracts awarded not in full compliance with the bidding procedures and procurement rules and regulations or lack of transparency are considered as null and void; (v) any bidder offering or promising material or other rewards directly or indirectly to procurement committee or other individuals in the procurement decision makingmay be disqualified and court proceedings may be instituted. 6. ProcurementArrangements InvolvingInternationalCompetition Goods and Worksand non-consulting services. Contract packageswith procurement methods and other details are listed below. All contracts estimated to cost US$lOO,OOO or more per contract will be subject to IDAprior review. IA.1 Grid-extension Component(EdL) I Tools co-financing Overheadconductors I ICB I No I Yes Pnor I June2006 I 58 A.2 Loss Reduction Component (EdL) 01 Domestic & commercial ICB - revenuemeters 02 Calibration & testing ICB - equipment 03 Distribution analysis DC No No Prior July 2006 Same software software as previously selected and purchased needs to be rolled out to - 04 GIS mappingsoftware Shopping No 1 No Post I July2006 I A.3 ITSystem Component (EdL) 01 I IT hardware and software I ICB No Yes Prior June 2006 AS Safeguard CapaciwBuilding 01 Environment monitoring Shopping No No Post July2006 Multiple l l equipment, office contracts equipment, vehicles A.6 Demand-side management 01 Computers,office Shopping No No Post July 2006 100%GEF equipment, materials for financing; campingetc. Multiple contracts B.1 Off-grid Investment Component (MIH) 01 SHS units ICB No Yes Prior June 06 3 roundsof ICB in equal quantity 02 VWGS, miscellaneous 100%MIH& materials consumer Financing 03 Works Installation - 100%MIH Financing 8.2 InstitutionalStrengthening 01 Computer, office equipment Shopping No No Post July 2006 100GEF etc. financing; multiple contracts B.3 Alternative RE Technologiesand Delivery Arrangement (MIH) 01 MiscellaneousRE ICBI No No PriorPost December 06 Multiple equipment (bio-mass Shopping packages equipment) B.4 RE Master Plan and Database Component (MIH) 01 Computer, office equipment, Shopping No No Post July 2006 100%GEF etc. financing; multiple contracts 59 ConsultingServices. List of Consulting Assignments with short-list of international firms. ___ 3 - --I__ 4 _^"_ 5 6." 7 1)esrription of Assignment Estimated Selection ' Review b i . Expected Proposal5 C ontments <'ost Method IDA (Prior/ SubtiiissionDate (USYm) Past) 01 A.l Grid Extension -project sss Prior Consultant already selected under implementation consultant SPRE financing; Retroactive financing reauired 02 A.2 Loss Reduction - Continuation ofprevious consulting implementation and capacity service for a PHRD-funded Loss building consultant Reduction Study completed during oroiect oreaaration 03 A.3 I T System - services for Prior June 06 supervision, testing, commissioningand training 04 A.3 IT System - financial CQS June 06 Multiplecontracts Post II 05 CQs Post June06 I Adjustment implementation 06 A.5 Safeguard capacity Building - training, study tours, books and materials Post A.6. Demand-Side management I June 06 07 -(a) technicalassistance Multiple Package 08 A.6 Demand Side Management Prior July 2006 100%GEF financing; -(b)localstaffing I IC I IUo to 6 positions 09 A.6 Demand Side Management Prior I November 2006 100%GEF financing -(cltraining B. MIH Component 01 B.2 (a) Off-Grid Institutional QCBS, Prior February 2006 100%GEF financing; Strengthening management - QBS 're-procurement and start-up with contract 'DF B grant funds B.2 (b) Off-Grid Institutional Prior June 06 100%GEF financing; Strengthening - Quality Pre-procurementand start-uo using Assurance Surveyor PDFB grant funds 1 - June 06 100%GEF financing Technologies and Delivery Models - alternative - B.3 (b) Alternative RE 100%IDA financing Technologies and Delivery 1 1 Models -biomass assessment and piloting. 05 B.3 (c) Alternative RE CQS, IC Prior June 06 100%IDA Financing 11 Technologies and Delivery Models - income generation linkage B.4 (a) REMaster Planand QCBS, 100% GEF financing Database- Master Plan QBS Prior i Juneo6 B.4 (b) REMaster Plan and Prior June 06 100%GEF financing Database- miidmicro hydro resource assessment & rehabilitation B.5 Sector FinancingStrategy - QCBS, June 06 100%IDA financing support to pilot of small hydro CQS, IC Prior I solicitation -. ---1.. - ..` -- - -I-- I , " _ ~ - " 3 6 < ~__^_ ~~.. 4 1 5 ~. Ref. '~ I)ewriptionofAsslgonlenl . Eslirnsteb S&ti1SO kWmonth) 765 765 765 765 765 765 765 765 0% Average 380 414 423 431 440 451 464 478 2.10% Non-residentialconsumers Agriculture 295 295 310 325 341 359 377 395 5% Government 706 706 696 686 677 667 658 649 -1.40% Industry 636 636 627 618 610 601 593 584 -1.40% Commercial 826 826 826 826 826 826 826 826 0% Internationalorganizations 1066 1066 1066 1066 1066 1066 1066 1066 0% Entertainment 1095 1095 1095 1095 1095 1095 1095 1095 0% Average 663 683 678 672 668 663 659 655 -0.58% MediumVoltage Agriculture 251 263 276 290 305 320 336 Government 600 592 583 575 567 559 551 Industry 541 533 526 518 511 504 497 Commercial 702 702 702 702 702 702 702 Average 604 598 591 584 577 571 565 Non-residential average 668 662 657 652 647 643 638 Total average 543 546 550 552 556 560 565 Note: all figures are in real t m at 21 Iprice levels. Source: MIHNotice 302, issuedon Jun 64 (2) Off-grid Component (i)The total cost for the off-gridcomponentisbasedoncostpercompletedsystem, including installation cost. The operation and maintenancecost i s estimated to be 10 percent of the system cost per year based on data for the currentlyoperational SHS installed under the SPRE. For the off-grid investment, all capital cost i s fully subsidizedby GoL with the GEF Grant. (ii) totaleconomicbenefitfortheoff-gndcomponentisbasedontheaverageconsumersurplus The of demand for lighting energized by SHS (see detailed explanation in the consumer surplus. section). (iii)The total financial benefit or loss for the off-grid component i s based on consumer's monthly repayments, inaccordancewiththe five-year repayment plan under the SPRE. Consumer Willingness and Ability to Pay. Consumers' willingness and ability to pay for grid electricity appears to be very high. The household survey reveals that the average monthly spending for lamp lightingamong un-electrified households inthe Project areas is estimated at Kip16,963 (US$l.Sl), while the average monthly spending for electric lighting-excluding other appliances-among electrified households is only Kip1,532 (US$0.14).'4 Inthe case of off-grid electrification, consumer willingness andability to pay is also high. However, ability and willingness to pay among poorer consumer groups-in the proxy baseline-is slightly lower. The household survey reveals that average monthly spending of un-electrified households that use only candle and diesel lamp for lighting is estimated at Kip12,302 (US$l.lO). However, the monthly charge for a 5-year lease purchase o f the smallest SHS (20 Wp) i s Kip19,OOO. It i s expected that many of these households may choose the 10-year leasepurchase option. For better off consumers (i.e., households that use candle, diesel lamp, and carlmotor cycle battery), the average monthly spending i s estimated at Kip25,381 (US$2.27). This amount of monthly spending is slightly higher than the requiredmonthly repayment for the 5-year lease purchase program for the 20, 30, and 40Wp SHS, but about Kip2,500 (US$0.22) lower than the requiredmonthly payment for 50Wp SHS. Consumer Surplus. Gross consumer surplus per household per year for those with grid connection i s estimated at about US$865. However, gross consumer surplus for those with SHS ranges from about US$68 to US$102 per household per annum (see Table 4). Table 4: ConsumerSurplus-Gross Benefit Benefit/YearMousehold(US$) Grid Connection 865.55 Off-Grid (SHS) 20w 68.45 30W 72.39 40w 89.15 50W 101.79 l4 The averagemonthlyspending for electricity - including electric lighting and all other appliances - i s estimated to be Kip10,895 (US$0.97). The total monthly electricity consumption i s 63.3 kWh, and electricity used for lighting accounts for approximately 23 percent of total electricity usageper month. 65 Assumptions and sources o f data for estimation o fconsumer surplus are as follows: (i) Household survey data collected during the Project preparation are used to calculate consumer surplus for both gnd and off-grid consumers. The survey was conducted among un-electrified households in the REP Iareas and among electrified households that have been electrified under the three previousWorld Bank financed projects inthe central and southern regions o fLao PDR. (ii)Basedonthesurveydata,un-electrifiedhouseholdsintheProjectareacanbeclassifiedintothree groups: 0 Candle, simple wick lamp, & hurricane lantern users; 0 Candle, wick lamp, hurricane lantern & cadmotor cycle battery users; and 0 Car/motor cycle battery users. (iii)Basedonthesurveydata,householdsfortheproxybaselinegroupforoff-gridcomponentcanbe classified into two groups: 0 Candle, simple wick lamp, & hurricane lanternusers; and 0 Candle, wick lamp, hurricane lantern & car/motor cycle battery users. (iv) Analysis of consumer surplus benefits for grid electricity is based on the weighted average benefits o f three behavioralassumptions: CariMotor & Car/Motor Cycle Battery Grid Users Cycle Battery Users Electricity I ` I 0 Candle & lamp users moving one step to grid electricity 0 Candle, lamp & battery users movingone step to gnd electricity 0 Cadmotor cycle battery users moving one step to gridelectricity Candle, Lamp, & Lamp Users CariMotor Cycle SHS Electricity Battery Users ~~ 0 Candle & lamp users move one step to SHS electricity 0 Candle, lamp & battery users move one step to SHS electricity (vi) The slope for demand curve is assumed to be 0.5. 66 B. Economic Benefits The benefits of RE presented in this section are based on the direct economic benefits to households. Four categories o f economic benefit are analyzed: (i) electric lighting, (ii) and television, (iii) radio productivity, and (iv) diesel fuel saving and health. Data usedto assess the benefits o f electrification are based on household surveys conducted for a sample o f households electrified under the three previous World Bank financed RE projects together with a household survey conducted among not-yet-electrified households living inthe proposed REP Iareas. The method for estimating expected economic benefits is basedon the comparison ofbenefits ofhouseholds with and without electricity. Electric Lighting. Survey data reveals that households move from total reliance on candle lamp, wick and hurricane lantern, and electric light energized by car or motorcycle battery, to mostly fluorescent lamp, with a few incandescentlamps. Table 5 shows that households living inthe proposed REP Iareas rely on a combination of energy sources for lighting. Each of these three lighting energy source combinations provides a different level of lighting(inlumens) and associatedcosts. Table 5: LightingEns-gy Sources for Uh-electrified'Households Lighting Source Percents of Household 1 Candle, simple wick lamp, & hurricane lanternusers 63% 2 Candle, Wick Lamp, hurricane Lantern& CarMotor Cycle Battery Users 31% 3 Cadmotor cycle battery users 6% Households shifting to grid-provided electricity from any of these three energy source combination starting points provide four observable pairs of price and quantity data (consumption level measured in kilo-lumen hour, which canbe translated into three behavioraldemandassumptions). The three behavioral demands assume that households from each group of lighting energy sources move in one step directly to electricity: (i) Candle, simple wick lamp, & hurricane lantern users; (ii) Candle, wick lamp, hurricane lantern & cadmotor cycle battery users; and (iii) Cadmotor cycle battery users. Figure 1: Household Benefits Estimation Average priceof candle 8 lamplighting per Kilo-lumenhours Candle 8 Lamp 4,628 P(0) Average priceof candle. lampB carlmotorcycle ge Priceof electriclight Candle, Lamp8 CarIMoto carlmotorCyclebattery CycleBatlery 2.183 P ( l Average Priceof electriclight pw Cyde Battery 1,029 P(2) Kilo-lumen burs Eieclflc light(Gnd): 3.32 P(3) Q(0)3.23 Q(1) 19.63 Q(2) 25.28 Q(3) 435.27 Quantity (Candle8 Lamp) (Candle.Lamp8 (Car/Mgtor (Electric Light:Gnd) (Kilo-Lumen Hours) I CarlMotOr CydeBattery) Cycle Battwy) Note: Figure 1above exhibits example of a brokendemand curve withone-step moves from candle and diesel lamp to electricity. Source: DOE,MIH, Lao PDR, Survey 2004. 67 Based on the survey data and the assumption o f lumens for each type of lighting appliances used by the households, price per kilo-lumen (P) and the total quantity (Q) inkilo-lumens consumed each month per household are calculated and shown inTable 6. Table 6: PriceandQuantityofLightingByLightingEnergy Sources __ Price and Quantity Value Unit Household by Initial Lighting Source 4,628 Per klmhour (Kip) Candle, simple wick lamp, & hurricane lantern 3.2 klmimonth Users 2,183 Per klmhour (Kip) Candle, simple wick lamp, hurricane lantern, 20 klmimonth andcarlmotorcyclebatteryusers 1,029 Per klmhour (Kip) 25 kldmonth Cadmotor cycle battery users 3.3 Per klmhour (Kip) 435 klm/month Gridelectricity users Source: DOE,MIH,Lao PD ,Survey 2004 Note: klm-kilo-lumen The estimated gross benefits for electricity lighting in each case are presented in Table 7. The weighted average consumer surplus and willingness to pay for grid electricity lightingi s US$865.55 per year per rural households inthe REPIareas. REPIaims to connection to grid o f about 42,000 rural households. Table 7: GrossBenefitper Year per Household YOof Household inthe Behavioral Assumptions US$/HH/Yr Group 1) Candle & lamp usersmove one step to gridelectricity 1,087.53 63% 2) Candle, lamp & battery usersmove one step to gridelectricity 532.69 31% 3) CarMotor cycle battery users move one step to gridelectricity 254.56 6% Average Gross Benefits (weighted average) 865.55 100% Table 8 shows example calculation o f consumer surplus and willingness to pay for gnd electricity lighting. 68 Table 8: Consumer Surplus andWillingnessto Payfor Lighting-GridConnection 11,205.00 Households wlthout Access to Grid Electrlclty Grld Electrlclty Candle, Lamp B Candle B Lamp CarlMotor Cycle CarlMotor Cycle Users Battery Users Battery Users Electric Llght Total spending for iightinglmonthlhousehoid (Kips) Total spending for lightinglmonthlhousehold (US$) $ 1.15 $ 2.16 $ 1.51 $ 0.14 Quantity of lighting obtained--k-lumen hourslmonth 3.23 19.63 25.26 435.27 Average price per k-Lumen hours (Kips) 4,627.91 2,183.41 1,028.92 3.32 Average price per k-Lumen hours (US$) $ 0.41 $ 0.19 $ 0.09 $ 0.00 Average price per k-Lumen hours P(0) P(1) P(2) P(3) 4,627.91 2,183.41 1,028.92 3.32 Quantity of lighting obtained--k-lumen hourslrno Q(0) Q(1) Q(2) Q(3) 3.23 19.63 25.26. 435.27 Adjust for Shape of Demand Curve (OS=straight line) 0.50 0.50 0.50 Consumer Surplus Gain per Month Consumer Move to Electricity Directly "One Step" 1,013,952.52 495,866.77 236,162.31 $ 90.49 $ 44.25 $ 21.08 Consumer Expenditure for Electric Lighting 1.531.91 8 0.14 Gross Benefit per Month % of HH in this gr. Weighted Avg Candle & Lamp Users Move to Grid Electricity 1,015.484.43 $ 90.63 63% $ 51.10 Candle, Lamp & Battery Users Grid Electricity 497.398.68 $ 44.39 31% $ 13.76 CarlMotor Cycle Battery Users to Grid Electricity 237694.23 $ 21.21 6% $ 1.27 Average Gross Benefits (weighted average) 1.00 $ 72.13 Gross Benefit per Year Gross Benefit per Year % of HH in this gr. Weighted Avg Candle & Lamp Users Move to Grid Electricity 12,185.813.22 $ 1,08753 63% $ 685.15 Candle, Lamp & Battery Users Grid Electricity 5.968.784.20 $ 532.69 31% $ 165.13 CarlMotor Cycle Battery Users to Grid Electricity 2,852.330.72 $ 254.56 6% $ 15.27 Average Gross Benefits (weighted average) 100% 5 865.55 Average price of candiealamp lighting /per Kib-lumen hours Candle Lamp: 4,628 P(0)\ Radio and Television. Previous studies and empirical evidence fiom Lao PDRhave shown that radio and television are among the most important electric appliances in the households. Without electricity, the cost to operate radio and/or television i s extremely highand the total hours listening to radio and viewing television tend to be relatively low (the alternative power supply sources for radio and TV are dry cell battery, motor cycle or car battery, each o f which is very expensive and only provides limited electricity 69 supply). Incontrast, gridelectricityprovides unlimitedelectricity supply at significantly lower cost, with the result that listening and/or viewing hours for radio and television are very high." Using survey data, Table 9 provides the price (or cost) of listeningto radio per hour and the total hours per month on average that households ineachsupply source category listen to the radio. Table 9: Price and Quantity ofRadio Listening I Priceand I Quantity Value Unit Radio by Sources of Electricity P(0) II 521 Per listening hr (Kip) Radio using dry cell batteries Q(0) 10 Listening hrslmonth ,~ P(1) 263 Per listening hr (Kip) Radio using car/motorcycle battery Q(1) 106 Listeninghrslmonth P(2) 3 Per listening hr (Krp) 4 2 Radio using gridelectricity (for plug-in radio) Q(2) 124 Listening hrslmonth batteries is 3 watts; cadmotor cycle batteries are9 Similar to lumen demand analysis, the benefit analysis assumes the kinkedlinear demand curve basedon sources of electricity used for radio. These parametersyield estimatedbenefits for gaining access to less expensive and longer radio listening hours to be kip22,021 (US$2) per month per household. Based on the survey, it i s estimated that about 17 percent of the households living in the proposed REP Iareas are using dry cell or cadmotor cycle battery to supply electricity for their radio. Given the total targeted connection (over four years) of about 42,000 households, it i s estimated that about 7,172 households would switch to plug-inradio. The total benefits or consumer surplus per year for radio i s estimated to be US$172,128. Table 10 presents parameters of price per television viewing hour and the total viewinghours per month. These parameters yield an estimate of the benefits o f gaining access to less expensive and longer television viewing hours to be Kip29,294 (US2.6) per month per household. Survey data shows that about 14 percent of un-electrified households in the proposed REP Iareas use car batteries to supply electricity for television viewing. Therefore, it i s estimated that about 5,906 households would switch to plug-intelevision. The total estimated benefit or consumer surplus for television viewing per year over the four-year period will be US$184,976. Price and Quantity Value Unit User by Sources of Electricity QW P(0) 362 Per viewing hr (Kips) 55 Viewing hrslmonth Carlmotorcycle battery users P(1) 6 Per viewinghr (Kips) Qo 106 Viewing hrslmonth Gridelectricity users (for plug-in television) '' The benefits analysisassumesthat after electrification households will switch to plug-in radio. 70 Education. The beneficial impacts of electricity on education are universally accepted. However, empirical data on the indirect economic benefits of electrification for education are not as well documented as the direct economic benefits of education. It i s clear that electricity extends evening hours for children to study, do homework, and/or read.'' Similarly, electricity also enables schools to be equipped with modem teaching equipment and communication, especially access to the internet. Survey data suggests an association between electrification and school enrollment at all levels of education, including vocational school. School enrollments, at all levels, for children living in the electrified households are significantly higher than for chldren inthe same age group who are living inthe proposed REP Iareas. It is therefore reasonableto expect that REP Iwould contribute to a significant increase in school enrollment among children. Table 11shows the average percentage of children for eachage group inthe householdwho arecurrentlyattendingschool. Table 11: Percentof ChildrenAttending School Elementary school Secondary& High School Vocational School With Access to With Access to With Access to Children Age Electricity Grid InProposed REPI Electricity Grid In Proposed REP I Electricity Grid In Proposed REP I 6 - 12yrs old 88% 83% n/a n/a n/a n/a 13 - 18 yrs old n/a n/a 67% 55% n/a n/a 13 - 18 yrs old n/a n/a 11% 5% 10% 6% Survey data reveal that children living in the electrified households do not spend longer hours reading than childrenliving inhouseholds without electricity. Regardlessof electrification status or age, children spend the same amount o f evening time (about one hour) reading or studying. Although electrification does not appear to entice children to increase their intellectual activities at night, clearly children from households with electricity benefit directly from brighter electric light. Performing school work or reading with electric lighting i s qualitatively, but unequivocally, more enjoyable than reading and/or doing homework under the dimlight of a lamp or candle. Productivit~~Electricity provides better opportunities for households to engage in productive activities and increases the income-generating potential of a given productive activity. Most rural household businesses in Lao PDR are small, consisting of handicraft, small furniture malung, small repair shops, convenience stores, or food and beverage shops. Survey data shows there is no difference inthe numbers and types of household business between previously-electrified areas and the proposed REP Iareas (in both areas about 27 percent o f households engage in household business activity). However, it appears that the size-measured interms of revenue generation-of household businesses in electrified areas is significantly larger than that for household business in the un-electrified area. The average monthly income of households who have home businesses in electrified areas i s Kip11,653,886 (US$1,040), almost two times larger than income of households who have home businessesinthe un-electrifiedareas, Kip6,522,440 (US$582). This clearly suggests some association between electricity and productivity of business operators, a relationship which seems intuitive Qven that businesses with electricity can operate more efficiently and for longer periods of time. Furthermore, each of the commonly cited types of home businesses can be shown to have some potential for productivity improvement with the advent of l6 Some may argue that insteadofdoingintellectuallyactivities or exercise childrenjust watch television 71 electricity. Thus, we include an assumed two-fold improvement in income from household benefits as part o f the economic benefits of the proposedREP I. Diesel Fuel Saving and Health Benefits. A final economic benefit worth mentioning is diesel fuel savings. InLao PDR, diesel fuel i s used as a kerosene substitute, as kerosene i s not widely available in the market. With electric light, householdswould no longer use diesel fuel for lamp lighting, Currently, un-electrified households living in the proposed REP Iareas use about 2.7 liters of diesel per month for lamp lighting. Based on the expected electrification of about 42,000 households over the four years period; diesel fuel saving could amount to 11,390 liters per month or about 1,366,824 liters per year. Since diesel fuel i s imported, electrificationwill directly reduce the import requirements for Lao PDR. The reduction in diesel fuel usage for lamp lightingwill also reduce indoor air pollution. When use for lighting, diesel fuel produces muchmore soot and smoke than kerosene, creating both safety and health problems for rural households. Introduction of electricity would directly contribute to the reduction of respiratoryillness among the ruralpopulation, thus reducingpublic andprivate health care costs. C. Social Benefits andImpacts Social impacts are another form of direct benefit from REP I, RE improves quality of life and brings as about positive changes inthe livingpatterns of rural households. The expected social impact of REP Iis basedon an assessment of the social impact andbenefits ofthe three previous REprojects financed bythe World Bank. The following analysis relies on field survey data collected from households and villages which were electrified by previous World Bank financed RE projects, and survey data collected from households and villages proposed to be electrifiedunder REP I. The types o f social benefits and impacts evaluated here include: (i) availability and utilization of the electric light by electrified households; (ii)the acquisitionand utilization of household electric appliances including radio, television and appliances for domestic work; and (iii) the positive feeling and attitude toward progress, safety and security of electrified households. Lighting Appliance Ownership, Usage, Quality of Lve, and Changes in Living Patterns. Prior to electrification, all rural householdsrelied on candle, diesel fuel (for lamps) as well as car and small motor cycle batteries to supply electricity for lighting. Typical households may only use one single fuel for an energy source or a combinationoftwo or all three sources, as shown inFigure 2. Figure 2: Percent of Households UsingDifferentEnergy Sources for Lighting Candle. Law_/ Users (63%) Source: DOE,MIH,Lao PDR, 2004. 72 The survey conducted among households to be electrified under REP Ihas shown that typical combustible lamp lighting i s the preferred choice for the majority of households that have no access to electricity. About 63 per cent of the households living inthe proposed REP Iareas rely on candle and combustible lamp lighting." Another 31percent rely on candle and combustible lamp lighting as well as electric light energizedby car or motor cycle battery. A small minority ofhouseholds, only 6 percent, use electric light energized by car or motor cycle batteries. The household survey makes clear that after electrification all households switched to electric lighting. Only a few electrifiedhouseholdsreported that they retained their wick or hurricane lantern to use duringblack outs." Survey data, on lighting appliance ownership and usage, from electrified households confirms that households with grid electricity connection fully utilize electric light. The survey also shows that the majority o f households with gnd connection use fluorescent lamps, which are more energy efficient and have higher lumens but are more expensive than incandescent light bulbs (see Table 12). Those households with grid electricity illuminate three to five times longer than households without electricity. They also use significantly more and brighterlightingappliances thanhouseholds without electricity. As most electrified households use fluorescent lamps, and the luminous rating for 40 and 20 watts fluorescent lamps is 1,613 and 1,200 lumens respectively, we can multiply by the reported daily household illumination patterns to estimate that electrified households receive about 435 kilo-lumen hours per month. Table 12: Electric LightingAppliance Ownership-ElectrifiedHouseholds I Household with Access to GridElectricity I ~ Fluorescent Lamp Compact Incandescent Light Tube Fluorescent Bulb Lamp 20 w 40 W 10-15W 4 0 W 60W 1OOW Total number owned 1.7 2.5 1.2 1.7 1.2 3.1 Numberofhours usedlday 5.8 6.3 4.1 4.4 2.9 3.2 Valid number of households 711 940 13 41 116 105 Incontrast, un-electrified households receive only 3 hlo-lumen hours per month Eromthose who utilize only candle and/or combustible lamp lighting, about 20 hlo-lumen hours among those who also use car or motor cycle battery inaddition to candle and lamp lighting, and 25 kilo-lumen hours among those who only use car or motorcycle batteries. Eveninghours of not-yet-electrified households are significantly shorter than for households with a grid connection. A typical household without electricity only has one or two simple wick lamps or hurricane lanterns, which are used for only one to two hours per e~ening.'~ Similarly, for households that also use car andor motor cycle battery to supply electricity for lighting, the averagetotal hours usingelectric light i s only two hours per evening. " It should be noted that in Lao PDR diesel fuel i s used as a substitute for kerosene in lamp lighting. Diesel fuel can produce a similar level of light as kerosene when use in the simple wick lamp or hurricane lantern. However, diesel fuel produces more smoke and soot than '* kerosene. Although car batteriesenablehouseholds to use the same type of electric light as grid electricity, they provide limited electricity supply, and are very expensiveand inconvenient. l9 It should be noted that simple wick lamp is a very simple lighting device. It i s usually made of recycled tin cans with small tube on the top to hold a wick, which i s usually made of old cotton rag cut to fit. 73 Comparing pre- and post-electrification lighting consumption shows household lighting consumption increases tremendously - by more than 17 to 20 times when comparing among households using candle, lamp lighting, and electric light suppliedby car or motorcycle battery and by more than 100 times when comparing among households using only candle and combustible lamp lighting. These order-of- magnitude improvements in lighting outcomes from grid-supplied electric lighting not only drastically reduce household energy bills, but allow household members to conduct close work, such as reading and household-level productive activities that directly and positively affect living standards and livelihood. The dynamics o f this livelihood improvement are discussedinmore detail below. Extended Hours for Evening Activities. Assessing the social impacts and benefits of electrification requires a more-detailed understandingof how household members spend their evening hours. There is considerable literature indicating that increased levels of electric lighting have drastically improved the quality of life among rural households while also altering rural life styles. Survey data helps document the life style improvements and changes that accompany grid electrification, using questions designed to explore how family members spend time in the evening. The data (see Table 13) show that, with grid- supplied electric light available, men and children spend an average of half an hour longer undertaking livelihood-improving activities than their counterparts inun-electrifiedhouseholdswithout gridelectricity connection, while women inhouseholds with grid electricity connection spend about 40 minutesmore on livelihood-improving activities than women inhouseholdswithout gridelectricity connection.'' Table 13: Duration of EveningActivitiesfor Membersof Households with andwithout Grid Electricity 1 WithAccess to Grid InProposedREPIArea I Electricity I Women 2.9 3.6 (valid number ofhouseholds) (807) (884) Men 2.5 2.9 (valid number ofhouseholds) (778) (856) Children 6 to 12 years old 1.6 2.3 (valid number ofhouseholds) (573) (630) Children 13to 18years old 2.1 2.7 (valid number ofhouseholds) (460) (557) The'survey data provides considerable detail as to the activity patterns of household members, allowing social impacts to be analyzed inmore detail. For example, literature on rural lifestyle patterns has shown that women in rural households bear disproportionate responsibility at home when compared to men. Without electricity women must complete all or most of household activities requiring good quality lightinginthe day time. Interestingly, the survey data analyzedhere reveals that women living inthe un- electrified households spend the same amount o f time doing household chores as women living in electrified households (see Table 14). However, it i s likely that the productivity of women in electrified households undertaking household chores would be higher, especially for activities that require close lighting. Furthermore, women in electrified households would be more flexible in choosing the type of household choresthan those living inun-electrified households. 2o Livelihood improvement activities include household chores, productive activities, and leisure activities 74 With Access to Grid InProposedREPIArea Electricity Women 1.7 1.7 (valid number ofhouseholds) (155) (860) Men: 1.3 1.1 (valid number of households) (155) (134) Children 6 to 12 years old 1.2 1.2 (valid number of households) (50) (79) Children 13 to 18 years old 1.2 1.3 (valid number of households) (165) (144) Electric Appliance Ownership and Usage i s an important indicator o f living standard improvement. There are several electric household appliances commonly found in electrified rural households in Lao PDR because of their usefulness and affordability: radio and television for entertainment and access to news and information; rice cookers and refrigerators for improved food storage and cooking; fans for ' improved comfort; and irons (see Figure 3). These appliances help save time, are convenient to use, and enhance health, hygiene and comfort of household members. It i s expected that households to be electrified under REP Iwill similarly acquire and utilize these. The effect of electric appliance ownership on selectedkey households activities andlinkages to livelihoodindicators is discussedbelow. Figure 3: ElectricAppliancesOwnershipinElectrified RuralHouseholds ____,_.___ _ _ _ _ . _ _ , Iron ! Electric Fan 72Yi 1i Refrigerator 8 Rice Cooker Television Set 0% 20% 40% 60% 80% 100% Source: DOE,MIH, Lao PDR, Survey 2004 Cooking accounts for a very large portion of energy used in atypical rural household. Inrural Lao PDR, firewood and charcoal are still the main sources of energy for coolung. Use of modern energy sources i s almost unheard of in rural Lao PDR, as firewood i s widely available and very inexpensive. However, with access to gnd electricity, some households have acquired some electric coolung and other related household appliances similar to those in use by urban households. These appliances-especially rice cookers-render some cooking tasks faster, cleaner, and more convenient. The survey shows that among grid-connected households, there are about 279 households (or 27 percent o f all households with grid connection) that have rice cookers at home. Of these households, the majority (about 218) have quickly adopted the rice cooker for everyday food preparation. 75 Refhgerators are another household appliance with beneficial impacts for household cooking. Refrigerators have obvious benefits for households, allowing food to be stored longer, reducing the frequency o f trips to the market, and improving health and hygiene for family members." The survey data reveals that refrigerator ownership among households with access to grid electricity i s relatively high,and slightlymorethan half(or 53 percent) ofelectrifiedhouseholdshaverefrigerator at home." Perhaps the most useful household appliance among rural households i s the electric fan, especially in a hot climate area like Lao PDR. Electric fans provide not only the amenity of cooling, but important health benefits from keeping indoor air circulating and disease-carrying insects away.23A large majority or 72 percent o f households with access to grid electricity reported to have at least one electric fan at home. On average, eachhouseholduses its electric fan for almost four hours eachday. TimeSpent on LeisureActivities. Time and opportunity for leisure activities, such as watching television entertainment and newsprograms, i s another indicator of living standardsimprovement. The survey data @ reveal that electrified household members spend about 30 minutes longer each day watching television than those living inun-electrified households. Due to the lack of grid electricity, the survey shows that only 131 households (or about 14 percent of households) living in the proposed REP Iareas own television sets (which currently use electricity from car battery). Since some 201 female and 276 male respondentsreported watching television inthe evening, this suggests that significant numbers of people watch television at neighbors' housesor ina communal facility. Television ownership among households with gnd electricity is 78 percent. This leap in television ownership and the number of household members who watch television regularly confirms that RE enableshousehold members to spendevening time together at home watching television. Table 15 shows the pattern o ftelevision viewing before and after electrification. Table 15: HoursWatching TelevisionintheEvening Proposed REP I With Access to GridElectricity Women 1.2 1.7 (valid number ofhouseholds) (201) (605) Men: 1.5 1.7 (valid number of households) I (276) I (762) I Children 6 to 12 years old 1.1 1.5 (valid number ofhouseholds) (121) (391) Children 13 to 18 years old 1.2 1.5 (valid number ofhouseholds) (130) (388) Attitude towards Progressand PositiveFeelingfor Safety and Security. Positive attitude and the feeling of people toward electricity i s another indicator of the social benefits of RE. The literature on benefits of RE argues that REbrings a sense of progress and belonging to the people. A survey of attitudes among households with gnd connection uncovered positive findings in this regard (see Figure 4). The vast " Inahotandhumidclimatecountry, refrigeration is important for storingfood and reducingfood poisoningincidents. " Inrecent years, the price of small refrigerators(5 or 6 cu. Ft.refrigerator), which are made in Thailand and are imported to Lao PDR, has dropped significantly. They are also widely available through local distributors especially in the central and southemregion of Lao PDR. 23 Both malaria and dengue fever are major public health problems in the country The availability of electric fans i s undoubtedly useful for preventingmosquitobites and the spread of diseases. 76 majority of respondents surveyedbelieve that life has improved since ele~trification.~~ also believe They that electricity will improve the living standard of the poor, and recall that life was more difficult before electrification. With regard to the sense of belonging, responding households believe that electricity affords better access to news and information and improved communication with their neighbors and fellow countrymen. Furthermore, almost all households reported that they feel more secure at night with electric light. Figure4: AttitudesRegardingElectricApplianceOwnership .-.---. Life is betterwith electricity 97% i Life is moredifficultbeforeelectrification 1 ! Electricity improves living standardof the poor ! ! Electricity is importantto bewell informed 96% i Electricity helps improve communication II i With electicily we feel more secured at night ,, I 92% 93% 94% 95% 96% 97% 98% Source: DOE,MIH,Lao PDR, Survey 2004. Conclusionsas to Social Inipacts and Benefits. The social impact of REP Ii s expected to be not only large but larger than with many other RE projects elsewhere reported in the literature, especially for lower-income rural households. The survey of rural households and communities previously electrified by World Bank financed RE projects clearly shows that grid electricity has been used not just for incremental improvements in quality and quantity of lighting, but for a range of livelihood-improving appliances. The high percentage of previously electrified households with television sets, fans, refngerator, and rice cookers, and the altered social pattern inthe evening, inwhich persons stay up later at night to watch television, doing household chores, or engage inproductive activities, all suggest similar social benefits for the householdsto be electrified under REP I. 2. FinancialAnalysis A. Financial Assessment of EdL Past Performance and Present Financial Position (see Table 16). EdL'scurrent financial situation and status of compliance with financial covenants for FY02-04 had been satisfactory in large part due to the implementation of financial strengthening measures under the FRP and other extra-ordinary events, particularly: (i) the revaluationof fixed assets which raisedtotal equity by Kip3.1 trillion, Kip127 billion o f which was transferred to retained earnings; (ii) the application of proceeds from the refinancing o f Theun Hinboun amounting to US$33 million for retirement of several outstanding EdL long term debts; (iii)reduction in tax payments due to increased depreciation expense arising from the revaluation; (iv) monthly tariff increase of 2.3 percent effective May 2002 for 25 months; and (v) dividends receivedfrom Theun Hinboun Power Company (THPC) of Kip124 billion in FY02. These favorable actions allowed EdL for the first time ever, to comply with financial covenants inFY02-04: (i) FinancingRatio at Self 24 Sinlilarly, respondents living inhouseholds withno access to electricity also believe that life will improve after electrification. 77 38%, 54%, and 93%; (ii) Service Coverage Ratio at 2.1, 2.2, and 3.0 times; and (iii) Equity Debt Debt Ratio at 32:68, 32:68, and 29:71 (exceeding the requirements of 20-30%, 1.5 times and 60:40, respectively). Table 16: EdLFinancialOperationResults(F`Y98-04) FiscalYear endingDecember31 1998 1999 2000 2001 2002 2003 2004 Generation (GWh) 948 1169 1579 1554 1570 1317 1396 ImportedElectricity (GWh) 142 172 160 182 201 229 251 Total Supply 1090 1341 1739 1736 1771 1546 1647 Transmission/DistributionLosses (GWh) 172 178 236 230 233 227 217 Electricity Sold Domestic (GWh) 513 565 640 710 767 884 910 Export (GWh) 405 598 863 796 771 435 514 Total ElectricitySold 918 1163 1503 1506 1538 1319 1424 Average Revenues Domestic (KkWh) 51.97 113.65 168.82 250.64 314.77 388.90 488.56 Export (K/kWh) 124.23 288.30 241.56 254.78 295.95 307.43 311.43 Average Revenues(WkWh) 103.67 230.88 226.71 265.07 322.23 39534 484.83 IncomeStatementItems: DomesticRevenues (elect + installation) 44,850 96,103 132,274 196,395 267,420 387,726 530,321 Export Revenues 50,3 15 172,405 208,470 202,802 228,174 133,732 160,075 Total OperatingRevenues 95,165 268,508 340,744 399,197 495,594 521,458 690,396 OperatingCosts 74,4 13 155,723 200,118 224,152 396,179 448,054 534,331 OperatingIncome 22,936 114,061 142,426 181,861 99,415 73,404 156,065 Interest Expense 36,493 99,437 90,683 43,073 48,841 39,945 42,865 Other Income(Expenses) 6,164 32,285 -11,842 -20,049 55,476 117,257 112,229 Net Income -7393 46909 39901 118739 106050 150716 225429 Cash Flow Items: InternalSources 54,083 196,593 287,959 278,385 552,928 370,765 463,254 Borrowings 104,404 287,502 174,364 191,926 201,750 229,847 808,424 Equity Investments 28,332 1,300 24,267 1 85,674 10,784 163,538 ExtraordinaryIncome 18,597 331 -3,657 -2,717 0 0 Total Sourcesof Cash 205,416 485,726 482,933 467,595 840,3520 611,396 1,435,215 CapitalExpenditure 144,085 327,896 250,236 135722 242791 323808 328484 Non-CashWorking CapitalInc. (Decr) 5,870 -13,162 73,047 118502 136181 -34916 34870 Debt Service 48,088 126,069 154,550 187965 469921 137248 199809 Dividendsand Other 0 0 Total IJses of Cash 198,043 440,8030 477,8330 442,1890 848,8930 426,1400 563,163 BalanceSheetItems: Current Assets 69,235 201,423 251,253 395,944 513,122 525,238 405,681 Less Current Liabilities -114,448 -341,552 -910,193 -233,582 -195,004 -230,703 -252,013 Net Fixed Assets 1,068,794 2,161,506 2,418,441 2,248,780 5,361,814 5,522,629 5,892,882 Total Assets (net of Current Liabilities) 1,023,581 2,021,377 1,759,501 2,411,142 5,679,932 5,817,164 6,046,550 Long-TermLiabilities 898,673 1,845,022 1,505,671 1,823,097 1,826,493 1,839,510 1,726,769 Shareholders' Equity 124,908 176,355 253,830 588,045 3,853,439 3,977,654 4,319,781 TotalLiabilities and Equity 1,023,581 2,021,377 1,759,501 2,411,142 5,679,932 5,817,164 6,046,550 FinancialRatios: OperatingRatio 78% 58% 59% 56% 80% 86% 77% Return on Average Equity 5.9% 31.1% 18.6% 28.2% 4.8% 3.9% 3.7% LT Debtas a% of Total Capitalization Self-Financing Ratio(%) -35% 8876 91% 86% 32% 32% 29% -27% -32% -76% 14% 38% 54% 93% Debt ServiceCoverage Ratio (times) 0.6 1.o 0.9 1.3 2.1 2.2 3.O Current Ratio (times) 0.6 0.6 0.3 1.7 2.6 2.3 1.6 ReceivablesCollectionPeriod (months) 3.8 2.5 3.5 3.1 5.0 4.9 5.3 Prior to the implementation of the package of measuresunder the FRP inFYO1, EdL's financial situation had deteriorated to the point were it became technically bankrupt. This highly precarious position was 78 primarily brought onby the unstable macroeconomic condition andthe rapid devaluation of the Kip to the US$, as the country descended into hyperinflation. Despite monthly tariff increases in February 1999, this was insufficient to fully offset the average monthly devaluation of the Kip. The severe impact of the foreign exchange devaluation on EdL's operating performance was evident in the FY98 profit and loss accounts. Although EdL reported a 24 percent increase in operating profit for the year, this was wiped out by a 178 percent increase in interest expenses on foreign debts (from Kip13.1 billion to Kip36.5 billion) and a drastic loss ensuing from its foreign exchange obligations (from a gain of Kip2.1 billion in FY97 to a loss o f Kip13.5 billion in FY98). EdL concluded that year with a net loss of Kip6.6 billion, reversing the net profit posted in FY97 of Kip2.6 billion. These audited figures could have been far worse hadEdLusedinternational accounting standardreporting. B. Financial Recovery Plan The objective o f the FRP was to develop a comprehensive set o f actions to restore EdL's financial health over the period FY99-02. Overall, the FRP was successfully completed; but for one element that could not be implemented and another which was only partly completed. The major components of the Plan and its significant milestones were: Conversion of Debt to Eauitv - completed inFYO1, with Government's conversion of U S 7 7 million o f EdLlong term debts to equity; Relaxation of on-lending terms of remainingloans - completed inFYO1, with the Government and various creditors agreeing to the following: (i) interest reduction to 2 percent from FYOO- 04 and to 6 percent from FY05-07 for IDA, ADB and NDF social loans; (ii) interest reduction by 50 percent of all interest rates of non-social loans; and (iii)extension of maturity period of all loans by 5 years; Maintain adeauate levels of electricity tariffs - effective May 2002, a new tariff structure increasing tariffrates by an average of 2.3 percent per month over aperiod of 36 months (upto FY05) was put in place. However, these tariff adjustments were suspended in June 2004 pendingreview of electricity tariffs (see Section C below); Revaluation of Fixed Assets - completed in November 2002: (a) August 2001, the Government approved the revaluation of fixed assets and established a Revaluation Committee in MOF with the assistance of an independent appraisal firm; (b) April 2002, revaluation of power generation and transmission assets commenced; (c) September 2002, the draft revaluation report was presented and discussed among MOF, MIH, EdL, ADB, IDA and PriceWaterhouseCoopers; Variable remittances of THPC dividends to the Government -not implemented; Review of EdL's Capital Expenditure Program - completed, the Lahmayer-Meritech Report was finalized and submitted to the Government and EdL for comment and review in March 2004; and (vii) Settlement of overdue Government Accounts - partly completed, with final agreement between GoL and EdLon settlement as specified inthe Sustainability Action Plan. 79 C. Key FinancialIssues Commercialization of EdL. The commercialization of EdLhas beenunderway since FY87. This gained momentum with EdL's incorporation as a public company in FY97. Its Board of Directors approves annually a corporate plan for the next 3 years, which covers EdL's annual budget, new investment, operations and maintenance plans, and proposed borrowings and tariffs. EdL currently submits all requests for tariff increases to the MIH, but tariff approvals are, in practice, obtained from the Prime Minister. InFY98, a new organizational structure establishing profit and cost responsibility centers was adopted, followed inFY99, by the establishment of a new budgetingand control system designed around the cost/profit centers, and the creation of the Corporate Planning Department, responsible for coordinatingbudget preparation, consolidation andreporting. While commercialization has been underway, there i s still strong interrelationship between the Government and EdL's finances. Inparticular, there is confusion among government's various roles as: owner of EdL, regulator, on-lender of loans to the Government, tax collector and electricity consumer. While considerable progresshas beenmade in straightening out the interrelationships under the FRP, it i s important that there be a complete separation of Government and EdL's finances and that the interrelationship between them be made more transparent and predictable. IDA and ADB have played a leadingrole inachievementsto date and will continue to stress financial separation. Electricity Tarwfs. EdL i s expected to be commercially viable, autonomous, and self financing. In accordance with its commitments under the Contract Plan signed with the Government, the Government undertook a set o f measures to strengthen the financial position and long-term viability of EdL. These measures include, among others, periodic review of the tariff structure to maintain electricity tariffs at levels that will enable EdL to meet its financial and social objectives, keep pace with fluctuations in foreign exchange, maintain a sustainable level of tariffs aligned to actual costs, and comply with loan covenants o f major creditors. The periodic tariff review, as embodied inthe Power Sector Reform Policy Statement,25 i s one of the significant measures recognized by the Government to strengthen the commercial functions of EdL. The policy also acknowledges the social dimension of electricity pricing and adopts specific guidelines and tariff-setting principles aimed at full cost recovery over a period of time. The tariff adjustments, which were initiated inMay 2002 under the FRP aimed at these objectives withmonthly increaseof 2.3 percent, were suspendedinJune 2004, one year aheadof completion. In recognition of the unresolved tariff issue, a Tariff Study was undertaken in preparation of REP I containing (i)detailed analysis of the actual cost of electricity supply to different classes o f consumers a at different points in the system; (ii) formulation of an appropriate subsidy policy and tariff structure reflecting the cost of supply; (iii) adjustment to new electricity tariff rates to reduce cross-subsidies and a suitable implementation plan; and (iii) identification and differentiation of subsidy flows (i.e. subsidies providedto EdL invarious forms and the subsidies passedon to the different classes o f consumers). As a result of the analysis, the Government endorsed on 24 June, 2005, a Tariff Adjustment to be rolled out from 2005 to 2011, and approved inNovember 2005 the Sustainability Action Plan including provisions for tariff adjustment against domestic inflation and fluctuations of exchange rate. At the end of the tariff adjustment period, EdL is projected to become commercially viable while maintaining a certain level of cross-subsidiesand with a clear distinction between EdL's comniercial operations and social obligations. Government's Overdue Receivables. EdL continues to struggle with compliance with existing payment collection covenant as agreed with IDA (i.e. that EdL accounts receivable shall be no more than two *' ~ Issued by the Government in March 2001 It sets out the main elements of the power sector policy and establishes priorities and objectives ofthe GoL for the development of the powei sector 80 months average o f its electricity sales). This i s the only other pending matter, together with above mentioned tariff adjustments, towards full completion of the FRP. EdL's growing accounts receivable, particularly past due arrears of various government ministries and agencies, had grown from Kip22 billion in FYOl to about Kip120 billion in FY04. While the government has had financial difficulties, EdL could not function as a true commercial enterprise under conditions of repeated non-payment by government ministriesand agenciesand without the permission to disconnect electricity supply. Duringpreparation ofREP I, agreement has been reachedbetween EdL and GoL to off-set existing cross debts and to settle any balance remaining against EdL's debt obligations to government in FY06. Likewise, a mechanism for timely payment of future government bills has also been endorsed. Under the mechanism adequacy of government agencies' budget allocation for electricity will be reviewed and the budget allocations ear-marked for electricity billpayments. The off-set will be effectuated incase of non- payment up to two months by government agencies. PDP and Financing. Financing EdL's system expansion has traditionally been provided by multilateral andbilateral agencies through soft loans and grants. With annual growth rates now coming off a higher base, capital requirements are increasing at a time when the power sector's traditional lenders are re- focusing their programs on other sectors. Non-traditional lenders, China and India, are playng an increasing role through provision of export credits (with significant grant element) for projects where goods and construction services are sourced through their respective countries. Lao's earlier successes with export generation projects demonstrates that the international private sector (particularly the Thai private sector) can play a role and the nascentlocalprivate sector and domestic banks shouldnot be ruled out as a source of capitalfor smaller projects. A Power Sector FinancingStrategy Study and associatedworkshops recommendedthat GoL: (i) examine financing modalities (traditional, built-operate-transfer, public-private and leveraging of bilateral and multilateral finds through credit enhancement or direct lending); (ii) develop solicitation strategies for supplier financed public projects and privately developed projects; and (iii) projects (particularly prepare hydropower projects) for solicitation to improve risk profile. During the Phase Iof REP and as a trigger for Phase 11, government will review the recommendations of the study and translate them into a Power Sector Financing Strategy endorsedby the Government. The strategy directions will also be reflected and discussed in EdL's annual PDP, the current version of which indicates a gradual increase inreliance on IPP off-take in combination with own investments in generation assets where sanctioned due to system optimization. EdL Non-Operating Income. The government is the owner ofEdL, the nominee shareholder for most of its IPP investment projects. EdL currently holds, for GoL, shares of 60 percent and 20 percent in THPC and Houay Ho Power Company (HHPC), respectively. As such, it i s entitled to a share of the total dividends declared proportional to its shareholding. The dividends from these investments represent significant amounts of EdL's non-operating income and their treatment presents major issues. However, the dividends also create distortion effects on EdL's balance sheet and income statement, The Government i s also concerned that the efficient and effective allocation and treatment of these dividends should be in the context o f the overall country revenue management policy and not in the narrower context of the corporate finances of EdL. In the case of NT2 project, the Lao State Holding Enterprise (LSHE) has been established as a special holding company to own Government's shares in the Nam Theun2 Power Company Ltd. (NTPC), the company that will manageand operatethe NT2project for the 25-year concession period. It has been recommended that this or a similar structure (i.e., an asset management company, like LSHE, to invest and raise financing for the power sector) be applied to all other future generation investments of the government inthe power sector. ADB i s presently conducting a study for IPP development and institutionalrestructuringto, among other tasks, identify and structure an 81 appropriate government agency to own and manage GoL's future IPP equity investments. This is inline with the principles of the tariff adjustmentproposedinthe Sustainability Action Plan which assumes that tariff adjustment will enable EdL to become financially self-sustaining (talung into account its social obligations) by 2011andphase out gradually reliance on IPP dividends for debt services. D. FinancialProspectsofEdL Assumptions. A base case scenario for the period o f FY05-12 was developed for EdL's financial projections with the following major assumptions: (i) annual average load growth of 10.5 percent based on EdL's FY05-12 power development plan; (ii) local and foreign inflation at 7 percent and 2.4 percent, respectively; (iii) an ambitious investmentprogramincluding Xeset 2 and Xepon 3; and (iv) tariff regime in accordancewith the tariff adjustment effective July 2005. Other assumption parameters include: (i) accumulated subsidies of about US$140.5 million from pre-tax dividends received from equity investments including THPC investments and concessional loans for new RE and spares (US$36.8 million) required duringthe projected period; (ii) no cashnor equity injections from the government; (iii) financing plan for new investments consisting of 70-80 percent borrowings and 20-30 percent self generation; (iv) an investment program in generation (US$419 million), transmission (US$l65 million), substatioddistribution (US$45 million), overhaul (US$45 million) and RE (US$104 million); (v) interest support for existing social andnon-social loans under the FRPwill cease, as scheduled; (vi) future loans at commercial rates (4.5-6.0 percent); and (vii)receivables at two months of sales. For details, see Table 17. Table 17: MainAssumptionsfor FinancialProjections FiscalYear endingDecember31 2005 2006 2007 2008 2009 2010 2011 2012 OperationalData: Generation (GWh) 1,715 1,521 1,645 1,697 2,255 2,255 2,255 2255 Purchasesfrom IPPs (GWh) 16 17 18 19 21 22 23 2s Imported Electricity (GWh) 326 350 374 378 179 345 529 765 Total Supply 2,057 1,888 2,038 2,094 2,455 2,622 2,807 3,044 Transmission/DistributionLosses (GWh) 250 258 278 362 391 425 463 512 Electricity Sold Domestic (GWh) 1,012 1,092 1,180 1,276 1,716 1,866 2,032 2,247 Export (GWh) 771 538 580 151 347 331 312 285 Total Electricity Sold 1,783 1,630 1,760 1,427 2,063 2,197 2,344 2,532 Average Revenues: Domestic (Kipkwh) 509.65 526.86 647.60 920.87 940.59 1,004.74 1,075.32 1,132.71 Export (KipkWh) 301.40 334.88 446.28 475.73 511.43 546.35 585.08 626.19 AverageRevenues(Kip/kWh) 456.33 492.09 609.24 910.22 895.04 962.10 1036.24 1101.30 EconomicData: GDP Growth Rate 5% 5% 5% 5% 5% 5% 5% 5% Average Foreign ExchangeRate (KipiUSS) 11,399 11,911 12,446 13,006 13,590 14,200 14,838 15,505 Foreign Inflation 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% Local Inflation 7% 7% 7% 7% 7% 7% 7% 7% Annual CapitalExpenditures(US%million) Generation Projects 14 42 111 102 56 0 40 54 Transmission Projects 12 19 51 14 10 16 16 SubstationProjects 12 15 4 3 272 2 2 5 Overhaul Projects 15 14 16 0 0 0 0 0 RuralElectrification Projects 16 15 12 2 9 17 18 15 Total Capital Expenditures 69 105 194 121 94 29 76 90 FinancingPlan (US%million) Foreign Currency Loans 75 147 98 74 20 57 68 Local CUIT~UCYLoans 480 0 0 0 0 0 0 0 Grants 2 0 0 0 0 0 0 0 EDLRetainedEarnings 21 30 45 23 20 9 19 22 Total Funding 71 105 192 121 94 29 76 90 82 Financial Forecast and Future Covenant Compliance. On the basis o f these forecasts, EdL concluded that future performance would be greatly impacted by the level o f capital expenditures inFY05-09. From an initial base o f US$l05 million in FY04, the Government's PDP for 2005-12 called for an ambitious capital expenditure program o f US$69 million, US$l05 million, $194 million, US$121 million, and US$94 million, respectively in FY05-09 (of which US$326 million is largely accounted for by expenditures in Xeset 2 and Xepon 3 hydropower projects). The Government and EdL would agree on the critical capital expenditures, particularly for Xeset and related transmission network and propose investment options takmg into account optimal allocation o f public resources in the long term, the projects that should and could be developed by the private sector, the available financing from external sources, and the direct support that could be provided by the Government in order to achieve the required financial ratios. Table 18provides EdL's projected financial ratios and covenant compliance for FY05-11: Table 18: Projectionof EdL's Key FinancialPerformanceIndicators Financial Ratios I Required 2005 2006 2007 I I I I2008 I2009 I2010 12011 1 Debt Service Coverage Ratio (times) 1.5 2.3 1.9 3.5 3.7 2.3 1.7 1.6 Self-Financing Ratio (%) 20-30% 40% 18% 33% 29% 55% 38% 52% Long-term Debtto EquityRatio (times) 1.5 0.50 0.70 1.00 1.20 1.20 1.10 1.00 Government Collection period (months) 2.0 23.9 16.9 7.3 2.4 2.0 2.0 2.1 Non-Government Collection Period (months) 2.0 3.3 3.1 2.3 1.5 1.9 1.9 1.9 Beyond 2006, EdL assumes that with the completion o fXeset and Xepon and no other generation projects earmarked until FY11, its cash position would be at more manageable levels. However, with the heavy debt drawdowns for these projects and the commencement o f normal debt servicing (with no FRP interest rate support), the debt service coverage ratio would begin to show strain from FYlO. Government has agreed that all necessary measures will be taken including but not limited to raising electricity tariffs, to ensure that EdLmeet the financial covenants as follows: (i) maintain a self-financing ratio ofno less than 20-30 percent o f three-year average planned capital expenditures; (ii) maintain net revenues o f no less than 1.5 times annual projected debt service payments; and (iii)maintain the ratio o f its long-term debt to no more than 1.5 times its equity. 83 EdL'sfinuncialperformance andprojections. SeeTables 19. Table 19: EdLFinancialOperatingResultsandProjection(FY05-12) ~~ FiscalYear endingDecember 31 2005 2006 2007 2008 2009 2010 2011 2012 Estimate Projected IncomeStatementItems: Revenues 813,643 802,112 1,072,254 1,298,879 1,846,476 2,113,743 2,428,952 2,788,497 Operating Expenses 630,026 636,387 770,959 873,009 954,364 1,163,766 1,399,218 1,722,241 Other Expense 10,590 -1,455 -35,463 -83,786 -267,634 -249,434 -362,037 -314,306 Net Income/Loss 194,207 164,270 265,832 342,084 624,478 700,543 667,697 751,950 Cash Flow Items: CashFlow from OperatingActivities 473,898 517,690 623,243 785,523 1,195,720 1,352,097 1,354,477 1,469,315 CashFlow from Financing Activities 524,673 896,389 1,848,818 1,390,880 1,074,785 321,404 862,907 1,137,529 CashFlow from Investing Activities 206,050 295,034 234,035 285,214 526,840 791,675 848,771 855,391 Increase/decreasein Working Capital 40,657 -101,396 -118,714 316,123 479,196 447,407 254,960 330,471 BalanceSheet Items: FixedAssets 6,507,507 7,598,128 9,887,407 11,399,319 12,580,599 12,913,354 13,910,782 15,205,063 Current Assets 450,847 333,218 362,931 637,630 1,198,560 1,501,233 1,833,090 2,220,057 Total Assets 6,958,353 7,931,346 10,250,338 12,036,949 13,779,159 14,414,587 15,743,873 17,425,120 Equity 4,514,053 4,618,392 4,944,305 5,286,510 5,911,104 6,611,786 7,279,648 8,031,796 Long-TermLiabilities 2,148,136 3,042,316 4,911,656 6,203,975 7,013,491 7,610,648 7,610,648 8,416,486 Current Liabilities 296,164 210,638 394,377 546,464 854,564 761,404 853,576 976,838 Current Equity and Liabilities 6,958,353 7,931,346 10,250,338 12,036,949 13,779,159 14,414,587 15,743,873 17,425,120 FinancialRatios: Debt Service CoverageRatio (times) 2.3 1.9 3.5 3.7 2.3 1.7 1.6 1.7 Self-Financing Ratio("h) 40% 18% 33% 29% 55% 38% 52% 53% Returnon CapitalEmployed 2.9% 2.4% 3.6% 4.4% 7.3% 7.3% 6.3% 6.4% Operating Ratio 129% 126% 139% 149% 193% 182% 114% 162% LT Debt to Equity Ratio (times) 0.50 0.70 1.oo 1.20 1.20 1.10 1.00 1.00 Current Ratio (times) 1.5 1.6 0.9 1.2 1.4 2.0 2.1 2.3 Government Collection Period (months) 23.9 16.9 7.3 2.4 2.0 2.0 2.0 2.0 Non-Government Collection Period (months) 3.3 84 Annex 10: Safeguard Policy Issues LAO PEOPLE'S DEMOCRATIC REPUBLIC Rural Electrification Phase I Projectof the Rural Electrification(APL) Program A. Resettlement Policy Framework Project Description The proposedon-gnd component for REP Iwill provide access to electricity to more than 42,000 households inabout 540 villages inthe targeted 7 central and southern provinces. Based on consultation inthe Project areas, the scope of the grid connection component has been identified, which include construction of 1400 km of 22 kV lines, 42 km of 12.7 kV lines, and about 1000 km of 0.4 kV spur lines, and installation of about 620 transformers. The total cost of the component will amount to US$30.15 million with IDA financing of US$7.55 million, NORAD co-financing o f US$lO million, and counterpart funds. The component will be directly linked to a number of 115 kV transmission lines to be constructed during project implementation. Two such 115 kV transmission lines have been identified and prepared, which include Thakhek - Xepon Line(165 km) and Pakse Khonphapheng (164 km). Even though they are not - financed by IDA, since they are directly related to the REP grid component, EdL agrees to apply the same resettlement policy fkamework to these transmission projects, and separate RAPShave been prepared for these projects. For the off-grid component, REP Iwill provide access to electricity to about 10,000 households from about 1100 villages in 17 provinces in Lao PDR through off-gnd technologies, using delivery models similar to the recently closed SPRE project which included SHS, VH andGS. Potential Land Acquisition and Resettlement Impact. For the 115 kV transmission projects, certain amount of landacquisition andresettlementmightbe required. Basedon experience fiom SPRE, and design requirements, each 115 kV substationwill require about 1 ha of land area, and each tower will require about 36 square meters. Inaddition, to ensure safe operation, all structures and trees underneath the transmission line will be removed within a 25 m right-of-way. However, the transmission and distribution lines will follow existing road as much as possible to minimize impacts and costs. Duringconstruction, a certain amount o f land areas will also be requiredtemporarily for buildingaccess roads, setting up towers, and storing construction materials. For MV and LV lines, according to technical standards and constructionpractices, very limited amounts of land acquisition might be required. They include land acquisition for the construction of poles (about 0.14 squaremetersper pole) andclearance of a4-8 mright-of-way under eachtransmissionline. Inaddition, during construction, a limited amount of temporary land occupation might be needed for erecting poles, storing materials, andconstructing accessroads. Since transmission lines often run through countryside, and efforts will be made during design stage to avoid built-upareas, the number of families that need to be relocated andbuildingsto be removedwill be relatively small. The amount of land areas required for towers or poles will be very small. Most of farmland under the transmission line will be allowed to continue being used for farming, and damages would be expected to be limited to some current crops duringthe construction. Various trees within the right-of-way will be removed. Followingthe compensation policies, all affected people will be provided with compensation at replacement values and rehabilitation measures if it is necessary, and the potential impact on their income and livelihood will be very limited. 85 For the off-grid component, no landacquisition, tree clearance, or resettlementi s requiredduringinstallation of SHS and GS schemes. For VH scheme, while most of them do not involve any land acquisition, some schemesmight needa small amount of landarea for buildinghead-race channels (200 mx lm). The off-grid planning guidelines and technical standards ensure that the channel routings do not cause any removals of productive trees or structuresusedby farmers for dwelling or working. They also ensure that all transmission lines do not interfere withexistingbuildingstructures andtrees. Legal Framework for Land Acquisition and Resettlement, In addition to the policy (No. 1147/CPC) issued inJuly 2002 by the Committee for Planningand Cooperation outlining principles for resettlement, the current Electricitv Law, Land Law, and Forestn Law also have general provisions which require compensations to be paid for the land and building owners in case their trees, crops or buildings are damaged by the public projects. Based on these provisions, MIH issued Environmental Management Standard, providing details guidance on how to prepare power sector projects. In addition, a draft National Policy on Resettlement and Compensation, prepared by STEA with ADB support, i s being approved by GoL, which is ingeneral agreementwith IDA resettlement policy. Compensation Standards. Based on the laws, compensation principles, and SPRE experience, a set of compensation standardsand valuation methods have beendeveloped for theproposed REP I. For permanent land acquisition, the basic compensation for productive farmland will be 10 times the annual output value. The detailed formula for unit compensation will be: (yields of the farmland (ton/'ha/year)) x (marketprice of grain) x (number of multiples). For acquired scrub land and garden land, the compensation rate will be set at one third of the compensation rate for farmland. Based on SPRE experience, such compensation was well received among affected people. With limited land loss and adequatecompensation, no significant negative impacts are expected. For temporary land occupation, compensation of lost crops and land reclamation will be paid by the Project owner. The compensation will be based on average output value o f lost crops and cost of restoring them into original conditions. Efforts will be made by the Project owner to minimize the impacts of temporary land occupation by timingthe construction after plantingseason. For affected houses, compensationat replacementvalue will be paidto affectedpersons. The compensation will include: (i) for lost structures; (ii) plot to build the replacement structure; and (iii) cash housing allowance for moving and transfer. For transmission line project, since affected houses are only required to move a short distance fiom the right of way, based on SPRE experience, most traditional wood structures were simply moved by the villagers to the nearby locations. Inthis case, the Project owner will pay all related costs for such moving after consultation with affected people and villages. The agreed total compensationwill include new site preparation, payment for a moving ceremony, and the cost of additional materials for minor repairs. The Project owner will ensure that all movedhouses will have the same or better conditions after the move. For the loss of various trees, the general compensation principle i s to provide replacement value to the affected people. After consultation with provincial government and affected villages, the basic formula land cleaning + cost of seedling) + (annual cost o f taking care x year of talung care). For fruit trees, the for estimating such compensation will be developed. For industry trees: unit compensation = (cost of unitcompensation = (cost of landclearing + cost of seedling) + (cost + (annual of talung care x year of taking care) cost of income x year of income). Inorder to ensurethat the compensation rates for economic trees are adequate, each province will develop a detail list of compensation rates for various trees, based on an agreed formula, current yield, andmarket prices, whichwill be discussed duringconsultations with local governments and affected people prior to project implementation. 86 Criteria and Eligibility for Compensation The compensation and rehabilitation will be provided for all displacedpersons iftheir land area or income source will beremoved; their houses demolishedor their other properties (crops, trees, and other facilities) removed or damaged due to land acquisition or construction of the Project. All displaced persons, regardless of their legal status, will be provided compensation and rehabilitation basedon the policies adoptedfor the Project. Lack of legalpapers or their customary rights of occupancy certificates shallnotbean obstacleto their obtaining compensation. Institutional Arrangement. The PMU of MIHand Project Office o f EdL will bejointly responsible for planning and implementation of REP I.Interms of resettlement planning and implementation, for the pd-extension component, three levels of institutions will be involved. The first level i s EdL's headquarter Project Office, which will be responsiblefor overall resettlementplanning andimplementation. The second level is EdLBOs in 7 provinces, which will be responsiblefor implementing actual grid-extension activities and coordinating with local authorities. The third level of organization i s the Resettlement Coordination Committees of 7 provinces with members from relevant provincial departments and districts. These three levels of organizations will form the institutional network to ensure smooth resettlement implementation in accordancewiththe resettlementpolicy framework. Similar arrangements are also being made for the off-gnd component. The first level is the PMU of MM, which will be responsible for overall planning and implementation. The second level is the Management Contractor, who will be responsible (through individual ESCO contracted) for actual implementation of individualcluster and village schemes. The thirdlevel will be P D M and local districts and villages, which will be responsible for assisting the implementation of resettlement activities following the resettlement policy framework for the Project. Reporting and ApprovaL For most of those subprojects with only minor impacts, only impact and compensation data sheet needs to be prepared, whch are not required to be submittal to IDA for review. Instead, they will be reviewed and approved by both EdL and MM to ensure that the resettlement policy framework is followed. For the subprojectswith serious resettlementimpacts, EdLandMMwillprepare full RAPs and submit these to IDA for reviewprior to implementation. Resettlement Cost Estimate. The cost of potential land acquisition andresettlementi s included inthe total project cost for REP I.Both EdL and MM will ensure sufficient funding i s available to cover all resettlement-relatedcost for gnd andoff-gnd subprojects. For each subproject, the total resettlementbudget submitted by EdL BOs and nationaYprovincia1ESCOsPDIH will be reviewed and approved by EdL and MM. Aftertheapproval,EdLBOsandMIHwillmakefundsavailableforimplementation. Consultations,participation, and disclosure in resettlement planning and implementation. In preparing each subproject, extensive consultations will be carried out in project areas by project implementation agencies and local government officials on potential resettlement impacts, compensation policies, and rehabilitation measures as well as gnevance procedures. The affected people are invited to voice their opinion on the Project and compensation policies. After consultation in each village, minutes of the meeting with villagers will be prepared by project implementation agencies to record all discussions and agreementsmadewith villagers. After finalization of the RAPs, or datasheets with detailed compensation standards and rehabilitation measures, the documents will be disclosed to the affected villages and individuals. The public disclosure of RAPs could be carried out by holding a public meeting, puttingup notices inthe affected villages, or distributing a resettlement information booklet to the affected people. The Resettlement Policy Framework will be translated into local languages and disclosed in both EdL BOs and ESCOPDM offices. 87 Grievance Redress Mechanism. In order to address complaints and disputes effectively and in a timely manner, a grievance redress mechanismwill be set up, whichwillbe disclosedto affected families before the resettlement implementation. If a person is not satisfied with hs/her compensation, he/she could voice a complaint to the affected village or district resettlement committee. The village or district resettlement committee will respondto the personwith solutionswithintwo weeks. Ifthe personis not satisfiedwiththe solutions, hehhe could appeal directly to EdLBO or ESCOPDIH, who will give a reply within two weeks. If personstilldoesnotagreewiththedecision,he/shecouldappealtoEdLorMIH,whichwillmakea the final decision within two weeks. Ifthe person still does not agree with the decision, hehhe could go to the local courts as a last option. Resettlement Monitoring and Evaluation. Following the requirements of IDA, during the Project implementation, bothinternal andexternalresettlementM&Eexerciseswill be carried out inorder to monitor resettlementimplementation andensure all affected people are compensatedadequately andtheir income and livelihood are restored afier resettlement andrehabilitation. Internal resettlementmonitoring will be carried out by EdL and MIH, and staff fiom EdL BOs and ESCOs. The main purpose of this M&E i s to have an overview of resettlement progress for both components. Every quarter, EdL BOs and the National ESCO will report on resettlement implementation for each subproject to EdL andMIH and this will be compiled into one resettlementprogressreport for the two components. The report will be submitted to IDA as part of the quarterly projectprogressreport for REP I. For those subprojectswith serious impacts (more than 200 displacedpersons), an external resettlementM&E agency will be selectedto carry out externalresettlementM&E. The mainobjective of independent M&E of resettlement implementation is to see whether the objective of resettlementi s achieved, and to providebasic assessmentonresettlementimplementation andrestoration oflivelihoodfor the affected people. B. EthnicPeople's DevelopmentPlan For REP I,among all villages and population to be benefited by the grid and off-gnd components, significant portions of them are ethnic villages and populations. For the grid-extension component, 37 percent of the villages have more than 50 percent of the population comprised o f ethnic peoples, and about 31 percent o f total project affected persons are ethnic people. For the off-grid component, since most of the Project villages will be located in remote areas in 17 provinces, about 68 percent of project villages are expected ethnic minority villages. Following IDA policy requirements, an EPDP has been preparedfor both components, under which a consultative process will be set up and arange of measures will be adopted during the Project implementation in order to ensure that affected ethnic people will derive benefits under the Project and adverse impacts are avoided or mitigated. The Project, by providing access to electricity through grid and off-grid components, i s anticipated to have positive impacts on ethnic groups living in the Project villages. These positive impacts include improved irrigation conditions, creation of new income opportunities in handcraft, providing a cheap lighting option, and reducing in burdens for women and children in fetching water and rice de-husking (see Annex 9). The EPDP covers the basic legal, cultural and socio-economic conditions for the ethnic groups in Lao PDR, particularly pertaining to land tenure and natural resource use. In addition, specific consultation procedures and institutional arrangements are proposed to address the particular needs and circumstances of ethnic groups duringproject implementation. It aims to ensuring that development progress fosters full respect for their dignity, humanrightsand cultural uniqueness. The basic strategy for addressing the issues will be based on the informed participation of the ethnic groups themselves, which includes identifying local preferences through direct consultation and incorporation of ethnic groups' knowledgeinto the project planning and implementationprocess. 88 C. EnvironmentalSafeguards The Project is infull compliance with all environmental policies and procedures of the Lao PDR andthe World Bank. Inaccordance with World Bankpolicy for Environmental Assessment (OP/BP/GP 4.01) the project was rated Category B. The Project consists of both grid-extension and off grid electrification components. Gnd-extension investments will be made in seven southern provinces of Lao PDR: Bolikhamxay, Khammouane, Savannakhet, Salavan, Xekong, Champasak and Attapeu. The off-grid electrification components will spread over 17provinces inLao PDR. The Recipient has prepared action plans and framework documents for both the grid and off-grid components to address the safeguard issues. The Recipient has agreed to implement the recommendations o f the action plans and follow the procedures outlined in the framework documents. E& has gained experience in environmental and social impacts mitigation with the recently completed SPRE project, which was also financed by IDA and is very similar to the proposed project. EdL has proven adequate capacity to plan and implement these actionplans. For the grid-extension component of REP I, anticipated environmental issues are minor and can be easily managed through good engineeringdesign and construction practices. The first year programwill include 45 subprojects in 545 villages. Only 0.4 ha of land area intotal will be required with 20 percent being farmland, and about 33,000 trees will be cut. The REP Ioff-grid component will use SHS and VH and GS for off-grid electrification o f 10,000 households. The first year program will focus on using SHS only. Limited landacquisition and resettlement impacts are expected. Environmental impacts for the off- gnd component are also minor and can be easily managed through good engineering design and construction practices as well as simple, easily performed good housekeeping measures during project implementation. Typical environmental issues and actions for environmental management (control and monitoring) are included inthe framework documents. For VH schemesto be developed inthe later stage o f the Phase Iproject, the Management Contractor will be the implementing agency for the off-gnd program, supervised by the MIH PMU. The capacity of these implementing agencies for planning and implementing safeguardactions have beenreviewedby the Task Team and are considered to be adequate. The capacity of both implementing agencies (for gnd- extension and off-grid electrification activities) will be strengthenedinthe early stage of Phase Iunder a Safeguard Capacity Building program, which i s part o f the technical assistance program of the proposed project. Environmental Policy Framework for On- and Off-Grid Components. Given the APL approach adopted for the Project and environmental impacts expected, an environmental policy framework has beenprepared for both on- and off-grid activities. The EnvironmentalPolicy Framework has established detailed procedures, documentation requirements and institutional responsibilities for: (i)project identification; (ii)environmental screening; (iii) environmental documentation and document content; (iv) review and approval; (v) consultation and disclosures; (vi) monitoring and reporting; (vii) project implementation; and (viii) standard format of EMP. The policy framework was reviewedby IDA andwas considered acceptable. Environmental Management Plansfor First Year On-grid Program. EMF%for the 45 subprojects to be implementedin the first year under the gnd-extension component were prepared in accordance with the 89 policy frameworks and submitted to IDA. For off-grid component, the first year program does not include any VH or GS scheme, so no EMPis required. EMPs submitted were reviewedby IDA and were considered acceptable. For new off-grid electrification activities or changes o f grid-extension subprojects duringthe process of implementation, the Recipient agreed to prepare EMPs as necessary in lines with the policy framework documents, satisfactory to the IDA. Environmental Issues of Associated Projects. For the two associated 115 kV transmission lines to be financed by investors other than IDA, environmental assessments were prepared by MIHwith assistance o f international consultants and included inthe IDA project files. Associated reports were reviewed by IDAandconsideredacceptable fromthe safeguards perspective. 90 Annex 11: ProjectPreparationandSupervision LAO PEOPLE'S DEMOCRATIC REPUBLIC Rural ElectrificationPhase I Project of the Rural Electrification(APL) Program 1. PreparationTimeline Milestone Planned Actual Project Concept Note review 0610912003 InitialProjectInformationDocument posted inPIC 08/24/2003 InitialIntegratedSafeguards Data Sheet to PIC 0813112003 Project Appraisal 0710612004 07/19/2004 ~ Negotiations 0611312005 08/01/2005 GEF CEO Endorsement 0612312005 0811212005 ScheduledBoardDate 04/27/2006 Planned Date o f Effectiveness 0613012006 Planned Closing Date 0313112010 I Fundsexpendedto date onprojectpreparation: 0 IDAresources $603,000 0 GEFResources $237,000 0 ASTAEfunds $233,000 0 Swiss Consultant Trust Fund $25,000 Sub-total $1,098,000 0 PHRDtrustfund $1,300,000 0 GEFPDF B Grant $330,000 Sub-total $1,630,000 Total $2,728,000 IDA and GEF resources and trust funds, includingthe recipient executed PHRD and GEF PDF B, were mainly used to financing the following studies and activities for project preparation: (i) Power System Development Plan; (ii) REP Design Report; (iii)Socio-economic Survey and Establishment of RE Database; (iv) Rural Electrification Framework Study; (v) Tariff Study; (vi) Power Sector Financing Study; (vii) Power Distribution Loss ReductionStudy; (viii)consulting servicesfor preparation o fthe off- gridprogram. Estimated Approval and Supervision costs: 0 Remainingcost to Approval: us$lo,ooo 0 Estimated annual supervision cost: US$65,000 91 3. Project Team A team of IDA staff and consultants who worked onpreparation ofthe Project include: Stag e Jie Tang, Task Team Leader, Energy Specialist e Mohinder P. Gulati, LeadEnergy Specialist e YulingZhou, Senior Procurement Specialist e RebeccaC. Sekse, Financial Specialist 0 Kannathee Danaisawat, FinancialManagement Specialist e RochLevesque, Senior Counsel e Hoi-ChanNguyen, Senior Counsel e Raj Soopramanien, Senior Counsel e KarinI. Nordlander, Senior Counsel e DouglasFrenchBarnes, Senior Energy Specialist e Perry Lee Radford, Program Assistant e Melissa Ortega Sanchez, Procurement Assistant e Teri G. Velilla, Program Assistant Consultants: e Barry Trembath, LeadPower Engineer (former IDATask Team Leader for REP, retired during preparation) Chrisantha Ratnayake, Senior Distribution Engineer Morten Larsen, Energy Specialist Somphone Simmalavong, Procurement Assistant GraysonHefher, Alternative Energy Specialist Youxuan Zhu, Social Specialist BernardBaratz, Environmental Specialist Voravate Tuntivate, Economist (Social and Statistics) ShaheenaKhan, Energy Economist William Derbyshire, Economist 92 Annex 12: Documents inthe Project File LAO PEOPLE'S DEMOCRATIC REPUBLIC Rural ElectrificationPhase I Projectof the Rural Electrification (APL) Program 1. ProjectPreparationStudy Deliverables Funding Title Date Author Source I II PHRD II IDA IPower System DevelopmentPlan I August 2004 I Maunsell- Lahmever IDA REP DesignReport October 2004 NipponKoei Socio-economicsurvey IINovember 22,2004 IIDECON- SystemsEuroDe PHRD Rural Electrification Framework Study November 30,2004 Maunsell Ltd PHRD Tariff Study December 2004 Electrowatt- Fichtner PHRD Power Sector Financing Study January 2005 Maunsell Ltd. PHRD Power DistributionLoss Reduction March 2005 TEPCO Engineering ASTAE Renewable EnergyResource November 2004 Maunsell Ltd. Assessment Preparation andPlanning ASTAE Demand-Side Managemenanergy November 2004 International Institute for Energy Efficiency ProgramDevelopment- Conservation ProgramPlan ASTAE D S M E E Study Tour Report November 2004 Danish Energy Management ASTAE Operational Manual December 2004 Economic Consulting Assoc. IDA Procurement Capacity Assessment July 2004 IDA Report IDA Financial Management Appraisal December 2004 IDA Report IDA Economic and Financial Analysis March 2006 IDA I I I I 2. Safeguards Documents 93 3. Other Referenced Documents I Title Date Lao PDR: Evaluation o f Off-GridRenewable Energy December 2003 3conomic Consulting Associates Electrification Pilot DemonstrationProject EGATPower DevelopmentPlan (PDP 2004) April 2004 3eneration System Development I ?lanning Dept. EdLPower DevelopmentPlan(PDP 2004-13) March 2004 SystemPlanningOffice, Development Div, EdL 11111Draft RE FundDecree October 2004 Prime Minister's Office, GoL I Procurement Plan January 2005 MIHand EdL Project Manual - EdLComponent February 2005 EdL Proiect Manual - MIHComponent February 2005 MIH III Village Screening Process for On-grid Electrification November 2004 EdL I Audit Reports o f EdLFinancial Statements, Special Account, and Management Report EdLAnnual Reports 2003 EdL EdLFinancial Model (electronic version) 2004 EdL Electricitk du Laos Adviser's Final Report, World Bank May 2004 Resident FinancialManagement SPRE Credit No. 3047-LA Adviser, P A Consulting Group Electricite du Laos Adviser's Draft Final Report, World March 2004 Resident FinancialManagement Bank SPRE Credit NO.3047-LA Adviser, P A Consulting Group Electricite du Laos Financial Model and Financial May 17,2003 P A Consulting Group Model Users Manual Electricite du Laos Financial Modeling Assignment, March 13, 2003 P A Consulting Group InceptionReport Brief on Importance of Information Technology for the February 6,2003 EdL Commercial Mandate o f EdL Electricitk du Laos, Report on the Revaluation o f Fixed 2003 Assets Theun Hinboun Power Project, Presentation to Board November 2001 Theun-Hinboun Power Company o f Directors Ltd, Paribas 11 Power Supply Tariff Study, Draft Final Report November 2001 Robert Vemstrom I Lao PDR Tariff Study, Progress Report October 23, 2001 Robert Vemstrom I Proposal to Provide Training on Basic Concepts and September 20, PriceWaterhouseCooopers Electricite du Laos, 2001 Electricitk du Laos, Loss Reduction Programme, August 2001 Meritec Recommendations for Action to Reduce Distribution --- Losses Review o f the Contract-Plan o f Electricite du Laos for March 2001 JP Thibaut and P Tardy the Period 199711999 Review o f Electricitk du Laos Financial Model 2001 Dan O'Hearn, Sierra West I- Consulting InformationTechnology Strategic Plan for Electricite March 2000 ESBI Consultants Ltd. duLaos 94 4. PreparedTerms ofReference II Title REPIComponent I Village Off-grid ProgramManagement Contractor B.2 Off-GridInstitutionalStrengthening Village Off-Grid Quality Assurance Surveyor B.2 Off-Grid Institutional Strengthening r 1 I REFundAdvisor I B.2Off-Grid InstitutionalStrengthening I I REPilot Projects -Management Contractor B.3 Alternative RETechnologies andDelivery Models Private Sector Distribution System Pilot Project B.3 Alternative RETechnologies andDelivery Models I Pic0 Hydro Safety and Operational Awareness B.3 Alternative RETechnologies andDelivery Development Models REMaster PlanStudy B.4REMasterPlanandDatabase Assessment o f the Rehabilitationo f Existing Micro B.4REMasterPlanandDatabase Hydro Electrification Systems Assessment o fMini/Micro Hydro ResourcesinSouthern B.4REMaster PlanandDatabase andCentralProvinces IIBiomass Energy Resource Assessments B.4 RE! Master PlanandDatabase Power Sector andRegulatory Policy Advisor B.6MIHOrganizational Strengthening I Regulatory Frameworks for RE IIIB.6MIHOrganizational Strengthening III 95 Annex 13: StatementofLoansand Credits LAO PEOPLE'S DEMOCRATICREPUBLIC Rural ElectrificationPhase I Projectof the Rural Electrification(APL) Program Differencebetween expected and actual OriginalAmount inUS$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO75287 2005 L A PRSC-1 0.00 10.00 0.00 0.00 0.00 9.63 0.00 0.00 P090693 2005 Lao EnvironmentandSocialProject 0.00 4.00 0.00 0.00 0.00 3.94 0.00 0.00 PO83543 2004 L A -ROAD MAINT APL2 0.00 22.65 0.00 0.00 0.00 16.17 -3.61 0.00 PO78113 2004 LA-SecondEducationDevelopment 0.00 13.00 0.00 0.00 0.00 13.19 0.67 0.00 PO75006 2003 L A SecondLandTitlingProject - 0.00 14.82 0.00 0.00 0.00 12.65 4.94 0.00 LA-SUSTAINABLEFORESTRY PO64886 2003 FORRURAL DEV. 0.00 9.90 0.00 0.00 0.00 8.77 4.87 0.00 LA-Fin. ManagementCapacity PO77620 2002 Building Cr. 0.00 8.50 0.00 0.00 0.00 8.54 4.41 0.00 PO77326 2002 LA-Poverty ReductionFundProject 0.00 19.34 0.00 0.00 0.00 15.08 1.oo 0.00 LA-Agricultural Development PO65973 2001 Project 0.00 16.69 0.00 0.00 0.00 14.06 5.66 0.41 PO42237 1999 LA-PROVINCIAL INFRA 0.00 27.80 0.00 0.00 0.00 3.65 2.12 0.00 PO04208 1996 LA-LAND TITLING 0.00 20.70 0.00 0.00 0.00 5.41 6.66 6.72 Total: STATEMENTOF IFC's HeldandDisbursedPortfolio InMillions o fUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Pa&. 2005 Millicom Lao 4.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 _I___ 1998 SEF Endeavor 0.15 0.00 0.00 0.00 0.15 0.00 0.00 0.00 1998100 SEF Settha 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 2001 SEF Villa Santi 1.13 0.00 0.00 0.00 1.13 0.00 0.00 0.00 Total POrtfOliO: 5.46 0.00 0.00 0.00 1.46 0.00 0.00 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. Total pendingcommitment: 0.00 0.00 0.00 0.00 96 Annex 14: Country at a Glance LAO PEOPLE'S DEMOCRATIC REPUBLIC Rural ElectrificationPhase I Project of the Rural Electrification(APL) Program Lao PDR at a dance 8/25/05 East -1 POVERN and SOCIAL La0 Asia B Low- PDR Paclflc income )%v%lopmentdlamond' 2004 Population, midyear (millions) 5 8 1,870 2.33 GNIper capta (Atlasmethod, US$) 380 1,280 510 Lifeexpectancy GNI (Aflasmethod, US$billms) 2 2 2,389 1,184 T Averageannual growth, 1998.04 POpUtation(%) 2 3 0 9 1 8 Lebwforce (%) 27 1 1 2 1 GNI Gross per primary Mostrecent estimate(latestyear avalable, W98-04) capita enrollment Pover6y(5% ofPoPulefiO~behw natfflnalpovertylrnel 39 Urban population/% oftotalpopulaflan) 21 41 31 LlfeSXBectancy at birth(years) 55 70 58 Infant mMtalitylper 1,WOBvebirths) 82 32 79 Childmalnutritlunf??of childrenunder 51 40 15 44 Accessto improvedwater source Access to an improvedwater source1% ofpopulafffln) 43 78 75 Literacy(% ofpopulafmw e 154 69 90 61 Grass primaryenrollment I%olscbod-age populafronJ 116 113 94 -Lao PDR Male 124 113 101 Low-incomegroup Female 106 112 68 KEY ECONOMIC RATIOSandLONG-TERMTRENDS 1984 1984 2003 2004 Economlcralios' GDP(US$ bihns) I 8 1 5 2 1 2 5 Gross capitalforn?atifln/GDP 6 2 Expo& of W s and SeMceslGDP 2 8 25 0 26 0 24 9 Trade Gross domestic SawngslGDP 2 6 Gross nationalsavingslGDP 2 8 163 10 1 Current account balance/GDP 4.3 -12 0 -5 3 -82 Interet payments/GDP 0 1 0 3 0 5 Domestic Capital Totaldebt/GDP 29.5 1340 1336 sawngs formation Totaldebt servicelemrts 13.6 5 1 8 9 Presentvalue of debUGDP 77 8 Presentvalueof debffewrts 296 6 Indebtedness 1984.94 1994.04 2003 2004 2004.08 (avenge annualgrowth) GDP 5.1 6.1 5 8 6 3 6 2 -Lao PDR GDPpercapita 2.3 3.6 34 3 9 3 6 - Low-incomegroup Exportsof goodsandservices STRUCTUREof the ECONOMY 1984 1994 2003 1 Growth (56 of GDP) of capitalandGDP (X) i Agriculture 57.6 40.5 Industry 18.1 25.9 Manufacturing 12.9 19.2 Services ........ 24.3 25.6 Householdfinal consumptionexpenditure 90.9 94 00 O< 02 03 04 Genal gov't final consumptionexpenditure 6.5 -GCF -GDP ImpMtsof goodsand setvices 6.3 39.8 31.6 32.7 1984-94 1994.04 2003 2004 (avenge annualgrowth) AQnCUltUre 4.0 4.6 2.2 3.5 Industry 10,2 10.1 11.5 11.3 Manufacturing 12.6 10.5 6,3 13.7 Services 4.0 6.5 7.5 6.6 HouseholdRnalcmsumptionexpenditure Generalgob4 final consumptionexoenditure Grosscapitalformation importsof goodsand services ~ ~~~ Note. 2004 data are prelimnaryestimates This tablewas producedfromthe DevelopmentEconomicsLDB database * Thediamondsshowfour key indicatowin the country (inbold) comparedwth its income-groupaverage If data are missing.the diamondwill be incomplete 97 Lao PDR PRICESand GOVERNMENTFINANCE 1984 1994 2003 2004 Domesticprices 1 inflation b (% change) Consumerprices 15.5 10.5 ImplicitGDP deflator 7.7 15.7 10.5 Government finance (% of GDP. includescurrent grants) Currentrevenue 13.1 13.0 Currentbudget balance 5.3 4.8 1 I Overallsurplusldeficit -5.9 -2.8 -GDPdeflator +CPI TRADE 1984 1994 2003 2004 (US$rni/lions) Export and import levels (US$ mill.) Total exports(fob) 300 401 437 Wood products 96 94 Agriculture 12 28 Manufactures 95 105 Total imports(cif) 564 618 752 Food 100 Fueland energy 43 0 0 Capitalgoods 125 231 Exportpriceindex (2000=100) 117 108 E:po,W 01 02 03 Import price index (2000=100) 107 120 rnImports Terms of trade (2000=100) 109 90 BALANCE of PAYMENTS 1984 1994 2003 2004 (US$ mi/lions) Current account balanceto GDP (%) 1 Exportsof goods and services 50 386 554 617 Importsof goods and services 110 615 673 810 Resourcebalance -61 -229 -119 -193 Net income -18 -2 -81 -108 Net currenttransfers 46 87 97 Current account balance -76 -186 -113 -204 Financingitems (net) 70 174 133 234 Changesin net reserves 6 12 -20 -30 Memo: Reservesincludinggold (US$ mi//ions) 216 239 Conversionrate (DEC, /ocaUUS$) 35.0 717.7 10,572.0 10,670.5 EXTERNALDEBTand RESOURCEFLOWS 1984 1994 2003 2004 (US$ millions) :omposition of 2003 debt (US$mill.) Totaldebt outstanding and disbursed 516 2,080 2,846 IBRD 0 0 0 IDA 26 253 561 n . 1 Totaldebt service 7 20 50 IBRD 0 0 0 IDA 0 2 11 Compositionof net resourceflows Officialgrants 13 98 123 Officialcreditors 104 43 75 Privatecreditors 0 0 0 Foreigndirect investment(net inflows) 0 59 19 Porlfolioequity (net inflows) 0 0 0 World Bank program Commitments 6 48 25 Disbursements 4 IBRD E -Bilateral 7 27 48 3 -- D Othermultilateral F Private - Principalrepayments . ~ 0 1 7 :-IDA IMF G Short-tei Netflows 7 26 42 interestpayments 0 2 4 Nettransfers 7 25 38 Note:This table was producedfrom the DevelopmentEconomicsLDBdatabase. 8/25/05 98 Annex 15: IncrementalCost Analysis LAO PEOPLE'S DEMOCRATICREPUBLIC Rural ElectrificationPhaseI Project of the Rural Electrification(APL) Program A. Barriers to AcceleratingRuralElectrificationand Off-Grid RenewableEnergy Development Themainbarriersto achieving GoL's ambitious electrificationtargets are (see Annex 1): Insufficient RE planning capacity to prepare large-scale, integrated RE projects that would deliverhousehold accessmost cost-effectively. Too little rural householdincome and renewable energy resource data to be able to prepare and appraise off-grid electrificationprojects. Scarcity o f concessionary financing to maintainthe planned pace of RE. Excessively low rural households tariffs, coupled with low electricity consumption, debarring recovery o f costs ofrural electricity services. Absence o f integrated rural development planning, resulting in slow development of income- generating usesneededto make power supply economicallyviable. Lack o fprivate sector capacity for scaling-up implementationof RE. B. Sector Reform and Capacity-buildingAgenda Overcoming these limitations in the current technical, financial and institutional arrangements for RE would require the following power sector reforms: Improved RE Planning Information and Process. Collection of data at the sub-district level on - the number ofhouseholds, availability of renewable energyresources,andproximity of the gnd, existing and potential demand, and scope for fostering income generating activities - i s a prerequisite for coordinated planning at the provincial and national levels. An electrification master planning process (linked to resource inventory studies) that captures all renewable energy i s necessary to establish the most economical methodof electrifjmgeachvillage. Improved Institutional Arrangements for Financing, Implementing and Governing RE. While GoL has made some progress in identifying institutional arrangements to realize its ambitious RE program, technical assistance necessary to move forward is lacking. Key areas where improved institutional arrangements are neededare: RE Financing. MIHhas established an off-grid reflow account into which flow the currently- modest lease payments from purchasing households. The reflow account i s contributing to a national REF established inAugust 2005 under the Prime Minister's Decree No. 238PM issued on August 11, 2005. The legal, regulatory and institutional arrangements for the REF will be developed through this technical assistance activity to enable the REF to attract concessionary financial resources to accelerate RE, including renewable off-grid and distributed generation. REF could provide, in a transparent and rule based manner, on-lending of concessionary credit and possibly also smart subsidies on a performance basis to organizations interested in 26 Substantial inventory data is available fromprevious studies supportedbyJICA and ADB, but it is largely incomplete and not available on a spatial data frame. 99 participating inREinLao PDR. The REF i s initially capitalized with funds inthe reflow account and participationby other donors inthe future shall be facilitated. 0 Alternative Delivery Mechanisms. SPRE's hire-purchase scheme was mostly successful in delivering SHS technology, which has limitedpotential for productive uses. Piloting alternative technologies, financing and delivery mechanisms and models is necessary, including: (i) Distributed generation systems, powered by diesel, bio-diesel substitutes and/or small hydro, serving remote population centers; (ii)Rehabilitation of existing mini/micro hydro stations; (iii) Scale-up o f other promising delivery mechanisms, such as the Solar PV Rental Model; (iv) Private-sector distribution models, in which private sector developers/operators bid on development and operation of small distribution systems; and (v) Franchise schemes, in which retailers and/or ESCOs are granted regulated concession areas. Substantial start-up investment i s required to pilot the alternative models, establish organizing frameworks; support design of alternative REmodels, and enacts the enabling legal and regulatoryarrangements. 0 Creating Sector Governance Capacity at MIH. To fulfill its mandate o f governing and coordinating the development of the power sector inLao PDR (including oversight and regulation o f the national RE program), MIH and its DOE,need substantial strengthening of their sector governance ability (including setting policy and standards, regulating private sector providers of REandrationalizingand setting tariffand subsidy levels). C. Role and Status of Renewable Development Table 1 (which depicts progress of electrification in Lao PDR) shows that off-grid supplies (predominantly solar and hydro) have grown insignificance over the past five years. Table 1: ElectrificationRate The off-grid component of SPRE has electrified 5,200 households by the project completion time. With GEF support, the overall unit cost per household for the SHS has been systematically reduced to about US$200 for a 30 W system. Financial remediation comprised a hire-purchase arrangement with individual householdsproviding for an up-front payment, covering the cost o f batteries, house wiring and lamps and fixtures, plus a monthly repayment charge, based on the size o f the system purchased (20, 30, 40, or 50 W) andthe term ofrepayment (5 or 10years). The concessionary IDA credit terms arebasically passedalong, but the customer repays the full system purchase cost, out of which is drawn a contribution to a service arrangement with the VEM, who maintains the systems. The VEMs operate under a 100 performance incentive scheme that allows them to retain a small amount of the householder's monthly repayment stream. The percentage of defaulting households i s only 3 percent. The accomplishments of MM'sOff-gridOfficeunderSPREare showninTable 2. Table2: PhysicalAccomplishmentsthroughend-September 2004 SPRE Off-Grid2' Note: HH: Household D. Barriersto RenewableEnergyDevelopmentfor Off-gridElectrification The modelpilotedbythe Off-grid Office of DOE,MMhas involved seven provincial ESCOsand some 140VEMs. To broaden its coverageand increaseits pace, the following barriers mustbe overcome: Lack of technology diversity in off-grid solutions. Although the model was designed to be technology- neutral, it has thus far yielded mostly SHSs, with unimpressive results for VH and other technologies. Thereasonsare a distrust of hydro and gen-set systems, and apreference for SHS which allows individual ownership and a choice of sizes, and ease of implementation. To expand into provinces where there are more hydro and less solar resources, it would be essential to develop outreach and planning procedures that embrace a broader range of technologies. Such new procedures must be culturally acceptable, economically justified and sustainable in the context of each village, especially as regards community mobilization around the chosen scheme. Insufficient capacity to scale-up the off-grid program. To date, 6 of the 7 provinces have been in the middle-income North and Northwest. Even this modest coverage has strained the resources of MIH's Off-grid Office. The proposed plan, targeted electrification of 10,000 households under the Phase I Project, i s to continue inthe 7 current provinces while movingto as many as 10newprovinces, including several with promisingbiomass and micro-hydro potential (see Annex 4, MIHComponent). This would require: (i) greater involvement of provincial governments, especially PDM, and additional provincial and national ESCO concessions; (ii) enhanced oversight o f planning and implementation and regulation o f the performance of provincial ESCOs and VEMs; (iii) intensive capacity building in participatory planning and community mobilization, as electrification in lower-income provinces would be generator sets and/or micro-hydro rather than the simpler SHSs. Limitations and Operational Inefficiencies in Existing Off-Grid Program Administration and Management. The MM Off-grid Office provided a viable means to "incubate" the program's key *'Off-Chld Electrification Program, Lao PDR. Quarterly Project Progress Report, 31d Quarter 2004. November 9, 2004, MIH Off-Grid Promotion and SupportOffice. Five ESCOswere operational at completionof SPRE in December2004. 101 components, including the development of provincial ESCOs. However, it is becoming ill-suited to the demands of a program growing in size, scope and complexity. Shortcomings identified in an interim evaluation of the GEF-supported off-grid program under SPRE included: (i) delays and difficulties in performing work due to competing priorities; (ii) weaknesses in monitoring and enforcement, due to administrative barriers from being a government office; (iii)failure to mobilize the private sector to make long-term capital investments; (iv) over-reliance on SHS installations; and (v) difficulties in retaining staff with valuable and specialized expertise. The following residual problems need to be addressed, either through regulation, capacity buildingor improved central administration: 0 Difficulties inkeepingspares and maintainingkey components locally; Findingreliable supplies of appropriate appliances to suit village scale productive applications, especially ricemills, icemakers, grinders, and pumps; and 0 Quality problems encountered when sourcing equipment, which requires careful performance tracking. E. ElectricPowerDSMOpportunity andPotential Domestic electricity use inLaos i s growing rapidly, with retail consumption forecast to continue growing at 12percent per annum due bothto expanded grid access and to higher consumption by urban customers (see Table 3). Unit 2005 2010 2015 2020 Annual billedenergy GWh 1337 2093 3138 4320 Losses GWh 334 470 628 762 Losses % 19.98 18.34 16.68 14.99 - .- - Total Energy GWh 1672 2563 3765 5082 Growth of annual billed energy % 14 11.3 10.0 7.5 Historically, Lao PDR has exported surplus power to Thailand, which earns it valuable foreign exchange and helps Thailand avoid more costly power generation and reduces its greenhouse gas emissions from thermal generation. A steady 12 percent growth in domestic consumption together with the forecast growth of imports neededto balanceregional supply and demand wouldresult inthe cross-border balance of trade switching to a net import of energy from Thailand beginning in 2006 (see Annex 1). Based on this analysis and the power development plan promulgatedby EdL for the REP period, we may conclude for purposes of benefits evaluation that the margmal unit of production required to satisfy domestic electricity growth will be thermal power production imported from Thailand. The DSMpotential would most likely be confined to the Central 1 Area, which includes Vientiane and comprises 70 percent of total EdL consumption. Growth i s forecast at 11percent for the period 2005 to 2010, which would be met by net energy imports from Thailand, where the marginal unit of productionis thermal power. This provides the basis for estimating the greenhouse gas benefits of the GEF financed program. F. Barriersto InstitutingDSM At present, EdL does not have the capacity to estimate or analyze electricity use patterns on a tariff or customer level. There are no loadresearchmeters or end-use survey capabilities inplace. Retail and MV customers are billed on non-time-differentiated rates. There i s no DSM, energy efficiency, or integrated 102 power sector planning capacity within EdL or MM. Similarly, there is little or no private sector capacity (including manufacturerdsuppliers and potential service providers) interms of DSMor energy efficiency services providers, with the exception of the provincial ESCOs established by Off-grid Office. There is also a complete lack of awareness by commercial or domestic end-use customers including Government departments and agencies-major sources of EdL's account receivables-as regards energy efficiency technologes and practices.'' At such a rudimentarystage it i s essentialthat any DSMor energy efficiency program be carefully developed and properly positioned as regards the larger context of power sector reform, including marginal cost revenue allocation and pricing, elimination of subsidies, efforts to reduce non-technicallosses anduncollected revenues, andoverall rationalizationof the tariff structure.3oAnother potentially strategic role for DSMis inthe mitigation o f currently-high arrears on the part of Government departments and agencies. Preliminary surveys of these government facilities suggest large potential scope for improved energy efficiency (and thus reduced unpaid bills) with changes in consumption behaviors and relatively modest investments in timers, occupancy sensors, and other straightforward buildingmodifications G. The Baseline or Business-as-usual Scenario The baseline scenario with respect to sector reform and capacity buildingi s that EdL would undertake a power tariff study and certain IT improvements. However, MM,which has the responsibility for overall RE planning, design of institutional and financial arrangements, and mobilization of financing, has negligible resources. Absent GEF support, MIH would be unable to finance the measures needed to overcome major reformand capacity barriers to accelerateREandrenewable energy development. The baseline scenario with respect to renewable energy development is continuation o f the current modest-scale SHS program. Capacity for program delivery would erode, raising system costs, reducing quality and reliability, and causing delays. The consequent deterioration in SHS customer service and equipment performance would undercut customer satisfaction necessary for the ten-year period of repayment and throttle new demand. Further, no steps would be taken to build technology diversity or outsource administration and managementto more efficient private orjoint venture companies. The baseline DSM and energy efficiency scenario i s that EdL, laclung the capacity, information or equipment to analyze and potentially manage electricity use patterns, would take no actions to promote energy efficiency or introduce DSM. A burgeoning 12percent per annum growth indomestic electricity consumption would result ina consequent loss of power export opportunities to Thailand and higher Thai GHGemissions. H. GEFAlternative Project Under the GEFAlternative Project, MIH/EdLwould strengthen managementof the off-grid component in anticipation of expanding off-gridrenewable investments; undertake broad-based reform and enhance RE; andlaunchapower efficiency andDSMprogram: Institutional Strengthening of the Off-Grid Component. The thrust o f the institutional strengthening activity would be a comprehensive program o f management outsourcing, based on the recommendations of the Interim Evaluation of the Off-Grid Component. GEF preparation funds and ASTAE funds have supported substantial progress towards preparing this critical procurement. The outsourcing process would systematically address the current short-comings of the Off-grid Office by establishing functional capacity, strengthening organization and management, providing for a wider range of off-grid '' Exceptions include Lao PlazaHotel and Lao Brewery Company Ltd. 30 As tariffs continue a steady climb there may be an additional reason for GoLand EdLto undertake energy efficiency programsIhelping poor customerscope withthese price increases 103 technologies. The MIH, supported by an Advisory Council, would retain overall jurisdiction over the program, includingsetting programpolicy and standards, regulatingprovincial ESCOs and managing the REF. Technical assistanceactivities would beas follows: 0 Management Contractor. The technical assistance will support DOEof MIHin outsourcing the development and management of the off-grid program under REP Phase Ito the Management Contractor, to support DOE in achieving the objectives of the MIH Component. Major assignments of the Management Contractor include: (i) providing access to electricity to about 10,000 rural households through off-gnd technologies; (ii) providing access to electricity to 10 percent o f the 10,000 through off-grid technologies other than SHS, to diversify technologies in the off-grid electrification program portfolio; (iii)ensuring collection of the customer repayments; (iv) ensuring quality services to operational customers; and (v) reducing operational cost (payments to ESCOs, VEMs, etc. in case of SPRE) o f the off-grid program. Performance indicators associatedwith these assignments have been incorporated into the performance-based management contract, based on which the Management Contractor will receive incentives or penalties inaccordancewith its performance againstthe indicators. 0 Ouality Assurance Surveyor. The technical assistance would support DOEto engage a Quality Assurance Surveyor to act as a third-party quality assurance consultant. The Surveyor will: (i) make assessment o f the existing off-grid program and field surveys to set up the baseline of the performance indicators for future assessment of the Management Contractor's performance; (ii) assess the performance of the Management Contractor during the Phase Iperiod; (iii) make recommendations to both the Management Contractor and DOEfor improvement of the off-grid program. 0 Village Hydro Planning. The Management Contractor will provide for training of provincial ESCO staff in VH site identification and system development and later assist in developing VH system designs for up to 15 remote villages (about 900 households) to achieved targeted diversification o f off-gnd electrification technologies. 0 Integrating Pic0 Hydro into household and village-level access solutions. Technical assistance would develop pilot projects and procedures for upgrading, integrating and rehabilitating existing pic0 hydro and adding new pic0 hydro to effect household-, household cluster- and village-level solutions acceptableto localpopulations and financially and technically sustainable. 0 Facilitating functioning o f the Management Contractor and Quality Assurance Surveyor, by devolving to them necessary accounting, financial management, quality assurance, O&M, fee collection and customer relations functions including,selection ofprovinces. I. RuralElectrificationSectorReformandImprovement The technical assistance would focus on the following two sub-components: Rural Electrification Master Plan and Database. This sub-component would help refine the physical planning processes relatedto renewable components, including establishing a comprehensive REdatabase which incorporates renewable energy resource information. IDA credits would support some aspects of grid extension planning. Two preparation studies, RE Framework Study, and Social Economic Survey and REDatabasefinanced by PHRD and ASTAE, have collated existing resource studies, collected social and economic data for RE, set up an initial GIS supported RE database, and defined Terms of Reference and a framework for development of the RE Master Plan. The activities under the latter would include: (i) ofexistingREtargetsandplanningpractices;(ii) review collecting and entering new RE data into the 104 MIHREdatabase and GIS to provide a comprehensiveresource suitable for REplanning; (iii) preparing an RE Master Plan usingthe RE database and GIs; (iv) training ME3 staff inmaintaining and upgrading of the RE database and RE Master Plan; and (v) disseminate outputs of RE Master Plan to concerned provincial and district organizations. Keyoutputs expected include: 0 Assessment of small andminilmicro hydropower resources; 0 Assessment of rehabilitationof existing small and mini/micro hydropower plants; 0 An updated RE database and GIS (including necessary hardware and software), including location-specific information relevant to developing electrification schemes using solar, hydropower, and biomass, adequate for preparation of a nationwide REMaster Plan; 0 An initial RE Master Plan, covering the period up to 2020, listing villages to be electrified, their timing, cost estimateandmethodof electrification; 0 An REPlanningManualusingthe REdatabase andthe GIS, including data formats. Alternative RE Delivery Models. The hire-purchase scheme piloted under SPRE was quite successful in delivering SHS technology, which has limitedpotential for productive uses, but was much less successful in delivering village or district hydro alternatives. The conventional on-grid delivery model also has limitations due to paucity of concessionary financing. REP would need to pilot alternative financing and delivery models. Candidates include: (i) Distributed generation, with small networks poweredby diesel and/or small hydro facilities servingremote population centers; (ii) Rehabilitation o f existingmini/micro hydro; (iii)Scale-up of existing delivery mechanisms, such as the Solar PV RentalModel; (iv) Models in which private sector developers/operators develop and operate small distribution systems; and (v) Franchise schemes, in which retailers and/or commercial ESCOs are granted regulated concession areas. Substantial start-up investment i s requiredto establish the organizing frameworks, and support design of the new REmodels, and enact enabling legal andregulatory arrangements. Establishment of Rural Electrification Fund. The national REF was established under the Prime Minister's Decree No. 238/PM issued on August 11, 2005. The technical assistance would support MIH in operation and management of the national REF, including: (i) recruitment of a Fund Manager and local support staff; (ii) development of necessary legal, regulatory and institutional arrangements and operating regulations for the Fund to enable the Fund to attract concessionary financial resources to accelerate RE and to be accessibleto other participants inthe future; (iii)consideration of subsidy policy for both on-gnd and off-grid electrification in cases where consumer financing is not possible; (iv) development of publicity/supporting materials for use in donor fundraising; (iv) and liaison with potential donors/lenders. Biomass resources assessment. The technical assistance would support MIH in survey o f biomass resources to assess ifthere are promising sites to facilitate RE master planning and piloting the use of biomass technologies duringPhase I. Income-generation linkage. Technical assistance would be provided to MIH in assessment of linkage of income generation and RE, to facilitate REplanning, sustainability of RE inpoor areas and expansion of REimpacts onpoverty alleviation. Technical assistance will be provided to develop promising alternative financing and delivery mechanisms for RE by way of either on-grid extension or off-gnd household or village systems. GEF support is proposed to identify two or three distinctive and promising models/mechanisms and pilot them inthe courseofREP. Ofparticular interest would be mechanisms and models which could apply to both on-grid and off-grid electrification modes and which maximize the productive application o f renewable energy. 105 Hence, this technical assistance would explore promising alternative - technologies, financing, and delivery mechanisms - for on-gnd and off-grid RE, and pilot some of those models/mechanisms. Emphasis would be placed on productive applications of bio-fuels (including biomass gasification, biomass burning, and extraction of energy-oils from seeds) for village industries (such as rice mills and irrigation pumps), so as to replace diesel fuels. The companion IDA credit would finance the investment portion of the pilots. Alternative delivery mechanisms could comprise: Contracting to private entrepreneurs: (i)some EdL RE operational functions; and (ii) construction, operation andmaintenance ofnew sections of the distribution gnd; Refurbishment of existing micro hydro systems in remote areas, through approaches such as refurbish-operate-transfer; Arrangements for the development of renewable electricity generation resources and distribution byprivateentrepreneurs,throughbuild-operate-transfer type approaches; Mechanisms for channeling subsidies to support investments indeliveringRE; Piloting o f alternative electrification models, with technical assistance used to develop appropriate legal, regulatory and contractual arrangements and support MM in preparing, invitingbids, and overseeingone or moreprojects; Piloting of alternative electrification technologes more conductive to income generating activities, such as fuel crops or bio-fuels, that offer greater levels of supply than SHS, can replace existing uses of diesel fuels and are suitable for areas where VH cannot be introduced; and Targeting of income-generation linkages for village-level off-grid electrification, with technical assistance used to: identify, develop and pilot strategies for overcoming the limitations on income-generating activities byhouseholds following electrification. Organizational Strengthening of DOEof MIH. Technical assistance, training and placement of a specialistladvisor will support the organizational development, upgrading o f staff capabilities, development of new areas of expertise, and targeted capacity building within MM's DOE. This organizational strengthening i s needed to enable DOEto undertake its expanded role in governing the energy sector, including sector reform, regulation, planning and coordination, and tendering and procurement. This component will anticipate the technical assistance needs of DOEas it undertakes its emerging role in coordinating, planning and regulating the power sector, including RE. A preparation consultant was mobilized using GEF preparation grant and has conducted an appraisal of the DOE organization in light of its prospective responsibilities and will recommend an action plan for capacity buildingand organizational development. Technical assistance insupport of this action planwill provide training and capacity buildingintwo main areas: Power Sector SpecialisffAdvisor. Technical assistance will support the placement of a senior- level Power Sector SpecialistlAdvisor in the Department of Electricity. This SpecialistlAdvisor will support DoE's efforts to undertake its broadened sector governance responsibilities. The Advisor would be located within the Department of Electricity, and will provide advice and support decision-making across the broad range of sector issues within DoE's purview. The SpecialistlAdvisor will also play an instrumentalrole inthe overall capacity buildingwithin DOE, and will help ensure MIH fulfills its responsibilities for executing World BanWGEF operations, including operating SAs. The Specialist/Advisor will provide support to DOEmanagement and staff regarding a wide range of topics and issues, including: (i) sector reform and regulation; (ii) power sector planning, especially as regards RE; (iii) commercialization of EdL; (iv) developing policies for the sector, especially as regards subsidies and tariffs related to meeting social and development objectives; and (v) regulation (including quality assurance) o f franchised electricity providers, including EdLand the village off-gridnational ESCO. 106 e Development of Regulatory Frameworks for RE. Technical Assistance will also be provided to assist MMinidentifyingand undertaking its regulatory responsibilities as regards existing and new RE delivery arrangements. Development of these new frameworks will be crucial in preparation for Phase I1of REP. The technical assistance will support MIH in: (i) developing procedures and rules for discharging MIH's regulatory responsibilities; (ii) determining the appropriate mechanism for regulationof off-grid and main grid service providers; (iii)developing recommendations on tariff and subsidy policy as regards RE, both connections and service; and (vii) producing guidelines and reviewing existing and proposed arrangements for setting tariffs and subsidies againstthis policy. DSM and Energy EfJicCiency. GEF Grant financing for aprogramof Technical Assistance for bothEdL and MIH, covering both DSM and energy efficiency, i s proposed. The GEF Grant will support early exploration of the potential and opportunities for DSM and energy efficiency in the country, including establishment o f provisional institutional arrangements for DSM planning, energy efficiency policy development within EdL or MIH or both, and an energy audit of Government departments and agencies. A total ofUS$750,000 infundingis requestedfor this activity. Detailedplanning of this inceptionDSM program included collection o f existing data on customer electricity uses, consultations regarding organizational arrangements for DSM planning and implementation, review of DSM models and arrangementsinuse at other utilities within SE Asia, andreview o f DSMand energy efficiency planning and implementation arrangements in use in Thailand, Vietnam and Malaysia. A detailed 3-year DSM Work Programi s now inplace. The technical assistancefundingwould support the following prioritycapacity buildingneeds: Establishment o f a DSMCell within EdL's Distribution Division; Hiringandtraining ofcoreDSMstaff; Establishment of a comprehensive energy end-use database for DSMplanning; Screening and design of DSMPrograms; Implementation of pilot programs, including an energy audit o f Government departments and agencies; e M&E; e Design of full-scale programs for Phase 11; and e Development and promulgationof long-termDSMStrategy for Lao PDR. J. Project Benefits The mainbenefits andbeneficiaries of GEF-financed technical assistancesupport are as follows: e For institutional strengtheningo f off-grid implementation, the beneficiaries are rural households whose electrification has been enabled or accelerated by IDA investment and GEF support of capacity building. An estimated 20,000 households would be electrified via off-grid schemes under REP. Their benefits would be significant increases in lighting and a rise in disposable income. Currently about 85 percent of households use diesel lamps for lighting. The useful lightingof 3.1 Kilo-lumen hours i s deliveredat a cost of about Kip13,OOO per month. About 41 percent of households use car and motor cycle batteries for primarily lighting, television and radio. The average spending on battery recharge and depreciation i s about Kip25,914 per month. Incontrast, households electrified under previous IDA REprojects use: (i) electricity of on-grid 63 kWldmonth at 135 Kip/kWhor 10,895 Kip/month, and (ii) electricity through SHS or off-grid VH, with contractedrepayment amounts averagedabout KiplO,OOO/month. 107 0 Electricity would confer the following additional benefits: (i) opportunities to engage in income generating activities; (ii) flexible and/or longer worlung hours; (iii) and cheaper access to better news, information and entertainment; (iv) post-sunset study hours for children; (v) opportunities for women to engage inproductive activities (handicraft, agricultural activities) and entertainment (television, radio) in the evening. Formal research on socioeconomic impacts of off-gnd electrification in Lao PDR i s underway, although considerable informal information has been collected by MLHand EdL and has been usedhere in support of economic and financial analysis (see Annex 9). A typical characterization of off-grid electrification, based on conversations with householders inSPREvillages of Pakoup and Tapen, i s provided inBox 1. 0 For support to RE reform, including improving RE planning methods and databases and development of more sustainable institutional arrangements for financing and implementation as well as sector governance and regulation, the beneficiaries broadly comprise the 65 percent of rural households and villages that do not currently have electricity but are scheduled to receive access over the next fifteen years. The benefit of GEF-financed technical assistance to the national REprogram would be to create conditions most suitable for meetingthe goals of GoL's national REprogram. 0 For technical assistance to the establishment of DSM and energy efficiency planning and strategy capacity, the main beneficiaries include EdL customers, who would be able to access energy-efficient goods and services, and participate in DSM programs, and consumers of all modem energy types, who would benefit from the early development national plans to combat inefficient energy use. The GoL and EdL and its ratepayers would benefit as well, as moderation of the rapid growth in domestic energy consumption would maintaidenhance export earnings from sales to EGAT. Box 1: ProductiveUse of HouseholdLighting inPakoup and Tapen Villages In Pakoup, 46 of the 52 houses supplied with SHS were using the electric light in the evenings to increase production o f woven scarves and skirts. The looms hadbeenmoved into the main rooms, and lit by one solar lamp. The women and teenagers were proudthat they could contribute US$5 per monthto family incomes, and were happy to do this after nightfall with the family gathered around. This compensated for declining income from fisheries - it certainly more than covered the hire-purchase payments made on the solar systems, Villagers routinely used solar systems to charge portable 6V batteries usedto power flashlights, which were used to hunt fish and frogs at night. Several fishermen could take fishing nets out onto the lake more frequently, as electric light was available to mendnets inthe evening. In Tapen, where 58 houses are supplied by a 2.5 kW VH system, families use electric light in the evenings to make baskets for tourists, adding about US$20 income per month An ice maker constructed by a local engineer and driven from the turbine during daytime hours produced enough ice to satisfy both the tourist demand and the demand from a neighboring village. One villager used electricity to power a refrigerator she used to preserve sweets for local sale, and to charge batteries for customers from nearby villages. Another villager used electric light to extend the sewing business into the evening hours, adding about US$5 a month to her net income - much more than her monthly expenditure on electricity. A carpenter operatedpower tools for h i s furniture and wood preparation business. 108 K. GlobalBenefits Both the off-grid investment component and the DSMEnergy Efficiency components would yield significant carbon benefits. For the off-grid component, the technical assistance providedby GEF would allow IDA funds to be investedmore expeditiously and more efficiently, and with greater embrace of technology diversity. Without this technical assistance, neither the MIH Off-grid Office nor the Management Contractor would be able to maintain the ten-year lifetime and exemplary repayment record of the current hire-purchase scheme.31The fall-off in sustainability i s projected as equivalent to a 50 percent drop-out rate by subscribers by the half-way point (five years) of their ten-year repayment obligation. By contrast, a well-supported and well-functioning off-grid scheme (such as has beenthe case with the predecessor SPRE project) will have only a nominal drop-out rate. Drawing on this comparison of outcomes for the Baseline vs. GEF Alternative we can calculate that 25 percent o f the total program lifetime greenhouse gas reduction potential would be achievable only with the pairing of the GEF financed support with the IDA-financed investment component. A 25 percent reduction inthe maximum potential program-wide carbon benefits of 16,200 te C02would take 4,050 te C02off the table in the Baseline case that is recoveredinthe GEF Alternative (see Figure 1). The DSMEnergy Efficiency component is 100 percent GEF-financed, allowing the entire amount of DSM and energy efficiency savings to be counted as global benefits. As described elsewhere, any reductions indomestic energy use due to DSMor energy efficiency activities would either reduce the net imports into Lao PDR from Thailand or, if surplus EdLhydropower is available for export, substitute for thermal power in Thailand. As gas- or oil-fired thermal power constitutes the marginal production unit for bothEGATand EdL, any reduction in consumption inLao PDR would have the same carbon benefits (other than adjustment for transmission losses) as an equivalent DSM or energy efficiency program in Thailand. We assume that targeted increases in energy efficiency awareness (1 in 5 domestic customers and 1in 3 non-domestic customers by the end of Phase I) and implementation of pilot programs could save 1 percent of grid-connected electricity consumption in Central and Southern Laos each year beginning in 2006 (which amounts to about 15.3 GWh of EdL avoided power production), the reduced energy consumption has the effect of avoiding thermal power production inThailand, yelding annual greenhouse gas savings of about 8,050 te of C02annually 32If energy efficiency measures implemented have an average lifetime o f 5 years, a program lifetime savings of 76.5 GWh and lifetime carbon impacts of at least 40,250 te of C02, would result. As regards the global benefits of GEF financed technical assistance to energy sector reform activities, no attempt i s made at a numerical estimate. Qualitatively, it i s likely that improved planning methods and institutional arrangements for financing and implementation would accelerate the rural access trajectory relative to any baseline, thus displacing very significant amounts of diesel and kerosene fuels currently usedfor lightingandbattery chargmg inmost rural areas awaiting on- or off-gnd electrification. The estimated global benefits directly attributable to the GEF-financed portions o f both the off-grid implementation and the DSMEnergy Efficiency efforts are shown in Table 4 below. The incremental costs and benefits are detailed inTable 5. '' Currently, the only sources of OSUbudgetary support are the up-front subscriberpayment and the ongoingmonthly repayment. Neither is sufficient to supportthe current levelof capability of the OSU. 32 COzemissions factors for Thailand taken from Standardized Baselines and Streamlined Procedures for Selected Small-Scale Clean Development Mechanism Project Activities: A Guide for Project Developers. Netherlands Ministry of Housing, Spatial Planning and Environment, December2001. 109 Table 4: GlobalBenefitsof GEF Support to REP - - Component Basis Baseline GEF Carbon Benefits-- Alternative due to GEF Support Off-grid Averageper-HH For each HHinthe off- Fullprogram 25% of the program Implementation lighting fuel use: 5 gridprogram, 100% of potential i s lifetime potential of (10,000 HHs) liters diesel per month dieselfuel for lighting i s realizedas HH 16,200 te C02= = 13.5 kg C02 = 162 initially displaced. and VH 4,050 te C02 kg C02annually= However, half of the systems are 1.62 te C02over a HHsiHHunits drop maintained ten-yr program life outlstop working by Year and operating 5; thus, 25% of the potential carbonsavings for the programlifetime are lost DSMiEnergy Lao Domesticuse 2006 domestic use: 1331 1% reduction Carbonbenefits of Efficiency grows at 14%over the GWh inLao reducingThai period2005-2009, 2006 imports: 550 GWh domestic use imports are 8,050 necessitatinggrowing saves 15.3 te C02annuallyand Thai imports. Each GWhin 40,250 te C02 MWh of Thai thermal imports in lifetime assuming a production generates 2006 5-yr life for any 0.526 te C02 energy efficiency Total 110 3 3 3 Annex 16: IDA TeamResponse to STAP33Reviewer Comments LAO PEOPLE'S DEMOCRATICREPUBLIC Rural ElectrificationPhase I Projectof the Rural Electrification(APL) Program STAPReview Dr.Jan Hamrin,Centerfor Resource Solutions June28,2004 IDA Grantto the GovernmentofLaoPDR RuralElectrificationPhaseIProject This is a complex project involving RE, energy conservation and improved transmission efjciency, completing commercialization of Electricite` du Laos (EdL), and dejning a strategy for Jinancing sector development. In general the plan seems appropriatefor the country given the current situation. Some portions of the plan are more fully explicated than others and as a result comments are not evenly distributedfor all of theplan subparts. Key Issues Scientific andtechnicalsoundness of the project Has the most appropriate and eflective approach been used to remove the barriers? Several of the barriers are directly addressedby this approach such as insufficient RE planning capacity, concessionary financing, tariff reforms, and lack of private sector capacity for scaled-up implementation o f RE. A couple of the barriers, however, are not being addressed and could continue to frustrate successfulresults. Those include: 0 *Too little rural household income and renewable energy resource data prepare and appraise off- grid electrificationprojects; and 0 Absence o f integrated rural development planning, with the result that income-generating electricity uses neededto make power supply economically viable are slow to develop. Good thinlung has gone into the village screening process, design optimization and sector reforms and capacity building. There are also excellent ideas of how to allow the private sector to make useful contributions (though Ido not know how compatible this i s with the Lao political structure). The following discussion reinforces some of the points made in the project description and suggests some strategiesthat mightexpand the project's benefits. Discussion Rural Electrijkation: Though the broader introduction of electricity to rural population will, in theory, increase rural household income through income-generating electricity uses that do not happen automatically. In many cases, households may predominately use the electricity for general lighting, entertainment and keeping beverages chilled. Additional effort with community development workers i s required to helppeople understand how and where electricity can add value to rural micro-enterprises and support the creation of newmicro-enterprises and local economic development. Capacity buildingto help 33 STAP: Scientific and Technical Advisory Panel, GEF. 112 community development workers understand and use resource inventories and economic renewable energy applications will greatly increase the potentialprogrambenefits. Internationalexperience has shown positivebenefits especially for women runrural enterprises but larger, community-based enterprises run by men may be slower to evolve without direct help and support. If micro-enterprise and increased rural economic development i s a major goal o f this project, capacity buildingand the availability of rural financing mechanisms should be key components. The availability of micro financing to support such investments as an electric sewing machine, power drills and sanders, or other small equipment can make the difference between a significant economic improvement and an incremental improvement inthe quality o flife. Resource assessment data (including training o f in-country people who can provide such assessments on an on-going basis) should also be a key element o f non-grid tied RE usingrenewable resources. Not only do you need to know the type and quality o f the resource to be used but also to what uses the electricity will be putbefore a micro-grid or home electric system is designed. People do not take long to find all kinds o f things to do with their new source o f electricity beyond what was originally envisioned. The reason non-grid connected renewable energy systems often cease functioning i s that too much load is eventually connected to the system and the batteries are soon destroyed. Not only i s OperatiodMaintenance training important and storage o f replacement parts, but also anticipating how the system will actually be used including designing in appropriate types o f circuit breakers to prevent system overload. In the discussions of hydro, it was unclear what type and size of hydro facilities are going to be encouraged. Small hydro can be up to 30 or 80 MW in size depending uponthe definition. Even though impoundments will be smaller than for large hydro, still the setting and environmental, social and cultural mitigation are critical elements that must be developed inconcert with local communities. There are now some excellent micro- and pico-hydro technologies manufactured in Asia that can be very cost-effective, efficient and compatible with community agricultural and social life. Inaddition, the statement was made that there were too many solar home systems and not enough small hydro. However, no criteria were mentioned as the basis for malung this statement or for allocating funds in the future. The criteria should be explicit and easily understood by the consumers who will receive and use the systems. It i s also unclear why so many micro-hydro systems are not operational and how this can be avoided in the future (another area that would benefit from some explicit information). Energy Efficiency: Development o f an energy efficiency program i s another excellent element for this program however details are sketchy at best. It appears that any energy efficiency programs will be an improvement where none have existed up to this time. Butlet me suggest some possible priority areas: 0 Development o f some appliance standards (particularly for such things as refrigerators, air conditioners, water pumps and small motors. As the economy grows, these are some of the first things people will add to their households. To the extent that they buy inefficient equipment (including equipment that i s `dumped' by developed countries where it i s no longer allowed), this will require more electricity than necessary continuing the cycle o f scarce capital and electricity facilities for rural areas. It will also contribute to a longer-term problem o f trying to get rid o f these inefficient appliances later. Ifpeople in Laos have few appliances now, there is the opportunity to leapfrog some of the problems that have developed inthe western world. 0 Stock small appliances and low wattage lighting for rural use. Since the resources for RE are scarce, it i s beneficial to use these resources wisely, that means attention to the loads that will be drawing electricity. Educating people about energy efficiency i s not enough. Particularly for 113 those living inrural areas, they need to have access to efficient lighting and small appliances at reasonable prices. Otherwise they will end upwasting their electricity and their money compared to what could havebeen done with the resources at hand. Electricity Sector Reform and Improvement: It appears that a lot of thought and effort has gone into planning the electricity sector reform and improvement. The only question Iwould pose here i s the extent to which this addresses the problem of "non-technical losses and uncollected revenues" noted on page 31 of the report. If this were a major problem now for conventional electricity service, one would think it would be an even greater problem for RE. Of particular concern i s the tendency for people to `steal power' from transmission and distribution lines. Since 80 percent of the rural power will be achieved through line-extension, that would seem to substantially increase opportunities for "non-technical losses." Moreover, since rural populations often have less money than urban populations, expanding rural electricity services without addressing this problem of `uncollected revenues' would seem to exacerbate that problem even further. Identificationof the GlobalEnvironmentalBenefits andDrawbacksofthe Project Ifsuccessful,thisprojectclaimsitcouldyieldsignificantcarbonbenefits. However,Idonothave sufficient information concerning the composition of Laos existing electricity system (though my impression i s that it i s predominantly hydro) to make an independent judgment. Small hydro development is not without its negative environmental impacts includingincreased GHG production due to inundation of new areas currently covered with plant life. After inundation, these plants will rot producing methane and other GHG. There inundation also reduces the carbon sequestration capacity of the landscape. New hydroelectric sites must be carefully selected, prepared and the facilities well operated to avoid negative environmental impacts. In addition, the key words here are "if successful." This will be a difficult and complex program to successfully implement, but if successful, many benefits could accrue from it. How theprojectjits within the goals of the GEFas well as the operational strategies, program priorities, GEF Council guidance and theprovisions of relevant conventions? It appears that this project fits perfectly within the GEF, its operational strategies, program priorities, Council guidance and provisions ofrelevant conventions. Regional Context. The project i s well integrated into the regional context. However, one potential claim does not seem consistent with the program: "The expected outcomes of the global objective i s substantial adoption of renewable energy in GoL's RE program and increased efficiency of energy consumption for EdL customers, that in turn will result in increased exports of hydropower production to Thailand." Unless new hydro development i s sized beyond what is needed for RE purposes, and unless the energy efficiency is very successful and there i s little or no growth in electricity demand within Laos, Iam not sure where the increasedhydro-electricity exports will come from. Replicability of theproject. Ifthis project is successful, it could provide valuable experience and models that would be applicable inmany parts of the globe. Sustainability of theproject. If successful (and that means that sufficient training and capacity building are done to support in-country expertise, and the issue o f non-technical lossesi s addressed), the project i s designed ina manner that is sustainable. Involvement of stakeholders and capacity building in the project. For the areas where non-grid connected renewable energy development i s to take place, Istrongly suggest involving community 114 development workers and community leaders early in the process so they have a feeling of ownership in the projects as they develop. Though there i s a plan for screening communities for grid-extensions, it i s unclear how communitieslhouseholds will be selected for the home and mini-gnd systems. My experience has been that rural people want electricity but may be illprepared to identify how it mightbe most beneficially used without some outside help and support. This type o f help can result in tangible plans for micro-enterprises, public works projects (e.g. water purification, water pumping,health clinics andmeetingcenters) that might otherwise be vague ideas that never come to fruition. As mentionedseveral times previously, capacity buildingshould also be a key ingredient inevery aspect o f this project if it i s to be successful. Ido not see funds set aside for this purpose in relation to community development workers or community leaders capacity development to prepare them to efficiently use the electricity they are to receive in a manner that leads to tangble economic and micro- enterprise development. Summary. This project seems to be fairly well conceived though there are a number o f blanks in the introductory "Strategic Context and Rationale" that make evaluation difficult. Ifthe project i s successful, itwill make an excellent contributionto Laos as well as the many similarly situated countries inwhich it couldbereplicated. However, the complexity of the strategyrequires a lot o f capacity buildingand hand- holding to bringabout success. Responseby Task Team to STAP Review r- <'anment- Response and Reference - Barriers that couldfrustrate successfulresultsthat The lack of data on householdincomesandrenewableenergy resources don't seemto beaddressedinclude: will be addressedby the large-scaleand comprehensiveRE data base andmaster planningeffort to be partially financedby the GEF. Outputs 0 Too little rural householdincome andrenewable energy resourcedatato prepareandappraise off- of this work will includea comprehensivedatabaseof location-specific grid electrificationprojects; and informationrelevant to developingoff-grid electrification schemes Absence ofintegratedrural development usingsolar, wind, hydropower, and biomass andcriteria and planning,with the resultthat income-generating methodology for decidingwhich villages will be electrifiedby which electricityusesneededto make power supply methodthat includes likely near-termprospectsfor productiveuse. economicallyviable are slowto develop. Additional effort with communitydevelopment Regardingintegratedrural developmentplanningand attentionto the workers is requiredto helppeopleunderstandhow needfor micro-credit, we agreethis is akey element to any sustainable andwhere electricity can addvalue to rural micro- REprogramandfor that reasonhaveincludedGEF-financedtechnical enterprises andsupport the creation of new micro- assistanceto develop improvedapproaches to integratedrural development.Technicalassistancewill beprovidedto MIHto help enterprises andlocaleconomic development. identify productiveuses and cross-sectorlinkagesto be incorporated with off-grid RE initiativesto improvetheir development impact (such as weaving, handicrafts, health centre improvements, education improvements, water pumping, electrification ofdiesel ricemills, etc.). This will involveliaising with awide rangeof stakeholdersincluding I GoL agencies, Lao Women's Union, PovertyReductionFund,NGOs, bilateraldonors, etc. The reasonnon-gridconnectedrenewableenergy We agree that ongoingattentionto how end-usersactuallyoperate the systems oftenceasefunctioningis that too muchload off-grid schemeis crucialto sustainability. Inthe completed(SPRE) is eventuallyconnectedto the systemand the batteries of-gridschemethe provincial ESCOs andtheir village-level are soon destroyed. Not only is Operationand representatives(VEMs) were responsible for ensuringproper operation of either individual SHS or VH schemes. They are infact trainedto be Maintenancetrainingimportantand storageof aware of improperuse of systems andpassthis training alongto the replacementparts, but also anticipatinghowthe systemusers. As the VEMS are locatedat the village level, they are in systemwill actuallybe usedincludingdesigningin the bestpositionto overseethe subscribersandredressany problem appropriatetypes of circuit breakersto prevent systembehavior. The sustainabilitybenefitsof an on-sitenetworkofstaff with overload. technicaltrainingare so largethat we to retainthe essentialelements of this ESCONEMschemeinREP, regardlessofdelivery mechanism 115 i the discussionsofhydro, it was unclear what type A priority of REP will beto addressthe lack ofrenewabletechnology ndsize ofhydro facilities are goingto be diversityfound inthe SPRE off-grid component. A key strategy for ncouraged. Smallhydro canbeupto 30 or 80 MW doingso will be to embracehydropowertechnology of everysort, from 1 size (dependingupon the definition. Inaddition, householdscalepic0hydroto district-levelsmallhydro. So it is fair to l e statement was madethat therewere too many say that theprojectwill seek appropriateandeconomicaloff-grid hydro olar home systems and not enoughsmallhydro. applicationsfrom 100W to 10 MW. Our goal for Phase IofREP is to fowever, no criteriawerementionedas the basis for grow the hydroportion ofthe off-grid portfolio from the 1% levelto the laking this statement or for allocatingfunds inthe 10%level(of total off-grid households),which seems agoodstart. Thii uture. The criteria shouldbeexplicit andeasily is possiblebecausethe off-grid componentwill expandto ten new nderstoodbythe consumerswho will receiveand provincesinthe center andnorthofthe countrywhere the hydro se the systems. It is also unclearwhy so many potentialis greaterthan inthe current sevenprovincescovered. nicro-hydro systems are not operational andhowthis Regardingwhy some existingmicro-hydrosystemsarenot operational, anbe avoidedinthe future (another areathat would this isthe subjectofaJICA studyunderwaynow whose resultswill be tenefit from some explicit information). consideredindevelopingany small/districthydroaccessdelivery schemes. luggestionsfor possiblepriority DSMIEnergy These are goodsuggestionsandthe projectwill take themunder ifficiency areas: advisement. Notethatthe designofthe DSMcomponent emphasizesa Development of some appliancestandards step-wiseapproach, inrecognitionofthe very rudimentarylevel of (particularlyfor suchthings as refrigerators, air DSMandenergy efficiency inLaoPDRat the moment. The program conditioners, water pumps andsmallmotors); suggestions providedcanbe consideredduringthe pilot project and planningprocess, to be undertakenafter dataon consumeruse patterns andloadshapes is developedandan overallpotentialassessment of Stock small appliancesandlow wattage lighting DSM andenergyefficiency for Lao PDRis conducted. for rural use. Legardingthe sectorreform component,to what The overall systemlossreductioncomponent will be fundedentirelyb j xtent is the problemof "non-technical lossesand IDA andwill includebothinvestment andtechnical assistance. As incollectedrevenues" addressed, especiallygiven budgetedit will double or treble the current levelofinvestmentby EdL nore opportunitiesfor peopleto `steal power' as the inactivitiesdesignedto mitigatebothnon-technicallosses(stealing, uralpower grid is extended? diversionandtampering) anduncollectedrevenues. This reflectsthe importantofminimizing unnecessarylosses to boththe commercial viability ofEdL andthe overallability ofthe sector to continue financinginvestmentsneededfor RE andsatisfymg demandgrowth. EachBOof EdLwill haveits own lossreductiontarget andbudget and will beprovidedwith the technicalassistancenecessaryto addressany increaseinnon-technicallossesdue to growthin the size oftherural grid or the number ofrural customersserved. Small hydrodevelopmentis notwithout its negative The singlehydro scheme includedinthe SPRE off-grid component= environmental impactsincludingincreasedGHG runofriver. All ofthehydroschemesexpectedto beaddedinPhaseI productiondue to inundationofnew areas currently of the REP off-grid componentwill also berunofriver. There is a coveredwith plant life. After inundation,these plants possibilitythat the GHG emissionsfrom rotting inundatedplantlife will rot producingmethane andother GHG. There maybe an issue withlargerhydro schemes or rehabilitatedsmall hydro inundationalso reducesthe carbonsequestration schemes, butthese will not come into play untilthe secondphaseof thi capacity of the landscape. New hydroelectricsites APL. Additional detail canbe found inthe Safeguards technical annex must be carefullyselected, preparedandthe facilities of thePAD. well operatedto avoidnegativeenvironmental impacts. 116 LAO PEOPLE'S DEMOCRATICREPUBLIC Rural ElectrificationPhase I Project of the Rural Electrification (APL) Program IBRDMapNo. 33762 102° 104° C H I N A C H I N A C H I N A MYANMAR 22° 22° LAO PEOPLE'S Gulf of Tonkin Phongsaly DEM. REP. V I E T N A M PHONGSALY Vientiane Mengla VIETNAM MYANMAR Sing LUANG THAILAND 35kV Mekong Luang Moc Chau Namtha NAMTHA Nam Ko M.Et Xiengkho Pahang NORTHERN Ban Sopbao Nahin BOKEO Xam neua CAMBODIA Viengxay Huayxay OUDOM Andaman XAY LUANG HUAPHANH Gulf of 22kV NORTHERN Thailand 20° Luang PRABANG 20° Sea Prabang Xieng Ngeun Ngeun Hongsa Nam Dong SwS 22kV XIENGKHUANG Phonsavan 22kV 22kV SAYABULY 106° Huay Huay tong kon Xayabury CENTRAL 1 VIETNAM XAYSOMBOUN Vangvieng VIENTIANE SPECIAL REGION Ban Don Nam Ngum 1 Namleuk Pakxan BOLIKHAMXAY Thalat Nam Nam Phao Theun Theun Paklay Non Hai Phonsoung Hinboun Tha Ngone Bung Kan 18° VIENTIANE Thanaleng 18° THAILAND Kenthao Botene Nongkhai KHAMMUANE 22kV Udorn 1 Nakhone Tha Li Udorn 2 Panom Mahaxay Sakhon Thakhek Nakhone 2 Nakhone Phanom LAO PEOPLE'S DEMOCRATIC REPUBLIC Mekong CENTRAL 2 Dong Ha SOUTHERN PROVINCES RURAL Pakbo Mukdahan SAVANNAKHET ELECTRIFICATION II PROJECT Densavan 35/22kV Savannakhet Phine Nong Kengkok POWER PROJECT: EXISTING POWER SYSTEM: 22 kV SUBSTATIONS 230 kV SUBSTATIONS 16° SPRE II 22 kV & 12.7 kV 115 kV SUBSTATIONS 16° DISTRIBUTION LINES 35 kV SUBSTATIONS 35 kV & 22 kV DISTRIBUTION LINES (IMPORTED) SARAVANE POWER SYSTEM REGION 230 kV TRANSMISSION LINES BOUNDARIES 115 kV TRANSMISSION LINES 35 kV TRANSMISSION LINES Xeset 1 22 kV & 12.7 kV TRANSMISSION LINES Selabam XEKONG HYDRO POWER PLANTS RIVERS SOUTHERN SELECTED CITIES AND TOWNS Sirindhorn PROVINCE CAPITALS NATIONAL CAPITAL Ubon 2 Bang Yo Houay Ho PROVINCE BOUNDARIES INTERNATIONAL BOUNDARIES KILOMETERS 0 50 100 150 CHAMPASAK ATTAPEU MILES 0 50 100 JANUAR This map was produced by the Map Design Unit of The World Bank. IBRD The boundaries, colors, denominations and any other information shown 14° on this map do not imply, on the part of The World Bank Group, any 14° Y judgment on the legal status of any territory, or any endorsement or 33762 2005 C A M B O D I A acceptance of such boundaries. 102° 104° 106°