Document of The World Bank

Report No: 30961-LA

PROJECT DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 10.4 MILLION (US$15 MILLION EQUIVALENT)

AND A PROPOSED GRANT FROM THE

GLOBAL ENVIRONMENT FACILITY TRUST FUND

IN THE AMOUNT OF US$3.75 MILLION

TO THE

LAO PEOPLE’S DEMOCRACTIC REPUBLIC

FOR A

SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

IN SUPPORT OF

THE FIRST PHASE OF THE SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION (APL) PROGRAM

August 4, 2005

Energy and Mining Sector Unit Infrastructure DepartmentEast Asia and Pacific Region

CURRENCY EQUIVALENTS(Exchange Rate Effective July 31, 2005)

Currency Unit = Lao Kip (LAK)LAK11,205 = $1$ l = SDR 0.684

SDR 1 = $ 1.46275

FISCAL YEARMIH: October 1 - September 30EdL: January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AFMS Accounting and Financial Management System LV Low VoltageAPL Adaptable Program Loan M&E Monitoring and EvaluationASEAN Association of South East Asian Nations MIH Ministry of Industry and HandicraftASTAE Asia Sustainable & Alternative Energy Program MMPS Material Management and Procurement SystemBAS Billing and Accounting System NGPES National Growth and Poverty Eradication StrategyBO Branch Office NPV Net Present ValueCFAA Country Financial Accountability Assessment OD Operational DirectiveDOE Department of Electricity OPS Off-Grid Promotion Support OfficeDSM Demand Side Management PDIH Provincial Department of Industries & HandicraftsEdL Electricité du Laos PDP Power Development PlanEGAT Electricity Generating Authority of Thailand PER Public Expenditure ReviewEHV Extra High Voltage PESCOS Provincial Electrification Service CompaniesEMP Environmental Management Plan PHRD Japan Policy and Human Resources Development FundEPDP Electric Power Development Plan PMU Project Management UnitEPDP Ethnic People's Development Plan PPIAF Public-Private Infrastructure Advisory FacilityERR Economic Rate of Return PS Procurement SpecialistESCOs Electrification Service Companies PSDP Power Sector Development PlanESMAP Energy Sector Management Assistance Program PWC Price Waterhouse CoopersEXIM Export Import Bank QA Quality AssuranceFM Financial Management QCBS Quality and Cost-Based Selection FMR Financial Monitoring Report RAP Resettlement Action PlanFMS Financial Management Specialist RE Rural ElectrificationFRP Financial Recovery Plan REF Rural Electrification FundGDP Gross Domestic Product SA Special AccountGEF Global Environmental Facility SHPP Small Hydro Power PlantGHG Greenhouse Gas SHS Solar Home SystemsGIS Geographic Information System SOE Statement of ExpenseGoL Government of Laos SPRE Southern Provinces Rural Electrification ProjectGS Generating Sets SPRE II Second Southern Provincial Rural Electrification ProjectGWh Gigawatt hour SWER Single Wire Earth ReturnICB International Competitive Bidding TA Technical AssistanceIPP Independent Power Producer te Ton equivalentIT Information Technology THPC Theun Hinboun Power CompanyJICA Japan International Cooperation Agency UNDP United Nations Development ProgrammekV Kilovolt VEM Village Electricity ManagerLPDR Lao People's Democratic Republic VH Village Hydro

CONTENTS

A. STRATEGIC CONTEXT AND RATIONALE.....................................................................................1

1. Country and Sector Issues 12. Rationale for IDA and GEF involvement 23. Higher Level Objectives to which the Project Contributes 4

B. PROJECT DESCRIPTION.....................................................................................................................4

1. Lending Instrument 42. Program Objective and Phases 53. Project Development Objective and Key Indicators 54. Project Components 65. Lessons Learned and Reflected in the Project Design 76. Alternatives Considered and Reasons for Rejection 8

C. IMPLEMENTATION.............................................................................................................................8

1. Partnership Arrangements 82. Institutional and Implementation Arrangements 93. Monitoring and Evaluation of Outcomes/Results 104. Sustainability and Replicability 105. Critical Risks and Possible Controversial Aspects 116. Loan/Credit Conditions and Covenants 12

D. APPRAISAL SUMMARY...................................................................................................................13

1. Economic Analysis 132. Financial 143. Technical 154. Fiduciary 155. Social 166. Environment 167. Safeguard policies 168. Policy Exceptions and Readiness 17Allocation of Grants Proceeds (Table C) 55

Annexes

ANNEX 1: COUNTRY AND SECTOR BACKGROUND........................................................................18

ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE IDA AND/OR OTHER AGENCIES25

ANNEX 3: RESULTS FRAMEWORK AND MONITORING..................................................................26

ANNEX 4: DETAILED PROJECT DESCRIPTION..................................................................................30

ANNEX 5: PROJECT COSTS....................................................................................................................40

ANNEX 6: IMPLEMENTATION ARRANGEMENTS.............................................................................44

ANNEX 7: FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS....................54

ANNEX 8: PROCUREMENT ARRANGEMENTS...................................................................................59

ANNEX 9: ECONOMIC AND FINANCIAL ANALYSIS........................................................................68

ANNEX 10: SAFEGUARD POLICY ISSUES...........................................................................................94

ANNEX 11: PROJECT PREPARATION AND SUPERVISION.............................................................100

ANNEX 12: DOCUMENTS IN THE PROJECT FILE.............................................................................103

ANNEX 13: STATEMENT OF LOANS AND CREDITS.......................................................................106

ANNEX 14: COUNTRY AT A GLANCE................................................................................................107

ANNEX 15: INCREMENTAL COST ANALYSIS..................................................................................109

ANNEX 16: WORLD BANK TEAM RESPONSE TO STAP REVIEWER COMMENTS....................122

MAP IBRD 33762

LAO PEOPLE'S DEMOCRATIC REPUBLIC

SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION (APL) PROGRAM (Phase 1 of APL)

GEF PROJECT BRIEF

EAST ASIA AND PACIFIC

EASEG

Date: August 4, 2005Country Director: Ian C. PorterSector Manger/Director: Junhui WuProject ID: P075531Lending Instrument: Grant

Team Leader: Jie TangSectors: Power (90%); General public administration sector (10%)Themes: Rural services and infrastructure (P); Regulation and competition policy (S)Environmental screening category: Partial AssessmentSafeguard screening category: Limited impact

Global Supplemental ID: P080054Lending Instrument: GrantFocal Area: Climate ChangeSupplement Fully Blended?: Yes

Team Leader: Jie TangSectors: Power (100%)Themes: Rural services and infrastructure (P)

Project Financing Data[ ] Loan [ ] Credit [X] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others:Total Bank financing ($m.): 30.00 (15.00 for Phase 1 of APL)Proposed terms:

Financing Plan ($m) – Phase 1 of APL(October 2005 – September 2009)

Source Local Foreign TotalBORROWER/RECIPIENT 8.05 8.05INTERNATIONAL DEVELOPMENT ASSOCIATION

15.0 15.00

GLOBAL ENVIRONMENT FACILITY 3.75 3.75BORROWING AGENCYLOCAL COMMUNITIES 4.36 4.36CO-FINANCING 5.0 5.0Total: 12.41 23.75 36.16

Financing Plan ($m)- Phase 2 of APL(October 2008 – September 2011)

Source Local Foreign TotalBORROWER/RECIPIENT 10.3 10.3INTERNATIONAL DEVELOPMENT ASSOCIATION

15.0 15.00

GLOBAL ENVIRONMENT FACILITY 1.25 1.25BORROWING AGENCYLOCAL COMMUNITIES 4.18 4.18CO-FINANCING 5.0 5.0Total: 14.48 21.25 35.73Note: this is only an indicative financing plan for Phase 2. For phase 2, investment program and financing plan will be finalized during appraisal. Annex 3 (a) describes the milestones to be achieved for consideration of Phase 2.Recipient: Lao People’s Democratic Republic

Responsible Agency: Ministry of Industry and Handicraft and Electricité du Laos

Estimated disbursements (Bank FY/$m) – Phase 1 of APLFY 06 07 08 09Annual 3 6 5 1Cumulative 3 9 14 15

GEF Estimated disbursements (Bank FY/$m) – Phase 1 of APLFY 09 10 11 09Annual 1 2 0 0.25Cumulative 1 3 3 3.75

Project implementation period: October 2005 – September 2009Expected effectiveness date: November 1, 2005Expected closing date: March 31, 2010

Does the project depart from the CAS in content or other significant respects? Ref. PAD A.3 [ ]Yes [X] No

Does the project require any exceptions from Bank policies?Ref. PAD D.8Have these been approved by Bank management?Is approval for any policy exception sought from the Board?

[ ]Yes [X] No[ ]Yes [ ] No[ ]Yes [ ] No

Does the project include any critical risks rated “substantial” or “high”?Ref. PAD C.5 [X]Yes [ ] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD D.8 [X]Yes [ ] No

Project development objective Ref. PAD B.2; Annex 3The project development objective is to improve the living standards through electrification of rural households in villages of targeted provinces. Global Environmental Objective Ref. PAD B.2; Annex 3Global environmental objectives: (1) substantial adoption of renewable energy in GoL’s rural electrification program; and (2) increased efficiency of energy consumption for EdL customers, resulting

in greenhouse gas emission reductions as increased Lao hydropower exports substitute for thermal power production in Thailand. Project description [one-sentence summary of each component] Ref. PAD B.3; Annex 4EdL Component - electrify 42,000 rural households through connection to the grid.MIH Component - electrify 10,000 households through off-grid technologies. Which safeguard policies are triggered, if any? Ref. PAD D.7; Annex 10 Environmental Assessment (OP/BP/GP 4.01) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Significant, non-standard conditions, if any, for: Ref. PAD C.6Board presentation:See Section C.6Loan/credit effectiveness:See Section C.6Covenants applicable to project implementation:See Section C.6

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues

With a population estimated at 5.7 million in 2004, and growing at a relatively rapid rate of 2.6 percent annually, Lao People’ Democratic Republic (Lao PDR) is characterized by a rich cultural and ethnic diversity where almost half of the population belongs to minority groups concentrated in the upland areas. A large majority of the population relies for its livelihood on agriculture, which accounts for over half of GDP. Urbanization is relatively low, at 25 percent. Gross National Income per capita stands at around $340. Reliance on external support to the budget remains high, and donor-funded programs account for nearly 40 percent of total public expenditures.

Progress towards Rural Development and Poverty Reduction. In the early 1990s, Lao PDR achieved healthy growth rates and significant reduction in poverty levels, but this trend has weakened since the late 1990s. To reinvigorate socio-economic development, the Government of Lao PDR (GoL) prepared the National Growth and Poverty Eradication Strategy (NGPES), which was approved by the National Assembly in January 2004. The cornerstones of the NGEPS are: (i) enabling environment for growth and development; (ii) enhanced governance; and (iii) poverty reduction. The power sector is central to achieving NGEPS goals, with Rural Electrification (RE) contributing significantly to poverty alleviation at the village level and revenues from hydropower exports contributing to growth in general.

In 2001, the Ministry of Industry and Handicraft (MIH) issued a Power Sector Policy Statement. This was followed by a stakeholder workshop and an action plan. The plan identified three key impact areas: (i) rapid expansion of RE; (ii) commercialization of Electricité du Laos (EdL); and (iii) a strategy for financing sector development.

Rural Electrification and Power Sector Issues. Increasing household connections from about 16% in 1995 to 40% in 2004, RE marks a remarkable achievement in the socio-economic development of Lao PDR. Through implementation of five IDA and ADB funded projects, EdL’s planning and implementation capabilities for conventional RE have markedly improved. However, as electrification moves to increasingly remote areas, on-grid RE becomes less viable and this has led GoL to promote off-grid models, with emphasis on renewable technologies.

GoL has an ambitious goal of electrifying 90% of the country’s households by 2020 (70% by 2010 and 80% by 2015), and increasing hydropower exports to neighboring countries. Meeting these objectives would require financing from sources other than the traditional concessionary lenders. Novel financing models for non-traditional public and private financiers need to be identified and the regulatory framework adapted to suit.

EdL was corporatized in 1997, remaining wholly GoL-owned. Cost/profit centers were created within EdL. EdL’s financial viability depends on hydropower export revenues, significant GoL equity injections, and soft financing from multilateral and bilateral agencies. Some level of GoL subsidy to EdL’s extensive RE program is understandable, and a rational basis for setting EdL’s tariff and GoL RE subsidy has been developed through a PHRD financed tariff Study during project preparation. EdL’s finances were strongly impacted by the dramatic currency devaluations during the East Asia financial crisis. Since then, significant improvements resulted from implementation of a Financial Recovery Plan (FRP) that helped EdL turn in strong financial performance in 2002 and 2003; yet much further improvements are necessary in planning, operations and financing strategy. Loss reduction achievements have been significant, but with

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transmission and distribution losses above 20%, there is scope for improvement. Finally, headquarters and branch operations are fragmented and need to be integrated through information technology and communication systems.

Power System Planning and Inter-Connection Issues. Lao PDR has four principal unconnected grids, each having a different supply and demand mix. As a result (as also due to the peculiar geographical contiguity of Lao PDR, Thailand and Vietnam), Lao PDR exports hydropower to Thailand (and will soon to Vietnam too) over Extra High Voltage (EHV) links, and simultaneously imports thermal-based electricity from Thailand at medium voltage (MV). This situation would persist (certainly over the tenure of SPRE II), till Lao PDR has a fully integrated transmission grid, which would facilitate development of national integrated generation expansion plans and help maximize utilization of domestic hydro generation. The increased substitution of Thai and Vietnamese thermal energy by domestically generated (conventional and non-conventional) renewable energy and development of energy efficiency program have specific implications for GEF involvement under OP-5 (see Annex 15, Incremental Cost Analysis).

Barriers to achieving Global Environment Objectives. Non-conventional renewable energy development in Lao PDR is in a nascent stage. MIH’s off-grid model has yet to develop a firm regulatory and sustainability foundation and a sound technology and planning base. Demand Side Management (DSM) and energy efficiency have not yet come under serious consideration by GoL or consumers. Key barriers to creating conditions supportive of increased use of renewable energy include: (i) insufficient RE planning capacity to prepare integrated projects (with both on- and off- grid components) that would provide most cost-effective delivery to households and productive electricity applications; (ii) insufficient availability of concessionary financing to achieve RE targets; and (iii) lack of private sector capacity for scaling-up implementation of RE.

Barriers to DSM and Energy Efficiency are even more basic: (i) low charges on electricity consumption for some consumer categories; (ii) lack of basic data on electricity consumption and end use patterns by rate class; (iii) lack of public or private sector capacity for program planning and implementation; (iv) lack of technical expertise or awareness among end-use customers as regards energy efficiency technologies and practices; and (v) little appreciation of the benefits of energy efficiency relative to electricity costs.

Policy Fit with Lao PDR Climate Change Strategy. The Science Technology and Environment Agency (STEA) in the Prime Minister’s Office, is the GEF National Focal Point and responsible for GoL’s Climate Change Strategy. The climate change issues of greatest concern to STEA include consumption of fossil fuels, especially diesel oil, by the industry, transport and agriculture sectors; methane emissions from paddy fields; use of fuel wood and charcoal in the agricultural/rural sector; and reforestation and grasslands conservation.

SPRE II policy objectives provide a close fit with the Lao PDR climate change strategy: (i) emphasis on DSM, Energy Conservation and Energy Efficiency improvements; (ii) fostering more efficient advanced technologies in all fields of electrification; and (iii) promotion of renewable energy such as small-scale hydropower development and electricity generation by solar, wind and biomass energy.

2. Rationale for IDA and GEF involvement

Rural electrification Acceleration of RE is an explicit thrust of GoL in its poverty alleviation efforts. While funding for transmission and generation is available from bilateral and private sectors, RE has not yet attracted funding from sources other than ADB and IDA. An IDA/GEF

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financed RE project, Southern Rural Provinces Rural Electrification (SPRE), which was closed on December 31, 2004, helped build the foundations of a sound RE program in Lao PDR. SPRE II builds on the lessons and experiences of SPRE and the capacity created within MIH and EdL. Concessionary lending terms are vital for RE, which requires capital subsidies to achieve social objectives. Of late, it is recognized that there is scope for attracting funding for RE from non-traditional sources, if mechanisms are devised to meld concessionary funding with private funding at moderate commercial rates. To this end, SPRE II provides for the establishment of a Rural Electrification Fund (REF) to support initially the Ministry of Industry and Handicraft (MIH) only for its continued efforts on off-grid RE, and development of necessary legal, regulatory and institutional arrangements during the first phase of the SPRE II APL Program to enable the REF accessible to other participants in Phase 2 and future time for promotion of non-utility RE development. The REF will be capitalized through the repayments by all off-grid consumers electrified by SPRE and other donor financed off-grid projects. MIH will be responsible for the management of the REF and international consultants will be hired through the SPRE II to assist MIH in the management of the Fund and development of the above mentioned legal, regulatory and institutional arrangements. IDA’s continued association with RE is necessary for successful implementation of GoL’s RE program. The SPRE II would also provide access to electricity to some of the people affected by the Nam Theun 2 hydroelectric Project, approved by IDA on March 31, 2005.

Need for GEF Involvement. GEF has made a substantial contribution to the off-grid component of SPRE, supporting electrification of some 5,000 households. The National GEF Focal Point endorsed the proposed GEF financing of SPRE II in its letter to IDA dated March 3, 2004. GEF financing, $5 million, was proposed for the Project. This would be a logical follow up to its predecessor and would be modeled on similar lines--IDA providing grant financing physical investment mainly and GEF providing grant financing technical assistance (TA). In essence, GEF funded technical assistance would support both IDA and GEF objectives, and be central to successful implementation of SPRE II Phase 1 and laying the foundations for a more sustainable approach to RE in the long term. Specifically, GEF would support organizational development, capacity building, and institutional arrangements that would overcome the barriers to meeting global environmental objectives. These activities are vital to maximizing the contribution of renewable energy and energy efficiency in the overall development of the power sector.

Commercialization of EdL. IDA and ADB have collaborated in the commercialization of EdL. While the FRP for EdL would achieve overall tariff levels close to adequate for financial sustainability of EdL, adjustment of tariff structure and tariff arrangements that would clearly separate EdL’s commercial objectives from GoL’s social objectives have yet to be implemented. PHRD funded technical assistance made recommendations for such an adjustment, on the basis of which an Action Plan for Financial Sustainability of the Power Sector, including tariff reforms, has been prepared and would be implemented through SPRE II. Following an ADB financed study underway that would address broader power sector restructuring issues, GoL has sought IDA assistance for specific issues, which would begin with a workshop on independent sector regulation. IDA and ADB are coordinating their support to reforms in the Lao PDR power sector.

Financing Strategy. In its efforts to attract private sector financing, GoL has prepared, with PHRD assistance, a sector financing strategy, whose implementation would be undertaken through SPRE II. The adoption of new models for public-private partnership, associated with regular updating of least-cost planning scenarios, and upstream development work on promising hydropower projects, would enhance exploitation of Lao PDR’s hydro potential.

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IDA’s ability to bring global knowledge to sector reform activities is its primary “value added” beyond the provision of grant. The ability to play this role derives from the deep knowledge of Lao power sector that IDA has gained and the relationship that has developed between IDA and GoL/EdL over a decade, which merits continuation.

3. Higher Level Objectives to which the Project Contributes

NGPES and CAS Objectives. In supporting rural infrastructure development, targeting especially the poor rural population, and promoting sector-wide reforms and institution building, SPRE II would contribute significantly towards meeting GoL, NGPES goals of poverty reduction and establishment of an enabling environment for growth and development. SPRE II would, likewise, support the current Country Assistance Strategy (CAS) objectives of rural and national infrastructure development and the overarching IDA goal of poverty reduction.

Global Environmental Objective. The GEF financed activities would contribute to two GEF climate change operational program objectives: (i) removing the barriers to higher efficiency levels in urban and rural power end-use consumption (OP 5); and (ii) wider use of renewable energy technologies in rural power supply, especially off-grid (OP 6). Furthermore, the strategies and outcomes that GEF financing would support are closely aligned with two of the six recently-adopted Strategic Priorities for the Climate Change Focal Area, creation of power sector policy frameworks supportive of renewable energy and energy efficiency (CC-3). The global benefits of the GEF-supported SPRE II components are estimated as 4,050 te CO2 lifetime for the off-grid component and 40,250 te CO2 lifetime for the DSM and Energy Efficiency component.

B. PROJECT DESCRIPTION

1. Lending Instrument

The SPRE II Program would be financed by IDA Grants (and possible Credit in future) in an IDA Adaptable Program Loan (APL) approach. It would be implemented over a seven-year period in two phases. This APL approach would accommodate, both, the current severe constraints on IDA funds and the long time span necessary to implement substantive sector reforms in a consensus-based political environment. The APL approach would enable IDA to provide support in a flexible manner – when the project supported investment and reform activities have sufficiently advanced to receive further IDA support. Likewise, the GEF grant financing would be spread over two phases. The progress of these reform activities are proposed as triggers for Phase 2 of the APL Program.

The proposed IDA Grant of $15 million and GEF Grant of $3.75 million and possible co-financing of $5 million will support Phase 1 of the APL Program. GEF Grant of $1.25 million was proposed for Phase 2 of the APL Program for an indicative amount of $15 million of IDA support, which will be subject to inclusion of the proposed lending program for Phase 2 in the next CAS, and co-financing of $5 million. Complementary financing for both phases would come from non-traditional sources.

Milestones to be reached for consideration of support to Phase 2 have been agreed with the Recipient (See Annex 3 Section 2). Key milestones include: (i) REF in operation, and GoL agreement to extend the REF support to other participants in rural electrification, and associated legal, regulatory and institution arrangements in place; (ii) solicitation documents for alternative models for financing and implementing off-grid program completed; (ii) agreed Action Plan for Financial Sustainability of the Power Sector, including adjustment of tariff and settlement of

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EdL’s account receivables with Government agencies, under implementation by GoL and EdL; (iii) completion of preparation for the first small hydropower project to be developed under new models for public-private partnership; and (iv) agreed level of completion for the on- and off- grid investment components.

In addition to the triggers, the Project will have to meet standard Bank requirements, including safeguards, and fit into the country programs and CAS.

2. Program Objective and Phases

The principal objective of the APL Program is to improve through increased access to electricity the living standards of rural households in villages of targeted provinces. That electrification brings about: (i) access to electricity to about 106,000 rural households (20% of GoL connections target 2004-2020) (ii) increases in household disposable incomes (through substitution of more expensive devices for lighting); (iii) increased economic production (through activities like rice milling, ice-making, irrigation pumping); and (iv) beneficial longer term effects such as longer student study hours, which are well documented.1 Achievement of this outcome would be measured by number of households electrified and socio-economic surveys in villages electrified under the project, by comparison with baseline established by the socio-economic surveys conducted during project preparation (See Annex 9).

The APL program will be implemented in two phases, over 48 months each. Phase 1 would finance electrification of some 52,000 households and Phase 2, about 54,000 households.

3. Project Development Objective and Key Indicators

The objective of Phase 1 is to improve through increased access to electricity the living standards of rural households in villages of targeted provinces. It would promote development of the legal, regulatory and institutional framework, encouraging other participants in sector development, provide a sound planning basis for electrification, and increase the efficiency of electricity delivery and consumption.

There are two key outcomes for the global environmental objective: (i) substantial adoption of renewable energy in GoL’s RE program (growing from a 7-10% share of all newly electrified households in SPRE to a 20% share in SPRE II Phase 1); and (ii) increased efficiency of energy consumption for EdL customers, that in turn would result in increased exports of hydropower to, and reduced imports of thermal power from Thailand, with eventual greenhouse gas (GHG) savings, as thermal power plants would be operated for marginal production in Thailand over the project period (See Annex 15).

Achievement of the renewable energy objective would be measured by the percentage of households electrified by renewable off-grid technologies in relation to overall household target of the Project. For the DSM and energy efficiency activities, a detailed monitoring and evaluation program would be formulated to estimate the domestic electricity usage and cost savings, increased power exports, and regional GHG emission reductions that comprise the benefits of the off-grid and DSM/energy efficiency components of SPRE II (see Annex 3).

1 See for example the PHRD-funded Socio-economic Survey, November 22, 2004, prepared by DECON – Systems Europe.

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4. Project Components

The Project has two components, one to be executed by each beneficiary, EdL and MIH. These components are summarized below and described in details in Annexes 4 and 5.

A. The EdL Component would comprise the following sub-components: A.1 Grid Extension: Extension of the EdL grid to about 42,000 households in some 540

villages in seven central and southern provinces;A.2 Loss Reduction: Enhancement of EdL loss reduction efforts (covering both technical

and non technical losses) through development of a Master Plan for Distribution Loss Reduction and implementation of prioritized projects and activities;

A.3 IT System: Integration of EdL Headquarters and Branch Offices (BOs) through rolling out the existing IT System to BOs, development of a new Material Management and Procurement System (MMPS), and technical assistance for financial management capacity building;

A.4 Tariff Reform: Implementation of tariff and subsidy policies and associated tariff regime in line with agreed Action Plan for Financial Sustainability of the Power Sector;

A.5 Safeguards Capacity Building: Enhancing EdL’s (also MIH’s) capacity in environmental and social assessment and impact management through training, study tours, and acquisition of necessary equipment;

A.6 DSM: Implementing a program of DSM and Energy Efficiency activities, including establishment of a DSM Unit within EdL, building an energy end-use database, and piloting DSM measures targeted to high-priority markets.

B. The MIH Component would comprise the following sub-components:B.1 Off-grid Investment Program: Provide electrification by off-grid technologies to

about 10,000 households in about 200 villages, in 17 provinces.B.2 Institutional Strengthening: Expand and scale up the MIH off-grid program through

improved organization, management outsourcing and performance assurance arrangements, offering a wide range of off-grid technologies;

B.3 Alternative RE Delivery Models: (a) Develop alternative delivery models for off-grid RE and financing mechanisms, including setting up and operation of the REF and development of necessary legal, regulatory and institution arrangement to enable the REF to be accessible to other participants; (b) assess biomass and small hydropower resources and pilot use of the biomass technologies; and (c) assess income generation linkages with village-level off-grid electrification;

B.4 RE Master Plan and Database: (a) Develop an RE master plan (including distributed generation) and an RE database (including mini/micro hydropower resource assessment), and institutionalize capacity for periodic updating; and (b) assess rehabilitation of existing mini/micro hydropower plants;

B.5 Sector Financing Strategy: Develop a sector financing strategy and prepare at least one small hydropower project and solicitation documents for concessioning to independent power producers (IPP);

B.6 Organization Strengthening of DOE/MIH: (a) strengthen organizational and management arrangements within MIH to enable it to undertake its expanded role and regulation of the power sector; (b) support the MIH Project Management Unit (PMU) in implementing the MIH component,

The total cost of Phase 1 project is estimated $36.16 including contingencies, out of which $30.04 is for EdL Component and $6.13 for MIH Component. Proposed financing sources include IDA Grant of $15 million (41%), GEF Grant $3.75 million (10%), co-financing of $5 million (14%),

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EdL/MIH counterpart funds of $8.06 million (22%) and consumer contributions for house wiring and solar home system (SHS) installation payments of $4.36 million (12%). Counterpart financing would reach 34%.

Project design has been underpinned mainly by the successful experience of the recently closed SPRE project and the following PHRD-financed studies: (i) a socio-economic survey of electrified and non-electrified villages and households and establishment of a rural electrification database; (ii) a tariff study to identify appropriate tariff levels and structure; (iii) an RE framework study including review of existing off-grid delivery models and examining alternatives for scaling up off-grid electrification; (iv) a study to define the overall financing strategy for the sector; and (v) a distribution system loss reduction study.

5. Lessons Learned and Reflected in the Project Design

The Project takes into account lessons on the Bank’s experience on RE projects and studies, in particular in Bangladesh, India, Sri Lanka, Philippines, Vietnam and Cambodia.

IDA has supported four projects in Lao PDR, the most recent being the SPRE (Credit # 30470), which was closed on December 31, 2004. Key lessons learned from its grid extension program include: (i) the elasticity of connection rates to upfront house-wiring costs is highly negative; (ii) large cost savings are achievable by optimizing grid-extension designs; and (iii) investments in loss reduction are very cost effective. Implementation of the grid extension program through SPRE was very successful. However, those lessons learned need to be institutionalized, and institutional capacity strengthened to enable scaling up the RE program.

The off-grid program supported by GEF under SPRE was very successful in achieving its objectives. However the delivery model, ESCOs hired by MIH, needs to be scaled up to achieve objectives of SPRE II and additional models tried to improve efficiency and reduce cost. Recommendations from evaluation of the GEF Medium-scale Project (MSP) off-grid program include: (i) being a government unit, the Off-grid Office of MIH faced serious constraints in performing its work, leading to delays in its operations; (ii) the management of the off-grid program under SPRE II should be transitioned to a private or joint venture company, allowing for more efficient operations, increased flexibility in design, greater focus and transparency in work and stronger incentives through linking payments to performance; and (iii) the management contractor should be authorized to take procurement and other decisions, while being accountable to MIH regulation and IDA oversight. Accordingly, SPRE II design would provide for outsourcing of off-grid planning and implementation and development of alternative delivery mechanisms.

Key lessons from GEF co-financed projects in Cambodia, Chile, Swaziland and Ethiopia, reflected in the design of the SPRE II off-grid component, include: (i) to ensure institutional and financial sustainability, rural energy programs must maximize private sector participation; (ii) to achieve impacts on living standards, an integrated approach linking RE services with livelihood support and income generating activities should be taken; (iii) the most critical role for governments is to put in place a sound regulatory framework, an adequate tariff structure, and a dedicated RE agency that can look after mobilization of concessionary financing; and (iv) RE programs should be an integral part of the overall power sector development strategy.2

2 A Review of the ESMAP Rural Energy and Renewable Energy Portfolio, April 2004. Joint UNDP/ESMAP Publication.

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6. Alternatives Considered and Reasons for Rejection

The APL approach was chosen in preference to a SIL for reasons set out in Section B1 Lending Instrument. To achieve the project development objective, alternatives considered include electrification of all the targeted households through grid extension. Due to remoteness and sparse distribution of some of the households and, cost of electrification through grid extension was projected too high, so a hybrid solution comprising on- and off-grid electrification was selected to achieve the objective.

C. IMPLEMENTATION

1. Partnership Arrangements

For the power sector developments in Lao PDR, GEF is a close partner in SPRE and SPRE II, while PHRD has financed a host of studies underpinning both. ESMAP financed a 1999 study “Institutional Development for Off-Grid Electrification”, and ASTAE provided assistance in project definition and supervision of PHRD financed studies. ADB is financing RE activities in northern provinces while IDA in southern provinces.3 The FRP for EdL was jointly developed with ADB, both participate in workshops, and sector reform technical assistance financed by both is complementary. JICA financed several studies, notably Transmission and Distribution Master Plan and Feasibility for Hydropower Based Mini Grids – both of which would underpin SPRE II. Moreover, JBIC in association with JICA have most recently committed financing for a 115 kV-line which would facilitate partially IDA-financed RE under Phase 2 of the APL Program. Interestingly, JICA has also picked up RE components along the line which IDA found economical but could not be financed by IDA due to limited resources. China Eximbank and India are financing local hydropower generation and transmission lines, the latter would support some RE in the APL Program. Private companies for off-grid service have been consulted in formulating off-grid RE arrangements for the Project.

For the SPRE II project, IDA is seeking partnership with a co-financer for $5 million for part of the 67 EdL grid extension subprojects. The rural household electrification subprojects are designed in a modular manner. The project cost and the financing plan includes $5 million for these subprojects through co-financing. Nordic Development Fund (NDF), NORAD, and SIDA have expressed their willingness to co-finance but formal commitment has not yet been received. Nordic Development Fund, which has co-financed EdL’s projects with ADB in the past, has expressed serious interest in co-financing these subprojects planned for the second to the third year of the project implementation but will be able to approve the financing only by November 2005 when replenishment of the Fund is approved. NORAD has also expressed interest and is currently reviewing project proposal. SIDA is interested in financing medium and low voltage rural electrification in the context of Great Mekong Sub-region (GMS) power trade. In the event that co-financing does not materialize, the fall back strategy is to reduce the number of households to be electrified in Phase 1 and defer associated grid extension subprojects from Phase 1 to Phase 2 of the APL Program. This will reduce the number of rural households who could be provided access during Phase 1, it will not affect the overall economic and financial viability and the achievement of development objectives of the Project.

3 The off-grid and district hydro schemes under SPRE II target the entire country.

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2. Institutional and Implementation Arrangements

Implementation Period. SPRE II Phase 1 would be implemented over 4 years (October 2005 to September 2009).

Implementing Agencies. The Project would be implemented by EdL and MIH jointly. EdL Project Office will be responsible for implementation of EdL Component and overall management of project execution and coordination with MIH and IDA; its BOs would be responsible for implementation of individual physical sub-projects in the seven southern provinces. MIH PMU will be responsible for overall management of execution of MIH Component and coordination with EdL and IDA. Intensive institutional strengthening effort on management of the off-grid component, including outsourcing management of the off-grid program and quality assurance by a third party will be made at project inception. The outsourcing process would address the current short-comings of MIH’s Off-grid Office. Terms of references (TOR) and procurement strategy have been formulated for the outsourcing and quality assurance with PHRD and ASTAE assistance. Short-listed consulting firms have submitted proposals for the Management Contractor and quality assurance assignments in June, 2005. Contracts would be ready for signing once the proposed financing for SPRE II is approved by IDA. After transition to the outsourced Management Contractor, role of MIH would be reoriented to overseeing the off-grid program, piloting new technologies and institutional arrangements for RE, supervising the national RE planning process, implementing activities related to sector reform and regulatory development, and establishing and managing the REF that would potentially lead to reduced subsidies for off-grid electrification.

Procurement Capacity Constraints: EdL has adequate experience for IDA financed procurement and would need external assistance in finalizing technical specifications, preparing bidding documents and contract management. An international consulting firm has been selected to assist EdL in these functions.

MIH has successful experience in IDA’s consultant selection process acquired from executing studies funded by PHRD; it has gained some experience in procurement with ICB through implementation of SPRE. The Task Team will provide training on IDA’s procurement procedures and an individual procurement consultant would be hired to assist the PMU.

Financial Management Capacity Constraints: EdL is familiar with IDA FM and disbursement procedures, but would still need training in preparation of Financial Monitoring Reports (FMRs). Technical assistance would be provided to enhance the capabilities of the Internal Audit department.

MIH has tracked and monitored financial transactions of SPRE, by using an in-house developed accounting program, which with minor modification would well serve the requirements of SPRE II. With GEF PDF B Grant implemented recently, MIH gained some experiences in the IDA disbursement procedures. In addition training would be provided to PMU staff on financial management and disbursement procedures for Bank projects. An individual consultant has been hired to assist the PMU.

Safeguard Capacity Constraints: EdL has successful experience in environmental and social impacts mitigation with the SPRE, and has adequate capacity to plan and implement the safeguard action plans as demonstrated during the implementation of SPRE. MIH has limited capacity in management of safeguard issues. Therefore, SPRE II includes training programs to enhance the capacity of EdL and MIH.

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Funds Flow. IDA Grant would be provided to GoL. GoL would provide the Grant proceeds, 80% in sub-grant and 20% in a loan, to EdL for the EdL component under a Subsidiary Financing Agreement.

Disbursement from the IDA Grant and GEF Grant would be made using the traditional system. Grant proceeds would be channeled to EdL and MIH either through Special Accounts (SA) or through direct payments. EdL counterpart funds would be channeled through normal EdL payment procedures. GoL (MIH) counterpart funds are expected to be mobilized from the re-flows associated with ongoing RE activities. These currently flow into a locked off-grid re-flow bank account, which would be opened for providing counterpart funds to co-finance the MIH component once the procedures for utilization of these funds are in place, which are currently being finalized.

3. Monitoring and Evaluation of Outcomes/Results

GEF-financed Monitoring and Evaluation. Comprehensive monitoring and evaluation (M&E) arrangements would be implemented for SPRE II. In addition, the GEF-financed component would comply with GEF guidelines for monitoring and evaluation, including those contained in the Monitoring and Evaluation Procedures Manual, dated January 2002.

The M&E plan would use the logical framework approach per the Procedures Manual and would provide for collection of baseline data before project implementation and collection of key performance indicators and other quantitative data. Several preparatory studies funded by PHRD, especially the socio-economic surveys and establishment of an RE database, and evaluation of the benefits of both on-grid and off-grid electrification, would be used in formulating the M&E plan.

4. Sustainability and Replicability

Sustainability of the off-grid component. With support of the GEF-financed technical assistance, SPRE II has included features that have helped improve sustainability of off-grid electrification in Lao PDR and other countries: (i) setting up and maintaining a self-sustaining REF to provide subsidies to off-grid electrification. A robust financing system, which during SPRE had achieved a 98%4 repayment rate from customers would ensure sustainability by assuring financial incentives to the key actors (villagers, technicians, Village Electricity Managers (VEM), oversight committees, and provincial Electricity Service Companies (PESCO), to keep installed equipment working and regular repayments flowing back into the REF; (ii) out sourcing the implementation of the off-grid program through a performance based management contract to ensure operational effectiveness, customer services, diversification of technologies, and repayments; (iii) providing technical assistance to MIH to enable it to focus on other important functions, such as regulation of RE, management of the REF, off-grid electrification planning integrated with on-grid planning, and supervision of the management contract. Reflow account will be used to provide subsidy and/or concessional finance to consumers.

Sustainability of the on-grid component. The sustainability of the on-grid electrification depends mainly on sound financial position of EdL. Based on lessons and experience of the SPRE in Lao PDR and RE programs in Cambodia and other neighboring countries, an Action Plan for

4 The remaining 2% were arrears and usually paid off within 1 month. The re-flow account had a balance of about 0.4 million USD by end July 2005. Eventual elimination of GEF grant financing is expected, with progressive replacement for certain types of expenditure from the re-flow account.

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Financial Sustainability of the Power Sector including solutions for tariff adjustment to achieve financial viability and off-setting account receivables on a regular basis would be implemented through SPRE II to ensure financial sustainability of EdL. Sustainability would be further enhanced through technical assistance and investments for system loss reduction.

Sustainability of the DSM and Energy Efficiency Component. As DSM and energy efficiency are practically unknown in Lao PDR, significant effort is needed just to create awareness and institutional capacity to prepare, evaluate, and implement these programs. Therefore, a DSM cell would be established within EdL, charged with basic planning and potential studies to broadly outline suitable DSM and energy efficiency strategies and programs.

Replicability. The design of both the EdL and MIH components is already an amalgam of RE programs in Lao PDR, Bangladesh, Chile and elsewhere.

Innovation of the basic framework for an off-grid component undertaken in a national program of on- and off-grid RE, where renewable energy plays a critical role and financing is from concessionary and other sources coordinated by a REF would be the likely norm throughout East Asia. Other countries likely to benefit from variants of this model include Nepal, Bangladesh, Papua New Guinea and Myanmar. Key elements of the replication approach would include: (i) a knowledge management activity which would document key aspects; (ii) an outreach and information dissemination effort which would include annual workshops (a stakeholder participation workshops of the MIH Off-grid Office was made as a start); (iii) documenting and disseminating key features of SPRE II, especially the outsourcing process, integrated RE planning, and the REF; (iv) bilateral and regional experts’ forums (possibly via ASEAN Energy or Rural Development Committees) on sustainable and renewable RE; and (v) replication of SPRE II components beyond the region with ESMAP support.

5. Critical Risks and Possible Controversial Aspects

SPRE II was built on lessons and successful experiences of SPRE. However, project implementation and results are subject to multiple risks. The most critical risk is associated with the performance of the Management Contractor for the off-grid program. The Task Team including an international consultant has provided substantial technical assistance to MIH on preparation of the TOR and a draft “Operational Manual” for village off-grid program, which provides a framework for the off-grid electrification. Quality assurance by a third party, which will be contracted by MIH, is designed to ensure monitoring and evaluation of the performance of the Management Contractor and making recommendations for improvement of the off-grid program. Continuous support as necessary will be provided to MIH by the Task Team throughout the process of project implementation. Another risk, which is rated high, arises from the potential fluctuating commitment of GoL on tariff adjustment and settlement of Government arrears past-due to EdL. Government endorsement of the Action Plan for Financial Sustainability of the Power Sector, which projected solutions to these issues, has been received and will be closely monitored. Co-financing poses another risk. If the proposed co-financing (see details in Annex 5) does not materialize, the fall back strategy is to reduce the number of households to be electrified in Phase 1 and defer those grid extension subprojects from Phase 1 to Phase 2 of the APL Program.

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Risks Risk Mitigation Measures Risk Rating with

MitigationTo project development objectivesAffordability of house wiring charges for lower-income households in targeted villages.

MIH/EdL agreed to provide medium-term financing for house wiring of poor households with EdL budget, or off-grid reflows. L

GoL and EdL do not honor their financial commitments, especially on an Action Plan for Financial Sustainability of the Power Sector for tariff adjustment and offsetting Government account receivables.

Action Plan for Financial Sustainability of the Power Sector agreed during negotiations and endorsed before Board presentation. Close supervision of implementation of the plan. H

To component resultsImplementation capacity of the off-grid investment component (performance of the Management Contractor not satisfactory).

Spin-off the implementation responsibility from MIH to a private or joint venture company through a Management Contract. Set up quality assurance system to monitor and evaluate performance of the Management Contractor. Continuous technical assistance to the MIH PMU in managing the Management Contract and overseeing the off-grid program.

M

Establishment of the REF in a manner that attracts participation of other donors and investors.

REF administration established and running is a trigger for approval of Phase 2 of the APL Program. M

Availability of counterpart funds. GoL confirmation of opening the reflow account to finance the off-grid component before Board Presentation, grant covenants enable the counterpart to sustain its commitments, and close monitoring of budgetary arrangement.

L

Availability of co-financing funds. Fall back strategies in place. LTime and cost overruns. EdL and MIH are familiar with IDA

procedures. Improve implementation, monitoring and supervision capacity through technical assistance provided in the Project.

L

Overall Risk Rating M

The Project does not have major social and environmental impacts; hydropower projects, if at all undertaken in Phase 2, are mini and small hydro schemes, hence no controversial issues and reputation risks for IDA are expected.

6. Loan/Credit Conditions and Covenants

Conditions of Board Presentation. (a) Government has endorsed agreed Action Plan for Financial Sustainability of the Power Sector, including procedures for tariff adjustment and solutions for settlement of Government arrears for electricity bills; (b) Government has approved to open the reflow account to provided planned counterpart funds to co-finance the off-grid component.

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Effectiveness Conditions. Execution of Subsidiary Grant Agreement; and execution of the GEF Grant Agreement.

Agreements Reached with Recipient during Negotiations

Flow and Utilization of Project Funds. On-lending terms to EdL will consist of 80% grant and 20% loan comparable to IBRD terms and conditions.

Management and Financial Aspects. (a) Take all necessary actions to enable EdL to meet the financial covenants set for this Project (see below); and (b) take all necessary actions to enable EdL to implement the actions on tariff adjustment and settlement of existing and future Government account receivables for electricity payments, to realize satisfactory operating, cash generation and debt limitation ratios.

Safeguard Aspects. Prepare and carry out EMPs, RAPs and EPDPs for MIH Component in accordance with respective framework documents agreed with IDA.

Agreements Reached with EdL during Negotiation

Management Aspects. Prepare and implement, in a manner satisfactory to IDA, a Power Investment Plan; and provide information to IDA for comment about any generation, transmission and distribution projects to be implemented outside the Plan.

Implement a House Wiring Affordability Action Plan, to reduce prices to be paid by customers, through increasing competition and price regulation, and provide medium-term financing to the poorest customers (about 20%) for house wiring costs.

Safeguard Aspects. Prepare and carry out EMPs, RAPs and IPPs for the EdL component in accordance with respective framework documents agreed with IDA.

Financial Aspects. Implement the Action Plan for Financial sustainability of the Power Sector as agreed during Negotiations to adjust tariff and off-set Government existing and future account receivables.

Financial covenants including: (a) maintain a self-financing ratio of no less than 30% of three-year average planned capital expenditures; (b) maintain net revenues of no less than 1.5 times annual projected debt service payments; and (c) maintain the ratio of its long-term debt to no more than 1.5 times its equity.

D. APPRAISAL SUMMARY

1. Economic Analysis

Summary Project Analysis (See Annex 9). Economic benefit for grid component is estimated at a net present value (NPV) of $146.68 million. For off grid solar PV home system economic benefit per solar PV home system ranges from the NPV of $90 to $121, depending on the size of

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the system. Key findings are summarized in the table below (10% Discount Rate):

NPV Benefit/Cost Ratio EIRRGrid Connection 146.68 (Million $) 3.4 79%Off-Grid SHS 20 Wp System 30 Wp System 40 Wp System 50 Wp System

107.84 ($ per System)90.09 ($ per System)

113.66 ($ per System)120.72 ($ per System)

1.531.381.411.38

67%34%46%30%

2. Financial

EDL's current financial situation. EDL's current financial situation and status of compliance with financial covenants for FY02-03 had been satisfactory in large part due to the implementation of financial strengthening measures under the FRP and other measures, particularly: (a) the revaluation of fixed assets which raised total equity and transferred surplus to retained earnings; (b) the application of proceeds from the refinancing of Theun Hinboun for retirement of several outstanding EdL long term debts; (c) reduction in tax payments due to increased depreciation expense arising from the revaluation; and (d) monthly tariff increase of 2% effective May 2002 for a period of 25 months up to FY04. These actions allowed EdL for the first time ever, to turn in a strong financial performance for 2002 and 2003, achieving a Debt Service Coverage Ratio more than 2 and Self Financing Ratio in excess of 30%.

Satisfactory tariff adjustment and settlement of Government overdue bills are critical to maintaining the future financial health of EdL. The Action Plan for Financial Sustainability of the Power Sector suggests solutions to these issues. Implementation of the Action Plan would enable EdL to achieve 4% rate of return on re-valued assets, gradually reduce subsidization among consumer categories, and phase out reliance on dividends from export hydropower plants for debt servicing over the Project period up to 2010.

It also needs to address financial issues associated with its investment program, including local, regional, and international financing of these investments; financing modalities (traditional, BOT, public-private and leveraging of bilateral and multilateral funds through credit enhancement rather than direct lending); strategies for supplier financed public projects and privately developed projects; preparing projects (particularly hydropower projects) to improve risk profile; treatment of EdL's non-operating income, etc.. Technical assistance will be provided through the Phase 1 Project to Government to review recommendations of the PHRD financed Sector Financing Strategy and to develop its own action plans.

Government has approved tariff increase of 1% per year, effective July1, 2005, for the period up to 2011. EdL's financial projections for the period FY05-11 concluded that future performance would be greatly impacted by the level of capital expenditures in FY05-06. From an initial base of $42 million in FY03, the Government's PDP 2004-13 called for an ambitious capital expenditure program of $209 million, largely accounted for by expenditures in Nam Mang 3 and Xeset 2 and expansion of its transmission network. Considering scarce public resources, it is necessary for GoL and EdL to agree on the essential capital expenditures, the projects that should and could be developed by the private sector, the available financing from external sources, and the direct support that could be provided by the Government in order to help EdL maintain a healthy balance sheet and satisfactory financial performance.

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3. Technical

Grid extension. The RE design conforms to best practices for network development. EdL’s designs and construction practices, evolved with international consulting assistance, provide the requisite balance between technical performance and construction costs. Network configurations are tailored to load characteristics, and adopt 22kV (MV) lines of three-phase, two-phase, single-phase, and single wire earth return (SWER) systems. 415 kV (LV) network is optimized in regard to sizing of transformers and line phasing.

Loss reduction component. State-of-the-art software and hardware, and project evaluation methodologies for reducing technical losses, and tested techniques based on information from the billing system and field measurements for non-technical losses would be employed. Adequate international consulting assistance has been engaged under a PHRD grant for project preparation. Loss would be addressed in a long-term program approach.

Off-Grid Component. Proven technologies for SHS, hydro and biomass generation will be employed for off-grid electrification. 4. Fiduciary

Procurement aspects: Majority of the procurement would be done through ICB procedures. Concrete poles and cross arms would be procured through NCB procedures as domestic suppliers are available and these items would not attract foreign suppliers. Procurement Plan prepared by EdL and MIH is satisfactory. Bidding documents for all ICB packages, except for the billing and accounting system (BAS), have been prepared for the on-grid component and reviewed by IDA.

IDA’s procurement capacity assessment report is in the project file. While EdL has good experience in carrying out procurement, MIH has limited ICB experience. To address shortcomings in design and procurement capacity, external assistance would be provided: (i) an international consulting firm has been engaged to assist EdL in project preparation and implementation including procurement and contract management; and (ii) an individual procurement consultant would be hired to assist MIH in preparation of ICB bidding documents (See Annex 8 for details). With these arrangements, the overall procurement risk is rated as “average”.

Financial management aspects. IDA’s FM capacity assessment report is available in the project files; it rates the overall FM risk as “average”. Financial management of the project would be handled by EdL and MIH for their respective component, which would ensure a separate flow of funds, reporting, monitoring, and tracking of funds usage. EdL project accounting would be automated by the newly installed Accounting and Financial Management System (AFMS). MIH project accounting would be automated by an in-house accounting program using Access software. Training on financial management and disbursement procedures would be provided. EdL, which is familiar with these procedures, would assist MIH during the transition in preparation of statements of expense (SOE) and withdrawal applications.

Separate FMRs would be prepared by EdL and MIH and submitted to IDA within 45 days of the end of each quarter following project effectiveness. EdL would prepare at year-end, consolidated Project financial statements and annual corporate financial statements. These statements would be audited by an independent auditor acceptable to IDA, following International Standards on Auditing. Audit reports would be submitted to IDA within six months after the end of each fiscal year (See Annex 7 for details).

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5. Social

The Project would yield positive social benefits to the rural population, as evidenced through baseline surveys during project preparation. These surveys showed that access to electricity would: (i) significantly increase the quality of lighting and disposable income through substitution of more expensive lighting devices; (ii) provide opportunity for rural households to engage in income generating activities; (iii) improve quality of life through better access to news, information and entertainment (radios and TVs); and (iv) extend working hours for children’s study and allow household members flexible and/or longer productive working hours in the evening (see Annex 9 for details).

6. Environment

Environmental Safeguards. In accordance with World Bank policy for Environmental Assessment (OP/BP/GP 4.01) the project was rated Category B.

For the on-grid component, the first year program will include 45 subprojects, for which only 0.4 hectares of land areas in 394 villages will be required for poles and towers, with 20 percent being farmland, and about 33,000 trees will be affected. Anticipated environmental issues are minor and easily managed through good engineering design and construction practices. The Phase 1 off-grid component will focus on using SHS and village hydro (VH) and generating sets (GS) for electrification of about 10,000 households. Limited land acquisition and resettlement impacts are expected. Environmental impacts for the off-grid component are also minor and easily managed through good engineering design and construction practices, as well as simple easily performed good housekeeping measures during project implementation.

The Recipient has prepared framework documents and management action plans, satisfactory to IDA, for both on- and off-grid components to address the safeguard issues, and agreed to implement the action plans and follow the procedures outlined in the framework documents. Typical environmental issues and actions for environmental management (control and monitoring) are included in the framework documents.

7. Safeguard policies

Safeguard Policies Triggered by the Project Yes NoEnvironmental Assessment (OP/BP/GP 4.01) [X] [ ]Natural Habitats (OP/BP 4.04) [ ] [X]Pest Management (OP 4.09) [ ] [X]Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [X]Involuntary Resettlement (OP/BP 4.12) [X] [ ]Indigenous Peoples (OD 4.20, being revised as OP 4.10) [X] [ ]Forests (OP/BP 4.36) [X] [ ]Safety of Dams (OP/BP 4.37) [ ] [X]Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [X]Projects on International Waterways (OP/BP/GP 7.50) [ ] [X]

Policy Frameworks. Phase 1 would include MV and LV lines and SHS, VH and GS. Limited land acquisition and resettlement impacts are expected. Given the Project’s APL approach, all resettlement and environmental impacts cannot be defined from start; hence resettlement and * By supporting the proposed project, the IDA does not intend to prejudice the final determination of the

parties' claims on the disputed areas

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environmental policy frameworks have been developed and agreed with EdL and MIH for both on- and off-grid activities. EDL has agreed to apply the same resettlement policy to the associated 115 kV transmission lines financed by others.

Action Plans for First Year Program. To mitigate negative impacts of grid extension, RAPs and EMPs for the 45 subprojects for the first year of Phase 1 have been prepared and submitted to IDA. For the off-grid component, RAP or EMP is not required now since the first year has no VH or GS schemes. RAPs and EMPs for future subprojects and VH or GS schemes to be developed will be prepared and implemented as necessary in line with these policy frameworks. A significant portion of the project beneficiaries are ethnic populations. An Ethnic People’s Development Plan (EPDP) has been prepared in compliance with Bank policies to ensure that affected ethnic populations benefit from the Project and adverse impacts are avoided or mitigated through a consultative process. The EPDP introduces the basic legal, cultural and socio-economic conditions for ethnic groups in Lao PDR, particularly pertaining to land tenure and natural resource use. Specific consultation procedures and institutional arrangements are proposed to address the particular needs of ethnic groups during project implementation, to ensure that development fosters full respect for their dignity, human rights and cultural uniqueness.

8. Policy Exceptions and Readiness

The project is in compliance with IDA policies and procedures without policy exceptions. It meets readiness criteria for implementation.

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Annex 1: Country and Sector Background

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

General5

With a population estimated at 5.7 million in 2004, and growing at a relatively rapid rate of 2.6 percent annually, Lao People’ Democratic Republic (Lao PDR) is characterized by a rich cultural and ethnic diversity where almost half of the population belongs to minority groups concentrated in the upland areas. A large majority of the population relies for its livelihood on agriculture, which accounts for over half of GDP. Urbanization is relatively low, at 25 percent. Gross National Income per capita stands at around US$340. Social indicators are poor; rural areas suffer the most, from paucity of social services, lack of income generating opportunities due to weak market linkages, and poor access to infrastructure.

GoL’s National Growth and Poverty Eradication Strategy (NGPES), approved by the National Assembly in January, 2004, embodies three macro-level objectives: (i) enabling environment for growth and development; (ii) enhanced governance; and (iii) poverty reduction. This strategy should help achieve the Millennium Development Goals (MDG) by 2015 and graduate Lao PDR from Least Developed Country status by 2020. A key engine of growth identified by the NGEPS is the energy sector, including RE, the central grid and hydropower development for exports.

Real GDP grew by 7% during 1992-97 and by 5.8% p. a. during 1999-2003, with intervening years adversely affected by the East Asian crisis. Exports also grew at a rapid rate over this period. Supporting growth are abundant natural resources including agriculture, forestry, hydro-electric power and minerals. Agriculture contributes around 51% of GDP and employs over 80% of the labor force. The recent slow-down in growth indicates that Lao PDR has reaped the “easy gains” of initial liberalization and natural resource exploitation. There is need for economic diversification to sustain growth. Lao PDR is heavily reliant on external support; donor funded programs accounted for 7% of GDP, 39% of total public expenditure, and 61% of the capital budget (in 2002-2003).

Sector Context

Lao PDR has prodigious hydropower resources (no confirmed oil or gas resources). Technical hydropower potential is estimated at 26,500 MW; only a small fraction has been developed, but these provide substantial exports and 97% of the country’s generation needs (see Table 1 below). Most hydro energy is exported to Thailand while imports cover peak hour and seasonal shortages. As domestic power demand grows (250 MW in 2003), exports have steadily declined.

Lao PDR has no national grid; four separate transmission systems supply the Central 1, Central 2, Southern and Northern load centers. However, a myriad of interconnections (several EHV “export” interconnections with Thailand and a large number of MV “import” connections from Thailand, China and Vietnam supplying provincial and district towns away from the main EdL grid) and formalized “wheeling agreements” with EGAT, the Lao PDR and Thailand networks effectively result in regional synchronization, with Lao PDR supply thereby acquiring a reasonable degree of reliability.

5 Numbers are taken from Lao PDR – Economic Monitor, April, 2004

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Table 1: Power Generation in Lao PDR

Name Year of commercial operation

Capacity Category (main market

supplied)

Ownership model

Nam Ngum 1971 150 MW Domestic GoL/EdLXeset 1991 45 MW Domestic GoL/EdLTheun-Hinboun 1998 210 MW Export IPPHouay Ho 1999 150 MW Export IPPNam Leuk 2000 60 MW Domestic GoL/EdLNam Mang 2005 40 MW Domestic GoL/EdLMini/micro-hydro 11.5 MW Domestic Provincial Diesel generators 17.5 MW Domestic Provincial Total 683 MW

Power System Development Planning and the Marginal Unit of Production6

Table 2 depicts consumption growth in the four unconnected area load centers –Central, Central 1, Southern, and Northern. Growth for Lao PDR averaged 13% p.a. over the past five years, with particularly dramatic increases in the South due to household electrification and irrigation pumping. Each load center has strong cross-border interconnections and nearby sources of hydropower. Over the time frame of SPRE II the centers would remain unconnected and EdL’s power development planning would continue on a regional rather than on a national basis.

Table 2: Historical Load Growth by EdL Load Center (GWh)

Area/Year

93 94 95 96 97 98 99 00 01 02 03 99-03 % Growth

Northern 1 2.8 4.4 5.5 7 15.7 18 22.2Central 1 201 213 259 288 323 375 402 462 518 557 645 13Central 2 38 45 53 62 72 87 102 114 119 126 141 8Southern 18 21 25 29 36 48 57 65 75 85 97 14All Laos 257 279 338 380 434 515 567 649 728 785 906 13 Table 3 shows recent patterns of production, consumption, and cross-border exchanges and a forecast for the SPRE II time frame. EDL hydropower stations can generate on average about 1,514 GWh annually (increasing to 1,844 GWh with the addition of Nam Mang 3 in 2005), but year-to-year variations are considerable, as shown by the sharp downturn in 2003. A 12% growth in domestic consumption together with the forecast growth of imports needed to balance regional supply and demand would result in the cross-border balance of trade switching to a net import of energy in 2006 (this excludes the significant exports from the two IPPs).

The Nam Theun 2 hydropower plant will represent a substantial expansion of Lao PDR’s IPP operations with its capacity of 995 MW which will become operational in 2009. Other expansions and green-field development of hydro sites are expected to further increase IPP operations over the next decade. This is also expected to affect EDL’s operational strategy as domestic off-take

6 Power Development Plan (PDP2004-2013), March 2004 - EdL; Power System Development Plan for LAO PDR, March 2004 - Meritec/Lahmeyer; EGAT Power Development Plan, April 2003 - EGAT.

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from large-scale IPPs will present a cost-effective alternative to EDL’s own development of more expensive medium-size hydro sites.

Table 3: Historical & Forecast Generation, Imports, Exports &Consumption – EdL

Year Generation Imports Exports Consumption(GWh) Growth

(%)(GWh) Growth

(%)GWh Growth

(%)(GWh) Growth

(%)1995 1,085 -9 76.8 34 675.4 -19 337.5 20.81996 1,248 15 87.6 14 792.4 17 379.9 12.51997 1,219 -2 101.6 16 710.2 -10 434.1 14.31998 947.8 -22 142.3 40 405.2 -43 514.6 18.51999 1,169 23 173.4 22 598.1 48 567 10.22000 1,578 35 162.6 -6 862.9 44 648.7 14.42001 1,554 -2 185.2 14 796.4 -8 728 12.12002 1,570 1 200.8 8 771.4 -3 785.4 82003 1,317 -16 237.9 18 452.2 -41 905.7 152004 1514 235 486 1,014.4 122005 1844 465 492.0 1,136.1 82006 1844 560 383.9 1227.0 82007 1844 560 267.0 1325.2 82008 1844 560 140.9 1431.2 8

The connections and power flows between these regions are shown in Figure 1.

Figure 1: Lao PDR Power Sector Production Flow Diagram - 20037

7 From Phase 1 DSM Program Plan, October 2004. Prepared for The World Bank by the International Institute for Energy Conservation, Bangkok, Thailand.

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Forecast power adequacy situation by area is reflected in EdL’s PDP2004-2013, as summarized below:

Central-1 Area. This major network includes Vientiane and comprises 70% of total EdL consumption. EdL’s 115 kV transmission grid connects major hydropower plants, Nam Ngum 1 and Nam Leuk. This region exchanges power with EGAT grid for load balancing, economy and reliability. Growth is forecast at 11% for 2005-2010, resulting in net energy imports over this period (see Figures 2 (a) and (b)). Imports peak at 30% in 2007 and continue for the duration of SPRE II.

Central-2 Area. This is the second-largest load center served by EdL, accounting for about 16% of total consumption. It is served entirely by HV transmission and MV distribution interconnections to Thailand and MV connection to Vietnam. Industrial load is growing quickly, as is household demand due to RE. A gold/copper mine would almost triple consumption in 2005. EdL would continue to rely on imports, partially offset in 2010 when Nam Theun 2 supplies its domestic share of load.

Southern Area. This is the third-largest load center served by EdL, with 10% of the total energy consumption. This region has domestic supply sources in the form of the EdL-owned Xeset 1 and Selabam hydropower plants and a 115 kV interconnection with EGAT. Imports are currently at 40% of requirements and would peak at over 50% before dropping back to 30% with the 2011 planned addition of the Xe Kaman 3 hydropower project.

EdL intends to further expand its domestic hydropower production, through its own financing (Xeset 2) and through power purchase agreements with IPP hydropower developers (Nam Theun 2). However, the time frame for these additions is 2008 - 2012, and their addition will not eliminate the need for continued imports to individual load centers. Based on this analysis and EDL’s power development plan over the SPRE II period, it is concluded in regard to GEF benefits evaluation that the marginal unit of production to satisfy domestic Lao electricity growth would be thermal power imported from Thailand. This is the basis on which global benefits calculation in Annex 15 is performed.

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Figure 2(a) and (b): EdL’s Central Grid Supply Demand Balance, 2005-2021

Power Sector Policy and Reform

In 2001 MIH published a "Power Sector Policy Statement" setting out four policy goals:

Maintain and expand an affordable, reliable and sustainable electricity supply in Lao PDR to promote economic and social development.

Promote hydropower exports to earn revenues to meet GOL development objectives.

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Enhance the legal and regulatory framework to underpin power sector development.

Strengthen institutional structures, clarify responsibilities, streamline administration and foster commercialization.

A subsequent workshop crystallized the following priorities: (i) expand electrification, (ii) complete commercialization of EdL, and (iii) develop a financing strategy for domestic and export power developments.

Rural Electrification

Lao PDR covers an area equivalent to that of Great Britain but with a population of only around 5.5 million (population density 23 persons/sq. km., the lowest in the region). Despite the geographic characteristics, EdL’s electrification performance has been impressive. Electrification rates have increased from 16% in 1995 to more than 40% by the end of 2003, yet the electrification coverage in rural areas remain around 20 to 25%.

Table 4: Electrification Rate

YearHouseholds in

Lao PDRNumber of HH

electrified EdL connections Non-EdL1991   83,400    1992   92,900    1993   102,900 101,138 1,7621994   111,200 111,226 -261995 754,265 120,100 117,922 2,1781996 758,036 136,280 134,084 2,1961997 761,808 196,998 165,308 31,6901998 765,579 226,004 198,330 27,6741999 768,142 254,610 226,317 28,2932000 818,668 293,495 249,648 43,8472001 866,277 303,690 273,825 29,8652002 875,744 337,363 307,521 29,8422003 892,872 368,259 355,651 12,6082004

GoL plans to reach 90% electrification by 2020. Extending the grid to remote undeveloped areas would put EDL’s financial viability at risk because of the prevailing large cross-subsidies. Hence, GoL has embarked on an off-grid electrification program. Under SPRE, pilot off-grid systems have proven successful, holding promise for scale-up. While a number of studies have confirmed that renewable energy resources are available (mainly hydro and solar, possibly biogas), a complete picture of renewable energy resources is yet to emerge.

There is general agreement that the RE strategy must build on a combination of grid and off-grid solutions. For this purpose an REF is planned to be introduced step by step. While the short-term strategy would predominantly focus on grid extension and off-grid solar systems, long term plans are to introduce differentiated delivery models and tariff schedules, depending on willingness-to-pay and local endowments.

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Commercialization of EdL

EdL was corporatized in 1997 as a 100% GoL owned entity, with a Board of Directors, and restructured its organization into separate cost centers. A three-yearly Contract Plan is agreed with GoL. Despite corporatization, confusion prevails among government’s roles as: owner of EdL, regulator of EdL (for tariff approvals), on-lender of loans to EdL, tax collector and electricity consumer (EdL carries large governmental receivables). Political interference is still present in operations as well as planning. An action plan for repayment of accounts receivables will be agreed among GOL, EDL and IDA prior to Board presentation. An important tariff issue is cross-subsidies across consumer categories, mainly from electricity export earnings. A tariff increase of 2.3% p. m. was implemented from 2002 to 2004 but was frozen before planned completion, partly because of favorable macro-economic development (including lower than expected inflation rate) partly due to consumer pressure. GOL has agreed with IDA to implement the final steps towards achieving full cost recovery over the period 2005-’11. At the end of this period, EDL will be able to sustain its domestic operations without reliance on dividends from its IPP equity. The tariff adjustments complement the Financial Recovery Plan, which EdL completed, enabling it to comply with financial covenants. Its components included tariff adjustments, assets revaluation, temporary debt service relaxation, and debt-equity conversion by GoL. EdL implemented conjunctively a new accounting system meeting International Accounting Standards. Computerized billing mechanisms are now being introduced to facilitate auditing and accounting across provincial BOs.

Sector Financing

EdL has traditionally received financing from multilateral and bilateral agencies through soft loans and grants. While power sector capital requirements are increasing, the sector’s traditional lenders are shifting their programs to other sectors. On the other hand, non-traditional lenders, China and India, are playing an increasing role through provision of export credits (with significant grant element) for projects where goods and construction services are sourced through their respective countries. Lao PDR’s earlier successes with export generation projects demonstrates that the international private sector (particularly Thai) could play a role and the nascent local private sector and domestic IPPs should not be ruled out for financing smaller projects.

A PHRD funded Financing Study recommended innovative financing modalities, including public-private development models and standardized legal agreements for small-scale operators. It is expected that such alternative development and financing models will ease the pressure on scarce public funds as well as EDL’s own limited (though improving) financing capacity. GoL has showed commitment to reforms with the liberalization of off-grid operations and an action plan for MIH organizational strengthening.

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Annex 2: Major Related Projects Financed by the IDA and/or other Agencies

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

Ongoing IDA-financed Project Sector IssueLatest Supervision

(PSR) Ratings(IDA-financed projects only)

Implementation Progress (IP)

DevelopmentObjective (DO)

Nam Theun 2 Hydroelectric Project Development of hydropower potentials; private-public partnership

NA NA

Lao Environment and Social Project (associated with Nam Thun 2 Hydroelectric Project)

Development of Hydropower potentials; emerging environmental and social challenges

NA NA

Completed IDA-finance Projects OED Evaluation

Outcome Sustainability

ID Impact

Southern Provinces Rural Electrification Project(Cr. 17142-LA)

Rural electrification and capacity-building in EdL and sector agencies

S* S*

Provincial Grid Integration ProjectCr. 2425-LA

Rural electrification and capacity-building in EdL (completed in 1999)

S U M

Southern Provinces Electrification ProjectCr. 1826-LA

Rural electrification and capacity-building in EdL (completed in 1994)

HS L SB

Nam Ngum Extension ProjectCr. 1197-LA

Hydropower extension and capacity building in EdL NR NR NR

HS= Highly Satisfactory; S = Satisfactory; L=Likely; U= Unlikely; SB = Substantial; M = Modest; NR= Not RatedNote *: Rating in Implementation Completion Report (ICR)

Other development agenciesNorthern Area Rural Power Distribution Project II (ongoing) ADBNorthern Area Rural Power Distribution Project I (completed) ADBVientiane Distribution System Improvements (completed) ADBOff-grid Renewable Energy Electrification Project (ongoing) UNDP/GEFSouthern Provinces Transmission Development I (ongoing) China EXIM IDASouthern Provinces Transmission Development I (ongoing) India EXIM IDATransmission Development Project (ongoing) Lane Xang Minerals Ltd.Nam Mang 3 Hydropower Project (ongoing) China EXIM IDATransmission Line and Substation System Master Plan (completed) JICAInstitutional Development for Off-Grid Electrification (completed) ESMAPPower Sector Policy Reform (completed) PPIAF

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Annex 3: Results Framework and Monitoring

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

PDO/Global Environmental Objective Outcome Indicators Use of Results InformationGEF Operational Programs: Remove Barriers to Energy Efficiency (EE) & Energy Conservation (OP 5); Promote Adoption of Renewable Energy by Removing Barriers & Reducing Implementation Costs (OP 6)Strategic Priority: CC-3: Power Sector Policy Frameworks Supportive of Renewable Energy & EEGlobal Environmental Objectives:Increase the contributions of renewable energy to Lao PDR’s RE program

Remove the barriers to higher efficiency levels in urban and rural power end-use consumption

Double the “market share” of off-grid renewable HHs from SPRE to SPRE II

Measurable reduction in Lao PDR domestic consumption from forecast levels

YR 1: Estimate potential for scaling-up off-gridYR 3: Maximum potential of renewable energy in follow-on efforts YR 1: Establish targetsYR 3: Estimate potential for scaling-up DSM/EE and take stock of political support initiatives

Project Development Objective: Improve living standards through increased access to electricity of rural households in villages of targeted provinces.

Existing socio-economic survey of impacts of electrification to be updated to measure impacts associated to, inter alia,access to education, health care and economic opportunities, gender equity, and increase in disposable income

YR 1: Establish baseline values and target values (through refinement of existing data)YR 3-4: Gauge early impacts of electrification

Intermediate Results Results Indicators Outcome Monitoring/UsesEdL – Grid ElectrificationUndertake a program of grid extension in seven central & southern provinces

Number of villages electrified. Number of households

electrified.

Semi-annual project progress reports (MIH, EdL) Grid:YR 1: Effectiveness of project designYR 2-3: Achieving village w/o achieving HH goals suggests consumer financing shortfallsOff-Grid:YR 1: Verify portfolio goalsYR 2-3: Insufficient village hydro share suggests participatory planning shortfalls

EdL – Reform & Improved Efficiency Establish organizations and build organizational capacity needed to reduce non-technical losses and increase energy efficiency of EdL customers

Implementation of Action Plan for Financial Sustainability of the Power Sector.

DSM cell established Pilot projects underway

MIH –Off-Grid ElectrificationExpand the provincial coverage, increase the size, and diversify the renewable energy portfolio of the off-grid program

Number of villages electrified. Number of households

electrified. Village hydro share in HHs electrified through off-grid.

MIH – Reform & Improved EfficiencyEstablish improved institutional arrangements, physical planning capacity, new delivery mechanisms, and regulatory frameworks necessary for a sustained RE program not totally reliant on project-based financing

REF operating Improved delivery mechanisms RE Database RE Master Plan implementation of Action Plan

for MIH organizational strengthening

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Arrangements for Results Monitoring

Target Values Data Collection and ReportingOutcome Indicators Baseline Year 1 Year 3 Frequency and

ReportsData

Collection Instruments

Resp. for Data

CollectionGlobal Environmental Outcome: Double the “market share” of off-grid renewable HHs from SPRE to SPRE II.

Measurable reduction in Lao PDR domestic consumption from forecast

Off-grid “market share” of total HHs electrified during SPRE (8%)

2003 EdL PDP forecast of 2008 domestic consumption

16% of newly-electrified HHs have solar/VH

1% reduction

Yearly reports

Semi-annual project progress reports

PESCOs, MIH, PDIH

EdL billing data

EdL, MIH

EdL

Project Development Objective: Existing socio-economic survey of impacts of electrification to be updated to measure impacts associated to, inter alia,access to education, health care and economic opportunities, gender equity, and increase in disposable income

2004 socio-economic survey of impacts and benefits of electrification

Verify baseline, (through refinement of existing data

improvement in socio-economic indicators and access to economic opportunities, 5% increase in disposable income

Once, prior to project completion

Final socio-economic survey

EdL, MIH

RESULTS INDICATORSEdL – Grid Electrification: Number of villages electrified. Number of households electrified

2004 provincial access levels – 44 % of HH in about 35 % of villages

Verify baseline and target values

Avg access level over 7 provinces increases to more than 50% of villages and 40% of HHs

Yearly cumulative reports

MIH

EdL – Reform & Improved Efficiency: Implementation of Action Plan for Financial

Sustainability of the Power Sector. DSM cell established Pilot projects underway

2004 domestic use & losses

DSMO in place

1% reduction in EdL forecast usage

T&D losses @ 15%

Yearly cumulative reports

EdL billing data & forecasts

EdL

MIH – Off-Grid Electrification: Number of villages electrified. Number of households electrified

Currently 6,000 HHs in 7 provinces

Only 150 not SHSOnly hire-purchaseOPS only delivery

3000 new HHs, 12 provinces, 5% VH, outsourcing underway

10,000 new HHs over 200 villages in 17 total new & old provinces, 10% VH, new delivery mechanisms

Monthly and quarterly reports from the MIH PMU

Quarterly project progress reports

MIH

MIH – Reform & Improved Efficiency: REF operating Improved delivery mechanisms RE Database RE Master Plan implementation of Action Plan for MIH

organizational strengthening

Initial version of RE Database developed

REF in place

RE Database REF regulation prepared for alternative delivery models

Yearly cumulative reports

MIH MIH

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Proposed Adjustable Program GrantDecision Framework

(1) EDL ComponentComponent Phase 1 Triggers Phase 2EDL GridExtension

Implement Phase 1 grid extension subprojects;Project preparation for Phase 2.

Agreed completion status of 70% of Phase 1 subprojects (final scope of Phase 1 is subject to availability of co-financing

Implementation Phase 2 grid connection program

EdL Loss Reduction Development of Master Plan for distribution loss reduction; implementation of priority projects; preparation of program for Phase 2.

Master Plan completed,Priority projects implemented.

Further loss reduction assistance if required

IT System Integration of EdL Headquarters and BOs; Development of MMPS; FM capacity building;

BASs rolled out to 7 new BOs; MMPS developed and running; Training programs on Internal Auditing and Corporate Planning completed.

Rolling out BASs and MMPS to all BOs; Further training programs as necessary.

EdL Tariff Reform Implementation of Action Plan for Financial Sustainability of Power Sector

Phased implementation on schedule. Completion of implementation

DSM Establishment of DSM cell within EdL; Development and implementation of DSM and energy efficiency programs; Prepare program for Phase 2.

DSM cell established in EdL and running; Phase 1 DSM and energy efficiency programs implemented; Phase 2 programs developed.

Further DSM assistance if required

(2) MIH ComponentComponent Phase 1 Triggers Phase 2

Off GridInvestment

Implement Phase 1 off-grid component;Project preparation for Phase 2

70% completion of Phase 1targets Implement roll-out of REF

Institutional Strengthening

Management contract for village off-grid awarded on competitive bidding basis; Contract for Quality Assurance by a third party awarded.

Alternative RE Delivery Models

Establishment of REF initially restricted to MIH projects; REF extension to other REF participants and development of legal and regulatory provisions; Project preparation and solicitation documents for alternative model projects.

REF established and running; Agreement to extend to other participants and any necessary legal provisions developed and approved; Solicitation documents for “other model” projects completed

Implement alternative model projects

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RE Master Plan and Database

Development of a RE Master Plan and associated RE database, including mini/micro hydro resource studies; Assessment of Rehabilitation of existing mini/micro hydropower plants.

Implementation of a time bound RE Master Plan covering the period up to 2020; Completion of renewable resource inventory and establishment of RE Database; Completion of assessment of rehabilitation of 20 existing mini/micro hydropower plants.

Update the Master Plan and associated resource studies as a continued practice. Maintain and update the RE database as a continued practice.

Sector Financing Strategy

Revision of PDP in line with PSDP; Development of financing strategy based on consultants study; preparation of legal documents for small-scale hydropower projects under IPP financing and operation.

Completion of preparation of at least one small hydropower project, including solicitation for IPP financing, if necessary.

Solicitation and implementation of small hydropower power plant by IPP financing. Possible additional assistance in this area if required.

(3) For both MIH and EdL ComponentsEdL and MIH Capacity Building

Implement capacity building component, including safeguard capacity building, training programs on procurement and financial management. Identification of capacity building program for Phase 2.

Satisfactory completion of training programs developed during Phase 1 and agreed by IDA

Further capacity building assistance as identified in Phase 1 as required.

Note: * Degree of completion agreed acceptable to trigger Phase 2 will be set during negotiations.

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Annex 4: Detailed Project Description

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

Project Phasing

SPRE II would be implemented in two phases over a six-year period, and would be financed by an IDA APL. This approach would accommodate, both, the current severe constraints on IDA funds and the long time span necessary to implement substantive sector reforms in a consensus-based political environment. Phase 1 incorporates in-principle agreements and triggers to usher in financing for Phase 2. Likewise, GEF grant financing would be spread over two phases and would be conditioned on the decision framework applicable to the overall program.

Project Structure

The Project is structured around two main components, with GEF financing earmarked for those activities that meet the GEF objectives. A summary of the main and sub-components, their total cost and financing by IDA, GEF and others is given in Table 1.

Table 1: Summary – Project Components

Project Component Amount ($ million)A. EDL Component Total Cost* IDA GEF OthersA.1 - Grid Extension 26.30 10.56 15.74**A.2 - Loss Reduction 2.00 1.00 1.00A.3 - Information Technology System 0.80 0.80A.4 - Tariff Reform 0.05 0.05A.5 - Safeguards Capacity Building 0.14 0.14A.6 - DSM 0.75 0.75Sub-Total 30.04 12.55 0.75 16.74

B. MIH Component Total Cost IDA GEF OthersB.1 - Off-Grid Investment 2.37 1.69 0.68B.2 - Off-Grid Institutional Strengthening 1.10 1.10B.3 - Alternative RE Delivery Models 0.70 0.40 0.30B.4 - RE Master Plan and Data Base 0.99 0.14 0.85B.5 - Sector Financing Strategy 0.21 0.21B.6 - MIH Organizational Strengthening 0.75 0.75Sub-Total 6.13 2.45 3.00 0.68Total 36.16 15.00 3.75 17.41

Notes:* Based on unit prices of the on-going SPRE project, with inclusion of physical and price contingencies (see Annex

5 for details);** Including co-financing of $5 million.

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A. The EdL Component

A.1 Grid Extension

Physical Parameters: This component would comprise 678 sub-projects, covering extension of EdL grid to about 42,000 households in some 540 villages in seven central and southern provinces. The network extension would comprise 1,405 km of 22 kV, 42 km of 12.7 kV and 1,059 km of 0.4 kV transmission or distribution lines, 627 sets of transformers of various types and capacities, and house wiring in about 42,000 households (Table 2).

Table 2. SPRE II - Scope of On-grid Investment (Phase 1)

Province No. of Villages

No. of Households

0.4 kV Line(m)

Transformers(set)

MV Line(m)

        3 phase mono SWER Total 22 kV 12.7 kV TotalBolikhamxay 59 5,936 125,663 44 26 - 70 192,571 - 192,571 Khammouane 102 5,777 158,530 77 43 12 132 334,279 35,000 369,279 Savannakhet 155 10,788 323,640 84 64 16 164 301,397 2,740 304,137 Salavan 93 7,614 150,371 70 30 - 100 119,356 - 119,356 Xekong 24 1,490 36,268 13 12 2 27 56,296 4,714 61,010 Champasak 93 8,409 209,890 83 31 - 113 347,398 - 347,398 Attapeu 19 2,281 59,315 20 - - 20 53,343 - 53,343 Grand Total 545 42,295 1,059,331 391 206 30 627 1,404,640 42,454 1,447,094

Technical Assistance for Implementation: The TA would finance an international consultant who would assist EdL in project implementation and supervision.

Village Screening Process: Villages were prioritized on the basis of their socio-economic profiles and taking into consideration of provincial government plans for development of specific areas (such as ethnic minority areas). A “weighted benefit” that would accrue from electrification of a sub-project (cluster of villages) was calculated and the sub-projects were ranked on the basis of the cost of their electrification divided by the “weighted benefit” derived thereof (See Annex 12, Item 3 for details) [This refers to the Socio-economic Survey –Is this the right reference?].

Design Optimization: The rural network design will conform to best practices evolved by EDL with the assistance of international consultants, and ensure an appropriate balance between technical performance and cost. MV network configurations will be tailored to load characteristics and include three-phase, two-phase, single-phase and SWER systems. Likewise, the LV network configurations have been optimized in regard to sizing of transformers and phasing of lines.

Scope for Phase 2: This has also been tentatively defined assuming US$ 15 million from IDA financing, US$ 9.5 million from EdL self-financing and US$ 4.18 million from consumer contribution for house wiring. Selection of the villages and sub-projects has undergone the same screening process as for Phase 1. The scope and design would be further refined and finalized in the later stages of Phase 1. See Table 3 for details.

Table 3: SPRE II - Scope of On-grid Investment (Phase 2)

8 45 out of the 67 subprojects to be implemented in the first year.

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Province No. of Villages

No. of Households

0.4 kV Line(m)

Transformers(set)

MV Line(m)

        3 phase mono SWER Total 22 kV 12.7 kV TotalBolikhamxay 64 5,680 222,817 25 55 23 103 220,089 111,000 331,089 Khammouane 148 7,684 245,300 113 12 - 125 332,711 - 304,211 Savannakhet 229 13,557 406,710 115 108 56 279 560,993 112,110 673,103 Salavan 149 8,078 320,389 83 109 - 192 256,574 - 256,574 Xekong 25 1,154 43,052 11 24 - 35 32,204 - 32,204 Champasak 117 12,136 406,460 127 - - 127 365,852 - 365,852 Attapeu 30 3,172 108,621 27 - - 27 96,147 - 96,147 Grand Total 762 51,461 1,753,349 501 308 79 888 1,864,570 223,110 2,059,180

A.2 Loss Reduction

This component would enhance EdL ongoing loss reduction (technical and non-technical) efforts, based on recommendations of the PHRD-financed study. This includes use of state-of-the-art software and hardware, and project evaluation methodologies for reducing technical losses, and test techniques based on information from the billing system and field measurements for non-technical losses. Technical assistance from international and local consultants would be provided to prepare (a) a master plan for reduction of technical and non-technical losses; (b) support implementation of prioritized investment activities.

Table 4: Loss Reduction Component – SPRE II Phase 1

Item IDA Funds ($) EdL Funds ($)(1) Technical Assistance 250,000(2) Investment Activity (a) Equipment - Instrumentation and Software 750,000 (b) Network reinforcement equipment 960,000 (c) Works 40,000TOTAL 1,000,000 1,000,000

(1) Technical Assistance Services ($ 250,000). This technical assistance would involve

(a) Development of Master Plan for distribution loss reduction(i) development of a Master Plan, including identification of priority projects and cost

estimations, which would allow EdL to realize reduction in overall losses from the current level of around 20% to approximately 13% in 2011. This activity should cover detailed and comprehensive studies on the LV systems and coordination with high voltage systems;

(iii) detailed definition of scope of priority investment activities for about $15 million, including economic and financial justification of identified projects, to form the basis for attracting investments from other donors.

(b) Capacity Building. This activity is targeted to building up capacity within EdL in planning, preparation and implementation of technical and non-technical loss reduction programs. The capacity building program would include:

For technical loss reduction: (i) data acquisition (load measurement, network parameters, data arrangement);

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(ii) loss reduction planning (training of usage of distribution software, training of loss reduction planning, planning of loss reduction projects for entire system);

For commercial loss reduction:(i) Meter quality management (inspections, database, unified operational guideline)(ii) Billing process management (debt control, early payment incentives, effective

disconnection policy)(iii) Personnel skill development in metering, meter reading and bill collection (field staff

enlightenment, instruction manual, on/off-the-job training)(iv) Customer side management for commercial loss reduction (power theft control, public

awareness program, large customer monitoring)

International consultants would be employed for training and local consultants for data acquisition.

(2) Investment Activity

Investment activities during Phase 1 would target loss reduction in the seven southern provinces. Major activities for technical loss reduction would be investment in new and re-conductoring MV and LV distribution lines. The following priority projects recommended by the PHRD financed study would be implemented during Phase 1.

[Do we have final bid package for these investments?]

(a) Equipment - instruments and software (US$ 750,000). Under this activity, software for technical loss reduction planning will installed and commissioned at EdL’s BOs. These BOs will also be equipped with meters and instrument for data acquisition. Domestic and commercial revenue meters will be installed or replaced at consumers’ properties.

(1) Technical loss reduction (US$380,000)(i) Distribution analysis software (8 sets, US$150,000) (ii) Pole transformer meters (100 sets, US$200,000)(iii) Clipping-on meters for LV lines (15 sets, US$30,000)

(2) Non-technical loss reduction (US$370,000)(i) Meter testers (15 sets, US$100,000)(ii) Meter replacement (US$220,000 in total)(iii) GIS mapping software for distribution systems (2 sets, US$50,000)

(b) Network reinforcement equipment (US$960,000). This activity is continuation of EdL’s investments in network enhancement. It is aimed at loss reduction following recommendations of the PHRD study. Equipment required includes:

(1) MV capacitors (10 MVA, US$40,000) (2) MV distribution lines (30 km new lines, US$360,000)(3) Re-conductoring MV distribution lines (40 km, US$200,000)(4) Re-conductoring of LV lines (60 km, US$360,000)

(c) Works – Installation and commissioning (US$40,000). This includes labor and works necessary for installation and commissioning of above equipment.

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A.3 Information Technology System

This component consists of three activities: (i) integration of EdL headquarters and BOs through extending the existing BAS installed under SPRE to 7 new EdL BOs; (ii) development of a new MMPS; and (iii) technical assistance for financial management capacity building.

(i) BAS. In addition to establish the hardware and software systems in the BOs to form an integral part of EdL’s BAS, an FM capacity building program will be implemented. This program includes (a) improving EDL’s capacity to discharge its responsibilities to undertake internal audit and ensure transparency of its operation; and (b) strengthen the quality of corporate planning functions at EDL. The specific tasks comprise training in two areas:

Internal Audit ($40,000): In order to carry out its responsibilities, the Internal Audit Department of EdL should be proficient in internal audit and financial control functions. As such it should be capable of assessing the broader administrative control environment which would entail gaining an understanding of such matters as (a) the integrity, ethical values and competence of staff; (b) management philosophy and operating style; (c) organizational structure; (d) methods of assigning authority and responsibility; (e) management control methods; (f) internal (or governmental) audit functions; (g) personnel policies and practices; and (h) external influences. Training would be geared towards general and procedural controls related to (a) budget preparation and execution; (b) computerized FM system; and (c) internal controls and internal audit functions in IT environment. This would enable the Independent Audit Department to identify organizational control risks, such as: (a) presence of honest and capable employees usually influenced by compensation, education and experience levels; (b) clear delegation and segregation of duties; (c) clear written standards and procedures; (d) clear responsibilities including levels of authority; (e) clear control over assets, inventory, cash and bank accounts; (f) easily available access to supporting documentation; (g) security over confidential data; (h) budget monitoring; and (i) timely and accurate financial reporting.

Corporate Planning ($20,000): The indicative activities would include: (i) training in financial planning and database management, risk analysis and assessment, and international financial reporting requirements (previously International Audit Standards); (ii) job specific training including public utility regulation, financial forecasting, capital budgeting, treasury functions, and FM and administration; and (iii) practical training for staff on best practice management and operation of a power utility. (ii) MMPS. While the MMPS would be developed as a priority under Phase 1, other systems - transmission and distribution work management, power plant maintenance management, management information system, and other technical, administrative and support systems - would be covered under Phase 2.

A.4 Tariff Reform

This component would provide technical assistance in implementing the Tariff Action Plan which is a central part of the Action Plan for Financial Sustainability of the Power Sector with the objective to enable EdL to operate as a commercial public utility while also delivering affordable electricity to poor consumers. Pertinent issues of the tariff restructuring include: (i) gradual adjustment of the tariff level and structure aimed at achieving rates of return appropriate to a commercial public utility, reducing cross-subsidy among customer categories, and providing incentives for efficient electricity usage; (ii) separation of commercial and non-commercial activities in EdL accounts including on-lending policy for new ODA credits (with possible

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restructuring of existing agreements); (iii) transparent tariff setting mechanisms; and (iv) definition of adequate price incentives for large-scale consumers (this part closely coordinated with the DSM/EE component described below).

A.5 Safeguards Capacity Building

This component would focus on enhancement of the capacity of EdL’s BO staff and their provincial authority counterparts in environmental and social assessment, through: (i) training sessions at provincial level, study tours and acquisition of reference books and materials ($65,000); and (ii) purchase of environmental monitoring equipment, office equipment and vehicles ($75,000).

A.6 Demand-Side Management and Energy Efficiency

DSM and Energy Efficiency planning and implementation are practically non-existent in Lao PDR. At this nascent stage, it is essential that these concepts be carefully developed and properly positioned in the larger context of power sector reforms that include marginal cost revenue allocation and pricing, elimination of subsidies, efforts to reduce losses and uncollected revenues, and rationalization of the tariff levels and structure.

This component would provide technical assistance to EdL and MIH in developing DSM and Energy Efficiency consciousness and practices. It would cover early exploration of the potential and opportunities, and establishment of provisional institutional arrangements for policy development and planning, within EdL or MIH or both.

Complementary to GEF funding, IDA has mobilized another $75,000 in ASTAE trust funds to support detailed planning of this component. This additional preparation has helped identify the recommended DSM program components for both phases of SPRE II.

The focus of Phase 1 (2005-2008) will be: Establishment of and capacity building for a DSM Cell within EdL; Developing a comprehensive energy end-use database for DSM planning; Screening and design of DSM Programs; Pilot projects for high-priority target markets such as commercial air conditioning and

lighting; residential lighting and appliance standards; and water pumping; Design of full-scale programs based on pilot project results.

Moreover, load studies of large-scale and medium-voltage consumers will be conducted to help EDL establish an appropriate scheme of price incentives for increased energy efficiency which would be reflected in the tariff structure. Phase 2 will focus on implementing full scale programs and sustainable business models. B. MIH Component

B.1 Off-grid Investment Program

The off-grid program under Phase 1 would electrify about 10,000 households spread over some 200 villages in all seventeen provinces through off-grid technologies including solar home

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systems (SHS), village hydro (VH) and generation sets (GS), as shown in Table 5.9 The Phase 2 program will be prepared later and will reflect the results of Phase 1, including development and piloting of new technologies and electrification delivery arrangements.

Table 5: Scope of Phase 1 Off-grid Component

Province Total No. of Villages

Total No. of Households

No. of ESCO

No. of Households to be ElectrifiedSHS VH/GS Total

     1 Vientiane 55 1,850 1 500   5002 Oudomxai 65 3,250 1 500 50 5503 Luangnamtha 101 5,120 1 600 50 6504 Champasak 279 17,550 1 600 50 6505 Luangphabang 19 901 1 500 50 5506 Xaignabouly 111 7,491 2 700 50 7507 Xiengkhoang 40 2,644 1 550 500 1,0508 Houaphan 52 2,917 1 500 250 7509 Bolikhamxay 44 2,158 1 500   50010 Khammouane 54 3,224 1 500   50011 Savannakhet 56 2,364 1 500   50012 Salavan 42 2,794 1 500   50013 Xekong 31 754 1 500   50014 Attapeu 36 4,337 1 500   50015 Phongsaly 32 3,493 1 500   50016 Bokeo 76 4,858 1 500   50017 Xaisomboun SR 16 970 1 550   550  Total  1109 66,675   9,000 1,000 10,000

B.2 Off-Grid Institutional Strengthening

PHRD- , PDF B- and ASTAE-funded preparation work has established a strategy for outsourcing most off-grid implementation functions, currently performed by the Off-grid Promotion Support Office (OPS) (including procurement of equipment, program promotion and marketing, planning, coordination, and preparation, contracting and management of ESCOs (electricity service companies) and ESCO services). This technical assistance would address shortcomings in operations and management of MIH’s OPS, as identified through the Interim Evaluation of the Off-Grid Component of the SPRE and subsequent preparation work for the SPRE II. Its thrust would be a comprehensive program of management outsourcing through a performance based Management Contract, and establishment quality assurance of the off-grid program and monitoring and evaluation of the Management Contractor’s performance through hiring an independent Quality Assurance (QA) Surveyor. TORs for the Management Contractor and the QA Surveyor were developed and reviewed by IDA. Evaluation of consultants’ proposals for this contract is on-going.

9 These numbers are necessarily approximate since the off-grid program is very much market-driven and customer preferences may vary from projections.

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The performance of the Management Contractor would be measured against the following indicators and objectives:

(i) Number of households connections -- achieving 10,000 new household connections under the village off-grid program over the duration of Phase 1 of the SPRE II;

(ii) Diversifying application of off-grid technologies -- increasing the share of new connections supplied by VH and GS to 10% of the total (at least 1,000 new household connections);

(iii) Customer payment collection rate -- exceeding a collection rate of 95% for customer payments.

The MC would also be required to (i) maintain the existing off-grid customers managed by provincial ESCOs currently under contracts with MIH and provide satisfactory ensure satisfactory services to these customers; (ii) reduce the costs of the off-grid program, in order to increase its affordability for consumers and its ability to finance new connections.

Technical assistance will be provided in the form of an QA Surveyor who would: (i) operate independently from the PMU and its off-grid Management Contractor and report directly to the Director of the Department of Electricity of MIH and a to-be-constituted Village Off-Grid Advisory Council (see organization chart in Annex 6, Fig 3); (ii) undertake sample field surveys upfront of Phase 1 implementation to set-up a baseline for measuring the performance according to indicators defined; (iii) inspect and make field surveys and inspections to ensure quality of the work of the MC and other key players, including provincial ESCOs, and the village electricity manager (VEM); and (iv) monitor and evaluate the performance of the MC and the off-grid program, and make recommendations regarding the off-grid program.

B.3 Alternative RE Technologies and Delivery Models

This sub-component is to develop alternative technologies, financing mechanisms and delivery models for off-grid RE, including (i) development of the necessary regulatory and institutional arrangements to allow the REF to open up the fund to other participants/ delivery models in the Phase 2 of the program; (ii) assessment of biomass resources and technologies and pilot of projects for productive use of biomass; and (iii) assessment of income generation linkages with village-level off-grid electrification.

On- and off-grid RE efforts have so far relied on SHS. Initial examinations show potential productive application of biomass. Hence this technical assistance would assess biomass potential and explore productive applications of bio-fuels (including biomass gasification, biomass burning, and extraction of energy-oils from seeds) for village industries (such as rice mills and irrigation pumps), and pilot some promising projects. Income-generation linkages to village-level off-grid electrification will also be assessed under this TA, to allow appropriate design of activities for income generation to achieve significant impact of RE.

Alternative RE delivery models to be considered include: (i) Contracting to private entrepreneurs some operational functions, including construction, operation and maintenance of new sections of the distribution grid; (ii) refurbishment of existing micro hydro systems in remote areas, through approaches such as refurbish-operate-transfer; and (iii) arrangements for the development of renewable electricity generation resources and distribution by private entrepreneurs, through

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build-operate-transfer type approaches. The technical assistance would assist development of mechanisms for channeling subsides to support investments in delivering RE and appropriate legal, regulatory and contractual arrangements to enable alternative delivery mechanisms. It would also support MIH in preparing and inviting bids, and overseeing pilot projects.B.4 Rural Electrification Master Plan and Database

Three preparatory studies financed by PHRD and ASTAE--Rural Electrification Frameworks, Social Economic Survey, and Renewable Energy Resource Assessment Needs-- underpin this component and have enabled start-up of an initial GIS based RE database. Based on their recommendations, the following three key activities would be undertaken under SPRE II.

Preparation of the RE Master Plan. In preparing the RE Master Plan, this technical assistance would develop: (i) institutional arrangements and planning approaches; (ii) improvements / adjustments to the existing RE database and GIS system of EdL and MIH, including incorporation of aspects such as topographical mapping, rural road planning, and census updating (2005); (iii) data formats and training of provincial/ district level staff in compiling basic village level RE data; (iv) village and household socio-economic survey questionnaires to form the database for effective RE planning; (v) criteria for planning of off-grid and main grid RE; (vi) a manual for RE planning (using the RE database) and train MIH staff in the application thereof; and (vii) a time-bound RE Master Plan covering the period up to 2020, and its dissemination to provincial / district organizations and the public through workshops. The technical assistance would include procurement of necessary computer systems, office equipment and software.

Renewable Resource Inventory. This technical assistance would comprise preparation of a renewable resource inventory including: (i) collating data on mini/micro hydro resources throughout the country; (ii) incorporating data on potential biomass resources for electricity generation in remote rural areas as identified under another technical assistance activity of the B.3 component--Alternative RE Technologies and Delivery Models; and (iii) identifying areas suitable for development of village-, micro- and mini- hydro systems in unserved areas or in outlying areas where voltage drops and frequency fluctuation occur.

Assessment of Rehabilitation of Existing Micro Hydro Projects. Evaluating the feasibility for refurbishment of some 20 existing mini/micro hydro systems.

B.5 Sector Financing Strategy

The objectives of this technical assistance are to assist MIH in (i) developing and adopting a power sector financing strategy, taking into consideration of recommendations of the PHRD financed Power Sector Financing Strategy Study prepared for MIH; and (ii) prepare at least one small hydropower project for concessioning to an independent power producer (IPP_.

Financing of system expansion has traditionally been provided by multilateral and bilateral agencies through soft loans and grants. However, given the ambitious electrification objectives of GoL and with annual growth rates coming off a higher base, capital requirements are increasing while concessionary financing is limited. Instead, non-traditional lenders from nearby countries are playing an increasing role either through direct private financing or by means of export/mixed credits for projects where goods and construction services are sourced through their respective countries.

This sub-component will support the development and implementation of a trial sector financing strategy following recommendations of the Power Sector Financing Strategy Study. Technical assistance will support preparation of guidelines and procedures for concessioning of at least one

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small hydropower IPP, possibly through competitive solicitation and on the basis of private or combined private-public financing. Specific outcomes will include:

(a) Translation of existing policy principles and guidelines into standard contracts (Power Purchase Agreement, concession terms, performance requirements/ Grid code and financial data);

(b) Preparation of a resource procurement package that will facilitate competitive solicitation and award small hydropower IPP concessions;

(c) TA to MIH and EdL in the process of IPP selection and associated contract management. B.6 Organizational Strengthening of Department of Electricity of MIH

This technical assistance supports the MIH’s PMU in implementation of the MIH component under the SPRE II. A separate PMU will be created within MIH to undertake (i) the procurement plan laid out in Annex 8, (ii) management of associated contracts, and (iii) financial management associated with the IDA and GEF grants.

This technical assistance also supports upgrading of staff capabilities and development of new areas of expertise within MIH’s Department of Electricity (DOE). This would enable DOE to undertake its expanded role in governing the power sector, including sector reform and regulation, RE planning (including continuous updating of the RE Master Plan and database), and coordination of on- and off- grid electrification programs.

A preparation consultant mobilized using the GEF PDF B grant is conducting an organizational appraisal of DOE and will recommend an action plan for organizational development. Consultants will be hired under this technical assistance to assist the DOE in implementation of the recommended action plan, and a TOR for the consultants will be prepared by the GEF PDF B supported preparation consultant. The action plan will include extensive training programs for upgrading capacity of the PMU in implementation of the MIH component under the SPRE II, and the DOE in planning and regulation of the power sector.

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Annex 5: Project Costs

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

A. Cost Estimation of Phase 1

Cost Estimation by Category

  Local Foreign Total   Local Foreign TotalCost by Category $ Millions Kip Billions

1.Goods 6.22 16.34 22.56 69.71 183.07 252.782.Works 4.41 - 4.41 49.42 0.00 49.423.Services 0.45 5.19 5.64 5.06 58.13 63.204. Training 0.10 0.10 0.00 1.12 1.125. Incremental Operating Cost 0.08 0.08 0.84 0.84

Total Base Cost 11.16 21.63 32.79 125.04 242.32 367.36Physical Contingencies 0.22 0.37 0.59 2.48 4.13 6.61Price Contingencies 1.11 1.68 2.79 12.42 18.84 31.26

Total Cost 12.49 23.68 36.16 139.94 265.29 405.23Total Financing Required 12.49 23.68 36.16 139.94 265.29 405.23

Note: 1$ = 11,205 Kip

Cost Estimation by Component

  Local Foreign Total   Local Foreign TotalCost by Component $ Millions Kip Billions

1.EdL Component 10.48 16.46 26.94 117.42 184.49 301.902.MIH Component 0.68 5.16 5.84 7.62 57.83 65.45

Total Base Cost 11.16 21.63 32.79 125.04 242.32 367.36Physical Contingencies 0.22 0.37 0.59 2.48 4.13 6.61Price Contingencies 1.11 1.68 2.79 12.42 18.84 31.26

Total Cost 12.49 23.68 36.16 139.94 265.29 405.23Total Financing Required 12.49 23.68 36.16 139.94 265.29 405.23

Note: 1$ = 11,205 Kip

The total cost of Phase 1 is estimated Kip405.23 billion or $36.16 million equivalent ($30.04 million for the EdL component and $6.13 million for the MIH component). Costs were based on unit prices of SPRE. For physical investment, physical contingencies are at 2% (as designs have been practically firmed up) and price contingencies at 10%. Services would be covered with lump-sum contacts.

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B. Financing Arrangement by Component and Source for Phase 1

ComponentSource

IDA Co-fin. GEF EDL MIH Cons.Sub-total

A EdL ComponentA.1 Grid extension 10.56 5.00 6.51 4.23 26.30A.2 Loss Reduction 1.00 1.00 2.00A.3 IT System 0.80 0.80A.4 Tariff Reform 0.05 0.05A.5 Safeguards Capacity Building 0.14 0.14A.6 DSM 0.75 0.75

Sub-total 12.55 5.00 0.75 7.51   4.23 30.04

B MIH ComponentB.1 Off-grid Investment 1.69 0.55 0.13 2.37B.2 Institutional Strengthening 1.10 1.10B.3 Alternative RE Delivery Models 0.40 0.30 0.70B.4 RE Master Plan and Database 0.14 0.85 0.99B.5 Sector Financing Strategy 0.21 0.21B.6 Organization Strengthening of DOE/MIH 0.75 0.75

Sub-total 2.45 3.00 0.00 0.55 0.13 6.13  Total 15.00 5.00 3.75 7.51 0.55 4.36 36.16  Percentage 41.5% 13.8% 10.4% 20.8% 1.5% 12.1% 100%

To finance the SPRE II project, IDA is seeking partnership with a co-financer for $5 million for about one-third of the 67 EdL grid extension subprojects. The rural household electrification subprojects are designed in a modular manner. The project cost and the financing plan includes $5 million for these subprojects through co-financing from any one of the sources (a) Nordic Development Fund; (b) NORAD; and (c) SIDA. All these donors have expressed their willingness to co-finance but formal commitment has not yet been received. Nordic Development Fund, who has co-financed EdL’s projects with ADB in the past, has expressed serious interest in co-financing these subprojects planned for the second to the third year of the project implementation but will be able to approve the financing only by November 2005 when replenishment of the Fund is approved. NORAD has also expressed interest and is currently studying documents. SIDA is very interested in financing medium and low voltage rural electrification in the context of Great Mekong Sub-region (GMS) power trade. In the event that co-financing does not materialize, these subprojects will be proposed by EdL for (i) financing under the proposed GMS Power Trade Project, for which these subprojects could be easily justified; or (ii) postponed from Phase 1 to Phase 2 for future financing. Though this will reduce the number of rural households who could be provided access during Phase 1, it will not affect the overall economic and financial viability materially and the achievement of development objectives of the project.

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C. EdL Component - Detailed Cost estimation of Phase 1

  Local Foreign Total   Local Foreign TotalCost by Category $ Millions Kip Billions

EdL Component Goods 6.07 14.56 20.62 67.99 163.10 231.10 Works 4.41 - 4.41 49.42 0.00 49.42 Services - 1.86 1.86 0.00 20.83 20.83 Training 0.05 0.05 0.00 0.56 0.56

Total Base Cost 10.48 16.46 26.94 117.42 184.49 301.90Physical Contingencies (2%) 0.21 0.31 0.52 2.35 3.44 5.79Price Contingencies (10%) 1.05 1.53 2.58 11.74 17.14 28.89

Total Cost 11.74 18.30 30.04 131.51 205.07 336.58Total Financing Required 11.74 18.30 30.04 131.51 205.07 336.58

Note: 1$ = 11,205 Kip

D. MIH Component - Detailed Cost Estimation of Phase 1

  Local Foreign Total   Local Foreign TotalCost by Category $ Millions Kip Billions

MIH Component Goods 0.15 1.78 1.93 1.71 19.97 21.68 Works 0.45 3.33 3.78 5.06 37.31 42.37 Services 0.05 0.05 0.56 0.56 Training 0.075 0.075 0.84 0.84 Incremental Operating Cost 0.68 5.16 5.77 7.62 57.83 64.61

Total Base Cost 0.01 0.06 0.07 0.14 0.69 0.82Physical Contingency (12%) /a 0.06 0.15 0.21 0.68 1.70 2.37Price Contingency (0%) /b 0.75 5.37 6.05 8.43 60.22 67.81

Total Cost 0.75 5.37 6.13 8.43 60.22 68.65Total Financing Required 0.15 1.78 1.93 1.71 19.97 21.68

Note: 1$ = 11,205 Kip

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E. Indicative financing plan for Phase 2

ComponentSource

IDA Co-fin. GEF EDL MIH Cons.Sub-total

A EdL ComponentA.1 Grid extension 12.00 5.00 8.00 4.00 29.00A.2 Loss Reduction 0.50 1.50 2.00A.3 IT System 0.10 0.10A.4 Tariff Reform  A.5 Safeguards Capacity Building 0.05 0.05A.6 DSM 0.05 0.15 0.20

Sub-total 12.70 5.00 0.15 9.50   4.00 31.35

B MIH ComponentB.1 Off-grid Investment 2.20 0.80 0.18 3.18B.2 Institutional Strengthening 0.90 0.90B.3 Alternative RE Delivery Models 0.05 0.05B.4 RE Master Plan and Database 0.10 0.10B.5 Sector Financing Strategy 0.10 0.10B.6 Organization Strengthening of DOE/MIH 0.05 0.05

Sub-total 2.30 1.10 0.00 0.80 0.18 4.38  Total 15.00 5.00 1.25 9.50 0.80 4.18 35.73  Percentage 42.0% 14.0% 3.5% 26.6% 2.2% 11.7% 100%

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Annex 6: Implementation arrangements

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

The proposed IDA Grant will follow the APL approach. Rather than the SPRE I approach of a single credit to be implemented over six years, IDA funds for SPRE II will be provided in two phases each covering a three year implementation period. Under the procedures for allocating IDA funds to individual countries, this should enable sufficient funds be channeled to finance entire proposals of MIH and EdL, albeit in two phases. The approach will also avoid the usual difficulty of getting agreement on specific sector reform measures to be undertaken under the project prior to Grant negotiations. While the overall reform strategy is agreed at negotiations, specific measures are designed in the first Phase and the Government has ample time to consider, discuss and finally agree on these measures. There are, however, “triggers” required to be achieved before the second Phase will be released. For the physical investment components these are physical achievements, but for the sector reform component, they represent evidence of Government commitment to sector reform. A preliminary decision framework, subject to change as preparation study results come available during Grant processing, is shown in Annex 3.

A. Implementing agencies. The Project will be implemented by EdL and MIH jointly.

A.1 The EdL component consists of both physical investment activities and institutional strengthening activities as described in Annex 4. EdL’s organization for the grid extension is shown in Figure. It involves a project office in headquarters and construction team at each of the five branch offices (BO). The project office will be responsible for overall management and control of the project execution and will maintain close coordination with the IDA, while the BOs will be responsible for implementation of individual physical sub-projects in the seven southern provinces.

(1) Project Office in Headquarters

Project Office and Project Manager for SPRE II. A Project Office has been set up in EdL’s Headquarters and a project manager has been appointed.

Deputy Project Manager . Two deputy project managers are assigned to assist the project manager. The deputy project manager shall be responsible for planning, design, procurement, and supervision of construction works to be carried out by the BOs. One deputy project manager will take charge of the construction works in Bolikhamxay, Khammouane and Savannakhet provinces and the other for Salavan, Xekong, Champasak and Attapeu provinces. (EdL has one BO in Salavan to manage both Salavan and Xekong provinces and also one BO in Champasak for Champasak and Attapeu provinces).

Construction and Installation Team - 1 and 2 . Under each deputy project manager, the construction and installation team is deployed for control and management of construction and installation works. Each team has one team leader and deputy team leader, who are well experienced distribution engineers, and are in charge of planning, design and any modifications where required, procurement of materials, supervision and monitoring of construction works, etc. for the respective provinces.

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Assistant Engineers . Five assistant engineers shall be assigned under the construction and installation teams, one engineer for each construction team of BO, for coordination and communication between the BO and the project office in headquarter to collect all necessary information from the BO and forward proper instructions to the BO.

Administration Officers . The administration officer shall be responsible for all the administrative work regarding the execution of the Project. Two administration officers are to be assigned during the construction period.

Accounting Officer . The accounting officer shall be responsible for all the accounting work regarding the project execution.

(2) Construction Team in each BO

Each BO will organize its own construction team for construction of 22kV, 12.7kV and low voltage distribution system under the SPRE II project. To manage this construction team, each BO shall have the following personnel:

Team Leader . The team leader shall be responsible for management and construction of distribution system in the respective province(s). The team leader is also responsible for coordination with the project office in the headquarters in reporting the progress of works, issues, procurement requirement, etc.

Distribution Engineers . Two distribution engineers will be assigned for each construction team, who are responsible for planning, design and construction supervision of 22kV and low voltage distribution system in technical aspect. During the execution of the project, the planned distribution system may require modifications due to the change of site conditions after the detailed design has been confirmed. The distribution engineers will be responsible for modification work of the original design of the system in consultation with the project office in the headquarters and the consultant.

Social/environmental Officer . The social/environmental officer shall have the responsibility to minimize the social and environmental impact of the project during the construction and after completion of the Project. The officer will monitor the preparation and implementation of action plans (RAPs, EMPs) to prevent or minimize the social and environmental impacts according to agreed policy frameworks for safeguards.

Warehouse Officer . The warehouse officer will be responsible for handling, control and management of materials and equipment delivered by contractors. The officer shall maintain all the records of deliveries by the contractors and quantities of materials and equipment handed over to the construction teams. As the management and control of materials and equipment in warehouses is one of the important tasks in the execution of the Project, two warehouse officers shall be stationed at each warehouse to maintain the proper records of receiving and delivery of materials.

Accounting Officer . The accounting officer will be responsible for accounting of each construction team.

Construction team. Each BO has its own construction team for construction of 22kV and low voltage distribution system. Each construction team is consisting of 30 to 50 members, i.e. supervisors, technician, linesmen, operators, drivers, skilled and unskilled laborers, etc.

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(3) Consultant Team

A consultant team will be hired to assist EdL’s project office in implementation of the grid extension component. The consultant team will comprise the following personnel: (i) Team Leader; (ii) distribution design specialist; (iii) procurement specialist; (iv) safeguard specialist; and (v) Resident Engineer

The Team Leader will be responsible for all the consulting services comprising of designing, assisting, supervising, and monitoring to ensure smooth execution of the Project.

The distribution design specialist is responsible for planning, design, preparation of technical specifications, supervising the site erection works, etc.

Procurement specialist is responsible for preparation of bid documents for supply materials and equipment, monitoring of deliveries by the contractor and storing of materials at site depots.

The safeguard specialist will be responsible for assisting the EdL’s social/environmental officers in preparing and monitoring the action plans for social and environmental impacts of the project throughout the implementation period.

One resident engineer (a national consultant) will be assigned, who will be stationed in the project office in headquarters in Vientiane throughout the implementation period to ensure the consultant’s continuous services for monitoring the progress of the Project, and to maintain close coordination between EdL’s project manager and counterpart personnel and the consultant’s international engineers/specialists even no international consultant is available at site.

(4) DSM Team

In order to carry out the DSM programs and related activities, EdL will establish a DSM Cell. The preferred location of the DSM Cell is in the Distribution Division of EdL, as the Division’s permanent unit. The 13 BOs throughout the country will provide maximum flexibility in the development and implementation of DSM plans and pilot projects, while technical and administrative resources are centrally located in Vientiane. Moreover, there are possible synergies between proposed DSM program options and planned activities of the Distribution Division. For example, the Technical Service Department will introduce a nationwide consumer awareness campaign on non-technical loss reduction which will complement well with the proposed consumer awareness program option.

The DSM Cell will operate under the direction and supervision of a DSM Steering Committee that will have overall responsibility for establishing DSM policies and programs, supervising the activities funded by donor agencies, and providing overall guidance to the DSM Cell Manager and key staff. The members of the Steering Committee should include representatives of senior management of MIH, EdL, STEA, LNCE, and SPE.

The recommended organization of the DSM Cell is shown in Figure 2. The DSM Cell will consist of a Manager supported by two Project Engineers (Industrial/Commercial and Residential/Agricultural), a Marketing and Promotion Specialist, Technicians, and Administrative Support. It is recommended that the three core positions of the DSM Cell - i.e. the manager and two project engineers - should be recruited first. Additional support staff can be sought depending

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upon requirements from priority program options and project schedules, allowing the DSM Cell to adjust its implementation programs in accordance with the needs of EdL.

A.2 MIH will carry out activities as described in Annex 4, comprising (i) the investment component, although the day-to-day management of the village off-grid program is outsourced to a Management Contractor; (ii) the sector reform component, including institutional and organizational strengthening, alternative RE technologies and delivery models, RE master planning, and sector financing; and (iii) FM of the DSM component.

Due to limited procurement and FM capacities of the MIH PMU and institutional constraints of being a government office, the implementation of the off-grid investment activities and associated social and environment management will be handed over to a third party, a private company or joint-venture through a management contract, effective August 2005 as targeted. A significant portion of the PDF B preparation grant mobilized for the GEF-financed off-grid component has being devoted to developing and implementing a strategy for outsourcing the implementation functions currently performed by the OPS (these include centralized procurement of major equipment categories, establishment and capacity building of ESCOs, provision of marketing materials and village preparation procedures, and provision of technical support). After the transition, MIH will oversee the off-grid program while continuing to implement all Technical assistance activities associated with MIH component, including procurement, FM, and other technical assistance activities.

The emphasis on outsourcing off-grid implementation directly resulted from evaluation of the predecessor project. The IDA undertook a formal interim evaluation of the SPRE GEF MSP off-grid project as part of its responsibilities as the Implementing Agency. The interim evaluation was conducted in accordance with GEF guidelines by an independent consultant. Although the consultant rated the SPRE GEF MSP as “Satisfactory” with regard to both Outcome/Achievement of Objectives and Sustainability, the consultant noted that program experience thus far has shown that the constraints associated with the OPS’s position as a government office leads to delays in its operations and difficulties in performing its work. The Consultant recommended that the management of an expanded off-grid program undertaken by the SPRE II program be transitioned to a private or joint venture company, allowing for “more efficient operations and increased flexibility in design, a greater focus and transparency in its work and stronger incentives through the linking of payments to the company to its performance. The company would need to have the authority to take procurement and other decisions, where delays currently often occur, and would be accountable to MIH and the IDA.”

MIH oversight of the off-grid investment and implementation of the sector reform activities will be conducted by the PMU located within the DOE of MIH. The PMU will provide overall administration, especially as regards procurement and FM, of the GEF and IDA Special Accounts to be established under SPRE II. The PMU will be staffed by a Project Manager already appointed by MIH, an Accounting Officer, who has also been identified and appraised and approved by the Bank, and a Procurement Officer, who will also likely be a PS Consultant to be appraised and approved by the Bank. The Project Manager will be an MIH employee who will have overall administrative authority over the MIH component operations subject to the Director of the DOE within MIH. The A ccounting Officer will be responsible for maintaining the accounting and books of the PMU, including all transactions related to the SAs and subsidiary Operating Accounts. The Project Manager and the Accounting Officer will be charged with overseeing the operations of the Management Contractor, especially reviewing reports and processing payments and repayment flows from program participants. The Procurement Officer is responsible for preparation of bid documents for centralized procurement and supply of materials

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and equipment related to the off-Grid program, especially ICB procurements. The Procurement Officer will also be responsible for implementing the procurement plan associated with the MIH components, including identifying qualified consultants to undertake the several assignments funded by GEF-financed TA.

An indicative organization chart for the MIH component is shown in Figure 3.

B. Implementation Schedule. The Project will be implemented in two phases over a six-year period with two tranches of IDA funds allocations. Phase 1 will be implemented from October 2005 to September 2008, and Phase 2 from October 2008 to September 2011. Trigger conditions are designed for initiation of Phase 2 and will be evaluated by the end of Phase 1. Project preparation work for Phase 2 will be completed by the end of Phase 1. (See Annex 3 for the decision framework for the proposed APL.) The proposed implementation schedule for execution of the SPRE II project is shown in Figure 4 (to be added at negotiation).

B.1 EdL

1) Preparatory Stage. Bidding for supply of materials and equipment will be executed from August, 2005. Supply of materials and equipment is divided into 20 lots. Bids for the first 14 lots for grid extension will be invited during two months from August to September. Evaluation on the bids for all lots will be carried out by the consultant and the EdL’s Project Office for one month after closing the bids for recommendation of the highest evaluated bidders to be awarded.

The evaluation reports for all lots shall be approved by the Committee of EdL and the IDA during the following two months. After obtaining their approvals, the contract negotiation with the selected bidders will be carried out for awarding the Contracts. All these work will be completed before February 2006 as indicated by the Procurement Plan and all the contracts will be ready for signing.

2) Implementation Stage: After the effectiveness of IDA Grant for SPREII Phase 1 (expected November 1, 2005), all contracts associated to secured financing will be signed by March 2006. All the contractors should be able to commence their works immediately after the signing.

Delivery of the materials and equipment by the contractors will be made in stage-wise as shown in Figure 4, which shows time of deliveries with triangle marks. Concrete poles will either be manufactured by EdL’s own factories or supplied by other local contractors. EdL’s factories will commence the manufacturing of concrete poles after receiving the first delivery of cement and reinforcing steel in December 2005 and the delivery to the site will be started in February 2006. The first delivery of concrete poles by the contractor is expected in March 2006. Thus, the erection of concrete poles will be possible to start in March 2006 in every province.

Construction period of all the works is estimated as 24 months after commencement of concrete pole erection in March 2006.

The completion of construction works is expected in March 2008.

3) Preparation for Phase 2: IDA approval of SPRE II Phase 2 is tentatively programmed for October 2008. Project preparation work for Phase-2 shall be completed by this time.

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Selection of subprojects for Phase 2 will be initially made by each BO, starting from April 2007. After collecting all the data and information of selected subprojects by the BOs, the EdL’s head office will conduct the technical examination on the selected subprojects with assistance of the consultant for screening the subprojects for implementation.

Provided that the Phase 2 project is firmed up, it is intended that pre-procurement will occur such that contracts can be awarded immediately after IDA approval, such that the installation program can continue with minimum interruptions.

The manufacturing and site erection works will be commenced in October 2008 for 3 years construction period.

MIH

Preparatory Stage: Pre-procurement is underway, especially for the critical management out-sourcing of the off-grid investment program. Consultant proposals have been received and are currently under evaluation by MIH.

1) Implementation Stage: Implementation of all aspects of the MIH component including off-grid investment and sector reform will commence upon Grant effectiveness, expected in October, 2005.

2) Preparation for Phase 2: Detailed preparation for Phase 2 will commence in April 2007, when sufficient results from the pilot projects and the RE master planning process are available. Those projects involving mini- or micro-hydro will be identified early enough to allow for environmental and resettlement safeguards assessment to be undertaken in a timely manner.

Monitoring and Evaluation. The key indicators in Annex 3 will be monitored and evaluated by EdL and MIH as the implementing agencies. These two agencies will be responsible for maintenance and updating of socio-economic data collected under the PHRD-financed impact and benefit survey of electrification to evaluate progress made towards the CAS related and national goals. Statistics collected from the Project by EdL and MIH will provide the basis for the annual progress report, on which monitoring will be based during the project implementation. Environment and resettlement monitoring reports by specialists will supplement the progress reports.

During the Project implementation period, the task team of IDA will supervise the Project implementation in full due diligence. After Project completion, the Recipient will prepare a completion report to evaluate achievement of Project objectives, and Project outputs and impacts. Within 6 months after Project completion, the task team of IDA will prepare an Implementation Completion Report to assess the Project in full aspects according to the IDA Policy.

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EdL Project Management Unit Organization Chart

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Figure 2: Placement of DSM Cell within EdL

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Figure 3: Implementation Arrangements for the MIH Component of SPRE II Phase 1

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Figure 4. Implementation Schedule for Execution of SPRE II

(detailed table to be added during negotiation)

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Annex 7: Financial Management and Disbursement Arrangements

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

Summary of the FM Assessment

The Country Financial Accountability Assessment (CFAA) of 2002 assessed the overall fiduciary risk in Lao PDR as high, despite elaborate built-in controls within the government FM system. The key findings of the assessment indicated that there is insufficient transparency related to public finances and the general attitude towards fiscal discipline is weak; the general permissive environment and lack of incentives for complying with rules and regulations is compounded by an inadequate awareness of modern practices of internal controls in the public sector; the budget process is not transparent and public access to government financial information is limited; while an elaborate control system is in place, involving extensive pre-approval and checking processes, it is not effective or efficient; the government has introduced a decentralization initiative without putting in place a sufficiently robust institution framework that clearly defines the new responsibilities at lower levels and technical capacity of staff at these levels needs to be strengthened; oversight functions and the National Auditor Office’s independence are weak; and the accounting and auditing profession and institutions are undeveloped. To address these challenges, the Government has developed a public FM strengthening program and is implementing several recommendations of the PER and CFAA. The proposed FM Capacity Building Project as well as government initiatives supported by ADB are expected to make the fiduciary risk more acceptable.

At the project level, the FM system for external funded projects remains weak and needs substantial improvement. A number of key issues and weaknesses regarding the Bank funded projects was identified: (a) inconsistent and inadequate FM standards, procedures and software in each PIU; (b) delay in project implementation resulting from management of SAs by MoF; (c) delayed audit and lack of consistent external audit standards and procedures; (d) PIU accounting departments that have been poorly staffed and equipped at start-up of the project; (e) poor internal controls and absence of internal audit function in line agencies; and (f) lack of FM capacity at provincial and district levels.

An assessment of the project FM arrangements of the two agencies: (a) EdL, a revenue generating utility and a separate legal entity; and (b) MIH, whose accounting personnel, who involved in the ongoing SPRE project, was appointed to be involved in the SPRE II project, will maintain the SPRE II books and accounts; indicates that with the implementation of the FM Action Plan to address weaknesses, the FM arrangements are acceptable for the project. The full FM assessment is in the Bank’s project files.

The associated risks in the proposed Project, which is rated as moderate, are mitigated by the following measures: (1) EdL and MIH will ensure that staff hired or assigned for this Project have proper qualifications in procurement, program management and FM and that proper and regular training is provided - experienced and highly motivated personnel that have worked on the previous Bank-funded projects are to be appointed to be involved in implementing the Project; (2) all payments must be duly authorized; (3) an FM Manual will be developed for MIH to make sure that proper guidance will be provided in case of staff turnover; (4) quarterly FM monitoring reports will be presented to IDA; (5) there will be segregation of duties among the project coordination staff, i.e. the functions of implementing and overseeing will not reside with the same staff; and (6) an external independent auditor acceptable to IDA will be appointed to audit the Corporate financial statements and Project financial statements.

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Audit Arrangements

An external Auditor, satisfactory to IDA, will be required to audit: (i) EdL’s annual Corporate Financial Statements; and (ii) the consolidated Project Financial Statements of all components implemented by EdL and MIH, in accordance with International Standards on Auditing, under term of reference satisfactory to IDA. The auditor will be required: (i) to express an independent opinion on the financial statements for the year(s) then ended and from inception of the project to the present, in accordance with agreed accounting standards; and (ii) to assess the extent of compliance with the provisions of the underlying funding agreements. A separate Management Letter will also be submitted which will: report on material weaknesses in accounting and internal control; the degree of compliance of financial covenants of the funding agreements; and any matters that have come to the attention of the auditors which might have a significant impact on the implementation of the Project. The audit will be financed from the Grant. The audit reports will be submitted to IDA within six months after the end of each fiscal year.

EdL has engaged PriceWaterhouseCoopers (PWC) as its external auditor since year 1997 to conduct the audit of EdL annual financial statements and the project’s financial statements of the ongoing SPRE project. The audit reports were acceptable to IDA for purposes of EdL's full compliance with the audit requirements of the funding agreements.

The table below summarizes the audit reporting requirements for the Project.

Implementing Agency Required Audit ReportEdL (1) EdL Corporate Financial Statements

(2) Consolidated Project Financial Statements of all componentsMIH Audited under Consolidated Project Financial Statements of all

components

Disbursement Arrangements

The proceeds of the Grant would be disbursed using the traditional method: (a) from the SAs with reimbursements made based on full documentation or against SOEs; and (b) direct payments from the Grant accounts. Three SAs would be established for EdL and MIH as indicated in the table below. In addition, MIH will help process the disbursements for EdL’s activities funded by GEF under MIH GEF-SA.

Implementing Agency Disbursement ArrangementsEdL IDA SA;

For GEF funded activities, EdL will disburse via MIH GEF-SAMIH IDA SA ; GEF SA

Allocation of Grants Proceeds (Table C)

The IDA Grant of US$15.0 million and the GEF Grant of US$3.75 million will be disbursed over a 3 year period. The Project is expected to be completed by September 2008, and will close on March 31, 2009. Disbursement of the proceeds of the Grants would be made against expenditure categories as shown in Table C.

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Table C: Allocation of Grant Proceeds

Expenditure Category IDA Grant GEF Grant Financing Percentage1. Goods 100%

Under EdL 10.160 0.060  Under MIH 1.770 0.020  

2. Consultants’ Services 100%Under EdL 1.155 0.690  Under MIH 0.465 2.905  

3. IOC 0.075  3. Unallocated 1.450  

Total 15.000 3.750  

Use of Statement of Expenditures (SOEs)

Expenditures for: (a) goods; (b) consulting firm; and (c) individual consultant; under contracts costing less than the amounts set out in the table below will be paid from the SAs and detailed in SOE supporting withdrawal applications for replenishment of SA. Withdrawal applications for expenditure exceeding the SOE thresholds set out below would be made in accordance with respective procurement guidelines and provisions in the Grant Agreements with submission of full documentation and signed contracts.

1. Expenditures Category

Contracts less than US$ EquivalentIDA Credit GEF Grant

Goods 200,000 200,000Consulting firms 100,000 100,000Individual consultants 50,000 50,000Incremental operational cost All through SOE All through SOE

Both EdL and MIH would retain documentation supporting SOE disbursements during the life of the Project and for one year after the receipt of the audit report for the year in which the last disbursement was made to IDA. These documents would be made available for review by the auditor and IDA supervision missions. Should the auditors or IDA supervision missions find that any disbursements that are not justified by supporting documentation, or are ineligible, IDA may withhold further deposits to the SA until the Recipient will: (a) either refund the amount involved; or (b) submit evidence of other eligible expenditures that offset the ineligible amounts.

Special Accounts

To facilitate disbursements from the Grants, EdL shall maintain a separate US dollar SA at the National Bank of Lao, and MIH shall maintain two separate US dollar SAs at the NBC (one for IDA-SA, another one for GEF-SA), on terms and conditions satisfactory to IDA including appropriate protection against set off, seizure and attachments.

The EdL IDA-SA, which will cover the IDA share of eligible expenditures in all disbursement categories, will have an authorized allocation of US$1.0 million with an initial deposit of US$0.5 million. When the amount withdrawn from the Grant account totals US$2 million equivalent, the initial allocation would be increased to the authorized allocation.

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The MIH IDA-SA and GEF-SA will have an authorized allocation of US$ 200,000 and US$ 300,000 respectively. The SAs will be replenished regularly, preferably monthly (but not less than quarterly) or when the amounts withdrawn equal 20% of the initial deposit, whichever comes first. All replenishment applications will be accompanied by reconciled bank statements from the depository bank showing all transactions in the SAs. The SAs will be audited annually by independent auditors acceptable to IDA.

FM and Reporting Arrangements

Funds Flow. IDA Grant will be provided to the Government. The Government will on-lend the Grant proceeds to EdL under a Subsidiary Financing Agreement. The on-lending terms will consist of 80% grant and 20% loan comparable to IBRD terms and conditions, in line with other recent RE projects in the region and in recognition of the continuing need for capital subsidies for RE operations.

IDA funds will be channeled either through the SAs to the EdL and MIH or through direct payment for project expenditures. EdL counterpart funds will be channeled through normal EdL payment procedures. Government (MIH) counterpart funds are expected to be mobilized from the re-flow payments associated with ongoing RE activities. These payments currently flow into a locked account, but under SPRE II would gradually be converted to the REF, with the ability to co-finance IDA investment.

With extensive experience in carrying out several projects funded by the WB and ADB, EdL will maintain the EdL IDA-SA by itself. The withdrawals from the SA will require the signatures from two persons within EdL - General Manager and Accounting Manager. However, the withdrawal applications will be approved by MOF prior to forwarding to IDA and will require two signatures – one from EdL and one from MoF.

With limited experience in FM and disbursement arrangements, the MIH and MoF will jointly maintain the MIH IDA-SA and GEF-SA. The Project Manager, with the assistance of the Project Accountant, will be responsible for administration of the SAs and all Grant disbursements related to transactions of the Project. Two signatures will be required on any withdrawal from the SAs and on withdrawal applications – one from MIH and one from MoF.

Accounting Organization and Staffing. The FM arrangements would be:

EdL – the appointed Project Accountant will be responsible for project accounting for EdL components, including accounting functions and reporting activities. The currently installed AFMS have been modified to capture the transactions by both project activities, disbursement categories and sources of funds for producing of FMRs. The Project Accountant will also: (i) ensure that the accounting transactions are consolidated with the corporate accounting transactions to produce the consolidated corporate financial statements at year end; and (ii) prepare consolidated Project Financial Statements at year end for independent audit.

MIH – the appointed Project Accountant will be responsible for project accounting for MIH components. Extensive training will be provided to the Project Accountant in: (i) preparation of SOEs and WAs; (ii) maintaining of accounting books; and (iii) preparation of FMRs. MIH has tracked and monitored financial transactions of the ongoing SPRE project, by using an in-house developed simple Access software based accounting

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program, which with some modifications, would well serve the requirements of SPRE II project. The mission reviewed the program modified by the Project Accountant and found it acceptable. The Project Accountant was requested to develop the FM Manual to guide for operating the in-house developed accounting program and for guidance to MIH staff in case of staff turnover in the future.

Internal Audit. EdL’s Internal Audit Department currently has four internal audit staff, mostly with strong operation background. The mission noted that internal audit staff has no involvement in newly implemented computerized BAS and AFMS. The early stage of involvement by internal auditor in system development, which will review the adequacy of the built-in internal controls, should help reduce the risk of system modification at the later implementation stage. The technical assistance under SPRE II project will be provided for on-the-job training with EGAT and will be supported by training courses related to internal controls and internal audit functions in an IT environment.

Monitoring and Reporting. EdL and MIH both will provide IDA with FMRs in accordance with the Bank Guidelines. The FMRs will include: (i) Management Assessment of Project Progress; (ii) Project Balance Sheet; (iii) Statement of Sources and Uses of Funds by Disbursement Categories; (iv) Statement of Uses of Funds by Project Activities; (v) Output Monitoring Report; and (vi) Procurement Status Report. The reports will link expenditures with physical progress. The FMR formats have been agreed upon with EdL and MIH during Project negotiation. The FMRs would be submitted to IDA on a quarterly basis within 45 days of the end of each quarter starting the quarter following the Project’s first disbursement. Additional output monitoring and performance indicators would be developed to suit project needs during implementation.

Financial Management Action Plan. The implementing agencies will carry out a time-bound action plan to strengthen the FM system, as per table below.

Actions Responsibility Completionby Date

Design and agree on Project FMRs. EdL/MIH Completed during Negotiation

Modify the computerized accounting systems (newly installed AFMS at EdL and the in-house developed simple accounting program at MIH) to be capable of producing FMRs and annual financial statements.

EdL/MIH Completed during Negotiation

Preparation and adoption of the final FM Manual for MIH MIH Completed during Negotiation

Training to be provided to the Project Accountants for the Bank’s policies and procedure on FM and disbursement arrangements.

IDA During Project Launch Workshop

Appointment of an independent auditor to audit the Project Financial Statements and EdL Corporate Financial Statements.

EdL September 30, 2006

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Annex 8: Procurement Arrangements

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

A. General

1. Procurement for the proposed project would be carried out in accordance with the IDA’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreements. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the IDA in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works: The installation & erection works will be performed by EdL’s own construction force (or subcontracted by EdL to qualified local contractors). No works are expected to be financed by the Credit.

3. Procurement of Goods: Goods procured under this project would include: (i) power distribution equipment and materials such as overhead conductors, transformers, meters, poles and associated fittings & accessories; (ii) field work vehicles and construction equipment, special installation tools; (iii) IT hardware and software, office equipment; (iv) loss-reduction-needed equipment such as meters, calibration & testing equipment, monitoring instrument, substation spot metering equipment; (v) solar home system units including installations; and (vi) VH and GS including installations.

4. All packages would be procured through ICB procedures with the following exceptions: (i) contracts with estimated costs not exceeding $100,000 per contract may be procured through NCB procedures. However, concrete poles and cross arms will be procured through NCB procedures irrespective of their value, since a number of local suppliers are available and these items are unlikely to attract any foreign suppliers; and (ii) small contracts (less than $50,000) for tools, loss-reduction equipment and office equipment, etc. may be procured following the Shopping procedures. All the ICB procurement will be done using the IDA’s latest SBD for Procurement of Goods.

5. Procurement of non-consulting services: Not expected.

6. Selection of Consultants: For EdL, consulting services would be required for: (i) support to Demand Side Management (DSM) program inception, including capacity building for a DSM Cell within EdL, developing a comprehensive energy end-use database for DSM planning, screening and design of DSM Programs, and undertaking pilot projects for high-priority target markets; (ii) technical assistance in implementation of loss reduction measures; (iii) IT system, including FM capacity building; (iv) tariff and subsidy design; and (v) institutional upgrading for EdL.

7. For MIH, consultant services needed would include for: (i) engaging a management consultant to undertake administration of the village off-grid program; (ii) providing advice on off-grid technologies other than SHS to PESCOs; (iii) consulting services in

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support of establishing an RE Fund and Secretariat; (iv) retaining individual FM and procurement consultants to support MIH’s PMU; (v) establishment of a QA Surveyor function to inspect and evaluate off-grid program operations at all levels; (vi) engaging a management consultant to plan and implement an Alternative Technology and Delivery Arrangement Pilot Program; (vii) engaging additional consultants or organizations to undertake a private sector distribution system pilot project and a pico-hydro safety improvement pilot project; (viii) engaging a management consultant to undertake the Lao PDR RE Master Plan; (ix) engaging additional consultants or individuals to undertake assessments of the existing micro-hydro schemes in Lao PDR and the potential micro/mini hydro resources in Southern and Central Lao; (x) engaging a consultant firm or individual to perform an assessment of the biomass energy potential available for RE; (xi) consulting services in support of a pilot of small hydro financing strategies in Lao PDR; (xii) engaging a Power Sector Policy and Regulation Advisor to assist the Director of the Department of Electricity in MIH with an organizational strengthening program; and (xiii) consulting services to develop a regulatory framework in support of alternative RE delivery mechanisms

8. The above services will be provided by consulting firms or individuals. No short lists of consultants (firms) are expected to compose entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. All consultants will be selected through QCBS, QBS, or CQ procedures depending on the specific situation; single-source selection (SSS) procedures may be followed if justified in line with the Consultant Guidelines (at this stage, SSS is expected to follow to engage the 17 PESCOs – one in each province – to provide planning/installation/support services for the off-grid investment, in view of their unique experience and position; the total budget is about $0.452 million, thus each contract would be very small). Individuals will be selected competitively or through single-sourcing if justified.

9. The project implementation consultant needs to be engaged in advance of IDA grant approval and signing. As such, it is agreed retroactive financing shall be applied for related eligible expenditures incurred after July 1, 2005 and up to an amount of $250,000 equivalent.

10. Operational Costs: No operational costs will be financed by the IDA credit.

11. Others: Significant support from trust funds including ASTAE has been mobilized to support project preparation. Efforts will be made during project implementation to obtain additional ASTAE or other suitable trust funds to support some of the technical assistance activities, such as resource inventory studies (especially renewable resources) associated with the RE Master Plan development.

B. Assessment of the Agency’s Capacity to Implement Procurement

12. Procurement activities will be carried out by EdL (a wholly stated owned enterprise) for the on-grid and loss reduction components and by MIH (a central government ministry) for the off-grid component. EdL and MIH will also be responsible for selection of consultants for their respective technical assistance activities.

13. For implementation, EdL has established a Project Management Unit (PMU) at its head office and PMUs at the five southern provincial BOs. The PMU includes three staff who have gained practical procurement experience through the previous IDA projects. This

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arrangement is being reviewed by the consultants and would be strengthened if necessary. MIH OPS, the unit responsible for the off-grid component under the on-going SPRE project, would continue implementation with the support of expatriate and local consultants. Within 6-12 months of Project start, the off-grid work would be transferred to a management contractor.

14. An assessment of the procurement capacity of the Implementing Agencies was carried out by IDA procurement staff in accordance with relevant guidelines. The assessment report is available in the project files.

15. Two main risks are identified: (i) non-transparent and collusive practices – though no specific cases have been reported under EdL/MIH sponsored procurement, given the general weak procurement environment in the country, the issue still warrants attention; and (ii) procurement delays. To mitigate the latter risk, bidding documents have been prepared for most of the on-grid packages and an international consulting firm is on board to assist with procurement. For the off-gird component, an individual procurement consultant would be hired to review the technical specifications and prepare bidding documents.

16. The overall procurement risk is rated as “average”, as: (i) EdL, which has extensive experience in ICB procurement, will handle the majority of procurement; (ii) an international consulting firm (with a senior procurement specialist) is on board to assist EdL in procurement; (iii) MIH has well handled the QCBS consultant selection for three PHRD financed studies, and its lack of ICB experience would be mitigated by appointing an individual procurement consultant to train its staff on ICB procedures and assist in preparation of ICB bidding documents; and (iv) overall procurement under previous IDA financed projects was conducted without major problems.

C. Procurement Plan

17. The EdL and MIH have developed a Procurement Plan with detailed procurement arrangements. This plan has been reviewed by IDA and will be agreed at the Negotiations. The agreed plan will be made available at EdL PMU and MIH OPS as well as the IDA project file. It would be available in the Project’s database and in IDA’s external website. The Plan would be updated in consultation with IDA, annually or as required, to reflect changes in implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

18. In addition to prior review supervision by IDA offices, the Procurement Capacity Assessment Report has recommended twice a year procurement supervision missions for post review of procurement actions and discussion/solutions of procurement related issues.

E. Complaints Handling Procedures

19. According to the Government Procurement Implementation Rules and Regulations (dated March 12, 2004), the following procedures should be followed to handle procurement complaints: (i) written complaints with proper evidence should be filed with Chairman of Procurement Committee; (ii) Procurement Committee should respond to the complainant

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within 14 working days. If necessary, contract award may be suspended, and all bidders are informed accordingly; (iii) bidders may refer to the MOF/Procurement Monitoring Office if no proper resolution has been received from the Procurement Committee. A resolution/decision should be given within 14 working days; (iv) in principle, contract award should be withheld until a complaint is satisfactorily solved. However, the Chairman of Procurement Committee may justify continuation of the procurement process by reasons of urgent necessity. The justification must be sufficiently supported and notified to the complainant within 7 working days; otherwise, the contract award decision will be considered as null and void; and (v) complaint after contract award will be reviewed by the Procurement Committee and a report should be submitted to the State Inspection Authority in the Prime Minister’s Office and MOF/Procurement Monitoring Office.

20. Disputes resolution procedures and court proceedings are also provided in the Government procurement rules and regulations.

21. The following sanctions are also provided: (i) breaching of procurement rules and regulations will be subject to warnings, administrative and disciplinary actions according to the civil service rules and relevant laws; (ii) criminal proceedings will take place if the misconduct so warrant (such as falsification of documents; abuse of authority, negligence in performance of duties); (iii) collusion and manipulation of contract award will be subject to court proceedings and punishment according to the law; (iv) contracts awarded not in full compliance with the bidding procedures and procurement rules and regulations or lack of transparency are considered as null and void; (v) any bidder offering or promising material or other rewards directly or indirectly to procurement committee or other individuals in the procurement decision making may be disqualified and court proceedings may be instituted.

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E. Procurement Arrangements Involving International Competition

22. Goods and Works and non consulting services.

(a) List of contract Packages with procurement methods and other details:

1 2 3 4 5 6 7 8 9Ref. No.

Contract (Description)

Estimated Cost ($’m)

Procure-ment Method

P-Q Domestic Preference (yes/no)

Review by IDA (Prior/ Post)

Expected Bid-Opening Date

Comments

A.1 Grid Extension Component (EdL)

01 Tools ICB No Yes Prior 11/02/0502 Overhead

conductorsICB No Yes Prior 11/02/05

03 Distribution transformers

ICB No Yes Prior 10/31/05

04 Watt hour meters & meter boxes

ICB No Yes Prior 11/25/05

05a Concrete poles NCB No No Prior 10/10/0505b Concrete poles

supplied by EdL pole factory

- - - - - 100% EdL financing

06 Transformer fitting materials

ICB No Yes Prior 11/10/05

07 Distribution line materials

ICB No Yes Prior 10/31/05

08 Cement for EdL pole factory

- - - - - 100% EdL financing

09 Steel reinforcement wire for EdL pole factory

- - - - - 100% EdL financing

10 Computer and office equipment

ICB No Yes Prior 10/10/05

11 Field work vehicles and construction equipment

ICB No Yes Prior 10/02/05

12 Concrete cross arms NCB No No Prior 10/05/0513 House wires and

switches- - - - - 100%

consumer financing

A.2 Loss Reduction Component (EdL)01 Domestic &

commercial revenue meters

ICB No Yes Prior March 2006

02 Calibration & testing equipment

ICB No Yes Prior March 2006

03 Distribution analysis software

DC No No Prior March 2006 Refer to note “***” in

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Section II, paragraph 1.

04 GIS mapping software

Shopping No No Post March 2006

A.3 IT System Component (EdL)01 IT hardware and

softwareICB No Yes Prior March 2006

A.5 Safeguard Capacity Building01 Environment

monitoring equipment, office equipment, vehicles

Shopping No No Post March 2006 Multiple contracts

A.6 Demand-side management01 Computers, office

equipment, materials for camping etc...

Shopping No No Post March 2006 100% GEF financing,Multiple contracts

B.1 Off-grid Investment Component (MIH)01 SHS units ICB No Yes Prior 11/03/05 3 rounds of

ICB in equal quantity.

02 VH/GS, miscellaneous materials

- - - - - 100% MIH & consumer Financing

03 Works - Installation - - - - - 100% MIH Financing

B.2 Institutional Strengthening01 Computer, office

equipment etc..Shopping No No Post 11/03/05 100 GEF

financing, multiple contracts

B.3 Alternative RE Technologies and Delivery Arrangement (MIH)01 (b) Miscellaneous

RE equipment (biomass equipment)

ICB/ Shopping

No No Prior/Post 04/05/06 Multi-packages.

B.4 RE Master Plan and Database Component (MIH)01 Computers, software

and toolsShopping No No Post 01/05/06 Multi-

packages. B.6 Organizational Strengthening of MIH’s DOE

01 Computer, office equipment, etc..

Shopping No No Post 11/03/05 100% GEF financing, multiple contracts

(b) All contracts estimated to cost $100,000 or more per contract will be subject to IDA prior review.

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23. Consulting Services.

(a) List of Consulting Assignments with short-list of international firms.

1 2 3 4 5 6 7Ref. No.

Description of Assignment Estimated Cost ($’m)

SelectionMethod

Review by IDA (Prior/ Post)

Expected Proposals Submission Date

Comments

A. EdL Component01 A.1 Grid Extension - Project

implementation consultantSSS Prior - Consultant already

selected under SPRE financing. Retroactive financing required.

02 A.2 Loss Reduction - implementation and capacity building consultant

QCBS Prior - Consultant already selected under PHRD financed funded Loss Reduction Study during project preparation. This assignment represents a natural continuation.

03 A.3 IT System – services for supervision, testing, commissioning and training

QCBS Prior January 2006

04 A.3 IT System – FM capacity building

CQS Post January 2006

Multiple contracts

05 A.4 Tariff Reform – Tariff Adjustment implementation

CQS Post February 2006

06 A.5 Safeguard capacity Building - training, study tours, books and materials

CQS Post January 2006

07 A.6. Demand-Side management – (a) Technical assistance

QCBS, QBS Prior December 2005

100% GEF financing.Multiple Package

08 A.6 Demand Side Management – (b) Local staffing

IC Prior February 2006

100% GEF financing.Up to 6 positions

09 A.6 Demand Side Management – (c) training

Prior August2006

100% GEF financing.

B. MIH Component01 B.2 (a) Off-Grid Institutional

Strengthening - Management contract

QCBS/QBS Prior September 2005

100% GEF financing.

Pre-procurement and start-up with PDF B grant funds

02 B.2 (b) Off-Grid Institutional Strengthening - QA Surveyor

QCBS/CQS Prior October 2005

100% GEF financing.

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Pre-procurement and start-up using PDF B grant funds

03 B.3 (a) Alternative RE Technologies and Delivery Models – alternative models/REF

QCBS/QBS Prior January 2006

100% GEF

04 B.3 (b) Alternative RE Technologies and Delivery Models – biomass assessment and piloting.

QCBS/QBS Prior January 2006

100% IDA financing

05 B.3 (c) Alternative RE Technologies and Delivery Models – Income generation linkage

CQS/IC Prior March 2006 100% IDA Financing

06 B.4 (a) RE Master Plan and Database – Master Plan

QCBS/QBS Prior December 2005

100% GEF financing

07 B.4 (b) RE Master Plan and Database – Mini/Micro Hydro resource assessment & rehabilitation

QCBS/QBS Prior December 2005

100% GEF financing

08 B.5 Sector Financing Strategy – Support of a pilot of small hydro solicitation

QCBS/CQS/IC

Prior February 2006

100% IDA financing

09 B.6 (a) DOE Organizational Strengthening – Implementation of recommendation on Action Plan

QCBS/CQS/ IC

Prior February 2006

100% GEF financing. To be defined by PDF B supported study

10 B.6 (b) DOE Organizational Strengthening – support to PMU (Financial management, procurement and database management)

SSS/IC Prior April 2005 100% GEF financing. Pre-Procurement by PDF B grant.

Miscellaneous Training activities

01 B.6 (b) DOE Organizational Strengthening - Support to PMU (Training)

Prior February 2006

100% GEF financing. To be defined by PDF B supported study

(b) Consultancy services estimated to cost $100,000 or more per contract and all Single Source Selection of consultants (firms), and $50,000 or more for individuals will be subject to prior review by the IDA.

(c) Short lists: No short lists would comprise entirely national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

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F. IDA Prior Review Thresholds

Expenditure Category

Contract Value Threshold ($’000)

Procurement Method

Contracts Subject to Prior Review ($’000)

Goods >=100 ICB ** >=100

<100 NCB **

<50 Shopping

NA DC All contracts

Consultant services >=100 QCBS, QBS >=100 for firmsAll SSS<100 CQS

NA IC >=50 for individuals

** With exceptions of two procurement packages (concrete poles and concrete cross arms) for grid extension component which NCB is the most appropriate method, and one package (Distribution Analysis Software) for loss reduction component which international shopping is the most appropriate method, though their estimated costs are above $100,000.

ICB: International Competitive BiddingNCB: National Competitive BiddingDC: Direct ContractingQCBS: Quality and Cost Based SelectionQBS: Quality Based SelectionCQS: Selection Based on Consultant’s Qualifications IC: Individual ConsultantsSSS: Single Source Selection

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Annex 9: Economic and Financial Analysis

Lao PDR: Second Southern Provincial Rural Electrification Project

1. Economic analysis

A. Summary: Economic and Financial Analysis - Project Costs and Benefits

1) Economic Analysis Results.

Economic benefit for grid component is estimated at a NPV of $146.68 million. For off grid solar PV home system economic benefit per solar PV home system ranges from the NPV of $90 to $121, depending on the size of the system.

Economic Analysis (@ 10% Discount Rate)Net Present Value Benefit/Cost Ratio EIRR

Grid Connection 146.68 (Million $) 3.4 79%Off-Grid (SHS) 20 Wp System 30 Wp System 40 Wp System 50 Wp System

107.84 ($ per System)90.09 ($ per System)113.66 ($ per System)120.72 ($ per System)

1.531.381.411.38

67%34%46%30%

2) Financial Analysis Results

Financial analysis for the project reveals that the average electricity tariff must be as high as $0.111 per kWh for the project to break even (30 years, @10% discount). Financial analysis for off grid solar PV home system component shows the NPV losses ranging from $115 to $191 per system.

Financial Analysis (@ 10% Discount Rate)Net Present Value Benefit/Cost Ratio FIRR

Grid Connection Avg Tariff $0.030 -44.4 (Million $) 0.27 < 0% Avg Tariff $0.046 Avg Tariff $0.076 Avg Tariff $0.111

-35.6 (Million $)-19.1 (Million $)

0 (Million $)

0.420.691.00

< 0%< 0%< 1%

Off-Grid (SHS) 20 Wp System 30 Wp System 40 Wp System 50 Wp System

-114.8 ($ per System)-145.1 ($ per System)-179.6 ($ per System)-191.0 ($ per System)

0.430.380.340.39

67%34%46%30%

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Assumptions and Data Sources:

Total investment cost is based on the total investment cost (EdL and IDA) over the three years period.

Total supply cost is based on the average cost (capacity and energy cost) of electricity supply to all categories of consumers. EdL Tariff Study prepared for this project calculates supply cost per kWh sold to be 855.6 Kip or $0.076 (year 2004 prices; exchange rate 11,205 Kips: $1).

The average total kWh sold is calculated from the following data sources:

Total kWh sold to household customers is calculated from the total number of household connections targeted for this project and household survey data on electricity consumption of rural households electrified by the three previous RE projects financed by the World Bank. Household survey reveal that the average electricity consumption during the first three years is 55 kWh per month and increase to 62 in the fourth and fifth year, after the fifth average consumption is around 68 kWh per month.

The total number of electricity sold to irrigation and industrial customers is calculated from the total number of irrigation and industrial customers in the project area (collected from the survey in the project area) and the average yearly electricity consumption and average tariff of existing irrigation and industrial customers in the southern provinces. The total number of irrigations found in the proposed project area is 24, and number industries are 1,449. The average electricity tariff for irrigation is 221.1 Kips or $0.020 per kWh; the average tariff for industrial customers is 468.3 Kips or $0.042 per kWh. The average yearly consumption for irrigation and industrial customers is 26,525 kWh and 24,285 kWh per year, respectively.

Total electricity consumption of irrigation and industrial customers is assumed to be only 60% of the existing customers during the first five years and increase to the same level as the existing customer in the sixth years.

Economic benefit for household customers is based on the average consumer surplus of demand for electric light (see detail explanation on the consumer surplus section).

Economic benefit of irrigation and industrial customers are assumed to be their cheaper source of energy. Since electricity is their cheaper source of energy, economic benefit is assumed to be the same as electricity consumption multiply electricity tariff.

Financial analysis for grid connection is based on four average tariff scenarios, ranging from $0.030 to $0.111 per kWh.

The total cost for off-grid component is based on CIB cost per completed system including installation cost. The operation and maintenance (O&M) cost is estimated to be 10% of the system cost per year.

Total economic benefit for off-grid component is based on the average consumer surplus of demand for lighting energized by SHS (see detail explanation on the consumer surplus section).

Total financial benefit or loss for off-grid component is based on consumer monthly repayment (5 years repayment plan).

3) Consumer Willingness and Ability to Pay.

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Consumers' willingness and ability to pay for grid electricity appears to be very high. The household survey reveals that the average monthly spending for lamp lighting among un-electrified households in the project areas is estimated at 16,963 Kips ($1.51), while the average monthly spending for electric lighting – excluding other appliances – among electrified households is only 1,532 Kips ($0.14).10

In the case of off-grid, consumer willingness and ability to pay is also high. However, ability and willingness to pay for poorer consumer groups – in the proxy baseline – is slightly lower. The household survey reveals that average monthly spending for un-electrified households that use only candle and diesel lamp for lighting is estimated at 12, 302 Kips ($1.10). However, the monthly charge for five year lease purchase of the smallest SHS --20 Wp is --19,000 Kips. It is expected that many of these households may choose the 10 years option. For better off consumers i.e., households that use candle, diesel lamp, and car/motor cycle battery, the average monthly spending is estimated at 25,381 Kips ($2.27). This amount of monthly spending is slightly higher than the required monthly payment for the 5 years lease purchase program for the 20, 30, and 40Wp SHS. However, the average monthly spending of households that use candle, diesel lamp, and car/motor cycle battery it is only 2,500 Kips ($0.22) lower than the required monthly payment for 50Wp SHS.

4) Consumer Surplus

Gross consumer surplus per households per years for grid component is estimated at $547. However, gross consumer surplus for solar PV home system only ranges from $74 to $105 per household per annum.

Consumer Surplus: Gross Benefit

Benefit/Year/Household (in $)Grid Connection 546.75Off-Grid (SHS)

20Wp 74.2530Wp 78.0040Wp 93.0050Wp 104.52

Assumption and Sources of Data:

Household survey data conducted during the project preparation are used to calculate consumer surplus for both grid and off-grid. The survey was conducted of among un-electrified households in the SPRE II project areas and among electrified households that have been electrified under the three previous World Bank financed projects in the central and southern region of Lao PDR.

Based on the survey data un-electrified households in the project area can be classified into three groups.(1) Candle, simple wick lamp, & hurricane lantern users;(2) Candle, Wick Lamp, hurricane Lantern & Car/Motor Cycle Battery Users; and (3) Car/motor cycle battery users.

10 The average monthly spending for electricity – including electric lighting and all other appliances – is estimated to be10,895 Kips ($0.97). The total monthly electricity consumption is 63.3 kWh, and electricity used for lighting account for approximately 23% of total electricity usage per month.

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Based on the survey data households for the proxy base line group for off-grid component can be classified into two groups. (1) Candle, simple wick lamp, & hurricane lantern users; and (2) Candle, Wick Lamp, hurricane Lantern & Car/Motor Cycle Battery Users.

Analysis of consumer surplus benefits for grid electricity is based on the average benefits of four behavioral assumptions.

Step 1 Step 2 Step 3

Candle & Lamp Users

Candle, Lamp, & Car/Motor Cycle Battery

Users

Car/Motor Cycle Battery

UsersGrid Electricity

(1) Consumers Move three Steps to Electricity(2) Candle & Lamp Users Move One Step to Grid Electricity(3) Candle, Lamp & Battery Users Move One Step to Grid Electricity(4) Car/Motor Cycle Battery Users Move One Step to Grid Electricity

Analysis of consumer surplus benefits for off-grid electricity (SHS) is based on the average benefits of three behavioral assumptions. This is due to the fact that the base line data of un-electrified households consist of only two types of consumers.

Step 1 Step 2

Candle & Lamp Users

Candle, Lamp, & Car/Motor Cycle

Battery UsersGrid Electricity

(1) Consumers move 2 Steps to Electricity(2) Candle & Lamp Users Move to Grid Electricity(3) Candle, Lamp & Battery Users Move to Grid Electricity

Slope for demand curve is assumed to be 0.5.

B. Economic Benefits of SPRE II Project.

The benefits of RE presented in this section are based on the direct economic benefits to households. Four categories of economic benefit are analyzed: (1) electric lighting, (2) radio and television, (3) productivity, and (4) diesel fuel saving and health. Data used to assess the benefits of electrification are based on household surveys conducted for a sample of households electrified under the three previous World Bank financed projects together with a household survey

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conducted among not-yet-electrified households living in the proposed SPRE II project areas. The method for estimating expected economic benefits is based on the comparison of benefits of households with and without electricity.

1) Electric Lighting

Survey data reveals that households move from total reliance on candle lamp, wick and hurricane lantern, and electric light energized by car or motorcycle battery to mostly fluorescent lamp, with a few incandescent lamp lighting. Table 1 shows that households living in the proposed SPRE II project areas rely on a combination of energy sources for lighting. Each of these three lighting energy source combinations provides different level of lighting (in lumens) and associated costs.

Table 1. Lighting Energy Sources for Un-electrified Households

Lighting Source Percents of Household

Candle, simple wick lamp, & hurricane lantern users 63%Candle, Wick Lamp, hurricane Lantern & Car/Motor Cycle Battery Users 31%Car/motor cycle battery users 6%Total valid cases 853

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

Households shifting to grid-provided electricity from any of these three energy source combination starting points provide four observable pairs of price and quantity (consumption level measured in kilo-lumen hours), which can be translated into four behavioral demand assumptions:

A broken demand curve demand curve assumption. Under this broken demand curve, it is assumed that candle, lamp and hurricane lantern users will move first to a combination of candle, wick lamp, hurricane lantern & car/motor cycle battery followed by a car/motor cycle battery combination, and finally grid electricity. The broken demand curve allows us to compute the benefits of one step at a time. For example, net benefits or consumer surplus of moving from candle, simple wick lamp, and hurricane lantern to adding car/motor cycle battery in their lighting energy sources is the B0 plus C0 areas shown in Figure 1. Likewise, the net benefits or consumer surplus for moving from a candle, wick lamp, hurricane lantern combination as well as car or motor cycle battery combination to only using car/motor cycle battery is the B1 plus C1 area. The net benefit of moving from car/motor cycle battery to electricity is the B2 plus C2. The total gross benefit for moving all three steps to grid electricity is the sum of all the areas under the demand curve.

Three other possible behavioral demand curve assume that households from each group of lighting energy source will move directly to electricity, i.e.: (i) Candle, simple wick lamp, & hurricane lantern users; (ii) Candle, wick lamp, hurricane lantern & car/motor cycle battery users; and (iii) Car/motor cycle battery users all move in one step directly to grid electricity.

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Figure 1. Household Benefits EstimationPrice (Kips) per Kilo-lumen hour

Average price of candle & lamp lighting per Kilo-lumen hours

Candle & Lamp: 4,628 P(0)

Average price of candle, lamp & car/motor cycle battery for lighting per Kilo-lumen hours

B0C0 Average Price of electric light

Candle, Lamp & Car/Motor using car/motor Cycle batteryCycle Battery: 2,183 P(1)

Average Price of B1 C1 electric light per

Cycle Battery: 1,029 P(2) Kilo-lumen hoursElectric light (Grid): 3.32 P(3) B2 C2

B3 Q(0) 3.23 Q(1) 19.63 Q(2) 25.26 Q(3) 435.27 Quantity(Candle & Lamp) (Candle, Lamp & (Car/Motor (Electric Light: Grid) Kilo-Lumen Hours

Car/Motor Cycle Battery)Cycle Battery)

Note: Figure 1, above exhibits example of broken demand curve (move 3 steps to electricity) and one step moves from candle and diesel lamp to electricity.Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

Based on the survey data and the assumption of lumen for each type of lighting appliances used by the household, price per kilo-lumen (P) and the total quantity (Q) in kilo-lumen consumed each month per household are calculated and shown in Table 2.

Table 2. Price and Quantity of Lighting By Lighting Energy Sources

Price and Quantity Value Unit Households by Initial Lighting Source

P(0) 6,628 Per klm hr (Kips) Candle, simple wick lamp, & hurricane lantern Q(0) 3.2 Klm/mo Users

P(1) 2,183 Per klm hr (Kips) Candle, simple wick lamp, hurricane lantern, Q(1) 20 Klm/mo and car/motorcycle battery users

P(2) 1,209 Per klm hr (Kips) Car/motor cycle battery usersQ(2) 25 Klm/mo

P(3) 3.3 Per klm hr (Kips) Grid electricity usersQ(3) 435 Klm/mo

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

These estimated gross benefits for electricity lighting in each case are presented in Table 3. The total expected house connections over the three years period are 42,295 households. Therefore, the cumulative benefits or consumer surplus of electric light over all electrified households and the three year period (2005 to 2008) is expected to be $23,124,791

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Table 3. Gross Benefit per Year per Household

Behavioral Assumptions $/HH/Yr

Households move 3 Steps to Electricity $312.23

Candle & Lamp Users Move to Grid Electricity $1,087.53

Candle, Lamp & Battery Users Grid Electricity $532.69

Car/Motor Cycle Battery Users to Grid Electricity $254.56

Average Gross Benefits (All Assumptions) $546.75 Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004 .2) Radio and Television

Previous studies and empirical evidence from Lao PDR have shown that radio and television is one of the most important electric appliances in the households. Without electricity, the cost to operate radio and/or television is extremely high and the total hours listening to radio and viewing television tend to be relatively low. (The alternative supply for radio and TV is dry cell battery or motor cycle or car battery, each of which is very expensive and only provides limited electricity supply.) In contrast, electricity provides unlimited electricity supply at significantly lower cost, with the result that listening and/or viewing hours of radio and television are very high.11 Using survey data, Table 4 provides price (or cost) of listening to radio per hour and the total hours per month on average that households in each supply source category listen to the radio.

Table 4. Price and Quantity of Radio Listening

Price and Quantity Value Unit Radio by Sources of Electricity

P(0) 521 Per listening hr (Kips) Radio using dry cell batteries Q(0) 10 Listening hrs per mo

P(1) 263 Per listening hr (Kips) Radio using car/motorcycle battery usersQ(1) 106 Listening hrs per mo

P(2) 3 Per listening hr (Kips) Radio using grid electricity users (for plug-in radio)Q(2) 124 Listening hrs per mo

Note: Assumption of wattage for radio using dry cell batteries is 3 watts; car/motor cycle batteries is 9 watts and plug-in radio is 18 watts. Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

Similar to lumen demand analysis, the benefit analysis assumes the kinked linear demand curve based on sources of electricity used for radio. These parameters yield estimated benefits for gaining access to less expensive listening hours of radio and longer listening hours per month to be 22,021 kips ($2) per month per household. Based on the survey it is estimated that about 17% of the households living in the proposed SPRE II project area are using dry cell, car/motor cycle battery to supply electricity for their radio. Given the total connection over three years targeted to be 42,186 households, it is estimated that about 7,172 households would switch to plug in

11 The benefits analysis assumes that after electrification households will switch to plug-in radio.

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electricity radio. The total benefits or consumer surplus per year for radio is estimated to be $172,128 over the three years period.

Table 5 presents parameters of price per television viewing hour and the total viewing hours per month. These parameters yield an estimate of the benefits of gaining access to less expensive television viewing and longer viewing hours each month to be 29,294 Kips ($2.6) per month per household. Survey data shows that about 14% of un-electrified households in the proposed SPRE II project area use car batteries to supply electricity for television viewing. Therefore, it is estimated that about 5,906 households would switch to plug in television. The total estimated benefit or consumer surplus for television viewing per year over the three years period will be $184,976.

Table 5. Price and Quantity of Television Viewing

Price and Quantity Value Unit User by Sources of Electricity

P(0) 362 Per viewing hr (Kips) Car/motorcycle battery usersQ(0) 55 Viewing hrs per mo

P(1) 6 Per viewing hr (Kips) Grid electricity users (for plug-in television)Q(1) 106 Viewing hrs per mo

Note: Televisions using electricity from car battery are small B&W; power rating assumption is 18-20W. Televisions using electricity from grid are B&W and color TV and average power rating is 45W (collected from field survey) Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

3) Education

The beneficial impacts of electricity on education are universally accepted. However, empirical data on the indirect economic benefits of electrification for education are not as well documented as the direct economic benefits of education. It is clear that electricity extends evening hours for children to study, do homework, and/or read.12 Similarly, electricity also enables schools to be equipped with modern teaching equipment and communication, especially access to the internet. Survey data suggests an association between electrification and school enrollment at all levels of education including vocational school. School enrollments for children living in the electrified households at all levels are significantly higher than children with the same age group who are living in proposed SPRE II project area. It is therefore reasonable to expect that SPRE II would contribute to a significant increase in school enrollment among children. Table 6, shows the average percentage of children in the household for each age group who are currently attending school..

12 Some may argue that instead of doing intellectually activities or exercise children just watch television.

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Table 6. Percent of Children Attending School

Elementary school Secondary and High School

Vocational School

Children AgeAccess to

Grid Electricity

Proposed SPRE2

Access to Grid

Electricity

Proposed SPRE2

Access to Grid

Electricity

Proposed SPRE2

6 - 12 years old 88% 83% n/a n/a n/a n/a13 - 18 years old

n/a n/a 67% 55% n/a n/a

13 - 18 years old

n/a n/a 11% 5% 10% 6%

Note: Statistical test for pair wise comparison are statistically significant at <0.05 level. Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

Survey data reveals that children living in the electrified households do not spend longer hours to read than children living in household without electricity. Regardless of electrification status or age, children spend the same amount of evening time (about one hour) reading or studying. Although electrification does not appear to entice children to increase their intellectual activities at night, clearly children from households with electricity benefit directly from brighter electric light. Performing school work or reading with electric lighting is qualitatively but unequivocally more enjoyable than reading and/or doing homework under the dim light of a lamp or candle.

4) Productivity

Electricity provides better opportunities for households to engage in productive activities and increases the income generating potential of a given productive activity. Most rural household businesses in Lao PDR are small, consisting of handicraft, small furniture making, small repair shops, convenience stores, or food and beverage shops. Survey data shows there is no different in the numbers and types of household business between previously-electrified areas and proposed SPRE II project area (in both areas about 27% of households engage in household business activity). However, it appears that the size – measured in terms of revenue generation – of household businesses in electrified area is significantly larger than household business in the un-electrified area. The average household monthly income of households who have home businesses in electrified area is almost two times larger than income of households who have home businesses in the un-electrified area. The average monthly income of households with business in electrified area is reported to be 11,653,886 Kips ($1,040), compared to just 6,522,440 Kips ($582). This clearly suggests some association between electricity and productivity of business operators, a relationship which seems intuitive given that businesses with electricity can operate more efficiently and for longer periods of time. Furthermore, each of the commonly cited types of home businesses can be shown to have some potential for productivity improvement with the advent of electricity. Thus, we include an assumed two-fold improvement in income from household benefits as part of the economic benefits of the proposed SPRE II project.

5) Diesel Fuel Saving and Health Benefits

A final economic benefit worth mention is diesel fuel savings. In Lao PDR, diesel fuel is used as a kerosene substitute, as kerosene is not widely available in the market. With electric light households would no longer use diesel fuel for lamp lighting. Currently, un-electrified households living in the proposed SPRE II project area use about 2.7 liters of diesel for lamp lighting per month Based on the expected electrification of 42,186 households over the three years period. Diesel fuel saving could amount to 11,390

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liters per month or about 1,366,824 liters per year. Since diesel fuels are imported, electrification will directly reduce the import requirements for Lao PDR.

The reduction in diesel fuel usage for lamp lighting will also reduce indoor air pollution. Diesel fuel when use for lighting produces much more soot and smoke than kerosene, creating both safety and health problems for rural households. Introduction of electricity would directly contribute to the reduction of respiratory illness among the rural population, thus reducing public and private health care costs.

C. Social Benefits and Impacts

Social impacts are another form of direct benefit from SPRE II, as RE improves quality of life and brings about positive changes in the living patterns of rural households. The expected social impact of the SPRE II is based on an assessment of the social impact and benefits of the three previous RE project financed by the World Bank. The following analysis relies on field survey data collected from households and villages which were electrified by previous World Bank financed RE projects, and survey data collected from households and villages proposed to be electrified under SPRE II.

The types of social benefits and impacts evaluated here include: (1) the availability and utilization of electric light by electrified households; (2) the acquisition and utilization of household electric appliances including radio, television and appliances for domestic work; and (3) the positive feeling and attitude toward progress, safety and security of electrified households.

1) Lighting Appliance Ownership, Usage, Quality of Life, and Changes in Living Patterns

Prior to electrification all rural households rely on candle, diesel fuel (for lamps) as well as car and small motor cycle batteries to supply electricity for lighting. As expected, all households that connected to the grid immediately adopt electricity for lighting. Typical households may only use one single fuel for an energy source or a combination of two or all three sources, as shown in Figure 2.

Figure 2. Percent of Households Using Different Energy Sources for Lighting

Car/Motorcycle Users

6%

Candle, Lamp Users (63%)

Candle, Lamp, Car/Motor Cycle Battery users

(31%)

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004 The survey conducted among households to be electrified under SPRE II has shown that typical combustible lamp lighting is the preferred choice for the majority of households that have no access to electricity. About 63 per cent of the households living in the proposed SPRE II project area rely on candle and combustible lamp lighting.13 Another 31 per cent rely on candle and

13 It should be noted that in Lao PDR diesel fuel is used to substitute kerosene for lamp lighting. Diesel fuel can produce similar level of light as kerosene when uses in the simple wick lamp or hurricane lantern. However, diesel fuel produces more smoke and soot than kerosene.

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combustible lamp lighting as well as electric light energized by car or motor cycle battery. A small minority of households, only 6 per cent, use electric light energized by car or motor cycle batteries. The household survey makes clear that after electrification all households switched to electric lighting. Only a few electrified households report that they retain hold their wick or hurricane lantern to use during black outs.14

Survey data on lighting appliance ownership and usage of electrified households confirm that households with grid electricity connection fully utilize electric light. The survey also shows that the majority of households with grid connection use fluorescent lamps, which are more energy efficient and have higher lumens but more expensive than incandescent light bulbs (See Table 7). Those households with grid electricity illuminate three to five times longer than households without electricity. They also use significantly more and brighter lighting appliances than households without electricity. As most electrified households use fluorescent lamps, and the luminous rating for 40 and 20 watts fluorescent lamps is 1,613 and 1,200 lumens respectively, we can multiply by the reported daily household illumination patterns to estimate that electrified households receive about 435 kilo-lumen hours per month.

Table 7. Electric Lighting Appliance Ownership – Electrified Households

Household with Access to Grid ElectricityFluorescent Lamp

TubeCompact

Fluorescent Lamp

Incandescent Light Bulb

20 W 40 W 10-15 W 40 W 60 W 100 WTotal number owned 1.7 2.5 1.2 1.7 1.2 3.1Number of hours used/day 5.8 6.3 4.1 4.4 2.9 3.2Valid number of households 711 940 13 41 116 105

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

In contrast, un-electrified households receive only 3 kilo-lumen hours per month from those who utilize only candle and/or combustible lamp lighting, about 20 kilo-lumen hours among those who also use car or motor cycle battery in addition to candle and lamp lighting, and 25 kilo-lumen hours among those who only use car or motorcycle batteries. Evening hours of not-yet-electrified households are significantly shorter than households with a grid connection. An average household without electricity will only have one or two simple wick lamps or hurricane lanterns, which are used for only one to two hours per evening. 15 Similarly, households that also use car and/or motor cycle battery to supply electricity for lighting, the average total hours using electric light is only 2 hours per evening.

Comparing pre- and post-electrification lighting consumption shows household lighting consumption increase tremendously - more than 17 to 20 times when comparing with households using candle, lamp lighting, and electric light supplied by car or motorcycle battery and more than 100 times when comparing with households using only candle and combustible lamp lighting. These orders-of-magnitude improvement in lighting outcomes from grid-supplied electric lighting not only drastically reduce household energy bills, but allows household members to conduct close work, such as reading and household-level productive activities, that

14 Although car battery enables households to use the same type of electric light as grid electricity, it provides limited electricity supply, very expensive, and inconvenience.

15 It should be noted that simple wick lamp is a very simple lighting device. It is usually made of recycled tin can with small tube on the top to hold wick, which is usually made of old cotton rag cut to fit.

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directly and positively affect living standards and livelihood. The dynamics of this livelihood improvement are discussed in more detail below.

Extended Hours for Evening Activities. Assessing the social impacts and benefits of electrification requires more-detailed understanding of how household members spend their evening hours. There is considerable literature indicating that increased levels of electric lighting has drastically improved quality of life among rural households while also altering rural life styles. Survey data helps understand the life style improvements and changes that accompany grid electrification, using questions designed to explore how family members spend time in the evening. The data (See Table 8) show that, with grid-supplied electric light available, men and children spend an average of half an hour longer undertaking livelihood improving activities than their counterparts in un-electrified households without grid electricity connection, while women in households with grid electricity connection spend about 40 minutes more on livelihood improving activities than women in households without grid electricity connection.16

Table 8: Duration of Evening Activities for Members of Households with and without Grid Electricity

Proposed SPRE II With Access to Grid ElectricityWomen 2.9 3.6(valid number of households) (807) (884)Men: 2.5 2.9(valid number of households) (778) (856)Children 6 to 12 years old 1.6 2.3(valid number of households) (573) (630)Children 13 to 18 years old 2.1 2.7(valid number of households) (460) (557)

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

The survey data provides considerable detail as to the activity patterns of household members, allowing social impacts to be analyzed in more detail. For example, literature on rural lifestyle patterns has shown that women in rural households bear disproportionate responsibility at home when compared to men. Without electricity women must complete all or most of household activities requiring good quality lighting in the day time. Interestingly, the survey data analyzed here reveals that women living in the un-electrified households spend the same amount of time doing household chores as women living in electrified households (See Table 9). However, it is likely that the productivity of women in electrified households undertaking household chores would be higher, especially for activities that require close lighting. Furthermore, women in electrified households would be more flexible in choosing type of household chores than those living in un-electrified households.

16 We define livelihood improvement activities to include household chores, productive activities, and leisure activities

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Table 9: Duration of Evening Household Chore Activities of Household Members

Proposed SPRE II With Access to Grid ElectricityWomen 1.7 1.7

(valid number of households) (155) (860)Men: 1.3 1.1(valid number of households) (155) (134)Children 6 to 12 years old 1.2 1.2(valid number of households) (50) (79)Children 13 to 18 years old 1.2 1.3(valid number of households) (165) (144)

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

Electric Appliance Ownership and Usage. Electric appliance ownership and usage is an important indicator of living standard improvement. There are several electric household appliances commonly found in electrified rural households in Lao PDR because of their usefulness and affordability - radio and television for entertainment and access to news and information; rice cookers and refrigerators for improved food storage and cooking; fans for improved comfort; and irons (See Figure 3). These appliances help save time, are convenient to use, and enhance health, hygiene and comfort of household members. It is expected that households to be electrified under SPRE II will similarly acquire and utilize these. The effect of electric appliance ownership on selected key households activities – and linkages to livelihood indicators - are discussed below.

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Figure 3 Electric Appliances Ownership in Electrified Rural Households

78%

27%

53%

72%

19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Televisionset

Rice cooker Refrigerator Electric fan Iron

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

Cooking accounts for a very large portion of energy used in the household. In rural Lao PDR firewood and charcoal are still the main sources of energy for cooking. Use of modern energy sources - electricity or LPG – is almost unheard of in rural Lao PDR, as firewood is widely available and very inexpensive. However, with access to grid electricity, some households have acquired some electric cooking and other related household appliances similar to those in use by urban households. These appliances – especially rice cookers – render some cooking tasks faster, cleaner, and more convenient. The survey shows that among grid connected households, there are about 279 households (or 27% of all household with grid connection) have rice cooker at home. Of these households the majority, about 218, households have quickly adopted the rice cooker for everyday food preparation. Refrigerators are another household appliance with beneficial impacts for household cooking. Refrigerators have obvious benefits for households, allowing food to be stored longer, reducing the frequency of trips to the market, and improving health and hygiene for family members.17

The survey data reveals that refrigerator ownership among households with access to grid electricity is relatively high, slightly more than half (or 53%) of electrified households have refrigerator at home.18

Perhaps the most useful household appliance among rural households is the electric fan, especially in a hot climate like Lao PDR. Electric fans provide not only the amenity of cooling, but important health benefits by reasons keeping indoor air circulating and disease-carrying insects away.19 A large majority or 72% of households with access to grid electricity reported to

17 In a hot and humid climate country, refrigeration is important for storing food and reducing food poisoning incidents.

18 In recent years, price of small refrigerators (5 or 6 cu. Ft. refrigerator), which are made in Thailand and are imported to Lao PDR has reduced significantly. They are also widely available through local distributors especially in the central and southern region of Lao PDR.

19 Both malaria and dengue fever are major public health problems in the country. The availability of electric fans is undoubtedly useful for preventing mosquito bite and the spread of diseases.

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have at least one electric fan at home. On an average each households use their electric fans for almost four hours each day.

Time Spent on Leisure Activities. Time and opportunity for leisure activities – such as watching television entertainment and news programs - is another indicator of improved living standards. The survey data reveals that electrified household members spend about 30 minutes longer each day watching television than those living in un-electrified households. Due to the lack of grid electricity, survey shows that only 131 households (or about 14% of households) living in the proposed SPRE II project area own television sets (which currently use electricity from car battery). Since some 201 female and 276 male respondents reported watching television in the evening, this suggests that significant numbers of people watch television at a neighbors’ house or in a communal facility.

Television ownership among households with grid electricity is 78%. This leap in television ownership and the number of household members who watch television regularly confirms that RE enables household members to spend evening time together at home watching television. Table 10 shows the pattern of television viewing before and after electrification.

Table 10: Hours Watching Television in the Evening

Proposed SPRE II With Access to Grid ElectricityWomen 1.2 1.7(valid number of households) (201) (605)Men: 1.5 1.7(valid number of households) (276) (762)Children 6 to 12 years old 1.1 1.5(valid number of households) (121) (391)Children 13 to 18 years old 1.2 1.5(valid number of households) (130) (388)

Source: Ministry of Industry and Handicraft, Department of Electricity (DOE) Lao PDR, Survey 2004

2) Attitude towards Progress and Positive Feeling for Safety and Security

Positive attitude and feeling of people toward electricity is another indicator of the social benefits of RE. The literature on benefits of RE argues that RE brings a sense of progress and belonging to the people. A survey of attitudes among households with grid connection uncovered positive findings in this regard (See Figure 4). The vast majority of respondents surveyed believe that life has improved since electrification.20 They also believe that electricity will improve living standard of the poor, and recall that life was more difficult before electrification. With regard to sense of belonging, responding households believe that electricity affords better access to news and information and improved communication with their neighbors and fellow countrymen. Furthermore, almost all households reported that with electricity they feel more secure at night with electric light.

3) Conclusions as to Social Impacts and Benefits

20 Similarly, respondent living in households with no access to electricity also believe that life will improve after electrification.

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The social impact of SPRE II is expected to be not only large but larger than with many other RE projects elsewhere reported in the literature, especially for lower-income rural households. The survey of rural households and communities previously electrified by World Bank financed RE projects clearly shows that grid electricity has been used not just for incremental improvements in quality and quantity of lighting, but for a range of livelihood-improving appliances. The high percentage of previously electrified households with television sets, fans, refrigerator, and rice cookers, and the altered social pattern in the evening, in which persons stay up later at night to watch television, doing household chores, or engage in productive activities, all suggest similar social benefits for the households to be electrified under SPRE II.

Figure 3 Electric Appliances Ownership

97%

94%

94%

96%

95%

96%

92% 93% 94% 95% 96% 97% 98%

Life is better w ith electricity

Life is more dif f icult before electrif ication

Electricity improves living standard of the poor

Electricity is important to be w ell informed

Electricity helps improve communication

With Electricity w e feel more secure at night

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2. Financial Analysis.

A. Financial Assessment of EDL

Past Performance and Present Financial Position (see Table 1)

1. EDL's current financial situation and status of compliance with financial covenants for FY02-03 had been satisfactory in large part due to the implementation of financial strengthening measures under the Financial Recovery Plan (FRP) and other extra-ordinary events, particularly: (a) the revaluation of fixed assets which raised total equity by K 3.1 trillion, K 127 billion of which was transferred to retained earnings; (b) the application of proceeds from the refinancing of Theun Hinboun amounting to $33 million for retirement of several outstanding EDL long term debts; (c) reduction in tax payments due to increased depreciation expense arising from the revaluation; (d) monthly tariff increase of 2% effective May 2002 for a period of 36 months up to FY05; and (d) dividends received from THPC of K124 billion in FY02. These favorable actions allowed EDL for the first time ever, to comply with financial covenants in FY02-03: Self Financing Ratio (SFR) at 38% and 56%, Debt Service Coverage Ratio (DSCR) at 2.1 times and 2.7 times and Debt Equity Ratio at 34:66 and 35:65, exceeding the requirement set out of 30%, 1.5 times and 60:40, respectively.

2. Prior to the implementation of the package of measures under the FRP in FY01, EDL’s financial situation had deteriorated to the point were it became technically bankrupt. This highly precarious position was primarily brought on by the unstable macroeconomic condition and the rapid devaluation of the Kip to the $, as the country descended into hyperinflation. Despite monthly tariff increases in February 1999, this was insufficient to fully offset the average monthly devaluation of the Kip. The severe impact of the foreign exchange devaluation on EDL’s operating performance is evident in the FY98 profit and loss accounts. Although EDL reported a 24% increase in operating profit for the year, this was wiped out by a 178% increase in interest expenses on foreign debts (from K 13.1 billion to K 36.5 billion) and a drastic loss ensuing from its foreign exchange obligations (from a gain of K 2.1 billion in FY97 to a loss of K 13.5 billion in FY98). EDL concluded that year with a net loss of K 6.6 billion, reversing the net profit posted in FY97 of K 2.6 billion. These audited figures could have been far worse had EDL used IAS reporting.

B. FINANCIAL RECOVERY PLAN (FRP)

3. The objective of the FRP is to develop a comprehensive set of actions to restore EDL’s financial health over the period FY99-02. Overall, the FRP was successfully completed; but for one element that could not be implemented and another which was only partly completed. The major components of the Plan and its significant milestones were:

Conversion of Debt to Equity - completed in FY01, with Government's conversion of $77 million of EDL long term debts to equity;

Relaxation of on-lending terms of remaining loans - completed in FY01, with the Government and various creditors agreeing to the following: (a) interest reduction to 2% from FY00-04 and to 6% from FY05-07 for IDA, ADB and NDF social loans; (b) interest reduction by 50% of all interest rates of non-social loans; and (c) extension of maturity period of all loans by 5 years.

Maintain adequate levels of electricity tariffs - effective May 2002, a new tariff structure increasing tariff rates by an average of 2.3% per month over a period of 36 months (up to

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FY05) was put in place. However, these tariff adjustments were suspended in July 2004 pending review of electricity tariffs (para. 8)

Revaluation of Fixed Assets - completed in November 2002: (a) August 2001, the Government approved the revaluation of fixed assets and established a Revaluation Committee in MOF with the assistance of an independent appraisal firm; (b) April 2002, revaluation of power generation and transmission assets commenced; (c) September 2002, the draft revaluation report was presented and discussed among MOF, MIH, EDL, ADB, IDA and PWC.

Variable remittances to the Government of THPC dividends - not implemented. Review of EDL's Capital Expenditure Program - completed, the Lahmayer-Meritech

Report was finalized and submitted to the Government and EDL for comment and review in March 2004.

Settlement of overdue Government Accounts - partly completed but major steps still needed in settling overdue arrears and ageing of accounts receivable (para. 9).

C. Key Financial Issues

4. Commercialization of EDL. The commercialization of EDL has been underway since FY87. This gained momentum with EdL’s incorporation as a public company in FY97. Its Board of Directors approves annually a corporate plan for the next 3 years, which covers EDL's annual budget, new investment, operations and maintenance plans, and proposed borrowings and tariffs. EDL currently submits all requests for tariff increases to the MIH, but tariff approvals are, in practice, obtained from the prime minister. In FY98, a new organizational structure establishing profit and cost responsibility centers was adopted, followed in FY99, by the establishment of a new budgeting and control system designed around the cost/profit centers, and the creation of the Corporate Planning Department, responsible for coordinating budget preparation, consolidation and reporting.

5. While commercialization has been underway, there is still strong interrelationship between the Government and EDL’s finances. In particular, there is confusion among government’s various roles as: owner of EDL, regulator, on-lender of loans to the Government, tax collector and electricity consumer. While considerable progress has been made in straightening out the interrelationships under the FRP, it is important that there be a complete separation of Government and EDL’s finances and that the interrelationship between them be made more transparent and predictable. IDA and ADB have played a leading role in achievements to date and will continue to stress financial separation.

6. Electricity Tariffs . EDL is expected to be commercially operating, autonomous, and self financing. In recognition of its commitments under the Contract Plan, the Government undertook the set of measures to strengthen the financial position and long-term viability of EDL. These measures include among others, the periodic review of the tariff structure to maintain electricity tariffs at levels that will enable EDL to meet its financial and social objectives, keep pace with fluctuations in foreign exchange, maintain a sustainable level of tariffs aligned to actual costs, and comply with loan covenants of major creditors. The periodic setting of tariffs, as embodied in the Power Sector Reform Policy Statement21, is one of the significant measures recognized by the Government to strengthen the commercial functions of EDL. The policy also acknowledges the social dimension of electricity pricing and adopts specific guidelines and tariff setting principles aimed at full cost recovery over a period of time.

21 Issued by the Government in March 2001 which sets out the main elements of the power sector policy and establishes priorities and objectives of the GoL for the development of the power sector.

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7. A study of EDL tariffs, financed under the first SPRE Project provided the basis for the current agreement on tariffs: increase (in kip terms) by 2.3 % per month for 36 months (May 2002 to May 2005). However, some reservations were expressed with this study. First, it was considered that EDL’s financial requirements were overestimated in that they required rural grid expansion to be financed on a fully commercial basis whereas current trends are for a capital subsidy for such extensions (and even operating cost subsidies for the very poor). Second, EDL’s use of dividends from its IPP investments to subsidize domestic tariffs was criticized. Third, the study suffered from shortcomings concerning tariff structure and its lack of differentiation among cost categories. Finally, the study lacks guidance with regard to seasonal and time of day pricing, an important aspect as in many cases, EDL imports power from Thailand where premiums for peak load power are becoming substantial. Current export tariffs are also an outstanding issue as these have fallen in recent years as a consequence of surplus generation capacity in Thailand arising from the East Asia financial crisis, and also from the inability of EDL to guarantee firm energy (as defined by EGAT). Re-negotiation of power exchange tariffs with Thailand is due to be carried out shortly and it is necessary to establish the principles that should govern an equitable power exchange agreement.

8. To ensure consistency with Government policy on the power sector, future tariff reviews should therefore take into consideration these issues. The Government and EDL requested that studies relating to domestic tariffs, socio-economic impact of electrification and various tariff levels and power exchange tariffs be carried out as part of the preparation of the proposed Project. With this in mind, a new tariff study, financed through a PHRD grant, is underway to provide guidelines for the forthcoming and future tariff revisions that would take into account: (a) a detailed analysis of the actual cost of electricity supply to different classes of consumers at different points in the system; (b) formulation of an appropriate subsidy policy and of a tariff structure reflecting the cost of supply; (c) new electricity tariff rates and a suitable implementation plan; and (d) identification and differentiation of subsidy flows, i.e. subsidies provided to EDL in various forms and the subsidies passed on to the different classes of consumers. Agreement on a Tariffs Action Plan which implements the recommendations of the FY04 EDL Tariff Study will be reached with EDL during SPRE II negotiations.

9. Government’s Overdue Receivables . EDL continues to struggle with compliance with existing collection covenant, i.e. that EDL accounts receivable be no more than two months average of its electricity sales. This is the only other pending matter towards full completion of the FRP. EDL's growing accounts receivable, particularly past due arrears of various Government ministries and agencies, had grown from K 22 billion in FY01 to K 44 billion in FY02. While the Government has had financial difficulties, EDL could not function as a true commercial enterprise under conditions of repeated non-payment by Government ministries and without the permission to terminate electricity service.

EDL had not met the collection covenant in years, however, it had taken some measures to address this issue: (a) the Government deducted K 9 billion from THPC dividend tax representing current unpaid Government arrears for January to April 2003; (b) from the FY02 declared dividends of K 33 billion, the Government accepted 50% in cash (K 17 billion) in October 2003 and 50% as offset (K 16 billion) against overdue receivables for electricity consumption during FY03; (c) the Government approved the offset against taxes and duties for the remaining overdue receivables from government offices for FY03; and (d) for the overdue receivables from government offices amounting to about K 44 billion as of end FY02, the Government agreed to settle this through the Government’s national budget: K 22 billion in FY03/04 and the balance in FY04/05.

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Agreement will be reached with the Government during SPRE II negotiations that will include the following terms: (a) the overdue payment of K 22 billion of government arrears, due September 2004, would be settled before December 31, 2004; (b) the balance of K 22 billion would be settled before June 30, 2005; (c) settle all remaining government arrears accumulated from FY03 by December 31, 2005; and (d) details of an Accounts Receivable Action Plan to be put in place by or shortly after SPRE II negotiations that will ensure timely payment of future government electricity bills.

10. Power Development Plan and Financing . Financing EDL’s system expansion has traditionally been provided by multilateral and bilateral agencies through soft loans and grants. With annual growth rates now coming off a higher base, capital requirements are increasing at a time when the power sector’s traditional lenders are re-focusing their programs on other sectors. Non-traditional lenders, China and India are playing an increasing role through provision of export credits (with significant grant element) for projects where goods and construction services are sourced through their respective countries). Lao’s earlier successes with export generation projects demonstrates that the international private sector (particularly the Thai private sector) can play a role and the nascent local private sector and domestic banks should not be ruled out as a source of capital for smaller projects.

11. A power sector policy workshop identified power development issues and recommended that the Government: (a) investigate the infrastructure investment finance market (local, regional and international); (b) conduct local and regional power market analysis; (c) examine financing modalities (traditional, BOT, public-private and leveraging of bilateral and multilateral funds through credit enhancement rather than direct lending); (d) develop solicitation strategies for supplier financed public projects and privately developed projects; and (e) prepare projects (particularly hydropower projects) for solicitation to improve risk profile. The workshop also provided specific measures for strategies in relation to IPPs. Agreement would be reached that EDL would prepare and furnish to IDA for its review and comment: (a) its proposed Rolling Power Development Plan (PDP); and (b) a report on the progress in the program for the succeeding 5 years.

12. EDL Non-Operating Income . The Government is the owner of EDL, the nominee shareholder in its IPP investment projects. EDL currently holds for the Government 25% shares of the NT2 project and 60% and 20% in THPC and HHPC, respectively. As such, it is entitled to a share of the total dividends declared proportional to its shareholding. The dividends from these investments, in particular anticipated dividends from NT2 which would begin to flow around about the year 2009, represent significant amounts of EDL’s non-operating income and their treatment presents major issues. The Government is concerned that the efficient and effective allocation and treatment of these dividends should be in the context of the overall country revenue management policy and in the narrower context of the corporate finances of EDL. As such, the lenders have taken the position that future NT2 revenues should be segregated from EDL's financial accounts and be made available for the Government’s poverty alleviation activities. Consequently, a review of the current and possible future arrangements was undertaken to analyze the revenues retained by EDL and transferred to the Government, the mechanisms that have been set up, and government directives that have been issued to enable the government transfers. The focus of the study was to suggest possible alternatives to treat and account for these future dividends.

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13. ADB, IMF and IDA have reviewed the available options and recommended that the Government consider establishing a special vehicle company, an independent entity that would receive and manage NT2 revenues. The company could be maintained as a purely passive investment vehicle, doing nothing more than hold shares for the Government (i.e. an asset management company to invest and raise financing for the power sector). The special company option was deemed to provide the most transparent separation of financial and accounting relationships between EDL and NT2, in the process, avoiding the distortion effects that may be created on EDL's balance sheet and income statement. It would also give greater flexibility to the Government to achieve its objective of maximizing NT2 benefits for its poverty alleviation goals and meet the criteria set out by the lenders for: (a) a clear separation of NT2 dividends from EDL's accounts; (b) maximize the non-financial advantages to EDL; (c) be simple and easy to implement, i.e. not require special legislation nor an overly artificial structure to be put it place; (d) be relatively inexpensive to maintain; (e) comply with Lao tax and company laws; and (f) maintain EDL's ability to comply with its existing legal covenants with lenders. It was recommended that this option be applied to all other future generation investments of the Government in the power sector. ADB is also conducting a study for IPP development and institutional restructuring to, among other tasks, identify and structure an appropriate government agency to own and manage the Government's future IPP equity investments, including NTPC, the company that would manage and operate the NT2 project. Further to this, EDL raised concerns regarding the treatment of current dividends in THPC and HHPC. EDL argued that while tariff adjustments assist in maintaining its financial viability and supported its financial recovery, the tariffs will not fully cover the cost of electricity service. Retention of THPC dividends will allow EDL to continue to pursue the Government’s electrification program without Government equity injections in the future. In view of the substantial impact of these dividends as a major source of cash revenues and a critical assumption of EDL’s future financial viability, the current arrangement for these dividends would be revisited in the context of the Tariff Action Plan which would look at the phasing of Government subsidies and treatment of existing and future dividends.

D. Financial Prospects of EdL

14. Assumptions . A base case scenario for the projected period, FY04-13, was developed for EDL’s financial projections with the following major assumptions: (a) annual average load growth of 10.5% based on EDL’s FY04-13 power development plan; (b) local and foreign inflation at 7% and 2.4%, respectively; (c) an ambitious investment program including Xeset 2; and (d) tariff regime in accordance with the Tariff Action Plan of December 2004. Other assumption parameters include: (a) accumulated subsidies of about $65.3 million from dividends from THPC investments ($60 million) and concessional loans for new RE (U$5 million) required during the projected period; (b) no cash nor equity injections from the Government; (c) financing plan for new investments consisting of 70% borrowings and 30% self generation; (d) an investment program in generation ($344 million), transmission ($168 million), substation/distribution ($17 million), overhaul ($58 million) and RE ($115 million); (e) interest support for existing social and non-social loans under the FRP will cease, as scheduled; (f) future loans at commercial rates (4.5%); and (g) receivables at 2 months of sales. For details, see Table 3.

15. Financial Forecast and Future Covenant Compliance . On the basis of these forecasts, EDL concluded that future performance would be greatly impacted by the level of capital expenditures in FY04-06. From an initial base of $42 million in FY03, the Government's PDP 2004-13 called for an ambitious capital expenditure program of $84 million, $84 million, and $110 million, and $114 million, respectively in FY04-07 ($209 million, largely accounted for by expenditures in

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Nam Mang 3 and Xeset 2) and transmission. The Government and EDL would agree on the critical capital expenditures, particularly for Xeset and related transmission network and propose investment options taking into account optimal allocation of public resources in the long term, the projects that should and could be developed by the private sector, the available financing from external sources, and the direct support that could be provided by the Government in order to achieve the required financial ratios.

16. EDL's projected financial ratios and covenant compliance for FY03-09 is provided below and in Table 2:

Financial Ratios: Required 2005 2006 2007 2008 2009 2010 2011Debt Service Coverage Ratio (times) 1.5 2.5 2.1 2.4 1.8 1.7 1.5 1.3Self-Financing Ratio (%) 30% 27% 23% 33% 34% 54% 42% 34%LT Debt to Equity Ratio (times) 1.50 0.70 0.90 1.00 1.00 1.00 1.00 0.90Government Collection Period (months) 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1Non-Government Collection Period (months) 2.0 2.9 2.5 2.2 1.8 1.5 1.4 1.4

17. Beyond 2006, EDL assumed that with the completion of Nam Mang and Xeset and no other generation projects earmarked until FY11, its cash position would be at more manageable levels. However, with the heavy debt drawdowns for these projects and the commencement of normal debt servicing (with no FRP interest rate support), the DSCR would begin to show strain and non-compliance from FY11. A sensitivity analysis showed that a financial restructuring of EDL’s foreign currency loans (whereby all foreign debts with concessional or commercial interest rates, except those for rural electrification projects, would be onlent to EDL at the uniform rate of 4.5%) would allow financial covenant compliance during the projected period (see details in Table 4). At negotiations, agreement would be reached that the Government would take all necessary measures including but not limited to raising electricity tariffs, to ensure that EDL meet the financial covenants as follows: (a) maintain a self-financing ratio of no less than 30% of three-year average planned capital expenditures; (b) maintain net revenues of no less than 1.5 times annual projected debt service payments; and (c) maintain the ratio of its long-term debt to no more than 1.5 times its equity.

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Table 1: EdLFinancial Operating Results FY92-03

Fiscal Year ending December 31 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Generation (GWh) 752 920 1199 1089 1247 1219 948 1169 1579 1554 1570 1317Imported Electricity (GWh) 41 48 57 77 88 102 142 172 160 182 201 229 Total Supply 793 968 1256 1166 1335 1321 1090 1341 1739 1736 1771 1546Transmission/Distribution Losses (GWh) 81 108 124 153 163 177 172 178 236 230 233 227Electricity SoldDomestic (GWh) 252 264 303 337 380 434 513 565 640 710 767 884Export (GWh) 460 596 829 676 792 710 405 598 863 796 771 435 Total Electricity Sold 712 860 1132 1013 1172 1144 918 1163 1503 1506 1538 1319Average RevenuesDomestic (K/kWh) 19.37 22.52 23.49 23.71 25.86 34.89 51.97 113.65 168.82 250.64 314.77 388.90Export (K/kWh) 26.35 25.25 24.71 30.91 34.85 52.84 124.23 288.30 241.56 254.78 295.95 307.43 Average Revenues (K/kWh) 23.83 24.41 24.4 28.51 31.97 45.94 103.67 230.88 226.71 265.07 322.23 395.34

Income Statement Items:Domestic Revenues (elect + installation) 5,500 6,434 7,097 8,615 14,589 16,204 44,850 96,103 132,274 196,395 267,420 387,726Export Revenues 12,107 15,045 20,489 20,881 27,619 36,369 50,315 172,405 208,470 202,802 228,174 133,732 Total Operating Revenues 17,607 21,479 27,586 29,496 42,208 52,573 95,165 268,508 340,744 399,197 495,594 521,458Operating Costs 17,607 21,479 27,586 29,496 42,207 52,573 74,413 155,723 200,118 224,152 396,179 448,054 Operating Income 6,774 8,562 10,435 9,482 14,742 17,046 22,936 114,061 142,426 181,861 99,415 73,404Interest Expense 4,026 4,018 3,874 4,809 7,899 10,067 36,493 99,437 90,683 43,073 48,841 39,945Other Income (Expenses) 257 197 327 2,260 -1,096 229 6,164 32,285 -11,842 -20,049 55,476 117,257 Net Income 1614 765 3784 3761 2538 4685 -7393 46909 39901 118739 106050 150716

Cash Flow Items: Internal Sources 11,835 13,879 19,045 14,916 21,867 26,912 54,083 196,593 287,959 278,385 425,510 204,666Borrowings 7,017 4,520 9,333 55,819 49,177 73,162 104,404 287,502 174,364 191,926 201,750 252,941Equity Investments -1,627 -122 947 -6,838 -90 44,623 28,332 1,300 24,267 1 217,088 54,401Extraordinary Income 2,260 556 656 18,597 331 -3,657 -2,717 38,994 0 Total Sources of Cash 17,225 18,277 29,324 66,157 71,510 145,353 205,416 485,726 482,933 467,595 883,342 512,008Capital Expenditure 11,791 7,615 11,790 43,813 42,371 51,522 144,085 327,896 250,236 135722 242791 318803Non-Cash Working Capital Inc. (Decr) 2,882 0 0 3,702 9,150 1,171 5,870 -13,162 73,047 118502 136181 -34916Debt Service 6,033 8,002 13,913 10,699 20,127 21,006 48,088 126,069 154,550 187965 469921 171888Dividends and Other -3,729 4 1,410 1,786 -2,240 0 0 0 0 0 0 0 Total Uses of Cash 16,977 15,621 27,113 60,000 69,408 73,699 198,043 440,803 477,833 442,189 848,893 455,775

Balance Sheet Items: Current Assets 12,630 15,453 16,973 18,880 27,171 46,983 69,235 201,423 251,253 395,944 513,122 551,558 Less Current Liabilities -341 -2,018 -5,649 -3,751 -7,251 -4,995 -114,448 -341,552 -910,193 -233,582 -195,004 -230,703Net Fixed Assets 117,080 119,888 127,054 167,213 203,885 349,616 1,068,794 2,161,506 2,418,441 2,248,780 5,361,814 5,496,309 Total Assets (net of Current Liabilities) 129,369 133,323 138,378 182,342 223,805 391,604 1,023,581 2,021,377 1,759,501 2,411,142 5,679,932 5,817,164Long-Term Liabilities 66,038 70,623 71,972 120,415 156,062 211,687 898,673 1,845,022 1,505,671 1,823,097 1,826,493 1,839,510Shareholders' Equity 63,331 62,700 66,406 61,927 67,743 179,917 124,908 176,355 253,830 588,045 3,853,439 3,977,654 Total Liabilities and Equity 129369 133323 138378 182342 223805 391604 1,023,581 2,021,377 1,759,501 2,411,142 5,679,932 5,817,164

Financial Ratios: Opearating Ratio 100% 100% 100% 100% 100% 100% 78% 58% 59% 56% 80% 86%Return on Average Equity 5.3% 4.4% 6.9% 6.1% 6.6% 6.1% 5.9% 31.1% 18.6% 28.2% 4.8% 3.9%LT Debt as a % of Total Capitalization 51% 53% 52% 66% 70% 54% 88% 91% 86% 76% 32% 32%Self-Financing Ratio (%) 41% 11% -14% -22% 4% -26% -14% -43% 59% 59% 45%Debt Service Coverage Ratio (times) 1.9 1.5 1.1 1.0 1.0 1.1 0.6 1.0 0.9 1.6 0.4 2.1Current Ratio (times) 37.0 7.7 3.0 5.0 3.7 9.4 0.6 0.6 0.3 1.7 2.6 2.4Receivables Collection Period (months) 4.7 3.4 3.1 3.7 4.7 4.5 3.8 2.5 3.5 4.0 5.0 4.6

Actual

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Table 2: EdL Financial Operating Results and Projection, FY04-10

Fiscal Year ending December 31 2004 2005 2006 2007 2008 2009 2010 2011Estimate

Income Statement Items:Revenues 694,388 831,850 934,560 973,936 1,262,649 1,475,617 1,815,456 2,117,003Operating Expenses 537,994 630,769 714,581 679,588 897,969 1,076,067 1,269,624 1,473,135Other Expense 325,627 95,954 155,767 228,120 296,283 384,465 501,991 619,315Net Income/Loss -169,233 105,127 64,212 66,228 68,397 15,085 43,841 24,553

Cash Flow Items: Cash Flow from Operating Activities 434,205 491,904 582,018 697,767 836,105 1,025,556 1,056,136 1,157,521Cash Flow from Financing Activities 504,885 521,960 693,406 785,750 142,758 113,613 -206,323 -322,562Cash Flow from Investing Activities -913,408 -998,552 -1,370,082 -1,514,343 -837,051 -889,848 -662,306 -769,622Increase/decrease in Cash 25,682 15,312 94,658 -30,826 141,812 249,321 187,508 65,337

Balance Sheet Items: Fixed Asssets 6,387,029 7,487,965 8,935,037 10,510,050 11,398,820 12,393,668 13,108,188 13,933,131Current Assets 524,311 542,674 458,699 427,661 594,555 843,536 1,072,258 1,182,057Other Assets 151 151 150 150 151 149 151 150Total Assets 6,911,491 8,030,790 9,393,886 10,937,861 11,993,526 13,237,353 14,180,597 15,115,338

Equity 4,203,344 4,615,397 4,983,133 5,364,994 5,817,554 6,370,625 6,921,301 7,537,997Long-Term Liabilities 2,551,012 3,249,753 4,266,073 5,277,327 5,825,988 6,356,374 6,625,382 6,896,514Current Liabilities 157,135 165,639 144,681 295,540 349,983 510,355 633,913 680,827Current Equity and Liabilities 6,911,491 8,030,790 9,393,886 10,937,861 11,993,526 13,237,353 14,180,597 15,115,338

Financial Ratios: Debt Service Coverage Ratio (times) 2.5 2.5 2.1 2.4 1.8 1.7 1.5 1.3Self-Financing Ratio (%) 34% 27% 23% 33% 34% 54% 42% 34%Return on Capital Employed 4.7% 4.8% 4.9% 4.9% 4.9% 4.8% 4.7% 4.7%Opearating Ratio 77% 76% 76% 70% 71% 73% 70% 70%LT Debt to Equity Ratio (times) 0.60 0.70 0.90 1.00 1.00 1.00 1.00 0.90Current Ratio (times) 3.3 3.3 3.2 1.5 1.7 1.7 1.7 1.7Government Collection Period (months) 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1Non-Government Collection Period (months) 4.0 2.9 2.5 2.2 1.8 1.5 1.4 1.4

Projected

Table3: Main Assumptions to Financial Projections

2004 2005 2006 2007 2008 2009 2010 2010Operational Data: Generation (GWh) 1,425 1,576 1,595 1,885 1,885 1,885 1,885 1885Purchases from IPPs (GWh) 10 13 16 19 22 233 714 737Imported Electricity (GWh) 268 544 624 388 508 442 87 210 Total Supply 1,703 2,133 2,216 2,002 2,415 2,560 2,686 2,832Transmission/Distribution Losses (GWh) 247 258 284 310 330 355 356 380Electricity SoldDomestic (GWh) 1,011 1,127 1,242 1,368 1,493 1,613 1,738 1,874Export (GWh) 436 490 377 18 282 281 267 259 Total Electricity Sold 1,447 1,617 1,619 1,386 1,775 1,894 2,005 2,133Average Revenues:Domestic (K/kWh) 513.91 564.78 620.36 682.05 749.18 823.21 905.03 994.19Export (K/kWh) 311.34 331.06 351.47 375.78 394.14 418.96 464.99 484.15 Average Revenues (K/kWh) 479.88 514.44 577.25 702.70 711.35 779.10 905.46 992.50

Economic Data: GDP Growth Rate 5% 5% 5% 5% 5% 5% 5% 5%Average Foreign Exchange Rate (Kip/US$) 10,520 11,043 11,539 12,057 12,599 13,165 13,756 14,374Foreign Inflation 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4%Local Inflation 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07

Annual Capital Expenditures (US$ million) Generation Projects 38 14 42 58 30 0 0 0Transmission Projects 19 24 19 25 10 40 18 3Substation Projects 18 11 14 4 3 2 2 2Overhaul Projects 3 17 14 16 0 0 0 0Rural Electrification Projects 6 18 20 10 12 22 20 5

Total Capital Expenditures 84 84 109 113 55 64 40 10

Financing Plan (US$ million)Foreign Currency Loans 62 63 78 80 43 49 32 8Local Currency Loans 0 0 0 0 0 0 0 0Grants 3 0 0 0 0 0 0 0EDL Retained Earnings 19 21 31 33 12 15 8 2 Total Funding 84 84 109 113 55 64 40 10

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Table4: Sensitivity Analysis

Financial Ratios: Required 2005 2006 2007 2008 2009 2010 2011A. Base Case:

Debt Service Coverage Ratio (times) 1.5 2.5 2.1 2.4 1.8 1.7 1.5 1.3Self-Financing Ratio (%) 30% 27% 23% 33% 34% 54% 42% 34%LT Debt to Equity Ratio (times) 1.50 0.70 0.90 1.00 1.00 1.00 1.00 0.90Government Collection Period (months) 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1Non-Government Collection Period (months) 2.0 2.9 2.5 2.2 1.8 1.5 1.4 1.4

B. Financial Restructuring:

Debt Service Coverage Ratio (times) 1.5 2.5 2.4 2.8 1.8 1.5 1.3 1.2Self-Financing Ratio (%) 30% 35% 41% 55% 41% 40% 29% 20%LT Debt to Equity Ratio (times) 1.50 0.70 0.90 1.20 1.20 1.20 1.20 1.10Government Collection Period (months) 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1Non-Government Collection Period (months) 2.0 2.9 2.5 2.2 1.8 1.5 1.4 1.4

Annex 10: Safeguard Policy Issues

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

Resettlement Policy Framework

Project Description

The proposed on-grid component for SPRE II Project will provide access to electricity to more than 42,000 households in about 545 villages in 7 southern provinces. Based on consultation in the project areas, the scope of the grid connection component has been identified, which include construction of 1.4 million meters of 22 kV and 12.7 kV lines, and about 1.1 million meters of 0.4 kV spur lines, and installation of 627 transformers. The total cost of the component will amount to $30.04 million with IDA financing $17.55 million.

The component will be directly linked to a number 115kV transmission lines to be constructed during project implementation. Two such 115kV transmission lines have been identified and prepared, which include Thakhek-Xepon Line (165 km) and Pakse-Khonphapheng (164 km). Even though they are not financed by the World IDA, since they are directly related with SPRE II grid component, EDL agrees to apply the same resettlement policy framework to these transmission projects, and separate RAPs have been prepared for these projects.

For off-grid component, it will provide access to electricity to about 10,000 households from about 1100 villages in 17 provinces in Lao PDR through off-grid technologies, using delivery models similar to the existing SPRE project which included SHS, VH and GS.

Potential Land Acquisition and Resettlement Impact

For 115kV transmission projects, certain amount of land acquisition and resettlement might be required. Based on experience in SPRE, and design requirements, each 115kV substation will require about 1 ha of land area, and each tower will require about 36 square meters. In addition, to ensure safe operation, all structures and trees underneath the transmission line will be removed within 25 m right-of-way. During construction, certain amount of land areas will also be required temporarily for building access road, setting up towers, and storing construction materials.

For MV and LV lines, according to technical standards and construction practices, very limited amount of land acquisition might be required. They include land acquisition for the construction of poles (about 0.14 square meters per pole) and clearance of 4-8 meters right-of-way under the transmission lines. In addition, during construction, limited amount of temporary land occupation might be needed for erecting poles, storing materials, and constructing access roads.

Since transmission line often runs through countryside, and efforts will be made during design stage to avoid built-up areas, the number of families that need to be relocated and buildings to be removed will be relatively small. The amount of land areas required for towers or poles will be very small. Most of farmland under the transmission line will be allowed to continue farming except for damages of some current crops during the construction. Various trees within the right of way will be removed. Following the compensation policies, all affected people will be provided with compensation at replacement values and rehabilitation measures if it is necessary, and the potential impact on their income and livelihood will be very limited.

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For off-grid component, no land acquisition, tree clearance, or resettlement is required during installation of SHS and GS schemes. For VH scheme, while most of them do not involve any land acquisition, some schemes might need small amount of land areas for building head-race channels (200m x 1m). The off-grid planning guidelines and technical standards ensure that the channel routing does not cause removing any productive trees or structures used by farmers for dwelling or working. They also ensure that all transmission lines do not interfere with existing building structures and trees.

Legal Framework for Land Acquisition and Resettlement

Even though there are no specific laws in Lao PDR concerning the details of resettlement and compensation, the current Electricity Law, Land Law, and Forestry Law have general provisions which require compensations to be paid for the land and building owners in case their trees, crops or buildings are damaged by the public projects. Based on these provisions, MIH issued Environmental Management Standard, providing details guidance on how to prepare power sector projects. In addition, a draft National Policy on Resettlement and Compensation, prepared by STEA with ADB support, is being approved by GoL, which is in general agreement with IDA resettlement policy.

Compensation Standards

Based on the laws, compensation principles, and SPRE experience, a set of compensation standards and valuation methods have been developed for the proposed SPRE II Project.

For permanent land acquisition, the basic compensation for productive farmland will be 10 times of annual output value. The detailed formula for unit compensation will be: (yields of the farmland (ton/ha/year)) x (market price of grain) x (number of multiples). For acquired scrub land and garden land, the compensation rate will be set at one third of the compensation rate for farmland. Based on SPRE experience, such compensation was well received among affected people. With limited land loss and adequate compensation, no significant negative impacts are expected.

For temporary land occupation, compensation of lost crops and land reclamation will be paid by the project owner. The compensation will be based on average output value of lost crops and cost of restoring them into original conditions. Efforts will be made by the project owner to minimize the impacts of temporary land occupation by timing the construction after planting season.

For affected houses, compensation at replacement value will be paid to affected persons, which will include (1) cash for lost structures; (2) housing plot to build the replacement structure; and (3) allowance for moving and transfer. For transmission line project, since affected houses are only required to move short distance from the right of way, based on SPRE experience, most traditional wood structure were simply moved by the villagers to nearby locations. In this case, the project owner will pay all related cost for such moving after consultation with affected people and villages. The agreed total compensation will include new site preparation, payment for moving ceremony, and cost of additional materials for minor repairs. The project owner will ensure that all moved houses will have the same or better conditions after the move.

For the loss of various trees, the general compensation principle is to provide replacement value to the affected people. After consultation with provincial government and affected villages, the basic formula for estimating such compensation is developed. For industry trees: unit

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compensation = (cost of land cleaning + cost of seedling) + (annual cost of taking care x year of taking care). For fruit tree, the unit compensation = (cost of land clearing + cost of seedling) + (cost of taking care x year of taking care) + (annual cost of income x year of income). In order to ensure that the compensation rates for economic trees are adequate, each province will develop a detail list of compensation rates for various trees, based on agreed formula, current yield, and market prices, which will be consulted with local governments and affected people prior to project implementation.

Criteria and Eligibility for Compensation

The compensation and rehabilitation will be provided for all displaced persons if their land area or income source will be removed; their houses demolished and their other properties (crops, trees, and other facilities) removed or damaged due to land acquisition or construction of the project. All displaced persons, regardless of their legal status, will be provided compensation and rehabilitation based on the policies adopted for the project. Lack of legal paper of their customary rights of occupancy certificates shall not be an obstacle for obtaining compensation for them.

Institutional Arrangement

The PMU of MIH and Project Office of EDL will be jointly responsible for planning and implementation of the SPRE II Project. In terms of resettlement planning and implementation, for grid extension component, three levels of institutions will be involved. The first level is EdL headquarter Project Office, which will be responsible for overall resettlement planning and implementation. The second level is EdL BOs in 7 provinces, which will be responsible for implementing actual grid extension activities and coordinating with local authorities. The third level of organization is the Resettlement Coordination Committees of 7 provinces with members from relevant provincial departments and districts. These three levels of organizations will form the institutional network to ensure smooth resettlement implementation in according to the resettlement policy framework.

Similar arrangement is also made for off-grid component. The first level is the PMU of MIH, which will be responsible for overall planning and implementation. The second level is the National ESCO, which will be responsible (through individual ESCO contracted) to actual implementation of individual cluster and village schemes. The third level will be Provincial Department of Industry and Handicraft (PDIH) and local district and villages, which will be responsible to assist the implementation of resettlement activities following the resettlement policy framework for the project.

Reporting and Approval

For most those subprojects with only minor impacts, only impact and compensation data sheet needs to be prepared, which are not required to submit to IDA for review. Instead, they will be reviewed and approved by both EdL and MIH to ensure that resettlement policy framework is followed. For the subprojects with serious resettlement impacts, EDL and MIH will prepare full RAPs and submit to IDA for review prior to implementation.

Resettlement Cost Estimate

The cost of potential land acquisition and resettlement will be included in the total project cost for SPRE II Project. Both EdL and MIH will sure sufficient funding available to cover all resettlement related cost for grid and off-grid subprojects. For each subproject, the total resettlement budget submitted by EdL BOs and national/provincial ESCOs/PDIH will be reviewed and approved by EdL

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and MIH. After receiving the approval, EDL BOs and MIH will make funds available for implementation.

Consultations, participation, and disclosure in resettlement planning and implementation

In preparing each subproject, extensive consultation will be carried out in project areas by project implementation agencies and local government officials on potential resettlement impacts, compensation policies, and rehabilitation measures as well as grievance procedures. The affected people are invited to voice their opinion on the project and compensation policies. After consultation in each village a minutes of meeting with villages will be prepared by project implementation agencies to record all discussion and agreements made with villages.

After finalization of the RAPs or datasheet with detailed compensation standards and rehabilitation measures, they will be disclosed to the affected villages and individuals. The public disclosure of RAPs could be carried out by holding public meeting, putting up notice in the affected villages, or distributing resettlement information booklet to the affected people. The Resettlement Policy Framework will be translated into local languages and disclosed in both EDL BOs and ESCO/PDIH offices once it is approved by EDL, MIH and IDA.

Grievance Redress Mechanism

In order to address complaints and disputes effectively and timely, a grievance redress mechanism will be set up, which will be disclosed to DPs before the resettlement implementation. If a person is not satisfied with his compensation, he could voice his complaint to the affected village or district resettlement committee. The village or district resettlement committee will give him an answer within two weeks. If he is not satisfied with the solution, he could appeal directly to EDL BO or ESCO/PDIH, who will give him a reply within two weeks. If he still does not agree with the decision, he could appeal to EDL or MIH, which will make a final decision within two weeks. If he still does not agree with the decision, he could go the court as a last option.

Resettlement Monitoring and Evaluation

Following the requirements of IDA, during the project implementation, both internal and external resettlement monitoring and evaluation exercises will be carried out in order to monitor resettlement implementation and ensure all affected people are compensated adequately and their income and livelihood are restored after resettlement and rehabilitation. The internal resettlement monitoring will be carried out by EDL and MIH, and staff from EDL BOs and ESCOs. The main purpose is to have an overview of the resettlement progress for both components. Every quarter, EDL BOs and the National ESCO will report resettlement implementation for each subproject to EDL and MIH to be compiled into resettlement progress reports for the two components. They will be submitted to IDA as part of quarterly report for the SPRE II Project.

For those subprojects with serious impact (more than 200 DPs), an external resettlement monitoring and evaluation agency will be selected to carry out external resettlement monitoring and evaluation. The main objective is by independently monitoring resettlement implementation to see whether the objective of resettlement is achieved, and to provide basic assessment on resettlement implementation and restoration of livelihood for the affected people.

Ethnic People Development Plan

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For SPRE II Project, among total benefited villages and populations by grid and off-grid components, significant portion of them are ethnic villages and populations. For grid extension component, according to the survey by EDL, among total project villages, 37 percent of them will have more than 50 percent of population as ethnic population, and about 31 percent of total project population being ethnic population. For off-grid component, since most project villages will be located in remote areas in 17 provinces, about 68 percent of project villages are ethnic minority villages. Following IDA policy requirements, an Ethnic People’s Development Plan (EPDP) has been prepared for both components, under which, a consultative process will be set up and a range of measures will be adopted during the project implementation in order to ensure that affected ethnic populations will derive benefits under the project and adverse impacts are avoided or mitigated.

The Project by providing electricity connection through grid and off-grid components is anticipated to have positive impacts on ethnic groups living in the project villages, which include improving irrigation conditions, creating new income opportunities in handcraft, providing cheap lighting option, and reducing burdens for women and children in fetching water and rice de-husking.

The EPDP introduces the basic legal, cultural and socio-economic conditions for ethnic groups in Lao PDR, particularly pertaining to land tenure and natural resource use. In addition, specific consultation procedures and institutional arrangements are proposed to address the particular needs and circumstances of ethnic groups during project implementation. It aims to ensure that development progress fosters full respect for their dignity, human rights and cultural uniqueness.

The basic strategy for addressing the issues will be based on the informed participation of the ethnic groups themselves, which include identifying local preferences through direct consultation and incorporation of ethnic groups’ knowledge into project planning and implementation process.

Environmental Safeguards

The project is in full compliance with all environmental policies and procedures of the Lao PDR and the World Bank. In accordance with World Bank policy for Environmental Assessment (OP/BP/GP 4.01) the project was rated Category B.

The project consists of both grid-extension and off grid electrification components. Grid extension investments will be made in seven southern provinces of Lao PDR, including: Bolikhamxay, Khammouane, Savannakhet, Salavan, Xekong, Champasak, Attapeu. The off-grid electrification components will spread over 17 provinces in Lao PDR.

The Recipient has prepared action plans and framework documents for both grid and off-grid components to address the safeguard issues. The Recipient has agreed to implement the recommendations of the action plans and follow the procedures outlined in the framework documents. EdL has gained experience in environmental and social impacts mitigation with the recently closed SPRE project, which is also financed by IDA and is very similar to the proposed project. EdL has adequate capacity to plan and implement these action plans.

For the grid extension component, anticipated environmental issues are minor and easily managed through good engineering design and construction practices. The first year program will include 45 subprojects for electrification of 42,000 households in 545 villages, only 0.4 ha land areas will be required with 20 percent being farmland, and about 33,000 trees will be affected. The Phase 1 off-grid component will use SHS and VH and GS for off-grid electrification of

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10,000 households. The first year program will focus on using of SHS only. Limited land acquisition and resettlement impacts are expected. Environmental impacts for the off-grid component are also minor and easily managed through good engineering design and construction practices as well as simple easily performed good housekeeping measures during project implementation. Typical environmental issues and actions for environmental management (control and monitoring) are included in the framework documents.

For VH schemes to be developed in the later stage of the Phase 1 project, MIH PMU will be the interim implementing agency and the future implementing agency will be the Management Contractor to be contracted as an outcome of outsourcing the management functions for the off-grid program. The capacity of these implementing agencies for planning and implementing safeguard actions have been reviewed by the Task Team and are considered to be inadequate.

The capacity of both implementing agencies for grid extension and off-grid electrification activities will be strengthened in the early stage of Phase 1 under a Safeguard Capacity Building program, which is part of the technical assistance program of the proposed project.

Environmental Policy Framework for On- and Off-Grid Components.

Given the APL approach adopted for the project and environmental impacts, an environmental policy framework has been prepared for both on- and off-grid activities.

The Environmental Policy Framework has established detailed procedures, documentation requirements and institutional responsibilities for (i) project identification; (ii) environmental screening; (iii) environmental documentation and document content; (iv) review and approval; (v) consultation and disclosures; (vi) monitoring and reporting; (vii) project implementation; and (viii) standard format of EMP.

The policy framework was reviewed by both the Task Team and the East Asia Safeguard Unit of IDA and was considered acceptable.

Environmental Management Plans for First Year On-Grid Program.

EMPs for the 45 subprojects under the grid-extension component were prepared in accordance with the policy frameworks and submitted to IDA. For off-grid component, the first year program does not include VH and GS schemes, so no EMPs were required. EMPs submitted were reviewed by the Task Team and East Asia Safeguard Unit and were considered acceptable.

For new off-grid electrification activities or changes of grid-extension subprojects during the process of implementation, the Recipient agreed to prepare EMPs as necessary in lines with the policy framework documents, satisfactory to the IDA.

Environmental Issues of Associated Projects.

For the two associated 115 kV transmission lines to be financed by investors other than IDA, environmental assessments were prepared by MIH with assistance of international consultants and included in the IDA project files. Associated reports were reviewed by the Task Team and considered to meet the IDA standards.

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Annex 11: Project Preparation and Supervision

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

1. Preparation Timeline:

Milestone DateProject Concept Note review 06/09/2003Initial Project Information Document posted in PIC

07/29/2003

Initial Integrated Safeguards Data Sheet to PIC 08/31/2003Project Appraisal 07/19/2004Negotiations 08/01/2005GEF CEO Endorsement Expected 08/11/2005Board/RVP Approval Expected 09/13/2005Scheduled Board Date 09/13/2005Planned Date of Effectiveness 11/01/2005Planned closing date 03/31/2010

2. Preparation Process and Funding:

The World Bank was primarily responsible for the preparation of this project. In addition to IDA preparation funding, significant Trust Fund resources were mobilized for project preparation from various sources, including a Japanese PHRD grant in the amount of $1.32 million (TF052798), a GEF PDF B Grant in the amount of $330,000 (GEF -PPG TF 053573), and ASTAE funding of $273,500. These grants and assistance were used to assist the recipient in the preparation of all aspects of the SPRE II project, with the GEF PDF B and ASTAE assistance targeted to the off-grid, renewable energy, and DSM/energy efficiency aspects of the project. Major Recipient-executed preparation studies included:

Power System Development Plan (IDA-funded) SPRE II Design Report (IDA-funded) Socio-economic Survey (PHRD-funded) Rural Electrification Framework Study (PHRD-funded) Tariff Study (PHRD-funded) Power Sector Financing Study (PHRD-funded) Power Distribution Loss Reduction Study (PHRD-funded)

Additional Bank-executed preparation work conducted in close cooperation with EdL and MIH included:

Renewable Energy Resource Assessment Preparation and Planning Demand-Side Management/ Energy Efficiency Program Planning Village Off-grid Operational Manual preparation Organizational Strengthening study for MIH

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TOTAL SPRE II PROJECT PREPARATION BUDGET

Activities Total IDA PHRD ASTAE EdL/MIH PDF BPower System Development PlanPrepare Physical Components – Grid-Connected and Off-Grid

50,000 50,000

Prepare RE Framework 430,300 320,300 50,000Socio-Economic Survey

Rural Electrification Master Plan 277,100 217,100 75,000 40,000

Sector Financing Strategy 214,350 194,350 50,000DSM and Energy Efficiency 75,000 75,000EdL Tariff Structure and ProcessEdL and MIH Capacity Building $50,000Monitoring and Evaluation

3. Project Team:

A team of IDA staff and consultant who worked on preparation of the project include:

i. Barry Trembath, Task Team Leader, Lead Power engineer;ii. Jie Tang, Co-Task Team Leader, Energy Specialist;

iii. Yuling Zhou, Senior Operation Officer, procurement accredit specialist;iv. Chrisantha Ratnayake, Senior Distribution Engineer;v. Rebecca C. Sekse, Financial Specialist;

vi. Kannathee Danaisawat, Financial Management Specialist;vii. Esperanza Miranda, Operation Officer

viii. Morten Larsen, Energy Specialistix. Teri G. Velilla, Program Assistantx. Perry Lee Radford, Program Assistant

xi. Hoi-Chan Nguyen, Senior Counselxii. Douglas French Barnes, Senior Energy Specialist

and

1) Somphone Simmalavong, consultant, procurement;2) Grayson Heffner, consultant, renewable energy specialist;3) Youxuan Zhu, consultant, social specialist;4) Bernard Baratz, consultant, environmental specialist;5) Voravate Tuntivate, consultant, economist (social and statistics);6) Shaheena Khan, consultant (rural energy);7) William Derbyshire, consultant, economist;

4. A table summarizing the IDA funds expended to date on project preparation and the estimated costs of approval and supervision costs.

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Planned ActualPCN review June 9, 2003Initial PID to PIC August 24, 2003Initial ISDS to PIC June 30, 2004Appraisal July 6, 2004 July 19, 2004Negotiations June 13, 2005Board/RVP approval September 8, 2005Planned date of effectiveness October 1, 2005Planned date of mid-term reviewPlanned closing date March 31, 2009

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Annex 12: Documents in the Project File

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

List of Project Documents

1. Project Preparation Study Deliverables

Funding Source

Title Date Author

IDA Power System Development Plan August, 2004 Maunsell - LahmeyerIDA SPRE II Design Report October, 2004 Nippon KoeiPHRD Socio-economic Survey November 22,

2004DECON – Systems Europe

PHRD Rural Electrification Framework Study November 30, 2004

Maunsell Ltd

PHRD Tariff Study December, 2004 Electrowatt - FichtnerPHRD Power Sector Financing Study January, 2005 Maunsell Ltd.PHRD Power Distribution Loss Reduction March, 2005 TEPCO EngineeringASTAE Renewable Energy Resource Assessment

Preparation and PlanningNovember, 2004 Maunsell Ltd.

ASTAE Demand-Side Management/ Energy Efficiency Program Development – Program Plan

November, 2004 International Institute for Energy Conservation

ASTAE DSM/EE Study Tour Report November 2004 Danish Energy Management

ASTAE Operational Manual December, 2004 Economic Consulting Assoc.

IDA Procurement Capacity Assessment Report July 2004 WBIDA Financial Management Appraisal Report December 2004 WB

2. Safeguards Documents

Title Component Prepared byEnvironmental Policy Framework On-Grid EdLEnvironmental Policy Framework Off-Grid MIHEnvironment Management Plans, On-Grid, one for each sub-project EdLResettlement Policy Framework On-Grid EdLResettlement Policy Framework Off-Grid MIHResettlement Action Plan On-Grid - First Year EdLEthnic People Development Plan On-Grid and Off-Grid EdLInitial Environmental Examination (IEE) Report

Associated 115 kV Transmission Projects

MIH

Resettlement Action Plan Associated 115 kV Transmission Projects

MIH

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3. Other Referenced Documents

Title Date AuthorLao PDR: Evaluation of Off-Grid Renewable Energy Electrification Pilot Demonstration Project

December 2003 Economic Consulting Associates

EGAT Power Development Plan (PDP 2004) April 2004 Generation System Development Planning Dept, System Planning Division

EdL Power Development Plan (PDP 2004-13) March 2004 System Planning Office, Development Div, EdL

RE Fund Decree October 2004 Prime Minister’s Office, GOLProcurement Plan January 2005 MIH and EdLProject Manual – EdL Component February 2005 EdLProject Manual – MIH Component February 2005 MIHVillage Screening Process for On-grid Electrification

November 2004 EdL

Audit Reports of EdL Financial Statements, Special Account, and Management ReportEdL Annual Reports 2003 EdLEdL Financial Model (electronic version) 2004 EdLElectricite du Laos Adviser's Final Report, World Bank SPRE Cr No 3047-LA

May 2004 Resident FM Adviser, PA Consulting Group

Electricite du Laos Adviser's Draft Final Report, World Bank SPRE Cr No 3047-LA,

March 2004 Resident FM Adviser, PA Consulting Group

Electricite du Laos Financial Model and Financial Model Users Manual

May 17, 2003 PA Consulting Group

Electricite du Laos Financial Modeling Assignment, Inception Report

March 13, 2003 PA Consulting Group

Brief on Importance of Information Technology for the Commercial Mandate of EDL

February 6, 2003 EdL

Electricite du Laos, Report on the Revaluation of Fixed Assets

2003 Meritec

Theun-Hinboun Power Project, Presentation to Board of Directors

November 2001 Theun-Hinboun Power Company Ltd, Paribas

Power Supply Tariff Study, Draft Final Report November 2001 Robert VernstromLao PDR Tariff Study, Progress Report October 23, 2001 Robert VernstromProposal to Provide Training on Basic Concepts and Principles of Accounting Electricite du Laos,

September 20, 2001

PriceWaterhouseCooopers

Electricite du Laos, Loss Reduction Programme, Recommendations for Action to Reduce Distribution Losses

August 2001 Meritec

Review of the Contract-Plan of Electricite du Laos for the Period 1997/1999

March 2001 JP Thibaut and P Tardy

Review of Electricite du Laos Financial Model 2001 Dan O'Hearn, Sierra West Consulting

Information Technology Strategic Plan for March 2000 ESBI Consultants Ltd.

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Electricite du Laos

3. Prepared Terms of Reference

Title SPRE II ComponentVillage Off-grid Program Management Contractor B.2 Off-Grid Institutional StrengtheningVillage Off-Grid Quality Assurance Surveyor B.2 Off-Grid Institutional StrengtheningRE Fund Advisor B.2 Off-Grid Institutional StrengtheningRE Pilot Projects – Management Contractor B.3 Alternative RE Technologies and

Delivery ModelsPrivate Sector Distribution System Pilot Project B.3 Alternative RE Technologies and

Delivery ModelsPico Hydro Safety and Operational Awareness Development

B.3 Alternative RE Technologies and Delivery Models

RE Master Plan Study B.4 RE Master Plan and DatabaseAssessment of the Rehabilitation of Existing Micro Hydro Electrification Systems

B.4 RE Master Plan and Database

Assessment of Mini / Micro Hydro Resources in Southern and Central Provinces

B.4 RE Master Plan and Database

Biomass Energy Resource Assessments B.4 RE Master Plan and DatabasePower Sector and Regulatory Policy Advisor B.6 MIH Organizational StrengtheningRegulatory Frameworks for RE B.6 MIH Organizational Strengthening

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Annex 13: Statement of Loans and Credits

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

Original Amount in $ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P075006 2003 LA - Second Land Titling Project 0.00 14.82 0.00 0.00 0.00 15.87 2.51 0.00

P064886 2003 LA-SUSTAINABLE FORESTRY FOR RURAL DEV.

0.00 9.90 0.00 0.00 0.00 10.23 0.00 0.00

P077620 2002 LA-Fin. Management Capacity Building Cr.

0.00 8.50 0.00 0.00 0.00 9.22 0.34 0.00

P077326 2002 LA-Poverty Reduction Fund Project 0.00 19.34 0.00 0.00 0.00 20.81 0.74 0.00

P068069 2002 LA-Fin Mgmt Adj Cr (FMAC) 0.00 17.00 0.00 0.00 0.00 11.74 14.41 10.00

P065973 2001 LA-Agricultural Development Project 0.00 16.69 0.00 0.00 0.00 17.91 -1.64 0.00

P064821 2001 LA-Road Maintenance 0.00 25.00 0.00 0.00 0.00 7.53 -1.31 0.00

P042237 1999 LA-Provin. Infrastructure 0.00 27.80 0.00 0.00 0.00 10.59 5.33 0.00

P044973 1998 LA-SOUTHERN PROVINCE RE 0.00 34.70 0.00 0.70 0.00 3.91 1.91 0.00

P004208 1996 LA-LAND TITLING 0.00 20.73 0.00 0.00 0.00 7.63 8.76 6.03

P004200 1995 LA-HEALTH SYSTEM REFORM & M 0.00 19.20 0.00 0.00 0.00 3.91 5.17 5.20

Total: 0.00 213.68 0.00 0.70 0.00 119.35 36.22 21.23

LAO PEOPLE'S DEMOCRATIC REPUBLICSTATEMENT OF IFC’s

Held and Disbursed PortfolioIn Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

1998 SEF BAFCO 0.77 0.00 0.00 0.00 0.77 0.00 0.00 0.00

1998 SEF Endeavor 0.15 0.00 0.00 0.00 0.15 0.00 0.00 0.00

1998/00 SEF Settha 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00

2001 SEF Villa Santi 1.15 0.00 0.00 0.00 1.15 0.00 0.00 0.00

Total portfolio: 2.25 0.00 0.00 0.00 2.25 0.00 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

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Annex 14: Country at a Glance

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

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Annex 15: Incremental Cost Analysis

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

BARRIERS TO ACCELERATING RURAL ELECTRIFICATION AND OFF-GRID RENEWABLE ENERGY DEVELOPMENT

The main barriers to achieving GoL’s ambitious electrification targets are (see Annex 1):

Insufficient RE planning capacity to prepare large-scale, integrated RE projects that would deliver household access most cost-effectively.

Too little rural household/income and renewable energy resource data to be able to prepare and appraise off-grid electrification projects.

Scarcity of concessionary financing to maintain the planned pace of RE. Excessively low rural households tariffs, coupled with low electricity consumption,

debarring recovery of costs of rural electricity services. Absence of integrated rural development planning, resulting in slow development of

income-generating uses needed to make power supply economically viable. Lack of private sector capacity for scaling-up implementation of RE.

THE SECTOR REFORM AND CAPACITY-BUILDING AGENDA

Overcoming these limitations in the current technical, financial and institutional arrangements for RE would require the following power sector reforms:

Improved RE Planning Information and Process. Collection of data at the sub-district level on - the number of households, availability of renewable energy resources, proximity of the grid, existing and potential demand, and scope for fostering income generating activities - is a prerequisite for coordinated planning at the provincial and national levels. An electrification master planning process (linked to resource inventory studies) that captures all renewable energy capabilities22, is necessary to establish the most economical method of electrifying each village.

Improved Institutional Arrangements for Financing, Implementing and Governing RE. While GoL has made some progress in identifying institutional arrangements to realize its ambitious RE program, technical assistance necessary to move forward is lacking. Key areas where improved institutional arrangements are needed are:

RE Financing. MIH has established an off-grid electrification account into which flow the currently-modest lease payments from purchasing households. Appropriately re-structured and expanded, the account could evolve into a national REF able to attract concessionary financial resources to accelerate RE, including renewable off-grid and distributed generation. REF could provide, in a transparent and rule based manner, on-lending of concessionary credit and possibly also smart subsidies on a performance basis to organizations interested in participating in Lao PDR electrification. Substantial start-up investment is needed to set up and operate the REF, and facilitate participation by other donors.

22 Substantial inventory data is available from previous studies supported by ICA and ADB, but it is largely incomplete and not available on a spatial data frame.

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Alternative Delivery Mechanisms. SPRE’s hire-purchase scheme was mostly successful in delivering SHS technology, which has limited potential for productive uses. Piloting alternative technologies, financing and delivery mechanisms and models is necessary, including: (i) Distributed generation systems, powered by diesel, bio-diesel substitutes and/or small hydro, serving remote population centers; (ii) Rehabilitation of existing mini/micro hydro stations; (iii) Scale-up of other promising delivery mechanisms, such as the Solar PV Rental Model; (iv) Private-sector distribution models, in which private sector developers/operators bid on development and operation of small distribution systems; and (v) Franchise schemes, in which retailers and/or commercial Electrification Service Companies (ESCOs) are granted regulated concession areas. Substantial start-up investment is required to pilot the alternative models, establish organizing frameworks, support design of alternative RE models, and enact the enabling legal and regulatory arrangements.

Creating Sector Governance Capacity at MIH. To fulfill its mandate of governing and coordinating the development of the power sector in Lao PDR (including oversight and regulation of the national RE program), MIH and its Department of Electricity, need substantial strengthening of their sector governance ability (including setting policy and standards, regulating private sector providers of RE and rationalizing and setting tariff and subsidy levels).

ROLE AND STATUS OF RENEWABLE DEVELOPMENT

Table 1 (which depicts progress of electrification in Lao PDR) shows that off-grid supplies (predominantly solar and hydro) have grown in significance over the past five years.

Table 1. Electrification RateYear Households

in Lao PDR HHs electrified

Off-grid HHs

Overall Electrification rate

Off-grid Share of HHs electrified

1995 754,265 120,100 3,858 16% 3.21%1996 758,036 136,280 4,689 18% 3.44%1997 761,808 196,998 4,853 26% 2.46%1998 765,579 226,004 7,460 30% 3.30%1999 768,142 254,610 10,897 33% 4.28%2000 818,668 293,495 18,051 36% 6.15%2001 866,277 303,690 19,224 35% 6.33%

The off-grid component of SPRE is expected to electrify 5,200 households. With GEF support, the overall unit cost per household for the SHS’s has been systematically reduced to about $200 for a 30 W system. Financial remediation comprised a hire-purchase arrangement with individual households providing for an up-front payment, covering the cost of batteries, house wiring and lamps and fixtures, plus a monthly repayment charge, based on the size of the system purchased (20, 30, 40, or 50 W) and the term of repayment (5 or 10 years). The concessionary IDA credit terms are basically passed along, but the customer repays the full system purchase cost, out of which is drawn a contribution to a service arrangement with the Village Electricity Manager (VEM), who maintains the systems. The VEMs operate under a performance incentive scheme that allows them to retain a small amount of the householder’s monthly repayment stream. The percentage of defaulting households is only 3%. The accomplishments of MIH’s OPS under SPRE are shown in Table 2 below.

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Table 2: Physical Accomplishments through end-September 2004 – SPRE Off-Grid23

Province Subscribers Operational WaitingHHs Villages Technology24 HHs Villages HHs Villages

Vientiane 1,098 29 SHS 791 29 21 0Oudomxai 1162 44 SHS 625 18 537 26Luangnamtha 1,099 42 SHS 1,084 42 15 1Champasak 1,350 19 SHS 1,350 18 0 0Luangphabang 52 1 VH 52 1 0 0Xiengkhoang 94 1 GS 94 1 94 1Sayabouri 586 9 SHS 417 9 139 9TOTALS 5,535 147 4,413 147 806 38

BARRIERS TO RENEWABLE ENERGY DEVELOPMENT FOR OFF-GRID ELECTRIFICATION

The model piloted by the OPS has involved 7 provincial ESCOs and some 140 VEMs. To broaden its coverage and increase its pace, the following barriers must be overcome:

Lack of technology diversity in off-grid solutions. Although the model was designed to be technology-neutral, it has thus far yielded mostly SHS’s, with unimpressive results for VH and other technologies. The reasons are a distrust of hydro and gen-set systems, and a preference for SHS which allows individual ownership and a choice of sizes, and ease of implementation. To expand into provinces where there are more hydro and less solar resources, it would be essential to develop outreach and planning procedures that embrace a broader range of technologies. Such new procedures must be culturally acceptable, economically justified and sustainable in the context of each village, especially as regards community mobilization around the chosen scheme.

Insufficient capacity to scale-up the off-grid program. To date, 6 of the 7 provinces have been in the middle-income North and Northwest. Even this modest coverage has strained the resources of MIH’s OPS. The proposed plan (see Table 3) is to continue in the 7 current provinces while moving to as many as 10 new provinces, including several with promising biomass and micro-hydro potential. This would require: (i) greater involvement of provincial governments, especially Provincial Departments of Industry and Handicrafts, and additional provincial and national ESCO concessions; (ii) enhanced oversight of planning and implementation and regulation of the performance of PESCOs and VEMs; (iii) intensive capacity building in participatory planning and community mobilization, as electrification in lower-income provinces would be generator sets and/or micro-hydro rather than the simpler SHSs.

23 Off-Grid Electrification Program, Lao PDR. Quarterly Project Progress Report, 3rd Quarter 2004. November 9, 2004, MIH Off-Grid Promotion and Support Office.24 SHS = Solar Home Systems; VH = Village Hydro; GS = Village Engine-Generator Set

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Table 3: Indicative Expansion Plan for the SPRE II Off-Grid Investment Component

Limitations and Operational Inefficiencies in Off-Grid Program Administration and Management. The OPS provided a viable means to “incubate” the program’s key components, including the development of provincial ESCOs. However, it is becoming ill-suited to the demands of a program growing in size, scope and complexity. Shortcomings identified in an interim evaluation of the GEF MSP included: (i) delays and difficulties in performing work due to competing priorities; (ii) weaknesses in monitoring and enforcement, due to administrative barriers from being a government office; (iii) failure to mobilize the private sector to make long-term capital investments; (iv) over-reliance on SHS installations; and (v) difficulties in retaining staff with valuable and specialized expertise. The following residual problems need to be addressed, either through regulation, capacity building or improved central administration:

Difficulties in keeping spares and maintaining key components locally; Finding reliable supplies of appropriate appliances to suit village scale productive

applications, especially rice mills, icemakers, grinders, and pumps. Quality problems encountered when sourcing equipment, which require careful

performance tracking.

ELECTRIC POWER DSM OPPORTUNITY AND POTENTIAL

Domestic electricity use in Laos is growing rapidly, with retail consumption forecast to continue growing at 12 % per annum due both to expanded grid access and to higher consumption by urban customers (see Table 4).

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Table 4: Forecast Domestic Electricity Consumption in Lao PDR

Historically, Lao PDR has exported surplus power to Thailand, which earns it valuable foreign exchange and helps Thailand avoid more costly power generation and reduce its greenhouse gas emissions from thermal generation. A steady 12% growth in domestic consumption together with the forecast growth of imports needed to balance regional supply and demand would result in the cross-border balance of trade switching to a net import of energy from Thailand beginning in 2006 (See Annex 1). Based on this analysis and the power development plan promulgated by EdL for SPRE II period, we may conclude for purposes of benefits evaluation that the marginal unit of production required to satisfy domestic electricity growth will be thermal power production imported from Thailand.18

The DSM potential would most likely be confined to the Central 1 Area, which incorporates Vientiane and comprises 70% of total EdL consumption. Growth is forecast at 11% for the period 2005 to 2010, which would be met by net energy imports from Thailand, where the marginal unit of production is thermal power. This provides the basis for estimating the greenhouse gas benefits of the GEF financed program.

Barriers to instituting DSM

At present, EdL does not have the capacity to estimate or analyze electricity use patterns on a tariff or customer level. There are no load research meters or end-use survey capabilities in place. Retail and MV customers are billed on non-time-differentiated rates. There is no DSM, energy efficiency, or integrated power sector planning capacity within EdL or MIH. Similarly, there is little or no private sector capacity (including manufacturers/suppliers and potential service providers) in terms of DSM or energy efficiency services providers, with the exception of the PESCOs established by OPS. There is also a lack of awareness by end-use customers as regards energy efficiency technologies and practices.25 At such a rudimentary stage it is essential that any DSM or energy efficiency program be carefully developed and properly positioned as regards the larger context of power sector reform, including marginal cost revenue allocation and pricing, elimination of subsidies, efforts to reduce non-technical losses and uncollected revenues, and overall rationalization of the tariff structure.26 Another potentially strategic role for DSM is in the mitigation of currently-high arrears on the part of GOL ministries. Preliminary surveys of these government facilities suggest large potential scope for improved energy efficiency (and thus reduced unpaid bills) with relatively modest investments in timers, occupancy sensors, and other straightforward building modifications.

THE BASELINE OR BUSINESS-AS-USUAL SCENARIO

25 Exceptions include Lao Plaza Hotel and Lao Brewery Company Ltd.26 As tariffs continue a steady climb there may be an additional reason for GoL and EdL to

undertake energy efficiency programs - helping poor customers cope with these price increases

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The baseline scenario with respect to sector reform and capacity building is that EdL would undertake a power tariff study and certain IT improvements. However, MIH, which has the responsibility for overall RE planning, design of institutional and financial arrangements, and mobilization of financing, has negligible resources. Absent GEF support, MIH would be unable to finance the measures needed to overcome major reform and capacity barriers to accelerate RE and renewable energy development.

The baseline scenario with respect to renewable energy development is continuation of the current modest-scale SHS program. Capacity for program delivery would erode, raising system costs, reducing quality and reliability, and causing delays. The consequent deterioration in SHS customer service and equipment performance would undercut customer satisfaction necessary for the ten-year period of repayment and throttle new demand. Further, no steps would be taken to build technology diversity or outsource administration and management to more efficient private or joint venture companies.

The baseline DSM and energy efficiency scenario is that EdL, lacking the capacity, information or equipment to analyze and potentially manage electricity use patterns, would take no actions to promote energy efficiency or introduce DSM. A burgeoning 12% p.a. growth in domestic electricity consumption would result in a consequent loss of power export opportunities to Thailand and higher Thai GHG emissions.

GEF ALTERNATIVE PROJECT

Under the GEF Alternative Project, MIH/EDL would strengthen management of the off-grid component in anticipation of expanding off-grid/renewable investments; undertake broad-based reform and enhance RE; and launch a power efficiency and DSM program:

Institutional Strengthening of the Off-Grid Component (GEF $ 1.0 million)

The thrust of the institutional strengthening activity would be a comprehensive program of management outsourcing, based on the recommendations of the Interim Evaluation of the Off-Grid Component and Draft Decree on the REF. PDF B and ASTAE funds have supported substantial progress towards preparing this critical procurement. The outsourcing process would systematically address the current short-comings of the OPS by establishing functional capacity, strengthening organization and management, providing for a wider range of off-grid technologies, and conversion of the existing purchaser repayment account into a REF that can potentially lead to a self-financing off-grid operation. The MIH would retain overall jurisdiction over the program, including setting program policy and standards and regulating PESCOS. Technical assistance activities would be as follows:

Specialist Consultants for the Tendering Process for Off-Grid Management Contractor(s). Technical assistance would finance experts to assist MIH in preparing the TOR and conducting the outsourcing process for one or more management contractors.

Management of the Off-Grid Repayment Fund. TA would support evolution of the off-grid repayment fund into a more versatile REF, including recruitment of a Fund Manager and local support staff, development of operating regulations for the Fund, consideration of subsidy policy for both on-grid and off-grid electrification in cases where consumer financing is not possible, development of publicity / supporting materials for use in donor fundraising, and liaison with potential donors / lenders.

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Village Hydro Planning. Technical assistance would provide for training of provincial ESCO staff in VH site identification and system development and later assist in developing VH system designs for up to 15 remote villages (about 900 households).

Integrating Pico Hydro into household and village-level access solutions. Technical assistance would develop pilot projects and procedures for upgrading/integrating/rehabilitating existing pico and adding new pico to effect household-, household cluster- and village- level solutions acceptable to local populations and financially and technically sustainable.

Facilitating autonomous functioning of management contractor(s), by devolving to them accounting, FMS, MIS, QA, O&M, fee collection and customer relations functions including, selection of provinces.

Rural Electrification Sector Reform and Improvement

The technical assistance would focus on the following two sub-components:

Rural Electrification Master Plan and Data Base (GEF $ 0.75 million, IDA$ 0.2 million)

This sub-component would help refine the physical planning processes related to renewable components, including establishing a comprehensive RE data base which incorporates renewable energy resource information. IDA credits would support some aspects of grid extension planning. Two preparation studies, RE Framework Study, and Social Economic Survey and RE Database financed by PHRD and ASTAE, have collated existing resource studies, collected social and economic data for RE, set up an initial GIS supported RE database, and defined a TOR and a framework for development of the RE Master Plan. The activities under the latter would include: (i) review of existing RE targets and planning practices; (ii) collecting and entering new RE data into the MIH RE database and GIS to provide a comprehensive resource suitable for RE planning; (iii) preparing an RE Master Plan using the RE database and GIS; (iv) training MIH staff in maintaining and upgrading of the RE database and RE Master Plan; and (v) disseminate outputs of RE Master Plan to concerned provincial and district organizations. Key outputs expected include:

An updated RE database and GIS (including necessary hardware and software) adequate for preparation of a nationwide RE Master Plan.

A comprehensive database of location-specific information relevant to developing electrification schemes using solar, wind, hydropower, and biomass.

An RE Planning Manual using the RE database and the GIS, including data formats. An RE Master Plan, covering the period up to 2020, listing villages to be electrified, their

timing, cost estimate and method of electrification.

Alternative RE Delivery Models (GEF $0.65 million, IDA $0.25 million)

The hire-purchase scheme piloted under SPRE was quite successful in delivering SHS technology, which has limited potential for productive uses, but was much less successful in delivering village or district hydro alternatives. The conventional on-grid delivery model also has limitations due to paucity of concessionary financing. SPRE II would need to pilot alternative financing and delivery models. Candidates include: (i) Distributed generation, with small networks powered by diesel and/or small hydro facilities serving remote population centers; (ii) Rehabilitation of existing mini/micro hydro; (iii) Scale-up of existing delivery mechanisms, such as the Solar PV Rental Model; (iv) Models in which private sector developers/operators develop and operate small distribution systems; and (v) Franchise schemes, in which retailers and/or

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commercial ESCOs are granted regulated concession areas. Substantial start-up investment is required to establish the organizing frameworks, and support design of the new RE models, and enact enabling legal and regulatory arrangements.

TA will be provided to develop promising alternative financing and delivery mechanisms for RE by way of either on-grid extension or off-grid household or village systems. GEF support is proposed to identify two or three distinctive and promising models/mechanisms and pilot them in the course of SPRE II. Of particular interest would be mechanisms and models which could apply to both on-grid and off-grid electrification modes and which maximize the productive application of renewable energy.

Hence, this technical assistance would explore promising alternative - technologies, financing, and delivery mechanisms - for on-grid and off-grid RE, and pilot some of those models/mechanisms. Emphasis would be placed on productive applications of bio-fuels (including biomass gasification, biomass burning, and extraction of energy-oils from seeds) for village industries (such as rice mills and irrigation pumps), so as to replace diesel fuels. The companion IDA credit would finance the investment portion of the pilots. Alternative delivery mechanisms could comprise:

Contracting to private entrepreneurs: (i) some EdL RE operational functions; and (ii) construction, operation and maintenance of new sections of the distribution grid.

Refurbishment of existing micro hydro systems in remote areas, through approaches such as refurbish-operate-transfer.

Arrangements for the development of renewable electricity generation resources and distribution by private entrepreneurs, through build-operate-transfer type approaches.

Mechanisms for channeling subsidies to support investments in delivering RE. Piloting of alternative electrification models, with technical assistance used to develop

appropriate legal, regulatory and contractual arrangements and support MIH in preparing, inviting bids, and overseeing one or more projects.

Piloting of alternative electrification technologies more conductive to income generating activities, such as fuel crops or bio-fuels, that offer greater levels of supply than SHS, can replace existing uses of diesel fuels and are suitable for areas where VH cannot be introduced.

Targeting of income-generation linkages for village-level off-grid electrification, with technical assistance used to: (i) identify, develop and pilot strategies for overcoming the limitations on income-generating activities by households following electrification.

Organizational Strengthening of MIH (GEF $ 0.6 million)

TA, training and placement of a specialist/advisor will support the organizational development, upgrading of staff capabilities, development of new areas of expertise, and targeted capacity building within MIH’s Department of Electricity (DOE). This organizational strengthening is needed to enable DOE to undertake its expanded role in governing the energy sector, including sector reform, power sector regulation, planning and coordination, and tendering and procurement. This component will anticipate the technical assistance needs of DOE as it undertakes its emerging role in coordinating, planning and regulating the power sector, including RE. A preparation consultant was mobilized using PDF B assistance and has conducted an appraisal of the DOE organization in light of its prospective responsibilities and will recommend an action plan for capacity building and organizational development. Technical assistance in support of this action plan will provide training and capacity building in two main areas:

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Power Sector Specialist/Advisor. Technical assistance will support the placement of a senior-level Power Sector Specialist/Advisor in the Department of Electricity. This Specialist/Advisor will support DOE’s efforts to undertake its broadened sector governance responsibilities. The Advisor would be located within the Department of Electricity, and will provide advice and support decision-making across the broad range of sector issues within DOE’s purview. The Specialist/Advisor will also play an instrumental role in the overall capacity building within DOE, and will help ensure MIH fulfills its responsibilities for executing World Bank/GEF operations, including operating SAs. The Specialist/Advisor will provide support to DOE management and staff regarding a wide range of topics and issues, including: (i) Sector reform and regulation; (ii) Power sector planning, especially as regards RE; (iii) Commercialization of EdL; (iv) Developing policies for the sector, especially as regards subsidies and tariffs related to meeting social and development objectives; and (v) Regulation (including quality assurance) of franchised electricity providers, including EdL and the village off-grid national ESCO.

Development of Regulatory Frameworks for RE. Technical Assistance will also be provided to assist MIH in identifying and undertaking its regulatory responsibilities as regards existing and new RE delivery arrangements. Development of these new frameworks will be crucial in preparation for Phase 2 of SPRE II. The technical assistance will support MIH in: (i) Developing procedures and rules for discharging MIH’s regulatory responsibilities; (ii) Determining the appropriate mechanism for regulation of off-grid and main grid service providers; (iii) Developing recommendations on tariff and subsidy policy as regards RE, both connections and service; and (vii) producing guidelines and reviewing existing and proposed arrangements for setting tariffs and subsidies against this policy.

DSM and Energy Efficiency (GEF US $ 0.75 million)

GEF grant financing for a program of Technical Assistance for both EdL and MIH covering both DSM and energy efficiency is proposed. The GEF grant will support early exploration of the potential and opportunities for DSM and energy efficiency in the country, including establishment of provisional institutional arrangements for DSM planning and energy efficiency policy development within EdL or MIH or both. A total of $750,000 in funding, or $300,000 per year, is requested for this activity. Detailed planning of this inception DSM program included collection of existing data on customer electricity uses, consultations regarding organizational arrangements for DSM planning and implementation, review of DSM models and arrangements in use at other utilities within SE Asia, and review of DSM and energy efficiency planning and implementation arrangements in use in Thailand, Vietnam and Malaysia. A detailed 2005-2007 DSM Work Program is now in place.

The technical assistance funding would support the following priority capacity building needs:

Establishment of a DSM Cell within EdL’s Distribution Division; Hiring and training of core DSM staff Establishment of a comprehensive energy end-use database for DSM planning Screening and design of DSM Programs Implementation of pilot programs Monitoring and evaluation; Design of full-scale programs for Phase 2; Development and promulgation of long-term DSM Strategy for Lao PDR.

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PROJECT BENEFITS

The main benefits and beneficiaries of GEF-financed technical assistance support are as follows:

For institutional strengthening of off-grid implementation, the beneficiaries are rural households whose electrification has been enabled or accelerated by IDA investment and GEF support of capacity building. An estimated 20,000 households would be electrified via off-grid schemes under SPRE II. Their benefits would be significant increases in lighting and a rise in disposable income. Currently about 85% of households use diesel lamps for lighting. The useful lighting delivered is 3.1 Kilo-lumen hours at a cost of about 13,000 Kip per month. About 41% of households use car and motor cycle batteries for primarily lighting, television and radio. The average spending on battery recharge and depreciation is about 25,914 Kip per month. In contrast, households electrified under previous IDA RE projects use and pay: (i) on-grid, 135 Kip/kWh, 63 kWh/month, 10,895 Kip/month; (ii) off-grid through SHS or VH, the monthly contracted repayment amounts average about 10,000 Kip.

Electricity would confer the following additional benefits: (i) opportunities to engage in income generating activities; (ii) flexible and/or longer working hours; (iii) better and cheaper access to news, information and entertainment; (iv) post-sunset study hours for children; (v) opportunities for women to engage in productive activities (handicraft, agricultural activities) and entertainment (television, radio) in the evening. Formal research on socioeconomic impacts of off-grid electrification in Lao PDR is underway, although considerable informal information has been collected by MIH and EdL and has been used here in support of economic and financial analysis (See Annex 9). A typical characterization of off-grid electrification, based on conversations with householders in SPRE villages of Pakoup and Tapen, is provided in Box 1.

For support to RE reform, including improving RE planning methods and databases and development of more sustainable institutional arrangements for financing and implementation as well as sector governance and regulation, the beneficiaries broadly comprise the 65% of rural households and villages that do not currently have electricity but are scheduled to receive access over the next fifteen years. The benefit of GEF-financed technical assistance to the national RE program would be to create conditions most suitable for meeting the goals of GoL’s national RE program.

For technical assistance to the establishment of DSM and Energy Efficiency planning and strategy capacity, the main beneficiaries include EdL customers, who would be able to access energy-efficient goods and services, and participate in DSM programs, and consumers of all modern energy types, who would benefit from the early development national plans to combat inefficient energy use. The GOL and EdL and its ratepayers would benefit as well, as moderation of the rapid growth in domestic energy consumption would maintain/enhance export earnings from sales to EGAT.

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Box 1: Productive Use of Household Lighting in Pakoup and TapenVillages

In Pakoup, 46 of the 52 houses supplied with SHS were using the electric light in the evenings to increase production of woven scarves and skirts. The looms had been moved into the main rooms, and lit by one solar lamp. The women and teenagers were proud that they could contribute $5 p.m. to family incomes, and were happy to do this after nightfall with the family gathered around. This compensated for declining income from fisheries – it certainly more than covered the hire-purchase payments made on the solar systems. Villagers routinely used solar systems to charge portable 6V batteries used to power flashlights, which were used to hunt fish and frogs at night. Several fishermen could take fishing nets out onto the lake more frequently, as electric light was available to mend nets in the evening.

IN TAPEN, WHERE 58 HOUSES ARE SUPPLIED BY A 2.5 KW VH SYSTEM, FAMILIES USE ELECTRIC LIGHT IN THE EVENINGS TO MAKE BASKETS FOR TOURISTS, ADDING ABOUT $20 INCOME P.M. AN ICE MAKER CONSTRUCTED BY A LOCAL ENGINEER AND DRIVEN FROM THE TURBINE DURING DAYTIME HOURS PRODUCED ENOUGH ICE TO SATISFY BOTH THE TOURIST DEMAND AND THE DEMAND FROM A NEIGHBORING VILLAGE. ONE VILLAGER USED ELECTRICITY TO POWER A REFRIGERATOR SHE USED TO PRESERVE SWEETS FOR LOCAL SALE, AND TO CHARGE BATTERIES FOR CUSTOMERS FROM NEARBY VILLAGES. ANOTHER VILLAGER USED ELECTRIC LIGHT TO EXTEND THE SEWING BUSINESS INTO THE EVENING HOURS, ADDING ABOUT $5 A MONTH TO HER NET INCOME – MUCH MORE THAN HER MONTHLY EXPENDITURE ON ELECTRICITY. A CARPENTER OPERATED POWER TOOLS FOR HIS FURNITURE AND WOOD PREPARATION BUSINESS. GLOBAL BENEFITS

Both the off-grid investment component and the DSM/Energy Efficiency components would yield significant carbon benefits. For the off-grid component, the technical assistance provided by GEF would allow IDA funds to be invested more expeditiously and more efficiently, and with greater embrace of technology diversity. Without this TA, neither the current OPS nor any successor management contractor would be able to maintain the ten year lifetime and exemplary repayment record of the current hire-purchase scheme.27 The fall-off in sustainability is projected as equivalent to a 50% drop-out rate by subscribers by the half-way point (five years) of their ten-year repayment obligation. By contrast, a well-supported and well-functioning off-grid scheme (such as has been the case with the predecessor SPRE project) will have only a nominal drop-out rate. Drawing on this comparison of outcomes for the Baseline vs. GEF Alternative we can calculate that 25% of the total program lifetime greenhouse gas reduction potential would be achievable only with the pairing of the GEF financed support with the IDA-financed investment component. A 25% reduction in the maximum potential program-wide carbon benefits of 16,200 te CO2 would take 4,050 te CO2 off the table in the Baseline case that is recovered in the GEF Alternative (See Figure 1).

The DSM/Energy Efficiency component is 100% GEF financed, allowing the entire amount of DSM and energy efficiency savings to be counted as global benefits. As described elsewhere, any reductions in domestic energy use due to DSM or energy efficiency activities would either reduce the net imports into Laos from Thailand or, if surplus EdL hydropower is available for export, substitute for thermal power in Thailand. As gas- or oil-fired thermal power constitutes the marginal production unit for both EGAT and EdL, any reduction in consumption in Lao PDR

27 Currently the only sources of OSU budgetary support are the up-front subscriber payment and the ongoing monthly repayment. Neither is sufficient to support the current level of capability of the OSU.

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would have the same carbon benefits (other than adjustment for transmission losses) as an equivalent DSM or energy efficiency program in Thailand.

Assuming the DSM program including pilot programs could save 1% of grid-connected electricity consumption in Central and Southern Laos each year beginning in 2006 (which amounts to about 15.3 GWh of EdL avoided power production), the reduced energy consumption has the effect of avoiding thermal power production in Thailand, yielding annual greenhouse gas savings of about 8,050 te of CO2 annually.

28 If energy efficiency measures implemented have an

average lifetime of 5 years, a program lifetime savings of 76.5 GWh and lifetime carbon impacts of at least 40,250 te of CO2, would result.

As regards the global benefits of GEF financed technical assistance to energy sector reform activities, no attempt is made at a numerical estimate. Qualitatively, it is likely that improved planning methods and institutional arrangements for financing and implementation would accelerate the rural access trajectory relative to any baseline, thus displacing very significant amounts of diesel and kerosene fuels currently used for lighting and battery charging in most rural areas awaiting on- or off-grid electrification.

The estimated global benefits directly attributable to the GEF-financed portions of both the off-grid implementation and the DSM/Energy Efficiency efforts are shown in Table

5 below. The incremental costs and benefits are detailed in Table 6.Table 5: Global Benefits of GEF Support to SPRE II

Component Basis Baseline GEF Alternative Carbon Benefits due to GEF Support

Off-grid Implementation(10,000 HHs)

Average per-HH lighting fuel use: 5 liters diesel per month = 13.5 kg CO2

29 = 162 kg CO2

annually = 1.62 te CO2 over a ten-yr program life

For each HH in the off-grid program, 100% of diesel fuel for lighting is initially displaced. However, half of the HHs/HH units drop out/stop working by Year 5; thus, 25% of the potential carbon savings for the program lifetime are lost

Full program potential is realized as HH and VH systems are maintained and operating

25% of the program lifetime potential of 16,200 te CO2 = 4,050 te CO2

DSM/Energy Efficiency

Lao Domestic use grows at 14% over the period 2005-2009, necessitating growing Thai imports. Each MWh of Thai thermal production generates 0.526 te CO2

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2006 domestic use: 1,531 GWh2006 imports: 550 GWh

1% reduction in Lao domestic use saves 15.3 GWh in imports in 2006

Carbon benefits of reducing Thai imports are 8,050 te CO2 annually and 40,250 te CO2 lifetime assuming a 5-yr life for any energy efficiency investments

Total 44,300

28 CO2 emissions factors for Thailand taken from Standardized Baselines and Streamlined Procedures for Selected Small-Scale Clean Development Mechanism Project Activities: A Guide for Project Developers. Netherlands Ministry of Housing, Spatial Planning and Environment, December 2001.

29 Calculating, Monitoring, and Evaluating Greenhouse Gas Benefits from Solar Home Systems in Developing Countries. Steven L. Kaufman, Sunrise Technologies Consulting. Working paper of the Renewable Energy Policy Project's and funded by The Joyce Mertz-Gilmore Foundation.

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TABLE 6: INCREMENTAL COSTS AND BENEFITS

Sub-Component Baseline GEF Alternative IncrementStrengthening Off-Grid Management

No GEF support. The current off-grid program continues under OPS. No steps are taken to improve the efficiency of the operation through outsourcing. The only support to the operation is the reflow account, which is not enough to fund the off-grid component. Lack of funds erodes capacity to maintain program quality and cost. Quality and reliability suffer, subscriber waiting periods get longer, repayment arrears grow, & there is deterioration in customer service, equipment performance, and customer satisfaction. End result is shortfall on targets and useful life of systems, resulting in rebound of diesel use for lighting.

$1,000,000 in support over 3 years supports comprehensive management outsourcing program of most off-grid functions currently performed by the OPS, including central procurement, establishment and capacity building of ESCOs, provision of marketing materials, village marketing, planning, and preparation procedures, and provision of technical support. The outsourcing process would address the current short-comings of OPS by establishing additional functional capacity, strengthening management arrangements, providing for a wider range of off-grid technologies, and conversion of the existing purchaser repayment account into a REF.

TA allows IDA credit to be invested more efficiently, and with greater embrace of technology diversity. The management contractor(s) can maintain the ten year lifetime and exemplary repayment record of the current scheme. We thus assume 25% of the program lifetime greenhouse gas reduction possible and program lifetime consumer cost savings would only be achievable with GEF financed support of the investment component.

Incremental benefits are then 4,150 te CO2 and $100,000 in additional disposable income for off-grid subscribers over program life.

RE Sector Reform, including: Improved Planning Alternative RE delivery

mechanisms MIH capacity building

No GEF support. MIH would be unable to finance measures needed to overcome major reform and capacity barriers to accelerated RE and additional renewable energy development needed to meet GoL’s RE targets

$2,000,000 over 3 years supports improved RE planning methods and databases, development of more effective and sustainable institutional arrangements for on- and off-grid electrification financing and implementation, as well as sector governance and regulation

Bbeneficiaries are the 65% of rural households without access scheduled to receive it. GEF-financed technical assistance to the national RE program creates conditions suitable for meeting the RE goals.

DSM/Energy Efficiency No GEF support. Neither EdL nor MIH undertake any data collection or policy or program development as regards customer energy use and efficiency. Demand growth continues at 12%, exports to EGAT decline rapidly.

$750,000 of GEF support over 3 years yields phased effort to establish DSM planning capacity, understand customer use patterns, identify DSM/EE potential, design pilot projects, resulting in a 1% decrease in EdL consumption by 2006

17 GWh annual savings starting 2006; EdL revenues increase by $500,000; EGAT purchases of hydro yield CO2

reductions of 9,000 te per year

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Annex 16: World Bank Team Response To STAP Reviewer Comments

LAO PDR: SECOND SOUTHERN PROVINCIAL RURAL ELECTRIFICATION PROJECT

STAP ReviewDr. Jan Hamrin, Center for Resource Solutions

June 28. 2004World IDA Loan/Grant to the Government of Lao PDR (GOL)

Second Southern Provincial Rural Electrification Project

This is a complex project involving RE, energy conservation and improved transmission efficiency, completing commercialization of Electricité du Laos (EdL); and defining a strategy for financing sector development. In general the plan seems appropriate for the country given the current situation. Some portions of the plan are more fully explicated than others and as a result comments are not evenly distributed for all of the plans subparts.

Key Issues

Scientific and technical soundness of the project

Has the most appropriate and effective approach been used to remove the barriers? Several of the barriers are directly addressed by this approach such as insufficient RE planning capacity, concessionary financing, tariff reforms, and lack of private sector capacity for scaled-up implementation of RE. A couple of the barriers, however, are not being addressed and could continue to frustrate successful results. Those include: Too little rural household income and renewable energy resource data prepare and

appraise off-grid electrification projects; and Absence of integrated rural development planning, with the result that income-generating

electricity uses needed to make power supply economically viable are slow to develop.

Good thinking has gone into the village screening process, design optimization and sector reforms and capacity building. There are also excellent ideas of how to allow the private sector to make useful contributions (though I do not know how compatible this is with the Lao political structure). The following discussion reinforces some of the points made in the project description and suggests some strategies that might expand the project’s benefits.

Discussion

RE: Though the broader introduction of electricity to rural population will, in theory, increase rural household income through income-generating electricity uses that do not happen automatically. In many cases, households may predominately use the electricity for general lighting, entertainment and keeping beverages chilled. Additional effort with community development workers is required to help people understand how and where electricity can add value to rural micro-enterprises and support the creation of new micro-enterprises and local economic development. Capacity building to help community development workers understand and use resource inventories and economic renewable energy applications will greatly increase the potential program benefits.

International experience has shown positive benefits especially for women run rural enterprises but larger, community-based enterprises run by men may be slower to evolve without direct help and support. If micro-enterprise and increased rural economic development is a major goal of

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this project, capacity building and the availability of rural financing mechanisms should be key components. The availability of micro financing to support such investments as an electric sewing machine, power drills and sanders, or other small equipment can make the difference between a significant economic improvement and an incremental improvement in the quality of life.

Resource assessment data (including training of in-country people who can provide such assessments on an on-going basis) should also be a key element of non-grid tied RE using renewable resources. Not only do you need to know the type and quality of the resource to be used but also to what uses the electricity will be put before a micro-grid or home electric system is designed.

People do not take long to find all kinds of things to do with their new source of electricity beyond what was originally envisioned. The reason non-grid connected renewable energy systems often cease functioning is that too much load is eventually connected to the system and the batteries are soon destroyed. Not only is Operation/Maintenance training important and storage of replacement parts, but also anticipating how the system will actually be used including designing in appropriate types of circuit breakers to prevent system overload.

In the discussions of hydro, it was unclear what type and size of hydro facilities are going to be encouraged. Small hydro can be up to 30 or 80 MW in size (depending upon the definition. Even though impoundments will be smaller than for large hydro, still the sitting, and environmental, social and cultural mitigation are critical elements that must be developed in concert with local communities. There are now some excellent micro- and pico-hydro technologies manufactured in Asia that can be very cost-effective, efficient and compatible with community agricultural and social life. In addition, the statement was made that there were too many solar home systems and not enough small hydro. However, no criteria were mentioned as the basis for making this statement or for allocating funds in the future. The criteria should be explicit and easily understood by the consumers who will receive and use the systems. It is also unclear why so many micro-hydro systems are not operational and how this can be avoided in the future (another area that would benefit from some explicit information).

Energy Efficiency: Development of an energy efficiency program is another excellent element for this program however details are sketchy at best. It appears that any energy efficiency programs will be an improvement where none have existed up to this time. But let me suggest some possible priority areas:

Development of some appliance standards (particularly for such things as refrigerators, air conditioners, water pumps and small motors. As the economy grows, these are some of the first things people will add to their households. To the extent that they buy inefficient equipment (including equipment that is ‘dumped’ by developed countries where it is no longer allowed), this will require more electricity than necessary continuing the cycle of scarce capital and electricity facilities for rural areas. It will also contribute to a longer-term problem of trying to get rid of these inefficient appliances later. If people in Laos have few appliances now, there is the opportunity to leapfrog some of the problems that have developed in the western world.

Stock small appliances and low wattage lighting for rural use. Since the resources for RE are scarce, it is beneficial to use these resources wisely, that means attention to the loads that will be drawing electricity. Educating people about energy efficiency is not enough. Particularly for those living in rural areas, they need to have access to efficient lighting and small appliances at reasonable prices. Otherwise they will end up wasting their electricity and their money compared to what could have been done with the resources at hand.

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Electricity Sector Reform and Improvement: It appears that a lot of thought and effort has gone into planning the electricity sector reform and improvement. The only question I would pose here is the extent to which this addresses the problem of “non-technical losses and uncollected revenues” noted on page 31 of the report. If this were a major problem now for conventional electricity service, one would think it would be an even greater problem for RE. Of particular concern is the tendency for people to ‘steal power’ from T/D lines. Since 80 percent of the rural power will be achieved through line-extension, that would seem to substantially increase opportunities for “non-technical losses.” Moreover, since rural populations often have less money than urban populations, expanding rural electricity services without addressing this problem of ‘uncollected revenues’ would seem to exacerbate that problem even further.

IDENTIFICATION OF THE GLOBAL ENVIRONMENTAL BENEFITS AND DRAWBACKS OF THE PROJECT

If successful, this project claims it could yield significant carbon benefits. However, I do not have sufficient information concerning the composition of Laos existing electricity system (though my impression is that it is predominantly hydro) to make an independent judgment. Small hydro development is not without its negative environmental impacts including increased GHG production due to inundation of new areas currently covered with plant life. After inundation, these plants will rot producing methane and other GHG. There inundation also reduces the carbon sequestration capacity of the landscape. New hydroelectric sites must be carefully selected, prepared and the facilities well operated to avoid negative environmental impacts. In addition, the key words here are “if successful.” This will be a difficult and complex program to successfully implement, but if successful, many benefits could accrue from it.

How the project fits within the goals of the GEF as well as the operational strategies, program priorities, GEF Council guidance and the provisions of relevant conventions? It appears that this project fits perfectly within the GEF, its operational strategies, program priorities, Council guidance and provisions of relevant conventions.

Regional Context – The project is well integrated into the regional context. However, one potential claim does not seem consistent with the program: “The expected outcomes of the global objective is substantial adoption of renewable energy in GoL’s RE program and increased efficiency of energy consumption for EdL customers, that in turn will result in increased exports of hydropower production to Thailand.” Unless new hydro development is sized beyond what is needed for RE purposes, and unless the energy efficiency is very successful and there is little or no growth in electricity demand within Laos, I am not sure where the increased hydro-electricity exports will come from.

Replicability of the project – If this project is successful, it could provide valuable experience and models that would be applicable in many parts of the globe.

Sustainability of the project – If successful (and that means that sufficient training and capacity building are done to support in-country expertise, and the issue of non-technical losses is addressed), the project is designed in a manner that is sustainable.

Involvement of stakeholders and capacity building in the project – For the areas where non-grid connected renewable energy development is to take place, I strongly suggest involving community development workers and community leaders early in the process so they have a

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feeling of ownership in the projects as they develop. Though there is a plan for screening communities for grid-extensions, it is unclear how communities/households will be selected for the home and mini-grid systems. My experience has been that rural people want electricity but may be ill prepared to identify how it might be most beneficially used without some outside help and support. This type of help can result in tangible plans for micro-enterprises, public works projects (e.g. water purification, water pumping, health clinics and meeting centers) that might otherwise be vague ideas that never come to fruition.

As mentioned several times previously, capacity building should also be a key ingredient in every aspect of this project if it is to be successful. I do not see funds set aside for this purpose in relation to community development workers or community leaders capacity development to prepare them to efficiently use the electricity they are to receive in a manner that leads to tangible economic and micro-enterprise development.

Summary – This project seems to be fairly well conceived though there are a number of blanks in the introductory “Strategic Context and Rationale” that make evaluation difficult. If the project is successful, it will make an excellent contribution to Laos as well as the many similarly situated countries in which it could be replicated. However, the complexity of the strategy requires a lot of capacity building and hand-holding to bring about success.

Response by Task Team to STAP Review

Comment Response and Reference

Barriers that could frustrate successful results that don’t seem to be addressed include:

Too little rural household income and renewable energy resource data to prepare and appraise off-grid electrification projects; and

Absence of integrated rural development planning, with the result that income-generating electricity uses needed to make power supply economically viable are slow to develop.

The lack of data on household incomes and renewable energy resources will be addressed by the large-scale and comprehensive RE data base and master planning effort to be partially financed by the GEF. Outputs of this work will include a comprehensive database of location-specific information relevant to developing off-grid electrification schemes using solar, wind, hydropower, and biomass and criteria and methodology for deciding which villages will be electrified by which method that includes likely near-term prospects for productive use.

Additional effort with community development workers is required to help people understand how and where electricity can add value to rural micro-enterprises and support the creation of new micro-enterprises and local economic development.

Regarding integrated rural development planning and attention to the need for micro-credit, we agree this is a key element to any sustainable RE program and for that reason have included GEF-financed technical assistance to develop improved approaches to integrated rural development. Technical assistance will be provided to MIH to help identify productive uses and cross-sectoral linkages to be incorporated with off-grid RE initiatives to improve their development impact (such as weaving / handicrafts, health centre improvements, education improvements, water pumping, electrification of diesel rice mills, etc.). This will involve liaising with a wide range of stakeholders including GoL agencies, Lao Women’s Union, Poverty Reduction Fund, NGOs, bilateral donors, etc.

The reason non-grid connected renewable energy systems often cease functioning is that too much load is eventually connected to the system and the batteries are soon destroyed. Not only is Operation/Maintenance training important and storage of replacement parts, but also anticipating

We agree that ongoing attention to how end-users actually operate the off-grid scheme is crucial to sustainability. In the present (SPRE) off-grid scheme the provincial ESCOs and their village-level representatives (VEMs) are responsible for ensuring proper operation of either individual SHS or VH schemes. They are in fact trained to be aware of improper use of systems and pass this training along to the

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how the system will actually be used including designing in appropriate types of circuit breakers to prevent system overload.

system users. As the VEMS are located at the village level, they are in the best position to oversee the subscribers and redress any problem behavior. The sustainability benefits of an on-site network of staff with technical training are so large that we to retain the essential elements of this ESCO/VEM scheme in SPRE II, regardless of delivery mechanism used.

In the discussions of hydro, it was unclear what type and size of hydro facilities are going to be encouraged. Small hydro can be up to 30 or 80 MW in size (depending upon the definition. In addition, the statement was made that there were too many solar home systems and not enough small hydro. However, no criteria were mentioned as the basis for making this statement or for allocating funds in the future. The criteria should be explicit and easily understood by the consumers who will receive and use the systems. It is also unclear why so many micro-hydro systems are not operational and how this can be avoided in the future (another area that would benefit from some explicit information).

A priority of SPRE II will be to address the lack of renewable technology diversity found in the SPRE off-grid component. A key strategy for doing so will be to embrace hydropower technology of every sort, from household scale pico hydro to district-level small hydro. So it is fair to say that the project will seek appropriate and economical off-grid hydro applications from 100 W to 10 MW. Our goal for Phase 1 of SPRE II is to grow the hydro portion of the off-grid portfolio from the 1% level to the 10% level (of total off-grid households), which seems a good start. This is possible because the off-grid component will expand to ten new provinces in the center and north of the country where the hydro potential is greater than in the current seven provinces covered. Regarding why some existing micro-hydro systems are not operational, this is the subject of a JICA study underway now whose results will be considered in developing any small/district hydro access delivery schemes.

Suggestions for possible priority DSM/EE areas:

Development of some appliance standards (particularly for such things as refrigerators, air conditioners, water pumps and small motors); and

Stock small appliances and low wattage lighting for rural use.

These are good suggestions and the project will take them under advisement. Note that the design of the DSM component emphasizes a step-wise approach, in recognition of the very rudimentary level of DSM and energy efficiency in Lao PDR at the moment. The program suggestions provided can be considered during the pilot project planning process, to be undertaken after data on consumer use patterns and load shapes is developed and an overall potential assessment of DSM and energy efficiency for Lao PDR is conducted.

Regarding the sector reform component, to what extent is the problem of “non-technical losses and uncollected revenues” addressed, especially given more opportunities for people to ‘steal power’ as the rural power grid is extended?

The T&D loss reduction component will be funded entirely by IDA and will include both investment and technical assistance. As budgeted it will double or treble the current level of investment by EdL in activities designed to mitigate both non-technical losses (stealing, diversion and tampering) and uncollected revenues. This reflects the important of minimizing unnecessary losses to both the commercial viability of EdL and the overall ability of the sector to continue financing investments needed for RE and satisfying demand growth. Each BO of EdL will have its own loss reduction target and budget and will be provided with the technical assistance necessary to address any increase in non-technical losses due to growth in the size of the rural grid or the number of rural customers served.

Small hydro development is not without its negative environmental impacts including increased GHG production due to inundation of new areas currently covered with plant life. After inundation, these plants will rot producing methane and other GHG. There inundation also reduces the carbon sequestration capacity of the landscape. New hydroelectric sites must be carefully selected, prepared and the facilities well operated to avoid negative environmental impacts.

The single hydro scheme included in the SPRE off-grid component was run of river. All of the hydro schemes expected to be added in Phase 1 of the SPRE II off-grid component will also be run of river. There is a possibility that the GHG emissions from rotting inundated plant life may be an issue with larger hydro schemes or rehabilitated small hydro schemes, but these will not come into play until the second phase of this APL. Additional detail can be found in the Safeguards technical annex of the PAD.

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