FOR OFFICIAL USE ONLY Report No: PAD 141684-AF INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT APPRAISAL DOCUMENT ON A PROPOSED GUARANTEE IN THE AMOUNT OF UP TO USD 12.8 MILLION TO THE ISLAMIC REPUBLIC OF AFGHANISTAN FOR THE SHEBERGHAN GAS-TO-POWER PROJECT September 19, 2019 Energy & Extractives / Infrastructure, PPPs, & Guarantees South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective September 16, 2019) Currency Unit = USD AFN 78.38 = USD1 FISCAL YEAR January 1 - December 31 [Afghan fiscal year: 22 December – 21 December] Regional Vice President: Hartwig Schafer Country Director: Henry Kerali Global/Regional Practice Directors: Riccardo Pulliti / Guangzhe Chen Practice Manager: Demetrios Papathanasiou / Sebnem Madan Task Team Leader(s): Christina Paul / Teuta Kaçaniku ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank A-GASP Afghanistan Gas Project AGE Afghanistan Gas Enterprise Bcm Billion cubic meters CO2 Carbon Dioxide COD Commercial Operations Date CPF Country Partnership Framework DABS Da Afghanistan Breshna Sherkat EHSGs Environmental, Health and Safety Guidelines EIRR Economic Internal Rate of Return FCS Fragile and Conflict-Affected States FIRR Financial Internal Rate of Return GHG Greenhouse Gas GoA Government of the Islamic Republic of Afghanistan GRM Grievance Redress Mechanism GSPA Gas Sale and Purchase Agreement IA Implementation Agreement IPP Independent Power Project/Producer Kwh Kilowatt-hour MCM Thousand Cubic Meters MEW Ministry of Energy and Water MoF Ministry of Finance MFD Maximizing Finance for Development MoMP Ministry of Mines and Petroleum MW Megawatt NEPS North-East Power System NPV Net Present Value O&M Operations and Maintenance PDO Project Development Objective PLR Performance Learning Review PPA Power Purchase Agreement PPP Public-Private Partnership SCD Systemic Country Diagnostic SHS Solar Home System SORT Systematic Operations Risk-Taking Tool TCF Trillion cubic feet UNAMA United Nations Assistance Mission in Afghanistan USAID United States Agency for International Development USD United States Dollar WTP Willingness to Pay The World Bank Sheberghan Gas-to-Power Project (P166405) TABLE OF CONTENTS DATASHEET ........................................................................................................................... 1 I. STRATEGIC CONTEXT ...................................................................................................... 5 A. Country Context................................................................................................................................ 5 B. Sectoral and Institutional Context .................................................................................................... 6 C. Relevance to Higher Level Objectives............................................................................................. 12 II. PROJECT DESCRIPTION.................................................................................................. 12 A. Project Development Objective ..................................................................................................... 12 B. Project Components ....................................................................................................................... 13 C. Project Beneficiaries ....................................................................................................................... 16 D. Results Chain .................................................................................................................................. 16 E. Rationale for Bank Involvement and Role of Partners ................................................................... 17 F. Lessons Learned and Reflected in the Project Design .................................................................... 17 III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 18 A. Institutional and Implementation Arrangements .......................................................................... 18 B. Results Monitoring and Evaluation Arrangements......................................................................... 20 C. Sustainability................................................................................................................................... 20 IV. PROJECT APPRAISAL SUMMARY ................................................................................... 20 A. Technical, Economic and Financial Analysis ................................................................................... 20 B. Fiduciary.......................................................................................................................................... 30 C. Safeguards ...................................................................................................................................... 30 D. Citizen Engagement ....................................................................................................................... 32 E. Grievance Redress Mechanism ...................................................................................................... 32 F. Climate Co-benefits ........................................................................................................................ 32 V. KEY RISKS ..................................................................................................................... 33 VI. RESULTS FRAMEWORK AND MONITORING ................................................................... 36 VII. INDICATIVE TERMS AND CONDITIONS FOR THE GUARANTEE ......................................... 39 ANNEX 1: Implementation Arrangements and Support Plan .......................................... 44 ANNEX 2: Economic and Financial Analysis .................................................................... 51 ANNEX 3: Team List ...................................................................................................... 62 ANNEX 4: Project Site Map ............................................................................................ 64 The World Bank Sheberghan Gas-to-Power Project (P166405) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country Project Name Islamic Republic of Sheberghan Gas-to-Power Project Afghanistan Project ID Financing Instrument Environmental Assessment Category P166405 IDA Guarantee B Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [x] Project-Based Guarantee [x] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) Expected Approval Date Expected Closing Date October 2019 June 2020 Bank/IFC Collaboration No Proposed Development Objective(s) To increase the amount of electricity generated in Afghanistan and to leverage private financing for the country’s energy sector. Page 1 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Components Sheberghan gas-to-power plant Cost (USD 42.27 million) Organizations Borrower: Islamic Republic of Afghanistan Implementing Agency: Bayat Power Electricity Services Distributor Company PROJECT FINANCING DATA (USD, Millions) SUMMARY -NewFin1 Total Project Cost 42.30 Total Financing 42.30 of which IDA Guarantee 12.8 Financing Gap 0 DETAILS -NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD)Guarantee 12.8 Non-World Bank Group Financing Counterpart Funding (Bayat Group) 42.30 Borrowing Agency 0 Local Sources of Borrowing Country 0 INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Energy and Extractives Fragility, Conflict and Violence Infrastructure, PPPs, and Guarantees (IPG) Page 2 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Climate Change and Disaster Screening The proposed Project has been screened for climate change and disaster risks. The project location as well as project components were not found to be vulnerable to climate and geophysical hazards during the project’s lifetime even if extended beyond its initial five-year term. Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of No country gaps identified through SCD and CPF b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or No men's empowerment c. Include Indicators in results framework to monitor outcomes from actions identified in (b) No SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance H 2. Macroeconomic H 3. Sector Strategies and Policies H 4. Technical Design of Project or Program L 5. Institutional Capacity for Implementation and Sustainability H 6. Fiduciary L 7. Environment and Social M 8. Stakeholders M 9. Other H 10. Overall H Page 3 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [X] No Does the project require any waivers of Bank policies? [ ] Yes [X] No Safeguard Policies Triggered by the Project No Yes Environmental Assessment OP/BP 4.01 X Performance Standards for Private Sector Activities OP/BP 4.03 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X PS1 – Assessment and Management of Environmental and Social Risks and Impacts; PS2 – Labor and Working Conditions; PS3 – Resource Efficiency and Pollution Prevention; PS4 – Community Health, Safety, and Security; PS6 – Biodiversity Conservation and Sustainable Natural Resources Management Page 4 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) I. STRATEGIC CONTEXT A. Country Context 1. Substantial improvements in development outcomes have been observed in Afghanistan since 2001, particularly in expanded access to water, sanitation and electricity, education, and health services. Macroeconomic management remains strong, government revenues have grown rapidly since 2014, and the government has engaged in an impressive range of business environment and public financial management reforms. 2. However, some gains are now eroding, and risks are rapidly rising. Economic growth has slowed substantially with a significant reduction in international troop numbers and increased insecurity since 2014. Civilian casualties remain at unprecedented levels: 10,459 killed or wounded in 2017 and 10,993 in 2018. While the United Nations Assistance Mission in Afghanistan (UNAMA) reported a 27-percent decrease in casualties in the first half of 2019 compared to the same period in 2018, violence has picked up afterward, especially in August and September. Various efforts towards a political settlement with the Taliban have been ongoing throughout 2019, but the probability of significant improvements in the security situation in the short run seems low. 3. Afghanistan faced severe economic headwinds in 2018, with the economy growing by an estimated 1.8 percent. Two main factors drove the slow growth. Firstly, severe drought had a strong negative impact on agricultural production. Secondly, business and investor confidence deteriorated significantly in the context of elevated uncertainty around: i) the level and duration of international security assistance; ii) prospects of continued or worsening election-related violence (civilian deaths reached their highest level since 2001); and iii) prospects of a peace settlement. 4. Real GDP growth is expected to have accelerated to 2.5 percent during the first half of 2019, mainly driven by the easing of drought conditions and improved agricultural production. Growth is expected to accelerate further through 2021, assuming a smooth political transition after the 2019 elections. With the population growing at 2.7 percent, however, the projected growth path will not be strong enough to improve incomes and livelihoods for most Afghans. 5. The poverty rate in Afghanistan has increased markedly from 38 percent in 2011/12 to 55 percent in 2016/17. It is estimated to have grown and deepened since then. The drought negatively impacted the livelihoods of many of the 82 percent of the poor living in rural areas. Drought-induced displacement reached record levels of 298,582 individuals, mainly to urban areas in adjacent provinces. Poverty is expected to remain high in the medium-term, driven by weak labor demand (despite an increasing labor force) and security-related constraints on service delivery. 6. For the longer term, growth prospects are predicated on improvements in security, steady progress with reforms, and sustained aid. Growth could also be enhanced by mobilizing investment in extractives, energy, and connectivity, building and harnessing the skills of Afghanistan’s youth and women, and taking steps to realize the job creation potential of agriculture and agribusinesses . Page 5 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) B. Sectoral and Institutional Context 7. Reforms and investments in the extractives and energy sectors are key for Afghanistan to achieve its full growth potential. Reforms are required immediately to both improve general investment confidence and mobilize existing economic potential. Aside from agriculture, extractives and energy are the only areas that harbor significant economic development potential for Afghanistan.1 8. Accelerated development of extractives and electricity sectors is needed for the following reasons: (i) by diversifying sources of electricity supply, more Afghans can be provided with access to the electric grid. Improved electricity supplies would also help in establishment of other industries in Afghanistan wherein electricity is a key input, leading to employment generation and economic growth of the country. This will enable Afghans to lift themselves out of poverty, by allowing them to engage in more productive uses; (ii) diversifying electricity sources will also provide for more stable supplies for those who already have access to the electric grid; (iii) increasing the supply of gas-fired power will help technically stabilize the electricity grid as the Government is advancing a 2,000 Mega Watt (MW) solar energy program (compared to 522 MW domestic power currently installed) as part of a wider green growth agenda; and importantly (iv) over the next 15 years, extractives is the only sector that has the potential to generate exports and revenues at scale, and is able to generate foreign exchange thus providing for greater fiscal stability.2 9. It is well recognized that gas power plants by independent power producers (IPPs) with medium to long term power purchase agreements (PPAs) can serve as an anchor for gas sector development . IPPs also serve as an effective on-the-job capacity building opportunity in support of the expansion of gas-based power generation. However, Afghanistan has yet to demonstrate a fully integrated “proof of concept” investment to develop and deliver natural gas. Against this background, the Government of Afghanistan (GoA) has requested the World Bank Group’s support on a dedicated development program along the entire gas-to-power value chain, which includes three inter-related initiatives aimed at jump-starting the extractives sector through a combined push-pull strategy. 10. The “push” for the development of the gas sector is provided for by a proposed new project helping to develop specific gas supply infrastructure and improve the governance of the gas sector, the Afghanistan Gas Project (A-GASP). It is prepared in parallel with the proposed Project and expected to be presented to the Board during the second quarter of FY20. The A-GASP ensures that enough gas can be supplied for current consumers, such as the fertilizer plant in Mazar-e-Sharif that is presently one of the biggest consumers, as well as future ones, in particular for power generation purposes. It is proposed to be financed by an IDA grant. The “pull” is being provided by two small-sized gas-fired power plants which will create a cornerstone market for the gas from Sheberghan: (i) the proposed Sheberghan Gas-to-Power Project, a 40 MW gas-fired IPP to be located at Sheberghan near the existing gas fields, which will initially operate for a five-year term; and (ii) the proposed Mazar-e-Sharif Gas-to-Power Project (P157827), a 58.6 MW gas-fired IPP to be located at Mazar-e-Sharif which will operate over a 20-year timeframe. 11. The first of these two IPP projects will be supported by an IDA guarantee, whereas the second will be supported by multiple World Bank Group instruments, including IDA and MIGA guarantees, an IFC 1World Bank Group. Afghanistan Development Update. Building Confidence Amid Uncertainty, July 2019. 2Extractives in Afghanistan will only reach maturity over time, but important impacts may be felt early. If properly leveraged through reforms and public investment, extractives offer a powerful instrument to maximize growth impact on livelihoods. Page 6 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) loan, and IDA PSW. The gas demand of all consumers requires the optimization of gas field facilities, including adequate dehydration, compression and desulfurization capacity. The completion of construction of the Sheberghan – Mazar Pipeline is another key requirement for the future gas supply to existing consumers, such as the above-mentioned fertilizer plant in Mazar-e-Sharif, as well as other consumers in the area, including the proposed Project. The pipeline, optimization works on the gas field facilities as well as a plan for development of the Sheberghan gas fields in the medium term proposed to be funded under the A-GASP. Electricity Sector 12. Access to electricity remains low but has steadily increased since 2004 . As of December 2018, household access to grid electricity was estimated at 34 per cent. Access to electricity is focused in urban areas3 and along transmission corridors that are connected to imported energy. Afghanistan’s per capita electricity consumption averages 178 kWh per person per year, significantly less than the South Asian average of 667 kWh per person and the average electricity usage of 3,050 kWh per person worldwide (based on 2015 data). Nevertheless, electricity access has expanded steadily, and the number of customers has grown from only a few tens of thousands in 2004 to over 1.5 million as of August 2018 (see Figure 1). More than 92 per cent are residential consumers and about 6 per cent are commercial consumers. The remaining 2 per cent include public agencies (the GoA departments, holy places, etc.) and industrial enterprises (registered & unregistered). Figure 1: DABS Growth of Customers (Source: DABS) 13. Gains in access to electricity are fragile. Afghanistan’s grid structure, which is operated as several separate grid islands (see paragraph 17), creates a challenging environment for the continued supply of power. The failure of the transmission lines between Uzbekistan, Tajikistan, and Afghanistan in February 2016, which normally would have provided 81 per cent of Afghanistan’s electricity in 2015-16, illustrates the fragility of the system and the need for diversifying power supply. Similar failures took place in early 2018. 3Since the transmission interconnection with Uzbekistan was completed in 2007, Afghans in urban centers enjoy mostly continuous access to electricity. Page 7 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Load shedding and outages are so common, even in urban areas that many homes and businesses continue to rely on private generators. A recent survey indicated that 75 per cent of grid-connected households and 57 per cent of business and institutional customers had some sort of backup supply in place4. Enhanced domestic self-reliance on electricity thus means greater security of supply. 14. Afghanistan’s electricity mix is dominated by electricity imports that are complemented by domestic hydropower. The country has limited indigenous sources of electricity, with only 522 MW of installed capacity, made up of hydro (49 per cent), thermal (39 per cent), and diesel (12 per cent). This compares to more than 1,000MW of imported electricity from four neighboring countries: the Islamic Republic of Iran, Tajikistan, Turkmenistan, and Uzbekistan (see Figure 2 below). Imports are based on annual PPAs. While current prices are low, there is no certainty on pricing or continuity of supply over the longer term. For the period of 2017-2018, electricity imports of 3,841 GWh made up 75 per cent of supplied electricity. Imported electricity is integral to meeting Afghanistan’s demand, and has resulted in the almost tripling of electricity consumption compared to the 1,289 GWh consumed in 2006. Figure 2: Electricity Supplied to Afghanistan from Domestic and Foreign Sources (as estimated for 2017/2018) (Source: DABS) 15. The current average retail tariff is 6.8 Afghanis/kWh (equivalent to approximately 9 US cents/kWh), which is below the average cost of supply. However, capital investments are largely financed by grants from donors, and the pricing reflects a deliberate choice by Afghanistan’s power utility, Da Afghanistan Breshna Sherkat (DABS), to partially pass on savings from investment subsidies to its customers. In the past, DABS has generally shown positive cash-flow and profits. This was a result of several positive factors including: donor funding of capital expenditure; exclusion of depreciation charges from the finances; and historical budgetary allocations from the Ministry of Energy and Water (MEW) and the Ministry of Finance (MoF). However, the need for sector investment exceeds the availability of donor financing, which decreases DABS ability to continue to maintain tariffs that are below the cost of supply. Furthermore, ongoing 4 Samuel Hall and Associates, Afghanistan Energy Survey 2018-2019, World Bank funded study, unpublished data Page 8 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) depreciation of the exchange rate places increasing pressure on the company’s finances as a large percentage of its costs, including the supply of imported electricity, are incurred in US dollars. 16. Plans for generation expansion see a dual role for expanding domestic supplies and enhancing electricity imports. The 2013 Power Sector Master Plan prepared by the MEW 5 presented a 20-year electricity demand forecast requiring a base case peak load of 3,502 MW and assessing a gross demand of 18,409 GWh by 2032. To meet this demand, the Power Sector Master Plan identified a combination of increasing domestic energy generation by means of thermal and hydropower plants, as well as imports. The construction of up to 150 MW of gas-fired power plants in north-western Afghanistan – the envisaged location of the proposed Project – is shown to be the least cost power generation option from 2017 in all scenarios6. 17. A further challenge related to Afghanistan’s energy sector is its transmission and distribution system which is small, fragmented, and underdeveloped. The total of installed voltage lines are: 790 km of 220 kV lines, 140 km of 132 kV lines, 1,331 km of 110-kV lines, 1,895 km of 15 kV to 44-kV lines, as well as around 6,000 km of lower voltage lines. Of this, about 2,170 km of transmission line and about 3,700 km of distribution line are operating. 7 The overall network consists of four major working islands linking the different generation sources to the grids: (a) the North-East Power System (NEPS), which consists of multiple small islands and connects 17 load users including Kabul, Mazar-e-Sharif, and Jalalabad with Tajikistan and Uzbekistan (at 220 kV, 110 kV, and 35 kV); (b) the South-East Power System consisting of Kandahar and linking with Kajaki (110 kV); (c) the Herat System linking with the Islamic Republic of Iran and Turkmenistan (132 kV and 110 kV); and (d) the Turkmenistan System linking Faryab, JawzJan, Sar-e-Pul, and Andkhoy Districts (110 kV). However, there are efforts underway to link some of these islands. A HV transmission line from Turkmenistan to Kabul and from Kabul to the Eastern provinces, financed by the Asian Development Bank (ADB), is under construction, and is expected to be completed in 2020. A transmission line from Kabul to the Southern provinces, financed by the United States Agency for International Development (USAID), is partially complete, and is expected to be completed in 2020. The proposed Project will be connected to the NEPS- Turkmen segment of the network. Gas Sector 18. The proposed Project would constitute a proof of concept both for gas development and for the expansion of gas-based power generation capable of displacing electricity imports . The most recent assessment of field production data and contingent resources for known gas fields in the Sheberghan area 8 – was conducted in July 20169 (see Table 1). According to its findings, even its 1C or “low case” estimates (see Table 1) would be enough to support a stable supply of natural gas at current production volumes; it would also be enough to provide gas-based power generation such as the proposed Project as well as the Mazar-e- Sharif Gas-to-Power Project10 in the short-term. For the proposed Project, this implies that adequate gas 5 Islamic Republic of Afghanistan MEW/ADB/Fichtner. Power Sector Master Plan. Final Report. April 2013. 6 There is only one other option that the expansion plan evaluates as being lower cost, and this is the interconnection of the NEPS and the South-East Power System within Afghanistan but which would take longer to be completed. 7 Multiple transmission rehabilitation and expansion projects are underway, most notably the CASA-1000 Project that will link Kyrgyzstan and Tajikistan (as energy exporters) with Afghanistan and Pakistan (as energy importers). 8 There are seven fields in the Sheberghan area: Jarquduk, Khoja Gogerdak, Yatimtaq, Khoja Bolan, Juma/Bashikurd and Shakarak. 9 Report by McDaniel & Associates Consultants Ltd. (under an USAID funded program). 10 This is expected to be supported by a proposed IDA guarantee. Page 9 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) supply to cover the initial five-year term of its respective PPA would require only minor investments in refurbishment and optimization of existing production and field facilities. Furthermore, the proposed Project would not need to rely on the rehabilitation and/or construction of any new gas supply infrastructure given that its envisaged location is directly at the gas fields of Sheberghan. Figure 3: Map of Gas Fields in Sheberghan Area Table 1: USAID/Mc Daniel Assessment11 Contingent Resources under Different Scenarios 2C BCM 2C TCF 1C TCF 3C TCF Jarquduq 1.233 0.04 0.02 0.10 Khoja Gogerdak 3.424 0.12 0.08 0.18 Yatimtaq 5.666 0.20 0.15 0.26 Shakarak 0.433 0.02 0.00 0.04 Juma 16.394 0.58 0.33 0.79 Bashikurd Khoja Bolan 2.601 0.09 0.07 0.13 Jangali Kalan Chekhche TOTALS 29.750 1.05 0.64 1.50 19. Current gas production can satisfy current and projected demand, including that for the proposed Project at the required pressures, for the next five years (i.e. through 2023). Current production of approximately 300-350 thousand cubic meters per day (Mcmd) comes from four productive fields that have been in production since the 1960s: (i) Jarquduq (10 Mcmd); (ii) Khoja Gogerdaq (70 Mcmd); (iii) Shakarak (80 Mcmd), which has only one well in production; and (iv) Yatimtaq (150 Mcmd). The older fields, Khoja Gogerdaq and Jarquduq, which produce sweet natural gas (low hydrogen sulfide content) are already in decline, with low wellhead pressures (4 bar) that do not meet inlet pressure requirements at dehydration and desulfurization and the proposed Project’s inlets (50 bar). Shakarak, with 37 bar at the wellhead has limited resources and, therefore, limited commercial development potential. Supply of natural gas to the Sheberghan (200 Mcmd) and Mazar (300 Mcmd) IPPs will be initially dependent on production at the 11 The gas measurement refer to billion cubic meters (bcm) of natural gas and trillion cubic feet (TCF). Page 10 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Yatimtaq field. Yatimtaq, which is still under development, has three wells in production, two of these have recently been refurbished and two additional wells are planned for 2019. These four wells are well placed to supply gas for current and projected demand over a five-year term, including for the proposed Project. An additional five wells are expected to be developed at Yatimtaq, and this would extend gas deliverability into the late 2020s. However, this development, as largely based on information gathered before the Soviet departure from Afghanistan in 1988, needs to be subject to an updated field development plan to determine the optimal number of wells to be drilled, their location and depth as well as the sequencing of drilling. The development plan would also help identify optimal sources of financing for these drilling works, i.e. wholly through Government’s budget or with support from development finance institutions. Preparation of this field development plan is contemplated among the components of the proposed A-GASP. 20. Optimization of field facilities to deal with increased offtake volumes, including dehydration, compression and desulfurization will be required prior to testing and commissioning of the power plant. Most importantly, these optimization works relate to the existing amine plant at the Sheberghan gas fields. While the GoA is in the process of tendering a turnkey contract to procure a new amine plant and dehydration unit for to ensure sustainable and reliable delivery of commercial-quality natural gas in the long term, it has, with World Bank support, procured an individual international expert who is in Sheberghan and is assisting AGE with improving operation of the current amine plant for the short to medium term. Arrangements for these works are closely coordinated between AGE, the GoA and the Project Company which is assisting the international expert on a daily basis and has also mobilized additional experts and equipment to support AGE with the optimization works. Through the proposed A-GASP, the World Bank will be further supporting the GoA to address these bottlenecks and to advance overall gas sector reforms. Institutional Context 21. The Ministry of Energy and Water (MEW) oversees the energy sector in Afghanistan and is responsible for sector planning (including investment planning), it takes the lead on preparing the National Energy Supply Program and the Power Sector Master Plan. Afghanistan’s power utility was formerly a department of the MEW under the name of Da Afghanistan Breshna Moassassa. In 2008, DABS was established as an independent and autonomous company under the Corporations and Limited Liabilities Law, although its shares remain fully owned by the GoA. It is responsible for operating and managing electric power generation, import, transmission, and distribution of electricity throughout Afghanistan on a commercial basis. It is the country’s single purchaser of power. 22. The Ministry of Mines and Petroleum (MoMP) is responsible for the governance of natural resources in Afghanistan; its long-term goals include supporting economic growth and job creation through the exploration, exploitation, and development, of the minerals and hydrocarbons sectors, with an emphasis on encouraging private sector participation. 23. The World Bank has supported MoMP via the Second Sustainable Development of Natural Resources Project (SDNRP II) and expects to continue doing so under the proposed A-GSAP, currently under preparation. Both projects are geared towards creating a sound policy and institutional framework for the extractive industries and towards enabling MoMP to transparently and effectively manage the process of rapid and large-scale foreign direct investment in the sector. Page 11 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) C. Relevance to Higher Level Objectives 24. The proposed Project is aligned with the Country Partnership Framework (CPF) 2017-2020 for Afghanistan which has been extended by two years to FY2022 during the Performance Learning Review (PLR). The CPF focuses on (i) building strong and accountable institutions; (ii) supporting inclusive growth; and (iii) deepening social inclusion which remain relevant in maintaining the balance between protecting the poor and laying the foundations for longer-term growth. The proposed Project fits within the objectives of supporting inclusive growth and building strong and accountable institutions that enables delivery of basic services to its citizens and creating an enabling environment for the private sector to increase participation across strategic sectors such as energy. It was informed and guided by the Systemic Country Diagnostic (SCD) which focuses on reducing poverty and addressing fragility as parallel and mutually reinforcing development imperatives in Afghanistan. The SCD identified both service delivery, including electricity services, as well as fiscal sustainability, as significant contributors to economic growth. By providing for the generation of indigenous electricity, its delivery to customers supplied by NEPS as well as leveraging private sector financing, the proposed Project will support both contributors. Further, the proposed Project supports the IDA18 Special Theme of Fragility, Conflict and Violence. 25. The proposed Project is also consistent with Maximizing Finance for Development (MFD) as it will use limited IDA public resources to help mobilize private sector investments to promote development, increase access to electricity, and contribute to the twin goals of increasing shared prosperity and ending poverty. The proposed Project sets out to help demonstrate the feasibility of IPPs and large infrastructure projects for public-private partnership engagements in Afghanistan. In this context, the involvement of the World Bank is critical to building confidence in the commercial viability of IPPs and creating an enabling environment for private investment in the country going forward. This in accordance with the PLR which states that energy is among the sectors which have been identified as priority for the World Bank Group’s MFD approach in Afghanistan. In parallel, the aim is to expand support to Afghanistan’s renewable energy sector by supporting additional solar IPPs, as well as possibly hydropower and wind IPPs. II. PROJECT DESCRIPTION A. Project Development Objective PDO Statement 26. To increase the amount of electricity generated in Afghanistan and to leverage private financing for the country’s energy sector. PDO Level Indicators 27. The key results indicators will be: a. Generation capacity of the plant constructed under the proposed Project (MW); and b. Private sector capital mobilized (USD). Page 12 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) B. Project Components 28. The proposed Project comprises the development, financing, design, construction and operation of a 40MW green-field gas-to-power plant as an IPP on a Build-Own-Operate basis. It will be implemented by Bayat Power Electricity Services Distributor Company (“Project Company”), a Special Purpose Company established by Bayat Group. The Project Company is 100 per cent owned by Unique Market Holdings Ltd., a British Virgin Island12 registered company. The latter is 100 per cent owned by Bayat Energy Group LLC, a Delaware registered company, whose ultimate owner is Dr. Ehsanollah Bayat. As a whole, the Bayat Group has been operating in Afghanistan for 17 years, and owns and operates several enterprises in Afghanistan, primarily in the telecommunications and media sector, but it has also engaged in oil and gas exploration, and production. The corporate structure is further detailed in Figure 5 of this document. 29. The power plant under the proposed Project will be located 20 km east of Sheberghan, and approximately 1 km west of the amine treatment plant (operated by Afghan Gas Enterprise (AGE)) at the Yatimtaq gas field in northwestern Afghanistan. The specific plot of land, on which the project site is situated, is Government owned, and has been leased to the Project Company under a lease agreement signed on 31 July 2018, coterminous with the initial term of the PPA (i.e., five years after the plant’s commercial operations date). Due to its location, the power plant will supply power to Jawzjan (Sheberghan is its center), Faryarb, Sar-i-pul and other parts of the provinces in the Balkh region. It is consistent with the 2013 Power Sector Master Plan, which identifies this as the least cost option for increased domestic energy generation (up to 150 MW of installed capacity by means of gas-fired power plants). The Project Company has entered into a five-year take-or-pay PPA with DABS, under which it will sell electricity at a fixed (non-indexed) tariff of US cents 7.5/kWh. This is slightly higher compared to the average cost of imported electricity, which ranges from US cents 5.5/kWh to US cents 6.5/kWh over a five-year period due to indexation, but is lower compared to the recently closed Kandahar Solar Project, which has a tariff of US cents 8.5/kWh. 30. The proposed Project will consist of one 40MW mobile gas turbine generator designed to burn natural gas. The balance of the plant will include a gas distribution and filtration system. The Project company has selected Siemens to supply this gas turbine. The respective generation units were shipped from Houston and arrived on site in Sheberghan in early July 2019 and were installed in early September 2019. The Project Company has identified a contractor that will undertake the operation and maintenance (O&M) of the power plant (see more details under Implementation Arrangements below). Project Cost and Financing 31. The total cost of the power plant is expected to be around USD 42.30 million to be financed by a majority equity portion. The remainder will be financed by Siemens in the form of vendor financing. The cost of the gas turbine is USD 25 million, whereas the reminder of USD 17.27 million will be used for development, 12 As of September 13, 2019, BVI is in the list of eligible intermediate jurisdictions. It underwent a Phase 1 review for which there is a Peer Review Report dated September 12, 2011 and a Supplementary Report dated October 26, 2011 and received a positive assessment. A Phase 2 Report was published on November 22, 2013, and the BVI was assigned a rating of “Non-Compliant”. Based on the Supplementary Phase 2 Peer Review Report dated August 3, 2015, the BVI was found to be “Largely Compliant” with the Global Forum’s requirements on tax transparency. (http://spapps.worldbank.org/quickstrike/BRCD/Shared%20Documents/OFC/Template%20language%20Status% 20of%20Common%20IJs%20October%202019%20(clean%20copy).pdf) Page 13 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) balance of plant, logistics and other capital expenditure (see Table 2 below). Bayat Group, as main sponsors/shareholders of the Project Company, will initially make a 25 per cent upfront payment for the gas turbine, and will fund the development cost, including site preparation works, for commercial operation. The remaining 75 per cent of payments related to the gas turbine are structured to be paid to Siemens over a period of 14 months, starting five and a half months after delivery of the gas turbine with monthly installments at USD 500,00 and USD12 million, to paid as last installment. The Project Company is actively exploring financing for this final payment from lenders. Table 2: Breakdown of Project Cost and Financing Uses of funds (in USD million) % Sources of funds (in USD million) % Turbine 25.00 59 Equity: Balance of Plant and Mobilization 5.32 13 Bayat Group 23.52 56 Logistics 4.00 9 Development costs 7.95 19 Other financing: Siemens 18.75 44 Total 42.27 100 Total 42.27 100 Proposed IDA Financing Instrument 32. The GoA has requested IDA’s support for the proposed Project, in the form of a credit enhancement tool (payment guarantee), to support the development of one of the first IPPs in the country (alongside the IPP envisaged under the proposed Mazar-e-Sharif Gas-to-Power Project which would equally be supported by an IDA payment guarantee). The proposed Project is an Investment Project Financing operation utilizing a guarantee instrument. 33. The IDA guarantee would meet a payment security requirement under the PPA . Specifically, the IDA guarantee will replace a letter of credit issued by the GoA which is currently fully collateralized by government cash. The IDA guarantee would backstop DABS' obligation to pay compensation to the Project Company for early termination under the PPA. 34. The form of IDA support envisioned for the proposed Project is a Payment Guarantee in an amount of up to USD 12.8 million. Given that coverage would be limited to DABS/the GoA’s obligation to pay compensation to the Project Company upon early termination of the PPA ( i.e., would exclude ongoing payment obligations under the PPA), the structure proposed is a Direct Payment Guarantee. 35. Under the Direct Payment Guarantee structure, if DABS fails to make termination payments that are due under the PPA, the Project Company would have the right to demand payment under the IDA Guarantee, subject to agreed grace periods and an agreed amount of coverage. Figure 4 below illustrates the structure. Page 14 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Figure 4: IDA Guarantee and Project Structure 36. A payment by IDA under the guarantee, would trigger an obligation of Afghanistan to repay IDA on demand, or as IDA may otherwise direct pursuant to an Indemnity Agreement to be entered into by IDA and the GoA. Please refer to Section VII. (Guarantee Term Sheet) below for further details of the guarantee structure. Risk Allocation 37. The allocation of commercial, technical and political risks between the Government/DABS and the Project Company under the IA and PPA is consistent with industry standards for a limited-recourse project financing structure in similarly challenging countries and sector environments . Table 3 summarizes this risk allocation, including the risks that are expected to be mitigated by the proposed IDA payment guarantee. The project sponsors will assume pre-construction, construction, and O&M risks. Gas supply is the responsibility of the GoA, through AGE, and the price is passed through to DABS under the PPA. The GoA bears the risk of gas unavailability, when that is not caused by a failure of the Project Company to perform its obligations. The off-taker will also bear the risk of political force majeure events and other off-taker risk events (e.g., unavailability of the grid). If any such event occurs, net dependable capacity will be deemed available, and DABS will be required to make a specified payment to the Project Company. The IA and PPA include customary termination provisions, such as material breach of obligations under the agreements, misrepresentations, change in law, change of ownership (in particular if DABS ceases to be owned by GoA), non-payment of undisputed amounts owed, prolonged force majeure events, etc. The termination compensation amounts differ depending on the termination trigger event. Under the IA, the GoA fully backstops DABS’ performance under the PPA and AGE’s performance under the GSPA. Page 15 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Table 3: Risk Allocation Contractual Responsibilities Phase Risks Government/ IDA Sponsor DABS Pre- Project design X construction Debt and Equity Funding X Cost Overrun X Construction Delays in Construction X Operation & Maintenance X Fuel supply X* X** Operation PPA payments (capacity, X** energy, and other invoiced X amounts) Currency depreciation X Convertibility and Transfer X X** Political Force Majeure X X** During PPA Change in Law X X** Expropriation X X** Natural Force Majeure X X X* *Unavailability of the gas for reasons outside of the control of the Project Company, would entitle the latter to the liquidated damages to be paid by AGE. As such, there would be no impact on the guarantee since the IDA guarantee is not backstopping AGE payment obligations. If however, the prolonged disruption of the gas supply leads to the termination of contractual agreements, this would give a rise to Government payment obligation, that is backstopped by the IDA guarantee. **IDA guarantee will cover these risks to the extent they lead to the termination of the IA. C. Project Beneficiaries 38. Primary beneficiaries of the proposed Project are households and enterprises using grid electricity in the areas served by transmission lines that are fed by the new power generating station. These are expected to include residential and non-residential electricity consumers connected to the NEPS-Turkmen section of the grid, specifically in Jawzjan, Faryarb, Sar-i-pul and other parts of the provinces in the Balkh region. The proposed Project would make additional power available in the system thus it will enable access to more consumers throughout the system and help reduce load shedding. D. Results Chain 39. The links between the project components, IDA’s involvement, and the project’s development objectives are simple and straightforward. A significant part of the country, including communities within the areas affected by the proposed Project, lack an adequate and reliable supply of electricity. Because the GoA lacks the resources to build new generating plants, it must look to alternative sources of financing, i.e., via the private sector. The Project Company is strongly committed to developing a 40 MW power plant to supplement the region’s electricity supply. However, the proposed off-taker for the power, DABS, represents a significant commercial risk, given that its financial viability is compromised by a rising gap between its revenues and its costs of supply. While DABS works towards improving its operating efficiency and maintaining its financial viability, an IDA payment guarantee is proposed that would in part indemnify the Project Company in the event of early termination, and facilitate the construction of a new power plant and Page 16 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) a consequent increase in the available supply of electricity. At the same time, successful implementation and operation of an IPP in Afghanistan serves as an example and as a model for other potential private sector developers and it is hoped that this will stimulate additional investment in this and in other sectors of the economy. 40. The Results Chain can be viewed as follows: a. Inputs – approximately USD 40 million of private sector investment, supported by an IDA direct payment guarantee of up to USD 12.8 million. b. Activities – construction and operation of a 40 MW gas fired power plant close to the Sheberghan gas fields, with an interconnection to the 110 kV Sheberghan substation. c. Outputs – an increase of approximately 300 GWh of electricity annually delivered to the grid. d. Outcomes – grid customers in the areas served by the new plant will have access to additional electricity supply with a consequent reduction in forced and unforced outages, and a reduced need for backup supply. e. Impacts – Increased electricity supply offers opportunities for customers to acquire and use additional machinery and appliances, which in turn supports both social and economic development. E. Rationale for Bank Involvement and Role of Partners 41. The World Bank Group is uniquely positioned to support the envisioned gas-to-power IPP in Sheberghan through its financing and risk mitigation instruments , as well as its early engagement with the project sponsors and its ongoing dialogue with the GoA concerning Afghanistan’s power sector. As such, the GoA engaged in negotiations with the Project Company and proceeded with the signing of project agreements which contemplate the possibility that an IDA guarantee could be provided at a later stage. The support for IPP implementation will facilitate enhancement of the Afghan power sector and foster future investment opportunities in subsequent projects of a similar nature. 42. The IPP, as supported by the proposed IDA guarantee, would have a strong signaling value to private investors, as it will help the GoA to improve its interaction with private sector investors and reduce costs of future developments. At the same time and through its involvement in the Mazar-e-Sharif Gas-to- Power Project, the World Bank Group (which is largely identical for the proposed Project) has accumulated considerable experience in dealing with the complexities of preparing an IPP in Afghanistan, and this will be beneficial to the efficient implementation of the proposed Project. F. Lessons Learned and Reflected in the Project Design 43. The following lessons were considered when designing the overall project: 44. Starting small. At 40 MW, the proposed power plant is small compared to the overall installed capacity of 500MW. The GoA has ambitious plans to leverage the private sector to deliver energy generation projects using the IPP model. Starting with a small-sized IPP provides for sufficient room to adjust the model going forward and allows for learning on the ground. Page 17 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) 45. Significant upstream sectoral level engagement is critical in the success of projects, especially in infrastructure. Key infrastructure sectors, such as energy with complex reforms and investments needs require a sustained level of effort with all stakeholders, public and private, over a long period of time to ensure that necessary ground work is done before an investment is committed. The amount of upstream sectoral work undertaken by the World Bank to unlock the indigenous gas sector and simultaneously to develop a bankable IPP framework has led to a viable long-term solution for the country’s energy needs. 46. Lessons learned from the World Bank Group’s experience with IPP projects, in particular those in challenging FCS (Fragile and Conflict-Affected States) IDA countries, have been incorporated into the proposed Project’s design. Deploying World Bank Group instruments in an optimal manner can mobilize project financing even in difficult and high-risk FCS countries. Recent World Bank Group-supported projects include IPPs in Mali, Senegal, Nigeria, Kenya, and Sierra Leone. In these operations, IDA payment guarantees de-risked the projects by covering the off-taker risk, helping the country to attract investors and lenders, and facilitating IFC and MIGA participation. The proposed IDA guarantee operation has incorporated experience from these joint operations, and has built on it through the harmonization of respective instruments and due diligence activities that enhance efficient World Bank collaboration. 47. In the Afghanistan context, project sponsors need to demonstrate the requisite technical and financial strength to carry out a long-term engagement as well as a long-term commitment, despite the country’s security and political risks. Attracting foreign investment for one of Afghanistan’s first IPPs is a challenge for many reasons. The proposed Project will be implemented by a Bayat Power Electricity Services Distributor Company (Project Company), a special purpose company established and owned by a local conglomerate with a US-based parent company that has been active in Afghanistan for 17 years. 48. The proposed IDA guarantee structure has a proven track record of mobilizing private investments. The IDA guarantee efficiently mitigates the payment risks associated with state-owned off- takers and/or governments, which have yet to establish a track record of contractual performance towards private sector projects. In the case of a payment delay, the IDA guarantee would provide valuable time for the off-taker and the GoA to resolve any liquidity issues while avoiding payment default linked to early termination; as such, it is designed to ensure the continuous operation of the power plant during periods of payment delays. 49. Guarantees are able to leverage limited IDA resources efficiently by covering only a limited, but critical, amount of funds in the case of default. This is helpful to Afghanistan as donor financing for infrastructure investments to meet the country’s substantial investment needs is increasingly scarce. The proposed IDA guarantee of USD 12.8 million is offered by using an allocation of only USD 3.2 million from Afghanistan’s IDA country envelope. This guarantee will leverage approximately USD 42.30 million in investments from Bayat Group as a private project sponsor. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 50. The proposed Project will be implemented by Bayat Power Electricity Services Distribution Company, a limited liability company incorporated in Afghanistan, as the Project Company. The Project Page 18 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Company will be responsible for construction, operation and maintenance, as well as financing of the power plant. The Project Company is 100 per cent owned by the Bayat Energy Group, through a subsidiary called Unique Market Holdings Ltd. (see Figure 5). Figure 5: Bayat Power Corporate Structure 51. The Project Company has entered into a five-year PPA with the local utility DABS for the sale of the entire capacity and plant output, an IA with MEW on behalf of GoA, and a Gas Sale and Purchase Agreement (GSPA) with AGE on behalf of MoMP (see Figure 4 above). 52. Construction: The Project Company has entered into an Equipment Supply Agreement with Siemens Energy Inc. for supply of the gas turbine while Relevant Power Solutions (RPS) International, Siemens exclusive packager of mobile gas turbines, is responsible for implementation, testing, and commissioning of the unit. Construction works are limited to site preparation work, namely construction of an access road, power house, office space, housing and cafeteria for staff, as well as other ancillary work. The Project Company has already started these site construction works which are in advanced stages. 53. Operation and Maintenance: O&M of the power plant will be handled by RPS with whom the Project Company is finalizing a five-year O&M contract. 54. DABS will be responsible for the off-take of the power generated and for payment of charges consistent with the PPA. AGE will be responsible for gas supply to the plant and for receiving payment in accordance with the terms of the GSPA. The gas price will be charged back to the off-taker on a pass-through basis. The gas supply risk is allocated to the gas supplier, i.e., the GoA through MoMP and AGE. The responsibilities of AGE and DABS vis-à-vis the private sector developers and development of their planning and operating capacity is being supported under the proposed A-GASP and as part of technical assistance to DABS. 55. DABS, as the off-taker, is liable for its performance under the PPA and for connection of the power Page 19 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) plant to the grid. Construction of a 3.3 km of transmission line (all on Government owned land) that is needed between the IPP and the 110-kV substation at Sheberghan was completed by DABS during the last quarter of 2018. B. Results Monitoring and Evaluation Arrangements 56. The Project Company will monitor project outcomes and results indicators . The Project Company and DABS will be responsible for preparing and submitting progress reports to IDA, as required under the IDA Project and Cooperation Agreements. The results framework for the proposed Project is set under Section VI. of this document. C. Sustainability 57. Technical sustainability of the proposed Project is supported by the involvement of a technically qualified implementing agency and by the use of well-tested and generally simple technologies for electricity production and transfer. With respect to fuel supply, as noted in paragraph 19, expert assessments suggest that there is sufficient gas readily available from existing wells that can supply the 40 MW plant for at least five years at full operation. However, the GoA will need to address identified shortcomings in gas gathering and processing and in particular, will need to optimize existing infrastructure and add a new amine plant. This is further detailed under Section V. (Key Risks). The GoA is currently assisted by an international expert on the ground for improving operation of the existing amine plant, as well as experts provided by the Project Company. is also tendering a new amine plant, dehydration unit and other required equipment which will provide the necessary back-up for the current facility. 58. Financial sustainability for the Project Company is linked to the sustainability of payments by the off-taker, DABS. In this context, certain risks associated with DABS’ commercial viability, given current tariff schemes and the agreed tariff with the Project Company, have been identified. These and appropriate mitigating factors are described under Section V. (Key Risks). IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis 59. The proposed Project will contribute to developing Afghanistan’s power sector in an inclusive way that links domestic natural resources, infrastructure and communities. Key benefits of the proposed Project include increased security of energy supply through reduced reliance on electricity imports, as well as support for the development of indigenous gas resources. It will also have a substantial economic benefit as increased availability of grid electricity services will displace more costly alternatives and facilitate economic growth. The IPP model as supported by the proposed Project is anticipated to serve as a platform for future similar projects across Afghanistan resulting in future investment opportunities. A financial analysis for both DABS and the proposed Project has been conducted during the due diligence process (paragraphs 76-86 and Annex 2). Page 20 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) Economic Analysis 60. Domestic gas fired power generation is part of the least cost expansion plan13 to satisfy growing demands for electricity in Afghanistan in general and in the NEPS in particular. The plan includes investments in transmission capacity to allow increased imports of power from neighboring countries, rehabilitation of existing generating assets within the country, interconnection of transmission networks to allow optimization of power supply, and development of new generating capacity based on domestic resources. Balancing between domestic and imported supply options was an imposed constraint on the least cost plan rather than an economic choice. However, subsequent analysis using techniques of decision-making under uncertainty validated the premise that domestic gas-fired generation was preferable to imports under a wide range of future scenarios.14 61. Evaluating the proposed Project’s cost and benefits presents challenges in that it is difficult to estimate or justify a monetary value for the primary benefits (security of supply, support for gas development). The only readily monetized benefits of the proposed Project are the welfare gains accruing to electricity customers who will have incremental access to grid-based power once the proposed Project is operational. These welfare gains are measured by the area under the observed demand curve for electricity, often referred to as the willingness to pay (WTP) for electricity supply. This WTP includes the actual customer payments for electricity (consumption times the tariff) as well as the consumer surplus accruing to customers as a result of the avoided cost of alternatives. In the case of household customers, the primary alternative was assumed to be a Solar Home Systems (SHS). In the case of institutional, commercial and industrial customers, the alternative source of power was assumed to be diesel generators. Based on these assumptions, the weighted average customer WTP in the NEPS region was estimated at USD 0.14 per kWh. This same methodology and assumptions were used to estimate the benefits of the related Mazar-e- Sharif Gas-to-Power Project and the A-GASP. Details of the methodology and assumptions are provided in Annex 2. 62. The cost side of the analysis included all of the costs of incremental supply including capital cost of the plant, capital cost of the incremental transmission and distribution networks15 required to deliver the power to the customers, operating and maintenance costs for the plant and networks, technical and non- technical losses, and the economic cost of gas supply. Capital costs and operating costs of the turbine generator were provided by the Project Company, while DABS confirmed the cost estimate for the transmission line. 63. In the short term, the cost of gas supply is based on supply from existing wells, including the planned investments in gas infrastructure that are being financed under the A-GASP. In the longer term, the estimated economic cost of gas includes capital investments in field exploration, well drilling and other gas infrastructure needed to ensure supply for the duration of the proposed Project. The estimated short-term cost of gas supply is estimated at USD 65 per MCM while the long-term cost is estimated at USD 150 per 13 Compare Islamic Republic of Afghanistan MEW/ADB/Fichtner. Power Sector Master Plan. Final Report. April 2013. 14 Gencer, D., Irving, J., Meier, P., Spencer, R., Wnuk, C., Energy Security Tradeoffs Under High Uncertainty, World Bank/ESMAP, 2018, Annex 4 15 The incremental power from the power plant will flow both to existing customers to meet growing demands and to customers newly connected to the grid. Thus, an unknown proportion of the distribution network is already in place. Assuming that new distribution infrastructure is needed for all incremental power represents an extremely conservative approach. Page 21 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) MCM. Both costs include a royalty/depletion premium of USD 50 per MCM. Because of the relatively short term of the proposed Project’s five-year duration relative to the likely useful life of the equipment, credits equal to the estimated residual value of the turbine, balance of plant and transmission and distribution networks were applied to the cash flow in the final operating period. 64. The Economic Internal Rate of Return (EIRR) for the proposed Project over its planned five-year life is estimated at 15.5 percent. Net Present Value (NPV) at a 6 percent discount rate is estimated at USD 14.5 million. 65. An analysis of switching values was also carried out to determine what changes in key assumptions could be tolerated before the estimated EIRR falls below 6 per cent. The results of the switching analysis are summarized in Table 4 below. The switching analysis indicates that the proposed Project can sustain threshold levels of EIRR with relatively substantial changes to the key underlying assumptions. The main exception is the sensitivity to the estimation of customer WTP. However, average WTP is heavily influenced by the current tariffs (average 8.6 cents/kWh) which represent a lower bound on the WTP for grid supply. Tariffs have not changed in Afghanistan in over three years, and planned increases in the electricity tariff to re-align them with DABS’ costs may lead to some demand suppression. However, given the strong support for grid connection, it is also likely that the observed WTP will rise rather than fall compared with the base-case assumption, particularly if the PPA got extended for up to two five-year periods which is an option contemplated in the agreement. Table 4: Switching Value Analysis For 6% EIRR Unit Base Switch Value Change Average WTP USD/kwh 0.140 0.119 -15% Short Term Value of Gas USD/MCM $65.00 $142.31 119% Long Term Value of Gas USD/MCM $150.00 $359.16 139% Capital Cost USD million $42.27 $58.50 38% DABS losses % 35% 46% 30% Plant Dispatch % 80% 61% -23% 66. Returns on the proposed Project are favorably impacted by the limited lifespan of five years and hence the relatively favorable gas prices over its first three and a half years of operation. As noted above, the PPA includes options to extend the agreement for two further five-year periods, which indicates an interest on the part of both parties to continue the relationship. If the agreement were to continue with existing terms regarding tariffs and the cost of gas, the proposed Project’s EIRR would be somewhat lower. Extending the agreement to reflect the more typical 20-year life of a generation project would decrease the EIRR to an estimated 12.9 percent with a NPV of USD 27 million. 67. As noted earlier, the benefits and costs discussed above include only those that can be readily monetized. There are significant benefits to Afghanistan associated with the planned IPP that do not lend themselves to quantitative value analysis. These include: (i) a reduction in the country’s reliance on imported electricity; (ii) demonstrated feasibility of private sector involvement in electricity supply; (iii) and Page 22 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) a firm market for indigenous natural gas which will hopefully help to stimulate further investment in developing gas resources. Taking these benefits into account provides a stronger case for the net economic benefits of the proposed Project than that suggested by the quantifiable benefits alone and validates the GoA’s decision to proceed. 68. With respect to gross carbon dioxide (CO2) emissions from the proposed Projec, these are expected to average 124,000 tons per year over its five-year life, or a total of 621,000 tons. The extent to which this is a net increase in regional emissions depends on the assumed counterfactual. It could be argued that the proposed Project would displace an equivalent level of imports from neighbouring countries, (i.e. the baseline emissions) all of whom also largely use gas to produce power. Assuming conservatively that their plants are more efficient than the proposed Project (i.e. that they are combined cycle gas turbines as compared to the simple cycle turbine the proposed Project will use), it is estimated that the counterfactual to the proposed Project would be a corresponding reduction in greenhouse gas (GHG) emissions for a net impact of approximately 110,000 tons per year, or a total of 550,000 tons over the project life. This would reduce the net impact of the proposed Project to an average of 14,000 tons of carbon per year or a total of 71,000 tons over the life of the project. Reality in the short term will probably lie in the middle, with some of the proposed Project’s emissions displacing imports and others being incremental. 69. Using the prescribed values for the social cost of carbon (under the low scenario given the low per capita emissions that already prevail), the average cost of carbon emissions from the proposed Project would be USD 4.4 million per year over five years, while the average cost of emissions from a corresponding level of imports would be USD 3.9 million. The net GHG impact of the proposed Project would be between USD 0.5 million (full displacement of imports) and USD 4.4 million per year (all emissions from the proposed Project being incremental). In present value terms, total impact over the five-year life of the proposed Project would lie somewhere between USD 2.5 million and USD 21.5 million. In the longer term, it can be argued that by demonstrating the feasibility of gas fired generation, the proposed Project would help to forestall development of the country’s coal sector. A coal fired plant producing the same GWh of power would produce roughly 250,000 tons per year of carbon. While these impacts would likely occur later than those of the proposed Project, they would come at a time when the social cost of carbon is also correspondingly higher than now. Fiscal Impacts 70. Overall the fiscal impacts of the proposed Project are relatively modest, owing at least partly to the relatively short term of the proposed Project’s lifespan. Potential fiscal impacts on the GoA were studied in relation to three areas: - Direct impacts on the GoA budget related to the cost of domestic gas supply; - Financial losses to DABS owing to a combination of high transmission and distribution losses and the narrow margin between the purchase price and the average tariff in the NEPS region; - Balance of payments effects owing to the difference between the payments to the IPP for electricity (which are denominated in USD) and the offsetting reduction in payments for electricity imports; and - Taxes paid by the Project Company including corporate income tax and business revenue tax. 71. The cost of gas supply, while notionally included in the electricity tariff, is the responsibility of the Page 23 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) electricity off-taker (DABS) and by extension the GoA. During the first three and a half years of the proposed Project (mid 2020 to the end of 2023), gas supply for this and other customers in the region is expected to come from existing wells. Payments for the gas will flow from DABS to the state-owned enterprise AGE with no net fiscal impact. Beyond the initial period, meeting the ongoing needs of gas customers, including the Sheberghan power plant, will require new investments in gas exploration and development to maintain and expand production. Private sector involvement and expertise is expected to play a major role in the future development of gas resources and the prices that they will command are likely to be influenced as much by perceived risks as by actual development costs. The economic analysis used a figure of USD 150 per MCM, which included a royalty payment to the Government of USD 50 per MCM. The expected total cost of gas would be USD 9.9 million in the proposed Project’s fifth year and USD 5 million in its sixth (half) year, all of which is the responsibility of the off-taker. DABS would absorb the equivalent of USD 5.2 million per year in its tariffs (based on a gas price of USD 78 per MCM), leaving a residual of USD 4.8 million per year to be absorbed by the GoA. Offsetting this, the GoA would earn a royalty of USD 50 per MCM on the gas sales for an annual total USD 3.3 and USD 1.7 million respectively. In present value terms, the net fiscal burden associated with unrecovered gas costs over the last one and half years of project operation would be USD 1.6 million. 72. Losses that DABS might incur on the purchase and resale of power from Sheberghan were also an area of concern. DABS current average tariff in the NEPS region is USD 0.086 per kWh, but approximately 35 percent of power purchases are lost in transmission and distribution. In the case of the proposed Project, the purchase price (including fuel costs) is USD 0.075 per kWh, which equates to a delivered price of USD 0.115. Over the life of the proposed Project, the present value of DABS losses would total USD 21.3 million. However, DABS losses are largely a function of non-compensatory tariffs and excessive technical and commercial losses. A tariff increase of, e.g., three percent per year over the course of the proposed Project could reduce DABS losses by more than 30 percent to USD 14.6 million. Successful implementation of a loss reduction program, including measures to allow for easy identification of theft and technical issues, would further reduce the deficits. 73. The third consideration is the effect on the GoA’s foreign currency balances. Power from Sheberghan is expected to displace electricity that would otherwise be purchased from neighboring countries. The current average tariff for these imports is USD 0.055 per kWh. The tariff paid to the IPP developer net of fuel costs is USD 0.045 per kWh payable in foreign currency.16 The net savings in foreign currency flows over the project period is estimated at USD 11.2 million. 74. Finally, the GoA is expected to receive payments of both corporate income tax (20 percent of profits) and business revenue tax (four percent of revenues) from the Project Company . The financial analysis indicates that the estimated ROE for the project is 12.2 percent. Based on the estimated equity financing (56 percent), the estimated annual profit would be approximately USD 2.9 million and the implied corporate tax at 20 percent would be USD 0.7 million per year or USD 3.0 million over the life of the proposed Project. 75. Overall, the proposed Project’s net fiscal impacts are small. Table 5 below summarizes the range 16The total price for the power is 7.5 US cents per kWh. Of this, DABS pays 1.9 cents to the gas supplier, 4.5 cents to the Project Company (in foreign currency) and a further 1.1 cent paid to the project company but denominated in local currency as a supplemental contribution linked to gas supply. Page 24 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) of impacts. Net negative impacts are projected to be USD 0.3 to USD 1.6 million per year of the five years of the project. By comparison, Afghanistan had a fiscal surplus in 2018 in excess of USD 100 million on total revenues of USD 4.8 billion. Imports of goods totalled USD 7.4 billion, USD 1 billion of which was mineral fuels. Thus, in the larger national context, the fiscal impacts of the proposed Project are very small. In return, the GoA will benefit from an incremental source of electricity to meet growing demands of households and enterprises (whose WTP exceeds the cost of supply), reducing its reliance on imported electricity, and providing a market for new domestic gas resources which, if expectations materialize, will reduce the country’s long-term reliance not only on imports of electricity but on imports of other costlier energy as well. Table 5: Net Fiscal Impacts over Project Term (USD million) Base Case 3% DABS Tariff Increase Negative Positive Negative Positive Uncompensated gas cost -5.24 -5.24 Royalties on Gas Sales 3.64 3.64 DABS losses -21.29 -14.61 Net Foreign Currency Impacts 11.26 11.26 Corporate Income Tax 2.96 2.96 BRT 0.47 0.47 Total Impacts -26.53 18.32 -19.85 18.32 Net Impact -8.21 -1.52 Net Impact per year -1.64 -0.30 Financial Analysis 76. DABS’ financial performance has declined over the past few years. While DABS reported a continuous positive net income from 2012 to 2015, in the last few years it has reported net income loss. This change of trajectory is attributed primarily to the revaluation exercise that lead to increase in depreciations cost, an increase in the price of electricity imports, as well as increase in the operational expenditures. Compared to increase in revenues, cost of electricity purchased has been increasing faster. However, in spite of this DABS has been able to generate positive cash flow from operation, thus enabling it to meet its short- term payment obligations. During this period, DABS has also been enjoying the grace period on its debt portfolio, 17 which is on-lent by the GoA at a concessional rate, thus putting less pressure on its current liabilities. Going forward, DABS will not be able to maintain this liquidity without taking measures at improving its operational efficiency, and addressing technical and commercial losses, which stand at 33 percent. The paragraphs below provide more details of the current financial position and forecasted one. 77. DABS’ overall historical financial performance: DABS historical financial analysis has been conducted using the audited financial statements for the period FY2016 – FY2018. The fiscal year covers the period of December 22 to December 21. While the auditor’s report has historically contained a qualified opinion, there have been some improvements resulting in a reduction of items under the list of qualifications. 17As a relatively young entity (it was incorporated in 2008), DABS has started borrowing in 2009, primarily in the form of GoA on- lending with long grace period and concessional rates. Page 25 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) As of the latest report, the key issues identified by the auditors pertain to: (i) the methodology used for revaluation of Property, Plant, and Equipment (PP&E); (ii) lack of recognition and accounting for certain non- monetary grants that DABS has received throughout the period; and (iii) challenges with physical verification and valuations of the inventory items. Bearing these in mind, the World Bank has conducted a historical financial analysis using the financial statements as reported by DABS. 78. DABS financial performance over the past few years: While DABS reported a continuous increase in revenue from AFN10.2 billion in 2012 to AFN25.5 billion in 2018, it has recorded net income losses in FY17 and FY18 of AFN0.39 billion and AFN1.63 billion, respectively. This is driven primarily by the increase in the cost of power purchase and other general operational expenditures, which have doubled in the last two years compared to the previous year. In addition, there are high losses in distribution and transmission network that currently are estimated at 35 per cent. This reflects a combination of both, technical and commercial losses: DABS currently collects only 65-70 per cent of electricity billed, which is estimated at 85-90 per cent of the electricity sold. In term of the increase in operational expenditures, part of this increase is driven by depreciation cost, which has increased significantly following revaluation of DABS assets’ in 2016 as its asset base doubled from AFN47 billion to AFN130 billion. On the revenue side, while DABS reported an increase of only 3 per cent in FY18, the cost of power purchase increased by 11 per cent. This led to a decrease in gross profit margin from 23 per cent in FY17 to 16 per cent in FY18. It is worth noting that the increase in revenues had been driven primarily by the increase in sales rather than in tariffs. 79. However, in spite of net losses recorded in the last two years, DABS has been able to generate positive cash flow from operations in the amount of AFN0.59 billion, AFN0.70 billion and AFN1.99 billion in FY2016, FY2017 and FY2018, respectively. Nonetheless, this is not sufficient to cover the need for extensive capital expenditure (Capex). In 2016, DABS undertook significant capex increasing its investments in 2016 to AFN12.96 billion compared to AFN2.52 billion in 2015. Since then and for the period under review, the investments in Capex has remained relatively stable, amounting to AFN13.39 billion in FY18. The financing for Capex is primarily through donor funding, and long-term financing in a form of government on- lending. 80. While overall DABS historical performance has been relatively stable, it is showing signs of deterioration, as illustrated with the worsening of the gross and profit margins (see Table 6 below). DABS current ratio is very healthy, albeit at a declining trend. Similarly, its overall leverage has increased due to an increased Capex program and funding for it by means of new loans. Currently, its debt portfolio stands at AFN26 billion (UD323 million), with total commitments amounting to USD 1.86 billion. While servicing most of these loans is still at a grace period stage, repayment is expected to impose a significant financial burden on DABS. Given the increased investment needs going forward and the need to finance them with a combination of donor funding, DABS internally generated resources, and new loans, DABS has agreed with the MoF to convert government on-lend existing loans into equity. This is expected to be reflected in FY19 and FY20. Table 6: Summary of Key Ratios Ratios 2016 2017 2018 Efficiency & Profitability Ratios: Working ratio 97 105 85 Page 26 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) percent percent percent Gross profit margin 14 23 16 percent percent percent Net profit margin 10 -2 -6 percent percent percent Liquidity ratios: Current ratio 6.9 5.6 4.0 Quick ratio 5.1 4.4 3.2 Leverage ratio: Debt to Equity ratio 40 50 63 percent percent percent 81. DABS forecasted financial performance: The forecasting analysis covers the period 2019 – 2025. Last year, the World Bank developed a financial projection of DABS’ performance taking into account increase in electricity demand, new supply of electricity from IPPs including the proposed Project, imports, and other domestic generation, as well as DABS’s Capex program. While the model is currently being updated, initial assumptions suggest that DABS’s revenue will gradually increase but that high operating expenses and DABS’ ambitions investment plan (expected to be around AFN222 billion (USD 2.7 billion)) for the forecasted period will deteriorate its profitability. Despite an assumed five per cent annual increase in tariff, DABS is expected to have negative net income throughout the period due to increasing cost of power purchase, and depreciation expense (see Annex 2 for DABS full Income Statement). An extension of the PPA after its initial five-year term, which is contemplated in the agreement, would arguable increase the project’s commercial sustainability to DABS. 82. Looking at cash-flows from operations, DABS is projected to have mixed results, showing negative cash-flow from operations in FY20 and FY21, turning to positive afterwards. The negative cash-flow from operation for these two years is driven by significant increase in the cost of power purchase resulting from the commissioning of the Kajaki Hydroelectric Dam Addition Project, the envisaged Kandahar Solar Project, and the Mazar-e-Sharif Gas-to-Power Project. The cash-flow from operation is expected to remain low suggesting donor funding will be needed for its investment program, and helping it to maintain a positive cash balance during the forecast period (see Annex 2 for DABS’ full Cash-Flow Statement and Balance Sheet). 83. Imports are expected to remain the major source of power supply for the forecasted period, thus neutralizing the impact on the cost of purchase from IPPs. Throughout the forecasted period the cost of supply ranges from USDc/kWh of 5.3 to 6.5, whereas the weighted average tariff ranges from USDc/kWh of 8 to 11 (see Table 7 below). The margin between the cost of power and retail tariff is not sufficient to cover all of DABS’s operational and capital expenditure. As part of the partnership agreement between DABS and the MoF18, one of the actions to be undertaken is tariff review and development of the tariff methodology. This would allow a better assessment of the cost component that needs to be reflected in the tariff so that DABS can achieve a full cost recovery tariff level. These works are currently being undertaken: a tariff committee has been set up that has agreed on a tariff setting procedure for DABS. This is expected to be approved by MEW in October 2019 while the final methodology is expected to be finalized by January 31, 18This constitutes a trigger for disbursement under the Afghanistan Incentive Program Development Policy Grant that was approved by the World Bank Board in June 2018. Page 27 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) 2020. Table 7: DABS's Average Cost of Power Supply Average cost of Power Supply 2019 2020 2021 2022 2023 2024 2025 1 2 3 4 5 6 7 In GWh Imports 5,534.0 7,456.0 7,737.0 8,115.0 8,379.0 8,576.0 8,845.0 Domestic Generation (IPP) 244.3 660.9 1,005.8 1,005.4 1,448.9 1,515.8 1,515.4 Domestic Generation (DABS) 886.8 874.2 871.7 871.1 870.6 870.1 869.7 Total Supply 6,665.1 8,991.2 9,614.4 9,991.5 10,698.5 10,961.9 11,230.1 IPP as % of total 4% 7% 10% 10% 14% 14% 13% In USD million Imports 293.0 410.2 442.1 481.1 514.6 541.1 571.6 Domestic Generation (IPP) 19.1 46.0 80.0 80.1 107.4 111.7 111.8 Domestic Generation (DABS) 23.1 20.0 19.5 19.8 20.1 20.5 20.8 Total Supply 335.2 476.3 541.5 581.0 642.2 673.2 704.3 IPP as % of total 6% 10% 15% 14% 17% 17% 16% In USD/kWh Imports 5.29 5.50 5.71 5.93 6.14 6.31 6.46 Domestic Generation (IPP) 7.80 6.96 7.95 7.97 7.42 7.37 7.38 Domestic Generation (DABS) 2.6 2.3 2.2 2.3 2.3 2.4 2.4 Total Supply 5.29 5.50 5.71 5.93 6.14 6.31 6.46 Retail tariff in USD/kWh 2019 2020 2021 2022 2023 2024 2025 (assuming 5% increase) Residential 0.06 0.07 0.07 0.07 0.08 0.08 0.08 Commercial and Industrial 0.13 0.14 0.14 0.15 0.16 0.16 0.17 Public 0.18 0.19 0.20 0.21 0.22 0.23 0.23 Weighted average 0.08 0.09 0.09 0.10 0.10 0.11 0.11 84. Financial performance of the Project Company: The financial costs and benefits of the proposed Project are similar to the economic costs and benefits with a few adjustments. Capital costs were adjusted to include any taxes and duties that were excluded from the economic analysis, and the cost of gas was adjusted to reflect the actual gas price of USD 78/MCM that the Project Company has agreed on with AGE in the GSPA. The financial performance of the proposed Project consists of the revenues collected from DABS, its operating expenses including gas payment and interest and principal payments for refinancing (if any). 85. Overall, for the five year PPA option, the FIRR of the project is 12.2 per cent, with a NPV of about USD 4.1 million19. The Project Company will sell the electricity to DABS at a pre-agreed fixed tariff of USD 0.075/kWh that has been designed to cover their fixed and variable costs as well as a return on investment. DABS revenues depend on the tariffs that it collects from customers, as well as the amount of power it can deliver net of technical losses. 86. After expiration of the PPA’s term, the Project Company may sell the project at a residual value 19 Using a 8 per cent discount rate. Page 28 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) assumed to be USD 15.2 million. While the project will be generating negative cumulative cash flow throughout the five year period, taking into consideration the residual value at the end of this period, the NPV of the project is about USD 4.1 million and the FIRR is about 12.2 per cent. These figures are relatively lower than other gas-to-power projects which are under development in Afghanistan mainly due to relatively shorter period of project life. Thus, the Project Company envisions extending the PPA after year five and potentially expand the power plant up to 200MW for the financial viability of the project as a whole. Technical 87. The proposed Project includes a gas-fired simple-cycle power facility with a contractual capacity of 40MW consisting of: a mobile gas turbine; all associated auxiliary equipment and spare parts; gas receiving and interconnection facilities; and an electrical switchyard. 88. Commissioning of the plant is expected for mid-October 2019. The Project Company has begun site construction, and the gas turbine arrived on site in early July 2019. Its installation was finalized in early September 2019 and (Commercial Operations Date) COD is currently envisaged for mid-October 2019. 89. Connecting the power plant to the grid is not difficult from a technical standpoint as it only requires a 3.3 km long 110 kV transmission line from the facility to the Sheberghan substation, which is then connected to the NEPS-Turkmen grid. This transmission line (fully on Government-owned land) has been constructed by DABS and has been connected to the power plant. Given its location at Sheberghan, the proposed Project would form part of the NEPS-Turkmen segment of the grid, which is connected to transmission lines from Turkmenistan and synchronized with the Turkmen power system. The GoA discussed grid integration of local generation produced by IPPs with Turkmenistan and an agreement was reached which will allow for synchronization of such local generation with power imported under the NEPS- Turkmen grid segment. In terms of the grid’s capacity to evacuate and absorb power generated from the proposed Project, DABS data indicated peak demand for the NEPS-Turkmen grid segment at 68 MW. These loads will be power generated from the proposed Project and imports from Turkmenistan. For the longer term, DABS plans to connect the NEPS-Turkmen segment/island to the rest of the NEPS system through a 110 kV and a 220 kV transmission line. Works on both transmission lines are in progress and expected to be completed by November 2019 and May 2020 respectively. Once done and the NEPS-Turkmen island will be connected to the rest of the NEPS system, the proposed Project would also be able to feed into the latter. 90. Gas for the proposed Project will be supplied from existing wells at the neighboring Sheberghan gas fields. As indicated in paragraph 19, reserve estimates indicate that existing wells have sufficient capacity to supply both current and projected demand, including for the proposed Project for at least five years which is the proposed Project’s initial term. The few hundred meters between the power plant and AGE’s nearest distribution pipeline are connected via a short pipeline. In this context, the Project Company and AGE jointly designed a connection plan according to which the Project Company procured the required pipe and ancillary equipment while AGE conducted the actual construction. The works have been completed. 91. Gas processing will be carried out at the adjacent amine plant. As noted earlier, the latter is in need of optimization and will be supplemented by new amine plant that will function as back-up. The associated risk as well as adequate mitigating factors are described under Section V. (Key Risks). Page 29 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) B. Fiduciary (i) Financial Management 92. Given that there will be no IDA-financed procurement, or procurement-related disbursements under the proposed Project, no financial management issues are noted. If the proposed IDA Guarantee is called, IDA would disburse to the Project Company and the GoA would be obligated to repay IDA in accordance with the terms of the Indemnity Agreement between the GoA and IDA. The Project Company will be responsible for managing the proposed Project’s finances. It will install and maintain adequate financial management systems, including accounting, reporting, auditing, and internal controls; it also needs to retain qualified staff. The annual financial statements will be prepared and audited in accordance with internationally accepted accounting and auditing principles. The proposed Project’s performance will be monitored through regular progress reports and audited annual financial statements to be submitted by Project Company to IDA. (ii) Procurement 93. Consistent with the World Bank Procurement Regulations for IPF Borrowers, Section II. General Considerations – 2.2, the Procurement Regulations do not apply to the procurement of goods, works, non- consulting services, and consulting services under projects where the World Bank provides Guarantees. Rather, in such projects, consistent with IDA’s Articles of Agreement, the World Bank assesses whether the contracts were procured with due regard to economy and efficiency. Bayat Power Electricity Services Distributor Company, as a private sponsor for the proposed Project, was not selected on a competitive basis. However, they procured equipment on a cost-efficient basis. Of the two main mobile gas turbine manufacturers, the Project Company selected the firm that provided the best combination of cost and turbine efficiency. The capital cost estimate of USD 42.30 million is in line with industry practice for the work required and the resulting tariff of USDc 7.5/kWh is comparable with other gas-to-power projects. C. Safeguards 94. The proposed Project is categorized as Environmental Assessment category B . 95. Consistent with the requirements of Performance Standards for Private Sector Activities OP 4.03, the proposed Project will follow World Bank Performance Standards of which the following are triggered: PS1 – Assessment and Management of Environmental and Social Risks and Impacts; PS2 – Labor and Working Conditions; PS3 – Resource Efficiency and Pollution Prevention; PS4 – Community Health, Safety, and Security; and PS6 – Biodiversity Conservation and Sustainable Natural Resources Management. The proposed Project will also follow the World Bank Group General Environmental, Health and Safety Guidelines (EHSGs) and the EHSGs for Thermal Power Plants. 96. The overall social safeguard risks are likely to be moderate. Environmental risks are mainly associated with the management of construction activities and air emissions as well as gas leaks during operation of the power plant. The key social risks relate to labor influx risk during construction and operation. Page 30 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) 97. The Project Company prepared and submitted a detailed Environmental and Social Impact Assessment (ESIA), acceptable to the World Bank. The ESIA also includes an environmental and social due diligence review of the 3.3 km transmission line as well as the few hundred meters of pipeline between the plant and the closest AGE distribution center, which are considered associated facilities of the proposed Project. A final version of the ESIA was disclosed on September 10, 2019 both in-country and on the World Bank website. Given that COD is expected mid-October 2019 and that most of the construction works have already been undertaken, the World Bank has been continuously coordinating with the Project Company and monitoring adherence to the Construction Environmental and Social Management Plan. Remaining action items have been agreed on with the Project Company in an Environmental and Social Action Plan (ESAP). (i) Environmental Safeguards 98. Potential environmental risks and impacts of the gas-to-power plant occur at two stages of implementation: (i) construction stage – risks and impacts associated with management of construction activities, equipment and staff, including dust, noise, management of construction spoil and other waste material, and safety concerns for neighboring communities; and (ii) operations stage – risks and impacts associated with air emissions from the gas-to-power plant, safety concerns around gas leaks in terms of air quality and risks of explosions/fire. 99. Given that the gas-to-power plant is only a 40 MW facility and is in a remote area, the above risks are limited to the foot print of the plant, mainly temporary and may be readily mitigated. The ESIA details how these risks will be managed and mitigated; guidelines are also presented in the Environmental and Social Management Plan (ESMP) for the construction and operation phases, and the Environmental and Social Management System (ESMS). (ii) Social Safeguards 100. The overall social safeguards risks are moderate and mainly associated with labor influx and the risk of Gender Based Violence (GBV) during construction and operation. The key social risks related to labor influx include risk of social conflict, increased risk of communicable diseases, adverse labor conditions, camp-related issues, misconduct, illicit behavior and crime affecting the local population and child labor issues. In terms of GBV risks, these may take the form of sexual exploitation and abuse and sexual harassment as the Project Company engaged workers from outside the project’s area of influence at the site. The ESIA and ESMPs address the requirements of PS2 (labor and working conditions) as well as PS4 (community health, safety and security). The ESMPs require all workers to sign a Code of Conduct to minimize the risks of workers’ misconduct. As noted above, and consistent with the requirements of PS1, the Project Company has established its own ESMS, which incorporates the findings of the ESIA and ESMP. 101. Project activities do not involve land acquisition impacts, as the required land for construction of the power plant has been obtained through a land lease from the Government. Equally, construction of the associated facilities took place on Government owned land. 102. The World Bank prepared the Environmental and Social Review Summary (ESRS) and an Environmental and Social Action Plan (ESAP), based on its review of the ESIA and ESMPs. These have been Page 31 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) disclosed on September 10, 2019 in accordance with the applicable World Bank policies. D. Citizen Engagement 103. Citizen Engagement for the proposed Project includes stakeholder consultations, a multi-level Grievance Redress Mechanism (GRM) and a citizen feedback mechanism. Specifically, the ESIA includes a mechanism for consultations with stakeholders. The Project Company carried these out with affected communities, potential customers (both male and female) as well as other stakeholders in the project area during the stages of project preparation and construction. Stakeholder groups had the chance to review key findings of the draft ESIA and their feedback was part of the document’s finalization. During the operational stage of the proposed Project, DABS (as the sole off-taker of the IPP) and the Project Company are to jointly carry out surveys to evaluate customers’ satisfaction of citizen engagement measures. E. Grievance Redress Mechanism 104. In terms of GRM, the Project Company established a system made up of one grievance redress committee (GRC) for direct and indirect employees and another, separate GRC for affected communities/stakeholders. The GRC has been set up at the IPP’s level and is composed of company officials, government representatives, non-government organization representatives and community/employee representatives. There are multiple uptake channels for complaints ( i.e., hotline, complaint box, internet), including a proper system for registration, i.e., a project level grievance logbook and a central database to enable tracking of types of grievances and timely and adequate follow up. The Project Company also has a GRM Officer to facilitate GRC meetings and provide training and information sessions to workers and local communities. He is also responsible for entering grievances into the database on a regular basis. 105. Communities, individuals and employees/workers who believe that they are adversely affected by a World Bank-supported project may submit complaints to the project-level GRCs or to the World Bank’s Grievance Redress Service (GRS). The project-level GRCs ensure that complaints are promptly reviewed in order to address project-related concerns. Communities, individuals as well as employees/workers may also submit their complaints to the World Bank’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of World Bank non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service . For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. F. Climate Co-benefits 106. As both Afghanistan’s real GDP and population is slated to grow in the coming years, so will its demand for electricity. As has been noted, the gap between demand and supply of electricity is wide and a significant portion (~80 per cent) of this demand is currently met through imports from neighboring countries. The need to build-up domestic capacity and reduce dependence on imports is critical for price Page 32 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) stability and sustained economic growth especially so in the context of a fragile country like Afghanistan. The proposed Project envisages to provide cost-effective, quality power while alleviating energy insecurity. 107. Afghanistan’s GHG emissions are relatively low (around 0.3 metric tons CO 2 per capita in 2010)20, making Afghanistan one of the lowest GHG emitters globally, compared both to the world average of around seven metric tons CO2 in 2011 21 and to the “Fragile and Conflict Affected Situations” average which was 0.84 metric tons CO2 in 2010.22 However, this is likely to increase in the future as a result of the country’s growing population and added capacity. The 2015, Intended Nationally Determined Contribution states Afghanistan’s intention to shift to natural gas and renewables by 2030 to contain some of this increase. As has been noted in paragraph 69, the proposed Project is a step towards meeting this goal of decarbonizing the country’s energy sector. It is also to be noted that a scenario developed under the International Energy Agency Sustainable Development, which examines the lower end of the ambition range concerning Paris-aligned pathways, includes natural gas as an important bridge technology. This scenario amplifies the important role that projects like the one proposed here can play in mitigating climate risks in countries like Afghanistan.23 V. KEY RISKS 108. The overall project risk is rated High. The key drivers of project risks are described below, including their potential mitigation measures. Political and Governance Risk: High 109. As one of the first IPPs to be executed in Afghanistan, the proposed Project was not approved under the legal framework being put in place for PPP but has received an exceptional approval from the National Procurement Committee. Consequently, extensive coordination and consultation between the various political stakeholders (particularly MEW, MoMP and DABS) have been held and will be necessary throughout preparation and implementation to ensure strong commitment by all relevant parties vis-à-vis agreed structure and execution of the proposed Project. Accordingly, the overall political and governance risk is rated high. 110. Mitigation measures. The World Bank has been supporting stakeholders and DABS by providing best practice examples and providing training on important aspects of the structuring of IPPs to support the GoA’s decision-making process. As part of project preparation, regular high-level coordination meetings, involving all relevant Government stakeholders and the World Bank, have been put in place and are held on a regular basis. Macroeconomic Risk: High 111. Afghanistan’s macroeconomic outlook is subject to high risks. The country remains heavily reliant 20 https://www4.unfccc.int/sites/NDCStaging/Pages/Search.aspx?k=Afghanistan 21 https://www.wri.org/blog/2014/11/6-graphs-explain-world-s-top-10-emitters; https://wriorg.s3.amazonaws.com/s3fs- public/uploads/per_capita_emissions.png 22 https://data.worldbank.org/indicator/EN.ATM.CO2E.PC?locations=F1-AF 23 https://www.wri.org/publication/toward-paris-alignment Page 33 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) on aid, and any reduction in security and civilian support below expected levels would place pressure on fiscal sustainability and service delivery. Continued external support is most likely if progress on key structural reforms can be sustained. 112. Mitigation measures. Successful implementation of the reforms planned under the proposed Public-Private Partnerships and Public Investment Advisory Project (approved on 27 June 2018) will help mitigate the macroeconomic risk as it promotes the maximization of private financing for development. Further mitigants are the reforms supported under the series of Development Policy Grants which are aimed at improving the country’s policy and institutional framework for public financial management, state- effectiveness and private investment. In particular, these reforms include revenue administration, tax administration, expenditure management (including a revised public investment management framework), and improved fiscal transparency, (including regular reporting of revenue performance and cash position). Institutional Capacity for Implementation and Sustainability: High 113. Given that the proposed Project concerns the preparation of one of Afghanistan’s first IPPs, the risk is high in terms of institutional capacity for project implementation and sustainability. MEW, MoMP and other ministerial stakeholders do not currently have sufficient capacity to manage an IPP. Furthermore, DABS does not have sufficient experience vis-à-vis contractual performance under a PPA, and its current precarious financial situation raises questions about its ability to honor financial obligations under the key project agreements. 114. Mitigation measures. Several reputable international law firms supported the GoA in the negotiation of the IPP’s key project agreements. Regarding DABS’ capacity, a detailed financial assessment and modeling exercise has been conducted to assess DABS’ capacity, and this has created a better understanding of DABS’ ability to meet its payment obligation. Reforms under the above-noted series of Development Policy Grants will further mitigate risks related to institutional capacity and sustainability. In particular, a financial recovery plan was developed which is part of a partnership agreement between DABS and MoF that was concluded on 11 November 2018 under the Afghanistan Incentive Program Development Policy Grant (approved by the World Bank Board in June 2018). Other Project risks: High 115. The following project risks have also been identified and justify the high-risk rating : 116. Security risk: While UNAMA reported a 27-percent decrease in casualties in the first half of 2019 compared to the same period in 2018, violence has picked up afterward, especially in August and September. Total civilian casualties reached 10,993 during 2018, higher than 10,459 in 2017. 24 Notwithstanding that the IPP will be in the relatively stable northwestern part of Afghanistan, the overall security risk within the country remains high. To mitigate this risk, the GoA has committed to mobilizing additional security to protect Sheberghan and its surroundings. Also, the Project Company, its parent company and affiliates have long-standing experience in managing security across Afghanistan. The Project Company has a comprehensive security plan in place as well as its own security personnel on-site. The World Bank will continue to monitor all relevant developments in this regard. 24 Source: World Bank, Afghanistan Development Update, July 2019. Page 34 of 64 The World Bank Sheberghan Gas-To-Power Project (P166405) 117. Gas risk: The gas supply for current and projected demand, including the proposed Project, can be met for the next five years by the gas resources currently available at Yatimtaq. In addition, MoMP has recently rehabilitated two wells in the Yatimtaq field, has programmed the drilling of two additional wells and has committed to the drilling of five new wells in the medium- to long-term. As noted in paragraph 19, the location, depth and sequencing of the drilling as well as optimal sources of financing for the drilling works needs to be identified in an up-to-date field development plan. In addition, the natural gas from the wells is ‘sour’ though, with high hydrogen sulfide content that needs to be removed at an amine plant. While there is an existing amine plant at the Sheberghan gas fields, it is operating at 20 per cent capacity and requires optimization, and maintenance to yield its nameplate capacity of 960 Mcmd. Further investment in the optimization of dehydration, compression and additional desulfurization is needed to ensure sustainable and reliable delivery of commercial-quality natural gas. The World Bank is assisting the GoA through the proposed A-GASP to address these bottlenecks, to support overall gas sector reforms and to build capacity within MoMP and AGE to manage the required optimization works. Also, the GoA is in the process of tendering a turnkey contract to procure a new amine plant, dehydration unit and other required equipment. To mitigate the risk of inadequate gas processing in the short to medium term, the GoA, with World Bank support, has procured an individual international expert who is in Sheberghan and has been assisting AGE with improving operation at the current amine plant since the past six months. Additional support lent by the Project Company, who has mobilized further experts as well as required equipment for optimization of the amine plant and is closely working together with the international expert and AGE, will further mitigate this risk. 118. Commercial viability risk: The proposed Project poses a risk in terms of DABS’ commercial viability given current tariff schemes that are lower than the tariff of US cents 7.5/kWh agreed with the Project Company. In addition, recent significant cost reduction in imported electricity, which now stands at USDc 5.5/kWh on average, has made this and comparable IPPs financially less attractive for DABS. It will need to continue working on improving its financial performance to mitigate this risk and pay close attention to its loss reduction program25 as well as its collections. A partnership agreement between DABS and MoF was signed on 11 November 201826 which outlines concrete measures that DABS will need to follow to restore its financial performance. In fulfilment of the partnership agreement’s commitments, a tariff committee has been set up who has agreed on a tariff setting procedure for DABS which is expected to be approved by MEW in October 2019. Further, DABS has established a VIP counter for fast-tracking commercial and industrial customer requests. DABS is also in the process of selecting staff to constitute a SWAT team working on PPP agreements (including for imports). The MoF and DABS are jointly working on measures enabling debt relief for DABS. All these measures constitute parts of a comprehensive plan to turn around DABS’ finances. Overall Risk Rating Explanation 119. The risk rating for delivering the PDO is assessed as High given the political and governance risk, and risks related to sector strategy and policies. The same holds for risks within institutional capacity and other areas. . 25 Technical and commercial losses currently stand at 16 and 17 percent respectively. 26 Under the Afghanistan Incentive Program Development Policy Grant (approved by the World Bank Board in June 2018). Page 35 of 64 The World Bank Project Name (P166405) VI. RESULTS FRAMEWORK AND MONITORING Results Framework Project Development Objectives(s) To increase the amount of electricity generated in Afghanistan and to leverage private financing for the country’s energy sector RESULT_FRAME_T BL_ PD O Unit of PDO Indicators by Objectives / Outcomes DLI CRI Baseline End Target Measure Generation capacity of the plant constructed under the project MW 0 40 USD Private sector capital mobilized 0 42.30 million RESULT_FRAME_T BL_ IO Unit of Intermediate Results Indicators by Components DLI CRI Baseline End Target Measure Reaching of COD as defined in the PPA % 0 100 Grievances registered under the GRM resolved within % 0 80 stipulated response times Page 36 of 64 The World Bank Project Name (P166405) Monitoring & Evaluation Plan: PDO Indicators Indicator Name Generation capacity of the plant constructed under the project Definition/Description Generation capacity of the plant constructed under the proposed project Frequency Annual Data Source Project Company Methodology for Data Collection Progress reports Responsibility for Data Collection Project Company Indicator Name Private Capital Mobilized Definition/Description Amount of private capital invested in the power plant Frequency Annual Data Source Project Company Methodology for Data Collection Progress reports Responsibility for Data Collection Project Company Monitoring & Evaluation Plan: Intermediate Results Indicators Indicator Name Reaching of COD as defined in the PPA Definition/Description Completion of all requisite works by COD Frequency Weekly Data Source Project Company Page 37 of 64 The World Bank Project Name (P166405) Methodology for Data Collection Progress reports Responsibility for Data Collection Project Company Indicator Name Citizen Engagement Definition/Description Grievances registered under the GRM resolved within stipulated response times Frequency Annual Data Source Project Company Methodology for Data Collection Project implementation M&E Responsibility for Data Collection Project Company Page 38 of 64 The World Bank Project Name (P166405) VII. INDICATIVE TERMS AND CONDITIONS FOR THE GUARANTEE This term sheet contains a summary of indicative terms and conditions of a proposed guarantee ("Guarantee") by the International Development Association ("IDA") for discussion purposes only and does not constitute an offer to provide a Guarantee. The provision of a Guarantee is subject, inter alia, to satisfactory appraisal by IDA of the proposed project involving the development, construction, operation and maintenance of a 40MW greenfield gas-to-power generation plant to be located approximately 20 km east of Sheberghan, Afghanistan near the Yatimtaq gas field (the "Project"). It is also subject to compliance with all applicable World Bank policies, including those related to environmental and social safeguards, review and acceptance of the ownership, management, and the financing structure27. It also needs to comply with review and acceptance of project/transaction documentation by IDA, it needs management approval as well as that of IDA Executive Directors in their sole discretion. IDA is highly selective with regard to the clients and beneficiaries it works with and is careful to engage with Know Your Customer requirements for all project participants (equity investors, ultimate shareholders, lenders, contractors, advisors); it will undertake a full appraisal of the Project and the Project Company (as defined below). IDA Guarantee Agreement Guarantor: International Development Association (IDA) Guaranteed Beneficiary: Bayat Power Electricity Services Distributor Company (the “Project Company”) Guarantee Face Value: USD [12.8] million Guarantee Support: Guarantor agrees to pay to the Guaranteed Beneficiary up to the Maximum Guaranteed Amount upon the occurrence of any Guaranteed Event and receipt of a conforming demand notice from the Guaranteed Beneficiary. Guaranteed Events: Failure of Da Afghanistan Breshna Sherkat (“DABS”) to comply with its obligation to pay the relevant termination compensation to the Guaranteed Beneficiary in accordance with the PPA following a termination of the PPA) [and failure to cure such payment default within an additional [12]-month cure period] Maximum Guaranteed Guarantee Face Value. Any amount paid by IDA to the Guaranteed Amount: Beneficiary under the IDA Guarantee would be deducted from the Maximum Guaranteed Amount and would not be reinstated. Maximum Guarantee Up to five years starting from the [guarantee effective date] plus [16] Period: months to cover any post termination payment obligations. Signing: If the Guarantee-related legal agreements are not signed within 24 months following approval by the Board of Executive Directors of IDA, IDA may withdraw the offer of the Guarantee. 27 This includes those that are connected with shareholders, suppliers, equipment and project design, and contracts. Page 39 of 64 The World Bank Project Name (P166405) Exclusions, Withholding, Standard exclusion, withholding, limitation/suspension and Limitation/Suspension & termination events for transactions of this nature. Termination Events: Conditions Precedent to Usual and customary conditions for this type of financing, including Effectiveness of the IDA but not limited to the following: Guarantee: (a) Firm commitment for sufficient financing to complete the construction of the Project, including satisfactory contribution of equity; (b) Execution, delivery and effectiveness of all Project and financing agreements, in form and substance satisfactory to IDA, including the PPA, the Implementation Agreement, the Gas Sale and Purchase Agreement, the O&M agreement, the Indemnity Agreement, the Project Agreement and the Cooperation Agreement; (c) Delivery of all relevant host country environmental approvals required for the construction and operation of the Project, and compliance with all applicable World Bank requirements relating to Sanctionable Practices and environmental and social safeguards, including the World Bank Performance Standards; (d) Effectiveness of all required insurance (to include IDA as an additional insured on third-party liability insurance); (e) Satisfaction of all conditions precedent under the financing documents, if applicable, save for any condition that requires the effectiveness of the Guarantee Agreement; (f) Provision of satisfactory legal opinions; (g) Payment in full of the Initiation Fee and Processing Fee, the first installment of the Guarantee Fee [and the reimbursement of IDA's outside legal counsel expenses]; and (h) Satisfactory integrity due diligence of Project Company (and related parties) and guaranteed parties. Subrogation: If and to the extent that IDA makes any payment under the Guarantee, IDA will be subrogated immediately to the extent of such unreimbursed payment to the Guaranteed Beneficiary’s rights under the PPA to the extent of the unpaid amount under the PPA that gave rise to the payment under the Guarantee. Governing law: English law or New York Law. Claims and disputes: If there is a dispute between the Guaranteed Beneficiary and DABS as to DABS’s obligation to pay or the amount of its liability, the Guarantee would be callable only in respect of amounts that DABS is obligated to pay and fails to pay. For the avoidance of doubt, Guarantor will pay only up to DABS’s liability that has been determined, whether through expert determination, settlement agreement between the parties, arbitral award, or in accordance with contractual procedures acceptable to Guarantor, so long as such Page 40 of 64 The World Bank Project Name (P166405) determination is final and binding (i.e., an arbitral award is not necessarily required). Indemnity Agreement Parties: IDA and the Islamic Republic of Afghanistan (the “Member Country”) Indemnity: The Member Country will reimburse and indemnify IDA on demand, or as IDA may otherwise direct, for all payments under the Guarantee and all losses, damages, costs, and expenses incurred by IDA relating to or arising from the Guarantee. Covenants: [Usual and customary covenants included in agreements between member countries and IDA.] [Define specific covenants] Remedies: If the Member Country breaches any of its obligations under the Indemnity Agreement, IDA may suspend or cancel, in whole or in part, the rights of the Member Country to make withdrawals under any loan, credit or grant agreement with IDA or IBRD, or any IBRD loan or IDA credit to a third party guaranteed by the Member Country, and may declare the outstanding principal and interest of any such loan or credit to be due and payable immediately. A breach by the Member Country under the Indemnity Agreement will not, however, discharge any guarantee obligations of IDA under the Guarantee. Governing Law: The Indemnity Agreement will follow the usual legal regime and include dispute settlement provisions customary for agreements between member countries and IDA. Project Agreement Parties: IDA and the Project Company Representations and The Project Company will represent, among other standard and Warranties: project-specific provisions, as of the effective date, that: (a) it is in compliance with applicable environmental laws and applicable World Bank guidelines, environmental and social safeguard requirements, including the World Bank Performance Standards and other applicable requirements; and (b) neither it (nor its direct and indirect shareholders and any other relevant project participants, as determined by IDA), nor any of its affiliates has engaged in any Sanctionable Practices28 in connection with the Project. 28"Sanctionable Practices" include corrupt, fraudulent, collusive, coercive, or obstructive practices, as defined in IDA’s Anti-Corruption Guidelines. Page 41 of 64 The World Bank Project Name (P166405) Covenants: The Beneficiary will covenant, among other things, that it will: (a) comply with applicable laws, including environmental laws, and the applicable environmental and social safeguards requirements under the World Bank Performance Standards; (b) provide annual audited financial statements and other reports; (c) provide certain notices and other information to IDA; (d) provide access to the Project; (e) not engage in (or authorize or permit any affiliate or any other Person acting on its behalf to engage in) any Sanctionable Practices in connection with the Project; (f) comply with World Bank requirements relating to Sanctionable Practices regarding individuals or firms included in the World Bank Group list of firms debarred from World Bank Group-financed contracts; (g) obtain IDA’s consent prior to agreeing to any change to any transaction document which would affect the rights or obligations of IDA under the Guarantee Agreement or any other guarantee related agreement; and Payment of Fees to IDA: Payment of fees due to IDA is the obligation of [the Project Company]. Initiation Fee: 15 bps of the Guarantee Face Value (but not less than USD 100,000). Processing Fee: 50 bps of the Guarantee Face Value29. Guarantee Fee: [75] basis points per annum. The IDA guarantee fee is charged on that portion of the guaranteed amount that IDA has contractually committed and for which IDA has financial exposure under the guarantee. The Guarantee Fee must be paid [in advance semi- annually on regular payment dates][in a one-time lump sum]. [Where the Guarantee Fee is payable in installments, the Guarantee will terminate in the event [the Project Company] fails to pay any installment of the Guarantee Fee.] External Legal Costs: Reimbursement of IDA external legal counsel expenses by [the Project Company]. Cooperation Agreement Parties: IDA and DABS 29 In exceptional cases, projects can be charged over 50 bps of the guarantee amount. Page 42 of 64 The World Bank Project Name (P166405) Cooperation agreement: DABS will covenant, among other things, that it will: (i) comply with all its obligations under the PPA and the other transaction documents; (ii) obtain IDA’s consent prior to agreeing to any change to the PPA and any other transaction document which would materially affect the rights or obligations of IDA under the Guarantee Agreement or any other transaction document; (iii) provide certain notices to IDA; (iv) take all action necessary on its part, in accordance with and as required by the terms of the PPA and the other project-related agreements to which it is a party, to enable the Project Company to perform all of the Project Company’s obligations under the Project Agreement, the PPA and other relevant transaction documents; and (v) cooperate with IDA and furnish to IDA all such information related to such matters as IDA shall reasonably request; ad promptly inform IDA of any condition which interferes with, or threatens to interfere with, such matters. (vi) reimburse and indemnify IDA on demand, or as IDA may otherwise direct, for any payments under the Guarantee related to a Guaranteed Event attributable to DABS. Page 43 of 64 The World Bank Project Name (P166405) ANNEX 1: Implementation Arrangements and Support Plan COUNTRY: Islamic Republic of Afghanistan Sheberghan Gas-to-Power Project I. Implementation Arrangements Project Institutional and Implementation Arrangements 1. Project Sponsor: The proposed Project will be implemented by Bayat Power Electricity Services Distributor Company (“Project Company”), a limited liability company incorporated in Afghanistan. The Project Company will be responsible for construction, operation and maintenance, as well as financing of the power plant for the five-year duration of the PPA. The Project Company is 100 per cent owned by Bayat Energy Group, through a subsidiary of the latter, Unique Market Holdings Ltd. The corporate structure of both the Project Company, as well as its parent company and affiliates has been detailed in Figure 5 of this document. Although the Project Company is relatively new to the energy sector, the Bayat Group as a whole has long-standing experience in Afghanistan through various direct investments in the telecommunications and media sector, oil and gas exploration and production. 2. Power Purchase Agreement: The project will sell its entire power capacity and output to DABS under a five-year PPA, signed on April 1, 2018 at a fixed (non-indexed) tariff of USDc 7.5/kWh. As part of the payment security requirements under the PPA, DABS is obliged to provide an escrow account that would cover one month of payments under the PPA, to be split in two currencies, AFN for the gas payments and USD for the energy conversion payments. It is also required to provide a Letter of Credit (L/C) in an amount of USD 12.8 million to cover termination payments, which has been issued by Commerzbank of Germany. The IDA payment guarantee is designed to backstop DABS obligation for provision of the L/C and once effective it will replace the L/C issued by the Commerzbank for which GoA was required to provide full cash collateral. Key contents of the agreement are highlighted in Table 8 below. Table 8: Key Contents of the PPA Item Key Highlights DABS (Off-taker) Parties Bayat Power Electricity Services Distributor Company Initial PPA Term Five years from COD Contract Capacity 40 MW [i) Fixed tariff per kWh unit split in USD portion and Afghani PPA Tariff Structure portion; and (ii) supplemental payments to cover other potentially incurred pass-through costs. Page 44 of 64 The World Bank Project Name (P166405) Gas Price Fully recovered from the off-taker on a pass-through basis Gas payments to be made in AFN Currency All other payment to be made in USD Obligation of DABS to pay compensation to the Project Company Termination Payments upon early termination which is customary transactions of this type 3. Construction Works and O&M Contracts: The requisite equipment for the power plant, the gas turbine, is supplied by Siemens. Further construction work is limited to site preparation work, namely construction of access roads, power house, office space, housing and cafeteria for staff, as well as other ancillary work. These have been undertaken by the Project Company. The Project Company is in the process of negotiating a five-year O&M contract with RPS. 4. Gas Supply Agreement: The proposed Project will be supplied with natural gas by AGE. To this end, the Project Company and the GoA acting through MoMP and AGE concluded a GSPA whose term matches that of the PPA. 5. Implementation Agreement: As part of the project’s key agreements, the GoA (represented by MEW) and the Project Company entered into an IA whose terms are dependent on that of the PPA. Most importantly, the IA sets out provisions concerning GoA’s support to the proposed Project. Financial Management 6. As there will be no IDA-financed procurement, or procurement-related disbursements under the proposed Project, there are no financial management issues to be noted. Should the proposed IDA Guarantee be called, IDA would disburse to the Project Company, and the GoA would then be obligated to repay IDA, in accordance with the terms of the Indemnity Agreement between GoA and IDA. The Project Company will be the primary responsible party for managing the finances of the proposed Project. It will install and maintain adequate financial management systems, including accounting, reporting, auditing, and internal controls, and it will also retain suitably qualified staff. The annual financial statements will be prepared and audited in accordance with internationally accepted accounting and auditing principles and audited pursuant to international auditing standards. The performance of the proposed Project will be monitored by regular progress reports and audited annual financial statements that need to be submitted by the Project Company to IDA. Procurement 7. Consistent with the World Bank Procurement Regulations for IPF Borrowers, Section II. General Considerations – 2.2, the Procurement Regulations do not apply to the procurement of goods, works, non- consulting services, and consulting services under projects where the World Bank provides Guarantees. Rather, in such projects, consistent with IDA’s Articles of Agreement, the World Bank assesses whether the Page 45 of 64 The World Bank Project Name (P166405) contracts were procured with due regard to economy and efficiency. While Bayat Power Electricity Services Distributor Company was not selected on a competitive basis, they procured equipment on a cost-efficient basis. Of the two main manufacturers of the requisite mobile turbines, the Project Company selected the firm that offered the best combination of cost and efficiency. Furthermore, the proposed Project’s capital cost estimate of USD 42.30 million is considered in line with industry practice for the scope of works and the resulting tariff of USDc 7.5/kWh is comparable with other gas-to-power projects globally. Environmental and Social (including safeguards) 8. Consistent with the requirements of Performance Standards for Private Sector Activities OP4.03, the proposed Project will follow World Bank Performance Standards of which the following are triggered:  PS1 – Assessment and Management of Environmental and Social Risks and Impacts;  PS2 – Labor and Working Conditions;  PS3 – Resource Efficiency and Pollution Prevention;  PS4 – Community Health, Safety, and Security; and  PS6 – Biodiversity Conservation and Sustainable Natural Resources Management. 9. The proposed Project has been given an environmental assessment Category B rating, given that the expected size of the plant is only 40MW and that the project site is expected to be of low to moderate environmental and social sensitivity. This is because environmental and social risks associated with the proposed Project during its construction and operation are limited to the foot print of the plant, mainly temporary and may be readily managed through tangible mitigation measures. 10. The ESIA and the ESMP developed by the Project Company have been subject to consultations in the proposed Project’s area with potential affected persons. 11. The ESMP has been the basis of developing detailed construction and operation phase management plans. It describes the structure and processes that are applied to construction and operation activities to assess and monitor compliance and effectiveness of the mitigation measures. In particular, the Construction and Operation ESMPs include: (ii) Health and Safety Plan including Fire Safety and Emergency Preparedness and Response Plan; (ii) Ambient Air Quality Monitoring; (iii) Noise Management; (v) Monitoring and Reporting Plan; and (vi) Waste Management Plan. 12. The Project Company hired external consultants to prepare the required environmental and social reports and plans, as well as to oversee and monitor performance. The Project Company will require the O&M contractor to develop its own specific implementation plans to demonstrate how it intends to comply with World Bank requirements. All contractor plans will be reviewed and approved by the Project Company. The O&M contractor will be responsible for ensuring that any sub-contractors comply with the relevant health, safety, environment, and social (HSES) requirements. Compliance will be monitored by the Project Company. 13. The Project Company will employ a full time HSES manager to develop and implement its HSES Management System and other relevant programs and plans. The HSES manager will also review and supervise implementation of O&M contractor programs and plans and ensure compliance with the Page 46 of 64 The World Bank Project Name (P166405) requirements of Afghan laws and the World Bank Performance Standards. The O&M contractor will be required to have a health, safety and environment (HSE) supervisor on the site. This officer will be responsible for managing potential social impacts; implementing the required project grievance mechanism; and supervising and coordinating with the contractor in all related matters. 14. Handling natural gas at the plant can present potential hazards in relation to leaks. The O&M contractor is expected to develop an emergency preparedness and response plan for the operational phase. The plan will describe the procedures to follow when handling an emergency such as explosions, fire, hazardous material, injuries, natural disasters. A Fire Safety and Emergency Preparedness and Response plan will be developed in close coordination with the affected communities. 15. The work will be monitored to ensure compliance with regulatory requirements and the World Bank Performance Standards, as well as to evaluate the effectiveness of operational controls and other measures intended to mitigate potential impacts, as identified in the ESIA. The monitoring plans will describe the indicators to be measured and the frequency of measurement, and will define roles and responsibilities for monitoring and reporting. Indicators monitored during construction include: noise and dust generation, construction spoil and other waste disposal, occupational health and safety (including near misses, accidents, lost time incident, root cause analysis), safety concerns of neighboring communities, and job creation within local communities. During operations, monitoring will include: air emissions and ambient air quality, noise, safety concerns around gas leaks both in terms of air quality and risks of explosions/fire, occupational health and safety, greenhouse gas emissions, and job creation within the local communities. 17. The Project Company performed external audits and inspections quarterly during construction and will do so annually during operations. The O&M contractor is required to provide HSE performance reporting to the World Bank on a regular basis and include audits in their respective HSE Plans. 18. The development of the project site does not involve physical displacement as there are no inhabitants (legal residents or squatters). Monitoring and Evaluation 19. Information for results’ monitoring will come from DABS and the Project Company. DABS prepares its annual financial reports describing the supply and demand situation of its network. Key project performance indicators on the amount and costs of electricity generated by the project will be provided as part of DABS’ normal reporting procedures. In addition, detailed information can be made available from DABS and the Project Company based on PPA invoicing and payments records. The proposed Project’s intermediate outcomes will be monitored using project reports prepared by the Project Company over the lifetime of the project agreements. Page 47 of 64 The World Bank Project Name (P166405) II. Implementation Support Plan Approach for Implementation Support 1. The approach for implementation support considers the nature of the proposed Project and the complex environment within it will operate. The strategy proposed below ensures that the World Bank Group’s resources and staff meet the necessary criteria to supervise the proposed Project and support its implementation. Implementation Support Plan and Resource Requirements 2. Implementation support will first focus on ensuring timely completion of contractual milestones as per the PPA agreed between the GoA and the Project Company, environmental and social aspects as well as contract management. Broader sector implementation support will be provided in close coordination with other World Bank support to the energy sector in Afghanistan, such as the Naghlu Hydropower Rehabilitation Project, the DABS Capacity Building and Enhancement Project, the Herat Electrification Project, the Mazar-e-Sharif Gas-to-Power Project, the Kajaki Hydroelectric Dam Addition Project, the series of Development Policy Grants, as well as ongoing policy dialogue. 3. Appropriate covenants30 will be included under the Indemnity Agreement between the GoA and IDA, the Cooperation Agreement between DABS and IDA, and the Project Agreement between the Project Company and IDA. Compliance with these covenants will be monitored on a continuous basis. Key Areas of Supervision 4. The implementation support plan is designed to match the requirements of the proposed Project and the focus will be on anticipating and managing risks that could impact the proposed Project as noted in this document. During the early phase of project implementation, more frequent supervision is envisaged to ensure that timely action is taken. The is why at least two implementation support missions will be undertaken during that period. Missions will include safeguards, sector expertise, and guarantee-related 30 (a) Project Agreement: The guarantee term sheet provides a list of standard covenants that the Project Company would be required to comply with under the Project Agreement with IDA, such as compliance with applicable E&S laws and instruments prepared pursuant to WB Performance Standards, and prohibitions relating to Sanctionable Practices. The list is non-exhaustive and is supplemented with additional covenants to address issues which are particular to the Project. (b) Indemnity Agreement. Per the guarantee term sheet, the Indemnity Agreement includes “Usual and customary covenants included in agreements between member countries and IDA.” While not specified in the term sheet, these covenants include standard covenants from the General Conditions for IDA Financing: Investment Project Financing (2018) which are incorporated into the Indemnity Agreement with certain modifications accounting for the differences between guarantees and credits/grants. The covenants also include a series of relatively standard obligations in relation to the Project (e.g., to perform, and cause all public sector entities to perform, their obligations under the project-related agreements to which they are a party; to cooperate with the project company in obtaining governmental authorizations and complying with applicable environmental and social laws and instruments; to cooperate and not interfere with the carrying out of the project; to notify IDA of material occurrences in relation to the Project; to ensure that it and other public sector entities do not engage in Sanctionable Practices). These covenants are in addition to the principle covenants to reimburse IDA for any amounts paid by IDA under the guarantee, and to indemnify IDA for any claims, losses, costs etc. brought against/incurred by IDA in connection with the guarantee. (c) Cooperation Agreement. Similar covenants on DABS relating to cooperation with the carrying out of the project will also be included in the Cooperation Agreement between IDA and DABS. A non-exhaustive list of these covenants can be found in the guarantee term sheet. Page 48 of 64 The World Bank Project Name (P166405) expertise and will, as much as possible, be combined with missions concerning the related Mazar-e-Sharif Gas-to-Power Project to allow for most efficient use of World Bank resources. 5. The World Bank team will be made up of a mix of skills and experience necessary for successful project implementation. Table 9 below outlines the expected staff weeks and travel required to ensure the actions and the schedule are appropriately resourced. Table 9: Estimated Implementation Resources Time Focus Skills Needed Resource Estimate (Staff Weeks) First 12 Compliance with the PPA; Guarantee Specialist; 60 SWs per months Review of any outstanding Task Management; annum construction works; Technical; Implementation of environmental Legal; Financial Analyst; and and social safeguard plans and Environmental and Social mitigation measures; Safeguards. Broader sector related matters impacting the project. 12 months Overall project progress and Guarantee Specialists; 30 SWs per onwards implementation support. Legal; Financial Analyst; annum Social and environmental safeguard Environmental and Social implementation support. Safeguards; and M&E Specialist. M&E implementation support. 6. The staff skill mix and focus in terms of implementation support is summarized in Table 10 below. Table 10: Skills Mix Skills Needed Number of Trips Comments Senior Guarantee Specialist (co-TTL) 2 per annum HQ based Senior Energy Specialist (co-TTL) 2 per annum HQ based Guarantee Lawyer 2 per annum Field based Senior Power Engineer 1 per annum Field based Financial Analyst 1 per annum Kabul/Field based Social Safeguards Specialist 1 per annum Kabul/Field based Environmental Safeguards Specialist 1 per annum Kabul/Field based Page 49 of 64 The World Bank Project Name (P166405) 7. Based on the implementation support plan, the estimated budget from FY20 to FY22 for IDA is summarized in Table 11 below: Table 11: Estimated Budget FY20 to FY22 Fiscal Year FY20 FY21 FY22 Amount of Resources Required (USD) 200,000 180,000 100,000 Page 50 of 64 The World Bank Project Name (P166405) ANNEX 2: Economic and Financial Analysis COUNTRY: Islamic Republic of Afghanistan Sheberghan Gas to Power Economic Analysis 1. The proposed Project is one of a trio of inter-related projects 31 which are intended to increase security of energy supply through reduced reliance on electricity imports, promote the development of indigenous gas resources, and increase the availability of grid electricity to meet growing demands for a robust and reliable source of power for households, institutions and commercial and industrial enterprises. The IPP model as supported by the proposed Project is anticipated to serve as a platform for future similar projects across Afghanistan resulting in future investment opportunities. A financial analysis for both DABS and the project has been conducted during the due diligence process. 2. Domestic gas fired power generation is part of the least cost expansion plan to satisfy growing demands for electricity in Afghanistan in general and in the NEPS in particular . 32 The plan includes investments in transmission capacity to allow increased imports of power from neighboring countries, rehabilitation of existing generating assets within the country, interconnection of transmission networks to allow optimization of power supply, and development of new generating capacity based on domestic resources. Balancing between domestic and imported supply options was an imposed constraint on the least cost plan rather than an economic choice. However, subsequent analysis using techniques of decision- making under uncertainty validated the premise that domestic gas-fired generation was preferable to imports under a wide range of future scenarios.33 3. Evaluating the proposed Project’s cost and benefits presents challenges in that it is difficult to estimate or justify a monetary value for the primary benefits (security of supply, support for gas development). The only readily monetized benefits of the proposed Project are the welfare gains accruing to electricity customers who will have incremental access to grid-based power once the proposed Project is operational. The assumptions used in the analysis are contained in Table 14 at the end of this section. 4. Welfare gains are measured by the area under the observed demand curve for electricity, often referred to as the willingness to pay (WTP) for electricity supply. This WTP includes the actual customer payments for electricity (consumption times the tariff) as well as the consumer surplus accruing to customers as a result of the avoided cost of alternatives. In the case of household customers, the primary alternative was assumed to be a Solar Home Systems (SHS). In the case of institutional, commercial and industrial customers, the alternative source of power was assumed to be diesel generators. The weighted average customer WTP in the NEPS region was estimated at USD 0.14 per kWh. This same methodology and assumptions were used to estimate the benefits of the related Mazar-e-Sharif Gas-to-Power Project and the A-GASP. 31 The other two projects are the Mazar-e-Sharif Gas-to-Power Project (P157827) and the Afghanistan Gas Project (P172109). 32 Compare Islamic Republic of Afghanistan MEW/ADB/Fichtner. Power Sector Master Plan. Final Report. April 2013. 33 Gencer, D., Irving, J., Meier, P., Spencer, R., Wnuk, C., Energy Security Trade-offs Under High Uncertainty, World Bank/ESMAP, 2018, Annex 4 Page 51 of 64 The World Bank Project Name (P166405) 6. The cost side of the analysis included all of the costs of incremental supply including capital cost of the plant, capital cost of the incremental transmission and distribution networks34 required to deliver the power to the customers, operating and maintenance costs for the plant and networks, technical and non- technical losses, and the economic cost of gas supply. Capital costs and operating costs of the turbine generator were provided by the Project Company, while DABS confirmed the cost estimate for the transmission line. Fixed O&M was accrued on an annual basis, based on estimated operating hours between major maintenance requirements. In the short term, the cost of gas supply is based on supply from existing wells, including the planned investments in gas infrastructure that are being financed under the A-GASP. In the longer term, the estimated economic cost of gas includes capital investments in field exploration, well drilling and other gas infrastructure needed to ensure supply for the duration of the Sheberghan contract. The estimated short-term cost of gas supply is estimated at USD 65 per MCM while the long-term cost is estimated at USD 150 per MCM. Both costs include a royalty/depletion premium of USD 50 per MCM. Because of the relatively short term of the proposed Project, relative to the likely useful life of the equipment, credits equal to the estimated residual value of the turbine, balance of plant and transmission and distribution networks were applied to the cash flow in year five. 7. The Economic Internal Rate of Return (EIRR) for the proposed Project over its planned five-year life is estimated at 15.5 percent. Net Present Value (NPV) at a 6 percent discount rate is estimated at USD 14.5 million. Table 12 below summarizes the flows of costs and benefits. Table 12: Economic Cash Flows Capex Plant Capex Trns Capex Dist'n Fixed O&M Variable O&M Fuel Distribution Total Costs Customer WTP Net Cash Flow $ million $ million $ million $ million $ million $ million $ million $ million $ million $ million 2019 14.20 14.20 -14.20 2020 28.07 3.00 1.28 1.50 2.15 1.20 37.20 12.53 -24.66 2021 4.68 2.57 2.75 4.30 2.39 16.68 25.07 8.38 2022 4.68 2.57 2.50 4.30 2.39 16.43 25.07 8.63 2023 4.68 2.57 2.50 4.30 2.39 16.43 25.07 8.63 2024 4.68 2.57 2.50 9.92 2.39 22.06 25.07 3.01 2025 -18.19 -2.25 -16.83 1.28 1.25 4.96 1.20 -28.58 12.53 41.12 EIRR 15.48% 6% NPV $14.45 8. An analysis of switching values was also carried out to determine what changes in key assumptions could be tolerated before the estimated EIRR falls below 6 per cent. The results of the switching analysis are summarized in Table 13 below. The switching analysis indicates that the proposed Project can sustain threshold levels of EIRR with relatively substantial changes to the key underlying assumptions. The main exception is the sensitivity to the estimation of customer WTP. However, average WTP is heavily influenced by the current tariffs (average 8.6 cents/kWh) which represent a lower bound on the WTP for grid supply. Tariffs have not changed in Afghanistan in over three years, and planned increases in the electricity tariff to re-align them with DABS’ costs may lead to some demand suppression but given the strong support for grid connection, it is also likely that the observed WTP will rise rather than fall 34The incremental power from the Sheberghan plant will flow both to existing customers to meet growing demands and to customers newly connected to the grid. Thus, an unknown proportion of the distribution network is already in place. Assuming that new distribution infrastructure is needed for all incremental power represents an extremely conservative approach. Page 52 of 64 The World Bank Project Name (P166405) compared with the base-case assumption, particularly if the PPA got extended for up to two five-year periods which is an option contemplated in the agreement. Table 13: Switching Value Analysis For 6% EIRR Unit Base Switch Value Change Average WTP USD/kwh 0.140 0.119 -15% Short Term Value of Gas USD/MCM $65.00 $142.31 119% Long Term Value of Gas USD/MCM $150.00 $359.16 139% Capital Cost USD million $42.27 $58.50 38% DABS losses % 35% 46% 30% Plant Dispatch % 80% 61% -23% 9. Returns on the proposed Project are favorably impacted by the limited lifespan of five years and hence the relatively favorable gas prices over its first three and half years of operation. The PPA includes options to extend the agreement for up to two five-year periods, which indicates an interest on the part of both parties to continue the relationship. If the agreement were to continue with existing terms regarding tariffs and the cost of gas, the proposed Project’s EIRR would be somewhat lower. Extending the agreement to reflect the more typical 20-year life of a generation project would decrease the EIRR to an estimated 12.9 percent with a NPV of USD 27 million. 10. As noted earlier, the benefits and costs discussed above include only those that can be readily monetized. There are significant benefits to Afghanistan associated with the planned IPP that do not lend themselves to quantitative value analysis. These include: (i) a reduction in the country’s reliance on imported electricity; (ii) demonstrated feasibility of private sector involvement in electricity supply; (iii) and a firm market for indigenous natural gas which will hopefully help to stimulate further investment in developing gas resources. Taking these benefits into account provides a stronger case for the net economic benefits of the proposed Project than that suggested by the quantifiable benefits alone and validates the GoA’s decision to proceed. 11. With respect to gross carbon dioxide (CO2) emissions from the proposed Project, these are expected to average 124,000 tons per year over its five-year life, or a total of 621,000 tons. The extent to which this is a net increase in regional emissions depends on the assumed counterfactual. It could be argued that the proposed Project would displace an equivalent level of imports from neighbouring countries, (i.e. the baseline emissions) all of whom also largely use gas to produce power. Assuming conservatively that their plants are more efficient than the proposed Project (i.e. that they are combined cycle gas turbines as compared to the simple cycle turbine the proposed Project will use), it is estimated that the counterfactual to the proposed Project would be a corresponding reduction in greenhouse gas (GHG) emissions for a net impact of approximately 110,000 tons per year, or a total of 550,000 tons over the project life. This would reduce the net impact of the proposed Project to an average of 14,000 tons of carbon per year or a total of 71,000 tons over the life of the project. Reality in the short term will probably lie in the middle, with some of the proposed Project’s emissions displacing imports and others being incremental. Page 53 of 64 The World Bank Project Name (P166405) 12. Using the prescribed values for the social cost of carbon (under the low scenario given the low per capita emissions that already prevail), the average cost of carbon emissions from the proposed Project would be USD 4.4 million per year over five years, while the average cost of emissions from a corresponding level of imports would be USD 3.9 million. The net GHG impact of the proposed Project would be between USD 0.5 million (full displacement of imports) and USD 4.4 million per year (all emissions from the proposed Project being incremental). In present value terms, total impact over the five-year life of the proposed Project would lie somewhere between USD 2.5 million and USD 21.5 million. In the longer term, it can be argued that by demonstrating the feasibility of gas fired generation, the proposed Project would help to forestall development of the country’s coal sector. A coal fired plant producing the same GWh of power would produce roughly 250,000 tons per year of carbon. While these impacts would likely occur later than those of the proposed Project, they would come at a time when the social cost of carbon is also correspondingly higher than now. Page 54 of 64 The World Bank Project Name (P166405) Table 14: List of Assumptions – Economic Analysis Assumptions Unit Value Discount Rate 6% Exchange Rate 80.05 Capital Cost of Power Plant USD million 42.27 Capital Cost of Transmission Line USD million 3 Capital Cost of Distribution Networks USD/kWh 0.17 Tax and Duty on Equipment 0% Project Life years 5 Residual Value after 5 years - turbine and BOP USD million 18.19 Residual Value after 5 years - transmission line USD million 2.25 Capex year 1 34% Capex year 2 66% First Power July 1, 2020 Plant conversion efficiency 39% Gas thermal content BTU/cf 1,030 Gas consumption m3/kWh 0.2405 Short term cost of gas 65.00 Long term cost of gas USD/MCM 150.00 Plant availability 90% Plant dispatch 89% Annual O&M - year 1 USD million 3.00 Annual O&M - year 2 - 5 USD million 2.50 Major maintenance USD million/yr 2.57 DABS technical and commercial losses 35% Electricity Sales - NEPS Turkmen Region - household % of total 71% Electricity Sales - NEPS Turkmen Region - institution % of total 9% Electricity Sales - NEPS Turkmen Region - commercial % of total 12% Electricity Sales - NEPS Turkmen Region - industrial % of total 7% Average tariff - household USD/kWh 0.061 Average tariff - institution USD/kWh 0.166 Average tariff - commercial USD/kWh 0.162 Average tariff - industrial USD/kWh 0.103 Weighted average tariff - NEPS region USD/kWh 0.086 Average WTP - household USD/kWh 0.098 Average WTP - Institution USD/kWh 0.211 Average WTP - commercial USD/kWh 0.325 Average WTP - Industrial USD/kWh 0.155 Weighted average WTP - NEPS region Page 55 of 64 The World Bank Project Name (P166405) Fiscal Impacts 11. Overall the fiscal impacts of the proposed Project are relatively modest, owing at least partly to the relatively short term of the proposed Project. Potential fiscal impacts on the GoA were studied in relation to three areas: - Direct impacts on the GoA budget related to the cost of domestic gas supply (cost of required gas investments to supply the power needed minus royalty received on gas sales); - Financial losses to DABS owing to a combination of high transmission and distribution losses and the narrow margin between the purchase price and the average tariff in the NEPS region; - Balance of payments effects owing to the difference between the payments to the IPP for electricity (which are denominated in USD) and the offsetting reduction in payments for electricity imports; and - Taxes paid by the project company including corporate income tax and business revenue tax. 12. The cost of gas supply, while notionally included in the electricity tariff, is the responsibility of the electricity off-taker (DABS) and by extension the GoA. During the first three and a half years of the proposed Project (mid 2020 to the end of 2023), gas supply for this and other customers in the region is expected to come from existing wells. Investments will be needed in gas processing, since the gas has a high sulfur content, and in a pipeline from the gas fields to Mazar-e-Sharif.35 The estimated average cost of this early gas is USD 15 per MCM.36 With an average annual gas consumption of approximately 66 mmcm, the total annual cost of the gas for the Sheberghan plant is USD 1.0 million. This will be paid to the state-owned enterprise AGE with no net fiscal impact. 13. Beyond the initial period, meeting the ongoing needs of gas customers, including from the Sheberghan power plant, will require investments in drilling new wells at existing fields (initially Yatimtaq) and exploring and developing new fields to maintain and expand production. Here the costs of gas supply are much more difficult to predict. Private sector involvement and expertise is expected to play a major role in the future development of the gas resource and the prices that they will command are likely to be influenced as much by perceived risks as by actual development costs. Based on a review of numerous estimates of the long-term prices for domestic gas, the economic analysis elected to use a figure of USD 150 per MCM, which included a royalty payment to Government of USD 50 per MCM. As noted above, the Sheberghan plant is expected to consume approximately 66 mmm3 of gas during each full year of operation. At USD 150 per MCM, the expected total cost of gas would be USD 9.9 million in its fifth year and USD 5 million in its sixth (half) year, all of which is the responsibility of the off-taker. The tariff paid by DABS includes an allowance of 1.9 US cents per kWh (based on a gas price of USD 78 per MCM), which means that USD 5.2 million and USD 2.6 million of the total gas cost is incorporated into the tariff paid by DABS in leaving a residual of USD 4.8 million and USD 2.4 million to be absorbed by the GoA in years five and six respectively. Offsetting this, the GoA would earn a royalty on the gas sales of USD 50 per MCM for a total USD 3.3 and 35 Financing for these investments will be provided under the related A-GASP (P172109). 36 The economic analysis included an estimated depletion cost of USD 50 per MCM which would normally be collected as a royalty. However, since state-owned enterprises (AGE and DABS) will be the sellers and effective purchasers of the gas, this was not included in the fiscal cash flow. Page 56 of 64 The World Bank Project Name (P166405) USD 1.7 million respectively. In present value terms, the net fiscal burden associated with unrecovered gas costs would be USD 1.6 million. 14. Losses that DABS might incur on the purchase and resale of power from Sheberghan were also an area of concern. DABS current average tariff in the NEPS region is USD 0.086 per kWh. However, approximately 35 percent of power purchases are lost in transmission and distribution, meaning that pay much more than the quoted purchase price per kWh of power actually delivered. In the case of proposed Project, the tariff (including fuel costs) is USD 0.075 per kWh, which equates to a delivered price of USD 0.115. Over the life of the proposed Project, the present value of DABS losses would total USD 21.3 million. However, DABS losses are largely a function of non-compensatory tariffs and excessive technical and commercial losses. A tariff increase of, e.g., three percent per year over the course of the project would reduce DABS losses by more than 30 percent to USD 14.6 million. Successful implementation of a loss reduction program, including measures to allow for easy identification of theft and technical issues, would further reduce the deficits. 15. The third consideration is the effect on the GoA’s foreign currency balances. Power from Sheberghan is expected to displace electricity that would otherwise be purchased from neighboring countries. The current average tariff for these imports is USD 0.055 per kWh. The tariff paid to the IPP developer net of fuel costs is USD 0.045 per kWh payable in foreign currency.37 The net savings in foreign currency flows over the project period is estimated at USD 11.2 million. 16. Finally, the GoA is expected to receive payments of both corporate income tax (20 percent of profits) and business revenue tax (four percent of revenues). The financial analysis indicates that the estimated ROE for the project is 12.2 percent. Based on the estimated equity financing (56 percent), the estimated annual profit would be approximately USD 2.9 million and the implied corporate tax at 20 percent would be USD 0.7 million per year or USD 3.0 million over the life of the project. 17. Overall, the proposed Project’s fiscal impacts are small, with the exception of the losses incurred by DABS. Table 15 below summarizes the range of impacts. Net negative impacts are projected to be USD 0.3 to USD 1.6 million per year of the five years of the proposed Project. By comparison, Afghanistan had a fiscal surplus in 2018 in excess of USD 100 million on total revenues of USD 4.8 billion. Imports of goods totalled USD 7.4 billion, USD 1 billion of which was mineral fuels. In the larger context, the fiscal impacts of the proposed Project are very small. In return, the GoA will benefit from an incremental source of electricity to meet growing demands of households and enterprises (whose WTP exceeds the cost of supply), reducing its reliance on imported electricity, and providing a market for new domestic gas resources which, if expectations materialize, will reduce the country’s long term reliance not only on imports of electricity but on imports of other more costly energy as well. 37The total price for the power is 7.5 US cents per kWh. Of this, DABS pays 1.9 cents to the gas supplier, 4.5 cents to the project company (in foreign currency) and a further 1.1 cent paid to the Project Company but denominated in local currency as a supplemental contribution linked to gas supply. Page 57 of 64 The World Bank Project Name (P166405) Table 15: Net Fiscal Impacts over Project Term (USD million) Base Case 3% DABS Tariff Increase Negative Positive Negative Positive Uncompensated gas cost -5.24 -5.24 Royalties on Gas Sales 3.64 3.64 DABS losses -21.29 -14.61 Net Foreign Currency Impacts 11.26 11.26 Corporate Income Tax 2.96 2.96 BRT 0.47 0.47 Total Impacts -26.53 18.32 -19.85 18.32 Net Impact -8.21 -1.52 Net Impact per year -1.64 -0.30 Page 58 of 64 The World Bank Project Name (P166405) Financial Analysis 1. Below are DABS’s financial statements, representing historical performance and projections for the period 2019 - 2025. Table 16: DABS Income Statement In Afs billion 2016 (H) 2017(H) 2018 (H) 2019 2020 2021 2022 2023 2024 2025 Operating revenues 17.68 24.66 25.47 26.30 29.69 41.96 46.97 50.92 56.88 60.61 Other revenues (as per CASA PPA) 1.95 1.96 2.04 2.07 Total revenues 17.68 24.66 25.47 26.30 29.69 41.96 48.93 52.87 58.92 62.68 % increase 14% 39% 3% 3% 13% 41% 17% 8% 11% 6% Total Cost of Sales 15.18 18.98 21.32 22.18 28.97 40.82 43.33 48.67 51.71 53.87 Power purchase (Imports and IPPs) 14.32 17.98 19.92 20.08 27.12 39.21 41.77 47.08 50.10 52.23 % increase 35% 26% 11% 1% 35% 45% 7% 13% 6% 4% Cost of generation by DABS (O&M ) 0.86 1.00 1.40 2.10 1.85 1.60 1.56 1.58 1.61 1.64 Gross Profit/Losses 2.49 5.68 4.15 4.12 0.72 1.15 5.59 4.21 7.20 8.81 Gross margin 14% 23% 16% 16% 2% 3% 11% 8% 12% 14% Operating Expenses 2.96 5.03 5.42 2.68 2.83 3.16 3.36 3.53 3.75 3.93 General expenses 2.23 4.04 4.38 2.00 2.08 2.16 2.25 2.34 2.43 2.53 BRT 0.73 1.00 1.04 0.53 0.59 0.84 0.94 1.02 1.14 1.21 Other expenses - - - 0.15 0.16 0.16 0.17 0.18 0.18 0.19 Depreciation expenses 3.10 2.80 3.45 3.24 3.24 4.13 5.73 7.47 9.70 11.62 Existing assets 2.04 2.04 2.08 2.13 2.18 2.23 2.28 New assets 1.20 1.20 2.05 3.60 5.29 7.30 8.97 Assets from New Investment Program (To be - - - - - 0.18 0.36 financed) Other operating income 6.39 0.63 0.60 1.00 1.04 1.08 1.12 1.17 1.22 1.27 Rental income 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 Donation income 1.53 0.97 2.52 - - - - - - - Exchange gain (loss) (0.59) 0.02 (0.35) - - - - - - - Total other expenses (losses on collection, etc..) (3.59) - - - - - - - Operating Profit/Losses 0.19 (0.50) (1.94) (0.77) (4.29) (5.05) (2.35) (5.61) (5.02) (5.46) Financing cost: Interest on loans 0.04 0.05 0.02 0.85 1.07 1.26 1.69 2.25 2.62 3.17 Profit before tax 0.15 (0.56) (1.96) (1.62) (5.36) (6.31) (4.04) (7.86) (7.64) (8.63) Income Tax (1.61) (0.17) (0.33) - - - - - - - Net Income 1.77 (0.38) (1.63) (1.62) (5.36) (6.31) (4.04) (7.86) (7.64) (8.63) Page 59 of 64 The World Bank Project Name (P166405) Table 17: DABS Cash-flow Statement In Afs billion 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Net income 0.15 (0.56) (1.97) (1.62) (5.36) (6.31) (4.04) (7.86) (7.64) (8.63) Adjustment for non-cash items: Add depreciation 3.10 2.80 3.34 3.24 3.24 4.13 5.73 7.47 9.70 11.62 Cash-flow pre WC adjustments: 6.93 4.39 1.38 1.62 (2.12) (2.18) 1.69 (0.40) 2.06 2.99 (Increase)/decrease in current assets Stores and spares (0.41) 1.06 (0.52) - (0.18) (0.19) (0.20) (0.21) (0.22) (0.23) Trade Debts (3.23) (4.23) 0.32 (1.75) (3.39) (0.12) 0.39 (0.08) 0.64 2.88 Advances and other receivables 0.74 0.16 (0.79) Increase/(decrease) in current liabilities Trade and other payables 0.91 (0.66) 1.52 0.44 1.60 0.65 0.51 0.77 0.49 (0.80) Short-term deposits (0.04) (0.00) 0.01 - - - - - - - Change in Working Capital (2.03) (3.66) 0.54 (1.31) (1.97) 0.35 0.71 0.48 0.91 1.85 Cash inflow/(outflow) from operations 4.89 0.73 1.92 0.31 (4.09) (1.84) 2.39 0.09 2.97 4.83 Cash-flow from investments PPE additions (1.81) (0.87) (0.75) 20.49 36.38 44.46 33.61 36.62 25.46 25.12 PPE disposal - 0.00 - - - - - - - - Intangible assets additions - - (0.00) - - - - - - - Net movement in capital WIP (8.94) (10.57) (12.63) - - - - - - - Net movement in capital stores and spares - - - - - - - - - - Cash flor from Investments (10.75) (11.45) (13.38) (20.49) (36.38) (44.46) (33.61) (36.62) (25.46) (25.12) Cash-flow from financing Proceeds from new loans 5.14 6.52 6.72 18.27 33.99 40.23 28.65 23.48 8.83 3.20 Repayment of loan - - - - - - - - - - Grants received 1.39 3.82 7.16 2.23 2.39 2.44 1.48 0.26 0.26 0.16 Movement in deferred revenues - 0.00 - - - - - - - - Contingencies and Commitments - - - - - - - - - - Grants by USAID and ARTF/WB - - - 6.31 13.61 17.18 8.69 8.34 - - Cash-Flow from financing 6.53 10.34 13.88 26.81 49.99 59.86 38.82 32.08 9.09 3.36 Change in CF (0.43) (0.70) 1.04 6.62 9.52 13.56 7.60 (4.45) (13.40) (16.92) Beginning of period CF 4.87 4.43 3.73 4.77 11.39 20.91 34.47 42.07 37.62 24.23 End of period CF 4.44 3.73 4.77 11.39 20.91 34.47 42.07 37.62 24.23 7.30 Page 60 of 64 The World Bank Project Name (P166405) Table 18: DABS Balance Sheet ASSETS 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Non-Current Assets Property, Plant & Equipment 106.92 116.24 124.86 144.64 185.86 215.34 246.23 264.22 279.64 289.61 Intangible Assets - - 1.49 - - - - - - - Investments properties 0.96 0.96 0.96 - - - - - - - 107.88 117.20 127.31 144.64 185.86 215.34 246.23 264.22 279.64 289.61 Current Assets Stores and spares 5.50 4.44 4.96 8.15 8.15 8.33 8.51 8.71 8.92 9.13 Trade debts 10.34 12.99 11.90 10.77 12.62 16.16 16.38 16.08 16.26 15.69 Advance and other receivables 0.69 0.51 1.30 - - - - - - - Advance business receipt tax - net 0.42 - - - - - - - - - Other current assets - - - - - - - - - - Cash and marketable securities 4.43 3.70 4.72 11.35 21.17 35.49 44.28 41.44 30.22 16.31 Total Current Assets 21.38 21.64 22.88 30.27 41.93 59.98 69.17 66.23 25.18 24.83 Total Assets 129.25 138.84 150.20 174.91 227.80 275.32 315.40 330.45 304.82 314.44 LIABILITIES 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Equity Shareholder capital 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 Retained Earnings 7.48 7.04 5.91 4.28 (0.69) (6.18) (9.01) (15.23) (20.69) (26.63) Reserves (Re-valuation) 57.71 57.71 57.71 57.71 57.71 57.71 57.71 57.71 57.71 57.71 Total Equity 90.18 89.75 88.62 86.99 82.02 76.53 73.70 67.48 62.02 56.08 Non-Current Liabilities Long-term debt (loans signed) 13.55 19.57 25.96 37.91 58.28 81.33 101.29 116.43 125.26 128.46 Deferred Grants 21.76 25.16 29.80 38.34 54.34 73.97 84.14 92.74 93.00 93.16 Deferred revenue 0.03 0.04 - - - - - - - - Deferred tax liability 0.64 0.46 0.13 - - - - - - - Long-term debt (loans TBF) - - - - - - 0.80 6.25 13.40 23.20 Other long-term liabilities - - - - - - - - - - Total Long-Term Liabilities 35.98 45.23 55.89 76.25 112.62 155.30 186.23 215.42 231.66 244.81 Current Liabilities Trade and other payables 2.45 2.25 3.43 3.42 3.91 5.56 6.27 6.84 7.68 8.24 Accrued mark-up 0.29 0.48 0.67 - - - - - - - Current portion of LT finance 0.31 0.76 1.44 - - - - - - - Provisions for BRT - 0.36 0.04 - - - - - - - Short term deposit 0.06 0.05 0.11 - - - - - - - Other short-term liabilities - - - - - - - - - - Total Current Liabilities 3.11 3.90 5.69 3.42 3.91 5.56 6.27 6.84 7.68 8.24 Contingencies and Commitments - - - 8.25 29.24 37.93 49.20 40.71 3.45 5.31 Total Liabilities 39.10 49.13 61.58 79.67 116.54 160.86 192.50 222.26 239.34 253.05 Total Equity and Liabilities 129.28 138.87 150.20 174.91 227.80 275.32 315.40 330.45 304.82 314.44 Page 61 of 64 The World Bank Project Name (P166405) ANNEX 3: Team List COUNTRY: Islamic Republic of Afghanistan Sheberghan Gas-to-Power Project Team Bank Staff Name Role Specialization Unit Senior Infrastructure Finance Teuta Kacaniku TTL IPGFS Specialist Senior Infrastructure Finance Christina Paul TTL IPGFS Specialist Fanny Missfeldt-Ringius Energy Economist Lead Energy Specialist ISAE1 Mark Sigrist Guarantee Lawyer Senior Counsel LEGSG Carlos Alberto Lopez Gas Specialist Senior Oil and Gas Specialist IEEXI Senior Environmental Mohammad Arif Rasuli Environmental Safeguards SSAE2 Specialist Senior Social Development Mohammad Yasin Noori Social Safeguards SSASO Specialist Najla Sabri Gender Specialist Social Development Specialist SSASO Syed Waseem Abbas Senior Financial Management Financial Management ESAG1 Kazmi Specialist Rahimullah Wardak Procurement Senior Procurement Specialist ESARU Zhuo Yu Disbursement Senior Finance Officer WFACS Ehsanullah Shamsi Gas Specialist Operations Analyst IEEXI Abdul Hamid Quraishi Financial Analyst Operations Officer ISAE1 Wahida Kakar Assistant Team Assistant SACKB Qingtao Yang Assistant Program Assistant ISAE1 Page 62 of 64 The World Bank Project Name (P166405) Extended Team Name Title Organization Location Robert Robelus Environmental Safeguards Consultant The Netherlands Asta Oleson Social Safeguards Consultant Denmark Peggy Wilson Economist Consultant Canada Abdul Baes Akhundzada Power Engineer Consultant Afghanistan Andrew Jones PPP Specialist Consultant United States Page 63 of 64 The World Bank Project Name (P166405) ANNEX 4: Project Site Map COUNTRY: Islamic Republic of Afghanistan Sheberghan Gas-to-Power Project Page 64 of 64