[1]

EN

ANNEX

of the Commission Decision on the Annual Action Programme 2016 in favour of the Republic

of Marshall Islands, to be financed from the European Development Fund

Action Document for Support for the Reform of the Energy Sector, Republic of

Marshall Islands

1. Title/basic act/

CRIS number

Support for the Reform of the Energy Sector in RMI, CRIS number:

2016/038-868 financed under European Development Fund

2. Zone benefiting

from the

action/location

Pacific; Republic of the Marshall Islands (RMI)

3. Programming

document Republic of the Marshall Islands (RMI) – European Union, National

Indicative Programme for the period 2014-2020

4. Sector of

concentration/

thematic area

Renewable Energy and Energy

Efficiency

DEV. Aid: YES

5. Amounts

concerned

Total estimated cost: EUR 9 100 000 M

Total amount of EDF contribution EUR 9 100 000 of which

Budget support EUR 7 900 000 M (86.8% of total)

Measures in favour of civil society EUR 400 000 (4.4% of total)

Support measures EUR 700 000 (7.7% of total)

Audit/Evaluation EUR 100 000 (1.1% of total)

Total EUR 9 100 000 (100%)

6. Aid

modality(ies)

and

implementation

modality(ies)

Focal area:

Direct Management - Budget Support

Energy Sector Reform Contract with the Republic of the

Marshall Islands (RMI)

Non focal area:

Project Modality - Indirect management with the Government of

Republic of Marshall Islands

Measures in favour of civil society: Programme Estimate/Grant

contracts – call for proposals

Support Measures: Programme Estimates/Procurement of

[2]

Services

7 a) DAC code(s) 23030 Power generation/renewable

23040 Electrical distribution and transmission

8. Markers (from

CRIS DAC form)

General policy objective Not

targeted

Significant

objective

Main

objective

Participation development/good

governance ☐ ☐ ×

Aid to environment ☐ ☐ ×

Gender equality (including Women

In Development) × ☐ ☐

Trade Development × ☐ ☐

Reproductive, Maternal, New born

and child health × ☐ ☐

RIO Convention markers Not

targeted

Significant

objective

Main

objective

Biological diversity × ☐ ☐

Combat desertification × ☐ ☐

Climate change mitigation ☐ ☐ ×

Climate change adaptation ☐ × ☐

SUMMARY

The action meets the needs of the Republic of Marshall Islands (RMI) as identified in the

National Indicative Programme 2014-2020 and is consistent with the country priorities as set

out in the RMI Strategic Development Plan Framework: Vision 2018.

RMI has finalized its latest National Energy Policy and National Energy Action Plan (2016-

2019). These two documents will serve as a framework to guide the 11th

EDF Program in

order to implement the measures of renewable energy and energy efficiency and to strengthen

the institutional framework. The proposed Sector Reform Contract (SRC) on energy builds on

the work carried out under the 10th

EDF.

The total allocation is EUR 9.1M, of which EUR 8.0M is programmed for the Energy Sector

Reform Contract (SRC), EUR 0.4M for support to civil society and EUR 0.7M for support

measures. For the SRC allocation, EUR 7.9M is to be disbursed over four years with 81% as

fixed tranche and 19% as variable tranche. EUR 0.1M is allocated for evaluation. The first

and second payment is a fixed tranche only. The variable tranches are expected to be

disbursed in the following years (beginning in the fiscal year 2018/19) and are linked to

progress in the two indicators, namely the losses in the grid and share of renewable energy

generation.

Support to civil societies (EUR 0.4M) is expected to encourage participation and involvement

from civil society, especially community-based groups, women, and youth, in engaging

sustainable energy development at the grassroots level. The anticipated increased participation

of civil society support will integrate to the energy sector budget support programme by their

involvement in monitoring the implementation of the National Energy Policy (NEP) and the

provision of energy services at the local level. Furthermore, enhancing civil society capacity

[3]

and increasing their knowledge of policies will be developed such that they have the space to

participate in policy dialogue with the national government.

The support measures allocation of EUR 0.7M is primarily envisioned to be utilized for

provision in technical assistance to the National Authorizing Officer (NAO), to assist with the

implementation of the budget support. The Action will support the NAO in carrying out its

role and obligations, as well as develop national capacity in programme management.

1 CONTEXT

1.1 Sector/Country/Regional context/Thematic area

Country context

The Republic of the Marshall Islands (RMI), comprising some 1 225 islands and islets

grouped in 29 coral atolls, is located in the tropic belt of the North Pacific Ocean. It is a

Lower Middle Income Country with around 53 000 people distributed over numerous small

islands (landmass of 180 square kilometers) spread widely in a very large Exclusive

Economic Zone (EEZ) of over 1 942 491 square kilometres.

RMI is a small and isolated country, with a dispersed population and limited export base, and

is highly dependent on external aid and fiscal transfers, primarily from the US. The

remoteness of the RMI from major markets has a negative impact on the economy and

development. Furthermore, the economy is small in relative terms (GDP per capita for

FY2014 is USD 3,529), with a narrow export base, mainly fisheries and copra and limited

production capacities. As such, it is vulnerable to external shocks.

The economy remains heavily dependent on donor funding, most of which comes from the

Compact of Free Association with the United States. The FY16 approved budget of USD 177

Million includes 45% from US Compact funds1 and a total of 62% from outside development

partners. RMI has few natural resources (e.g. agro-forestry and marine) and imports far

exceed exports. The RMI public sector continues to dominate the economy in terms of

contribution to about 40% of GDP and overall employment.

The Strategic Development Plan Framework: Vision 2018 is the national planning document

which provides the RMI with a long range view of national context and perspective which

continues to provide relevant national priorities. The ten goals are 1) operating in an

interdependent world, 2) enhanced socio-economic self-reliance, 3) an educated people, 4) a

healthy people, 5) a productive people, 6) law-abiding people, 7) God-loving people, 8)

respecting individual and fundamental human rights, 9) respecting culture and traditions, and

10) environmental sustainability.

1 The Compact of Free Association between the United States and the Republic of the Marshall Islands provides the framework for their very

close relationship. The purpose of the Compact is to provide funding to support the GRMI build the capacity of various sectors of the economy and society, with a priority on education and health. The Trust Fund is to provide the government with an ongoing source of

revenue after fiscal year 2023. The Trust Funds are governed by the Trust Fund Agreement, a subsidiary agreement of the Amended

Compact.

[4]

Moreover, on 21 July, 2015, the RMI has submitted to the United Nations Framework

Convention on Climate Change (UNFCCC) its Intended Nationally Determined Contribution

(INDC) towards a quantified economy-wide target to reduce its emissions of greenhouse

gases (GHG) to 32 % below 2010 levels by 2025 and its intention to reduce its emissions of

GHGs to 45% below 2010 levels by 2030. RMI ratified the Paris Agreement on the 22 March

2016.

In 2013, 89% of households in the RMI have access to electricity, with 26% from off-grid

solar and 63% from the grid. Following a rural electrification project due to be completed this

year, household rural electrification will reach 100%.

Most of the primary energy supply (90%) comes from petroleum, with biomass used for

cooking accounting for nearly all the rest. Solar electricity generation is expected to expand

rapidly but contributed less than 1% of RMI energy in 2014. Biofuel from coconut oil is also

expected to increase in future. At the moment, it makes up a tiny proportion of the national

energy balance.

Electricity is provided mainly by two public sector utilities KAJUR and MEC. KAJUR only

serves Ebeye in Kwajalein. MEC operates throughout the rest of the country. Its main grid is

on the Majuro atoll, along with a diesel mini-grid on Rongrong islet. Diesel mini-grids on

Jaluit and Wotje atolls each serve about 100 homes. The Majuro and Ebeye grids have a

combined load of 8.8 megawatts (MW), and the small local grids less than 1 MW. MEC also

manages the stand-alone solar installations on all the populated outer islands.

In September 2012 - October 2013, the peak load for the main Majuro grid was 8.7 MW. Its

generation was 62,437 MWh, of which 228 MWh came from renewable energy (solar) (less

than 1%) and the rest from diesel.

The electricity tariff for early 2014 for residential customers consuming less than 500 kWh

per month is USD 0.41/kWh, while those using over 500 kWh per month are charged USD

0.43/kWh. Commercial customers pay USD 0.49/kWh, while government entities are charged

USD 0.50/kWh. These tariffs are the same for all MEC and KAJUR grids. Small grids

operated by communities and local governments are not required to charge this national tariff,

and their tariffs vary widely. The full cost of electricity delivery is approaching USD

0.50/kWh, so residential tariffs appear to be somewhat below cost. There is no cross-subsidy

within the electricity tariff structure, but MEC profits from the sale of diesel fuel are

substantial and help offset the electricity sector losses.

The Energy Planning Division (EPD) is part of the Ministry of Resources and Development

(MRD). It has full responsibility over the entire national energy policy framework and its

associated action plans, overseeing: renewable energy; energy efficiency in both power

supply and demand sides; petroleum reform towards energy efficiency; and the push towards

an energy security plan that is linked to both national disaster management and energy supply

security/management.

The Marshalls Energy Company (MEC) is one of the state-owned enterprises and is the

primary electric power provider that is responsible for electric power on Majuro and also

[5]

operates the power systems of Jaluit and Wotje, two outer-island regional centers, under a

government contract.

1.1.1 Public Policy Assessment and EU Policy Framework

An official endorsement of the updated National Energy Policy (NEP)2 and Energy Action

Plan (EAP)3 can be foreseen by May 2016. The 11

th EDF Programme will further support the

implementation and the realization of these two energy sector documents.

The updated NEP is intended to be a pragmatic document, guiding the planning,

communicating, financing and advancing of the energy sector in the RMI through a “whole of

sector” energy development approach with the policy vision for energy sector aligned to the

national vision: “an improved quality of life for the people of Marshall Islands through clean,

reliable, affordable, accessible, environmentally appropriate and sustainable energy

services.”

The estimated costing for implementing the updated Energy Action Plan for three years from

2016 – 2019 is USD 20 Million. The EAP is a realistic and credible costed plan. The

financing of the NEP targets, are anticipated to be met through a combination of external and

internal funds, clearly indicated in the EAP.

The development of updated RMI NEP is in line with the objectives of Sustainable Energy for

All Initiative (SE4ALL) and Agenda for Change in poverty reduction, sustainable growth,

clean energy, and improving resilience to natural disasters and to the consequences of climate

change. All of these development objectives can be achieved and accelerated with a

reinforced cooperation and partnership between the RMI and the EU.

The monitoring and evaluation process within the NEP is, at this stage, sufficiently robust as

to allow for monitoring of sector progress in implementing the plan. However efforts will be

needed to ensure that the monitoring framework allows for overall policy implementation

progress to be assessed.

It needs to be clearly mentioned that eligibility of the public policy needs to be made with

close reference to Annex 10 of the Budget Support Guidelines and the unique set of

challenges (vulnerability, volatility and development capacity) faced by SIDS.

On the basis of this assessment it is concluded that the policy is considered sufficiently

relevant and credible for budget support programme objectives to be achieved.

1.1.2 Stakeholder analysis

The overall coordination of the 11th

EDF energy SRC is with the Ministry of Finance (MOF).

The Energy Planning Division (EPD) is part of the Ministry of Resources and Development

(MRD). In alignment with these responsibilities, the EPD has engaged all relevant

stakeholders during the development of the updated NEP and EAP.

2 The NEP will be from 2016-2020.

3 The EAP is a 3 year document, covering the period 2016-2019.

[6]

The Marshalls Energy Company (MEC), the major electrical energy producer in the nation,

also imports and distributes petroleum fuel products and installs, operates, and maintains

renewable energy systems in remote areas on a contractual basis. The willingness and ability

of MEC to manage renewable energy initiatives makes MEC play the de facto lead role in

energy sector implementation and coordination at present.

The 11th

EDF program will benefit several target groups. The principal beneficiaries will be

the end-users (in the main and outer islands) of the renewable energy technology and energy

efficiency technology. The private sector and the Development Banks are also important

stakeholders, particularly in respect of their ability to deliver energy efficiency campaigns.

And, lastly, the Government will benefit through savings brought about by energy efficiency

and non-fossil generation sources, freeing up funding for other much-needed development

efforts.

1.1.3 Priority areas for support/problem analysis

Renewable energy, climate change and development are related at the local and global level.

Renewable energy technology can reduce demand for fossil fuels and contribute to economic

sustainability. In the remote, rural atolls of RMI, renewable energy technology is the only

practical way of providing communities with access to energy, which among other benefits

can strengthen their resilience to climate change.

For these reasons, the 9th

and 10th

EDF National Indicative Programmes (EUR 11.4 million in

total) focused on renewable energy, targeting disadvantaged households, schools and health

clinics on the outer islands. A continued focus on the energy sector will assist in consolidating

successes so far gained through the previous projects.

In addition, the RMI has realized that there is an extensive need to strengthen the institutional

structure and framework of the energy sector to ensure that the energy policy is planned,

coordinated and implemented in a consistent, coordinated and structured manner. There is

also a need to put in place a monitoring and evaluation mechanism for the energy sector to

gauge its development and also to highlight the challenges in the energy sector. This is a

primary reason that RMI is seeking support and partnership with the EU on improving and

reforming of the energy sector.

Beyond the energy sector, EU support will continue to go to areas related to public finance

management, economic development and accountability, as well as increased support to civil

society to enhance the participation of Non State Actors in policy dialogue - a crucial

component of any democratic system. In line with the Agenda for Change and the EU's

fundamental values, support to this area could be enhanced through regional or thematic

envelopes, in partnership with the UN or other development partners.

1.2 Other areas of assessment

1.2.1 Fundamental values

In accordance with its Constitution, the RMI Government operates under a mixed

parliamentary-presidential system and is a self-governing democracy in free association with

the U.S. The legislative body consists of a 33 member Nitijela (Parliament) who elects the

President by majority vote. From the Nitijela, the President appoints his 10-member Cabinet.

The most recent elections was held in November 2015, with the first lady President being

[7]

appointed. An 11-member Council of Iroij (traditional Chiefs) presides over traditional and

customary matters. Elections are held every four years in universal suffrage for all citizens

over 18 years of age. The Constitution provides for a judicial body of the Government: the

Supreme Court, the High Court, and the Traditional Rights Court, and various district and

community courts to ensure equal rights of all citizens and grants all visitors full protection

under the law. The short history of independent government means public understanding of

democratic principles and processes is limited.

Prison conditions, government corruption, and domestic violence are the main human rights

problems in the Marshall Islands. The RMI government accepted the recommendations on

ratification or accession to the main international human rights treaties and underlined the

serious need of technical and financial assistance in properly implementing them. The

Marshall Islands also accepted the recommendations on the promotion of human rights,

addressing domestic violence and other issues affecting women, children’s rights, socio-

economic development and climate change.

1.2.2 Macroeconomic policy

The Marshall Islands faces important challenges over the medium-term, although the recently

renewed activity in Compact-funded construction activities is expected to contribute to

growth through FY2018, with growth slowing significantly after that. The forecast for the

RMI is unchanged, with GDP expected to grow by 3.5 % in 2015 and 1.5% in 2016. The

fishing sector is expected to expand further, but at a slower pace. In the medium-long term,

growth potential is weighted down by the scheduled reduction in Compact grants and limited

private sector expansion. Inflation is expected to remain moderate at 1.7 % in FY2014, thanks

to subdued global commodity prices.

The RMI faces persistent budget deficits, substantial fiscal risks from poorly performing state-

owned enterprises (SOEs), financial insecurity of the social security system, and the

expiration of most US Compact Grants after FY2023. However, the restructuring plan for the

MEC (one of the SOEs) is starting to yield some benefits and is on a positive trend. While the

Compact Trust Fund (CTF) was established in 2004 to contribute to the long term budgetary

self-reliance for RMI to replace Compact grants from 2024 onwards, based on current

projections, contributions to the CTF are inadequate to assure a smooth transition, and annual

CTF income can be expected to fall USD 11 Million (in 2011 prices) short of what is needed

to replace Compact grants in 2024. Current public sector and structural reform measures, if

successfully implemented, will help to free up funding that could be contributed to the CTF.

However, for the CTF to reach adequate capitalization by 2023 and for fiscal sustainability

beyond 2023, additional grant support will likely be required under any realistic scenario.

Private sector development is limited by remoteness, small market size, SOEs dominance in

some sectors and a weak business climate, constraining growth, and making fiscal

sustainability more challenging. However, support from development partners for reform to

SOEs, in line with supportive legislation passed in 2015, could pave the way for private sector

growth. Specifically, the availability of private sector involvement in installation of

renewable/sustainable energy systems is relatively limited in the domestic market, given the

limited number of companies that might have the capacity to implement a large scale project.

However, increasing the engagement of the private sector in renewable energy is one of the

strategies of the updated National Energy Policy.

[8]

Measures are in place and planned to address fiscal sustainability challenges in the energy

sector and in the performance of SOEs like the Marshalls Energy Company. The Public

Sector Program supported by the ADB has led to the identification of several priorities for

achieving savings and improving the effectiveness of public expenditure. A planned but as of

yet unscheduled audit of public sector functions is expected to reveal duplication of certain

roles and opportunities to reduce the wage bill, while the Ministry of Finance is working to

eliminate unfilled positions. A review of government allowances and benefits could deliver

further savings but it is yet unscheduled.

The macroeconomic policy framework is dependent on continued availability of grants from

development partners and is subject to high levels of uncertainty. A sharper than expected rise

in global commodity prices would exacerbate inflation and lead to further contraction of the

Marshall Islands’ economy. Any change in Compact arrangements or in the Marshall Islands’

capacity to access US federal grants and other grants from development partners, or from

further effects of the global economic slowdown would have a significant and negative impact

on macroeconomic stability. Finally, the country remains vulnerable to a variety of natural

disasters that may also place considerable stress on the macroeconomic policy framework.

In spite of this typical vulnerability to SIDS, the degree of risk is moderate given the stability

of the external aid and the anticipated exit strategy scheduled for the US Compact grants.

Limited international financial linkage with global markets, ensure the RMI remains fairly

isolated from spill overs from external financial developments, given low dependence on

tourism and relatively stable fish demand. The macroeconomic eligibility criteria assessment

for budget support is challenging, but positive.

IMF Article IV consultation took place from May 9, 2016 to May 18, 2016 to assess the

economic health of the RMI and to forestall future financial problems. The preliminary

mission outcome is, 'The economy is improving gradually, while risks are tilted downside.

Ensuring fiscal sustainability over the medium term calls for a decisive fiscal adjustment and

social security reform, aided by strengthening public financial management'.

1.2.3 Public Financial Management (PFM)

The 2012 Public Expenditure and Financial Assessment (PEFA) report showed progress in

PFM areas including reasonable adherence to budget discipline at the aggregate level;

transparency of inter-governmental fiscal relations; orderliness and participation in the annual

budget process and predictable amounts of direct budget support provided by external

development partners.

Nonetheless, some PFM areas were identified as continue to be weak, such as the non-timely

issuance of in-year budget execution reports and annual financial statements and the

consequential effect on the timeliness of annual audits; timeliness in reconciling accounts;

weaknesses in payroll and other internal expenditure controls; limited follow-up by the

audited entities to audit and Public Accounts Committee (PAC) recommendations; weak

relationship between planning and budgeting; limited consultation for budget preparation and

policy planning; limited tax compliance and enforcement; and lack of monitoring of potential

fiscal risk.

[9]

Following this assessment, the Government, with assistance from the Pacific Financial

Technical Assistance Team (PFTAC), developed the Public Finance Reform Roadmap (PFM

Roadmap) 2014-2016 which was adopted and endorsed by the cabinet in August 2014. The

PFM Roadmap covers and addresses major key constraints and weaknesses identified in the

PEFA report and provide a comprehensive list and timeline of activities to address those

constraints and weaknesses.

The Government of the Marshall Island attaches high importance to PFM reform, which is

considered critical to long-term growth. The PFM Roadmap 2014-2016 emphasizes

strengthening priority areas such as PFM, legal and policy framework, budgeting framework,

accounting systems, fiscal reporting, procurement management, payroll management, SOE

oversight, tax administration, management of non-tax revenue, social security framework,

internal and external audit functions, oversight by public accounts committee.

The Government is making progress on key economic and public sector stabilization reforms

to strengthen the macro economy, but challenges remain. The ongoing reforms include:

a) The Tax and Revenue Reform and Modernization Commission (TRAM) implemented

through a program of reform supported by the Pacific Financial Technical Assistance

Center.

b) Consideration of a tax reform bill(s) which include modernized net profit tax and

consumption tax with the aim of making the RMI economy more business friendly.

c) ADB has conducted several studies on SOE performance which have led to a SOE

Reform Law which was adopted by the Parliament in October 2015, and the MEC

Board adopting a comprehensive recovery program and action plan.

d) Government adoption in August 2014 of a PFM Reform Road Map based on the 2012

PEFA Assessment with implementation following a timeline of scheduled targets.

e) The Social Security Amendment Act is under consideration by the national

parliament, but there is a lot of political risk associated with its support for higher

contributions; also, the Marshall Islands Social Security Administration (MISSA) is

currently recruiting a consultant specializing in system conversion (i.e., from a

Defined Benefits Plan to a Defined Contributions Plan) and related matters (i.e.,

actuarial and investment review).

There are a number of activities underway in implementing the PFM Roadmap. These

include;

a) Establishment of PFM Reform project governance (including Steering Committee and

Working Group)

b) Installation of new HR Information Management System in the Public Services

Commission to improve HR management

c) Establishment of Division of International Development Assistance within Ministry of

Finance to strengthen aid coordination among ADB, WB, and EU program

d) Technical Assistance (TA) request to recruit an aid coordination specialist to establish

an aid coordination mechanism at the national level

e) Conducted accounting training to enhance accounting capacity within Ministry of

Finance

f) Recruitment of 2 accountant-consultants to improve the accounting and auditing

capacity within Ministry of Finance

[10]

g) Reviewed current Procurement Act (a TA support by WB)

h) Assessing new Financial Management Information System to improve accountability,

fiscal reporting, and internal control

i) Exercising Performance-based budgeting and Medium Term Budgeting Framework

j) Initiating the establishment of MOF website to publicize key fiscal

information/reports

The direction of change in PFM Roadmap is positive however, the pace of reform is

hampered by constraints in implementation and absorptive capacity, weaknesses in technical

capacities, and lack of domestic financial resources. While expatriate consultants and experts

can be requested through assistance from development partners, local sustainability is

questioned when participation and capacity of local counterparts are insufficient. The

recruitment and retention of qualified officials will be particularly important to sustain the

reform programs under way.

Moreover, the National Strategic Plan 2015-2017 also includes measures to strengthening the

financial and fiscal situation, and improving resource allocation as three of its key broad

strategies. With the government's strong commitment to enhance PFM and the support of IMF

Public Finance Technical Assistance Centre (PFTAC), Asian Development Bank (ADB), and

the World Bank towards Public Finance Management, through technical assistance, will allow

public finance systems in RMI to steadily improve in the coming years.

The PFM reform strategy has an appropriate sequencing, is comprehensive and well

formulated based on an independent and credible PEFA assessment conducted by ADB, The

Pacific Financial Technical Assistance Team and the IMF. The PFM road map is credible and

consistent with National Priorities.

1.2.4 Transparency and oversight of the budget

On transparency, the national budget is formulated, appropriated, executed and reported in the

primary instance by source of funds (e.g. General Fund for recurrent expenditures, Compact

Fund, US Federal Funds), shown in the Appropriation Act under “Schedules”.

In the past, limited availability of fiscal information to the public weakened the transparency

and oversight of the budget. However, efforts are currently underway to fund creation of an

open Ministry of Finance web page that would provide the public with easy access to ministry

reports and key fiscal information. It is expected that the development of web page be

completed by September 2016. Though the budgetary documents are not available online,

access to hard copies is possible upon request to the Ministry of Finance.

2 RISKS AND ASSUMPTIONS

Risks Risk

level

(H/M/L)

Mitigating measures

Political risks associated with tariff

setting may evolve, especially with

M These risks will be mitigated with the

establishment of an independent

[11]

regard to user-fee collection and

usage of revolving funds for outer

island communities.

replacement fund managed according to

observations and measurement and capital

cost.

Lack of ownership and slow

progress in fiscal reforms including

tax, expenditure and SOE oversight

would undermine PFM reforms.

H Establish PFM Reform Steering

Committee, component working groups

and component implementation teams to

drive the reforms.

The major risk associated with

implementing the programme is the

Government's ability to achieve and

maintain its 'eligibility' to receive

EU budget support.

M Mitigating measures will include the

provision of EUR 400 000 for Technical

Assistance support to assist RMI prepare

for budget support in the focal area.

Should, for any reason, budget support

prove problematic delivery will revert to a

project approach.

RMI's history with natural

disasters. Extreme weather events

and sea level rise can threaten

energy infrastructure and prolonged

droughts can create higher energy

demands.

M Impacts from climate change, specifically

rising sea level, a high probability of

natural disasters can be foreseen and

planned for. These need to be addressed

by a comprehensive programme of

coordinated action. Climate proofing will

be integrated into the design of any

infrastructure to be financed under the

programme.

Assumptions

The Government of Marshall Islands is assumed to provide opportunities for the

participation in policy dialogue on energy related issues.

3 LESSONS LEARNT, COMPLEMENTARITY AND CROSS-CUTTING ISSUES

3.1 Lessons learnt

National ownership, involvement and collaboration during development assistance design,

planning and implementation is critical. The project should complement and be consistent

with the national energy policies. Communities should be consulted and informed about key

decisions related to payment mechanisms, land tenure, and maintenance.

National capacity and skills are key components that need to be addressed when providing

new technologies and infrastructure.

Designing innovative mechanisms to support resourcing of maintenance will be considered.

Innovative funding arrangements shall be put in place to meet future operations and

maintenance costs, which is an issue that has been highlighted in many international projects

as a major factor, which, if not addressed, may undermine sustainability of a project.

Individual usage charges for outer island solar installations have been difficult to collect due

to the lack of a cash economy in those islands. Planned activities in the 2015 EAP include

stakeholder development of workable payment schemes, government absorbing the cost of

battery replacement, and a government-supported effort to properly dispose of used batteries.

[12]

3.2 Complementarity, synergy and donor coordination

Given the geographic and economic constraints facing the country, external assistance is

unlikely to be a transitional phenomenon in the Marshall Islands. Development partner

support being provided to support public financial management and/or energy sector includes

the following:

The ADB’s Country Operations Business Plan for 2015-2017 identifies three areas of

strategic focus: 1) macroeconomic and fiscal management, 2) human capacity development,

and 3) infrastructure development. In addition, the indicative technical assistance program for

2015-2017 will 1) prepare the proposed outer islands development project in 2015, 2)

continue implementing the government’s public financial management roadmap, and 3)

continue public sector reforms. With regard to support to the energy sector, ADB’s future

plan is to provide technical assistance to assist MEC in developing a strategic plan for the

next ten years.

The World Bank Country Partnership Strategy for the RMI for the period FY13-FY16 has

identified enhancing energy security through effective regulation, management, and

governance of the energy sector as one the medium-term goals to address outdated MEC

business model and fuel price volatility. However, the financial commitment for this

particular goal has not been delivered yet.

The Government of Australia has provided an Energy Adviser to the Energy Planning

Division from 2009 to 2014 to assist in the renegotiation for RMI’s long-term fuel supply

contract, resulting in an annual saving of an estimated $3.7 million. Currently, the

Government of Australia provides technical assistance to MEC through Australian Volunteers

International Development (AVID) Program.

With reference to the CSO action, the Global Environment Facility-Small Grants Program has

been providing funding to CSOs in the RMI to adapt to climate change by utilizing renewable

energy. Also, this support aims to increase the utilization of renewable energy to be associated

with productive end uses, such as using solar-powered lights for the facility where women and

community members can conduct income generating activities.

Australia has been providing funding through the Pacific Women Shaping Pacific

Development RMI County Plan 2014-16 to improve the political, economic, and social

opportunities of Marshallese women. This program aims to strengthen civil society action for

gender equality, reduce the incidence of gender based violence and expand support services

including counselling service.

External aid and internal implementation is coordinated through the Ministry of Finance. The

Ministry of Finance has been initiating reform activities proposed in the PFM Roadmap. One

of reform activities is to strengthen aid coordination with the goals to 1) improve integration

of donor project planning and project commitments with central planning and budget

processes; 2) improve monthly capture of donor disbursements including direct payments and

in-kind projects; and 3) provide a legal mandate through the revised PFM legislation for MOF

central coordination of donor projects and funding. Aid coordination has been identified as

one of the focal areas for improvement in the PFM Roadmap. It is a responsibility that

[13]

Ministry of Finance is only partially fulfilling. However, an improvement plan within the

Ministry of Finance is currently under discussion to move towards achieving the above-

mentioned PFM reform goals in a long term.

3.3 Cross-cutting issues

Cross cutting issues, such as environment, climate change, poverty reduction, and gender

equality are all priorities for RMI. The RMI will address these cross-cutting issues across all

11th

EDF activities and make it an integral part of the overall approach to development.

Sustainable energy, therefore, can be an engine for poverty reduction, social progress, equity,

enhanced resilience, economic growth, and environmentally sustainability. Energy

infrastructure is vulnerable to climate change, and thus their design will integrate climate-

proofing, in line with the INDC’s adaptation component that calls for “ensuring climate

resilient public infrastructure”. The programme will also contribute to climate change

adaptation through its contributions to improved energy security, as recognised by the Joint

National Adaptation Plan.

Equal access to modern, affordable, and sustainable energy is a critical enabler for economic

and social development. Once communities have access to modern energy services, the

impact on human development is significant. Policy dialogue in the energy sector will ensure

that gender dimensions are considered and efforts will be made to ensure gender desegregated

data is made available in the future to allow for better analysis and evidence base policy

making to take place.

4 DESCRIPTION OF THE ACTION

4.1 Objectives/results

This programme is relevant for the Agenda 2030. It contributes primarily to the progressive

achievement of SDG target 7 (Affordable and Clean Energy) but also promotes progress

towards Goals 9 and 13. This does not imply a commitment by the country benefiting from

this programme.

The overall objective is to contribute to the improvement of social and economic

development, reduce poverty, increase resilience to climate change and contribute to climate

change mitigation.

The specific objectives are to achieve universal access to modern and sustainable energy

services by specific initiatives in the outer islands, to increase energy efficiency and to

increase the share of renewable energy.

The main expected results are:

1) Strengthened financial, policy, and legislative frameworks for the energy sector

2) Achieve universal access to modern and sustainable energy services

3) Improvement in energy efficiency

4) Increase the share of renewable energy

[14]

4.2 Main activities

4.2.1 Budget support

The main activities will include;

Policy dialogue on energy with Government and alignment with Government

priorities,

Coordination with other donors and the regular monitoring of budget support

eligibility criteria and the energy sector performance through the annual review of the

sector, and with exchanges with sector stakeholders, including assistance to

coordination of other donor activities.

Monitoring of macroeconomic conditions taking into account IMF missions and other

relevant assessments,

Monitoring of public finance management eligibility on the basis of government PFM

reform strategy and related assessment as well as ad-hoc analyses.

Analysis of budget transparency which will be undertaken through verification of

public availability of appropriate documentation.

These activities will be supported by the transfer of EUR 7.9M over the next four fiscal years.

Financial additionality is a key element of the sector reform contract (SRC) as the energy

sector is currently underfunded. The Programme will allow for increased level of spending in

the sector in line with the policy financing needs. The level of public spending will be

monitored through the annual review of the energy sector.

4.2.2 Complementary support

Using project approach as the implementation modality, EUR 400 000 will be utilized to

support Non State Actors (civil society) to actively engage in the 11th

EDF program activities.

Increased support to civil society to enhance the participation of Non-State Actors in policy

dialogue which serves as a crucial component of RMI’s democratic system will also be

foreseen. The foreseeable activity includes encouraging participation and involvement from

civil society, especially community-based groups, women, and youth, in engaging sustainable

energy development in the outer islands. The anticipated increased participation of civil

society support will integrate to the energy sector budget support programme by their

involvement in monitoring the implementation of the National Energy Policy (NEP) and the

provision of energy services at the local level. Furthermore, enhancing civil society capacity

and increasing their knowledge of policies will be developed such that they have the space to

participate in policy dialogue with the national government. This is complimentary to the

CSO roadmap for the Pacific.

Using project approach as the implementation modality, EUR 400 000 will be utilized for a

Technical Assistance (TA) support programme to assist RMI in the focal area. This support

programme is intended to support the country in any of the four eligibility areas and its

implementation. In addition, EUR 300 000 will be utilized to support the operation of the

NAO office in completing its responsibilities and functions related to 11th

EDF Program

operation.

[15]

4.3 Intervention logic

The overall objective is to improve social and economic developments and provide

sustainable living conditions for the people of RMI, contributing to an environmentally

sustainable and low carbon-development path. It will facilitate the development of a

conducive energy policy framework and ensure increased policy dialogue. Continued

cooperation will improve national ownership and ensure a stronger engagement of all actors.

Focused on the energy sector, the EU supported efforts will lead to increased access to

affordable energy services for the population, including in the outer islands, through increased

use of renewable sources for the generation of energy and improve energy efficiency.

On the result level, the intervention is expected to facilitate the implementation of the energy

sector policy and funding orientated towards a long term vision of a sustainable energy sector.

This shall lead to a political, administrative and financial framework conducive for renewable

energy and energy efficiency improvement.

Specific activities foreseen by the energy policy and the action plan aim at reducing reliance

on imported petroleum, promoting the use of renewable energy and improving energy

efficiency whilst taking into consideration potential environmental impacts.

In addition, Civil Society Support will allow for an increased cooperation between the RMI

National Authorizing Officer and civil society actors, including private sector associations.

5 IMPLEMENTATION

5.1 Financing agreement

In order to implement this action, it is foreseen to conclude a financing agreement with the

partner country, referred to in Article 17 of Annex IV to the ACP-EU Partnership Agreement.

5.2 Indicative implementation period

The indicative operational implementation period of this action, during which the activities

described in section 4.1 will be carried out and the corresponding contracts and agreements

implemented, is 60 months from the date of entry into force of the financing agreement.

Extensions of the implementation period may be agreed by the Commission’s authorising

officer responsible by amending this decision and the relevant contracts and agreements; such

amendments to this decision non-substantial amendment in the sense of Article 9(4) of

Regulation (EU) No 322/2015.

5.3 Implementation of the budget support component

5.3.1 Rationale for the amounts allocated to budget support

The amount allocated for budget support component is EUR 7.9M, and for complementary

support is EUR 1.1M. This amount is based on;

- Commitment of the partner country to allocate national budget resources (including

EU budget support) in line with development strategy and objectives and to follow

standard national budget procedures;

- Track record and absorption capacity of past allocations and how effectively agreed

objectives were achieved with project operations;

[16]

- Result orientation in the partner country's development strategy including a

monitoring system.

- EU commitment to maintain a financial engagement (although higher) to that achieved

under the 10th EDF.

- The sector’s high performance under the previous programme, i.e. the 10th EDF

North-REP project.

5.3.2 Criteria for disbursement of budget support

a) The general conditions for disbursement of all tranches are as follows:

- Satisfactory progress in the implementation of the National Energy Policy and

continued credibility and relevance thereof;

- Positive actions in macroeconomic policy to enhance long-term economic stability

- Satisfactory progress in the implementation of the RMI PFM Reform Programme;

- Satisfactory progress with regard to the public availability of timely, comprehensive

and sound budgetary information.

b) The specific conditions for disbursement that may be used for variable tranches are the

following:

First indicator: Generation, transmission and distribution losses4

Second indicator: Renewable energy generation

The indicators are consistent with the National Energy Policy and the Energy Action Plan.

They have been agreed upon by the National Authorising Officer, the Ministry of Resources

and Development and Marshall Energy Company. Indicators are monitored regularly and are

part of the Monitoring Plan.

Indicators are relevant, credible and measured regularly and accurately. Accomplishment is

determined by adding the first indicator result weighed 50% and the second indicator weighed

50%. Detailed formulas are provided in Section 5.3.3 below.

The first and second payment is a fixed tranche.

The chosen performance targets and indicators to be used for disbursements will apply for the

duration of the programme. However, in duly justified circumstances, the Government of the

Republic of Marshall Island may submit a request to the Commission for the targets and

indicators to be changed. The changes agreed to the targets and indicators may be authorised

by exchange of letters between the two parties.

In case of a significant deterioration of fundamental values, budget support disbursements

may be formally suspended, temporarily suspended, reduced or cancelled, in accordance with

the relevant provisions of the financing agreement.

4 This includes station losses, technical and non-technical losses for MEC operated areas only.

[17]

5.3.3 Budget support details

The disbursements under this sector reform contract will consist of four fixed tranche of EUR

6.9 Million in total, and two variable tranches of a total of EUR 1.0 Million.

Type of

tranche

Country Fiscal Year

FY 2016/17* FY 2017/18 FY 2018/19 FY 2019/20

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Fixed 2.0 2.0 1.5 1.4

Variable 0.5 0.5

Total 2.0 2.0 2.0 1.9

* RMI’s fiscal year starts on 01 October and ends on 30 September. Payment will be made in the

last quarter of each fiscal year.

The following tentative schedule is proposed:

Annual review

of the Energy

Sector

Disbursement

Request

submitted by

NAO, latest

Monitoring Period

of the

disbursement of

variable tranche

Planned

disbursement

Budget Year Tranches

November

2016

June 2017 N.A Sept 2017 FY 2016/17 1 fixed tranche € 2.0M

Total: € 2.0M

November

2017

June 2018 N.A Sept 2018 FY 2017/18 1 fixed tranche € 2.0M

Total: € 2.0M

November

2018

June 2019 October 2017 -

September 2018

Sept 2019 FY 2018/19 1 fixed tranche € 1.5M

1 variable tranche € 0.5 M

Total: € 2.0M

November

2019

June 2020 October 2018 -

September 2019

Sept 2020 FY 2019/20 1 fixed tranche € 1.4.M

1 variable tranche € 0.5M

Total: € 1.9M

Budget support is provided as direct untargeted budget support to the national Treasury. The

crediting of the euro transfers disbursed into United States Dollars will be undertaken at the

appropriate exchange rates in line with the relevant provisions of the financing agreement.

5.4 Implementation modalities for complementary support of budget support.

5.4.1.1 Indirect management with the partner country

A part of this action with the objective of supporting the Office of the NAO and support to

civil society organisations may be implemented in indirect management with the NAO of the

GRMI in accordance with Article 58(1)(c) of the Regulation (EU, Euratom) No 966/2012

[18]

applicable by virtue of Article 17 of the Regulation (EU) No 323/2015 according to the

following modalities:

The partner country will act as the contracting authority for the procurement and grant

procedures. The Commission will control ex ante all the procurement procedures except in

cases where programme estimates are applied, under which the Commission applies ex ante

control for procurement contracts above EUR 100,000 (or lower, based on a risk assessment)

and may apply ex post control for procurement contracts up to that threshold. The

Commission will control ex ante the grant procedures for all grant contracts.

Payments are executed by the Commission except in cases where programmes estimates are

applied, under which payments are executed by the partner country for ordinary operating

costs, direct labour and contracts below EUR 300,000 for procurement and up to EUR

100,000 for grants.

The financial contribution covers, for an amount of EUR 700,000 the ordinary operating costs

incurred under the programme estimates.

In accordance with Article 190(2)(b) of Regulation (EU, Euratom) No 966/2012 and Article

262(3) of Delegated Regulation (EU) No 1268/2012 applicable by virtue of Article 36 of the

Regulation (EU) 323/2015 and Article 19c(1) of Annex IV to the ACP-EU Partnership

Agreement, the partner country shall apply procurement rules of Chapter 3 of Title IV of Part

Two of Regulation (EU, Euratom) No 966/2012. These rules, as well as rules on grant

procedures in accordance with Article 193 of Regulation (EU, Euratom) No 966/2012

applicable by virtue of Article 17 of the Regulation (EU) No 323/2015, will be laid down in

the financing agreement concluded with the partner country.

a) Overview of implementation

Activity/objective/result, include

location

Type of financing (works, supplies, or service

contract, grant, programme estimate)

Support measures to NAO

Support measures to civil societies

Programme estimate

b) Implementation through programme estimates

The contracting authority for these activities shall be the National Authorising Officer.

An imprest administrator and an imprest accounting officer, and their deputies, shall be

appointed for the management and implementation of the programme estimate by the

contracting authority, in agreement with the Head of Delegation.

In accordance with the powers delegated to them by the partner country authority that

appointed them, the imprest administrator and the imprest accounting officer shall draw up

and implement programme estimates, award contracts and grants, commit expenditure and

make the corresponding payments.

[19]

The imprest administrator and the imprest accounting officer shall submit their technical and

financial reports to the project steering committee, where applicable, and to the National

Authorising Officer and a copy to the Head of the EU Delegation.

5.5 Scope of geographical eligibility for procurement and grants

The geographical eligibility in terms of place of establishment for participating in

procurement and grant award procedures and in terms of origin of supplies purchased as

established in the basic act and set out in the relevant contractual documents shall apply

subject to the following provisions.

In accordance with Article 22(1)(a) of Annex IV to the ACP-EU Partnership Agreement; the

Commission decides that natural and legal persons from the following countries having

traditional economic, trade or geographical links with neighbouring partner countries shall be

eligible for participating in procurement and grant award procedures: United States, Australia,

EU Countries, and ACP Countries. The supplies originating there shall also be eligible.

The Commission’s authorising officer responsible may extend the geographical eligibility in

accordance with Article 22(1)(b) of Annex IV to the ACP-EU Partnership Agreement on the

basis of urgency or of unavailability of products and services in the markets of the countries

concerned, or in other duly substantiated cases where the eligibility rules would make the

realisation of this action impossible or exceedingly difficult.

5.6 Indicative budget

EU

contribution

(amount in

EUR)

Indicative

third party

contributio

n, in

currency

identified

5.3.- Budget support- Sector Reform Contract 7.9M N.A

5.4.1.1. – Indirect management with Government of RMI

(CSO and Support Measures)

1.1M 0

5.9 – Evaluation, 5.10 - Audit 0.1M N.A.

Totals 9.1M

5.7 Organisational set-up and responsibilities

Focal sector

The Ministry of Resources and Development through the Energy Planning Division (EPD)

shall be responsible for the implementation of the programme, in accordance with the energy

sector action plan. The monitoring by the EU and the NAO will be through government led

[20]

sector coordination and through government/donor meetings, based on country reports and

monitoring and evaluation systems, in line with the Aid Effectiveness agenda.

Annual energy sector coordination meetings will be held with the European Union invited as

a member. In addition, energy policy dialogue takes place at the occasion of six monthly

meeting between government and budget support partners.

The disbursement schedule is aligned with the GRMI budget year September (N) to October

(N+1), the Development Partner/government annual meetings and the energy sector annual

review process.

Non-focal sectors

Measures in favour of civil society – the National Authorising Officer through the Ministry of

Internal Affairs shall be responsible for the implementation of the programme.

Support measures- a steering committee composed of the Ministry of Finance and the EU will

be formed under this action to monitor the implementation and gauge the progress of the

projects.

5.8 Performance monitoring and reporting

With respect to the focal sector, annual energy sector meeting will be held on an annual basis

with the European Union invited as a member. All sector implementing agencies,

development partners supporting the sector will be invited to attend. The annual energy sector

meeting will provide updated implementation reports and review of progress made in the

sector and progress in relation to the targets set for the variable tranches. The monitoring

framework which is part of the EAP, will also be used a basis for evaluation of the sector’s

performance.

The day-to-day technical and financial monitoring of the implementation of this action and

projects resulting from a call for proposals will be a continuous process and part of the

implementing partner’s responsibilities. To this aim, the implementing partner shall establish

a permanent internal, technical and financial monitoring system for the action and elaborate

regular progress reports (not less than annual) and final reports. Every report shall provide an

accurate account of implementation of the action, difficulties encountered, changes

introduced, as well as the degree of achievement of its results (outputs and direct outcomes)

as measured by corresponding indicators, using as reference the logframe matrix (for project

modality) or the list of result indicators (for budget support). The report shall be laid out in

such a way as to allow monitoring of the means envisaged and employed and of the budget

details for the action. The final report, narrative and financial, will cover the entire period of

the action implementation.

The Commission may undertake additional project monitoring visits both through its own

staff and through independent consultants recruited directly by the Commission for

independent monitoring reviews (or recruited by the responsible agent contracted by the

Commission for implementing such reviews).

[21]

5.9 Evaluation

Having regard to the nature of the action, a final evaluation will be carried out for this action

or its components contracted by the Commission.

It will be carried out for accountability and learning purposes at various levels (including for

policy revision), taking into account in particular the fact that this will the first sector reform

contract for the country.

The Commission shall inform the implementing partner at least 2 months in advance of the

dates foreseen for the evaluation missions. The implementing partner shall collaborate

efficiently and effectively with the evaluation experts, and inter alia provide them with all

necessary information and documentation, as well as access to the project premises and

activities.

The evaluation reports shall be shared with the partner country and other key stakeholders.

The implementing partner and the Commission shall analyse the conclusions and

recommendations of the evaluations and, where appropriate, in agreement with the partner

country, jointly decide on the follow-up actions to be taken and any adjustments necessary,

including, if indicated, the reorientation of the project.

5.10 Audit

Without prejudice to the obligations applicable to contracts concluded for the implementation

of this action, the Commission may, on the basis of a risk assessment, contract independent

audits or expenditure verification assignments for one or several contracts or agreements.

5.11 Communication and visibility

Communication and visibility of the EU is a legal obligation for all external actions funded by

the EU.

This action shall contain communication and visibility measures which shall be based on a

specific Communication and Visibility Plan of the Action, to be elaborated at the start of

implementation and supported with the budget indicated in section 5.6 above.

In terms of legal obligations on communication and visibility, the measures shall be

implemented by the Commission, the partner country, contractors, grant beneficiaries and/or

entrusted entities. Appropriate contractual obligations shall be included in, respectively, the

financing agreement, procurement and grant contracts, and delegation agreements.

The Communication and Visibility Manual for European Union External Action shall be used

to establish the Communication and Visibility Plan of the Action and the appropriate

contractual obligations.

[22]

[APPENDIX - INDICATIVE LIST OF RESULT INDICATORS (FOR BUDGET SUPPORT)5]

The inputs, the expected direct and induced outputs and all the indicators, targets and baselines included in the list of result indicators are indicative and may be

updated during the implementation of the action without an amendment to the financing decision. The table with the indicative list of result indicators will evolve

during the lifetime of the action: new columns will be added for intermediary targets (milestones), when it is relevant and for reporting purpose on the achievement

of results as measured by indicators. Note also that indicators should be disaggregated by sex whenever relevant.

Results chain Indicators Baselines (incl. reference

year)

Targets (incl. reference year)

Sources and means

of verification

Ov

era

ll o

bje

ctiv

e:

Imp

act

The overall objective is to improve

social and economic development,

reduce poverty and increase resilience to

climate change, especially in the outer

islands with the advanced dialogues and

cooperation with the European Union

and is consistent with the RMI Vision

2018.

The impacts of oil price volatility and

electricity price in the Marshall Islands

Reliance on fossil fuels for power generation

Inflation rate:

1.4 % in FY15

Inflation rate

remains steady at

1.4 or lower

through 2019

Performance

Assessment

Framework (PAF)

Reports from

International

Organizations

Sp

ecif

ic

ob

ject

ive(

s):

Ou

tco

me(

s)

The specific objective is to improve

sustainable energy services aligned with

the updated National Energy Policy and

Action Plan.

Existence of the financial policy and

legislative frameworks for the energy sector

Progress in the implementation of RMI’s

energy sector action plan and the progress in

implementation of the Performance

Assessment Framework (PAF)

Lack of energy

sector

management

legislation

Adopted energy

sector

management act

by 2017

Progress in the

implementation

of the

Performance

Assessment

Framework by

2019

National policy

documents

Country data/with

project support

Performance

Assessment

Framework

documents

5 Mark indicators aligned with the relevant programming document mark with '*' and indicators aligned to the EU Results Framework with '**'.

[23]

Ind

uce

d o

utp

uts

Improvement in the coordination of

external assistance in the energy sector

Improvement in the participation in the

budget reform process, including

advocacy of performance-based

budgeting within the government with

energy criteria as performance measures

Number of energy sector coordination

initiatives with external assistance

Improved coordination and dialogue

between RMI energy sector stakeholders and

external assistance

Improved coordination and performance-

based budgeting in the RMI energy sector

budgeting process

Limited

progress in

FY16

Satisfactory

progress by FY18

Record/report of

annual energy sector

review

Dir

ect

ou

tpu

ts

The direct input is to contribute to the

overall objectives of the National

Energy Policy to increase the share of

renewable sources, improve energy

efficiency, accessibility and service

quality.

The difference in % of the total energy

generated at generation plants operated by

MEC and the energy metered at point of use

The ratio of energy generated through

renewable sources over the total amount of

energy generated per year

26.21 % in June

2015

5% RE share in

June 2015

21.00 % achieved

by Sep. 2019

20% achieved by

Sep. 2019

National energy

generation and

energy metered

records

National report on

generation from

renewable sources

measures