Aide Memoire

 KENYA Kenya Electricity Expansion Project (KEEP), IDA Credit 4743-KE IDA Implementation Support Mission Aide Memoire 1. INTRODUCTION AND ACKNOWLDEGEMENT 1. A World Bank team1 conducted an implementation support mission for the Kenya Electricity Expansion Project (KEEP) from November 12-26, 2012. 2. The Bank team expresses its appreciation for the courtesies received and for the support and cooperation accorded to them by the management and staff of the Ministry of Energy (MoE), the Energy Regulatory Commission (ERC), the Kenya Power and Lighting Company Ltd. (KPLC), the Kenya Electricity Generating Company Ltd. (KenGen), the Rural Electrification Authority (REA), and the Kenya Electricity Transmission Company (KETRACO). Annex 1 records the officials met. 3. This aide -memoire records the findings and recommendations of the mission and is subject to confirmation by International Development Association’s (IDA) Management. It was discussed during the mission’s wrap-up meeting on November 26, 2012 and transmitted to the Permanent Secretary, Ministry of Energy, the project’s implementing entities, and copied to the representative of the project’s co-financiers on December 14, 2012. 2. CONTEXT 4. Project Development Objectives: The Project has two development objectives:  Increase the capacity, efficiency, and quality of electricity supply.  Expand access to electricity in urban, peri-urban, and rural areas. 5. The Project will meet the first objective through an increase in generation capacity (Component A) and transmission capacity (Component B), as well as improvements to the distribution system (Component C). The achievement of the second objective will take place through measures to increase electricity connections, including programs to make them more affordable for lower-income households (Component C). In addition, the Project will help sustain the policy, institutional and regulatory environment, created by earlier operations, necessary for the Project’s results to materialize (Component D). 3. KEY FINDINGS/PROGRESS OF IMPLEMENTATION 6. Project Commitments and Disbursement: Of the US$330 million original credit, total commitments in awarded contracts is $268 million (81%) and disbursement is 1 Team: Mmes./Messrs. Kyran O’Sullivan (Mission Leader), Paul Baringanire (Power Engineer), Mitsunori Motohashi (Financial Specialist); Josphine Ngigi (Financial Management Specialist); Noreen Beg (Sr. Environmental Specialist); Margaret Ombai (Consultant Social Safeguards); Efrem Fitwi (Procurement Specialist); Vonjy Rakotondramanana (Power Engineer); and Lucy Kang’arua (Program Assistant). KEEP Implementation Support Mission November 12 – 26, 2012 US$58 million (17.5 percent). The implementing entities have forecast about US$60 million additional disbursement in FY13. Since about US$20 million of this is expected in the May and June 2013 a conservative estimate is in the range of US$30-40 million (i.e. about 30 percent disbursement by end FY13). One contract award (for concrete poles) is being processed for US$7.3 million and one procurement is ongoing (Olkaria geothermal complex –engineer’s estimate US$7 million). Procurement for off-grid pilot projects (allocation US$8 million) is anticipated to be launched in December 2012. The cost savings are therefore currently estimated at US$40 million approximately. 7. The mission discussed with MoE how the approximately US$40 million cost saving might be allocated. KenGen have proposed that an additional 70MW unit at Olkaria I be constructed using project savings. The proposal envisages the facility be constructed by variation orders to the existing contracts i.e., not to carry out rebidding. The facility would be commissioned by December 2014. A cost estimate has not yet been prepared but an approximate estimate of the additional cost in the steam-field contract that IDA is financing would be US$25 million. MoE requested that IDA also consider allocating US$10 million of the estimated cost savings to the rural electrification component. The mission agreed to consider these proposals (MoE will formally make the requests). If the savings were reallocated as proposed, the remaining unallocated amount would be about US$5 million which is on the low side but reasonable for contingencies. Disbursement Status per the Client Connection as at November 19, 2012 KEEP Principal Disbursed Undisbursed Special Disbursed Amount Commitments IDA XDR XDR XDR XDR 17.48% 4743 217,400,000 38,000,808 179,399,191 8,596,419 USD USD USD USD 330,000,000 58,226,743 273,368,488 13,099,223 Disbursement Forecast (US $m) for Remainder of FY13 (see also Annex 9). Forecast prepared by the implementing entities. Nov. 26 – Dec. 30, Jan. – Mar., Apr. – Jun., Total 2012 2013 2013 2013 KenGen 3.5 8.0 10.0 21.5 KPLC 6.4 3.1 6.3 15.8 REA 10.0 10.0 20.0 MoE 1.1 1.1 2.2 8. Financial Covenants: In FY2012 KPLC's current ratio is 0.9 below the target 1.0 and for self-financing ratio, is 24 percent below the target of 25 percent. This is mainly due to a rapid expansion of new connections outside urban areas, which does not lead to immediate cash inflows. KPLC estimates that the cost of connecting new residential customers is about US$400 more than the connection fees paid. As KPLC extends its distribution lines moving beyond densely populated areas, these challenges are set to aggravate. Going forward, the mission suggested review of: (a) the scope of capital investment included in the regulatory asset base as part of regular tariff reviews, (b) implications of REA's investment in grid extensions, (c) cost estimate of the required investment for connection and the adequacy of connection fees to recover cost, and (d) financing options for the time-lag involved between investment and collection. The mission noted another risk factor in the delayed Tariff Review. As the deferred costs are being exhausted, impacts of the deferred Tariff Review will likely be felt in FY2013. 2 KEEP Implementation Support Mission November 12 – 26, 2012 9. The threat to KPLC’s balance sheet arising from the targets for connections (210,000 in FY13) is of concern to KPLC management and policy makers and remedial measures are being discussed. They include an increase in the lifeline tariff and an audit of connection costs. The Bank will continue to monitor the issue. 10. Financial Management (FM): The FM Implementation Status Report rating is assessed as Satisfactory for KenGen and KPLC but Moderately Satisfactory for REA and MoE. There are no outstanding audits from any of the implementing agencies. All entities except MoE have no outstanding Interim Financial Reports (IFRs). They have submitted quarterly IFRs on time up to the quarter ended September 30, 2012. A two day joint GoK/ World Bank workshop on audit issues and FY 2012 audit process that was held on November 14 and 15, 2012 for accounts staff in the implementing entities of energy and transport projects and for auditors in the Kenya national accounts office (KENAO) was deemed by the KPLC, MoE, REA and KenGen participants to be very helpful in clarifying outstanding issues in the 2011 audit. 11. The FM arrangements continue to be adequate for KenGen and KPLC. For MoE, the issue of staff (accountants) turnover is affecting the project negatively in terms of preparing the quarterly reports and annual draft accounts for the project. REA was initially having challenges with staffing capacity but this has now been addressed. Social Safeguards 12. Olkaria Resettlement Action Plan (RAP): The preparation of a revised RAP for the Olkaria IV component is progressing and the revised RAP is expected to be submitted by KenGen by January 25, 2013. Issues that are being addressed in the revised RAP include:  Demarcation of the 1700 acres resettlement site: The project affected persons (PAPs) want an undertaking from KenGen that apart from the beacons that show the demarcation of the 1700 acres, the land will not be fenced off.  Site layout plan for residential houses: The PAPs wish that they be settled in a way that is similar to their current settlements’ layout where there are distances between one family and the neighboring family, while allowing blood relatives to be neighbors.  Resolution of the Cultural Center land acreage: This continues to be a pending issue and needs expeditious resolution.  Sustainability of the facilities in the resettlement site.  Final census of PAPs.  Grievance Resolution Mechanism 13. Transmission Lines RAPs: The preparation of revised RAPs for the three transmission lines is ongoing. KETRACO is continuing with the work of making compensation to PAPs for structures, crops and land in the wayleave. The mission 3 KEEP Implementation Support Mission November 12 – 26, 2012 highlighted that KETRACO may require additional field staff for wayleaves compensation considering the number of t-line projects that are ongoing under various projects. Now that the contracts for construction of the three t-lines in KEEP are advancing rapidly (surveys ongoing and designs being finalized) it is urgent to complete the compensation. 14. Independent Evaluation Panel for RAPs. The mission reviewed the first quarterly report of the Consultant and met with the Consultant’s team. The report is of poor quality with imprecise description of issues and processes and erroneous statements of facts. MoE and the mission agreed that a revised report be prepared by the Consultant that will be reviewed by MoE and the World Bank. Policy Discussions 15. The mission had wide ranging discussions on energy policy issues including the following (i) targets for electricity connections and the impact on KPLC’s balance sheet due to the gap between cost and connection fee (see discussion above under Financial Covenants); (ii) the need to develop robust electricity demand forecasts based on empirical analysis of disaggregated demand by sub-sector within the main sectors of industry, commercial and households; (iii) harmonization of the Kenya Grid code with Regional Grid code and inter alia adequately cater for integration of renewable energy; and (iv) policy recommendations arising from technical assistance activities completed as detailed below. 16. Data Survey for Model for Analysis of Energy Demand (MAED). The MAED tool used by the planning committee that prepares the Least Cost Power Development Plan (LCPDP) in Kenya relies on comprehensive data gathering for all the subsectors of industry, commerce and households. These data sets are underdeveloped in Kenya so that the planners must make subjective assumptions and estimations. In view of the overriding influence demand forecasts have on the output of the planning process of the power industry, it is considered imperative to invest in development of credible and reliable demand forecast datasets in order to generate dependable demand forecast results. The dataset should address the specific data requirements of the model including conversions to different units and should be in a manner that can be updated every 3-5 years to capture new information. The mission received a request from ERC to consider funding a country wide MAED data survey using KEEP resources. To ensure quality of data and continuity in future, the LCPDP committee considers it important to engage the Kenya National Bureau of Statistics to undertake the survey. ERC and KNBS will develop ToRs and a cost estimate for the survey. 17. Recommendations of the Cost of Service Study. The findings of the Consultant that the current tariff rates are not sufficient to meet the annual revenue requirement of the power sector need to be confirmed by ERC. ERC will continue with the tariff review over the next several months with a view to preparing the new tariff schedule at the beginning of FY14. See also Sector Institutional Development and Operation Support below. 18. Recommendations of Study Options for the Development of a Power Market in Kenya. The study is valuable in that it sets out the preconditions for introduction of a competitive wholesale electricity market and proposes a roadmap for implementation. 4 KEEP Implementation Support Mission November 12 – 26, 2012 The mission suggested that increased competition in supply to end users should be implemented gradually, and provided that a number of preconditions are in place. The current approach of middle-income developing countries such as Chile, Brazil, Peru, Colombia and El Salvador is one of "competition for the market" and is a departure from the approach of "competition in the market" i.e., it is a reversal of the tendency to create wholesale markets that was predominant in the 1990s. These countries priority now is to ensure security of supply through competitive processes (auctions and others), to sell electricity to financially viable distribution companies through long-term Power Purchase Agreements (PPA). See also Sector Institutional Development and Operation Support below. 19. Recommendation of Study on Grid Connection of Small Scale Renewable Energy: The report proposed a number of new instruments and adjustments to existing polices to the MoE and the ERC. In order to reduce transaction costs for both KPLC and the developer, the Consultant developed a standard PPA for projects below 10 MW. The standard PPA has been accepted by MoE and ERC. The Consultant proposed the introduction of net-metering with the upper limit on system size only restricted by the capacity of the connection to KPLC. The Consultant suggested that embedded - must run must take - small scale generation should be restricted to 10 percent of the overall installed capacity in Kenya. The report proposed a revised Feed in Tariff (FIT) system which entails that a ceiling at the Long-Run Marginal Cost (LRMC) of KPLC is applied on the technology specific FITs. At the wrap-up meeting, the mission was informed that the ceiling will be fixed below these thresholds (the exact values are currently being discussed) and will be adjusted upwards if necessary depending on the volume of projects that will reach financial closure. The Study also made recommendations on the applicable distribution wheeling tariffs. There is increased interest from private investors on net metering, wheeling and energy banking. However, to implement the recommendations from the studies ERC will need to develop a policy and regulations to guide investors wishing to take advantage of net metering, wheeling and energy banking. ERC/MoE requested the mission to consider financing the cost of engaging a consultant to assist in developing the guidelines and regulations. The mission agreed that this could be financed under the technical Sector Institutional Development and Operation Support component. 20. Grid Code Review. ERC developed the Kenya electricity grid code in 2008. The East African Power Pool is in the process of developing a grid code for the region, which borrows heavily from the Kenya Grid Code. There is need to review the Kenya Grid code to align it with regional grid code and also adequately deal with integration of renewable energy. ERC/MoE requested IDA to finance the cost of hiring a consultant to review the Grid Code and align it to the regional Grid Code. The mission agreed that this could be financed under the technical Sector Institutional Development and Operation Support component. 21. Wind Project Training Seminar. The mission discussed the scope of a 3 day wind training seminar with ERC and MOE. ERC/MoE requested the training be financed by the project under the Sector Institutional Development and Operation Support component and the mission agreed. 22. Study Tours for Sector Agencies. The mission agreed that ERC will submit a proposal for study tours in countries that have good practices in electrification planning and implementation. 5 KEEP Implementation Support Mission November 12 – 26, 2012 Electricity Modernization Project 23. The mission resumed discussions it had earlier with KPLC on the possible scope of investments and technical assistance focused on network modernization. The mission informed KPLC that in order for the project to be pre-appraised in March – April 2013 KPLC would need to undertake various preparatory activities related to scope identification and justification, and packaging. Activities related to system reinforcement could be informed by the ongoing IFC/KPLC assessments of loss reduction measures and the soon to be completed Distribution Master Plan. See also Annex 6. ASSESSMENT OF IMPLEMENTATION PROGRESS Generation component 24. KenGen reports on progress in regular meetings with the financiers. The last meeting was on October 29, 2012. Currently, there is no change to the original project schedule. 25. Current challenges that are rated high risk are the delay in award of the Suswa substation contract and delay in obtaining wayleaves from the landowner for the transmission line between Olkaria I and IV. The Suswa substation contract commencement date was October 24, 2012 that is 143 days behind schedule for the project. If execution of the contract does not make up for the delay, a solution being explored is to evacuate the power from the first units that will be commissioned in 2014 to the Nairobi North transmission line as a temporary measure. Negotiations are ongoing with the landowner for the transmission line wayleaves. The mission visited the site at Olkaria IV to observe progress (piling – i.e., the construction of the concrete pads for the generators and other equipment is underway). 26. IDA is financing the steamfield contract (US$143 million) awarded to Sinopec International Petroleum Service Corporation (SIPSC) with KfW on a 67:33 basis. It is the largest value contract in the project. Current status is that the Contractor (SIPSC of China) has continued procurement with the first orders for pressure piping and pressure vessels. Third-party witnessing of welder testing in China took place throughout September 2012. The Contractor has continued with the off-site accommodation camp and construction of the site facilities. A key issue is that KenGen raising the steam separation pressure to mitigate silica scaling and the consultant that will entail design modification of the steamfield infrastructure (pressure vessels and piping). Timely modifications of the design are critical to avoid wastage since the contractor has commenced fabrication. 27. The mission conducted a site visit to the Olkaria road that is financed by IDA. The key finding was that the drainage structures provided at several major stream crossings and gullies would not be adequate. The mission strongly recommended a re-assessment and re-design of the drainage structures by a hydrology specialist, including provision for river bank protection or river training to allow for smooth and erosion-free flow of water. Subsequently, the Consultant submitted a re-assessment report to KenGen with proposed design modifications. The road is expected to be delayed beyond the original completion date in February 2013. The delay period cannot yet be confirmed but is not expected to be more than a few months. 6 KEEP Implementation Support Mission November 12 – 26, 2012 28. Geothermal Complex and Laboratories (IDA financed - $7 million estimate): Procurement is delayed by 8 months but is now ongoing with bid opening scheduled for December 15, 2012, bid award by February 2013 and completion by March 2014. 29. Disbursement Arrangements. A challenge that arose in payment of the Chinese Yuan (CNY) portion of advance payment for the Steamfield Contract that is co-financed by IDA (67%) and KfW (33%) was since CNY currency is not freely traded, IDA was unable to pay the advance in CNY currency. To expedite the process, KenGen and the Contractor agreed that KenGen would make the payment in CNY to the Contractor's account and IDA made reimbursement to KenGen for the equivalent amount in USD. This arrangement did require amendment of the existing Advance Payment Guarantee. For remaining payments (interim and final payments) IDA will disburse the USD equivalent value of the CNY portion into the Designated Account. There will be no change to the contract value (KenGen will take the currency exchange risk). Transmission Component 30. All the contracts are awarded and the contractors have mobilized. Commencement date for all the contracts was July 1, 2012 and the forecast completion dates are between December 31, 2013 (Mwingi and Garissa Substations) and July 1, 2014 (the transmission lines from Kindaruma to Garissa). Challenges to date have been the slow mobilization of contractor and compensation of PAPs both of which are somewhat delayed. The three RAPs for the three lines are being updated. Current unrest in Garissa is a risk to the timely completion of the works. Distribution Component 31. Subcomponent C1: Strengthening and Extension of the Distribution Networks: Most of the contracts related to supply of materials and equipment have been awarded, except the procurement of concrete poles which was significantly delayed. A challenge for the supply of concrete poles is that there is only one manufacturer in Kenya and several traders who purchase from the contractor. In the procurement of the poles, the manufacturer who bid, was declared non-responsive as the bid bond was short by 28 days (it expired on the date of bid validity rather than as required 28 days after the bid validity). KPLC’s Board was reluctant to accept the disqualification as it has on going contacts with the manufacturer. 32. All the four substation contracts were made effective on various dates between May and July 2012 and completion is scheduled by September 2014. 33. Line construction- the three contracts for line construction were signed on July 27, 2012 and completion is scheduled for September 2014. 34. The mission discussed with KPLC issues related to delays in contract effectiveness. It was noted that in some cases, selected bidders/contractors deliberately delay effectiveness to firm up their orders. The mission advised KPLC in future to review the proposed contract effectiveness conditions in a bid to ensure that implementation begins soon after contract award and signature. Penalties such as disqualification of a best ranked bidder who fails to provide an acceptable performance bond within 28 days from 7 KEEP Implementation Support Mission November 12 – 26, 2012 the date of notice of contract award need to be enforced. Further, effectiveness conditions need to consider aspects related to mobilization requirements and not confirmation of payments such as an operative letter of credit which would normally be required by the time of shipment. 35. Supervision Consultant for the Distribution Component - KPLC and the mission discussed change of scope of the consultant contract (additional site supervisors will be required so as to ensure timely completion and quality and also due to the increase in the number of contracts from 4 to 7). It was agreed that KPLC will submit to the Bank the proposed contract amendment for its review and no objection. Sub component Rural Electrification Component (Priority Loads) 36. Grid connection: This component is implemented through 7 contracts of which 6 are labor and transport (L&T) type contracts and one a turn-key contract. The grid extension sub-component has experienced delays due to an array of factors. REA as a new implementing agency on a Bank funded project had challenges completing documentation (e.g., withdrawal applications and Letters of Credit) that delayed contract effectiveness. These challenges were addressed with the support of World Bank financial management staff, training and rotation of staff in REA. 37. However, the coastal turn-key contract became effective August 3, 2012, the L&T contracts are about to become effective, material for the L&T contracts are arriving at REA’s stores and the majority of the designs for the grid extensions have been approved by the engineer. Implementation time for the L&T contracts is 6 months after effective date and for the turn-key contract 15 months (completion in November 2013). 38. REA does not currently have the ability to work on KPLC’s GIS/NIS system and hence all designs are done manually. REA needs a GIS/NIS system that integrates with KPLC in order to seamlessly, cost-effectively and with optimized technical solutions; cooperate with KPLC in designing and implementing grid extensions. The Consultant, SWECO, has conducted the training part for the Bank funded sub-component GIS/NIS introduction and implementation at REA. However, further progress is effectively on hold due to the fact that required hardware and software have not been procured by REA. The mission expressed its concern with this status and REA assured the mission that within 3- 4 weeks, i.e., by mid-December 2012, the hardware and software issues will be resolved and the component can start making progress. 39. REA and the Consultant have informed the Bank that an Addendum to the contract between the Consultant and REA is planned to ensure additional support for Kenya activities. During the mission, a draft addendum was submitted to the Bank outside of Procys for initial review. Sub-component Off-grid: 40. US$ 8 was allocated in the project for design and implementation of off-grid electrification projects, including pilot programs. Following discussions with REA and MoE, the mission agreed that the sub-component will be implemented as follows: 8 KEEP Implementation Support Mission November 12 – 26, 2012 41. A prioritized list of between 6 and 10 sites - the majority green field sites will be developed by REA for fast implementation. The exact number of sites for actual implementation will depend on cost estimates. 42. The criteria for selection of the sites will be agreed between the World Bank and REA. It is expected that they will include: potential for renewable energy penetration (the target is that 60% or more of the energy is supplied by renewable sources), potential for additional cost savings (remoteness and sites with difficult access for re-supplying of diesel), expected demand and the potential for using deferred productive loads, and the existence of anchor costumers. 43. A two stage tender of EPC (Engineering, Procurement and Construction) contracts for each agreed site will be launched. 44. In parallel, REA will recruit international experience in off –grid electrification. The Consultant will assist REA in the technical evaluation against the agreed selection criteria; will assist REA in advancing the technical, managerial and financial capabilities of the renewable energy unit of REA and conduct training interventions in recognized industry tools such as the Homer software. The modality of recruiting the international experience will be discussed between the Bank and REA. 45. The mission recognizes that there are on-going discussions concerning the institutional arrangements around operation off-grid stations. Presently, all off-grid stations with the exception of two are operated by KPLC. The mission was informed that the Privatization Committee has an on-going study that is analyzing the present arrangements for operation and maintenance of off-grid stations. Tentative Timeline for Off-grid Electrification Sub-component Deadline Responsible Selection of sites December 5, 2012 MoE/REA Evaluation criteria December 5, 2012 REA & World for first stage of Bank EPC Advertisement Bidding Award Commencement Responsible documents of work International December 12, February1, June 2013 July 2013 REA Consultant 2012 2013 EPC contractor for December 12, February 15, August September 2013 REA all sites (2 stage 2012 2013 2013 bidding process) Subcomponent C3: Slum Electrification 46. The mission expressed concerns that the implementation of the subcomponent has been delayed by over a year. There was a delay between the approval of the GPOBA Project on June 29, 2011 and signing of the Grant Agreement between IDA and KPLC, which took place on February 20, 2012. The Grant Agreement subsequently became effective on May 21, 2012. The selection of an Independent Verification Agent (IVA), which was also delayed as a consequence, is in the final stages and the contract with the IVA is expected to be signed by mid-November (to be confirmed). Due to the legal and procurement delays, KPLC is behind the original connection target of 6,000 households by December 2012, with only 60 connections made as of November 15, 2012. 9 KEEP Implementation Support Mission November 12 – 26, 2012 47. The mission agreed with KPLC on a revised preliminary connection and disbursement targets below. This revised plan would go beyond the Closing Date of the Grant Agreement on June 30, 2014. However, at this stage, the mission agreed with KPLC not to amend the Grant Agreement because (i) the works involved are pilot in nature and the track record of the connection has not yet emerged and (ii) the verification works have not yet started. The mission instead requested KPLC to explore measures to expedite the subcomponent. Revised Connection and Disbursement targets Timing Revised GPOBA US $ 000 IDA US$ 000 Total Connection (US$75/connection) (US$150/connection) US$ 000 Targets June 2013 6,000 450 900 1,350 December 15,000 1,125 2,250 3,375 2013 June 2014 15,000 1,125 2,250 3,375 December 15,000 1,125 2,250 3,375 2014 June 2015 15,666 1,174.95 2,349.9 3,375 Total 66,666 4,999.95 9,999.9 14,999.85 48. To reflect that the subsidy for eligible electricity connections provided by GPOBA and IDA will be fixed amount for every connection made to eligible consumers (i.e. US$75 per connection for GPOBA and US$150 per connection for IDA) and hence the percentage of expenditures covered by the grant and credit vary from time to time, it is necessary to make a correction in the Financing Agreement of KEEP, which currently states 100 percent of expenditures will be financed by IDA. To make the correction, a MoF will formally request amendment of the Financing Agreement to accommodate the change. Subcomponent C2: Electrification of Priority Loads in Rural Areas - KEEP-KAPAP Linkage 49. The sub-component C2 (electrification of priority loads in rural areas) emphasizes linkages with the Kenya Agricultural Productivity and Agribusiness Project (KAPAP), which identified the lack of electricity as one of the key constraints to improving agricultural productivity and agribusiness growth in the country. 50. The mission informed REA of progress in the off-grid energy component of KAPAP. Of the five prospective sites for pilot subprojects, draft feasibility studies are prepared for three prospective sites (Muino Micro Hydro Power Project for aloe vera soap production; Korakora Wind Power Project for dairy production; and Mbuvo Off-grid Solar PV Project for cassava and other cash crops), which were submitted to the World Bank for review; and a feasibility study for Kakamega Micro Hydro Power Project is nearing completion with a draft expected to be submitted to the Bank by December 2012. The KAPAP secretariat is in the process of selecting a fifth site and expects to start preparing a feasibility study in January 2013. 51. For the four sites that are at advanced stages (i.e. Muino, Korakora, Mbuvo, and Kakamega), the Mission notes that the KAPAP Secretariat had a meeting with REA on 10 KEEP Implementation Support Mission November 12 – 26, 2012 September 26, 2012 to coordinate with grid reticulation and electrification activities planned in the surrounding areas. To coordinate the activities further, the KAPAP secretariat will further engage with stakeholders in the energy sector, including the MoE, REA, ERC, and possibly KPLC and inform them of the activities under the KAPAP project. Sector Institutional Development and Operational Support component Risk Study 52. This study will support KPLC in strengthening its Enterprise Risk Management Program. During the mission, the Bank provided its comments on the draft TOR for the study. KPLC will finalize the Request for Expressions of Interest (REOI), Request for Proposals (RFP) and the Terms of Reference (ToR) by the end of November 2012 and submit them to the Bank for No Objection. Feasibility Study for Menengai 53. The contract for the feasibility study for the Menengai project was signed between Geothermal Development Company (GDC) and ELC Electroconsult S.P.A. of Italy on August 27, 2012. Inception Report was submitted to GDC and the assignment is expected to be completed in May 2013. GDC is implementing the drilling program for the Menengai geothermal field with four rigs on site. According to GDC, the first seven wells are drilled with an indication of 27MWe of steam discharged from five wells. 54. GDC also has a board of consultants, Geothermal Advisory Board (GAB), constituted to review and advise the company’s operations in drilling, geochemistry, geology, environmental management, and geothermal reservoir engineering. The GAB was appointed through single source selection in October 2010. The mission takes note that GDC requested the Bank to finance its future engagements. The Bank and GDC will discuss possible funding sources, including KEEP Subcomponent D1(Institutional Development and Studies) or a Project Preparation Advances for the Menengai project, as well as appropriate procurement method. Cost of Service Study 55. The overall goal of the study is to help the ERC determine system charges (i.e. generation, transmission, and distribution wheeling charges, and rates for various categories of consumers) which recover costs and send appropriate price signals to consumers about the cost of generating and delivering electric services. It will be the tool used by ERC in the next tariff review. ERC will need to ensure that the revised tariffs are cost reflective, fair, and equitable, and that they meet the financial needs of the power sector. 56. The Consultant presented the final report in a workshop on November 8 and 9, 2012 followed by training in use of the model during the week of November 12, 2012. The adequacy of the existing tariffs for the Test Year 2012/13 were analyzed by the Consultant. The model shows that the current rates are not sufficient to meet the Annual Revenue Requirement of the power sector. Given the forecast and expansion plan considered for this study, when the revenues collected are compared to the costs at the 11 KEEP Implementation Support Mission November 12 – 26, 2012 power sector, there is a shortfall in the overall revenues of 19 percent of the costs to be recovered. The analysis of the revenue shortfall reveals the extent of the inadequacy under the current rates:  shortfall of 15 percent in the revenues to be collected from the customers under Low Voltage customer categories, and which account to 67.4% of the total energy sold;  shortfall of 29 percent in the revenues to be collected from the customers under the Medium Voltage customer categories, and which account to 29.6% of the total energy sold; and  shortfall of 29 percent in the revenues to be collected from the customers under the High Voltage customer categories, and which account to 3.0% of the total energy sold. While the shortfall of revenues associated to this group is relatively important, the weight of the group of customers is small in contrast with the weight of the customers under the Low Voltage customer categories. 57. The findings of the Consultant need to be confirmed by ERC. The mission requested ERC to communicate the findings of its own review and that if tariff adjustment is found to be necessary that it be implemented speedily to safeguard the financial sustainability of the sector. Options for the Development of a Power Market in Kenya 58. The consultant has submitted the final report of the Study and a workshop to discuss the recommendations was held on October 24, 2012. The study is valuable in that it sets out the preconditions for introduction of a competitive wholesale electricity market and proposes a roadmap for implementation. The mission suggested that increased competition in supply to end users should be implemented gradually, and provided that a number of preconditions are in place. Ideally, the following characteristics are required:  Large size  Multiplicity of market players on both sides (generators and buyers)  No major transmission constraints  Wholesale power markets – these work better in mature power systems, rather than in developing markets where significant generation capacity additions are necessary 59. Even well-performing wholesale markets fail to provide market signals to ensure optimal security of supply. The current approach of middle-income developing countries such as Chile, Brazil, Peru, Colombia and El Salvador is one of "competition for the market" and is a departure from the approach of "competition in the market" i.e., it is a reversal of the tendency to create wholesale markets that was predominant in the 1990s. These countries priority now is to ensure security of supply through competitive processes (auctions and others), to sell electricity to financially viable distribution companies through long-term PPAs. Grid Connection of Small Scale Renewable Energy 60. The study that was completed in August 2012 was designed to accelerate small scale grid connected renewables projects (mini-hydros, wind, solar, bio-gas and bio- mass). Despite the presence of a Feed in Tariff (FIT) and other measures, the actual 12 KEEP Implementation Support Mission November 12 – 26, 2012 number of projects implemented to date is limited. This confirmed the potential for small scale grid connected renewables and proposed a number of changes to the present framework in order for the market to accelerate. The main bottlenecks identified were access to finance for developers and the administrative procedures for project approval and implementation. The study stresses that the few successful projects implemented suffered from very high transaction costs for both developers and KPLC. 61. The report introduced a number of new instruments and adjustments to existing polices to the MoE and the ERC. In order to reduce transaction costs for both KPLC and the developer, the consultant developed a standard PPA for projects below 10 MW and proposed the elimination of the non-firm and firm energy categories in the old FIT framework. 62. In addition, the Consultant proposed the introduction of net-metering with the upper limit on system size only restricted by the capacity of the connection to KPLC. The Consultant suggested that embedded – must run must take – small scale generation should be restricted to 10 percent of the overall installed capacity in Kenya. 63. The report proposed a revised FIT system which entails that a ceiling at the LRMC of KPLC is imposed on the technology specific FITs. At the wrap-up meeting, the mission was informed that the ceiling will be fixed below these thresholds (the exact values are currently being discussed) and will be adjusted upwards if necessary depending on the volume of projects that will reach financial closure. 64. The Study also made recommendations on the applicable distribution wheeling tariffs. There is increased interest from private investors on net metering, wheeling and energy banking. However, to implement the recommendations from the studies, ERC will need to develop a policy and regulations to guide investors wishing to take advantage of net metering, wheeling and energy banking. ERC/MoE requested the mission to consider financing the cost of engaging a consultant to assist in developing the guidelines and regulations. The mission agreed that this could be financed under the technical Sector Institutional Development and Operation Support component. Materials and Supply Chain Management Study Procurement of the consultancy is ongoing. Environmental Safeguards 65. A World Bank safeguard specialist visited Kenya and reviewed environmental safeguard compliance between October 22 and 26, 2012. 66. The mission reviewed the preliminary Environmental Impact Assessment study prepared for the Olkaria IV resettlement site, and found it to be of acceptable quality to meet World Bank compliance standards. It is noted that the National Environmental Management Authority (NEMA) requested that a full EIA study be prepared, and KenGen informed the mission that its environmental officers have updated the project report and submitted it to NEMA on November 8, 2012 for further review. Once NEMA has cleared the EIA KenGen is requested to submit it to the Bank for final review and disclosure. 13 KEEP Implementation Support Mission November 12 – 26, 2012 67. The mission met with the KenGen’s environment team to discuss environmental compliance with Environment Management Plans EMPs at Olkaria I units 4 & 5; and Olkaria IV. EMP progress reports for the second and third quarters 2012 were reviewed. Based on discussions and reviews of written documents, the following actions are requested: 68. Contractors at all projects (KEC International and SKM at Olkaria I Units 4 & 5) and HADISH and Africon at Olkaria IV) should immediately take measures to dispose of solid waste at compounds and construction waste at project sites in an environmentally sustainable manner, at a disposal site approved by Kenya Wildlife Society if it is inside Hells Gate Park, or preferably outside the Park at an approved dumpsite. Waste should not be burned in open pits, and all approved waste sites should be covered with soil on a regular (weekly) basis and rehabilitated upon completion of construction, through the planting of grass and indigenous flora. 69. Borrow pits should be fenced to prevent fauna from the park entering the borrow areas. Borrow pits should be rehabilitated upon completion of construction. 70. Efficient use of water is a key component of the EIA for KEEP. Details on water conservation measures should be provided in the EMP progress reports, and contractors should install rain water harvesting tanks as soon as possible. 71. Although it is noted that there have been no animal kills since the start of construction, concerns about vehicle speeds (in terms of safety and generation of dust) continue. Speed limits should be clearly signposted and enforced, with penalties for non- compliance. GDC has a good policy on speed limits at Menengai and advice can be sought from them on successful enforcement measures. 72. Fire-fighting equipment at the contractors yard (in the construction of the 10km road connected to Olkaria IV) should be installed immediately, and it is suggested that works halt until such equipment is in place. At the same yard, while it is acceptable to have food kiosks outside the yard, strict enforcement of waste removal should be enforced, to prevent wildlife in the park eating food remains and food containers, etc. 73. KenGen is requested to provide an update on whether the two families at Olo Nongot who were removed from the village due to dust generation have been reinstated in their homes. Were they provided disturbance allowance or alternate shelter? Are there any continuing health issues they face (respiratory illness, eye infections?) Social Safeguards 74. Compliance with Involuntary Resettlement (OP 4.12) and with Indigenous Peoples (OP/BP 4.10) are both rated Satisfactory. 75. See also Pending Actions/Next Steps Section 5 below. Financial Management 76. Compliance with financial covenants: The FM ISR rating is assessed as Satisfactory for KENGEN and KPLC but Moderately Satisfactory for REA and MOE. 14 KEEP Implementation Support Mission November 12 – 26, 2012 77. There are no outstanding audits from any of the implementing agencies i.e. KPLC, KENGEN, REA and MoE. All entities except MoE have no outstanding Interim Financial Reports (IFRs). They have submitted quarterly IFRs on time up to the quarter ended September 30, 2012. 78. The FM arrangements continue to be adequate for KENGEN and KPLC. For MoE, the issue of staff (accountants) is affecting the project negatively in terms of preparing the quarterly reports and annual draft accounts for the project. REA was initially having challenges with staffing capacity but this has now been addressed. Legal Agreements 79. The project is in compliance with IDA legal covenants. Annex 5 provides the status of IDA covenants as approved by the Board on May 27, 2010. 4. AGREEMENTS REACHED 80. The key agreements were on proposed use of project savings, additional technical assistance activities to be implemented by ERC project is in compliance with IDA legal covenants. Annex 5 provides the status of IDA covenants as approved by the Board on May 27, 2010. 15  KEEP Implementation Support Mission November 12 – 26, 2012 5. PENDING ACTIONS/NEXT STEPS Action Timing Responsible Agency Implementation of environmental safeguards Continuous KenGen recommendations in Olkaria I and IV Proposal on use of Project Savings December 14, KenGen, 2012 MoE, REA Electrification Study Tour proposal December 14, ERC 2012 Submission of Revised RAP for Olkaria IV January 25, 2013 KenGen Submission of Revised RAPs for Transmission Lines January 25, 2013 KETRACO Define scope of preparation activities for tentative February 4,2013 KPLC Electricity Modernization Project (scope identification and justification and packaging) Data Survey for MAED (Model for Analysis of Energy February 15, 2013 ERC/KEBS Demand - ERC and KEBS to develop ToRs and a cost estimate for the survey. Policy and regulations for net metering, wheeling and February 15, 2013 ERC energy banking- ERC to develop Terms of Reference (ToR) and a cost estimate for the Consultancy Harmonization of Kenya Grid Code with Regional Grid February 15, 2013 ERC code- ERC to develop ToRs and a cost estimate for the Consultancy Implementation of Wind Training in Kenya for Sector February/ March ERC Agencies 2013 Complete the Tariff Review using the model of the Cost June 30, 2013 ERC/MoE of Service Study 6. DISCLOSURE 81. The Bank mission explained that under the Bank’s Access to Information Policy introduced on July 1, 2010, the aide memoire may be made public, if both the client and Bank agree. 82. The Bank and the borrower confirm their understanding and agreement to publicly disclose this aide memoire. The disclosure of this aide memoire was discussed with project/Ministry counterparts led by the Permanent Secretary at the wrap-up meeting that took place on November 26, 2012, in the Ministry of Energy. 16 KEEP Implementation Support Mission November 12 – 26, 2012 Annex 1: Officials Met Annex 2: Status of Financial Covenants and Financial Performance of KenGen and KPLC Annex 3: System Reliability Issues Annex 4: Olkaria Road Field Visit Annex 5: Social Safeguards Olkaria IV Annex 6: Tentative Electricity Modernization Project Annex 7: Results Monitoring Framework Annex 8: Dated Legal Covenants 17  Annex 1 Officials Met Ministry of Energy Mr. Patrick Nyoike, Permanent Secretary Mr. Rodney Sultani, Project Coordinator Eng. Richard Muiru, Power Engineering Consultant Mr. Isaac Bondet, Power Engineering Consultant Mr. Amos Tayari, Accountant Mr. Joseph Kwambai, Accountant Mr. Patrick Oluchiri, Accountant Ms. Catherine Mwithiga, Accountant Eng. George Kibiru, SPSE Eng. D. G. Kimani, CSE Eng. Isaac Kiva, Acting DRE Eng. Titus Ndunga Gitahi, CSE (M) Energy Regulatory Commission (ERC) Eng. Kaburu Mwirichia, Director General/CEO Eng. Buge Wasioya, Senior Manager, Systems Dr. Frederick Nyang, Director, Economic Regulations Ms. Grace Njeru, Economist Mr. R. Pavel Oimeke, Director, Renewable Energy Mr. John Mutua, SMER Kenya Power and Lighting Company Ltd. (KPLC) Eng. Joseph Njoroge, Managing Director and CEO Eng. Stanley Mutwiri, Team Leader, ESRP and KEEP Mr. Samuel Yego, Chief Accountant, ESRP and KEEP Mr. Joshua Mutua, Customer Service Manager Mr. Harun Mwangi, Coordinator, GPOBA Mr. John Guda, Manager, Safety, Health and Environment Mr. Wilfred Koech, Environmental and Social Specialist Ms. Grace Ngigi, Manager, Insurance and Risk Management Mr. Benson Muriithi, Manager, Distribution Mr. Lawrence Yego, Chief Manager, Finance Mr. Daniel Njuguna, Chief Accountant, Budget and Budgetary Control Mr. Raphael Mwaura, Chief Manager, PR and PM Ms. Rosemary Gitonga, Chief Manager, CS Kenya Electricity Generating Company Ltd. (KenGen) Mr. Eddy Njoroge, Managing Director and CEO Mr. David Kagiri, Projects Execution Manager Mr. Pius Kollikho, Environment and CDM Manager Mr. Joshua Were, Chief Environmental Management Officer Ms. Pacifica Achieng, Environmental Officer Ms. Beatrice Kipng’ok, Senior Human Resource Officer (Performance) Rural Electrification Authority Eng. Zachary Ayieko, Chief Executive Officer Eng. Simon Mwangi, Chief Manager, Operations Eng. Fredrick Oluoch, Assistant Supplies Officer Eng. Festus Kasonzo, Procurement Officer Ms. Caren Oduor, Senior Accountant Mr. Björn Tingnert, Project Manager, SWECO Eng. J. W. Nyaaga, Local Project Manager, Aberdare Eng. Raphael Khazenzi, Manager, Renewable energy Kenya Bureau of Standards (KEBS) Mr. Raymond K. Michuki, Chief Manager, Surveillance Mr. Paschal Vusa Nzioki, Manager, Petroleum Kenya Electricity Transmission Company Eng. Joel Kiiliu, Managing Director Ms. Mildred Ogendo, Socio - Economist Celestine Kaseve- Socio - Economist 19  Annex 2 Status of Financial Covenants and Financial Performance of KenGen and KPLC 1. The compliance status of KenGen and KPLC on the IDA financial covenants is described in the table below: Status of IDA Financial Covenants Description of Covenants (IDA) Status KenGen Funds from internal sources is equivalent to not less than 25% of the Complied three-year annual average of its capital expenditure Ratio of current assets to current liabilities is 1.0 or more Complied Net revenue is at least 1.2 times its estimated maximum debt service Complied requirement KPLC Funds from internal sources is equivalent to not less than 25% of the Not three-year annual average of its capital expenditure Complied Not Ratio of current assets to current liabilities is 1.0 or more Complied Net revenue is at least 1.2 times its estimated maximum debt service Complied requirement Accounts receivable on electricity sales is at or below 60 days of Complied revenues 2. KenGen. Based on the latest financial statement for FY2012, the year ended on June 30, 2012, KenGen is in compliance with the financial covenants for the Project. The debt service coverage ratio (DSCR), the current ratio and the self-financing ratio are all above the target values. KenGen’s Financial Performance Compared to Targets Agreed with IDA Target FY2008 FY2009 FY2010 FY2011 FY2012 Values Financial Ratios Debt Service Cover Ratio ≥ 1.2 2.2 2.2 4.3 3.3 1.8 Current Ratio ≥ 1.0 2.0 2.7 4.7 1.7 1.5 Self-financing Ratio ≥ 25% 113% 83% 43% 41% 66% Source: KenGen 3. KPLC. Based on the latest financial statement for FY2012, KPLC is in compliance with two of the four financial covenants for the Project, the debt service coverage ratio (2.3) and the number of days in accounts receivables (42 days). However, the current ratio (0.9) and the self- financing ratio (24 percent) were below the target values. KPLC’s financial statements show that the company is facing challenges in working capital and cash management as briefly discussed below. 20  KPLC’s Financial Performance Compared to Targets Agreed with IDA Financial Ratios Target FY2008 FY2009 FY2010 FY2011 FY2012 Values Debt Service ≥ 1.2 4.1 5.3 2.3 4.8 2.3 Coverage ≥ 1.0 1.2 0.9 1.0 1.2 0.9 Current Ratio ≥ 25% 54% 161% 29% 49% 24% Self-financing Ratio ≤ 50 days 50 45 43 53 42 Accounts Receivables Source: KPLC 4. Connection and Cash Management. KPLC explained that a major factor affecting its working capital and cash management is the rapid connection of new customers, which does not immediately results in cash inflows. While KPLC’s generation of cash flows from operating activities plateaued in FY2012 even though its collection performance is 100 percent, the company kept investing in expanding distribution lines and connections. In the absence of significant addition to its long-term debt, the company resorted to cash and bank overdrafts for immediate cash relief. This escalates the risk of insolvency. 5. KPLC estimates that the cost of connecting new residential customers is about $400 more than the connection fees paid. As KPLC extends its distribution lines moving beyond densely populated areas, these issues are set to aggravate. Going forward, it will be crucial to review (a) the scope of capital investment included in the regulatory asset base as part of regular tariff reviews, (b) implications of REA’s investment in grid extensions, (c) cost estimate of the required investment for connection and the adequacy of connection fees to recover cost, and (d) financing options for the time-lag involved between investment and collection. KPLC’s Cash Flows 30,000,000 25,000,000 Cash generated from 20,000,000 operations 15,000,000 Purchase of property 10,000,000 and equipment, net of capital 5,000,000 contributions - 2008 2009 2010 2011 2012 6. Impact of Deferred Tariff Review. Another risk factor is the delayed review of tariffs, which was supposed to be completed by June 2011. Until FY2012, the impact of the delay is not clearly visible in KPLC’s financial statements mainly due to (i) the lead time in inflationary adjustments, and (ii) incorporation of investment projects that did not materialize in the previous round of tariff review. The latter in particular helped KPLC’s income statements by being recognized as deferred power purchase costs. As the deferred costs are being exhausted, however, impacts of the tariff will likely be felt in FY2013. 21  Annex 3 System Reliability Issues 1. KPLC informed the mission the various undertakings to date related to system reliability and security of supply among which are: (i) upgrading and expansion of the SCADA system covering 27 and 40 transmission and distribution substations respectively; (ii) construction of about 1300km of OPGW fibre optic backbone on transmission towers and 140km of ADSS type of fibre optic cables on various sections of the distribution network; (iii) ESRP supported radio network that has enabled connection of 12 substations to the central control center; (iv) Installation of AMR on all customers with an average consumption of 7000Khw or above; and (v) Distribution automation in some parts of Mombasa; and (vi) GIS based distribution network planning. Other planned activities include: (i) undergrounding of the network in major towns, starting with Nairobi (a US$200 million project is under discussion); (ii) installation of recently procured ring main units with remotely controlled functions in Nairobi; (iii) Installation of AMRs on the main substation outgoing line feeders, and (iv) construction of about 200km of a fiber optic cable on major distribution lines. 2. In addition to the above, KPLC jointly with IFC have commissioned several system analysis studies and data collection aimed at identifying the network losses and in some cases have embarked on investments to address some of the causes such as the proposed installation of capacitors and voltage regulators in the at the customer premises and along the distribution network respectively. The mission further notes other actions being undertaken to systematically track/carry out energy audits in order to be able to undertake corrective actions to further reduce network losses among which are setting up of a facility database including distribution transformer metering and consumer referencing; and Installation of capacitors and AMRs on major line feeders. 3. The proposed new components to support and scale up the above KPLC initiatives and mission discussions are summarized below: 4. Under grounding the Distribution Network in the Central Business Districts of major cities- The existing network in these priority cities mainly consist of overhead lines and in most cases has reached it maximum power transfer capacity. As the cities expand, the network system uprating is increasingly becoming difficult due limited wayleaves in these densely built up areas in addition to frequent network disruptions due to interference arising out of several factors such as traffic knocking poles creating both outages and transient faults, interference during excavations and construction, etc…The network in these major cities needs to be reinforced to meet the increase in demand and KPLC proposes to replace the existing overhead network with an underground system in the due process. In addition to upgrading the network to cater for increase in demand, the proposed undergrounding is aimed at: (i) increasing power supply reliability by reducing disruptions resulting from network interruptions; (ii) reducing operations and maintenance costs arising out of the savings from reduced network failures due to external interference and wayleaves acquisition. In addition to the tangible benefits, other benefits include: (i) increased safety in these densely populated areas, (ii) compliance with city planning authorities as related to aesthetics, required safety clearances, etc.. 5. Extension of the KPLC’s automation project to cover additional areas in Nairobi and other central business centers- The proposed activities include investments in the distribution network needed to improve customer service in the main urban by installing automated switchgear (Ring Main Units, Load Break switches and Fault Locators) at various points of the distribution network to enable remote network operations, control and monitoring. The benefits from the proposed automation include: (i) reduced duration of outages by fast fault detection, localization and isolation and restoration of power supply via alternative feed available; (ii) Shortening of times for repair works by being able to automatically locate the fault position and 22 (iii) Improving the Power Supply quality by on-line voltage and reactive power management. These outcomes are expected to contribute to KPLC’s medium term objective related to increased power supply reliability and quality. 6. Other proposed components include: (i) Extension of SCADA system to cover remaining 104 substations (66/11KV & 33/11KV); (ii) Installation of AMRs to cover all substations and customer with an average monthly consumption of 4000 units and above; and (iii) Installation of 200km of an optic fibre cable on major distribution lines. The mission has discussed the proposed scope with the KPLC and notes the components’ benefits as related to the integration of the system operations and data acquisition to the national control center and facilitation of having in place an integrated MIS 7. The mission has reviewed the proposed scope and discussed with KPLC options to consider related to: (i) equipment sizing to optimize investment requirements to meet the (n-1) criteria; (ii) network reinforcements/creation of ringed network to increase system reliability especially for the central business districts where alternative transmission feeds exists; (iii) noting the increasing operations costs; power quality requirements, reliability expectations and regulatory oversight will in the near future be pressing issues that require KPLC to position itself to manage its assets and resources more closely. The mission discussions considered including a component aimed at providing geospatial information to a host of applications to help integrate information from many sources, both internally and externally and also provide visual information for the executives, managers and operators. In this regard, KPLC will consider hiring a specialist to support KPLC in further refining the proposed SCADA to include the geospatial information and its integration into the KPLC MIS to be to host a number of operations and users. KPLC would use available fund of ongoing project to finance this activity. In addition, the mission advised KPLC to consider a review of its next generation performance benchmarks and the need to balance network expansion focusing on additional connections with respect to improved system reliability. 8. Project Preparation time-line- The project is expected to be ready for appraisal June 2013. In this regard, KPLC will undertake the various preparatory activities related to scope identification and justification, and packaging. Activities related to system reinforcement could be informed by the ongoing IFC/KPLC assessments and the soon to be completed Distribution mater plan, whereas the SCADA component may require additional technical assistance to support KPLC as discussed above. 23  Annex 4 Olkaria Road Field Visit 1. The mission visited the 10km Road Construction site (OLKARIA II - OLKARIA IV) November 7, 2012 and met with officials of the Employer KenGEN; the Supervision Consultant Howard Humphreys, and the Contractor Messrs, S S Mehta. The missions comments and recommendations that were transmitted to KenGen on November 11, 2012 were as follows: 2. The mission was provided with the progress report as of September 2012 and noted that the contractor had mobilized fully and after a slow start, progress now stood at about 25% while the time already spent in the contract is 50% (four months out of the 8 months provided in the contract for completion); 3. The mission noted that the natural soil in the area was volcanic granular ash with CBR values greater than 20% (which is strong and highly suitable as subgrade). However, the mission was informed that due to lack of adequate cohesion in the soil, it was not possible to achieve 100% of the maximum dry densities when compacted at the optimum moisture content. As a result, the contractor was directed to use suitable select material (100 -150 mm) to mix with the subgrade so as to achieve 100% dry density. While it is desirable to achieve 100% of the maximum dry density and the Kenyan Specifications require so, Mission observed that in many instances, dry densities in the range of 95-100% of the maximum are accepted as specifications for cohesionless subgrades. However, the important aspect to bear in mind was that the quality of material (particularly the CBR strength) of this additional layer should not be inferior to the underlying subgrade CBR. At best, the intervening layer could be an extension of the specified sub-base. 4. Proper drainage is one of the most essential things, for unless the sub-grade of the road is dry and firm the surfacing is sure to break through. Ordinarily side ditches, which must be large enough to carry off all of the water falling on the road, will be sufficient. These side ditches should be wide and shallow, rather than narrow and deep (except in hilly environment), as thus they will not be hard to keep open nor dangerous to travel. They should be from four to five feet wide and from one to one and a half feet deep, sloping three to one on the side next to the road and down to one on the outer side, and they should have outlets (mitre drains) as frequently as possible to carry the water entirely away from the road. 5. The mission observed that at one place in a large cut area, the cut slope was quite steep and very close to the fence of a steam well. It is recommended to use gabions or other suitable means to create a stepped slope and protect the built up area behind the fence from curving into the slope. 6. Mission observed that the quality assurance laboratory was well established and staffed by the contractor and records were available on various tests done to date. The soil tests were jointly conducted by the contractor and the supervision consultant and approved (or rejected) by the supervision in accordance with the defined specs. 7. The mission observed several major stream crossings and gullies that indicate a high intensity of rainfall in the area. In many cases, culverts were observed (900 mm - 1,200 mm in diameter). However, it was evident that in several cases, the drainage structures as provided would not be adequate judging from the surrounding catchment areas and the size of the gully or stream crossing. Mission strongly recommended a re-assessment and re-design of the drainage structures by a hydrology specialist, including provision for river bank protection or river training to allow for smooth and erosion-free flow of water. The possible use of ARMCO pipe culverts (circular or arched) should also be considered to provide a large discharge area with lower headroom and at least cost. 24 8. The mission requested that an urgent report should be prepared by the Supervision Consultant documenting the re-assessment and re-design of drainage structures along the road with estimated costs and submitted to the Employer and World Bank for review. The report should also include the treatment and protection of steep gullies by the side of the road in light of excessive erosion that was observed in several locations. 9. Overall, the mission was satisfied with the progress of road construction but concerned about the inadequate provision of drainage structures at major water crossings which should be urgently remedied to avoid serious delay in project completion. 25  Annex 5 Social Safeguards Olkaria IV Enhanced Safeguards Implementation Support for the Kenya Electricity Expansion Project (KEEP) –P103037, Olkaria IV: Workshop to Sensitize PAPs Representatives on the Legal Options for Registration of the 1700 Acres Resettlement Site and the Cultural Centre Land in their Name Margaret Ombai, WB Consultant, November 8 and 9, 2012 1. Workshop at KenGen’s Mvuke Hall, Olkaria: The workshop was facilitated by an independent Lawyer, Patrick Rugo, a partner at Muthoka Gaturo and Company Advocates, who was contracted by KenGen for this purpose. Workshop participants included the PAPs representatives from all four PAPs villages, and their Lawyer. The government was represented by the District Cooperatives Officer and the District Land Registrar. KenGen was represented by the Environment and CDM Manager, the Property Manager, Chief Property Officer, two Legal Officers, the Social Safeguards Advisor and the Community Liaison Officer. The workshop was chaired by the RAPIC Chairman who is also the Naivasha District Commissioner. The main purpose of the workshop was to enable the PAPs make a decision on the legal entity that best suits them for the registration of the resettlement land and the Cultural Centre land in their name. The objectives of the workshop were: (i) to present to the PAPs representatives the legal options that are available to them under the current laws of Kenya for the registration of community land; (ii) to hold a question and answer session to enable the PAPs representatives understand more deeply, the practical implications of each option (iii) to allow time for the PAPs representatives to digest the implications of the various options, consult among themselves and their Lawyer, consult with the PAPs and to make a decision on the option that best suits them. 2. Presentation of available legal options: Mr Rugo informed the PAPs representatives of the relevant Constitutional Provisions on Land. These include article 60 of the Constitution of Kenya 2010 which sets out the key principles of land policy in Kenya; article 61 which classifies land into Public land, Community land and Private land, and, article 63 which deals with community land. According to article 60 of the Constitution, the key principles of the land policy include:  Equitable access to land;  Security of land rights;  Sustainable and productive and management of land resources;  Elimination of gender discrimination in law, customs and practices relating to land;  Encouragement of communities to settle land disputes through recognized local initiatives consistent with the Constitution. In addition to the constitutional provisions, the Layer informed participants that Parliament has also enacted a law to govern the registration, the Registration of Land Act 2012. This is the only law under which land registration can take place in Kenya today. Parliament is yet to enact a law that stipulates how community land should be managed, utilized or disposed off. This law is still in the Bill stage. The following six (6) options are the legal entities under which the PAPs can register the two land parcels – the 1700 acres resettlement land and the Cultural Centre land: 1. Public limited liability company; 2. Company limited by guarantee; 3. Society; 4. Co-operative Society; 5. Trusts; 6. Other Forms of organizations: a. Non-Governmental Organizations (NGOs) b. Self Help Groups (SHGs) and Community Based 26 Mr. Rugo impressed upon the PAPs representatives the need for them to take time with their Lawyer, and ask him as many questions as possible to enable him explain to them in the minutest of details, the practical implications in law, of each of the available options. In this way, the PAPs would be able to decide on the best option that suits them under the prevailing land laws in Kenya. He cautioned them against hurrying their decision-making before everything is clear to them. He also cautioned them against asking their lawyer, KenGen or anybody else to make the decision for them. He informed them that when they make the decision after understanding all the legal implications of the option that they choose, they would be able to cushion themselves against any challenges that may arise in future as the decision would be something they believe in and binding upon them. In this regard, he asked them to settle for an option that would unite rather than divide or bring in-fighting among the PAPs. Details with regard to the requirements for registration, including the registration procedures and advantages and disadvantages of each option, are in the attached power point presentations. 3. The question and answer session: Having listened to presentations on all the available legal options, the PAPs had the following concerns for which they sought clarification from the independent lawyer. a. The place of individual rights to community owned land: They were informed that some of the options presented allow for individuals to be given share certificates that act as proof of individual rights to community land; b. Most of the options presented seemed to be business-oriented with issues of liabilities and profits, yet what the PAPs wish for is a title that enables them to own the resettlement land and to settle in it peacefully. They therefore wished to know, if other options such as having individual titles or registering the land as “Group Ranch