Lebanon - Power Sector Restructuring and Transmission Expansion Project

Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No: P-6863-LE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT OF US$65 MILLION AND A PROPOSED PARTIAL CREDIT GUARANTEE IN AN AMOUNT OF US$100 MILLION TO THE LEBANESE REPUBLIC FOR A POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT November 5, 1996 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (As of Februarn 1996) Currenc\ Unit = Lebanese Pound US$1.0 = 1 1 1.600 WEIGHTS AND MEASURES I barrel (bbl) = 0.16 cubic meter I Giga Watthour (GWh) 1000,000 kilo\% att hours (kWh) I kgoe = kilogram of oil eqUiValent 1 kilovolt (kV) = 1000 volts 1 Megawatt (MW) = 1.000 kilowatts ( ) 1 Megavolt ampere (MVA) = 1000.000 volt-ampere I toil of oil eqUivalent (toe) 1,000 kilogra of oil eqUivalent ABBREVIATIONS AND ACRONYMS EDL Electricite du Liban ECAs = Export Credit Agencies EIB European Investment Bank ERRP = [mergency Reconstruction and Rehabilitation Project GOL Government of Lebanon IBRD = International Bank for Reconstruction and Developient ICB = International Competitive Bidding ICR = implementation Completion Report IDB = Islamic Development Bank I DC Interest During Construction IRR = Internal Rate of Return IPP = Independent Powxer Producers LSDP = Letter of Sectoral Development Polic\ MHER = Ministry of Hydraulic and Electric Resources NERP = National Emergency Reconstruction Program PCR = Project Completion Report PPAR = Project Performance Audit Report FISCAL YEAR (January I to December 3 1) FOR OFFICIAL USE ONLY LEBANESE REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Loan and Partial Credit Guarantee Project Summary Borrower/Guarantor: Government of Lebanon (GOL) Implementing Agencies: Electricite du Liban (EDL) and Ministry of Hydraulic and Electric Resources (MHER) Beneficiaries: EDL, GOL, urban and rural customers Amount: Loan: US$65 million Guarantee: US$100 million Terms: Loan: Standard variable interest rate for LIBOR-based US dollar single-currency loans payable in 9 years, including 9 years of grace (bullet repayment). Guarantee: Non-accelerable guarantee of repayment of principal at maturity, for a 10-year Eurobond priced at an indicative spread of 95-100 bp above 10-year US Treasuries with a tranche placed in the US under SEC Rule 144-A. Relending Terms: Loan: GOL would relend to EDL US$64.5 million of the loan at the prevailing Bank interest rate with repayment of principal in nine and a half (9/2) years, including four and a half (4/2) years of grace. US$0.5 million of the loan amount would be used by MHER to finance activities related to the restructuring of the sector and the establishment of a regulatory framework. Guarantee: GOL would re-lend the entire proceeds to EDL, net of underwriting fees, commissions and guarantee fee. Commitment Fee: 0.75 percent per annum on undisbursed loan balances, beginning 60 days after signing, less any waiver. Guarantee Fee: 0.25 percent per annum charged against the Bank's guarantee exposure, represented by the present value of the guaranteed amount at maturity, payable in advance in one lump-sum by GOL at financial closure date. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wihout World Bank authorization. u Loan and Project Summary Financing Plan: (US$ Million) Source of Funds Amount Percentage of Total EDL/GOL 56 12 Commercial Loans 79 16 EIB 20 4 IDB 31 6 ECAs/Buyers' Credits 130 27 French Protocol 5 1 IBRD Loan 65 13 Bank-Guaranteed Bond 100 21 Total 486 100 Economic Rate of Return: Not applicable for project component; 17 percent for sector investment program, valuing benefits at electricitry prices projected under the project. Environmental Rating: "B" Poverty Category: Not applicable Staff Appraisal Report: Report No. 15478-LE Map No.: IBRD 26093 Project Identification No.: 36087 Vice President: Kemal Dervi Director: Inder K. Sud Division Chief: Alastair J. McKechnie Task Manager: Rama Skelton MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED PARTIAL CREDIT GUARANTEE TO THE LEBANESE REPUBLIC FOR A POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed Loan of US$65 million and a proposed partial credit guarantee of up to US$100 million to the Government of Lebanon (GOL) to help finance a Power Sector Restructuring and Transmission Expansion Project. The loan would be at the Bank's standard LIBOR-based interest rate for US dollar denominated single-currency loans with a maturity of 9 years, including nine years of grace (bullet repayment). Part of the proceeds of the Loan would be onlent to Electricite du Liban (EDL) for 9V2 years, including 4/2 years of grace with the same interest rate and conditions as the Bank Loan. The Project would be financed by ECAs/buyers' credits, the European Investment Bank (EIB), Islamic Development Bank (IDB), the proposed IBRD loan, and a bond issue of US$100 million proposed to be guaranteed by IBRD. Country/Sector Background 2. Rebuilding and returning Lebanon's war-ravaged economy to sustainable growth involves three phases: (a) short-term emergency rehabilitation; (b) medium-term reconstruction; and (c) long-term expansion within the traditional market-based and outward-oriented policy framework. Following this strategy, Lebanon embarked in late 1992 upon a three-year (1993-95), US$2.24 billion National Emergency Reconstruction Program (NERP). This initial program covered a series of high-impact rehabilitation investments, a limited development of new facilities in areas of most urgent need, as well as institutional strengthening and technical assistance elements. The NERP is supported by US$225 million of Bank assistance through the Emergency Reconstruction and Rehabilitation Project (ERRP, Loan 3562-LE, 1993), including a US$50 million supplement approved in May 1996, in the fields of power, water and waste water, solid waste, education, housing and telecommunications. Re-establishing institutional capacity in the power sector had not been specifically addressed under NERP. Focusing attention on this aspect has now become critical. Electricity sector 3. The electricity supply system is dominated by the state-owned EDL, a vertically integrated utility with approximately 900,000 customers. Besides its own plant, EDL purchases from three independent hydroproducers and sells at wholesale to four private distributors. EDL is also the majority shareholder in the once-private Kadisha company, a producer and distributor to about 100,000 consumers in northern Lebanon. Installed generation capacity is about 1,389 MW (nameplate) of which 265 MW is hydro-electric and 1,124 MW thermal. A 220-kV interconnection with Syria has recently been rehabilitated and permits imports of up to 100 MW. 4. At the end of the hostilities, the electric power subsector was characterized by a damaged and dilapidated network and a fragile utility with an acute shortage of qualified staff. In particular, the transmission system was heavily damaged. Daily rotating blackouts have been routine since the late 1980s, with supply to consumers severely rationed, as only 500 MW to 600 MW of plant was operational versus a system demand of 1,100-1,300 MW. Most commercial and industrial customers and a significant proportion of residential consumers installed privately-owned diesel generators. An 2 Power Sector Restructuring and Transmission Expansion Project aggregate of 600 to 800 MW of such small, inefficient units are thought to exist. In the absence of firm data, privately-generated electricity is estimated at 1500 GWh annually, giving an average load factor of 21 percent for these generators. These non-utility systems are environmentally unsound and cannot be expected to meet growth in demand. Furthermore, the extensive anarchic distribution networks associated with them are not only unsafe but also an unsightly feature of the urban landscape. In early 1996, after EDL had been able to provide a 24-hour supply service to customers, the owners of these back-up generators, set in place to meet the shortfall in EDL's supplies, were being persuaded to shut them down. Re-establishing Financial Viability: Steps Undertaken and the Challenges Ahead 5. EDL has incurred losses for many years. Financial difficulties result from high technical and non-technical losses, including those resulting from widespread illegal connections coupled with loss of control over its commercial operations, and low tariffs. In 1995, technical and non-technical losses accounted for approximately 55 percent of production instead of a normal 10 to 12 percent for a comparable system. GOL and EDL are aware that tariffs need to be adjusted to reflect costs, but deferred action until a credible plan began implementation to regain mastery of EDL's commercial operations by: substantially reducing non-technical losses; improving collection ratios; and, improving service quality to a level of service continuity of close to 24 hours/day. Recently, tariffs were increased when most of the plant being rehabilitated (some 1,100 MW) entered service.I Additional steps were taken starting in 1996 to deal vigorously with billing weaknesses and non-technical losses. Turnkey contracts have been let to: (a) verify metering and correctly bill all medium and high voltage customers - a measure that covers 2,000 consumers, accounting for approximately 25 percent of EDL's forecast revenues in 1996; (b) normalize metering installations and records for some 140,000 customers in two urban areas where non-technical losses are disproportionately high; and (c) install a new commercial billing and customer accounting system. In addition, the contracting-out - under performance-based arrangements - of meter reading and revenue collection activities has been let to 1 8 private agencies covering areas outside of Greater Beirut. Despite these actions, EDL's losses in 1996 are forecasted at near US$150 million. Further tariff increases, financial restructuring, and measures to deal with the systemic problems in commercial operations are urgently required to accelerate the restoration of the sector. Sectoral Strategy/Priority Policy Reform: Restructuring and the Unbundling of EDL 6. Consultants (funded by the Bank under the ERRP) recently completed a comprehensive management audit of the sector. Problems identified include a legal framework that is no longer suited to present circumstances; a severely weakened public utility, EDL, that suffers, inter alia, from a lack of management autonomy; acute skill shortages; and weak financial and commercial practices. At the same time, EDL is facing a major challenge in modernizing and expanding all aspects of its operations. The consultants developed a menu of options to re-establish the viability of the sector. Following a consultative process to discuss options and modalities for implementation with key stakeholders, the Government decided, in principle, to unbundle the main operational functions of EDL and bring in private management to run generation and distribution. Actions to implement these would be carried out in phases. The reform program includes: a set of sector-wide restructuring actions designed to introduce competition along with the participation of the private sector in utility operations; and, a second set deals with internal reform actions for EDL itself - to re-establish its financial viability and develop its Effective March 1, 1996, the fixed charge component for all consumer categories was increased from LL 1,000/kVA to LL 1,200/kVA and a three-part rate with an on-peak charge of US$0.20/kWh was set for large consumers having a demand 300 kW. Effective October 1, 1996, a monthly rehabilitation surcharge that is expected to yield US$30 million on an annual basis, came into effect as follows: small consumers (< 3kVA) LL5,000/mo.; large consumers (> 3kVA) LI10,000/mo.; industrial consumers LL200/kVA. Power Sector Restructuring and Transmission Expansion Project 3 management capacity in line with its newly-defined mandate under the new, unbundled, sector structure. The program is spelled out in detail in the Government's Letter of Sectoral Development Policy (LSDP; 2 Annex 1.3 of the Staff Appraisal Report) . Main elements of the overall reform program include: * unbundling of the vertically integrated national utility into separate production, transmission, and distribution functions; * privatization of these key functional areas in a program involving "affermage',3 and upon approval by Parliament of the new electricity law, the establishment of several privately- operated regional distribution concessions; * restructuring residual utility functions under the restructured EDL, which would now serve as an asset holding company (societe de patrimoine) while retaining the natural monopoly functions of sector planning; bulk power contracting; transmission and generation dispatch, * introduction of two new laws: (a) a new sector electricity law; and (b) a new law and statutes covering the restructured EDL. The former law will provide for a competitive power market through the separation of electricity generation, transmission and distribution functions, the participation of the private sector therein, and the establishment of an autonomous regulatory body in the sector; * a vigorous program to dramatically cut non-technical losses (over 40% of production is currently lost due to such causes) and to improve collections; * in harmony with the technical loss reduction and collection improvement program (para. 5 above) make effective a series of annual rate increases to achieve sector solvency by year 2000; * phase-out GOL subsidies -- now exceeding US$100 million/year -- to keep EDL afloat. Interim subsidies for years 1996-99 to be treated as grants until sector solvency is achieved; * establish institutional capacity using a Project Management Team to manage the US$486 million transmission construction program; and * the placement of a US$100 million GOL bond issue backed by the World Bank guarantee facility, to support the sector reconstruction and reform program. 7. GOL has indicated that sector unbundling will require new legislation. It is expected that a new EDL Law will be submitted to Parliament in 1998 allowing the utility to operate on a commercial basis; it will, inter alia, authorize the lease of assets on a long-term basis to private operators. However, preparation of bidding documents for the leasing contracts is underway. It is important to note that key initial steps of the reform program have already been implemented, i.e., the recapitalization of EDL (US$450 million of GOL debt has been converted to equity); the restoration of the Kadisha concession and the letting of management contracts for meter-reading and collection activities (see para. 5). Sectoral Investment Program 8. National reconstruction - following the initial NERP phase - includes substantial investments in power. The 1995-2002 sectoral investment program is estimated at US$2.2 billion (including physical and price contingencies). Forty seven percent of the power program is for new generation projects, 2 Approved by the Council of Ministers of the Lebanese Republic, under Resolution #3746, September 26, 1996. Affermage or "operational contracting "- a contractual leasing arrangement under which the private operator ("fermier") leases state assets, and operates the facilities using his own working capital. Depending on contractual arrangements, new investments needed to operate/expand the leased facilities may be financed by the fermier. 4 Power Sector Restructuring and Transmission Expansion Project totaling approximately 1,000 MW. The investment program also provides for the overdue replacement of about 200 MW of non-repairable capacity as well as additions to meet demand growth. Reinforcement of the transmission system accounts for a further 31 percent of the program, while distribution represents 18 percent. Implementation of the program is concentrated in the early years, due to the backlog of investment which could not be carried out during the war. The Government has proceeded with these capacity additions, as it considers them essential to providing utility-quality power supply throughout Lebanon and vital for the nation's economic recovery. Project Objectives 9. The objectives are to : (a) expand a high-voltage transmission system to meet an integrated system peak demand of approximately 1,500 MW at the N-1 level of reliability ; and (b) assist the Borrower to implement the Action Program in the Letter of Sectoral Development Policy (LSDP) which provides for establishing an enabling environment for private sector involvement in the power sector, including the institutional restructuring of the sector. Project Description and Cost 10. The proposed Project comprises two elements: (a) an investment component (US$480 million or 98.8 percent of the project cost), which would include 339 km of double- and single-circuit 220-kV transmission lines, 49 km of underground 220-kV cables, and 14 new 220-kV substations; and (b) an institutional development component (US$6 million or 1.2 percent) consisting of technical assistance for project implementation, training and assistance to implement the institutional reform action program defined in GOL's LSDP. Details of the planned routes of the 220-kV lines and cables, and the locations of substations and major generation stations are shown in the map attached (Map IBRD 26093). Schedule A provides details of project costs, by components, and the project financing plan. Schedule B provides a summary of the proposed procurement and disbursement arrangements. A timetable of key processing events is shown in Schedule C. Statements of Bank Loans and IFC Investments are given in Schedule D and the Lebanese Republic at a glance is shown in Schedule E. Schedule F is a summary of the Proposed Partial Credit Guarantee Operation. Staff Appraisal Report (No. 15478-LE), dated November 5, 1996, is being distributed separately. Project Financing H1. The proposed Project is to be financed by buyers' credits (US$130 million), commercial loans (US$79 million), the European Investment Bank (US$20 million), the French Protocol (US$5 million), the Islamic Development Bank (US$31 million), the Government of Lebanon (US$56 million), a Bank loan (US$65 million) and Bank-Partial Credit Guarantee Bond (US$100 million). Both the EIB and the IDB loans have been approved. In view of the variance in financiers' procurement procedures, parallel financing for individual procurement packages is to be used. The Bank would finance a portion of the costs of two 220-kV substations and of the 220-kV underground cables connecting the IPC and Bahsas substations. The proposed Bank-Guaranteed Bond would also cover interest during construction (IDC). The Bank loan would be onlent by GOL to EDL at the IBRD interest rate. 12. GOL has opted for a bullet maturity of 9 years (from the first interest payment date) for the Bank loan with 9 years of grace in lieu of standard country terms (17 years maturity including 5 years of grace). The Bank's current policy allows for an extension of the grace period with a reduction in the total maturity on country or project grounds (in a 1 to 2 ratio, for a maximum, as in this case, of a 4-year This norm requires that the transmission system design and its configuration be adequate to reliably meet peak load demand, even in the event of the outage of any single element of the system. Power Sector Restructuring and Transmission Expansion Project 5 extension of grace, and an 8-year reduction in total maturity). The relevant country grounds are that over the next 4 to 6 years, Lebanon will continue to have large post-war reconstruction needs while a sizable portion of the current public debt - most of which is domestic - will fall due. The Government's strategy is to contain the growth of total public debt through fiscal adjustment, including improved cost recovery, e.g., in the power sector. The modified terms would help towards achieving the adjustment in a sustainable manner by deferring amortization obligations to a time by which reconstruction investment will have been completed, the fiscal deficit will have been reduced, and, based on projected rapid medium-term growth, the total public-debt-to-GDP ratio will have declined. Under the on-lending arrangements, GOL would require EDL to begin amortizing the subsidiary loan after four years of grace in order to ensure financial discipline in its operations. Finally, GOL opted for a single currency US- dollar loan, due in part to the fact that EDL tariffs are in Lebanese Pounds, which are linked to the US dollar under current policy. Partial Credit Guarantee 13. A partial credit guarantee for a US$100 million bond issue is proposed to help mobilize the necessary financing to fund the financing gap for the Project. The guarantee would also help catalyze private financing for the power sector through debt financing from the capital markets. EDL is not a creditworthy entity. Poor financial performance and the state of its financial records make it virtually impossible for EDL to access the commercial capital markets under its own name. Therefore, it is proposed that while EDL is undergoing restructuring and the sector reforms are in progress, GOL would borrow on behalf of EDL to maximize the terms of the borrowing sought under the partial credit guarantee. This would be the first guarantee operation in the country. Following market soundings among a cross section of financial institutions, it was determined that a bond issue would result in more favorable terms than a syndicated loan. The proposed partial credit guarantee would support a 10-year Eurobond Issue with a tranche placed in the United States under the SEC's Rule 144-A. The Bank's partial credit guarantee would cover 100 percent of principal repayment, on a non-accelerable basis, with the interest payment risk being undertaken by private investors (Schedule F). 14. The partial credit guarantee operation would provide EDL with long-term funds and would facilitate mobilization of the foreign exchange required for the completion of the project. Since the bond would be issued by the Lebanese Republic, this would allow EDL to access the market for reasonable maturities and terms while it is undergoing restructuring. The Bank's guarantee support would result in significant additionality in terms of mobilizing longer maturities and narrower margins and in broadening the existing investor base for Lebanese debt. The proposed partial credit guarantee operation would extend maturity significantly to 10 years. A guarantee operation would help initiate GOL's access to long-term funds in international markets. In contrast, GOL's recent borrowings from international markets have been of short maturities, between 3-5 years. Through the leveraging effect of the partial credit guarantee, the market would be encouraged to assume Lebanese sovereign risk for a longer credit period by assuming the interest payment risk. The proposed operation is intended also to broaden the investor base to include international institutional investors, thereby helping to diversify the country's borrowing sources, an important consideration given the country's large investment requirements. 15. The guarantee would represent credit support from the Bank of about 52 percent in present value terms of the total funds mobilized through the bond issue. These benefits are important to Lebanon, given the country's large infrastructure investment requirements. Based on the evaluation of the financing proposals and the award of the conditional mandate (Schedule F), Board approval is being requested for the partial guarantee. Following Board approval, GOL and the Bank would enter into 6 Power Sector Restructuring and Transmission Expansion Project 5 negotiations with the lead bank to conclude the relevant documentation for the guarantee financing Once these negotiations are completed, the Board would be informed of the terms and conditions of the guarantee prior to the launching of the bond issue. If as a result of these negotiations, the terms and conditions of the bond issue and guarantee were to be materially different from that reflected in Schedule F, Board approval for the revised documentation would be sought. Project Implementation 16. EDL would be responsible for the transmission and substation components and the Ministry of Hydraulic and Electric Resources for the institutional and regulatory framework components. Construction would be done through turnkey supply-erect-commission contracts, procured under international bidding procedures acceptable to the Bank. As EDL lacks project management skills, an experienced consultant team would be set up within EDL prior to the signing of the first construction contracts. The consultant would be required to provide on-the-job training of counterpart staff. Out of the proposed Bank loan, GOL has proposed to use up to US$10 million (or 15 percent of the total loan) for advance procurement and retroactive financing of essential transmission system components (220-kV cables and 220-kV substations). Such advance procurement is considered necessary by GOL to complete the transmission system not only so that the power produced by the two new combined cycle stations at Beddawi and Zaharani, currently under advanced stage of construction can be delivered to consumers, but also so that transmission system reliability can be restored. However, the retroactive financing would cover only those expenditures falling within a maximum period of twelve months prior to the expected date of loan agreement signing. Project Sustainability 17. Given continued political stability, project sustainability is dependent on: (a) implementation of structural reforms; (b) introduction of an unambiguous legal framework; (c) clear definition of an impartial and competitive regulatory structure; and (d) a political commitment to carry out the reforms. GOL's commitment to implement the preceding institutional and policy reforms is demonstrated by the LSDP Action Program, key steps of which have already been implemented (para 7). This policy framework provides for use of operational contracting (affermage) for electricity generation and distribution. The incentive structure and regulatory framework to be made part of the affermage contracts would be designed to further assure the project's sustainability and the efficient management of sector assets by providing the private operators with full operational responsibility. The private operators would bear normal commercial risks associated with electric utility operations, and would be required to provide at least part of working capital requirements. In the near to intermediate term EDL/GOL would continue to provide capital needs for long gestation and long lived system facility additions. Given the non-blueprint nature of the proposed operation, close project supervision and a full mid-term review of implementation would be carried out under the proposed Project. Lessons from Previous Bank Involvement 18. Implementation experience under the ERRP has been good. Institutional development and reform, particularly when it involves legislation, is expected to take a period of several years because of the need to develop political consensus. GOL and EDL are committed to reform, but this must proceed flexibly at its own pace. In this context, it is more appropriate to agree on a broad framework for reform of the sector rather than on a set of detailed milestones in an ambitious action program. GOL has Documentation for the guarantee would include: Offering Circular; Subscription Agreement; Fiscal Agency Agreement; Trust Deed and Bonds; Warranty Agreement; Indemnity Agreement; Articles of Consent for Currency and Markets; and Statutory Committee Report. Power Sector Restructuring and Transmission Expansion Project 7 increasingly relied on the private sector to accelerate reconstruction as well as to put in place needed institutional capacity to operate new facilities. These policies are fully consistent with the proposed restructuring/unbundling of EDL to be supported in the proposed operation, as well as with the Bank's 1992 policy guidelines for lending in the power sector. Rationale for Bank Involvement 19. The proposed Project is essential to the satisfactory completion of the power system facilities rehabilitated under the NERP and to their sustainability. GOL has requested the support of the Bank in mobilizing external resources for reconstruction and to assist it in designing a modern institutional and regulatory framework for the sector. The latter involves a step-by-step process which will take several years to put in place. Without the specialized technical support that the Bank is able to provide, it is likely that the process of institutional renewal would not start - or would be indefinitely postponed - putting at risk the entire national reconstruction effort. The Bank would play a catalytic role in establishing a credible policy environment conducive to the attraction of private sector operators (key to the sustainability of reconstruction of the sector) and in coordinating support from other donors and export credit agencies. Through the support provided by the proposed Project for the implementation of the LSDP Action Program, conditions for efficiency and quality of service improvements would be gradually created by enabling the private sector to play a major role in sector operations and possibly future investment. The proposed Project is consistent with the Country Assistance Strategy discussed by the Board on June 29, 1994, which calls for Bank support for reconstruction of basic infrastructure and for a private-sector-led economic recovery. 20. The proposed Project and underlying policy reforms are consistent with Bank guidelines for lending in the power sector. These call for shifting the role of governments from ownership and management to policy-making and regulation, promoting efficiency and quality through commercialization of operational activities and competitive provision of services. Finally, the project is an essential part of a comprehensive and integrated sector investment program needed to re-establish utility service in the entire country. Absent the timely construction of a reliable backbone transmission system, remaining investments (near US$1.7 billion) now underway in power plants and distribution facilities would not only become redundant, but would result in an enormous financial drain on the economy. Agreements Reached 21. During negotiations, the following agreements and assurances were obtained: (a) with GOL (i) Not later than January 1, 1998, GOL will submit a draft electricity law to Parliament that is satisfactory to the Bank; (ii) On-lending arrangements for the loan and Bank guaranteed bond; (iii) A mid-term review and evaluation of the execution of the Project will be conducted not later than November 30, 1998; and (iv) EDL and GOL will carry out the LSDP Action Program with due diligence and efficiency. 8 Power Sector Restructuring and Transmission Expansion Project (b) with EDL (i) EDL will continue to have its accounts audited by independent auditors satisfactory to the Bank, and audited accounts shall be submitted to the Bank not later than nine months after the end of fiscal years 1996 and 1997, and six months after the end of fiscal year 1998 and thereafter; (ii) Not later than September 30, 1997, EDL will undertake a risk assessment study to determine insurance requirements; (iii) EDL will carry out the environmental management plan in a manner satisfactory to the Bank; (iv) A Project Management Team will be established and maintained within EDL; (v) All measures will be taken to enable EDL to produce revenues equivalent to cash operating expenses and debt service not later than January 1, 2000; (vi) Not later than January 1, 1998, a tariff study will be undertaken in order to introduce a tariff structure by March 1, 1999, that will reflect the actual cost of supply to different consumer groups, provide for a life-line rate for low income consumers, and encourage energy conservation; (vii) Effective January 1, 1999, EDL will not incur any new long-term debt unless a reasonable forecast of its debt service coverage ratio, including the debt proposed to be incurred, indicates that said ratio will not be less than 1.5 times; and (viii) EDL will submit not later than October 31 of each year its investment program for the following year to the Bank, together with a financing plan indicating how the investment program would be financed. 22. The signing of a subsidiary loan agreement between GOL and EDL satisfactory to the Bank would be a condition of loan effectiveness. Program Objective Category 23. Although the Project objective does not have a direct poverty focus, it would avoid any adverse effect on the poor by, among other items, the use of life-line rate structures, and by serving the electric utility needs of all solvent users, including low-income households. Environmental Aspects 24. The project is designated as Category B. A comprehensive Environmental Impact Assessment (EIA) and related report has been prepared. The review included the two new power plants as well as the new transmission system - lines, substations, and cables. The mitigation plan proposes the following actions at the construction stage: (a) payment of adequate compensation for rights-of-way, tower and substation sites, including for crops and woodlands; (b) line alignment designed to minimize interference with agricultural land; (c) tower heights reduced whenever possible, especially in mountainous areas; (d) maximum use of existing roads and village tracks for access to tower/substation sites; (e) use of existing rights-of-way, wherever possible; (f) revegetation of new access roads and tower sites after construction; and (g) procedures for contractors to follow in case of archaeological findings. Power Sector Restructuring and Transmission Expansion Project 9 During the operational phase, actions shall include (a) routine inspections for erosion control at tower sites and steep slopes; and (b) selective hand clearance of vegetation along rights-of-way and at substation sites. The EIA has been reviewed by EDL and GOL and by the Bank. Environmental aspects of the project have been considered to be satisfactorily addressed and are in compliance with current environmental policies and procedures. Project Benefits 25. The proposed Project would provide urgently needed transmission capacity in the power sector. Backbone transmission facilities are an integral part of the sector's priority investment program and without it, EDL would be unable to deliver power from its new facilities. The choice of developing the transmission system at a new internationally recognized voltage standard of 220-kV was evaluated versus feasible alternatives of continuing system expansion at the existing non-standard 150-kV. The choice of the 220-kV level is likely the least-cost solution of meeting transmission system expansion over the medium/long-term. Phasing of construction in a modular fashion, e.g., initially building for a system demand of 1,500 MW under the N-1 reliability criteria, would permit close tracking of future growth in demand. Boosting the power capacity of the transmission system beyond 1500 MW would have required the doubling of some of the circuits, a decision that would now be difficult to justify owing to the lack of reliable data on consumption The new combined cycle power stations in the sector investment program were demonstrated to be the least-cost solution to generation expansion compared to feasible options of coal, conventional steam and/or simple cycle combustion turbines. 26. Eliminating rotating power cuts and minimizing the risk of unplanned blackouts have large indirect benefits through the avoidance of the disruption to economic activity. Without these investments and the accompanying institutional reforms, the improvements in electricity supply recently achieved under the NERP would not be sustainable. The ability to provide reliable public supply is expected to lead to the shutdown of small, inefficient private generators. The shutdown of diesel generators in densely populated urban areas would help reduce air and noise pollution, and the removal of the parallel overhead low voltage distribution network will bring safety and aesthetic benefits. The main economic benefits from the project results from the incremental electricity demand served, as well as from assuring the sustainability of the substitution of lower cost grid supply for informal generation (available from the NERP emergency rehabilitation). As project benefits are indivisible from those produced by the underlying investment program, the internal rate of return (IRR) was calculated on the full sector investment program required to meet the incremental demand on the power system associated with the project over its expected 25-year life (1995-2020). The IRR was calculated under an 8 percent demand growth scenario. The base case IRR was estimated at about 17 percent assuming benefits valued at tariffs projected in relation to the agreements under the project. This IRR understates the benefits from the project since economic benefits to consumers from a reliable, uninterrupted electricity supply are not easily quantified. 27. The impact of a one-year delay in completing the transmission investments to be financed by the proposed loan would be to lower the IRR by about 0.5 percent. A ten percent cost overrun on the transmission component would have the same relatively minor impact. One of the main areas of uncertainty, which has considerable influence on the IRR, is the forecast rate of growth in demand. The impact of lower electricity demand under a low GDP growth scenario was therefore examined. Annual average load growth of 6 percent over the 1995-2000 with benefits valued at projected tariffs results in an IRR of 13.5 percent. This shows that even if electricity demand falls short of the base-case forecast, the IRR on the investment program would remain satisfactory. Only if electricity demand growth during 1996-2001 averages 4 percent or less (benefits at projected rates) does the IRR fall below 10 percent. The risk of such low demand growth is considered to be small. 10 Power Sector Restructuring and Transmission Expansion Project 28. The Project is expected to strengthen EDL's sectoral analysis and planning capability. It would also enhance its ability to manage the new transmission system. The financial recovery measures under the Project would help ease EDL's reliance on operating subsidies from the national budget. Risks 29. The investment component of the Project does not involve any unusual technical or environmental risks. Implementation would be on a turnkey basis using prequalified international contracting firms. Final costs are known with reasonable accuracy as bids have already been received. The project includes an institutional strengthening component to reduce the risks of poor overall project management. The major risk facing the project is political. Restructuring the sector and delegating the bulk of EDL's operations to the private sector is key to achieving the anticipated benefits earlier than under the status quo. Recruitment of private operators could be delayed or hindered because of political constraints and/or public opposition. Care is being taken to prepare comprehensive, high-quality bidding documents and to ensure that the process is conducted objectively and transparently. The inevitable reductions in EDL's staff would have to be handled with due sensitivity. In assessing the preceding risks, it is important to note that it is fully feasible, though not desirable, to continue EDL operations relying only on internal reforms rather than under the unbundled structure proposed under the project. Under a no-restructuring scenario, significant delays would occur in the commercialization of EDL. However, benefits from improved power supplies would not be lost to the larger economy. A qualitative analysis was conducted by consultants comparing the relative impacts of various institutional arrangements - including the option of limiting restructuring to an essential set of internal reforms within the existing structure. Results of this analysis showed that while the status quo structure is viable, it ranks lowest of the structural models examined. Thus, the reforms under the proposed Project can be categorized as "no regrets" policy reform - meaning that even if it turns out that no substantive reforms are implemented, the project would still have resulted in positive economic gain, i.e., NPV > 0. This is an innovative project in the Lebanese context and the reform process may prove to be slower to implement than currently estimated. Until now, the focus of GOL has been on physical reconstruction. While there is no substantive difference of opinion on the nature of the needed reforms, political constraints may slow down the process and hence a longer time period may prove to be necessary to put them in place. GOL will need to make a special effort to convince the public that, in light of the risk that the unbundling of the sector will be perceived as responsible for the large tariff increases, these increases would be required even if the status quo were maintained. Recommendation 30. I am satisfied that the proposed Loan and proposed partial credit guarantee would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve both operations. Upon satisfactory completion of the negotiations of the partial credit guarantee, the Board will be informed of the terms and conditions of the guarantee prior to the launching of the bond issue. James D. Wolfensohn President by Caio Koch-Weser Attachments Washington D.C. November 5, 1996 11 Schedule A LEBANESE REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Summary Project Costs (US$ Million) Component Local Foreign Total Transmission Lines 14 49 63 Underground Cables 16 97 113 Substations 48 181 229 Technical Assistance & Training 2 4 6 Sub-total 80 331 411 Physical and Price Contingencies 9 25 34 Interest During Construction 0 41 41 Total Cost 89 397 486 Project Financing Plan (US$ Million) Source of Funds Amount Percentage of Total EDL/GOL 56 12 Commercial Loans 79 16 EIB 20 4 IDB 31 6 ECAs/Buyers' Credits 130 27 French Protocol 5 1 IBRD Loan 65 13 Bank-Guaranteed Bond 100 21 Total 486 100 12 Schedule B Page 1 of 2 LEBANESE REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Summary of Procurement Arrangements (US$ Million)4 Procurement Method Non-Bank Financed Project Elements ICB Other Total Cost Underground cables 123.9 71.2 123.9 (52.7) (52.7) Transmission lines 72.9 72.9 72.9 Substations 241.2 - 229.7 241.2 (11.5) (11.5) Technical assistance 7.0 6.2 7.0 (0.8)_b/ (0.8) Interest during construction 41.0 41.0 Total 438.0 7.0 421.0 486.00 (64.2) (0.8) (65.0) g/ Figures in parentheses denote IBRD loan financing. h/ Consulting services to be procured under Guidelines for the Use of Consultants by the World Bank 13 Schedule B Page 2 of 2 Disbursement Arrangements by Category (US$ Million) Percentage of Loan Category Amount of Expenditure to Loan Allocated be financed 1. Underground cables 47.6 1001/ 2. Substations 10.4 1002/ 3. Technical assistance 0.8 100 4. Unallocated 6.2 Total 65.0 1/ 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 85% of local expenditures. 2/ ibid. Estimated IBRD Disbursements /i (US$ Million) Fiscal Year 1997 1998 1999 2000 2001 2002 Annual 2 7 21 23 8 4 Cumulative 2 9 30 53 61 65 Percent 3 14 46 82 94 100 1/ Based on MNA standard disbursement profile for power sector investment loans. 14 Power Sector Restructuring and Transmission Expansion Project Schedule C LEBANESE REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Timetable of Key Project Processing Events Time Taken to Prepare the Project: 28 months1' Prepared By: Government of Lebanon, Electricite du Liban First Bank Mission: July 1994 Appraisal Mission Departure: January 1996 Negotiations: September 1996 Board Presentation: November 26, 1996 Planned Date of Effectiveness: March 1997 Relevant PCRs/ICRs/PPARs: None Responsibilities for Preparation: Task Manager: Rama Skelton, MN2PI Division Chief: Alastair J. McKechnie, MN2PI Department Director: Inder K. Sud, MN2DR Regional Vice President: Kemal Dervi§, MNAVP Peer Reviewers: Jean-Pierre Charpentier, IENPD Rafael Moscote, LATAD Graham Smith, EMTIE 1/ Project preparation proceeded in parallel with the implementation of the power component of the Emergency Reconstruction and Rehabilitation Project (Loan No.3562-LE, 1993). This component provided for the funding of technical assistance, including the restructuring consultancy, was used as a basis for the preparation of the proposed Project. 15 Schedule D Page 1 of 2 LEBANESE REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Status of Bank Group Operations in Lebanon IBRD Loans in the Operations Portfolio As of October 31, 1996 Difference between expected Project Fiscal Original amount in USS and actual ID Loan No. Year Borrower Purpose IBRD Cancel Undisbursed disbursements a Number of Closed Loans/Credits: 4 Active Loans 5336 L35620 1993 Government of Lebanon Emergency Recovery 175.00 53.86 11.12 5344 L37690 1994 Government of Lebanon Lebanon Irrigation 57.23 56.38 9.35 5340 L37700 1994 Government of Lebanon TA for Revenue Enhanc. 19.94 18.98 7.34 34004 L38290 1995 Government of Lebanon Health Project 35.70 35.00 6.70 5345 L38990 1995 Government of Lebanon Solid Waste/Environment 55.00 55.00 3.70 5336 L35621 1996 Government of Lebanon Emergency Recovery 50.00 50.00 34035 L39300 1996 Government of Lebanon Admin. Rehabilitation 20.00 19.64 1.14 38674 L40650 1997 Government of Lebanon National Roads 42.00 42.00 34037 L40920 1997 Government of Lebanon Agric. Infrastr. Develop. 31.00 31.00 TOTAL 485.87 0.00 361.85 39.34 Active Loans Closed Loans Total Total disbursed (IBRD) 124.02 93.66 217.68 Of which repaid 0.00 88.54 88.54 Total now held by IBRD 485.87 5.12 490.99 Amount sold 0.00 3.45 3.45 Of which repaid 0.00 3.45 3.45 Total undisbursed 361.85 0.00 361.85 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. 16 Schedule D Page 2 of 2 LEBANESE REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Lebanon - Statement of IFC Investments Committed and Disbursed Portfolio As of September 30, 1996 (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1993/96 Banque Audi 15.40 0.00 0.00 1.80 5.40 0.00 0.00 1.80 1993/96 Byblos Bank 15.40 0.00 0.00 1.80 5.40 0.00 000 1.80 1993/96 BBAC 10.40 0.00 0.00 1.80 5.40 000 0.00 1.80 1993 BLOM 3.20 0.00 0.00 1.07 3.20 000 0.00 1.07 1993/94/96 Fransabank 18.33 0.00 0.00 6.66 10.83 0.00 0.00 6.66 1993 Uniceramic 240 0.00 0.00 1.20 2.40 0.00 000 1.20 1994 Banque Libanaise 5.50 0.00 0.00 2.64 5.50 0.00 000 2.64 1994/96 Libano-Francaise 15.70 0.00 0.00 5.10 5.70 0.00 0.00 5.10 1994/96 SGLEB 13.20 0.00 0.00 5.10 5.70 0.00 0.00 5.10 1995 Cimenterie Nat'1 20.00 000 0.00 30.00 18.20 0.00 0.00 27.30 1995 Lebanese Leasing 7.50 075 0.00 7.50 2.10 0.75 0.00 2.10 Total Portfolio: 127.03 0.75 0.00 64.67 69.83 0.75 0.00 56.57 Approvals Pending Commitment Loan Equity Quasi Partic 1996 AUDI-HOUSING CL 0.00 0.00 000 10.00 1996 BBAC -HOUSING CL 0.00 0.00 000 5.00 1996 BLF --HOUSING CL 0.00 000 0.00 10.00 1996 BYBLOS HOUSINGCL 0.00 0.00 000 10.00 1996 FRANSABK-HOUS CL 0.00 0.00 0.00 7.50 1996 SGLEB HOUSING CL 0.00 0.00 0.00 7.50 Total Pending Commitment: 0.00 0.00 0.00 50.00 17 Schedule E Page I of 2 LEBANON REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Lebanon at a glance M. East Lower. POVERTY and SOCIAL & North middle. Lebanon Africa Income Development diamond' Population mid-1995 (millions) 4.0 273 1,154 GNP per capita 1995 (USS) 2,670 1,780 1,700 Life expectancy GNP 1995 (billions US$) 10.7 486 1,962 7 Average annual growth, 1990-95 Population (%} 1.9 2.7 1.4 GNP Gross Labor force (%} .. 3.3 1.8 per pr ry Most recent estimate (Fateos year available silce 1989) capita enrollment Poverty: headcount Index (% of populalon) Urban population (% of total population) _87 56 56 Life expectancy at birth (years) 68 66 67 Infant mortality (per 1,000five births) 32 49 36 Access to safe water Child malnutrition (% of children under 5) Access to safe water (% of population) .. 82 78 illiteracy (% of populaton age 15+) 8 39 Lebanon Gross primary enrollment (% of school-age population) 115 97 104 Male 117 104 105 Lower-middle-icome group Female 114 90 101 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1994 1995 Economic ratios* GDP (billions USS) .. .. 9.1 11.1 Gross domestic investment/GDP .. .. 32.4 36.6 Openness of economy Exports of goods and non-factor services/GDP 8.9 9.6 Gross domestic savings/GDP .- .. -24.2 -19.1 Gross national savings/GDP .. .. -8.7 -6.6 Current account balance/GDP .. .. -41.0 -43.2 Interest payments/GDP .. .. 0.3 0.7 Savings Investment Total debt/GDP .. .. 18.8 23.7 Total debt servicelexports .. .. 12.0 9.7 Present value of debt/GOP .. .. 20.3 Present value of debtlexports ., .. 120.8 Indebtedness 1975-4 1985-95 1994 1995 1996-04 (average annual growth) - Lebanon GOP percap8.0 6.5 6.7 Lower-middle-income group GNP per capita . .. 7.8 4.1 Exports of goods and nfs ., .. 16.8 16.5 12.4 STRUCTURE of the ECONOMY 1978 1985 1994 1995 (% of GDP) Growth rates of output and investment(%) Agriculture .. .. 7.2 go 8 Industry . .. 23.7 Manufactunng .. .. 16.6 Services .. .. 69.1 0. o , d 91 92 93 94 DS Private consumption .. .. 1099 104.9 140 - General govemment consumption .. .. 14.5 14.1 - GI ----GDP Imports of goods and non-factor services .. .. 65.6 65.2 (average annual growth) 1975-84 1985-95 1994 1995 Growth rates of exports and Imports (%) Agriculture *. Industry a Manufacturing 40 Services 2o Private consumption .. .. -1.0 10.6 o General govemment consumption .. .. 28.5 7.6 0 91 93 s4 as Gross domestic investment .. .. 67.6 4.5 -20 Imports of goods and non-factor services .. .. 13.3 13.0 - Exports Imports Gross national product .. .. 9.8 6.2 Note: 1995 data are preliminary estimates. The diamonds show four key Indicators In the country (in bold) compared with its Income-group average. If data are missing, the diamond will be incomplete. 18 Schedule E Page 2 of 2 PRICES and GOVERNMENT FINANCE 1975 1985 1994 1995 Domestic prices Inflation (%) (% change) iso Consumer prices 8.3 10.6 Implicit GDP deflator .. .. 8.3 10.6 Government finance (% of GDP) o Current revenue .. .. 14.6 16.8 0o 01 02 03 94 0s Current budget balance .. .. -11.2 -8.9 - GDP def ----CPI Overall surplusldeflcit .. .. -20.4 -18.3 TRADE 1975 1985 1994 1998 (millions US$) Export and Import levels (mill. US$) Total exports (fob) 737 982 7.sO Other agriculture .. .. 251 296 Fuel .. .. 7 8 Manufactures .. .. 413 601 s,ooo Total imports (cif) .. .. 5,541 6,721 Food 1,441 1,748 2,500 Fuel and energy .. .. 302 354 Capital goods .. .. 1,044 1,800 Export price index (1990=100) .. .. 114 119 00 90 01 92 93 04 05 Import price index (1990=100) .. .. 113 120 0 Exports a Imports Terms of trade (1990=100) .. .. 101 99 BALANCE of PAYMENTS 1975 1985 1994 1995 (millions US$) Current account balance to GOP ratio (%) Exports of goods and non-factor services .. .. 817 1,073 a Imports of goods and non-factor services .. .. 5,990 7,266 Ls 01 0 0 os as Resource balance .. .. -5,173 -6,193 -20 Net factor income .. .. 437 503 Net current transfers .. .. 987 881 Current account balance, before official transfers .. .. -3,749 -4,809 . Financing items (net) .. .. 4,880 5,065 Changes in net reserves .. .. -1,131 -256 -o Memo: Reserves including gold (mill. USS) 2,494 4.089 7,419 8,105 Conversion rate (local/USS) .. .. 1,680.1 1,622.4 EXTERNAL DEBT and RESOURCE FLOWS 1975 1985 1994 1995 (millions US$) Composition of total debt, 1995 (mill. USS) Total debt outstanding and disbursed 46 870 1,714 2.640 IBRD 16 36 64 113 A D IDA 0 0 0 0 85 E 230 Total debt service 11 126 184 181 IBRD 3 7 8 11 IDA 0 0 0 0 G Composition of net resource flows 1339 Official grants 9 54 98 125 Official creditors -3 6 -13 118 F Private creditors 0 -30 -2 783 873 Foreign direct investment 0 7 7 35 Portfolio equity 0 0 1 38 World Bank program Commitments 0 0 77 146 A - IBRO E - Bilateral Disbursements 5 4 27 51 8 - IDA D - Other multilateral F - Prrvate Principal repayments 2 4 4 4 C - IMF G - Short-term Net flows 4 0 23 47 Interest payments 1 3 4 7 Net transfers 3 -2 19 40 Middle-East Department, Country Operations Division 8120196 19 Schedule F Page 1 of 2 LEBANESE REPUBLIC POWER SECTOR RESTRUCTURING AND TRANSMISSION EXPANSION PROJECT Summary of the Proposed Partial Credit Guarantee Operation Issuer: Lebanese Republic (GOL). Investors: Institutional and retail investors in the Eurobond and US 144A markets. Lead Manager: Merrill Lynch Currency: U.S. Dollars. Amount: US$100 million. Use of Proceeds: The net proceeds of the Bonds will be used exclusively to provide part of the financing requirements for Project expenditures, as such project is described in Schedule 2, Part A of the World Bank Loan Agreement, and which is not financed by the World Bank Loan. Drawdown: On the closing date of the issue, GOL will receive the full amount of the proceeds of the Bonds, less the guarantee fee payable to the World Bank and the fees and commissions payable to the Managers, the Fiscal Agents, the Trustee and the advisers engaged by GOL. The entire net proceeds of the Bonds will be credited to a special account maintained with the Banque Centrale du Liban in the name of EDL. Subsequent drawdowns from the special account will be made exclusively to meet Project expenditures as they are incurred. The Special Account will be audited annually by independent auditors acceptable to the World Bank and the audit reports will be submitted to the World Bank. Maturity: 10 years. Repayment: Bullet repayment at maturity. Indicative Spread: 95 - 110 bp per annum over 10-year U.S. Treasury Securities. Coupon: Fixed rate, payable semi-annually in arrears. Commissions: 60 bp Listing: Luxembourg. Trustee: To be appointed. 20 Schedule F Page 2 of 2 Expenses: GOL shall reimburse the Lead Manager for all reasonable out-of-pocket expenses incurred in the negotiation, syndication, listing and execution of this Bond issue, up to a maximum of US$100,000. Taxes and Other Deductions: All payments to be made under or in connection with the Bonds to be free and clear of any Lebanese taxes, withholdings or other deductions whatsoever. Documentation: Customary Eurobond/Rule 144A documentation, including an Offering Circular, Subscription Agreement, Fiscal Agency Agreement, Trust Deed and Bonds. Special provisions will be included to reflect the World Bank's participation, to provide disclosure of material information on the World Bank, and terms of the partial credit guarantee provided by the World Bank which will be contained in the Trust Deed. World Bank Partial Credit Guarantee Provisions: Non-accelerable guarantee of principal only at stated maturity granted by the World Bank and exercisable by the Trustee. The World Bank will only be obliged to pay on the maturity date of the Bonds, only to the extent that GOL has failed to pay the principal amount of the Bonds and only following a demand made in accordance with the Trust Deed. If the guarantee is exercised, the World Bank would pay out against delivery of the Bonds. The World Bank would be entitled to reimbursement from GOL forthwith on demand, or as the World Bank may otherwise direct, any amount paid pursuant to the guarantee. Guarantee Fee: A fee of 25 bp per annum charged on the guaranteed exposure on present value basis, using the Bank's cost of funds as discount rate. The fee is payable in advance by GOL at financial closure date, out of the proceeds of the Bonds; in the event of early redemption of the Bonds (or part thereof), a precalculated refund of a prorated part of the guarantee fee will be made by the Bank. Counter-Guarantee and Indemnity by GOL: The Lebanese Republic will enter into a Counter-Guarantee and Indemnity Agreement with the World Bank in respect of the guarantee. Under the agreement, GOL will indemnify the World Bank in respect of any costs and expenses relating to the guarantee. Requisite Authorization: All requisite authorizations and approvals required to make the partial credit guarantee effective would have to be obtained and be in full force and effect. Governing Law & Jurisdiction: The laws of England. Non-exclusive jurisdiction will be vested in the courts of England. In this regard, GOL will appoint agents for service of process in England and will waive all immunity from suit, attachment and/or execution of judgment which they now enjoy or might enjoy in the future. MAP SECTION  IBRD 26093 BEIRUT 36 00 36 30 COMMERCIALE Theh -p .a produced % y he Mou Des,gn Un't of The World Ban The I SEI:BASTAR *oundane col- BEYRU ' ACHRAFIEH "" * deno-ao, o'd on, - on, th.s mop dc not PINS py. O he por' of TeWorid Bank G-op onySri dgmev t co the lega ou of an -encr,o a p -34,301 or anye dosemenI ./ or occeponce of such BEDDANI /oodo.es 35'30' I.P.C. BAHSAS * NORD/ Mediterranean Sea f' HA EBAA LB EC K- -34'00' ' / 34 00'- ZOUK See Inset Above BEI UT IBSALIM KSARA "MIKALLES JAMHOUR ./ . ARAMOUN LEBANON POWER SECTOR RESTRUCTURING AND . TRANSMISSION EXPANSION PROJECT 220 kV AND 150kV NETWORK FOR 1500 MW SYSTEM AND . MAJOR EXISTING AND PROPOSED / GENERATING PLANTS SAID -3330' ZAH PROPOSED EXISTING 33 30- 220 kV TRANSMISSION LINES * - - -- 220 kV UNDERGROUND CABLES 150 kV TRANSMISSION LINES - 150 kV UNDERGROUND CABLES 220/150 kV SUBSTATIONS S220/66 kV SUBSTATIONS SOUR 220 kv/MV SUBSTATIONS (R A A MAJOR THERMAL GENERATING PLANTS GAS TURBINE GENERATING PLANTS A HYDROELECTRIC SITES @ NATIONAL CAPITAL S. -. - -INTERNATIONAL BOUNDARIES 0 5 10 15 20 25 Kilometers 33-t' OI I 0 5 10 15 20 25 Miles 33 00' 35030' 36100' 36 30' OCTOBER 1996   IMAGING Report No: P- 6863 LE Type: MOP