Document of The World Bank FOROFFICIALUSEONLY Report No: 27015-KH PROJECTAPPRAISALDOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OF SDR 27.9 MILLION(US$40MILLIONEQUIVALENT) AND A PROPOSEDGEF GRANT OFUS$5.75 MILLION TO THE KINGDOM OF CAMBODIA FOR THE RURALELECTRIFICATIONAND TRANSMISSIONPROJECT November 21,2003 Energy and MiningSector Unit SEAsia andMongoliaCountry Unit EastAsia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective September 30,2003) Currency Unit = Riels (Rs) 1RS= 0.000261 1US$ = RS3,835 FISCALYEAR Government: July 1- June 30 EDC: January 1- December 31 ABBREVIATIONS AND ACRONYMS ADB Asian DevelopmentBank CAS Country AssistanceStrategy EAC Electricity Authority of Cambodia EdC Electricit6du Cambodge ESMAP Energy SectorManagementAssistanceProgram EVN Electricity of Vietnam FMR FinancialManagementReport FRAP FinancialRecovery Action Plan GEF Global EnvironmentFacility GHG GreenHouseGas GMS Greater MekongSub-Region ICB IntemationalCompetitive Bidding IDA IntemationalDevelopmentAssociation IPP IndependentPower Producers IRC Inter-MinisterialResettlementCommittee kWh kilowatt hour GWh Gigawatthour MEF Ministry of EconomyandFinance MIME Ministry of Industry,Mines andEnergy MOE Ministry of Environment M V MediumVoltage MW MegaWatt MWh Megawatthour NCB NationalCompetitiveBidding NGO Non-GovemmentalOrganization PAF ProjectAffected Families PIC ProjectImplementationConsultant PMU ProjectManagementUnit PPIAF Public-PrivateInfrastructureAdvisory Facility PPA Power PurchaseAgreement RAP ResettlementAction Plan RE Rural Electrification REAP Renewable EnergyAction Plan REE RuralElectricity Enterprises REF RuralElectrification Fund RFP Requestfor Proposals ROW Right-of-way SA SpecialAccount SBD StandardBidding Documents SHS Solar Home Systems T L Transmission Line TA TechnicalAssistance WPP West PhnomPenh Vice President: Jemal-ud-din Kassum Country Director: IanPorter Sector Manager: Junhui Wu Task Team Leader: Rebecca Sekse FOR OFFICIAL USEONLY KINGDOMOFCAMBODIA RURALELECTRIFICATIONAND TRANSMISSIONPROJECT CONTENTS Page A.ProjectDevelopmentObjective ........................................................................................................ 4 1. Project developmentobjectives................................................................................................... 4 2.Global objective .......................................................................................................................... 4 3. Key performance indicators........................................................................................................ 4 B. Strategic Context............................................................................................................................. 4 1. Sector-relatedCountry Assistance Strategy (CAS) goal supportedby the project ..................... 4 2. Mainsector issues and Government strategy.............................................................................. 5 C. Project Description Summary ......................................................................................................... 11 1.Project Components ....................................................................................................... 11 2.Key policy and institutional reforms supported by the Project...................................... 13 3.Benefits and target population........................................................................................ 14 4. Institutional and implementation arrangements ............................................................. 14 D. ProjectRationale................................................................................................................ 16 1.Project alternatives considered andreasonsfor rejection .............................................. 16 2 Major relatedprojects financed by IDNIBRD andor other development agencies .....17 3 Lessons learnedand reflectedinthe project design....................................................... .. 17 4.Indications of borrower commitment and ownership .................................................... 19 5.Value added of IDA support in this Project.................................................................... 19 E. Summary ProjectAnalysis ................................................................................................. 20 1.Economic........................................................................................................................ 20 2. Financial......................................................................................................................... 21 3. Technical ............................................... .. ........................................................................ 22 4. Institutional..................................................................................................................... 22 5.Environmental ................................................................................................................ 23 6. Social.............................................................................................................................. 25 7. Safeguard and Business Policies.................................................................................... 27 E Sustainability andRisks..................................................................................................... 27 1.Sustainability.................................................................................................................. 27 2.Critical risks ................................................................................................................... 28 3.Possible controversial aspects ........................................................................................ 30 G. MainCredit Conditions...................................................................................................... 30 1.Effectiveness condition .................................................................................................. 30 2. Other............................................................................................................................... 30 This document has a restricted distribution andmay be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. H.Readiness for Implementation............................................................................................. 31 I. CompliancewithBankPolicies......................................................................................... 32 Annex 1:Project Design Summary.......................................................................................... 33 Annex 2: Detailed Project Description..................................................................................... 38 Annex 3: Project Costs............................................................................................................. 49 Annex 4: Economic and Financial Analysis Summary ............................................................ 51 Annex 5: Financial Summary................................................................................................... 64 Annex 6 (A): Procurement Arrangements ................................................................................ 76 Annex 6 (B): Financial Management and Disbursement Arrangements.................................. 87 Annex 7: Project Processing Schedule..................................................................................... 96 Annex 8: Documents inthe Project File .................................................................................. 97 Annex 9: Statement of Credits ................................................................................................. 99 Annex 10: Country at a Glance................................................................................................ 101 Annex 11: Resettlement Action Plan....................................................................................... 103 Annex 12:Environmental Management Plan .......................................................................... 109 Annex 13 (A): Rural Electrification Fund .............................................................................. 129 Annex 13 (B): Status of REF Sub-project Pipeline ................................................................ 138 MAP(S) IBRD32776 and 32777 Cambodia RuralElectrificationandTransmissionProject ProjectAppraisalDocument EastAsia andPacificRegionalOffice EnergyandMiningDevelopmentUnit Date: November 25, 2003 Team Leader: Rebecca C. Sekse Director: IanPorter Sector Managermirector: Junhui Wu Project ID:PO64844 & GEFPO71591 Sector(s): PP-Electric Power & Other Energy Adjustment Lending Instrument: Theme(s): RuralDevelopment Specific InvestmentLoan (SIL) Poverty Targeted Intervention: [XI Yes [ ] N o Government Counterpart Funds (IDA)* 6.33I 6.33 Government Counterpart funds (ADB) 21.15 21.15 IDA 9.16 30.84 40.00 ADB and Other 9.22 46.08 55.30 Private Funds 8.13 13.46 21.59 GEFgrant 1.36 4.39 5.75 Total: 55.35 94.77 150.12 - 4 - A. ProjectDevelopment Objective 1.Projectdevelopmentobjectives(see Annex 1) The main development objectives of the Project are to: (a) improve power sector efficiency and reliability and reduce electricity supply costs; (b) improve standards of living and foster economic growth inrural areas by expanding rural electricity supplies; and (c) strengthenelectricity institutions, the regulatory framework and the "enabling environment" for sector commercializationand privatization. To achieve these objectives, the Project's transmission line (TL) component would establish the first stage of a 220kV link between Cambodia and Vietnam, furnishinglow cost reliable power to industrial users currently employing costly diesel-based self-generation. The rural electrification (RE) component would bring affordable and reliable grid-based electricity within the reach of rural consumers, while continuing to promote a "uniquely Cambodian" private-sector-led, Government-enabled rural and renewable electricity market. The technical assistance (TA) component would strengthen capacity of the sector institutions and provide operational support and training to implementingagencies inland compensation, resettlement and environmentalmanagement. 2. Global objective (see Annex 1) The Project's global environmental objective i s to overcome barriers to renewable energy development in Cambodia, including those relatedto lack of a policy framework, financing, information and institutional capacity. 3. Key performanceindicators(see Annex 1) The performance indicators established for this Project would focus on: (a) increased efficiency, reliability and quality of overall power system services; (b) reduction of average electricity production costs by means of power trade with Vietnam; (c) maintenance of financial soundness of EdC; (d) the number of additional rural households with electricity (conventional and renewable), as well as indicators of social benefits and income-generating impacts; (e) increased share of licensed private power inproject areas outside of PhnomPenh; and (f) effective operation on a sustainable basis of the Electricity Authority of Cambodia (EAC) and the Rural Electrification Fund(REF). B. Strategic Context l(a). Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1) CAS document number: IDA/R2000-15 [IFC-231 Date of latest CAS discussion: February 29, 2000 The main objective of the CAS are to assist Cambodia inbuildingthe foundations for sustainable development and poverty reduction, through: (a) rebuilding human capital to enhance institutional capacity and good governance, ultimately leading to better public services and increased economic activity; (b) buildingphysical infrastructure, particularly roads, water supply, and electricity inrural and provincial areas to increase access to services and productive activities; (c) facilitating private sector development through policy work, constructive dialogue with the Government and the private sector, and direct support to business ventures; and (d) focusing all interventionsas much as possible on rural areas where the majority of the poor, and indeedthe majority of the population live. - 5 - The Project amply conforms with the CAS objectives through its support for electricity infrastructure development for bothurban and rural economic growth, and its emphasis on improving the operational and managerial efficiency of the power sector and promoting its commercialization and privatization. l(b). GEFOperational Strategyprogram objectivesaddressedby the project The renewable energy activities supported by the Project are fully consistent with the Global Environment Facility's (GEF) Operational Strategy and with its "Operational Program #6: Promoting theAdoption of RenewableEnergy by Removing Barriers and Reducing Costs". The major barriers it will address are lack of Government, private and financial capacity to plan, provide and finance renewable energy systems; high initial costs of renewable energy equipment inthe currently small Cambodian market; and the lack of awareness of and confidence inrenewable energy systems among potential suppliers and consumers. While implementing various initiatives aimed at economic recovery, the Government i s fully committed to environmental sustainability, as indicatedby their ratification of UNFCCC in 1995. As part of this, the Government initiated an exercise for building a national inventory of greenhouse gas (GHG) emissions, and several other projects relatedto environmental capacity building,resource management, etc., financed by UNand bilateral organizations. The Government has prepared a 10 year, 3-phaseRenewable Energy Action Plan (REAP) inMay 2003. This actionplan has beenprepared basedon wide andextensive stakeholders consultations spanning three national workshops over a 2-year period. Phase 1,market preparation, lasts approximately three years and broadly includes institutional and regulatory development and private and public sector capacity building. Phase 2, early growth, builds on the base established duringPhase 1and will last another three years. It will be typified by early market growth, and assessment of initial investments made inhydro and solar photo voltaics. Phase 3, rapid growth, continues from year six forward. It will be characterized by robust market growth, more private sector firms and participants, and improved donor support to leverage successful activities. The result of these three phases will be a nationwide understanding and appreciation of when and where privately owned renewable energy technologies are able to be most cost effective in the production and distribution of electricity to rural homes and businesses. The Project coincides with phases 1and 2 of the REAP. As part of the Project, investments will be made intechnologies that were identified duringthe Project's PDFB phase as having short termpotential, that is, small hydro, village (mini)hydro systems and solar home systems. Total avoided emissions are estimated to be about 233,026 tons of C02,over the 12-18 year life (varying with technology used) of the investments done duringthe Project's implementationperiod. This GHGmitigation potential i s the rationalefor the GEF grant component. 2. Main sector issuesand Government strategy Power Sector Background: Cambodia has one of the lowest electrificationrates inAsia with only about 12% of its population of 13 million connected to a power supply. Electricity costs are among the highest inthe world. These two aspectsarepartly connected andbotharepartly the consequenceof Cambodia's recent turbulent history - the country has only recently emerged from a lengthy period of conflict, civil war and invasion. Civil peace was restored only in 1998. Private independent power producers (PPs) engaged inearly1994 to revive supplies, contributed63% of the supply in2002; generation by the government-owned Electricite du Cambodge (EdC) accounted for 32% and the Kirirom Hydro Plant the remaining 5% (see figure 1below). The dependabletotal system capacity in2003 was 109 MW. There i s no national grid and towns are supplied through isolated systems. - 6 - I Production in 2002 (GWh) Consumption in 2002 (GWh) Kirirom Vietnam Commercial inc.Hotels inports (0) M / d ~ ( 2 7 ) \ 0Yo EdC(159) IF% (309) 32% 63% - I -..-A .._.:-- in 2009 (GWh) IndustryExpectedConsumption in 2009 (GWh) Others lrrports Commercial (661) 57% 44% Generation and Sales 25% 20% 600 400 15% 200 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 +Generation (GWh) +Sales (GWh) +T&D Losses (YO) The table below providesa forecastof demand-supply inPhnomPenhfor 2003-2009. - 7 - KiriromHydro 7 7 7 7 7 7 7 ImportsfromVietnam 80 80 200 The principal entities inthe electricity sector are: (a) the Ministry of Industry, Mines and Energy (MIME), responsible for sector policy, strategy for RE, negotiations for electricity trade agreements and major investment projects and, with the Ministry of Economy and Finance (MEF), i s the sponsoring ministry for EdC; (b) the Electricity Authority of Cambodia (EAC), the newly created power sector regulator responsible for licensing, approving tariffs, setting and enforcing performance standards and settling disputes; and (c) the electricity providers: (i)EdC, which supplies PhnomPenh, Sihanoukville, Siem Reap, Kampong Cham, Takeo and Battambang, accounting for nearly 90% of the total consumption; (ii) IPPs, providingnearly half of EdC's power requirements; (iii) diesel-based generators (not small companies) under the responsibility of MIME,accounting for 5% of total consumption; and (iv) Rural Electricity Enterprises (REEs), small private entrepreneursinthe countryside, supplying about 5% of total consumption. Power Sector Issues. The main sector issues and Government strategy are: Shortage of Reliable Electricity Supply. Despitethe creation of substantial IPPgenerating capacity and EdC's commendable efforts to reduce system losses to 13.5%, the quality and reliability of supply to PhnomPenhcontinue to be poor, and generation reserve margins remain well below norms. Consequently, many large consumers operate high cost captive diesel-powered generators and the national electricity network remains disintegrated, precludingcapture of economies of scale. With demand from EdC's grid expected to grow at a rate of about 13% p.a. during 2003-2008, EdC must look for major new sources of power supply. Government's long term strategy to meet demand growth includes the development of a National Transmission System, the construction of a 120M W hydropower plant at Kamchay, and interconnections with neighboringcountries, especially Vietnam and Thailand, incoordination with the development of the Greater Mekong Sub-Region (GMS) grid. Inthe near to mediumterm, EdC and the Government plan to engagenew IPPs and import power from Vietnam through a 220 link, whose establishment would later facilitate retirement of EdC's largely inefficient and costly generation. High Electricity Costs. Electricity costs to Cambodian consumers are very highby international standards,ranging from about USc14/kWh inEdC's grid to about USc30-92/kWh inthe rural areas served by REEs. Costs of urban suppliesare highbecause the disaggregated generation facilities of both - 8 - EdC and IPPs are small capacity, low efficiency, highfuel cost diesel plants. Inaddition, earlier IPP contracts provided for highrisk premiums. Rural supplies are expensive as they reflect costs posed by: (a) very small diesel generators, usingdiesel oil transported over long distances; (b) small loads with demands peaking at certain hours (due again to highprices); (c) low technical levels and highlosses of the networks; (d) highrisks borne by operators due to lack of regulation and clear franchising arrangements; and (e) limited access to capital for investments to improve efficiency or capture economies of scale. Government's strategy to reduce the highcosts of EdC's supply comprises: (a) the import of electric power from Vietnam, and possibly other neighbors; (b) conversion of selectedIPPand EdC generating plant from diesel oil to less-expensive heavy distillate oil; (c) renegotiation of certain IPPpower purchase agreements, and securing new IPPgeneration on better terms; (d) reducing EdC's operating costs through - competition infuel procurement, introduction of modem load dispatching, improving maintenance efficiency, reducing staff costs, and reducingbad debts; (e) retirement of EdC's inefficient plant, when reserve margins allow; and (f) possible development of medium-sized hydropower generation. Government's strategy to reduce prices of rural electricity includes: (a) extension of bulk power supply from EdC's grid to peri-urban areas, where economically viable; (b) support for the stabilization and strengthening of REEs, by improving their access to financing, increasing licensing of rural franchises by EAC, and providing technical support; and (c) support for the development of lower cost generation sources, including minihydro and other renewable energy sources. Low Access to Electric Power inRural Areas. Rural electrification (RE)is relevant to the vast majority of Cambodia's population and land areas. Inthe provincial towns, EdC andor local entrepreneurs supply power to the town center. Outside of these areas, power supply i s rare and meager. As showninTable 2, only about 6% of Cambodia's rural households have access to electricity supply, and another 3% have some type of individual power generating unit. The remaining 91% of the rural population either use automobile batteries (costing US$2-3.5/kWh) for occasional and limited use, or do without electricity completely. The RErate of 12% is exceptionally low. Villages Households Number % Number % EdC-grid 370 3% 42,000 2% REE-grid 864 7% 84,000 4% Household batteries* 10,488 85% 1,155,000 55% Household gen-set 63,000 3% I None of these** 617 5% 756.000 36% Total I 12,339 I 100% [ 2,100,000 I 100% I * In85% of the villages,car batteriesare the most commonsourcesof electricity. Almost 55% of households ** use a battery and about 32% of the householdshave aBn?r TV set. Use dry cell batteriesor no electricity. Onthe outskirts of suburban areas and ina few localities near transmission lines, electric power is supplied from small isolated systems and generators, covering about 100,000 households. Mininetworks developed informally by local entrepreneurs are very small (about 200 kVA), and technically low grade. The Government's plan to increase rural electricity coverage from about 10%today to 70% by 2030, faces serious obstacles. EdCdoes not have the capacity or financial resources to extendits small grids into the countryside; besides it i s uneconomicalto stretch its network to vast remote areas which can be more - 9 - economically served by decentralized grids. The existing roughly 600 REEsprovide a possible private- sector- led framework for developing local systems. To make significant contributions to Cambodia's RE goals, however, the REEsmust significantly expand their scale of operations and reduce costs and prices, all of which are interrelated. Many REEs are having difficulty doing so. To make a better contribution, REEsneed: (a) legitimacy, through licensing, to be able to solidify and formalize their businesses, coupled with a clear framework of technical standards and pricing guidelines within which all players have a common understanding of expectations; (b) improved access to financing, beyond the current limited resources of the entrepreneurs' private equity; and (c) greater access to technical and managerial know how. Power Sector Reform. Major steps undertakenby the Government to reformthe power sector include: (a) the conversion in 1996, by a Royal Decree, of EdC into a limitedliability company, ownedjointly by MIMEandMEF;(b)developingwith IDA assistanceandpassinginFebruary 2001 of Cambodia's new Electricity Law; and (c) establishment in2002 of EAC, an independent regulatory body to license operating entities and establish electricity prices. The passage of the Electricity Law and the subsequent implementation steps have set the power sector on a path of reformthat would lead to a largely unbundled sector with substantial private participation ingeneration and distribution of electricity. The main reform issue is to strengthen the new sector structure established under the Electricity Law, and further commercialize EdC's operations. Although EdC is a legally separate entity, it has been difficult for the Government to separate its own role as sector policy maker (as EdC's owner), from its interests as one of EdC's largest customers, and to refrain from interference inEdC's operations. Lines between EdC's finances and the government budget remain blurred. EdC has been plagued since inceptionby financial problems, arising from its inability to pass on to consumers increases inthe cost of power, and from higharrears inbillpayment by government entities. EdC also needs to transform to a true company, and focus its attention on core businessesin transmission, system dispatch, and urban distribution, with a declining role in generation. EAChas already begun to make an impact on sector operations. As of July 2003, it has issuedover 40 licenses to power generatorsand REEdistributors. With the support of ESMAP and the PublicPrivate Investment Advisory Facility (PPIAF), EAC i s currently developing standardpower purchase agreements (PPAs) and licensing guidelines and policies, specifically for small REEs.Itplans to develop pricing methodologies, possibly with ADB assistanceinthe latter part of 2003. Continued support to EAC i s necessaryto increase its capacity and effectiveness in licensing and implementation of pricing regulation. Involvement of I D A inthe Power Sector. IDA, with major donors, has been supporting the Cambodian power sector since 1993 through lending for emergency rehabilitation, TA and an active policy dialogue. Assistance has includedthe following: Power Transmission Master Plan and RE Strategy. Financedby AusAID and executed by IDA in 1998, this study analyzedthe development of atransmission network inCambodia andprovided along-term approach to defining the evolution of the transmission system; A Power TradeStrategy was formulated for the GMS inMarch 1999, which proposedthe T/L from PhnomPenh to Vietnam to be the first interconnectioninvestment under the GMS power trade initiative; The CambodiaPower Sector Strategy was completed inJune 1999 as a collaborative effort between IDA and the power policy team within MIME. The strategy has provided an underpinning for the subsequent structural and legal reforms inthe sector; - 10- The IDA Phnom PenhPower Rehabilitation Project, CR 2782-KH,approved inDecember 1995, provided for the rehabilitation of the distribution system inPhnomPenh, strengthening of commercial operations of EdC, and implementing a new sector structure through the establishment of EAC. IDAhas organized a series of efforts for Institutional CapacityBuilding at EAC and MIME. PHRD, GEF, ESMAP, ASTAE, and PPIAF have provided financing for the following: (a) Cambodia RE Strategy and Implementation Plan (PHRD) to assist the Government inthe preparation of an RE strategy; (b) Cambodia Preparation of GEF Renewable Energy PromotionProject to prepare for a GEF grant and support for buildingits capacity to implement the renewable energy component of this Project; (c) Cambodia Renewable Energy Action Plan (ESMAP) to support a strategy and plan of action for private sector-led renewable energy development; (d) Cambodia PrivatePower Policy Development (PPIAF)to support the Government with: (i) the development of a clear and comprehensive policy that will attract private sector to the power sector; and (ii) detailing critical elements of the BOT Law and the new Electricity Law; and (e) Capacity Buildingfor EAC (ESMAP) to expand and implement the regulatory framework and good governance inthe power sector of Cambodia. Sector issues to be addressedby the Project and strategic choices The Project addresses the main sector issuesas described below. Alleviating Shortagesof Reliable Power and Reducing Electricity Costsfor EdC's Grid. Establishment of the proposed 220 kV link with Vietnam, and reinforcement of the PhnomPenh 115 kV transmission network, will allow Cambodiato import and utilize about 156 Gwh of power in2007 and about 484 Gwh in 2009 (almost 50% of EdC's requirement). This new source of power would allow EdC to better meet the natural demand growth inits PhnomPenh-centered system. The weighted averageprice of Vietnamese imports at the medium-voltagelevelinPhnomPenh are expected to be about USc 7/kWh, compared to Usc 11.8/kWh from IPPs in2002. Combining the cost reduction benefits of the interconnectiontogether with other cost reduction measures beingundertaken by EdC, it is estimated that, even with no changes inoil prices, the average cost of electricity supply into EdC's systemwould decrease from about USc 10/kWhin 2002 to about USc 8/kWh in2009. Based on the PPA already signedwith Vietnam, and the marginal costs for generating plants supplying the Phnom Penharea, production simulation studies show that electricity cost savings due to power purchases from Vietnam would be about US$18 million in2007, rising to US$24 million in2009. Apart from reducingelectricity costs, the 220 kV interconnectionto Vietnam and the strengthening of the 115 kV ring around PhnomPenh would enhance system quality and reliability and induce commercial consumersto discontinue high-cost self-generation and switch over to EdC's grid. As the first investment inthe overall GMS Power Trade Initiative (supported by IDA),the proposed Project i s a key landmark inthe realization of the broader power trade strategy. These medium and long- term strategies can providemajor benefits among the GMS countries interms of reduced or postponed costs through sharedreserve capacity and lower cost hydro generation; improve supply conditions, through increasedreliability and quality of service and reduced emissions. These benefits can be very important for relatively small systems such as Cambodia's in which size becomes an obstacle to installing efficient, low cost units. Improving RuralAccess to Electricity. The Project would develop a new long-termframework for RE that would significantly increase access to electricity supply inrural areas and reduce rural electricity costs. Specifically, it would: (a) support extension of EdC's grid, where feasible, to outlying suburban areas, with distribution largely undertakenby REEs, acting as lessees or agents who may eventually buy - 11- out the assets; and (b) through the creation of the pilot Rural Electrification Fund(REF),provide financial and technical support for the expansion of REEdistribution systems and generating capacity in rural areas, outside the ambit of economic grid extension, and finance connection of about 100,000 households, (almost doubling the current level). The key ingredients of this framework are: 0 Licensing. Proper licensing of REEs i s requiredto establish their franchise rights, provide business stability, and allow better access to financing. Licensing would also establish safety, quality and service standards, and pricing boundaries. 0 Financing. Mechanisms are requiredto facilitate flows of commercial financing, especially loan financing, to REEs who have little or no access to local financing. While legitimization through licensing would help, it would be necessaryto foster borrowing relationships with the banking sector, which i s currently underdeveloped. 0 Technical Sumort. Substantial TA i s requiredto enhance technical and managerial capacity of REEsto enable themmeet minimumstandards, and delve into decentralized generation. 0 Cross-Subsidization. As urban and rural distribution are physically separated, a special urban- rural cross-subsidy mechanism is needed, to provide a measure of relief to the inherently poor rural consumers from the highcosts of RE, or else desired RElevels would be unattainable. Subsidy levels could be tapered off as rural demand grows, networks expand and economies of scale are realized. Consolidating and Deepening Power Sector Reform. Specific reformareas addressedby the Project are: 0 Strengthening EAC's capacity - through TA and IDA's operational involvement inthe issuanceof licenses for rural generation and distribution entities. 0 EnhancingCommercialization of EdC -through: (a) implementation of the financial action plan agreed with IDA and ADB, which would steer EdC towards greater financial and commercial discipline; and (b) IDA's engagement with EdC and MIMEin a steady dialogue to involve strategic partners, or possibly other equity investors, inEdC. 0 Unbundling. Transmission and Distribution - through strong support for the development of distribution companies independent of EdC, compelling the latter to focus on transmission. C. Project DescriptionSummary (See Annex 2 for detailed description and Annex 3 for detailed cost breakdown) 1.Project Components The Project has the following three components: Part A. The Transmission Line (TL)component to be implementedby EdC comprises: (1) construction of a 109 kmlong double circuit 220kV line from the border with Vietnam to PhnomPenh and two associatedsubstations; (2) reinforcement of the 115kV grid around PhnomPenh involving about 20 kmof 115kV lines and modifications to three 115kV substations and 22kV extension; (3) a National Control Center to optimize load dispatch operations inthe EdC system and increase system security; and (4) buildingEDC's capacity inproject management, land acquisition, resettlement and - 12- environmental monitoring and mitigation. Part A (1) of the Project within Cambodia would be financed by the ADB. Complementary investments inthe 220kV systemrelating to Part A (l), above, on the Vietnam side would be financed by surplus funds inan ongoing IDA Credit 3034-VN Part B. The Rural Electrification(RE) component, to be implemented by EdC, comprises the EdC gridextension programcovering 516 kmof mediumvoltage (MV) and 536km of low voltage (LV) lines and electrification of about 50,000 households. The Project will support the symbiotic relationship of EdC and the REEs, and whenever feasible, will make use of private sector providers (REEs)inthe operation of rural distributionsystems. EdC would identify existing REEs and options for publidprivate partnership including distribution licensing, billing and collection arrangements, management contracts, and leasing arrangements. Part C. The pilot REFcomponent to implement an innovative mini and off-grid electrification program. The creation of the REFas a transparent institutional mechanismfor promoting RE, has been widely acceptedinthe country through three national stakeholder consultation workshops. As a result, the REFis being established by the Government as a public institution with administrative, managerial, technical and financial autonomy to channel sub-grants and TA to the private sector and rural communities to implement RE sub-projects. The REF will provide assistanceto private sector developers for: (a) provision by REEs of about 45,000 new connections; (b) provision of electricity to about 12,000 households usingsolar home systems; and (c) addition of at least 6 MW of mini-hydro and 850kW of micro hydro capacity. Box 1: Summary of the Rural ElectrificationFund(REF) To implement sub-projects, the REFwould use the concept of "capital enabling", rather than project financing. The REF will rely on three principal factors to leverage commercial financing for sub-projects: (a) to ensure safety and technical standards, only sub-projects with valid operational licenses from the EAC will qualify for REFconsideration; (b) co-financing sub-grants will be provided by the REFto facilitate financial closure; and (c) TA will be provided to prepare good quality sub-projects and buildlocal technical and business capacity. Together, these will strengthen the REEs case for securing loans with suitable terms from commercial banks and micro-finance institutions. The justification for the co-financing grants i s two- fold: (i) to make supported RE projects and promising renewable energy technologies commercially viable by closing the gap between the rural population's affordability to pay and the cost of electricity supply; and (ii) facilitatefinancialclosureorsecurefinancingforasub-project,sincethecapitalmarketisunder- to developed and has limited access to financing, reflecting the high transaction risks inherent in the country and rural operations. As the REFis a new concept, implementation will include a pilot phase to gain experience that will then be applied to the main phase. (Refer to Annex 13 for details). Part D. The Institutional Developmentand Sector Reform TA component comprises consulting and advisory services to: (1) MIME inrenewable energy policy development, power market analysis, and development of apower sector master plan; (2) REF for implementation support, promotion of rural income generation options, renewable energy business development, REEimprovement and association building, and capacity buildingof financial institutions; (3) EAC for institutional strengthening; and (4) EdCfor services of a project implementationconsultant and in-house advisor, creation of an independent monitoring agency and a project grievance committee, improvement of commercialpractices, management training, capacity buildingfor land acquisition, resettlement and environment, and power investment planning. - 13 - Indicative % o f GEF % of P n t Sector % of - Component costs total financing total financing total US$million) financing (US8million) inancing (US$million) inancing (US8 million) financing A. TransmissionComponent 90.59 60.35% 16.91 11.30% A I , 220kV Interconnectionto Vietnam (ADB-financed). 70.21 46.77% O.W% A2. 115kV Relnforcement and MV extension** 14.7E 9.85% 12.30 8.19% A3. NationalControlCenter 5.M 3.73% 3.11% B. RuralElectrification Component 14.14 9.82% 12.81 8.53% C. REF Component 28.23 18.81% 5.10 3.40% 1.54 1.03% 21.59 14.38% D.Institution4 Developmentand SectorReform Component 9.33 6.22% 5.12 3.41% 4.21 2.80% 1 Di. MIME 0.80 0.53% 0.30 0.20% 0.50 0.33% D2. EAC 0.55 0.37% 0.44 0.29% 0.11 0.07% D3. EDC 1.79 1.19% 1.79 1.19% D4. REF"' ::J: 4,12961 4iz 1.73% 3.60 2.40% Total Proied Cos 142.89 95.19% 26.64% 5.15 3.83% 21.59 14.38% ServiceCharge(IDA onl 0.36% Commitmentfee (IDA onl: IDC(AD Total Financing Requiri 40.00 26.64% 5.15 3.83% 21.59 14.38% IAll I I i * IndicativeCosts includeprice andphysicalcontingencies plus 7 and Duties ** Includescapacity building and land acquisitionand resettlementcosts associatedwith Z20kV componentsand NationalControlCenter. *** IncludesOperationalSupponto EDC duringProject Implementation(US$O.C million) and land acquisitionand resettlementcosts (US%0.36miilion) All TA will be initially carriedby the PMUat MIMEuntilthe REFis established 2. Key policy and institutional reforms supported by the Project The basic framework for reformof the power sector has already beeninstituted by the Government. A new Electricity Law has been passedand subsequent implementationsteps defined that would leadto a largely unbundled sector with substantial private participation ingeneration and distribution of electricity. The roles of entities inthe sector and the legal and regulatorybasis for sector management and regulation have been defined. EdC has been converted into a limited liability company. The licensing regime for all enterprises carrying out generation, transmission, dispatch, distribution, bulk sale, retail, and subcontracting has been established. An independent regulatory body, EAC, has been set up to license operating entities, to establish electricity prices, and to lay down and enforce standards. The Project would consolidate and deepenthe reform process inregard to the following aspects: 0 Enhance the commercialization of EdC, secure greater autonomy from Government interventions. 0 Investigate options for strategic partnerships by coordinatingdonor action inthe power sector. 0 Strengthen the regulatory framework and the regulatory enforcement capacity of EAC. 0 LimitGovernment's roletomarket-enabling, regulating, andproviding technicalandmanagement support to REEs. e Establishsector policies that reflect actual cost of service, permittedto vary by service area. e Establishan urban-rural cross subsidy mechanism making electricity affordable to the rural poor. e Introduce sound pricing procedures and create incentives to extend services inrural areas through diversifieddistribution. e Concretize Government policy for promotion of renewable energy resources. 0 Foster environmentally sound and socially acceptable methods of service. 0 Retain flexibility especially inthe early stages of institutionaldevelopment (particularly, through the envisagedpilot phase of co-financed grant awards). - 14- 3. Benefits and target population Obvious beneficiaries of the Project would be consumers inurban, rural and remote areas of Cambodia. Urban consumers would benefit from better quality, more reliable and lower-priced electricity and commercial consumers would be able to retire their expensive captive generating sets. Consumers in rural areas would benefit from availability of electricity per se and from lower than hitherto electricity prices. Efforts to reach isolatedpockets of population will allow such consumers to avail of basic amenities (lighting, communications) which would significantly improve their welfare. Electricity would foster growth innon-farmrural enterprises such as grain mills and food and agricultural processing, carpentry shops, welding shops, vehicle repair, refrigeration etc. Electricity will also enhance social services - street lighting,education inschools and night study at home, and healthclinics. The overallproject target is to provide electricity to about 100,000 new consumers. Other beneficiaries of the Project would be the electricity agencies EdC, EAC, MIME,the REFand REEs and the electricity sector itself which through capacity buildingprogress towards commercialization. Finally, the GMS would get a shot inthe armthrough the first Cambodia-Vietnamhigh voltage link. 4. Institutionaland implementation arrangements 4.1 Implementationperiod The Project will be implementedover a period of six years from 2004-2009. 4.2 Executing agencies The executing agency responsibilitiesare summarized inthe table below: ComponentDescription ImplementingAgency 1 2 * 1. I220kV Interconnection(ADB financed) EdC 115kVTransmissionSystemReinforcementand 22kV EdC I extension 3. NationalControlCenter EdC 4. EdC RuralGridExtension EdC 5. REFComponent REF 6, Technical Assistance Component MIME/EAC/EdC/IRC/REF Project oversight: MIMEwould ensure that all project activities are in accordance with national power sector policies and overseeproject implementation.MEFwould overseefinancing and disbursements, , monitor compliance with financial covenants, and supervise and advise EdC and REFon financial matters. The Office of the Prime Minister would provide policy guidance to all entities. EAC would ensure that all operators inthe power sector adhere to standards and regulations and facilitate private sector involvement inREby meansof regulatory instruments. The Boardof Directors ofEdC andthe REFwould bein charge of reviewing progress of their respective project sub-components. Project PreparationFacility (PPF) for US$290,840 was approved on August 28,2001 to allow MIME and EdC to support the initial operation of the then recently established EAC and to engageproject managementconsultants to assist inthe initial stages of EdC's procurement. The activities supported by the PPF consolidatedthe ongoing reformof the power sector and expedited the start-up of urgent physical - 15 - components of the proposed Project. The effective operation of these institutions i s essential for successful implementation of the Project. On September 10,2002, the Government, requested an extension of the refinancing date for 18 months from September 30,2002 to March 31, 2004. Extension of the PPFbecamenecessary due to delays inproject processing and uncertainties over project financing. The extension request was approved inJanuary 2003. Retroactive financinginan aggregate amount not to exceedUS$0.2million, accounting for 0.5% of the expected IDA credit amount, would be provided for anticipated expenditures (for any advanced contracts relatedto TA for project preparation and implementation, such as the in-house advisor to EdC) incurred after January 1,2003. 4.3 Accounting,financial reportingand auditing arrangement An assessment of the adequacyof the project financial management systemshas beencarriedout and an action plan to improve EdC's capabilities has been agreed (see Annex 6B). The Project would meet minimumBank Group financial managementrequirements. While traditional disbursement procedures would be used as opposed to FinancialManagement Reports (FMR)-based disbursement system, FMRs will still be produced for monitoring purposes. Status of the borrower and the project implementingentities' compliance with audit covenantsin existing Bank Group-financed projects. There were no overdue audit reports for Credit 2782-KH (Phnom Penh Power Rehabilitation Project) and Grant No. TF026154 (Cambodia RuralElectrification and Transmission Project). The audit reports were acceptable to IDA. Agreement with the borrower on standard format for audited financial statements and the timetable for their submission: EdC's accounts are audited by independent financial auditors and audits are conducted in accordancewith International Standard on Auditing. Independent audits of the REF'S accounts, including MIMEand EAC activities, would be prepared by external auditors acceptable to IDA. The audit reports of EdC and the REFwould be furnishedto IDAno later than June 30 of eachfiscal year. Monitoring and evaluation arrangement: Satisfactory procedures for monitoring the progress of the Project interms of physical execution, environment and social aspects and financial reports have been agreed with the implementing agencies, which would furnish quarterly progress reports. EdC, the REF, MIMEandEAC, together with IDA, have established performance indicators by which the Project canbe monitored and evaluated. These performance indicators (as indicated inAnnex 1)will be confirmed at negotiations. An Implementation CompletionReport (ICR) would be drafted by IDA, with the assistance of EdC, REF, MIMEand EAC, not later than six months after closure of the IDA Credit. EdC and the REFwould also prepare andmake available to IDA their own evaluation reports, which would formpart of the ICR. 4.4 Projectsupervision Four missions annually (two main and two project updating missions) for aperiod of six years are foreseen, with an estimated 48 staff weeks of inputp.a. Bank's field-based staff would be used for the updating missions. Supervision expertise would comprise RE and renewable energy development, power engineering, economics, financial analysis, fiduciary (procurement and financial management), and safeguard (environment, resettlement and social issues), restructuring, and private sector development. For the REF,the level of co-financing grants and disbursement principles for the initial phase have been agreed basedon preparatory studies and surveys undertaken duringproject preparation. Supervision would initially concentrate on making the REFoperational, inthe grant approvals for the 6-10 sub- projects and their releasemechanisms. Followingthis initial phase, the grant setting process and the grant - 16- levels would be reviewed and, if necessary, modified inthe operational manualfor the main phase of the Project. A mid-termreview would be carried out inDecember2006. D. Project Rationale 1. Projectalternatives consideredandreasons for rejection T/L component, Developmentof a highvoltage transmission network inCambodia is premised onthe assumption that to effectively meet demand inthe fast growing urban areas, electricity supply must capture economies of scale to reduce costs while simultaneously improving service quality and reliability. The transmission study contracted for project preparation considered several alternatives for meetingthe forecast demand growth and concluded that a 220kV transmission link to Vietnam would be the appropriate first step inthe least-cost power development plan for Cambodia. This would be followed by 115kV interconnections between major cities of Sihanoukville, Kampot and SiemReap. REComponent. Duringproject preparation, consideration was givento alternative project designs and models regarding different institutional arrangements for providing and expanding rural and renewable energy services: Expanding EdC's mandate to exclusively undertake all electrification, to ensure service standards and quality. This approach has been discussedby IDA with the Government over the past few years, and discarded because: (a) this model has failed inmany countries due to politicization and lack of incentives; (b) Government resources are inadequate even with generous donor assistance; (c) the approach would undermine locally-based innovators and drivers behindthe REEs. Enactment of the Electricity Law has eliminated this approach. Project implementationthrough village cooperatives. The cooperative structure inCambodia is neither universal nor strong and too much time and resourceswould be consumed combating political rivalry and local favoritism to the detriment of the project objectives. The Project provides for a limitednumber of community village hydro pilots, recognizing that the ultimate aim of village electrification i s community development. Market approach without oversight and regulation. While the Project accepts the market approach, it provides for regulation of the market players. Experience inother countries has shown that a minimumamount of regulation i s necessary to protect the consumer. Insummary, the Projectpropounds an institutionalmodelthat brings together therespective strengths of the different stakeholders - Government, financial institutions, project developers, local communities, equipment suppliers, etc. - to bear on Cambodia's electrification program. Staged developmentof REF. A full fledged implementation of the REFfrom start was considered and rejected inview of the large preparatory institution buildingefforts required. The REF-based program would bepiloted in the first year of the Project by capping the number of transactions to 6-10 projects in 3-4 provinces. Basedon the experience gained, the REFcriteria and manuals would be revisedbefore proceeding with the main phase. - 17- 2. Major related projects financed by IDMBRD and/or other development agencies (completed,ongoing andplanned) Sector issue Praiect Latest PSR Ratings (Bank-financedDroiects Bank-financed InCambodia: (a) Rehabilitation o f PhnomPenh's PhnomPenh Power Rehabilitation Project (CR distribution system; 2782), closed in2000 (b) Strengthen sector institutions; and promote private sector involvement (a) Restore macroeconomic stability; Emergency RehabilitationProject - Infrastructure (b) Ensure adequatefunctioning of the Component (CR 2550), closed in 1996. newly-established Government administration (c) Maintain essential services Outside of Cambodia: (a) Rural electrification - grid Indonesia Solar Home Systems Project intensification and expansion S (b) Renewable energy -dealer model I Renewable energy -national policy and India Renewable Resources Development; and S I S high level government institutional set-up India Renewable Energy I1Project Renewable energy - off-grid models Lao Southern Provinces Rural Electrification Prniect Renewable energy - programmatic I Vietnam Rural Energy I S S approach Rural electrification - rural energy fund Uganda Energy for Rural Transformation Project S S Renewable energy -performance based Sri Lanka Energy Services Delivery Project H S H S Renewable energy - community based I Nepal Power Sector Development S I S hydro Renewable energy - off-grid concessions I Argentina Renewable S S (TA4078); Provincial Power Supply Project (SF 1794); Power Rehabilitation I1Project (TA2629); SSTA to Update Power Rehabilitation I1Project Preparatory Study (TA 3256); Power Rehabilitation IProject (SF 1345); and Special Rehabilitation Assistance Loan (SF 1199) UNDP NepalRural Energy Project 3. Lessonslearnedand reflectedinthe project design Key lessons learned and reflected inthe Project design are: 0 OED's Cambodia CountryAssistanceEvaluation (CAE)indicatedthat project design was insome cases too complex and implementation capacity stretched and as the policy dialogue has become complex, donor coordination has become increasingly important. The project design has been - 18- kept simple and adequate institutional strengthening incorporated. Coordination with other organizations has been maintained and will continue to be maintained throughout project execution. 0 The IDA-fundedPhnom Penh Power Rehabilitation Project revealed the need to provide consulting services for project management at least until all civil works have been fully completed inorder to ensurethat IDAassistanceis available at every project stage. It also stressedthe need for a firm compensation policy for land acquisitionthat allows the implementing agencies to apply uniform standards for compensation. These aspects have been taken care of inthe Project. 0 The Project i s built upon the Energy Sector Strategyfor Cambodia and the ensuing RE strategy prepared and discussedwith the Government in2001. Setting up of the regulatory and institutional framework for encouraging private sector participation inREare the key ingredients of the Project. The Government's RE strategy sets targets for a phasedexpansion of REand buildsupon the five main principles given inthe Bank's Rural Energy and Development Best Practice Paper:' (a) providing for consumer choice; (b) ensuring cost-reflective pricing; (c) overcomingthe high first cost barrier; (d) encouraging local participation; and (e) implementing good sector policies. 0 The design of the REFhas benefitedfrom lessons learned ina number of other countries and incorporates the concepts of transparency and output basedsubsidies. Inparticular, experiences in the implementation of the Sri Lanka: Energy ServicesDelivery Project, the Indonesia: Solar Home Systems Project, Bangladesh: Rural Electrification and Renewable Energy Development Project, and the Uganda: Energyfor Rural Transformation Project have been incorporatedin designing this Project. Experience inother countries showed that targeting of subsidies can be an effective way of leveraging private investment. The financial support for REEs has been limited but ageneral Law on Investment gives fiscal incentives to large investors. The REF will be oriented towards coordinating the allocation of funds to the sector usingthe concept of "capital enabling" rather than total project funding or credit guarantee. A major challenge beingaddressedinthe Project is to determine how to extend the institutional framework in a practical way to support and develop the private sector's role through the initiative of REEs. The lessons reflectedin a cross study2of RE in South EastAsian countries have been incorporated inthe design of the REF. To ensure sustainable development of rural private power, it is necessaryto: (a) have absolute clarity inGovernment procedures for approvalllicensing regime and awarding of grants; (b) assist the REEsto improve their technical performance by learning from each other and encouraging them to adopt best practice standards; (c) implement effective micro-finance fundingmechanisms; and (d) find appropriate regulatory balance to promote development and protect existing customers. Moreover, through the Project, the Government will announce its policies, making clear what i s to be offered, what incentives it will provide-the guidelines for award of the co-financedgrants, and what rules are to be followed to avail of the grants. LicensedREEs would be subjected to the same rules so that all are treated equally. The steps and procedures to be followed by all interested parties would be made public, making Government's action fully transparent and predictable. `TheWorld Bank,Rural Energy and Development: Improving Energy Suppliesfor Two Billion People, 1996. Economic Consulting Associates, "Emerging Lessons in Private Provision of Rural Infrastructure Services, Rural Electrification in South East Asia: Cambodia, Laos, Vietnam", October 2002. - 19 - The autonomy of EAC i s akey requirement to attract privatecapital and ensure an efficient development and operation of the power sector. The Electricity Law ensures achievement of this objective when it appointed a well respectedand capablepower sector professionalto act as regulator whose decisions could not be revokedby the executive branch, who will operate with budgetary autonomy, and whose office could attract qualified technical staff. Experience in other countries have shown that, even under the protectionof the law, regulatory bodies have suffered arbitrary political pressures which undermined their autonomy becauseof lack of commitment to respect regulatory authority and a strong office to support its daily operation. The Project would contribute to the success of regulatory reformby providingTA that would ensure EAC becomes a technically competent and independent organization able to attract and retain qualified staff. 4. Indicationsof borrower commitment and ownership The commitment of Government and EdC to the Project is assessed to be strong as amply demonstrated by the actions it has already taken: Promulgation of the Electricity Law followed by the creation of EAC; Promotion of the private sector: (a) formally, by establishing the institutional framework under the Electricity Law, appointment of a professional regulator, and establishment of the REFby Royal Decree; and (b) informally, by the acceptanceby EdCof private producers and to co-exist with REEs; The Government's adoptionof a Rural RenewableElectricity Policy to set the underpinning principles of localized development of renewable energy resources, under the REMaster Plan; Government's action to address the financial problems of EdC and support the commercialization process of EdC; Adoption of manuals for financial management and availing of Credits insupport of TA to modernize and professionalise power sector staff; Development of a Regional Master Plan which outlines transmission links between the region's present and expected future generating facilities; Signing of a PPA betweenEdC and EVNand a power trade Memorandumof Understanding (MOU) between the Governments of Cambodia and Vietnam for import of up to 200 MW of power; The Government's request from ADB to provide a loanto co-finance the proposedProject. Assumption of primary responsibility for project implementationand committing to establish PMUs; Issue of a policy statementby MIMEcommitting to promoterenewable energy resources for rural development and creation of a Directorate of Renewable Energy within MIME. Passage of the Decree establishing the REFto promote equitable RE coverage in Cambodia by facilitating the population's access to electricity for economic, social and household uses. 5. Value added of IDA support inthis Project IDA's value-added to the Project would be inthe followingkey areas: IDA's continuing involvement inthe Cambodian power sector would help maintainthe momentumof reformand address Government concerns about alleviation of rural poverty. IDA has a leadrole to play inmobilizing resources for REandrenewable energy development from donors such as ADB, JICA and GEF and incoordinatingdonor action inthe power sector. IDA is well positioned, through its presenceinthe power sectors of Cambodiaand Vietnam, to support trade between the two countries and promote a regional strategy for power trade among the GMS countries; - 20 - 0 Through its experience inREincountries roundthe world, IDA i s well placed to help Cambodia inanalyzingfreshapproachesto RE; 0 Based on its experience and global knowledge, IDA can assist incoordinatingTA activities including a large array of specialized technical advisors; 0 DuringProject preparation itself, IDA has contributed, throughthe ESMAP,GEFand PDFB in preparing a RenewableEnergy Action Plan and designing the renewable energy component, preparing Small Producers PurchaseAgreement templates and establishing the feasibility for solar home systems and small hydro power projects. Its continued presencei s vital for satisfactory implementation; 0 The presence of IDA would promote greater transparency and accountability inEdC's and REF'S operations, through requirements to produce reliable financial information, and public disclosure. E. Summary ProjectAnalysis (detailed assessments are inthe project file, see Annex 8) 1. Economic (see Annex 4) [ X I Cost benefit [ ] Costeffectiveness [ ] Other(specify) Table 4A: Summary Analysis of 220kV Transmission: Border to Cambodia NPV* FRR ERR Factor ModelingAssumption ($MI % % Base Case 200 35.4 32.5 Economic recession Zero growth in demand for 5 years 180 30.8 28.9 Construction delays. Zero imports to 2011 151 24.4 24.1 Large scale customers do not connect Growth inindustrial demand 50% 135 31.1 27.6 less than predicted Elasticities mis-specified Price elasticities doubled and growth 101 20.3 20.5 elasticities halved Construction cost 15% increase in construction cost 193 32.6 30.0 Import Price Price increase o f 15%in 2012 158 33.6 30.3 Source: ADB Refers to NPV for the economic analysis at a discount rate of 12%. * For the portion of the 220kV Transmission system from Vietnam to the Border, the ERR i s estimated at 20% and the NPV at a discount rate of 12% i s estimated at US$18 million. The FRR i s estimated at 40%. Table 4B: Summary Economic Analysis of the RE Components Base case Sensitivity (+lo% costs, -10% consumers) ERR(%) NPV (million) ERR(%) NPV (million) (i) extension Grid 19.8 US$7.9 15.9 US$5.0 (ii) systems Isolated 22.3 US$9.6 21.2 US$9.2 (iii) hydro Mini 8.1-19.4 US$9.3 (total) 5.6-15.5 US$3.2 (total) - 21 - 2. Financial (see Annex 4 and 5) FinancialAnalvsis of RE Comoonents Base case Sensitivity (+lo% costs, -10% consumers) Return on NPV (million) Return on NPV (million) equity (%) equity (%) (i) extension Grid 4.4 US$(1.3) (2.7) US$(2.0) (ii) Isolated systems 22.3 US$4.3 20.5 US$3.9 (iii) Minihydro 25.9 US$13.0 (total) 20.5 US$7.3 (total) 2.1 Fiscal impact (see Annex 4A) The REFis designed to be self-sustaining over the long-term. While the initial fundingis largely expected to come from IDA and GEF under the Project and other donors later, long-term sustainability of the REF would be achieved though a "compensation fee" paid for REby urban, commercial and industrial customers. In addition, the Government could also make budgetary allocations to the REFbased on an assessment of the social and economic benefits. The REFrepresentsa clear and transparent mechanism for providing cross-subsidy support for RE. The IDA and GEF financing of the REF component is US$6.64 million, which will be disbursed over the 6 year life of the Project at the rate of approximately US$1.0 million p.a. The national budget expenditures for Cambodia are inthe range of US$680 million p.a. and growing approximately 12-15% p.a. The REFwould also provide co-financing grants for renewable energy development for overcoming market barriers and will be phasedout over time (7-10 years). However, as these grants would be largely provided for by GEF, it would not pose additional burden on the Government. The amount of public resources allocated through the REF in support of RE arejustified by their socio-economic and resulting revenue impacts. 2.2 Financial Performance (see Annex 5A) EdC's Financial Situation. A summary of the financial performance is presentedinAnnex 5. EdC recordedpositive operating incomes inFYOl and 02 due to: (a) highsales growth of 19% and 17%; (b) reduction inlosses from 24.1% inFy99 to 17.1% inFYOl and 13.5% inFY02; (c) improved customer billing and collection; (d) reductioninoperating costs, through reductionof staff, andretirement and refinancing of expensive debts to IPPs; (e) the Riel remaining fairly stable against the U S dollar; and (f) reduction in internationalcrude oil prices from a yearly average of US$27 to US$23 and US$25/bbl. At IDA'Sand ADB's behest, aFinancialAction Plan on measuresto improveEdC's finances was approved by MEF,MIME,EAC and EdC inJune 2003. The Plan calledfor actions on: (a) the reduction of overdue Government and Municipalities' arrears; (b) arrangements for settlement of future arrears; (c) the reimbursementof VAT by the Government to EdC; and (d) measures to reduce EdC's operating costs. As of September 2003, the Government and EdChadmade substantial progress inimplementingthe specific elements of the Plan by: (a) settling overdue electricity bills via offsets against amounts owing to the Government by EdC for customduties and taxes and cashtransfer; (b) setting up adequate line item budgets by MEFfor eachministry sufficient to meet their expected electricity consumption and implementing a Plan to improve mechanisms for collecting government arrears; (c) offsetting the VAT amounts due againstEdC'sexcise taxes and penalties; and (d) implementing various time bound measures to reduce EdC`s operating expenses. These strong but short-term measuresto address current operational and financial weaknesses would not be sufficient and EdC'sfinancial outlook will remain fragile particularly ifEdC'stariffs are not indexed to the movements of operating costs, foreign exchange and - 22 - inflation. But with tariffs beinghigh as they already are and EdC havingno control over international fuel prices or for macroeconomic factors, EdC's only option is to develop less expensive approachesto supplying electricity. The proposed Project provides this option. The interconnection with Vietnam is a significant first step as the Vietnamese have agreedto provide Cambodia with supplies at prices below EdC's cost of generation. Inthe long-term, further steps would be the development of a regional power market with the possibilities of purchasing more power from neighboring countries. EdC's prospects are projectedto be favorable with the implementationof the proposed Project which when fully operational should increaseits electricity revenues by 20%. 3. Technical Designof the physical components of the Project i s backedby detailed feasibility studies. Implementation to internationalstandards would be ensuredthrough high grade technical specifications. Strategieshave beenplanned to ensure supply continuity to the Takeo and WPP areas duringconstructionof the 220kV and 115kV transmission systems. Studies have been conducted to ensure stable operation of the interconnected Vietnam-Cambodia grids. The technologies for mini-hydro, community hydro and PV have already been proven inother countries inthe region. Identification of low-cost designs and procedures for electrification of off-grid loads and the pilot projects would be addressedduring implementation. 4. Institutional 4.1 Executing Agencies Primary responsible agencies for project preparation and implementation are EdC and the REF. EdC. Although previous IDA and ADB financed projects has givenEdC practical experience intechnical design, internationalprocurement and project management, it still does not have the full capacity to prepare and implement the Project independently. Hence, inaddition to establishment of a fully staffed EdC PMU,TA will be provided for an in-house advisor, and an international consultant to provide a full range of services inproject implementation, including procurement, engineering design, construction supervision and coordination, contract management, quality/cost/schedule control, testing and commissioning, resettlement and environmental management, and training of EdC staff. EdCprepared a Project ImplementationPlan (PIP), covering all key aspects relatedto project implementation, which will be finalized before credit negotiations, and adopted and updated as necessaryduringproject implementation. REF.As the REForganizational structure is not expectedto befully operational after credit effectiveness, a P M U within MIMEhas been established duringthe transitionalphase prior to REFestablishment. The PMUis responsible for implementing actions necessaryto establishthe REFBoard and Secretariat. The Project includes TA for implementation support; initially, assistancewill be provided to the MIMEP M U and subsequentlythe TA will be transferred to the REF,once it becomes operational. Support will be neededfor sub-project appraisal, monitoring and evaluation capacity, incrementaloperating costs, and development and implementation of a financial management system. An in-house technical advisor will assist the REFinits day-to-day operations. An Operational Manual for REFhas been finalized, and covers eligibility criteria, technical specifications, grant trigger mechanisms, sub-project cycle, conflict of interest and disclosure of information, financial management,procurement, disbursement, and social and environmental safeguard measures. MIMEwill havepolicy oversight of the REFandtheMEFwillberesponsiblefor the mobilizationof national and international sources of fundingfor the REF. The REFwill be governed by a Board composed of representatives from the Government, donors, private sector and civil society. An Annual -23 - Meeting of Stakeholders will act as the consultative organ for the REFBoard. The Executive Director of the REFSecretariat will be responsible for the day-to-day management of the REF. This will include appraising and approving applications for REF grants, within the overall criteria and budgets approved by the Board. An REFPayment Agent will administer payments to sub-project grant recipients. 4.2 Procurement Issues A procurement capacity assessment by IDA has determined the overall risk relatedto procurement as average. A procurement plan has been prepared as part of the PIP including procurement packaging, procurement method, contract type, schedule, etc. More than 95% of the goods procurement will be carried out through ICB procedures and subject to IDA prior review. Three major packages (115kV TL, substation modification, and National Control Center) will be basedon supply and installation contracts. Most of the consultants for TA activities will be selectedthrough QCBS or other competitive procedures and subject to IDA prior-review. International consultants will be engagedto help prepare biddingdocuments and handle the biddingprocess. Inaddition, extensive procurement training will be provided to the PMUstaff. 4.3 Financial Management Issues EdC. The financial managementfunction at EdC is organized under aFinance and AccountingDirector who reports to the ManagingDirector. There i s separation of accounting and cashmanagement functions. The External Financial Management Divisioni s responsible for accounting for the foreign funded projects of IDA, ADB, and other donors. The financial accounting system at EdC includes a computerized Billingsystem named Gentrack (the New Zealand product) and a General Ledger system maintained on Excel spread sheet, backed up by ACCPAC accounting software - General Ledger module. However, the project accounting handled by the External Financial Management Division are maintained on Excel spread sheet. An assessment of these systems was carried out inJune 2000 which identified principal weaknesses and a comprehensive Financial and Accounting Procedures Manual to address these was developed. The Manual was found to be a sound basis for establishing policies and procedures and training of staff. An assessment of the financial management system relatedto the Project and actions to improve the systems was done by IDA and i s detailed inAnnex 6B. The REFis being established as an autonomous public institution with independent legal status and full juridical standing as well as administrative, managerial, technical and financial autonomy under the laws of Cambodia. Several aspects of the operation of the REFwould ensure good governance, namely: (a) REFoperation would beclosely linked to a strong sector institution inthe EAC; (b) grants would be disbursed only against physical audit reportsjointly prepared by the REFwith the commercial banwfinancing institution; (c) payment of grants would actually be made by a "payment agent" and not the REF Secretariat or its finance unit; (d) dual signatures would be utilized for processing grants; and (e) transparency in the REF'Smanagement and operations through stakeholder involvement and public disclosure of information. The finance unit (once established) and payment agent would be assessedby IDA to ensurethat effective internalcontrols are inplace (Annex 6B). 5. Environmental InaccordancewithWorldBanksafeguardpoliciesonenvironment(OP/BP/GP 4.01)theProjecthasbeen assigned"Category B" . The rating i s basedupon conclusions drawn from two environmentalanalysis studiesfor the transmission and REcomponents respectively, that any impacts are moderate, of limited spatial influence and/or of short duration. - 24 - The transmission component consisting of the 220kV and 115kV TLs and two substations will be built and operated incompliance with all appropriate policies, procedures and regulations of the Government of Cambodia, the World Bank and/or internationalbest practice. Furthermore, the Vietnam transmission line currently under construction to which this sub-project will connect is also financed by the World Bank, and is infull compliance with boththe government of Vietnam and World Bank environmental regulations, policies and procedures. During construction, chief areas of concern are temporary disruption to agriculture from access roads and movement of men, machines and material, as well as dust, noise and management of any hazardous materials (fuels, lubricants etc.) associatedwith these activities. Reinforcement of 115kV PhnomPenh ringmay cause temporary disruption to traffic and noise to localresidents. Any landclearance will use manual methods, no pesticides will be involved. T/Ls and substations will be routed to minimize proximityto population centers and any areas of ecological or cultural significance and avoid migratory birdflight paths. They will be designed to internationalstandardsto minimize exposure to electric and magnetic fields, and use of polychlorinated biphenyls (PCBs) will be prohibited. The route followed i s predominantly agricultural land (rice paddy). Duringoperation the chief issuesinvolve exposure of the localpopulationto electric and magnetic fields and permanent loss of agricultural production from the land occupied by the transmission tower footings and the substations. An EnvironmentalManagement Plan (EMP)to address these key issuesincludes: (a) mitigationprogram, (b) monitoring program, and (c) institutional strengthening has beenprepared by the Borrower and found acceptable to IDA.The Borrower and EdC have agreed to implement this EMP(see Annex 12) ina manner satisfactory to IDA. The REcomponent consists of a number of sub-projects which fall broadly into two classes: (a) grid extension to provincial towns, and (b) off grid electrification with renewable energy sources. These sub- projects will be identifiedduringproject implementation. Consequently environmental issues, which are directly linked to the exact location and nature of the specific power source5are not known a priori. Therefore, for bothclasses of electrification, eligibility criteria for financing will be established that will include, inter alia, environmental factors. For grid extension sub-projects, a checklist (see Annex 12) establisheskey environmentalaspects which must be evaluated to determine if an environmental assessment i s neededand the issues to be addressedif any specific environmental assessment i s required. Off grid electrification subprojects will be financedthrough the REF.The REFpolicies and procedures will be in accordancewith an IDA-approved Operations Manual. A special chapter of this Operations Manual will be dedicated to environmental criteria, and will include checklists and generic EMP.In addition, the environmental chapter of the Operations Manual will provide institutional procedures for sub-project environmentalreview and approval. Sample generic EMPs for the types of subprojects to be financed are also included inAnnex 12. Early inimplementation, the Project will focus on strengthening institutionalcapacities by supporting the formation of a Rural Electrification EnvironmentalAdvisory Group (REEAG) under the Ministry of Environment (MoE). The REEAGwill consist of bothgovernment and non-governmental members and have overall responsibility for implementingthe EMPs of bothproject components.. The project will provide TA to REEAGfor the transmission component, and to support creation and operation of an environmental unit inthe REFto establish their environmentalreview and evaluationfunction for the RE component. Details regardingthe environmental analysis for the transmission and REcomponents are presented in Annex 12. -25 - 6. Social 6.1 Key Social Issues T/L Component. Certainamount of landacquisitionandresettlement will be required, which is mainly causedby acquiring land for substations, tower bases, and clearing right of way (ROW) under the T/L. Followingthe Bank policy on involuntary resettlement, a Resettlement Action Plan (RAP) was prepared in 2001, and updated in2003. A common RAP has beenprepared for the ADB-financed 220kV and IDA- financed 115kV elements of the components. Resettlement Action Plan. The RAPwas based on 100% census survey of all affected people and social economic survey among 25% of potentially affected families. According to the updated survey, the whole component will acquire about 9 ha of land areas for both substations and tower bases. Most of them are paddy land. Along with land acquisition, a total of 149households will be relocated from the ROW, most of whom will be movedwithin a short distance. Among total impacts, significant portion of resettlement i s under the 220kV component funded by ADB. For the whole component, a total of four Provinces (including PhnomPenhMunicipality), 15 Districts, 37 Communes, and 120Villages will be affected by the Project. Most of such impact is relatively minor; causedby the clearance of ROW (30m) and land acquisition of tower bases. The more significant impact i s those affected by land acquisition intwo substations (23 households) and those to be physically relocated along the transmission alignment (149 households), with a total of 172 households. Removal of 7,300 economic trees, primarily sugar palm, might also have significant impacts for some affected households. Most of those are likely to be the owners of residencesrequiring relocation, as the trees tend to be clustered around builtup residentialareas. Inaddition, during project construction, some temporary impacts might take place either inor outside the ROW and substation boundaries. Inorder to ensurethat the affected people will beable to restore their livingcondition andlivelihoodafter resettlement, a set of compensation standards has been developed, based on detailed survey of replacement values. For acquired farmland, compensation rate will be set at US$O.1to US$5.6/m2 basedon replacement value and market prices at different locations. For removed houses, compensation will be set at US$7 to US$283/m2,averaging US$2000/house. For removed attachments, detailed compensation rates will be developed basedon replacement cost. Inaddition, the Project will provide various moving and transition allowance for the project affected people, such as US$40/household for moving allowance, US$40/household for transition assistance, and US$20/household for those vulnerable households. These compensation rates will be reviewed and approved by IRC - an ad hoc inter-ministrial committee. According to the RAP, for those who will lose farmland, replacement farmland or cash at replacement value will be provided; while those losing structures and other attachments, compensation will be provided at replacement value. Extensive consultationhadbeencarried out duringthe resettlement planning stage, and a resettlement information booklet had been translated into local language and distributedto affected villages. To ensurethat affected people's complaints on compensation and rehabilitation are addressedina timely and satisfactory manner, a well defined grievance redressmechanism will be established under the Project through the PMUat EdC. A special resettlement and environment unit has been established at EdC to handle resettlement implementation for all projects under EdC. To strengthen institutional capacity for resettlement, TA such as workshops, training, and study tour, will be provided under the Credit for staff from both EdC and IRC. An Independent MonitoringOrganization(IMO) will be appointed to monitor the -26 - resettlement and compensation process and verify that these have been implemented inaccordance with the RAP. Linkage with the 220kV T/L inVietnam. On the Vietnamese side the Cambodia-Vietnam T/L component will connect the 220kV T L between Thot Not and the border point (via Chau Doc) in Vietnam, a length of about 98 km. Becausethe 220kV T L inVietnam i s "directly and significantly related to the IDA assistedproject", the IDA resettlement policy should also apply inaccordancewith the IDA'Snew OP 4.12. This 220kV T Lwith two switchyards is proposed to be funded from cost saving from the existing IDA loan, Vietnam Transmission, Distribution and Disaster Reconstruction Project (Cr. 3034-VN) and the RAP, following the IDA OP, has been developed and approved by the Bank. Resettlement Policy Framework For the RE Component. The RE component includes both grid extension and off-grid RE sub-projects. While construction of MV and LV requires little land acquisition and resettlement, small land acquisitionmightbe requiredfor the constructionof minihydro and some MV facilities. Since detailed project selection anddesign has not yet beenprepared, aresettlement policy framework has been developed in2001 and updated in2003 to ensure that any land acquisition and resettlement under the REcomponent will follow the same resettlement policy as under the transmission component. The developed resettlement policy framework includes these key elements: (a) resettlement principles; (b) project description; (c) potential impacts and resettlement screening procedures; (d) legal framework; (e) organizational structure; (f)consultation and grievance procedures; and (g) monitoring arrangements.According to the Policy Framework, an abbreviated RAP will be prepared by the implementing agency if less than 200 people are affected by a sub-project. If more than 200 people are affected, then a RAP will be prepared. The screening of resettlement impacts will be the responsibility of two implementing agencies: EdC for the grid extension sub-projects, and the REFfor the off-grid sub- projects. Ethnic Minority Development Strategy for REFComponent. Although there are no ethnic minorities inthe project areas for bothtransmission and gridextension components, becausethe REFis anational programand its activities may benefit ethnic minority populations, an ethnic minority development strategy has been developed for the REFcomponent. The proposed ethnic minority development strategy will include a screening process, followed by social assessment and development of an indigenous people development plan, which will be incorporated into the application and approvalprocessfor REF sub- projects, identifying sub-projects that involve ethnic minorities and setting a consultative process inplace where this i s the case. 6.2 ParticipatoryApproach Identification/ Implementation Operation Preparation Beneficiarieskommunitygroups I S COL COL National government CON COL COL NGOs CON COL COL Other donors: CON CON CON GEF ADB CON COL COL Japan CON I S I S (Note: IS: information sharing; CON: consultation; COL: collaboration) Extensive stakeholder consultations have been held, especially inthe design of the REFcomponent. With assistance from ESMAP, three national stakeholder consultation workshops were organized for the preparation of a renewable energy action plan and the creation of the REFas an independent financing - 27 - mechanism for off-grid electrification. Another workshop will be organized to address resettlement issues for each of the two project components. Active participation of local communities would be sought throughout project implementationina demand-driven provision of RE services. 7. Safeguard and Business Policies 7.1.Safeguard Policies Policy Applicability (OP 4.01, BP 4.01, GP 4.01) Environmental Assessment Y (OP 4.04, BP4.04, GP 4.04) Natural Habitats N (OP 4.36. GP 4.36) Forestrv N (OP 4.09) Pest Management N (OPN 11.03)Cultural Property N (OD 4.20) IndigenousPeople N (OD 4.30) Involuntary Resettlement Y (OP 4.37, BP4.37) Safety of Dams N (OP 7.50, BP 7.50, GP 7.50) Project inInternational Waterway N (OP 7.60, BP 7.60, GP 7.60) Project in Disputed Area N Where safeguards were deemedapplicable (OPBP 4.01Environmental Assessment and OD 4.30 Involuntary Resettlement), measureswere taken from the earliest stages inthe project preparation. Local communities have participatedin all stages of project development and will continue to do so. Each subproject of the REcomponent will be subject to individual assessments of environmentalrisks. Institutional strengthening inthe Ministry of Environment and MIME'SEnergy Development Department will work towards this end. Assessments and management plans which are currently available, provide for the development of detailed implementation plans as soon as project details are specified. A number of the targetedREEsare community-based organizations with features similar to NGOs, i.e. field-based and specialized knowledge, social proximity and long term commitment to sustainability. In order to capitalize on these skills, local community groups and NGOs have participatedinproject design and identification of priorities as prescribed inOD 14.70, Involving NGOs inBank-sponsored activities. F.Sustainability andRisks l(a). Sustainability The following conditions would ensure the sustainability of project components. The Government's willingness to deepenpower sector reforms, including enhanced liberalization of investments and full support of the commercialization of EdC, i s vital for project sustainability, as also actions to address government arrears and electricity tariffs. A clear political and public commitment to encourage and sustainprivate investmentinthe sector i s the only guaranteethat the private sector can flourish. Growth of electricity demand in urban as well as rural areas i s necessary to make power trade strategies such as the interconnectionwith Vietnam and Cambodia viable. High standards and quality of TLs,substationsand distribution system construction and proper maintenance of facilities constructed under the Project are critical to project - 28 - sustainability. The choice of appropriate technology/maintenance management practices and procedures for renewable electricity projects is essentialfor their sustainable operation. 0 The success of the REFi s intertwined with the future performanceof REEs and local financial institutions inexpanding rural electricity supply. Government'would needto develop specific policies to encourage the private sector inRE.Government should also adhere to the REmaster planto ensure coordinationbetween grid and off-grid components. 0 The decree establishing the REFallows for different sources offunding to sustainthe REF. The sources may include various donors, power transmission and supply businesses,urban consumers, andor the Government. Sources of funds and fundingmechanisms must be identified and confirmed no later than the proposed project mid-termreview. l(b). Replicability The Project offers a significant opportunity for replication: (a) the current level of RE i s low and the potential expansion through gridand off-grid options is quite large; (b) the Project pilots an innovative institutionalapproach to improve electricity access and depending on the success of the REFmechanism inthepilot stage, couldbe significantly scaled-up to cover larger market segments. The flexible and transparent design of the REFallows for different delivery models to be implemented, ensuring that the programbuild on rich experience and selection of suitable replicable models; (c) there i s substantial private sector presence inthe rural areas among the estimated 8,000 battery chargers over 600 REEsthat will be supportive inprogramreplication; and (d) the pilot REF experience will also have a significant impact on the commercial institutions through project financing experience and TA. With greater maturity inthe financial institutions, thesewill become channelsfor providinglonger termcredit to consumers, and therefore expanding rural markets for off-grid technologies. The REFimplementation support TA sub- component includes specific activities to disseminate results among REEs and financial institutions, share experience among stakeholders, and community demonstrations. 2. CriticalRisks The critical risks that the Project may encounter duringimplementation are detailed inthe table below. Some of the key implementation risks are: (a) The Financial Action Plan i s not implementedby EdC. A number of actions have been agreedwith the Government to improveEdC's financial condition. Close monitoring of the implementation of the Planby the Government, IDA and ADB will be required. (b) REFoperation: While the REFmodel to REhas been selectedas the optimal approachby all the stakeholders, its successful operation hinges on a number of factors coming together such as good progress of REElicensing by EAC, coordination between grid and off-grid development, ability of the REFseedfunding to act as a "capital enabler" for commercialbanks to providelonger term credit, transparent selection of subprojects based on clear criteria, consumer receptiveness and private sector appetite for suchaprogram. Moreover, sustainability of the REF is linked to the use of some cross- subsidization within the sector. While the REFi s a transparent mechanismfor providing support to RE, the team also recognizes its complexity. The Government will need to take a pro-active approach and highlevelof commitment inits early implementation, and later, inensuringtimely transfers of "compensation fees"/budget support. Close supervision by IDA and the Government will be required duringthe implementationof the pilot phase of the REFand the teamhas plans for three supervision missions during the first year of REFoperations. - 29 - 1) Risk tisk Rating iisk MinimizationMeasure 3lectricity Law has beenenacted. 'rocedures for the selection and :ontracting of IPPs will be approved. Government and EdC does not honor their financial d ZdC commercialization together with commitments. ;ound pricing policies are implemented. ;inancia1 actions/decisions required prior o Boardpresentation and Credit :ffectiveness. Transparent implementation of regulatory rulings v l MIMENEFcommitment to support andEAC decisions are not carried out. ZAC's independence prevails. TOR has 3een prepared for additional TA for Further development of the regulatory structure, including licensing procedures for operators and standard PPAs. Vietnam does not honor PPA. vl Zlear contractual agreements have been signed. FromComponentsto Outputs MIME,theREFandfinancial institutions do not 3 Close monitoringduring the initial phase function effectively in their respective roles of of the REFwill help in fine tuning of the planning, policy development, supervision, operations. implementation of the REF sub-component. Mismanagement o f the REF. VI To ensure governance, fund operation would be linked to EAC, grants would be disbursed against physical audit reports, payment of grants would be made by an outside payment agent, financial management systems would be set up aimed at establishing effective internal controls, and independent audits of REF accounts will be required. Counterpart funds are not available. M Credit covenants enable the Government to sustain its commitments. Low utilization of the REF. M Phased approach would assess and fine- tune disbursemendimplementation bottlenecks. Based on these lessons, experience would be reviewed, and the REFmanuals and grant criteria would be revised before proceeding with main phase. Time and cost overruns. M UtilizeEdC who i s familiar with IDA procedures. Familiarize other stakeholders on IDAprocurement and disbursement procedures. Improve monitoring and supervision capacity in MIME,EdC, EACandfinancial institutions through TA provided in the Proiect. IOverallRiskRating M (Note: Risk Rating - H: High Risk, S: Substantial Ri, M : Modest Risk J: Negligible or Low Risk) - 30 - 3. Possiblecontroversial aspects No controversial aspects have been identified. G.MainCredit Conditions 1. EffectivenessCondition Execution of subsidiary loan agreement between the Borrower and EdC; Execution of the loan agreement between the Borrower and ADB; Execution of the loan agreement between the Borrower and NDF; Execution of the GEF grant agreement; 9 Adoption of the PIPfor EdC in a manner satisfactory to IDA: Initial deposits are made into the Counterpart Funds. 2. Conditions of Disbursement 9 Establishment of the REF and making itfully operational in a manner satisfactory to IDA and ensure the: (a) issuance of REF Decree and Sub-Decree; (b)appointment of REF Board and Secretariat; (c) establishment of afinancial management and accounting system satisfactory to IDA; (d) adoption of the REF Operational and Financial Management Manual; (e)provision of training of REF staff; and (f)appointment of an independentpayment agent. 3. Other [classify according to covenant types inthe legal Agreements] Agreements Reached with the Borrower: Flow and Utilization of Project Funds: 9 Onlend the Credit amount to EdC under a subsidiary loan agreement between the Government and EdC under terms and conditions satisfactory to IDA which shall include: (a) interest at a fixed rate of 4.2% per annum, repayment over 20 years including a grace period of 5 yearsfor the T/Lcomponent; (b) interest at a rate of 2%per annum, repayment over 25years including a grace period of 7 years for the rural grid extension component; and (c) foreign exchange risk to be borne by EdC; and 9 Assure availability of adequate counterpart funds in addition to the IDA creditfor implementing theproject components. Managementand FinancialAspects of the Project: Take all actions, including but not limited to adjustment of tariffs to enable EdC to realize satisfactory operating, cash generation and debt limitation ratios; 0 Take all necessary measures to carry out the Accounts Receivable Management Action Plan to assist EdC in collecting and reducing outstanding Government arrears and achieve monitoring targets in the Plan; - 3 1 - Agreements Reached with EdC,EAC, the REFand MIME: Management Aspects of the Project: 0 Take all necessary action to: (a) enable EdC to prepare and implement, in an efficient and transparent manner, satisfactory to IDA, EdC's Power Investment Plan; and (b)provide information to IDA on any energy generation, transmission and distributionprojects to be implemented outside of EdC's Power Investment Plan, and allow IDA to comment on such investments. Environmental and Resettlement Aspects: 0 EdC to carry out the EMP and RAP as agreed with IDA and in a manner satisfactory to IDA.. FinancialAspects: 0 EdC to review with IDA, by April 30 of eachyear, the adequacy of its tariffs to produce the required break-even, debt service coverage, and debt equity ratio covenants, satisfactory to IDA; EdC to generate sufficient revenues to cover no less than the sum of: (a) operating expenses; and (b) the amount by which debt service requirements exceed theprovisionfor depreciation; EdC to maintain net revenues at the level of 1.2 times its total estimated debt service requirements until FY06 and 1.3times by FY07 and thereafter; EdC to not incurfurther debt if such additional debt would raise its long-term indebtedness to more than 1.5times its total capitalization; EdC and MIME shall review with IDA, by April 30 of each year, EdC's and the REF'Sproposed annual budgets andfinancial planfor each succeeding three-year period. AccountsIAudits: EdC, MIME, the REF and EAC to appoint independent auditors, acceptable to IDA, and vnake the audit reports available to IDA within six months after the close of eachfiscal year. Monitoring, Review and Reporting: EdC, the REF and MIME to: (a) carry out satisfactory proceduresfor monitoring theprogress of the Project in terms of physical execution andfinancial reports, and agreedpe$ormance monitoring indicators; (b)furnish to IDA Financial Management Reports (FMRs), 45 days after the end of each calendar quarter with thefirst of such reports due on July 15, 2004 covering the period up to June 30,2004for EDC; and October 15,2004for the period up to September 30, 2004for the REF; and (e) carry out a mid-term assessment of project implementationfor the period ending December 31, 2006. H.Readinessfor Implementation [ ]1.a) Theengineeringdesigndocumentsfor thefirstyear's activitiesarecompleteandreadyfor the start of project implementation [ ] 1.b) Notapplicable [ ]2. Theprocurement documentsfor thefirst year's activities are complete and readyfor the start of project implementation. - 32 - [x ] 3. TheProject Implementation Plan has been appraised andfound to be realistic and of satisfactory quality. [ ] 4. Thefollowing itemsarelackingandarediscussedunderloanconditions(SectionG) The feasibility studies for all project componentshavebeencompleted and approved by the Government. EdC has hired consultants to reviewhpdate the feasibility study (that was carried out by IDA inFYOO) for both the 220kV and 115kV components of the Project, as well as for updating the RAPSand EIAs. The PPAbetween the Governments of Cambodia and Vietnam on the 220kV interconnection was signed by EdC and EVNon July 24,2000 and a written commitment from the Vietnamese authorities confirming their intention to implement their sections of the project, as agreed with the Cambodianauthorities, was obtained on July 1, 2003. A Project ImplementationConsultant (PIC) will be hired under the Project to assist EdC inthe engineering designand preparation of bidding documents. To this end, EdC has advertised requests for expression of interest inthe UNDB and local newspapers. Upon IDA'Sapproval, the RFPhas been released to the short listed consultants. Proposals will be submitted by November 2003. After evaluation and approval, the PIC should be on boardinMarch 2003. To facilitate a possible more advanced project preparationand implementation, the project team has recommended the option of retroactive financing. But while the Borrower, opted to avail of this financing for an in-house technical adviser, it was unwilling to take any riskinusingthe same financing arrangementfor the PIC inview of its budgetconstraint. I.CompliancewithBankPolicies [ x ] 1. Thisproject complies with all applicable bankpolicies. [ ] 2. Thefollowing exceptions to Bank policies are recommendedfor approval. Theproject complies with all other applicable policies. Rebecca Sekse IJunhui Fy u ' l u IanPorter TeamLeader I Sector Manager . Country Director + 0 0 0 0 0 0 0 0 0 0 Y I m a m x 3 r4 x I IA m I 4 e e e x C 0 3 3 .3 z C w 4 4 4 4 4 4 5 Y 5 w Y Y Y Y 0 0 0 0 2 2 2 2 - 38 - Annex 2: DetailedProject Description CA IBODIA: RuralElectrificationand Transmission Pra,xt Background The Project has been designed to include components - (a) 220kV interconnection to Vietnam; (b) reinforcement of the 115kV transmission gridaround PhnomPenh; (c) National Control Center; (d) EdC REgrid extension; (e) REFPilot, based on the establishment of the REF; and (f) TA to MIME,EAC, REFandEdC, which as a whole respondto the most pressing needs of Cambodia's power sector today. Because of restrictedIDA funds, the 220kV transmission component inCambodia will be financed by ADB (together with financing from the Nordic DevelopmentFund) under its GreaterMekong Sub-region Transmission Project, which includes the 220kV T/L portion in Cambodia; two new substations, at West PhnomPenh(WPP) and Takeo; and capacity building. The 220kV portion of the system inVietnam, comprising 98 kmof 220kV T/L between the existing substation at Thot Not and Chau Doc will be funded from savings in an ongoing IDA Credit (Transmission, Distribution and Disaster Reconstruction Project, CR 3034-VN). The Project's transmission components are part of EdC's Transmission Master Planfor 2003- 2008. A recent regional indicative master plan on power interconnectioninthe Greater Mekong Subregion (GMS), outlining transmission links between the region's present and expected future generating facilities, recommends that the 220kV interconnectionto Vietnam be commissioned at the earliest possible time. The new National Control Center will greatly facilitate systemcontrol inthe evolvingnational grid. The existing PPA (Bilateral Cooperation Agreement), signed on July 24, 2000 betweenEdC and Electricity of Vietnam (EVN), follows a Power Sector Cooperation Agreement signed on July 10, 1999between the Governments of Cambodia and Vietnam. Underits terms and conditions, EVNwould make available at the interconnection point, subject to force-majeure and planned outage, firmcapacity of 80 MW initially between 2003 and 2005, and 200 MW after 2005. As these dates are now no longer valid, EdC has drafted an Amendment to the PPA to renegotiate the terms and conditions of the agreement, inline with the Articles of Agreement. The tariff structure of the original PPA allows for "dry" and "rainy" season tariffs varying with the time of day with an average tariff of US$6.2/kWh inthe dry season and US$ 5.6/kWh inthe rainy reason (assuming 4 hours at the peak tariff rate, 14 hours at the normal tariff rate and 6 hours at the off-peak tariff rate) Inregard to RE, a two-pronged approach is beingfollowed. First,continuewithEdC's RE programthrough grid extensions based on an economic rationale and revenue generation criteria. Second, utilize the unique strengths of the REEsto rapidly expand access and broaden scope of service. The REcomponents are inline with the Government's RE strategy to ensure equity inaccess to supplies through: (i) balanced development inthe provinces at different levels of economic growth; (b) selecting a scheme having the highest costhenefit ratio and economic rate of return; and (c) providing electricity to as many households as possible within the limit of affordability. - 39 - By Component: A. TransmissionComponent. (US$90.59 million; of which US$16.66 millionIDA and US$70.21millionADB) Al. 220kV interconnectionto Vietnam (ADBfinanced: US$70.21million notincluding - IDC) Background. This component of the Project, to beco-financed byADB, would develop afirst stage of a 220kV transmission grid linkingCambodia and Vietnam that would enable regional loads to be supplied from the grid at lower costs and encourage industrialusers to switch from self-generation to the grid. The Project would also increase access to electricity to the rural areas inCambodia, aroundWestPhnomPenhandTakeo where substationswill beplaced. When commissioned in2007 the interconnector is expectedto start transferring about 80 MW and be increased to 200 MW after 2008. The 220kV ADB-financed T/L component of the Project consists o f (a) Design and construction of a 109 kmlong 220kV double circuit T/L from Cambodia's border with Vietnam to the Municipality of PhnomPenhand a bulk supply distribution system serving communities along the transmission route. (b) Design and construction of, and installation of equipment in, substations inTakeo and WPP and an MV distribution system serving Takeo town and WPP. (c) Supply of equipment for Takeo and WPP substations. (d) Capacity Buildingconsisting o f (i) Strengthening capacity of EdC staff infinance, financial recovery planning, information systems and internal audit capacity; (ii) Training indeveloping and disseminating a demand managementprogramdesigned to provide targeted information to assist low income consumers inenergy saving options; (iii)Strengthening customer relations through reviewing the current performance of EdC customer service centers and evaluatingpotential improvements, training staff incustomer relations, and reviewing potential for improved service procedures; (iv) Supporting EdCinmobilizing private electricity providers, including sale of bulk supply to REEs, and assisting REEs to apply for licenses and to access capital funds necessaryfor LV investments; (v) Establishinga social and environmental unit within EdC Corporate Planning and Projects Department, includingprovision for advanced education of two specialists; (vi) Supporting EAC incarrying out its regulatory functions; - 4 0 - (vii) Assistance incarrying out a comprehensive review of EdC long-termtariff structure and levels for PhnomPenh and connected transmission areas inorder to determine appropriate tariff levels: and (viii) Provision of consulting services. A2. 115kV T/L reinforcementand MV Extension (US$14.78 million, of which US$12.30 million IDA). Background. Duringthe previous IDA Project (Le. PhnomPenhPower Rehabilitation Project), which connected about 50,000 additional consumers, three new primary 115kV substations (i.e. GS1, GS2 and GS3) were built together with about 23 kmof 115kV single circuit line connecting these substations around the perimeter of PhnomPenh. Inaddition about 144 cct-km of MV lines and about 400 kmof LV lines resulted inthe improvement of reliability of supply of existing customers as well as improvement of transmission and distribution efficiency with a reduction of system losses from 33% in 1995 to 13.5% in2002. This component would reinforcethe 115kV ring around PhnomPenh to supply additional demand and improve reliability and quality of supply. It includes a 115kV connectionfrom the new ADB-financed WPP substation to the existing 115kV ringthrough two double circuit 10km pole lines on separate routes to increase security. Plans have been devised to minimize power shutdowns duringconstruction. Extensionof the MV network around the new substationsWPP and Takeo i s also provided by the Project. This will extend the MV side of the transformer at the substations by about 130 kmover a SWER three phase wire system along the main routes (WPP to Ang Snoul Road No. 4; WPP to Tram Khnar roadNo. 3; Takeo to Kampong Chrey RoadNo. 2; Takeo -Kg Chrey and Takeo to Samraong). Component Description. Costs include contingencies plus taxes and duties and service charges and commitment fee. Land acquisition and resettlement costs amounting to US$0.36 million have been included for the 115kV and MV extension components. SubcomponentA2.1- Reinforcement of the 115kVtransmissionsystem (US$5.96 million, of which US$4.97 million IDA). This subcomponent comprises (i) kmof 115kV TLs, 20 including poles, conductors, insulators and fittings, and other accessories, to connect the new WPP substation and grid substation 3 (GS3), and (ii) stringingof about 23 kmof 115kV conductors to complete the second circuit between the three existing grid substations, i.e. GS1, GS2, and GS3; Subcomponent A2.2 -Upgradingof ll5kVgrid substations GSl, GS2, and GS3 (US$6.32 million, of which US$5.23 million IDA). This subcomponent comprises: (i) GS1: switchyardmodifications and connectionof 10MVAr of reactive compensation at the 22kV side; (ii) switchyardmodifications, 1x115/22kV, 30/50 MVA transformer, 115kV bus GS3: coupler and transformer bay, and 15 MVAr of reactive compensation at the 22kV side; (iii) GS3: switchyard modifications, 1x115/22kV 30/50 MVA transformer, 115kV bus coupler and transformer bay, and 15 MVAr of reactive compensation at the 22kV side; Subcomponent A2.3 -MVnetwork expansionat WPPand Takeo (US$1.90 million, of which US$1.60 million IDA). This component will extend the distribution networks at the new substationsat WPP and Takeo to supply at MV level along the roads No 3 and 4 at WPP and from Takeo to Samraong, and to Kampong Chrey; -41 - Subcomponent A2.4 Operational Support to EdC/PMU (US$0.60m, of which US$O.SO - million IDA). This operational support to EDC and the IDA-PMUi s important for the smooth functioning of the P M Uduringimplementationof the 115kV and RE grid extension components. It consists of (i) InspectionVehicles (US$ 0.1million); (ii) work Vehicles Field (US$O.10million); (iii) computer and peripherals (US$0.095 million); (v) Office Equipment (US$0.095 million); (vi) O&M Equipment and Tools (US$0.095 million); (vii) CommunicationEquipment (US$0.095 million); and (vii) Power Planning Software (US$0.07 million). A3. National Control Center (US$5.60 million: of which US$4.67 millionIDA). Background. A National Control Center (essential for the operation of a gridthat will eventually connect several countries) will cater for the following functions. (i)generation planninghcheduling, load forecasting; (ii) planned and forced maintenance co-ordination; (iii) control and status monitoring of generators, circuit breakers, capacitor banks, transformers; (iv) frequency control; (v) under frequency load shedding; (vi) scheduling of spinningreserve as requiredby interconnected grid; (vii) real-time data acquisition of GWhgenerated, GWh consumed; system losses, MVAR flows, voltages; (viii) management of losses, frequency, voltage, load flows, reactive flows; (ix) sequence of events recording for fault analysis for major substation CB operations, major substation reclose operations, line protection trips and alarms, generator trips and alarms; and (x) statistics and metering data, load forecasts, billing datdreconciliations, and data requiredfor PPA with Vietnam. The SCADA system will operate over an optical fiber communication cable. SubcomponentA3.1. Constructionof Modern National Control Center and installation of a modern SCADA system (US$5.60million). B. Rural ElectrificationComponent (US$14.74 million, of which US$12.81 million IDA) Background. Electricity demand inCambodia is concentrated inPhnomPenhand neighboring areas, which account for over 70% of the country's electricity consumption. At present only 12% of the country's total populationof 13 million have access to electricity. Consistent with the Government's objective of 70% electrification by the year 2030, this component of the Project will contribute to achieving this objective by extending the MV and LV networks to about 50,000 new costumers inthe four provincial areas of Sihanoukville, Battambang, Kampot, and Kampong Speu. EdC now provides electricity to six isolated provincial areas of which PhnomPenh is the largest. This grid extension component will support EdC inthe planning, installation of low-cost feeders and backbone LV distribution systems, to the rural area, that is, non-urban areas excluding cities and towns, on a commercially sound basis. It will improve the quality of service to customers and provide the most cost-effective solution for doing so. The main criteria for the selection of the grid extension to rural areas are: 0 Expansion of EdC's grid to rural areas which are already provided with electricity by EdC, or under contractual arrangement with MIME,or areas which are not currently electrified; 0 Villages within 40 kmsurrounding EdC's distribution grid; 0 Villages with reasonable access to roads, where there are already population living along-side the road, for ease of installation, as well as operation and maintenance; 0 Villages inwhich the population is ready to make a partial contribution to electrification and are able to pay their electricity bills; - 42 - 0 Villages that have development potential for agriculture, forestry, handicrafts, or other income generation opportunities 0 Villages where investments ininfrastructure and electrification will assist the Government programs for stopping internal migration, reducingnomadic farming and deforestation, or helping inthe development of communes or villages; Villages within cost-effective reach of the grid, or cross-border points of supply. The areas selectedfor grid extensions were those exhibiting amongst the highest levels of per capita income, population and load density, and where clearly the extension of EdC's grid i s the least cost option. The methodology for the final selection i s basedon the valuation of the cost per connection for each customer, based on the MY and LV length of the conductors selected, as well as the number of distribution transformers, isolating transformers (Le. for SWER-based system - the use of isolating transformers allows, among other factors, for the selection of an operating voltage for SWER lines independent of the voltage of the parent supply system), poles and meters). The dominant criterion used inthe selection of SWER inany particular area, i s the projectedload for the next 10years being less than 5OOkVA. Subcomponent Description. The estimated average cost per household connection i s about US$214 for about 50,000 additional households to be connected by this Project, which would require about 516 cct-km of MV line, 536 cct-km of LV lines, 200 sets of single-phase transformers with capacities ranging from 50-100kVA and one 15OkVA three phasetransformer for Sihanoukville, as well as 16 sets of isolating transformers. Insulated MV 70 sqmm and ABC LV conductors are selected. The cost estimates also includeany associatedland acquisition and resettlement costs, which are estimated not to exceed 1% of the total costs. The use of a SWER system (for cost effective REat reasonablereliability and quality of service) i s assumed. The design used50-100 mpole spans, 70 sq mmMV and LV conductors, and pole-mounted substations. A watt-hour meter and a circuit breaker would be provided at customer premises. C. REF Component (US$28.23 million, of which US$5.10million IDA, US$1.54million GEF,and US$21.59millionfrom the Private Sector) Background. A survey carried out by Enterprise Developmentof Cambodia (now SME Cambodia) inJanuary 2001established that over 600 independent entrepreneurs are currently supplying power to about 60,000 rural electric customers throughout Cambodia. The survey identified several factors that limit the ability of the REEs including: (i) a low level of business management and technical skills; (ii) extremely limited access to reasonablepriced financing alternatives; (iii) lack of focus as to what constitutes "best practice"; and (iv) lack of valuable synergies that occur through interaction with similar and other businesses inindustrysector groups or organizations. REE'sface problems of low quality, low connections and hightariffs. Though at present REEs are operating commercially, their very hightariffs (average of USc 51kWh) severely constrain access to rural consumers, particularly the poor. Lack of adequatetechnical capacity and use of sub-standardequipment also results inpoor service standards. There are no incentives for growth of REEbusinesses and economies of scale inservice delivery are not being achieved-- they remain small and scattered. Provision of public support for this rural programthrough TA and co- financing grants will help REEs overcome these problems and establish businessesthat have a builtinincentive for growth and improved service delivery. There i s consensus among stakeholders that ajoint private/public effort i s essential to achieve the set REgoals. To embark on this partnership, the Government has adopted a new Electricity Law -43 - that established the newly appointed regulator, EAC, and initiated steps to develop the regulations and make EAC fully operational. Also, the Government has completed a Rural and Renewable Electricity Strategy and Action Plan. These important activities should define "the rules of the game" for future expansion of rural electricity services in Cambodia. EAC and the REF, will closely coordinate private sector promotion. REFwill invite RFPs to serve particular areas. Proposals will be evaluated basedon specific indicators such as number of consumers served, level of tariff proposed by the bidder, a viable businessplan and, quality and level of service. Pre-selected proposals would apply to EAC for an operating license to serve in an area and also be eligible to receive the small co-financing grant from the REF as an incentive for RE. Together, the license and the availability of grant will act as a "capital enabler" to help strengthen the case for the developer in securing loans with suitable terms from commercial banks. Final approvals of sub-grants will be madeby the REF only against evidence of EAC license and financial closure on bank loans. Final portion of grant disbursements will take place after physical audits and customer certification. As the strategy to facilitate private sector involvement through the REF is new, a phased implementation approach would be followed, inorder to be able to refine the operations basedon lessons from an initial phase. It was agreed with the Government and private sector stakeholders that 6-10 sub-projects will be tested out in the initial phase of the REF in 3-4 provinces. The guidelines for the initial phase will consist o f 0 Effective license issued by EAC with a duration of not less than 5 years; 0 Economic least-cost option inthe area; 0 Variety infuel source (including at least 1solar system, 1hydro scheme); 0 Variety in size (1provincial town, 1district, and 1commune); 0 Number of consumers shouldnot be less than 300; and 0 Installation of 300 Solar Home Systems (SHS). The REFwill prepare simple RFPs incollaborationwith EAC; the RFPwill be flexible and allow bidders to utilize one or more technologies to serve an area. To ensure transparency and current EAC process, all licenses issued will be displayed on EAC's internet site. Agreement has been reached in principle with the various stakeholders and Government on the level of the co-financing grant as well as on disbursement principles for the initial phase. For the main phase and after incorporating lessons learned from the initial phase, the process and levels of sub-grant amounts will be reviewed and, if necessary, modified inthe operational manual. The co-financing estimates for various systems for the initial phaseare: Type Grant Proposed Estimated Total Cost/Unit New household connected (diesel) US$45 US$150 Minihydro (0.75-5 MW) US$4OO/kW installed US$1744/kW installed Micro hydro (average 50kW) US$4OO/kW installed US$27OO/kW installed Solar Home System US$100/set of 40 Wp US$400/set of 40 Wp Sub-grants will be approved in parallel with the approval of licenses by EAC and loans by commercialbanks for REEs. The REFwill publicly disclose inter alia the names of the approved sub-projects, a brief description of the approved subprojects, the names of the sub-grant beneficiaries, and the amount of each sub-grant approved. - 44 - Grants will be released in 2-3 installments based on implementation progress and will be paid directly to the supplier of equipment/developers by the payment agent upon certification by the REF. Inthe case of SHS, co-financinggrants will bereleasedto the supplier after installationand verification. The grant allowance is expected to be calculated ina way that splits the capital costs in approximately 25% co-financing grant, hence, assuming a 25% equity share and 50% loan financing. Subcomponent Description. This component will promote private sector participation inRE and renewable energy development and will include investments as well as implementation assistance. The Project would assist infinancing the following: Subcomponent C2.1- REE Grid Extension (US$7.58million; of which US$2.34million IDA, US$5.24million private sector). This subcomponent comprises the provision by REEsof about 45,000 new connections; Subcomponent (22.2 Solar Home System (US$5.49million, of which US$1.20million GEF; - US4.29millionprivate sector). This subcomponent comprises the provision of electricity to about 12,000 households usingSHS. This subcomponent will be implementedby existing solar dealers, companies and REEs; Subcomponent C2.3- Mini Hydro (US$12.84million; of which US$2.76million IDA, US$lO.O8million private sector). This subcomponent comprises the construction of at least 6 MW of renewable energy capacity; Subcomponent C2.4. - Village Hydro (US$2.32million, of which US$0.34million GEF; US$1.98million private sector). This subcomponent comprises the construction of about 850 kW of micro hydro plants and will be implementedby rural communities, and private entrepreneurs,including REEs. Since the off-take from the REFwill be based on market demand, the allocations for the various technologies are notional and fundingis fungible within sub-components C2.1 -C2.4. It i s useful to note that the REF itself i s a technology neutral mechanismfor REwhere proposals will be selectedbasedon economic least cost principles. D. Institutional Development and Sector Reform Component (US$9.33 million, of which US$5.12 million IDA, and US$4.21 million GEF) Background. Institutional strengthening of MIME, EAC and EdC i s vital for execution of this Project. TA is therefore provided for institutional strengtheningkapacity building/operational support to MIME, REF, EAC, EdC, and for training in land compensation, resettlement and environment. Dl. TA to MIME(US$O.SO million, of which US$0.30 millionIDA, andUS$0.50 million GEF). The Project will provide financing towards the following subcomponents: Subcomponent Dl.1- RenewableEnergy Policy Development (US$0.50million, all GEF). This subcomponent comprises the development of policy that would create a level playing field for renewable energy private sector investors basedon renewable energy assessments and least cost planning; and other TA as required within the budget and scope of the Project. Assistance will include development and implementation of a Small Power Purchase Agreement (SPPA) for renewable energy developers, and development of details of the -45 - financing of the subsidy mechanismfor ensuring sustainability of renewable energy development inthe country. Subcomponent01.2 -Development of a Master Plan (US$0.30 million, all IDA). To improve MIMEcapabilities indeveloping amasterplanfor the sector, thisTA would complement the assistanceprovidedby JICA and Australia inthe fields of REmaster planning and energy consumptionforecasting. It would provide consultancy service to: (a) survey energy consumptioninprovincial and rural areas which would serve as a baseline survey of areas to be included inthe grid extension component; and (b) prepare a power system expansion master plan including generation additions, transmission and distribution expansion, and zoning of grid versus off-grid areas. D2. TA to REF(US$6.19 million,of which, US$2.59 millionIDA, US$3.60 millionGEF). Subcomponent02.1 -Implementation Supportfor the REF (US$2.39million; of which, US$1.57million IDA, US$0.82 million GEF).The REF component will include implementation assistanceto ensure its smooth administration. As the REFhas yet to be established, a PMUunder MIMEwill managethe TA. When the REFDecree and sub- Decree are enacted, and the REFbecomes operational, this TA will be transferred from MIMEto the REF. Support will beprovidedfor developing implementationcapacity of the REF(including appraisal capacity), incrementaloperating costs, implementationof a financial management system (a qualified firm will be selectedto put inplace an efficient and transparent system) and a technical in-house advisor to assist inthe day-to-day operationof the REF. The TA would cover office equipment and supplies, furniture, computers, printers, and fax machines, and fieldwork vehicles. Subcomponent02.2 Rural Income Generation Promotion (US$0.35 million, of which - US$0.20 million IDA, US$O.lS million GEF). TA will be provided to develop end-use activities inorder to increase income generation opportunities inrural areas and enhance productive uses. Suitably tailored training programs and demonstration activities on new electricity-based rural income generating options as well as adapting existing uses to runon electricity will be offered (for example, use of power tools by existing village carpenters). Promotion of such village economic activity will gradually buildup demand among new consumers and also increase affordability. It i s envisaged that these activities will be carried out by local consultants and NGOs so as to ensure outreach to rural consumers. Specific areas of support include: (i) rural village and commune planning relatedto electricity; (ii) assessment of businessesand products; (iii) economic development promotional activities, i.e. training programs and demonstrations; and (iv) establishing links between rural businessesand markets. Subcomponent02.3 -Renewable Energy Business Developmentfor Solar and Mini/Micro Hydro (US$2.44 million, of which, US$0.24 million IDA, US$2.20 million GEF). Cost- sharedTA will be provided for preparationof feasibility reports, business plans, technical training, awareness programs and promotion of the use of renewable energy sources. Separateactivities will address solar and hydro power, with possible extension to bio-mass as well. This subcomponent funds activities inthree principal areas: (i) pipeline development, to be implementedas one or two consolidated consulting assignments over the life of the Project, whereby developers and communities interested inpreparingREFproposals will receive cost-shared assistance. The TOR of the consultant would include a provision that a pipeline of six sub-projects should have completed feasibility studies, businessplans and REF sub-grant applications prepared for appraisal by the REF within three months of Credit -46 - effectiveness. Guidelines for cost-sharing were decided basedon consultations with stakeholders and will be specified inthe TOR for this block consulting assignment; (ii) promotional activities which will include media campaign, awarenessprograms, community demonstration, as well as other suitable interventions to overcome informationbarriers; and (iii) andworkshopsincludingtechniciantraining,trainingofNGOandprivatesector training entrepreneurs on renewable energy technologies, regional and international study tours and participation internationalconferences. Subcomponent02.4 -REE Improvement andAssociation Building (US$O.76million of which, US$0.58million IDA, US$0.18million GEF). TA will be providedto buildtechnical and businessplanning capacity within REEs. This activity will work towards converging technical standards and improved services. Specific areas of support will include: (i) strengthening REEmanagement, technical and operating capacity; (ii) demonstration of international and regional best practices; (iii)strengthen and expand the capacity of REE cooperation inthe areas of training, communications, outreach and business support activities; and (iv) facilitate coordination with local stakeholders, i.e. industry, villages and communities to better serve their electricity service needs. Subcomponent 02.5 - Capacity Building of Financial Znstitution (US$0.25 million, all GEF). Commercialbanks have indicatedthat main barriers to financing RE subprojects are unfamiliarity with renewable energy technologies resulting inlimited appraisal and supervision ability. The TA would help improve appraisal and supervision capabilities would be provided as TA. D3. TA to EAC(US$0.55million, of which US$0.44 million IDA;US$O.11 millionGEF). The Project will provide financing towards the following subcomponent. Subcomponent 03.1 -Znstitutional strengtheningof the EAC (US$0.55million; of which US$0.44 million IDA; US$O.ll million GEF). The proposed TA will strengthen EAC's capacity to discharge its responsibilities mandated inthe Electricity Law, and have Regulations and Codes inplaceto improve the quality of the supply and services and ensure transparency inEAC's operation. The specific tasks comprise: (i) Operational Support (US$0.42 million) - for consultancy services to assist EAC in: (a) issuinglicenses to existing service providers and service providers that seek assistancefrom the REF; (b) dealing with tariff applications, fixing of tariff and writing of tariff orders; (c) monitoring of Licensees inidentifying informationto be recorded and the format to report the information to the EAC; (d) Regulationand Codes including preparation of Grid Code and Distribution Code and to issueregulatiodprocedures to amend existing regulations/procedures to enable EAC to carry out its duties properly; and (e) development of technical standards to ensure consumer safety and a minimumquality of services by REEs and to buildcapacity and awareness on renewable energy inEAC; (ii) Training (US$0.06 million) - inthree areas: (a) foundation skill training incomputer skill, administrationand management andEnglish language; (b) job specific training including Power Sector Regulation, Pricing Control and methodology for tariff setting; and Public Hearing, Complaint and Dispute Resolution; (c) practical training for managers and senior staff on best practicemanagement and operation of a regulatory body; and (ii) Facility Support (US$0.07 million) consisting of a portable meter testing equipment and accessories. - 47 - D4. TA to EdC(US$1.79 million,all IDA). The Project will providefinancing towards the following subcomponents. Subcomponent 04.1 -EdC PMU Project Implementation Consultant (US$0.80 million, all IDA). The Project ImplementationConsultants (PIC) will assist EdC inengineering supervision, inspection, coordination, training, and implementation of the IDA financed 115kV and REEdC grid extensions components of the Project, as well as inthe establishment of a National Control Center. As one of the components of the Project is being carried out by ADB through a co-financing arrangement, the Consultant alsoneedsto coordinate activities with the ADB PMUwhich is executing the 220 kV component of the Project. The proposed TA of a Resident Engineer, adviser to EdC's IDA-PMUManager, is expected to extend over a period of about 36 months. Inaddition, senior specialists inthe areas of 115 kV and MVLV T L design and construction, substation design and construction, systemplanning and protection, and experts providing advice to the resettlement and compensation programs will be requiredto work inCambodia for shorter periods. Finally for the National Control Center (US$0.20 million) which would be fully equipped to carry out the extensive monitoring of the entire net-work operations, load dispatching, load and frequency control, load shedding and optimum loading of various plants, remote back-up protection etc, as well as modern SCADA system operating over optical fiberglass communications cable, specialized consultancy services are required. The Consulting Firmwill also be expected to provide additional non- resident short-term consultants invarious specialized fields as and when required. Subcomponent 04.2 -EdC In-house advisor (US$0.36 million, all IDA). An in-house procurement advisor has assistedEdC during in all activities relatedto project preparation, including procurement, and inperforming the tasks inimplementation of the Project including NCB procurement, as well as other related tasks as determined by EdC. The in-house Advisor has been financed through retroactive financing from the proposed Credit. In-house advisory support to EdC would be financed through ProjectLaunch and Project Implementation. Subcomponent 04.3 -Independent Monitoring Agency and Project Grievance Committee (US$0.04million, all IDA). The Independent Monitoring Agency (IMO) monitors the resettlement and land compensation process to verify and ensure to IDA, EdC and the IRC that the objectives are met. The agency would also be involved in complaints/grievance procedures to ensure that any relevant concerns of the PAFs are beingaddressed. The IMO must have a good working relationshipwith the Government; but at the same time needs to maintain a strong independent position and provide constructive feedback to the Project to ensure the objectives are met. EdCPMUneeds to contact NGOs to initiate the selection of a qualified IMO. The in-house Advisor will prepare TOR for the IMO. He would prepare separateTOR for the Project Grievance Committee, which will respondto complaints and grievances. Subcomponent 04.4 -Improvement of EdC Commercial Practices and management training (US$0.28 million, all IDA). This subcomponent comprises: (i) TA to fully implement ACCPAC software, including installation and training or an alternative software acceptableto IDA; (ii) training to introduce new module of project costs and financial management system for use inthe Project; and (iii)management training (US$O.OS million). Subcomponent 04.5 - Capacity Buildingfor Land Acquisition, Resettlement and Environment (US$0.06million, all IDA). This subcomponent comprises activities to improve resettlement implementation in Cambodia, for bothEdC and the IRC, namely: (i) Workshop; (ii) Training - 48 - on IDA resettlement, land compensation and environmental monitoring and mitigation; and (iii)studytourtoimproveresettlementimplementationinCambodia. a Subcomponent04.6 - Power Investment Planning (US$0.25million, all IDA). Consultancy services will be providedto EdC to develop the planning capacity for preparinga power investment plan which includes various alternatives for generation, transmission and distribution investment, talking into account demand, fuel and other uncertainties. The master plan provide for 10year plans on a rolling yearly basis. -49 - Annex 3: Project Costs Cambodia: Rural Electrificationand Transmission Project. Summary of Project Costs by Component Integrated Project (IDA, GEF and ADB) Foreign I Local I Total US$ million 47.001 11.771 58.77 1. 220kV T L and SS and other ADB-financed components 38.35 9.80 2. 115kVT L and Substations andMV extensions at WPP and Takeo 8.19 1.93 3. Operational Support to EdCPMU 0.45 0.05 NationalControlCenter 3.6C 0.40 RuralElectrificationComponent 7.49 3.71 1. EdC RE GridExtension (for about 60,000 new connections) 7.49 3.21 . Warehouse to store RE Equipment and Materials 0.50 . REF Component 14.92 5.96 .REEoff-grid extension (for 45,000 new connections) 4.11 1.82 . MiniHydro (6 MW) 6.37 2.81 3. Solar Home System (12000 units) 3.19 0.79 . Village Hydro (850kW) 1.25 0.53 .InstitutionalCapacity and Sector ReformComponent 6.92 2.41 1.TA to MIME 0.52 0.28 0.42 0.13 1.34 0.45 4 TAtoREF* 4.64 1.55 Total BaselineCosts 79.93 24.26 Contingencie 12.32 7.66 Subtotal 92.25 31.91 Taxesand Dutie 18.73 TotalProjectCosts 92.25 50.65 Interestand Service Charges (IDA only 0.54 Commitmentfee (IDA only 0.44 IDC (ADB 1.44 4.761 6.2 TotalFinancingRequired 94.711 55.40( 150.1 * To be undertakeninitially by MIME until the REF is established - 50 - IDA andGEF-FinancedComponents Foreign I Local 1 Total Project Cost by Component I ;$million Physical Components 115kV Transmission and M V extension Componen 8.64 1.69 10.33 National Control Cente 3.60 0.40 4.00 EdC REExtensioi 7.49 3.71 11.20 RuralElectrification Fun( 14.92 5.96 20.88 Subtota 34.66 11.76 46.41 Technical Assistance TechnicalAssistance to MIMI 0.56 0.30 0.86 TechnicalAssistance to EA( 0.42 0.13 0.55 TechnicalAssistance to Ed( 1.30 0.43 1.73 TechnicalAssistance to REF: 4.64 1.55 6.19 Subtota 6.92 2.41 9.33 Acquisition, resettlement and environment costsfor 115kV and V extension 0.30 0.30 Total Baseline Cost 41.57 14.47 56.04 Contingencies 6.13 4.13 10.26 Physical Contingenc, 3.98 1.35 5..33 I Price Contingenc, 2.15 2.78 4.92 Subtotal 47.70 18.60 66.30 Taxes and Duties 6.38 6.38 otal Project Cost 47.70 24.98 72.68 Service charge 0.54 0.54 Commitment Fe 0.44 0.44 Total Financing Required 48.68 24.98 73.66 Financing from GEF 4.39 1.36 5.75 Financing from RGC* 6.33 6.33 Financing from Private Sector ** 13.46 8.13 21.59 binancing from IDA 30.84 9.16 40.00 * ** To be undertaken initially by MIME until the REF is established. Government Cash Contribution US$2.60 million, Taxesand Duties: US$3.73 million. ***Including Private Sector Taxes and Duties in the amount of US$2.65million. -51 - Annex 4: Economic and FinancialAnalysis Summary 220kV Transmission System This section presents the economic analysis of the 220kV Vietnam-Cambodia Transmission Link in two parts: PartA for the 220kV transmission system from the Borderto Cambodia andPart B for the 220kV transmission system from Vietnam to the Border. The material i s drawn from the comprehensive Economic Analysis undertaken by ADB which mustbe referredfor details (see ProjectFiles). Least Cost Power Development for Cambodia At prices at which Vietnam has agreedto sell electricity to Cambodia, the 220kV transmission link to Vietnam provides the least cost solution to meeting the power needs of Cambodia inthe near to medium term. This is demonstrated by the analysis that follows which shows very robust results. Alternative scenarios which include isolated development of the Cambodian system through installation of thermal and/or hydro plants and development of national 220kV grid lines, are not only higher incost, but are fraught with uncertainties inthe developments of medium to large scale generation plants inCambodiainthe near to mediumterm. Earliestpossible commissioning of the 220kV linkto Vietnam andimposingnoimport constraints is crucial for improving the efficiency and reliability of Cambodian electricity supplies. Part A. 220kV Transmission System from the Border to Cambodia DemandForecastfor PhnomPenh ADB has undertaken a detailed analysis of sector-wise demand in Phnom Penh and has come up with the forecast shown in Attachment 1. Behind the growing demand is a significant yearly increase in the number of consumers, especially that of industry and commercial sectors. EdC would be constrained in its ability to connect new consumers during 2004-2007, a situation which would prevail till the 220kV T/L is in operation. Overall, the demand forecast i s considered to be realistically conservative. Least Cost Alternative to the Transmission Link A hypotheticalleast cost alternative to the 220kV transmission is installationof medium size IPP-operated fuel oil fired plants inCambodia. The following plant sequencei s assumed: 2007 4x8 MW diesel engine sets. 2008 2x30MW Gas Turbines (GTs) burningheavy fuel oil. 2009 1x20MW Steam Turbine (ST) to form an 80 MW Combined Cycle (CC) plant burningheavy fuel oil. - 52 - A suitable phasing of GTs and CCs is repeatedto meet the demand otherwise supplied by the T L throughout the project life time, to the year 2038 (see Attachment 2 for supply-demand balance). It is assumedthat the diesel engine plant would be located inthe outskirts of PhnomPenh and would not require HV transmission lines. The GT/CC plants are assumedto be located at the WPP substation and would be connectedto the PhnomPenhgrid by a 10kmdouble circuit 115kV T/L. The long runmarginal cost (LRMC) of generation from the single cycle and combined cycle gas turbines are presentedinAttachment 3. The average LRMC to end consumers, including distribution costs, is estimated at around USc 12.3kwh. Project Benefits The following benefits were taken into account for assessing the economic viability of the Project: (i) costs of productionwithout the Project evaluated at LRMC of USc 12.3/kwh including generation and distribution costs. (ii) the value of increased reliability and quality of supply associatedwith lost load that the T L would provide (this value is a small percentage of the value of parameter (i) and does not have a significant impact on the Project's EIRR). The valuation of the reduction inlost loadmade possible by a more secure electricity supply through the T L was made intwo steps. First,the reduction inlost load was estimated by comparingthe reliability of the T L to the expected reliability of the alternative means of supply. Data indicateda forced outage rate for a simple cycle plant of 0.5% and 4.6% for a combined cycle plant'. Weighting these percentagesby their respective shares of total demand gave an overall forced outage rate of 3.7%. Incontrast, the forced outage rate for the T L is very low at 1 hour per 100kilometer per year per circuit. A conservative forced outage would be about 0.04% of expected demand in2007. An unexpected interruption to supply can impose very large costs on consumers, and on society at large. The value of the lost load varies across consumer categories. On a conservative basis, lost load for residential and government consumers was evaluated at the average tariff while the value of the lost load to commercial and industrial customers was based on the cost of supply from a standby generator. This cost could be over US$l/kwh; conservatively a value of US$O.g/kwh was used inthe analysis. Project Costs The cost (constant 2003 values) associatedwith the benefits of the Project include: (i) The capital cost of the 220kV T/L and substations, 115kV reinforcement and load dispatch center; (ii) The border cost of energy imported from Vietnam; Data is providedby the California Electricity Commission. - 53 - (iii) The investment indistribution neededto utilize the power imported; (iv) Operationand maintenance cost of 2% of the capital cost for the 220kV line; and (v) Operationand maintenance cost of $O.O038/kWh on the distribution network; The 220kV T/L loss i s assumedat 2%; the distribution loss i s assumedto stay constant at the level of 13.5%. These costs were converted from market prices to economic prices by removing taxes on imported energy and VAT and duty on importedcapital equipment. Traded goods were brought to domestic prices using the calculated shadow exchangerate factor (SERF).The economic prices are given inTable 1. Table 1: Economic prices for Inputs Market Price excluding Proportion Economic Taxes SERF Traded Price Cost of energy imported from Vietnam $ k W h 0.06000 1.116 1.00 0.067 Distribution investments $ k W h 0.01700 1.116 0.80 0.019 Transmission line investments $ M 59.88000 1.116 0.86 65.854 O&M distribution $/kwh 0.00375 1.116 0.80 0.004 Source: ADB Economic Internal Rate of Return Taking into account the costs, benefits and the distortions inthe Cambodian economy, the Project yields an economic internal rate of return (EIRR)of 32.5% for Cambodia for the base case scenario. Overall, the project yields an economic NPV of about US$200million to the Cambodian Economy, when the net benefits are discounted at the social discount rate of 12%. See Attachment 4 for details of the evaluation. Sensitivity Analysis A switching analysis indicates that economic viability is robust with respect to significant changes inall tested parameters; the Project would still achieve a 12% threshold EIRRif the demand turned out to be 80% lower than base forecast or the cost of purchased energy from Vietnam was 50% higher than the base value, or the constructioncosts were 380% higher than the base value. RiskAnalysis A detailed risk analysis undertaken by ADB shows the following sensitivities to variations inseveral parameters, all of which indicate that the Project has strong economic and financial viability. - 54 - Table 4A: Summary Analysisof 220kV Tranmission: Border to Cambodia NPV* FIRR EIRR Factor ModelingAssumption ($M) YD % Base Case 200 35.4 32.5 Economicrecession Zero growthindemandfor 5 years 180 30.8 28.9 Constructiondelays. Zero importsto 2011 151 24.4 24.1 Large scale customersdo not connect Growthinindustrialdemand50% 135 31.1 27.6 less than predicted Elasticitiesmis-specified Priceelasticitiesdoubled andgrowth 101 20.3 20.5 elasticities halved Constructioncost 15%increasein constructioncost 193 32.6 30.0 Import Price Price increaseof 15%in2012 158 33.6 30.3 *Refers to NPV for the economic analysis at a discount rate of 12%. Source: ADB Part B. 220kV TransmissionSystemfrom Vietnam to Border An economic analysis of costs and benefits for the Vietnamese side of the 220kV T/L was conducted by ADB. The benefits of the project include: (i) exportofenergy; (ii) additional sales to consumers located on the load centers inVietnam; (iii) reduction on lost load made possible by a more reliable supply to consumers located inthe load centers; and (iv) additional demand by consumers located inthe load centers created by a more reliable supply. As information on additional consumers inVietnam was not available, the analysis was limited to include benefits of exports to Cambodia. The cost of achieving these benefits include: (i) The capital cost of the TL, estimated at US$20 million; (ii) Operation and maintenance on the TL, estimated at 2% of the capital cost; (iii) Generation costs associatedwith exports to Cambodia (iv) T L lossesestimated at 0.0061% of the loaddispatched (thisis lower than for the Cambodian side since the line length is shorter). The unitcost of generation for exports to Cambodia were assumedto be derived from a modern combined cycle and simple cycle plant. The cost of this generation was assumedto be approximated by the unit price investors inthe PhuM y 2-2 plant agreedto sell energy to EVN. This price is reported to be US$O.O409/kWh.' This price was taken to represent the cost of base and shoulder supply. The cost of peak supply was then calculated as the base price multiplied by the ratio of the unitcost of supply from simple cycle plant relative to the unit cost of combined cycle plant as given indata providedby the California Energy Commission. This gave a unit price for simple cycle operationof US$O.1254kWh. Weighting these two unit prices together usinga weight of 0.22 for peak generation and 0.78for other generation gave an LRMC cost to supply exports of $0.0595/kWh. EIA Country Analysis Brief, Vietnam, March 2003, p.6. However, Vietnam also has a significant proportion of hydro power which would reduce the LRMC. Hence, the price that PhuM y 2-2 Plant sells at i s likely to be an overestimation of the LRMC. - 55 - Based on these assessmentsand the averagetariff of USc 6 k W h the financial assessment of the project on the Vietnam side gave a financial internalrate of return (FIRR)of 40%. The economic analysis included applying the calculated SERFSfor Vietnam to tradable goods. It was assumedthat 86% of capital investments were tradable and a 99% tradable portion was appliedto the LRMC. Applying a discount factor of 12%the analysis indicates that the Project would generate NPV of US$17.85 million, which i s equivalent to an ERR of 20% over the lifetime of the Project. A summary of economic costs and benefits is provided inTable 2. Table 2: Summary Cost BenefitAnalysis Vietnam - Unit Capital Generation Net Year Exports Revenue GEB cost cost Line Loss O&M TotalCost Benefit GWh US$/kWh US$M US$M US$M US$M US$M US$M US$M 2004 0.00 0.00 4.71 0.00 0.00 0.00 4.71 -4.7 1 2005 0.00 0.05 0.00 10.45 0.00 0.00 0.00 10.45 -10.45 2006 0.00 0.05 0.00 6.73 0.00 0.00 0.00 6.73 -6.73 2007 338.99 0.06 18.65 15.90 0.20 0.40 16.50 2.15 2008 502.52 0.05 27.56 23.57 0.30 0.40 24.27 3.29 2009 624.98 0.05 34.20 29.32 0.37 0.40 30.09 4.11 2010 748.66 0.05 40.90 35.12 0.44 0.40 35.96 4.94 2011 880.57 0.05 48.07 41.30 0.52 0.40 42.23 5.85 2012 1021.35 0.05 55.74 47.91 0.61 0.40 48.91 6.82 2013 1171.71 0.05 62.16 54.96 0.70 0.40 56.06 6.10 2014 1185.96 0.05 62.86 55.63 0.70 0.40 56.73 6.12 2015 1276.61 0.05 68.43 59.88 0.76 0.40 61.04 7.39 2016 1476.43 0.05 79.13 69.25 0.88 0.40 70.53 8.60 2017 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2018 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2019 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2020 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2021 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2022 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2023 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2024 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2025 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2026 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2027 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2028 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2029 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2030 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2031 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2032 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2033 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2034 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2035 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2036 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2037 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 2038 1489.20 0.05 79.82 69.85 0.88 0.40 71.14 8.68 NPV $17.85 EIRR 20.13% Source: ADB - 56 - Financial Analysis of 220kV Line (Reproduced from ADB Files) A financial analysis of the transmission component was undertaken by valuing the energy demand supplied by the T/L at the prevailingaverage tariff of KR 589/kWh inPhnomPenh. As per the assumptions inthe EdC's financial model, the averagereal tariff was assumedto remain constant throughout the forecast period while incorporatingchanges inthe composition of total demand served. The cost of meetingthis demand was taken to be: (i) the capital cost of the T/L including physicalcontingencies, taxes and duties but excluding price contingencies and interest duringconstruction(approximately US$75.4million); (ii) quantity of energy imported from the Vietnam, valued at the averagepurchaseprice of US$0.07/kWh, includingimport duties and VAT; (iii) operation and maintenance (O&M) on the transmission line valued at 2% of the capital cost of the T/L; (iv) O&M distributioncost at US$O.OOS/kWh; and (v) returnon and of distribution capital estimated at US$O.O17/kWh. An estimated 2% transmission losses and 13.5% distribution losses were subtracted from the amount of energy imported to determine net revenue from energy sales. All project benefits and costs were discounted at arate of 6.0%, the calculated weighted average cost of capital (WACC) for EdC. After accounting for the full costs of meeting the additional demand via the T/L, the Project generates a significant net return suggesting the Project is viable from a financial perspective (see attachedTable A10.4). The NPV of the Project is estimated to be about KR 2,506 billion (US$653 million), which is equivalent to an FIRR of approximately 35.3%. REcomponent The economic and financial analysis of the REcomponent of the Project covers: (i) Analysis of grid extension ledby EdC; and (ii) Analysis of sample projects under the REF. Consideringthat different technologies can be supported under the REFdepending on the market demand, analysis is presentedhere for the most significant ones. For that reason, the REEsand Mini-hydro were selected. Additional analysis on renewable energy technologies are available in project files on the GEF project. Presentedbelow i s the methodology and summary analysis of the REcomponent. Methodology The calculations are basedon the following assumptions: - 57 - Results of the economic analysis All main sub-components show acceptableto good ERRSinthe base case scenario. Two of six potential hydro sites produce an EIRRof only around 8%, the other have a return of at least 15%. The ERRSare conservative as only readily quantifiable benefits, such as avoided costs of self-generation, are includedas consumer benefits. Other consumer benefits such as increased productivity, improved social services etc. are, thus, not included. This approach was necessary becauseof the limitedlevel of productive uses of electricity inrural Cambodia at present, combined with a lack of data on the project area, giving insufficient material for their quantification. Base case Sensitivity (+lo% costs, -10% consumers) ~~ ~ ~~ ERR NPV ERR NPV (i) extension Grid 19.8% US$7.9M 15.9% US 5.OM (ii) Isolatedsystems 22.3% US$9.6M 21.2% US$9.2M (iii) hydro Mini 8.1-19.4% US$9.26M (total) 5.6-15.5% US$3.2M (total) (i)Gridextensionsub-component. ThebasecaseEIRRforthegridextensionsub-component i s calculated to be 19.8%. This estimate i s based on atotal connection up-take of 66,000 households, that i s 43% of households within reach of the feedersby the end of year 2008. With 10% lower up-take and 10% cost overruns, the EIRR would be 15.9% and NPV at US$5.0 million. Supply of electricity to the Project i s priced at the estimated LRMC of bulk supply at MV level, whereas the consumer benefit of electricity supply is set at the average cost of electricity supply on off-grid projects of US$0.38/kWh. (ii)REisolatedsystems. ThebasecaseEIRRoftheREisolatedsystemssub-componentis calculated to be 22.3% and NPV, US$9.6 million. Due to the use of the US$O.38/kWh W-T-P estimate, there i s no reference to the avoided cost of battery charging, kerosene etc. because consumption pattern once electricity i s introducedwill be different, showing an increase in standard of living. (iii)Minihydroprojects. ThebasecaseEIRRoftheminihydroprojectsarebasedon displacement of the fuel and variable operating costs of existing diesel generation inthe town systems into which the minihydro schemes will feed. Four of the six projects show good economic return, with EIRRsranging from 15.6% to 19.4% whilst the two projects at Siem Reap exhibit marginal economic return of about 8%. The analysis ignores other benefits, such as COz abated from avoided diesel generation, the diversification of Cambodia's power generation facilities, and the reduction of foreign exchange expenditure on imported fossil fuels and spare parts. Results of financial analysis The FIRRrange from a 4.4% return on equity for gridconnected REto strong returnon equity for isolated systems and mini hydro projects. However, inthe case of cost overruns of 10% and a 10% lower up-take, the returnon equity on EdC grid connections plunge to a negative 2.7% whilst off-grid and mini hydro remain attractive. - 58 - The higher financial returns of isolated systems and mini hydro are a result of up-front subsidies and the higher tariffs which shield the developers from accessing debt in an underdeveloped capital market. Base case Sensitivity (+lo% costs, -10% consumers) Return on NPV Return on NPV equity equity (i) extension Grid 4.4% US$(1.3)M (2.7)% US$(5.7)M (ii)Isolatedsystems 22.2% US$4.2M. 20.4% US$3.9M (iii) hydro Mini 25.9 '36 US$13.0M (total) 20.1% US$7.3M (total) Gridextension. The basecase financial analysis for the gridextension sub-component was calculated on the following financial terms: Equity contribution: 20% Loan conditions: Interest rate 4.2% - Loanperiod - 25 years - Grace period - 5 years Corporate tax: 20% profit tax and 4% turn-over tax Average revenue: US$O.19kWh (excluding VAT) The debt service cover achieved by the EdC grid extension component starts from 0.62~in Year 1of loanrepayment, gradually increasing to 1.08~inYear 4. The adequacy of debt service cover generatedby project revenues should be determined for EdC as a whole and not on the basis of individual rural investments. The fiscal impact, interms of incremental tax revenue from the gridextension component, is estimated to result in an NPV US$2.7 million (including VAT and corporate taxes) inthe base case. Inthe low case scenario the fiscal impact would be US$2.5 million. Average tariff i s calculated on the basis of current tariff regimes inthe targeted provinces, with the exception of Kampong Speu which will be connected to the PhnomPenh system, as a consequence, reduction to PhnomPenh level i s assumed. N o capital subsidy has been assumed for grid extension projects, but support is granted interms of on-lending rate from MEFat 2%. REEisolatedsystems were calculated on the same assumptions as the gridcomponent except that: Loan terms: Interest rate 12% - Loanperiod - 8 years - Grace period - 4 years Average revenue: US$0.35/kWh (excluding VAT) Cost subsidy: US$45/New household connected The base case return on equity on isolated systems is 22.2%. This result i s significantly higher than the grid-based ruralextensions becauseof the higher tariff and anup-front capital subsidy of US$45/Household connected. The different tariffhbsidy structure is requiredin order to shield the private REEs from highinitial debt obligations. The loan structure operates with a four year grace period after which the debt service cover will reach 0 . 6 3 ~and 0 . 5 6 ~in Year 5. Fulldebt service cover, at US$0.35/kWh would be achieved with a loanmaturity at 12 - 59 - years. However, this approach is not feasible presently becauseof the weakly developed financial sector in Cambodia. The Project will assist the rural finance institutions and commercial banks to prepare themselves for the proposed credit lines and will assist indeveloping acceptance of REEprojects for funding on reasonableterms. Every encouragement should be given to helping create an environment conducive to loan terms of around 10-15 years, rather than shorter terms. The NPV of fiscal impact is estimated at US$8.8 million inthe base case and US$8.5 million inthe low case. Minihydroprojectshavebeenassessedfor six sites on similarterms asREEisolated systems, except that: Average revenue: Competitive bulkprice atUS$O.11-0.148 Capital subsidy: US$4OO/kW installed The sites exhibit good financial returns on capital employed averaging about 25.9% with assumedpower purchaseprices of US$O.11and US$O.148/kWh depending on the alternative solution available for the provincial grid. These returns indicate that the projects are viable and would be attractive to private investors. Debt service cover i s reachedno later than Year 5 of operation for any of the investments and could be further improved if clean development mechanisms were introduced. The sites are estimated to have a significant fiscal impact inthe order of US$5.85 million to US$6.83 million over the full life span of 33 years. - 60 - Attachment 1 Demand Forecast by Sector ' Year Domestic Govt Total CommercialIndustrial Other Total Total Total Total Poor Non-Poor Total 2004 28.1 238.0 266.1 72.3 106.2 76.8 41.5 562.9 2005 30.8 263.7 294.5 76.8 130.8 86.4 45.6 634.0 2006 33.5 290.3 323.8 81.3 156.7 96.7 52.3 710.8 2007 36.3 317.9 354.1 86.0 184.0 107.7 67.6 799.4 2008 39.1 346.4 385.5 90.8 212.8 119.5 80.8 889.4 2009 41.9 378.4 420.3 96.1 247.2 137.0 96.8 997.3 2010 44.9 411.7 456.6 101.5 283.7 156.3 108.2 1106.3 2011 47.9 446.4 494.2 107.2 322.5 177.5 121.1 1222.5 2012 50.9 482.6 533.4 113.1 363.8 200.8 135.5 1346.6 2013 53.9 520.3 574.2 119.2 407.6 226.5 151.6 1479.1 2014 56.9 559.7 616.6 125.6 458.4 260.4 169.6 1630.6 2015 59.8 600.9 660.7 132.2 512.8 298.3 189.8 1793.9 2016 62.9 643.1 706.6 139.1 571.0 340.8 212.5 1969.9 2017 65.9 688.4 754.3 146.3 633.3 388.4 223.1 2145.4 2018 69.0 734.9 803.9 153.7 700.1 441.7 234.2 2333.6 2019 72.5 783.0 855.5 161.5 758.6 481.5 246.0 2503.0 2020 76.1 833.0 909.1 169.6 820.5 524.5 258.3 2681.9 2021 79.8 885.1 964.9 177.9 885.9 570.9 271.2 2870.8 2022 83.6 939.3 1022.9 186.7 955.0 621.1 284.7 3070.4 2023 87.5 995.8 1083.3 195.7 1028.0 675.2 299.0 3281.2 2024 91.2 1054.9 1146.1 205.2 1113.4 748.3 313.9 3526.9 2025 94.9 1116.4 1211.3 215.0 1204.2 828.7 329.6 3788.8 2026 98.7 1180.5 1279.2 225.2 1300.6 917.2 346.1 4068.3 2027 102.6 1247.2 1349.8 235.8 1403.1 1014.5 363.4 4366.6 2028 106.6 1316.7 1423.2 246.8 1512.0 1121.5 381.6 4685.2 2029 111.3 1388.3 1499.6 258.3 1605.0 1192.2 400.6 4955.7 2030 116.1 1462.9 1579.0 270.2 1703.0 1267.0 420.7 5240.0 2031 121.1 1540.5 1661.6 282.6 1806.4 1346.4 441.7 5538.7 2032 126.2 1621.3 1747.5 295.6 1915.4 1430.5 463.8 5852.7 2033 131.5 1705.4 1836.9 309.0 2030.3 1519.7 487.0 6182.8 2034 136.9 1792.9 1929.8 322.9 2151.6 1614.3 511.3 6529.8 2035 142.4 1884.0 2026.4 337.5 2279.5 1714.5 536.9 6894.7 2036 148.1 1978.7 2126.9 352.6 2414.5 1820.7 563.7 7278.3 2037 154.0 2077.4 2231.4 368.3 2556.9 1933.3 591.9 7681.7 2038 160.1 2180.0 2340.1 384.6 2707.2 2052.6 621.5 8106.0 Source: ADB -61 - Attachment 2 Imports(GWh) Demandmet EdC Requirements (excluding Share of Loadmet Year Generation Demand (including Imports DistributionLosses) Transmission fromImports Losses) 2007 5063 745.3 845.8 339.0 332.2 0.40 2008 506.8 889.4 1009.3 502.5 492.5 0.50 2009 506.8 997.3 1131.7 625.0 612.5 0.55 2010 506.8 1106.3 1255.4 748.7 733.7 0.60 2011 506.8 1222.5 1387.3 880.6 863.0 0.63 2012 506.8 1346.6 1528.1 1021.4 1000.9 0.67 2013 506.8 1479.1 1678.5 1171.7 1148.3 0.70 2014 664.4 1630.6 1850.4 1186.0 1162.2 0.64 2015 759.1 1793.9 2035.7 1276.6 1251.1 0.63 2016 759.1 1969.9 2235.5 1476.4 1446.9 0.66 2017 990.4 2145.4 2434.5 1489.2 1459.4 0.61 2018 1208.0 2333.6 2648.2 1489.2 1459.4 0.56 2019 1403.8 2503.0 2840.4 1489.2 1459.4 0.52 2020 1610.5 2681.9 3043.4 1489.2 1459.4 0.49 2021 1828.9 2870.8 3257.8 1489.2 1459.4 0.46 2022 2059.5 3070.4 3484.2 1489.2 1459.4 0.43 2023 2303.2 3281.2 3723.5 1489.2 1459.4 0.40 2024 2587.1 3526.9 4002.3 1489.2 1459.4 0.37 2025 2889.9 3788.8 4299.5 1489.2 1459.4 0.35 2026 3212.9 4068.3 4616.7 1489.2 1459.4 0.32 2027 3557.7 4366.6 4955.2 1489.2 1459.4 0.30 2028 3925.9 4685.2 5316.7 1489.2 1459.4 0.28 2029 4238.6 4955.7 5623.7 1489.2 1459.4 0.26 2030 4567.2 5240.0 5946.3 1489.2 1459.4 0.25 2031 4912.5 5538.7 6285.3 1489.2 1459.4 0.24 2032 5275.4 5852.7 6641.7 1489.2 1459.4 0.22 2033 5656.9 6182.8 7016.3 1489.2 1459.4 0.21 2034 6058.0 6529.8 7410.1 1489.2 1459.4 0.20 2035 6479.7 6894.7 7824.1 1489.2 1459.4 0.19 2036 6923.1 7278.3 8259.4 1489.2 1459.4 0.18 2037 7389.4 7681.7 8717.2 1489.2 1459.4 0.17 2038 7879.8 8106.0 9198.7 1489.2 1262.7 0.16 Average 0.41 Source: ADB - 62 - Attachment 3 Long-runMarginal Cost for Single Cycle Plant (30MW) Variable Unit Value Taxes SERF Proportion Traded EconomicPrice Capitalcost US$m 14.522 4.532 1.116 0.890 11.021 Capacity MW 30.000 30.000 Life Years 35.000 35.000 Heatratebtdkw Btdkwh 10670.000 10670.000 Heatingvalue btdl Btdltr 32174.000 32174.000 Fuelprice $us/liter US$/ltr PP 0.238 0.238 WACC % 0.110 0.120 Annual capitalcost US$ m 1.640 1.348 Generation Gwh 105.120 105.120 Fuelcost US$ m 8.313 1.250 1.116 1.000 7.883 Maintenance cost US$ m 0.024 1.116 0.000 0.024 Total cost Unit 9.977 9.255 Generation Gwh 105.ooo 105.000 LRMC US$/kWh 0.095 0.088 Source: ADB Long-runMarginal Cost for Combined Cycle Plant (80 MW) Variable Unit Value Taxes SERF Proportion Traded Economic price Capitalcost US$ m 71.52 22.32 1.12 0.89 54.28 Site costs US$ m 26.00 4.32 1.12 0.89 23.92 Capacity MW 80.00 80.00 Life Years 30.00 30.00 Heatrate btdkw btdkwh 6,890.00 6,890.00 Heatingvalue btdl btdltr 32,174.00 32,174.00 FuelpriceUS$/litre US$/ltr PP 0.24 0.24 WACC % 0.11 0.12 Annual capitalcost US$ m 11.23 9.72 Fuelcost US$ m 20.40 3.07 1.12 1.oo 19.34 Maintenance cost US$ m 0.64 1.12 0.00 0.64 Total cost Unit 32.27 29.70 Generation Gwh 399.00 399.00 LRMC US$/kWh 0.08 0.07 Source: ADB - 63 - Long-runMarginalCost for CombinedCyclePlant (160 MW) Variable Unit Value Taxes SERF Proportion Traded Economicprice Capital cost US$ m 88.16 39.99 1.12 0.89 53.14 Site costs US$ m 26.00 4.32 1.12 0.89 23.92 Capacity MW 160.00 160.00 Life Years 30.00 30.00 Heat rate btu/kw btdkwh 6630.00 6630.00 Heating value btu/l btdltr 32174.00 32174.00 Fuel price US$/liter US$/ltr PP 0.24 0.24 WACC % 0.11 0.12 Annual capital cost US$ m 13.15 8.88 Fuel cost US$ m 39.26 5.90 1.12 1.oo 37.22 Maintenance cost US$ m 1.28 1.12 0.00 1.28 Total cost Unit 53.69 47.38 Generation Gwh 799.00 799.00 LRMC US$/kWh 0.07 0.06 Source: ADB - 64 - Annex 5: Financial Summary Financial and Institutional Issues A. Past Financial Performance and Present Financial Position 1. This annex presents key financial and institutional issues inCambodia's power sector. A summary of the current and projected financial performance of EdC's consolidated accounts i s presented inTable 1. Detailed historical and projected financial performance i s available inthe project files. 2. Consolidated accounts of EdC comprisingPhnomPenh and branchoperations were prepared for FYO1. As PhnomPenhrevenues account for about 90% of EdC's consolidated operations, the analysis of past financial results was restrictedto PhnomPenhs. 3. EdC recorded operating incomes inthe last two years, FY01-02 due to: (a) sales growths of 19% and 15%; (b) reduction inthe level of transmission and distribution losses from 17.1% in 2001 to 13.5% in2002; (c) improved collectionof past due receivables for non-Government consumers; (d) reduced operating costs through reduction of staff and retirement of expensive debts to IPPs; (e) a fairly stable exchange rate; and (f)a reduction inyearly average international crude oil prices from $27 inFYOOto $23 and $25/bbl inFYOl and 02. Still, EdC's liquidity and financial operations remain unsatisfactory and would continue to remain so as long as: (a) electricity supplies are based almost entirely on highcost importedfuel or purchasedpower from IPPs, bothpayable inU S dollars; (b) outstanding Government arrears continue to be large; and (c) EdC i s unable to recover costs through tariff increases. Consequently, EdC will not be able to generate sufficient revenues to break even leave alone self-finance any significant investment for rehabilitation or expansion. With proper actions taken, this situation could change. 4. Since its creation inFY95, EdC's liabilities have far exceeded its equity due to continuing operating losses. With cumulative losses of KR 87 billion inFY02, EdC's financial condition was nurtured due to Government conversion to equity of an ADB loan of US$25 million inFY98, contribution of US$15 million (for its share of the Japanese funded-Phnom Penh DistributionProject) inFY99, and subsequentyearly contributions aggregating to US$20 million inFY01-03. The debt equity ratios have improvedfrom 58:42 inFY99to 42:58,40:60, and 47:53 inFY00-02. B. Key Financial Issues and Remedial Measures 5. Insufficient Electricity Tariffs. The poor financial performance of EdC is ultimately due to inadequacy of tariffs to recover operational costs. Tariffs have remain unchanged since February 2000. The following are some of the remedial measuresundertaken. e The Government implementeda Financial Recovery Action Plan (FRAP) inOctober 2000. The Plan includedarestructuring of tariffs3,with effect from August 1, 2000, and The new rates called for domestic tariffs to be graduated into 3 blocks as follows: (a) 50 kWh/month (Rs 350/kWh); (b) 51-100kWh/month (Rs 550/kWh); and (c) over 101kWh/month (Rs 650kWh). Hotel tariffs were reduced and aligned with commercial tariffs, and industrial tariffs were also slightly reduced to attract more industrial consumers. Inaddition, hotels, commercial, and industrial categories were also separated into "Small", "Medium" and "Big" with tariff levels at KR 650, 600 and 5OO/kWh, for hotels and commercials, and KR 600, 550 and 5OOkWh for industrials, respectively. A new category for - 65 - adjustments by about 17% were allowed mainly for domestic consumers usingmore than 5OkWhImonth. EdC's proposalto index tariff levels to fuel prices and foreign exchange rate fluctuation was not approved. e A FinancialAction Planthat would address government arrears, VAT, tariffs andEdCs operating costs was discussedwith the Government at a meeting on June 24,2003 (chaired by the Minister of MEFand attendedby heads of EdC, Customs, Tax Department, ADB and IDA). This Plan and implementationmatrix, which contained detailed actions on: (a) the reduction of overdue Government and Municipalities' arrears; (b) arrangementsfor settlement of future receivables; (c) reimbursement of VAT to EdC; and (d) measuresto reduce EdC's operating cost, was approved by the Government in August 2003. It has sincebeen agreed with IDA that EdC would achieve annually: (a) minimumbreak-even covenant (revenues to cover no lessthan the sumof operating expenses and debt service requirements); (b) debt service coverage ratio of 1 . 2 initially ~ untilFY06 and 1 . 3by FY07 and thereafter; and (c) debt equity ratio of 1.5~. ~ 6. HighElectricity ProductionCosts. EdC`s generation is almost exclusively basedon imported fuel or IPPpurchasedpower, bothpayable inUS$, and its operational costs (over 75% US$-based) are thus extremely sensitive to fuel costs and exchangerate fluctuations. The exchange rate has declined from KR 2,6OO/US$ inSeptember 1995 to KR 4,SOO/US$ inFY02, currently stabilizing at KR 3,80O/US$. This has severely impacted EdC's financial performance over the years. Key IPPissues are: e InFY96, purchasedpower was almost zero, butas anemergency responseto a serious energy crisis inFY97, it accounted for 43%, 54%, 48%, 56% and 61% of cost of sales, in FY97-02, respectively. While IPPoperations are generally supposedto be more economic interms of fuel, technical and managerial aspects, IPPexperience inCambodia has not been good due to the absenceof transparent and competitive selection procedures. Groups of interested investors signed memoranda of understanding with the Government and negotiated the PPAs directly with EdC. EdC has little experience innegotiating these contracts and allowed itself to be advised by developers and lawyers acting on behalf of, or paid by, the developers. e IPPs provide 45% of the capacity of EdC's system and are likely to continue playing a significant role inproviding generation inthe towns. Fiscal incentives including tax and duty concessions (reduced income tax rate from 20% to 9% and exemption from import duty on generating equipment) under the existing Law on Investments are likely to be removedunder the new law soon to be enacted. This is being objected to by foreign- invested IPPs arguing that it would make Cambodia less competitive with other regional investment laws, could harmprivate power investment availability, and raise private generation costs. 7. Outstanding;Government Arrears. The collectionperformance of government arrears i s poor. While non-government arrears account for less than one month of sales, owing to EdC's strict disconnection policy, about KR 51billion of government arrears were more than 90 days overdue as of the end of May 2003 . Key actions include: mediumvoltage, with tariffs at KR 480/kWh, was also introduced. Moreover, a lifelinerate of KR 350kWh was introducedfor residentialusers to eliminatethe undesirable cross subsidies to the domestic sector by industrialand commercial customers. - 66 - 0 Under the 2000 Financial Action Plan, the Government undertookmeasuresfor the timely settlement of electricity bills via an offset of EdC's taxes. The Government Declaration No. 4 stipulated that: (a) eachministry shall create a provision inits annual budgets for electricity payments; (b) if consumption exceeds the electricity budget, the ministry shall seek MEFapproval and charge the extra consumptionagainst its other budget expense; (c) MEFshall make direct payments to EdC of eachministries'bill upon presentation and verification of monthly bills; (d) ministries shall enter into a Purchase and Sale Agreement of Electricity with EdC for the amount provided inthe ministries' budget allocation; (e) ministries shall assigntheir officers at MEFto monitor implementation of this Agreement; and more importantly; (0EdC shall have the right to temporarily disconnect the electricity supply of errant ministries not complying with this Agreement. These instructions have not been complied with and accounts receivables have mounted. 0 On January 5,2003, the Prime Ministerapproved Declaration No. 13 proposed by MEF regardingthe annual budget for the payment of electricity bills of the Government ministries. Specifically, it: (a) calls for all ministries to strictly implement the measures stipulated inDeclaration No. 4; (b) sets out the budget for 2003 as estimated by EdC; and (c) instructs MEFto allocate from the budget, funds for electricity consumption of the ministries as estimated by EdC. It has been agreed with IDA that MEFwould implement an Accounts Receivable Management Action Plan, satisfactory to IDA, to assist EdC incollecting and reducing outstanding government arrears and achieve the monitoringtargets inthe Plan (government arrears not to exceed 3 months of EdC's average sales). 8. HighDistributionLosses. Prior to FY96, PhnomPenhs distribution network was inpoor shape and minimally maintained. However, continuing rehabilitationand refurbishment, since FY96 is beginning to pay off and althoughthe network continues to suffer from interruptions, there have been remarkable improvements inlosses from 25% inFY99 to about 13.5% today, due to EdC's actions in: (a) identifying and improving loss reduction inthe weakest areas of the system; (b) requiringindustrial and big commercial customers to install capacitors to maintainthe minimumpower factor; (c) settingup vigilance squads to conduct surprise checks at consumers' premises to detect energy theft; (d) introducing energy audit systems; and (e) implementing incentive schemes. 9. Rural and ProvincialElectrification Institutionaland Financial Issues. 0 MIMEis responsible for policy andplanning of the electricity sector andalso for the management of supplies inprovincial capital towns where EdC does not operate. The total investment requirements over the periodFY03-10 are about US$195 million, half of which are for the electrification of provincial towns and the other half for expansion in the remaining 8 provincial capital towns and system upgradingfor adjacent villages. EdC i s progressively taking responsibility for power supply in the provincial centers. It assumedresponsibility for the power systems inSihanoukville, SiemReap and Kompong ChaminFY99 and has assumedcontrol of existing systems inTakeo and Battambang in FYOO. Elsewhere, a mix of public and private providers operates the other 16 isolated systems inprovincial centers. Inthe smaller towns and villages, a mix of private generators, informalnetworks and automotive batteries is supplying electricity. Because the Government had only marginally invested inthe development of provincial and rural - 67 - electrification, there i s a vibrant and highly profitable privatepower market inrural towns and provinces. 0 So far, no REprogramhas been undertaken either by MIMEor EdC. The Government, however, i s committed to supplyingpower to the rural areas as an integral part of its poverty alleviation strategy and inDecember 2000 formulated an RE Strategy with the objective of supplying power to 70% of the rural households and all communities by FY30. To achieve the Government target, an investment of more than US$1billion would be required, translating to an electrification rate of about 14,000 new services per year, and over the next 10years, additional manpower and training. The recent Government action of allowing the commercializationof EdC and establishing a regulatory framework for the power sector, through the implementation of the Electricity Law, would encourage private sector involvement and respond to the REchallenge. It i s recognized that further expansion of EdC's role by way of rural supply of electricity shouldnot be pursued, as it would offer no clear financial advantage to EdC. Due to its own financial difficulties, EdC i s also reluctant and unable to commit to the social cost of REwithout firmcommitments of significant andreasonablefinancing. The paceof EdC's rural involvement depends substantially on the availability of external sources of funding. EdC'sfinancial prospects inview of the current levels of tariff and its volatile operating expensesi s not very promising, hence, the issue of how EdCs contribution to rural grid extension would be financed, capital investments paidfor and debt repayments serviced, needs to be addressed. 0 EdC would be the executing agency for the US$15 million grid extension component of the proposedProject and would provide near term investment boost for about 45,000 new rural consumers. A critical issue is the likelihood that affordable electricity could be provided by the EdC grid or diesel generation at a cost of less than USc 16kwh. Widespread RE would only be feasible if cheaper sources of electricity could be found through alternative sources, i.e. imports fromneighboring countries, solar, micro hydro systems, etc. Another concern would be the separation of finances of the provincial and rural systems from EdC's finances inPhnomPenhto avoid cross subsidization. However, creation of a separate entity may be difficult since EdChas already assumed the operation of 5 provincial towns. Moreover, an extreme shortageof experienced managers and the fact that the necessary technical skills, spare parts, workshops, equipmentfacilities are already existing inEdC, would also pose a problemif there is a separate entity. Resolution of these pricing and institutional issues would have to be carefully assessed. 0 Eventually, EdC will gradually take over the responsibility for more towns and extend its service outwards to the highest density urban centers. This pattern of small town development will provide urban and peri-urban areas with lower cost electricity than i s possible inthe rural areas. The nature of the institutional arrangementsvia lease- purchase,joint venture, or other arrangements with the private sector and exactly what role, if any, EdC would or should play need to be clarified. The REMaster plan, among other things, should guide decentralized investments inRE, delineate areas for grid and off-gridmini-grid electricity service provision, and develop targeted projects to be implementedby the private sector or public/private sector partnerships. 0 The Electricity Law createduncertainty for REEsfaced with potential competition from EdC. When EAC issues licenses, there is a danger that without exclusive geographic rights,localbosses could effectively over-ride EACby only facilitating the operation of - 68 - the REEinan area despitethe issuanceof multiplelicenses. A more important point is the potential for crowding out private initiatives of the REEsby EdC. If EdC extends the gridthey should not be allowed to pushout the REEsunless they have previously announced firmly their plans, and these were knownto the REEsand taken into account by EAC inthe license. Ultimately, the two types of service provided by EdC and the REEsshould be viewed as complementary. REEs can initiate service provision inareas that may remain outside the reach of the EdC grid for a considerable time with some on the fringes of the grid servedareas. Over time, the grids will extend and encompass supply to areas now servedby the REEs whilst REEs should then move on to the new fringe areas. EAC statedthat clear boundaries should exist betweenEdC's and REEs' service areas, and to achieve this, EdC was awarded a consolidated license for generation, transmission and distribution inPhnomPenh and provincial centers. Therefore, the extent of EdC's rural grid expansion would initially be to connect rural households but with a view that REEscould and would enter into lease-buy back arrangements for these operations with EdC or to purchase bulkpower from EdC. EAC has clarified that only REEshaveand will be givenretail license inthe rural areas. 10. Commercialization and Institutional Strengtheningof EdC. e EdC i s a wholly state-owned limited liability company with the character of a Society National, being vested with ajuridical personality in accordance with the law. Operationally, EdC uses private contractors to plan, construct, operate and maintain power systems outside PhnomPenh, and provides technical support to the provincial electricity operations as required. Staffing levels at EdC are high(1,278 staff inPhnom Penh and about 200 inthe branches), and government salaries are extremely low, averaging about US$60 a month. EdC has a shortage of experienced management and technical staff especially in system planning, construction supervision, and accounting and finance. The dearth of qualified people i s understandable as Cambodia i sjust emerging from civil war and political turmoil with most of its infrastructure and educated elite decimated. Hence, institutional strengthening i s of paramount concern. e The issue was identified inthe earlier credit operation such that credit disbursements were conditioned on several actions that addressedEdC'scommercialization and corporatization: (a) EdC be established as an autonomous entity possessinga separate juridical personality with attributes, powers and responsibilities; (b) the Electricity Law be enacted; and (c) an autonomous regulatory body for the power sector be established. Substantial progress has been achieved. EdC now has a corporate status and legally, it operates as an autonomous body; the Electricity Law was enacted and the EAC was created inMarch 2001; external auditors have been inplace since 1997; and corporate plans and objectives, monitoredthrough performance contracts developed since 1997. However, much remains to be done to improve EdC's productivity by improving its financial and budgeting systems, the efficiency of staff, gradually restructuring staff levels to match work requirements and upgradingits financial systems and accounting practices. e EdC formally operates as a separateentity from MIMEand has been granted autonomy in its operations since 1996, but the Government's inability to separate its role as policy maker, owner and customer of EdC, manifests itself inpolitical interference inEdC's operations and blurs the lines between EdC'sfinances and the Government budget. A case inpoint i s government arrears, where EdC faces difficulties not only from political pressure to forestall service cutoff, but also from the convoluted current collection - 6 9 - practice of offsetting arrears against government remittances and taxes. Another test would be tariff decision making, and whether EAC, free from political pressure, could implement difficult and politically charged tariff increases and automatic tariff adjustment clauses. Complete autonomy, infact and inpractice, i s only possible if EdC's Board of Directors i s truly independent. More importantly, further commercializationof EdC i s possible with the implementationof the Electricity Law to explicitly separate government ownership and policy-making roles and the effectiveness of EAC to, among others: (a) rationalize tariffs that make EdC viable, inthe short-term, and profitable in the medium-term; (b) mandate performance targets inexchange for greater autonomy; (c) impose regulatory standards for the supervision of the different operational functions (i.e. generation, transmission, distribution and bulk supply); and (d) requireEdC to conform to the requirements of the new regulatory standards. 11. Power Develoument Plan and Financing. 0 Neither EdCnor the Govemment has access to local funding and neither i s ina position to provide substantial amounts of counterpart funds for significant power sector expansion. Understandably, the Government's first preference would be to seek grants from bilateral sources. However, grant funding would not be adequate to meet the sector's financing targets. For instance, the ADB funded training center, at a cost of US$3.5 million, faced major start-up problems due to the lack of counterpart funding by EdC. 0 Cambodia has experienced mobilizing private funds. CUPL, Malaysia, a 35 MW IPPhas been operating a power plant since 1996. Privatefunds have also been raised through a BOT for the rehabilitation of the Kiriromhydro plant and associatedtransmission. In addition, there have been unsuccessful efforts infunding IPPs inPhnomPenh and other provincial centers, the most recent being the 60 MW Beacon Hillproject, initially supported by IFC, but was eventually canceled. Another more recent project was the agreement signed by the Government with Jupiter Power CambodiaLtd for a temporary 22.5 MW power plant facility inPhnomPenh and its successor, the 30 MW Khmer Electrical Power Development Ltd (renegotiated from the failed Eclipse Energy which couldnot come to financial closure). The cost of the CUPL and Jupiter transactions, unfortunately, has been unacceptably highdue mainly to the lack of any competitive selection process and the high-riskpremiumassociatedwith private funding for power development. Recently, concerns have been raised on the Government's continued use of directly negotiated contracts despite the statedcommitment inthe Electricity Law to provide electricity services in a transparent and competitive manner. These non- competitive deals would have a serious negative impact on the Cambodian economy, and would undermine the benefits of the proposed Project. 0 The main source of financing power development inCambodia for the moment is foreign funds, principally multi-lateral sources. These also provide the most attractive source of financing as they are offered on highly concessional terms to the Government, although onlent at commercial or near-commercial terms to EdC. The unimpededflow of multi- lateralfinancing i s critical not only for the obvious reasons that it i s "the only game in town" but also becauseof its impact on improvingEdC's finances and sustainability. The support of these lending is vital to pressing the Govemment to permit adequate tariff increases, pay its electricity bill on time, improve operational efficiency, and ensure low- cost power particularly for those living inpoverty. - 70 - C. Future Financial Performance. 12. Financial projections for FY03-16 are summarized inTable 2. They are based on the following main assumptions. Detailed assumptionsfor fuel and other operating expenses, purchased power, foreign exchangelosses, revaluation of assets, depreciation rates, taxes, debt servicing and borrowings, grant and equity contributions, and other inputparametersare available intheproject files. Sales and Losses. EdC's power sales are expected to increase on averageby 14% from 477 Gwh inFY02to 1,400 Gwh inFY10 (Table 3), which are realistic considering that for the last four years, sales increased at an average rate of 12%, electricity consumption and penetration are low, there i s substantial pent-up demand and there are the IDA and ADB projects inthe pipeline. The level of lossesis expected to be maintained at 13.5%. Fuel Costs.. The costs of light and heavy diesel oil are assumedto increaseto US$422/ton (from US$382/ton inFY02) and to US$253/ton (from US$219/ton inFY02), respectively. These costs are based on the average internationalcrude oil price increasing from US$25/bbl inFY02to US$30/bbl inFY03 and exclude the 10% VAT. In accordance with government instructions, VAT i s not addedto the customer's electricity bills. The fuel costs for subsequentyears are projectedto move inline with international crude oil prices, which are assumedto return to normal levels of US$25/bbl on average from FY04 onwards. IPPPurchases. EdC is assumedto continue purchasing power from IPPs (35 MW-CUPL untilFY14; 15MW-Jupiter untilFY06; and 30 MW-KEPfromFY07 onwards), andfrom the existing 12MW Kiriromhydro plant and the possible Kamchai hydro plant (currently under study and expected by FY14). Imports from Vietnam, through the proposed Project, of up to a maximumof 200 MW i s expected fromFY07 and thereafter. Implementation of FY03 Financial Action Plan. The financial projections assume that the FY03 Financial Action Plan would be implementedfully. The status of the Plan i s as follows: Overdue GovemmentArrears: 8 Overdue electricity bills of Government departments, Municipalities and Public Lighting amountingto KR 48.6 million as of December 31,2002 were settled as follows (a) KR 33.4 billion was offset against amounts owing to the Government by EdC for custom duties and taxes on September 19, 2003; and (b) KR 13.7 billion was paid by the Municipalities via cash transfer on September 19,2003 and KR 1.5 billion by December 31, 2003. 0 Current arrears (FY03) would be settled under similar arrangements as follows: (a) government departments bills to be offset against EdC's outstanding duties and taxes; and (b)for Municipalities' bills, first priorityfor allocationof the special tax collectedby the Municipalities will be for electricity bills. 0 Futurearrears (FY04), MEFwill set up an adequateline itembudgets for eachministry sufficient to meet their expected electricity consumption and implement a Plan to improve mechanisms for collecting government arrears. -71 - Input VATfor Electricity4: 0 VAT on power purchases,fuel and spareparts would be considered as a subsidy to the consumers. EdC, however, will be reimbursed by the Government for its VAT payments, untilsuchtime anew subsidypolicy onVAT is framed. 0 The amount of KR 40.3 billion for VAT amounts due as of December 31,2003 was offset against EdC excise taxes and penalties due to the customs department on July 31, 2003. TarifSStructureand Levels: EAC has agreed inprinciple to review the following tariff proposals of EdC: 0 EdC's retail tariff would allow it to comply with the proposed ADB and IDA financial covenants: (a) BreakEvenbeginning FY04; and (b) MinimumDebt Service Coverage Ratio of 1 . 2 in2004 and 1 . 3 in ~ ~ 2007 and thereafter. 0 An automatic fuel cost and foreign exchangerate adjustment mechanisms would be introducedinthe retail tariffs. 0 The minimumconsumptioncharge for all customers except those with 5 amperes or lower service would be raised. 0 Government would approve EdC's proposal to rationalizeLifeline Tariffs' by applying the tariff only to customers with monthly consumption inexcess of 50kwh as part of a broadrestructuringof tariffs when lower cost power from the new IPP(see below) i s available. Reduction in EdC's OperatingExpense: 13. The following measuresto reduce operating expenses would be implemented: 0 Procure fuel on the basis of competitive bids basedon new Government guidelines beginningfirst quarter of FY04. 0 Convert EdC'sC5 power plant to runon cheaper heavy fuel oil by FY04. 0 Negotiate with a new IPP(218 GWhper year) with purchase price considerably below the cost of EdC'sexistingIPPswithin the next 18 months to: (a) allow EdC to shut down EdC could not collect this VAT from customer bills nor could the tax laws be changed so that EdC could become VAT-exempt or be under the 0% VAT rate, as earlier proposed to the Government. EdC's proposal would allow for the first block of domestic tariff only to consumers who receive the first 50kwh at KR 350kwh; consumption at 51-99kwh would require consumers to immediately pay the next block at KR 550lkwh and those with consumption at lOOkwh and above would pay the next block at KR 50kwh. This proposal should take effect inFY06 inorder for EdC to achieve the proposed financial covenants. - 72 - higher cost plant; and (b) seek new commercial customers currently operating their own plants. Renegotiate with existing IPPs to reduce its off-take of power once new IPPi s operating. Implement a 5-year StaffingPlan by assessing EdC's staff needs at Head Office and provincial branches over the periodthat would allow EdC to realize some cost savings in Salaries and Wages beginning inFY04. Review O&M costs starting from FY04 and achieve cost savings by shuttingdown older generating unitsinFY05 when the new IPPis operational. Further reduce system losses and improve metering by setting targets for each branch and taking action to maintainpower load factors at each substations from FY04. Update EdC policy for bad debts provisioning and write-offs inFY04. Unless the aforementioned measures are implemented, EdC's financial outlook will remain fragile. No tariff adjustment would be necessaryif these measures are implementedin a timely fashion, and EdC would comply with the proposed financial covenants. D. Sensitivity Tests 15. A stress test on the various probabilities of tariffs and fuel prices was undertaken under several scenarios: (a) Case A: EdC's base case, internationalprice of crude oil is unchanged; (b) Case B: these prices drop to only US$28/bbl (instead of the projectedUS$25/bbl inthe base case); and (c) Case C: these prices remain at US$30/bbl. The results of the sensitivity analysis are given in Table 4. - 73 - Table 1:EdCPhnom PenhFinancialOperating Results and Projection, FY97-02 (billion Riels) Fiscal Year ending December 31 1997 1998 1999 2000 2001I 2002 Energy Sales (GWh) 218 266 274 305 364 418 Sales Growth 28% 22% 3% 11% 19% 15% Average Tariffs (RskWh) 354 371 493 570 588 589 Average Tariffs (US centkWh) 9.3 9.8 13.0 15.0 15.1 15.0 Average Tariff Increase inRiel term 0% 5% 33% 16% 3% 0% Income Statement Items: Revenues 79 104 146 177 223 253 Operating Expenses 90 150 146 192 216 252 Other IncomelExpense 0 0 3 17 2 1 Net IncomeLoss -14 -49 -4 -16 -5 -11 Cash Flow Item: Cash Flow from Operating Activities -5 1 4 0 -9 -2 CashFlow from Financing Activities 4 189 26 19 14 100 CashFlow from Investing Activities 1 -186 -28 -15 -2 -95 Increaseldecreasein Cash -1 4 2 4 3 3 Balance Sheet Items: Fixed Asssets 197 365 378 358 341 408 Current Asseets 32 43 76 107 143 183 Gross Accounts Receivables 34 46 69 54 76 101 Provisions for Bad Debts 11 18 19 7 7 11 Total Assets 229 408 454 465 485 591 Equity 137 190 186 231 234 328 Long-Term Liabilities 62 147 172 120 130 131 Current Liabilities 31 72 96 114 120 132 Financial Ratios: OpearatingRatio 114% 145% 100% 108% 97% 100% Return on Net Fixed Assets in Operation 0.0% -21.5% 0.0% -4.7% 2.1% 0.3% L T Debt to Equity Ratio (times) 0.0 0.5 0.8 0.9 0.5 0.6 Debt Service Coverage Ratio (times) 1.o 2.3 0.9 Current Ratio (times) 1.1 0.6 0.8 0.9 1.2 1.4 Receivables CollectionPeriod (months) 0.0 5.4 5.8 3.7 4.1 4.8 - 74 - Table 2: EdC Consolidated Financial Operating Resultsand Projection, FYO1-10 Fiscal Year endingDecember 31 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Audited Unaudited Projected IncomeStatement Items: Revenues 266 304 315 380 435 513 603 723 828 935 OperatingExpenses 258 299 344 377 428 490 570 675 770 868 Other IncomeiExpense 2 1 1 1 1 1 1 0 0 0 Net IncomelLoss -5 -6 -45 -13 -12 -5 -4 3 10 19 Cash Flow Items: CashFlow from Operating Activities 7 17 55 18 40 65 67 93 103 115 CashFlow from FinancingActivities 1 68 15 102 80 199 89 13 -51 -56 CashFlow from InvestingActivities -3 -98 -54 -129 -107 -245 -132 -123 -70 -74 Increase/decreasein Cash 4 5 -13 16 -8 12 18 24 -18 -18 Balance Sheet Items: Fixed Asssets 418 478 493 583 647 838 908 964 963 962 CurrentAsseets 159 192 128 137 164 205 254 267 276 289 Cash& Other Current Assets 19 6 22 14 26 44 68 50 31 17 Net Accounts Receivables 75 98 64 76 84 96 111 132 149 166 Total Assets 577 669 621 720 811 1,043 1,162 1.231 1,239 1,251 Equity :;; 413 405 396 379 367 361 364 Long-Term Liabilities 188 275 497 620 671 660 644 Current Liabilities 127 138 113 119 130 150 163 193 217 243 Financial Ratios: DebtService Coverage Ratio (times) 2.7 1.1 0.3 1.5 2.2 2.3 2.3 2.6 1.8 1.9 BreakEvenTariffs (RskWh) 618 614 629 614 617 605 600 595 597 601 AverageTariffs (RskWh) 626 623 579 624 633 641 645 648 653 658 R e mon Net Fixed Assets inOperation 1.9% 1.3% -6.2% 0.3% 0.9% 2.8% 3.7% 4.9% 5.8% 6.7% OpearatingRatio 97% 98% 109% 99% 99% 96% 94% 93% 93% 93% LT Debt to Equity Ratio (times) 0.4 0.3 0.5 0.5 0.7 1.3 1.6 1.8 1.8 1.8 CurrentRatio (times) 1.3 1.4 1.1 1.1 1.3 1.4 1.6 1.4 1.3 1.2 ReceivablesCollection Period(months) 4.0 4.6 3.0 2.9 2.9 2.8 2.7 2.7 2.7 2.6 - 75 - Table 3: MainAssumptionsto Financial Projections 2003 2004 2005 2006 2007 2008 2009 2010 Operational Data: GenerationRequired (GWh) 617 692 778 908 1,061 1,269 1,441 1,617 Energy Purchases(GWh) 386 378 607 492 863 1,030 1,153 1,280 Share of Vietnam Importto Total Generation 0% 0% 0% 0% 35% 42% 46% 49% Sales of Power (GWh) 532 596 672 785 919 1,099 1,247 1,400 Sales Growth 11.6% 12.1% 12.7% 16.8% 17.1% 19.6% 13.5% 12.3% Transmission& DistributionLosses 13.9% 13.8% 13.6% 13.5% 13.4% 13.5% 13.4% 13.4% Average Tariffs (WkWh) 579 624 633 641 645 648 653 658 Average Tariffs (UScenVkWh) 14.5 15.4 15.4 15.3 15.2 15.0 14.9 14.8 Economic Data: ForeignExchange Rate (Riel/US$) 4,000 4,063 4,126 4,190 4,256 4,322 4,390 4,459 ForeignInflation 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% Local Inflation 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% InternationalCrude Oil Price ($/bbl) 30 25 25 25 25 25 25 25 Annual Capital Expenditures (US$ million) GenerationProjects 13 27 1 0 0 0 0 0 TransmissionProjects 0 2 18 38 14 7 0 0 DistributionProjects 0 1 5 18 14 18 12 13 Total Capital Expenditures 13 30 24 56 28 25 12 13 Financing Plan (US$ million) ADB 10 10 19 48 23 7 0 0 IDA 0 1 4 8 3 2 0 0 Government 0 21 2 0 0 0 0 0 EDC Funds 3 -1 -1 0 2 17 12 13 Table 4: Sensitivity Analysis 2003 2004 2005 2006 2007 2008 2009 2010 A. Base Case International Crude Oil Price ($/bbl) 30 25 25 25 25 25 25 25 Average Tariffs (WkWh) 579 624 633 641 645 648 653 658 Average Tariffs (US cent/kWh) 14.5 15.4 15.4 15.3 15.2 15.0 14.9 14.8 Increase in Average Tariff in Riel term -7% 8% 1% 1% 1% 0% 1% 1% Break Even Tariff (RieVkWh) 629 614 617 605 600 595 597 601 Debt Service Coverage Ratio (times) 0.3 1.5 2.2 2.3 2.3 2.6 1.E 1.9 B. Fuel at $28/bbl after 2004 Break EvenTariff (RieVkWh) 629 627 629 612 606 600 602 605 Debt Service Coverage Ratio (times) 0.3 1.2 1.E 2.1 2.2 2.4 1.7 1.E C. Fuel at $30/bbl after 2004 Break Even Tariff (RieVkWh) 629 635 638 617 611 604 605 608 Debt Service Coverage Ratio (times) 0.3 1.o 1.6 2.0 2.1 2.3 1.7 1.7 - 76 - Annex 6(A): Procurement Arrangements Summary of Procurement CapacityAssessment An assessment of the project implementing agency's procurement capacity was carried out in line with IDA guidelines during the project preparation. The full Procurement Capacity Assessment Report (PCAR) i s available in the project file; and a brief summary i s provided below. The current version of the Country Procurement Assessment Report (CPAR) i s a "Draft for Review by the Royal Government of Cambodia" dated June 30, 2003. This report was jointly prepared by the World Bank and ADB. Among other aspects, the acceptability of Government NCB procedures i s summarized in the CPAR (Annex D), and the suggested legal provisions for inclusion in the IDA Development Credit Agreement in respect of NCB procurement are also provided in the CPAR (Annex E). Nevertheless, for NCB procurement, EdC follows as much as possible IDA'S ICB procedures. An internal regulation entitled "EdC's Guidelines for Procurement of Goods and Works for National Competitive Bidding and Local Shopping'' has been prepared by EdC and found acceptable. There are four implementing agencies under the Project. Their main responsibilities and relatedprocurement capacity are as follows: (i) EdC i s the main implementingagency and will be responsible for implementationof all the physical components and relatedTA activities. Through successful completion of one IDA-financed project (with an IDA credit of US$40 million) and three ADB-financed projects (with an aggregated ADB loan amount of US$68 million), EdC has gained practical experience with ICB procurement and became familiar with IDA procurement and consultant selection guidelines. However, it would still need external assistance in preparation of bidding documents especially the technical specifications. To facilitate a smooth project implementation, EdC has setup a fully staffedPMUincludingprocurement personnel; (ii) the REFwill be an independent institution to be established by Government decrees to implement the pilot REF program. A transitional PMU has been setup by MIME to facilitate the establishment of REF and to initiate some preparation activities (including hiring long-term consultants, programawareness campaign, etc). The PMUincludes several staff who have gained procurement experience through previous IDNADB financed projects. This procurement capacity will be transferred to REF once it i s fully established. Procurement under sub-projects to be co-financed by the REF will be following established commercial practices under the responsibility of sub-project developers (private companies); (iii)MIME and EAC will implement several TA activities related to them. Both agencies have gained certain experience with IDA consultant selection procedures through previous IDNADB projects and the PPF for this Project. The overall procurement risk is therefore rated as average. Nevertheless, to mitigate any possible risk associated with procurement and to enhance long-term institutional development and capacity building, a plan of action, as summarized in the section below, has been developed and agreedto be implemented: a) Procurement Training: In addition to the several procurement training sessions organized by the World Bank and ADB in 2002 and 2003 for Cambodia that EdC has sent several staff to attend, a special procurement training program for the Project -77- will be conducted in March 2004, as part of the project launch workshop. All aspects of the IDA procurement and consultant selection guidelines and procedures including latest SBDs and SRFP will be covered. In addition, adequate attention will also be given to procurement filing requirements. The project launch workshop will be organizedjointly by IDA and EdC, with participation of all the related agencies. Procurement Related TA for EdC: Two TAs will be provided by external consultants: (i) the current in-house advisor will be retained under the proposed Project to provide assistance in technical and administrative areas including procurement particularly related to consultant selection and implementation of various TA activities; and (ii) a project implementationconsultant (PIC) will be hired to provide assistance in procurement (including preparation of bidding documents, bidevaluation and contract negotiation), engineering design, constructionsupervision and coordination, contract management, quality/cost/schedule control, testing and commissioning. The consultant will also provide on-the-job training to EdC staff in various aspects of project management including contract management. Following QCBS procedures, the PIC selection has now proceeded to an advanced stage and a contract will be awarded inearly 2004. Internal regulations for NCB procurement, Procurement Check List: An internal document entitled "EdC Guidelines for Procurement of Goods and Works for National Competitive Bidding and Local Shopping" has been prepared by EdC and found acceptable (the guidelines are attached to the PCAR). A draft "EdC Procurement Checklist - Information and Practical Instructions on Procurement" has also been prepared and will be revisedtaking into IDA'Scomments. Both documents are expected to facilitate the procurement process. Project Management Units (PMU): As mentioned above, two PMUs have already been established, one by EdC to implement all the physical components as well as TA activities for EdC, and the other by MIME to facilitate establishing the REFand manage some preparatory work during the initial transition period. Both PMUs have procurement staff who are familiar with the IDA procurement and consultant selection guidelines. Inaddition, the procurement group under the EdC PMU is expected to sustain as an independent procurement unit even if the PMU will be dissolved upon the project completion. PIP and Operational Manual: To facilitate project implementation, a PIP including detailed procurement arrangements has been prepared and adopted by EdC; and an Operational Manual has beenprepared for the REF. Inaddition, riskof procurement delays was minimizedunder the previous IDA financed project through IDA close monitoring and supervision and prompt actions inprocurement related reviews and clearance. A similar approach will be adopted inthe proposed Project. Expenditure Items for IDA and GEF Financing The IDA Credit and GEF Grant will be used to finance: (a) goods for power transmission and distribution, including: SCADA system, cables and conductors, transformers, concrete poles, meters and meter boxes, insulators and fittings; inspection and filed work vehicles, O&M equipment, computers and software, office equipment, portable meter testing equipment; (b) works associated with the installation of the above equipment and materials; (c) subgrants under -78 - the REF for new rural connections, mini hydro, micro hydro and solar home systems; (d) consultant services and training, such as institutional capacity building and strengthening, operational and project implementation support, policy studies, market analysis, strategy development, etc. Table A shows amounts to be financed by IDA and GEF, respectively. Procurement Guidelines All goods, works and consultant services to be financed under the IDA Credit and GEF Grant shall be procured in accordance with the IDA Guidelines ("Guidelines - Procurement under IBRD Loans and IDA Credits", January 1995, revised in January and August 1996, September 1997 and January 1999; and "Guidelines for Selection and Employment of Consultants by World Bank Borrowers", January 1997, revised in September 1997, January 1999, and May 2002). Standard Documents for Procurement Various types of standard bidding documents (SBD) shall be used in preparation of bidding documents. For procurement of goods basedon supply and installation arrangements, the SBD for Supply and Installation of Plant and Equipment (November 1997, Revised January 1999, March 2002 and March 2003) shall be used. For other procurement of goods, the SBD for Procurement of Goods (January 1995, Revised March 2000, January 2001, March 2002 and March 2003) shall be used. For procurement of installation works, the SBD for Procurement of Works (smaller contract, January 1995, revised June 2002 and March 2003) shall be used. The Standard Bid Evaluation Forms for Procurement of Goods and Works (April 1996) shall be used inbidevaluation andpreparation of thebidevaluation report. For employment of consultants, the Standard Request for Proposals (dated July 1997, Revised April 1998, July 1999, and March 2002) shall be used. Inevaluation of the proposals following QCBS and QBS, the Bank Sample Form of Evaluation Report for Selection of Consultants (October 1999) shall be used. Inthe event that the above SBDs and SRFP are revised or updatedduringthe project implementation, the latest versions will be applicable. Domestic Preference In evaluation of bids following ICB procedures, qualified domestic manufacturers of goods would be eligible for a margin of preference of 15% of the Cost, Insurance and Freight (CIF) price or the actual customs duty, whichever i s lower. Advertising For procurement of goods, the invitations to bid shall be advertised as specific procurement notices in accordance with the procedures under paragraph 2.8 of the IDA Procurement Guidelines. For selection of consultants, advertisements shall be conducted according to the procedures under paragraph 2.5 of the IDA Guidelines for Selection of Consultants. In addition, a General Procurement Notice (GPN) has been published in UNDB Issue No. 604 on April 16,2003; it shall be updated on an annual basis. -79 - Project Costs By ProcurementArrangements The estimated project costs by procurement arrangements are summarized inTable A. Procurement Packaging and Methods Goods to be financed under 115kV Transmission, National Control Center, and EdCREGridExtension components(total estimated cost is US$29.99 million including contingencies and estimated taxes and duties, of which the IDA credit will cover US$26.40 million): The procurement shall be carried out through the ICB procedures, based on the arrangements of supply and installation or supply only. However, for smaller packages with estimated cost not exceeding US$lOO,OOO or US$50,000 equivalent per package (up to an aggregate amount of US$1.25 million), procurement may be carried out following the International Shopping (IS) or National Shopping (NS) procedures under paragraphs 3.5 and 3.6 of the IDA Procurement Guidelines. Operational support to REF,EdC and EAC, consisting of goods, are also included. The related procurement packaging arrangements are presentedinTable Al. Installation Works (total estimated cost is US$4.84 million including contingencies, of which the IDA credit covers US$3.87 million): The installation works associated with the EdC rural grid extension component shall be carried out through the NCB procedures for those procurement packages with estimated cost of US$1.5 million equivalent or less per package (up to an aggregateamount not to exceed US$5.0 million). ICB procedures shall be followed for any larger works packages. The related procurement packaging arrangements are presentedin Table A2. Subgrants under Rural Electrification Fund (REF) (total estimated cost is US$28.23 million; of which the IDA credit covers US$5.10 million, GEF grant finances US$1.54 million, and private sector developers fund the balance of US$21.59 million). The REF will provide subgrants to eligible subprojects (rural electrification enterprises, mini hydro, micro hydro, solar home systems, etc.). The associated goods and construction works shall be procured by the subproject developers (private companies) in line with established local private sector commercial practices, except those large procurement packages with estimated cost exceeding US$2 million equivalent per package for which ICB may be the more efficient and economic procurement method. Based on the current survey and estimation, it i s unlikely there will be procurement packages of this size. Consultant Services and Training (total estimated cost i s US$9.26 million, of which the IDA credit covers US$4.81 million while GEF grant finances US$4.21 million): All consultant services will be subject to QCBS procedures except those cost less than US$lOO,OOO for which CQ procedures would be more practicable (up to an aggregate amount not to exceed US$2.0 million). For the assignments that would be performed more effectively by individual consultants such as operational support to PMUs, the REF and EAC as well as the in-house advisor to EdC, individual consultants shall be selected through comparison of qualifications of at least three candidates, with the following exception. An in-house advisor (an expatriate individual consultant) has been financed previously under the PPF to assist EdC in various technical and administrative aspects. The advisor has established a very close and effective working relationship with EdC and has eamed hightrust of the EdC management and staff. In view of the substantial delays in project preparation and the necessity of his service, EdC has decided to retain the advisor under its own budget upon - 80 - depleting of the funds allocated under the PPF, with an understanding that related expenditures will be reimbursed from the IDA credit upon its approval and effectiveness. IDA has issued no- objection to the extension of advisor's contract and endorsed the above arrangement on a retroactive financing basis. The advisor will continue his service during the period of project implementation. The consultant services arrangement i s summarized inTable A3. Prior Review Thresholds (Table B) For procurement of works, IDA prior review in line with the IDA Procurement Guidelines shall be carried out for all procurement packages with estimated cost of US$500,000 equivalent or more per package. According to the current procurement packaging arrangements, suchprior review would cover about 65% of the value of all works. For procurement of goods, IDA prior review in line with the IDA Procurement Guidelines shall be carried out for all procurement packages with estimated cost of US$200,000 equivalent or more per package. According to the current procurement packaging arrangements, such prior review would cover about 95% of the value of all goods. Furthermore, for procurement of goods through shopping procedures, all contracts with estimated cost of US$75,000 or more shall be subject to IDA prior-review. No prior-review shall be conducted for commercial-practice-based procurements under subprojects to be financed by the REF subgrants. For consultant services, Bank prior review in line with the IDA Guidelines for Selection of Consultants shall be required for all contracts with estimated cost exceeding US$lOO,OOO for firms and US$50,000 for individuals. Such prior review would cover at least 90% of all consultant contracts to be financedby the IDA and GEF. Shortlists of Entirely National Consultants National consultants and local NGOs would be capable and more economically perform certain services under the Project, such as rural income generation promotion activities, independent monitoring of land acquisition and resettlement; project grievance services. In such cases, the shortlist may comprise entirely national consultants (firms registered or incorporated in Cambodia), if the assignment i s below a ceiling of US$lOO,OOO. ProcurementSupervision and Post Reviews Field based supervision of procurement work will be conducted as part of the regular project supervision missions, which are expected to be fielded twice a year. For those contracts that are not subject to IDA prior review, post-reviews will be carried out based on a ratio of one out of three. Procurement Progress Reporting Procurement progress will be reported as part of the Quarterly Project Progress Reports. Information would include but not limited to the following: (a) progress of the bidding process and updated procurement schedule with explanations for nay delays; (b) contract awards; (c) -81 - contract amendments, with explanations andjustifications; and (d) compliance with prior-review threshold levels and aggregatelimits on specified methods of procurement. NCB Provisions For NCB procurement, EdC has adopted an internal regulation entitled "EdC's Guidelines for Procurement of Goods and Works for National Competitive Bidding and Local Shopping", which i s generally in line with the IDA ICB procurement guidelines. Nevertheless, the legalprovisions inAnnex Eto the CPAR of June 30, 2003 shall be includedas an attachment to the procurement schedule in the DCA and shall apply to the NCB procurements under the Project. Retroactive Financing Retroactive financing up to an aggregate amount of US$200,000, or 0.5% of the Credit amount, would be provided for anticipated expenditures (for any advanced contracts related to TA for project preparation and implementation, such as in-house advisor to EdC) incurred after January 1,2003 (one year prior to the expected signing of the DCA). - 82 - Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Expenditure Category ProcurementMethod Total ICB I NCB IOther' I N.B.F.3 Cost 1.Works 4.30 0.74 4.84 IDA (3.69) (3.69) GEF I 2. Goods I 0.73 I 0.83 I 29.99 IDA (25.67) (0.73) (26.40) GEF 3. REFSubgrants 6.95 21.59 28.23 GEF 1 I I (1.54) I I (1.54) 7. Service Charge & Commitment Fee 0.98 0.98 IDA GEF Total 28.44 4.10 16.94 24.50 73.66 IDA (25.67) (3.69) (10.64) (40.00) GEF (5.75) (5.75) I/ Figures in the parenthesis are the amounts to befinanced by the IDA credit and GEF grant respectively. All costs include contingencies. 2/ Including: goods to be procured through IS and NSprocedures; and consultant services. 3/ N.B.F. -Not Bank Financed. 4/ ADB will cofinance (US$57.86million - including contingencies, but excluding taxes and duties and IDC) the Project on a parallel basis. The associated procurement will be carried out separately following ADB's guidelines. ADB's procurement arrangements are not included in the above table. - 83 - Table Al: Procurement Packaging for Goods Package I Estimated Procurement 1 1 I No. Description Cost($'000) Cost ($'OOO) Method Remark Remark I1 EdC EdC IFB-1 115kVTransmissionLine II [ 4,000 I ICB 1 S&I 1 I IFB-2 115kVSubstation Modifications I I 4,330 I ICB I S&I 1 I IFB-3 NationalControlCenter -SCADA System 1 I 4,000 I ICB I S&I 1 IFB-4 Cables and Conductors (MV&LV) 3,575 ICB IFB-5 ConcretePoles (MV&LV) 3,983 ICB IFB-6 Distribution & IsolatingTransformers(MV&LV) 740 ICB IFB-7 Insulators& Fittings, Cross Arms, Accessories 2,879 ICB IFB-8 Meters and Meter Boxes 3,311 ICB InspectionVehicles 95 IS FieldWork Vehicle 95 IS Computers andPeripherals 95 IS Office Equipment 80 I S Operation & Maintenance Equipmentand Tools 80 IS PlanningSoftware 45 IS I EAC Portable MeterTestingEquipmentfor EAC I I 70 1 I S I Computers andPeripherals 25 I S Office Equipment 20 I S Office Furniture 20 Isms Notes: Theabove costs exclude contingenciesand taxes (thus may not reconcile with TableA). ICB: International Competitive Bidding S&I: Supply and Installation. IS: International Shopping NS: National Shopping - 84 - Table A2: Procurement Packaging for Civil Works Description I Estimated Procurement I I Cost ($'OOO) Method Remark 1 Works for Sihanoukville Area 600 NCB Smaller Works 2 Works for Battambang Area 960 NCB Smaller Works 3 Works for Kampot Area 480 NCB Smaller Works I 1 Works I I I I I I 4 for Kampong Speu Area 960 NCB Smaller Works 5 MV Networks (West Phnom Penh & Takeo) 350 NCB Smaller Works 6 Warehouse 500 NCB Smaller Works Notes: Theabove costs exclude contingencies and taxes (thus may not reconcile with TableA). NCB: National Competitive Bidding. Smaller Worksmean IDA's Standard Bidding Documentsfor Procurement of Works(Smaller Contracts). - 85 - Table A3: ConsultantServices andTrainingArrangements No. Description Estimated Selection Cost ($'OOO) Method Remark I MIME I I Component 1 I RenewableEnergy Policy Development I 500 1 QCBS I Firm I I 2 I DevelopmentofaPower Sector MasterPlan I 300 I QCBS I Firm I I 3 I Training I 230 1 CQ,IC I Individual I I REF Component ImplementationSupportto REF (including i 1QCBS, CQ, Multi-contracts,firm & accountingsystem, expatriate technical advisor, 2'390 IC individual I I 1 local long-termconsultants) REERuralIncome GenerationPromotion 350 CQ Multi-contracts,local 1 5 1 consultants& NGOs 6 RenewableEnergy BusinessDevelopmentfor Solar 2,440 QCBS, CQ, Multi-contracts,firm& and MinMicro Hydro IC individual 7 REE ImprovementandAssociationBuilding 760 QCBS, CQ, Multi-contracts,firm & IC individual 8 Capacity Building for FinancialInstitutions 250 QCBS, CQ, Multi-contracts,firm& IC individual I EAC Component I 9 OperationalSupport 420 IC Individual 10 Training 60 CQ, IC Multi-contracts,firm & individual 11 ProjectImplementationConsultant (PIC) 800 QCBS Firm 12 In-houseAdvisor 360 sss Individual 13 IndependentMonitoring of LandAcquisition and 20 CQ Local NGO Resettlement 14 ProjectGrievanceCommittee 20 CQ Local NGO 15 CommercialPractice ImprovementandManagement 280 QCBS, CQ, Multi-contracts,Firm& Training IC Individual I I Capacity Building for LandAcquisition, Firm l6 Resettlement,andEnvironmentalManagement I I I 6o cQ I 17 I Power InvestmentPlanning I 250 I QCBS I Firm I Notes: REF Component -the REF has not yet been established. The assignment details shall be worked out in due course with the progress of project implementation. QCBS: Quality- and Cost-Based Selection CQ: Selection Based on Consultants' Qualijkations SSS: Single-Source Selection IC: Individual Consultant - 86 - Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category Threshold Method Prior Review (US$'OOO) (US$'OOO) ~ 1.Works >=1,500 ICB >=500 4,500 NCB 2. Goods >=100 ICB >=200 e100 IS e50 NS 3. Consultant servicesI >=200 I OCBS I >=100for firms <=loo CQ N A IC >=50 for individuals - 87 - Annex 6 (B):FinancialManagementandDisbursementArrangements Financial Management 1. Summary of the FinancialManagementAssessment The Country Financial Accountability Assessment (CFAA) was carried out by the World Bank and the report was deliveredto the Government inMay 2003. It was notedthat the legislative and regulatory framework governingpublic finances in Cambodia i s generally acceptable, with the exception of the control function, which requires a complete overhaul. However, the implementation of public expenditure is very weak, resulting ina lack of transparency and high level of risk concerning the reliability of public expenditure management. Inaddition, the financial management systems and procedures cannot be relied upon to provide any assurance that the public funds are used for authorized purposes. The system i s all cashbasedand most receipts and almost all payments do not pass through bank accounts. Such a systemprovides many opportunities for corruption and misuse of public funds. The overall country fiduciary risk in Cambodia i s considered to be high. Inspite of the multiplicity of controls and the centralized nature of the Public ExpenditureManagement system, weak financial management practices pose serious fiduciary risks. The fundamental problems result from a weak control environment, severe weaknesses inNational Treasury operations, especially inthe area of cashmanagement, inadequacies inthe public accounting system, and weak internal and external auditing capacity. These problems are so serious that the Government's budget and reporting systems cannot be relied upon to expend resources inan accountable manner. These systematic weaknesses thus raise serious concerns about fiduciary risksand possible corruption. However, suchfiduciary risksare expected to be mitigatedthrough the proposed system. These risksare considered as manageabledue to the risk-mitigation measuresto be taken as outlined inthe financial management action plan. To assess the existing capacity at the implementing agencies, an assessment of the adequacy of the project financial management system of the following implementing agencies was carried out inOctober 2003: (a) EdC, the electricity utility, a separatelegal entity, is revenue generating and maintains its own books and accounts; (b) MIME-PMU, initially and untilthe REFi s created, the MIME-PMU will handle the MIME-TA and REF-TAactivities. Once the REFi s established, the MIME-PMU'sresponsibilitieswill beabsorbedby the REF. The REFis to bealegalentity, non- revenue generating and will maintain its own books and accounts; and (c) EAC, the power sector regulator, i s a separate legal entity, non-revenue generating but maintains its own books and accounts. The overall assessment i s that EdC, which has experience with the previous Bank-financed projects, has the capacity to manage the project financed activities while the capacity at the MIMEandEACneedsto bedeveloped. EdCwill helpMIMEduringthe transitionin disbursement arrangement and book keeping. Once the REFi s established, the Project Accountant to be engaged under the REFwill also handle the above tasks. EdC will provide the same assistances to EAC. - 88 - 2. Audit Arrangements EdC has engagedas its external auditor, PriceWaterhouseCoopers (PWC), since 1999. The annual audits are conducted inaccordance with internationalstandards on auditing and includes boththe consolidated financial statements of EdC; and the separate audits of the EdC units: PhnomPenhHeadOffice, Siem Reap, Battambang, Kampong Cham, Sihanoukville, and Takeo branches. There are no overdue audit reports for Credit 2782-KH (Phnom PenhPower Rehabilitation Project) and Grant No. TF026154 (Cambodia Rural Electrification and Transmission Project). The audit reports were acceptableto IDA since FY99 for purposes of EdC'sfull compliance with the audit report requirements of the Credit and Project Agreements. The corporate financial statementsof previous years were qualifiedby the auditor due to the VAT issue - pending decision from the Government whether the offsetting of inputVAT (being recorded as an asset inthe balance sheet) with the Government arrears and tax to be paid to the Custom Department would be allowed. The missionnoted from the appraisal mission during September 15-25,2003 that the VAT issue has been settled and EdC has made substantial progress inimprovingEdC's finances. The REF will be responsible for ensuring that the project accounts of the REFoperations, MIME- TA andEAC-TA components, under aconsolidated project financial statements, are audited in accordance with InternationalStandards on Auditingby an independent external auditor appointed under terms of reference satisfactory to IDA. Auditors will be requiredto audit: (a) EdC's annual consolidated corporate financial statements; and (b) the consolidated project financial statements of the REF, and the MIME-TA and EAC-TA components. Inaddition, the respective audits will be requiredto determine: (i) whether the activities of the Special Accounts associatedwith the respective project funds have been correctly accounted for and used inaccordancewith the IDA Credit and GEF Grant Agreements; and (ii) the adequacy of supporting documents and controls surrounding the use of the Statement of Expenditures (SOEs) as a basis for disbursement. A separate Management Letter will also be submittedwhich will: (a) identify any material weaknessin accounting and internal control; (b) report on the degree of compliance of financial covenants of the Credit and Project Agreements; and (c) communicate matters that have come to the attention of the auditors which might have a significant impact onthe implementation of the Project. The audited financial statements will be submitted to IDA within six months after the end of each fiscal year. The table below summarizes the audit reportingrequirements for the Project. ImplementingAgency RequiredAudit Report EdC EdC Consolidated Corporate Financial Statements REF Consolidated Project Financial Statements of REF, MIME-TA and EAC-TA MIME Audited under REF EAC Audited under REF PWC has been engaged as EdC's external auditor since 1999 and PWC i s eligible to audit the Bank-financedprojects, so it i s likely that PWC will continue to audit EdC Corporate Financial Statements which include the transactions of project activities to be implementedby EdC. The auditor of the Consolidated Project Financial Statement will be appointed inthe future according to the procurement method indicated inthe Development Credit Agreement. The possibility that two different auditors would be appointed i s likely and, hence, separate auditors may not be able to access the information of the whole Project. - 89 - 3. Disbursement Arrangements Disbursementof the proceeds of the CredidGrant will be madebasedonthe traditional system: from the Special Accounts with reimbursements madebased on full documentation or against SOEs; and direct payment from the CrediVGrant accounts. Three Special Accounts will be established for EdC and the MIMEPMU/REF:two for IDA and one for GEF. EAC will disburse via direct payment for its TA activities. Disbursement arrangements for eachof the respective implementing agencies will be as follows: [ ImplementingAgency I DisbursementArrangements EdC Special Account REF Special Account for IDA I F I SDecial Account for GEF I MIME Disbursementthrough the REFSpecial Account EAC Direct Payment Allocationof CreditIGrant Proceeds(Table C) Disbursement of the proceeds of the CrediVGrant would be made against expenditure categories as shown inTable C. Table C: Allocationof CreditIGrant Proceeds expenditures (ex-factory cost), and of local expenditures for other items - 90 - Use of Statement of Expenditures (SOEs): Some of the proceeds of the CredidGrant are expectedto be disbursed on the basis of SOEs as follows: 0 works estimated to cost the equivalent of US$500,000 or less; 0 goods estimated to cost the equivalent of US$200,000 or less; 0 consulting firms estimated to cost the equivalent of US$lOO,OOO or less; e individual consultant's contract estimated to cost the equivalent of US$50,000 or less; and 0 REFsub-grant, no matter the cost. Disbursement for any expenditure exceeding the above limits will be made inaccordancewith respective procurement guidelines and provision inthe CredidGrant Agreements against submission of full documentation and signed contracts. The documentation supporting SOE disbursements will be retained by the Project duringthe life of the Project and untilone year after the receipt of the audit report for the last year inwhich the last disbursement would be made. These documents will be made available for review by the auditors and IDA supervision missions. Shouldthe auditors or IDA supervision missions find that disbursements have been made that are notjustified by supporting documentations, or are ineligible, IDA will have the right to withhold further deposits to the Special Accounts. IDA may exercise this right untilthe Borrower has refundedthe amount involved or (if IDA agrees) has submitted evidence of other eligible expenditures that offset the ineligible amounts. Special Accounts: To facilitate credidgrant disbursement, EdC and MIMEshall each maintaina separate US dollar Special Account (SA) at the National Bank of Cambodia, the central bank, on terms and conditions satisfactory to IDA including appropriate protection against set off, seizure and attachments. The SAs will cover the IDA share of eligible expenditures inall disbursement categories. The EdC Special Account, to be managedby EdC for all components, except for the REF component, will have an authorized allocation of US$2.5 million with an initial deposit of US$l million equivalent to be withdrawn from the Credit account and deposited inthe SA. When the amount withdrawn from the Credit account totals SDR 3 million equivalent, the initial allocation will be increased to the authorized allocation. The MIMEIDA SAs, to be managedinitially by MIME-PMUfor the MIMETA and REF-TA activities untilthe REFi s established, will have an authorized allocation of US$1.5 million with an initial deposit of US$0.5 million equivalent to be withdrawn from the CredidGrant accounts and deposited inthe SA. When the amount withdrawn from the CredidGrant accounts totals SDR 2 million equivalent, the initial allocation will be increased to the authorized allocation. After the REFis established, the SA will be managedby the REFand the board will designatean independent payment agent for the REF. -91 - The GEF SA which will also be managed by MIME-PMUfor the MIMEand REFTA activities, untilthe REFis established,will have an authorizedallocationof US$500,000, with an initial deposit of US$300,000. When the amount withdrawn from the Grant account totals US$1.5 million, the initial allocation will be increased to the authorized allocation. The SAs should be replenished regularly, preferablymonthly (butnot less than quarterly) or when the amounts withdrawn equal 20% of the initial deposit, whichever comes first. All replenishment applications will be accompanied by reconciledbank statements from the depository bank showing all transactions inthe SAs. The SAs will be audited annually by independent auditors acceptableto IDA. FinancialManagement and Reporting Arrangements: ImplementingEntity: EdC was the executing agency for the previous IDA financed PhnomPenh Power Rehabilitation Project (Credit No. 2782-KH) and Cambodia Rural Electrification and Transmission Project (Grant No. TF026154). The organizational chart of EdC i s attached in Appendix 1. The proposed Project will be implementedby two PMUs: (a) One PMUwill be hosted by EdC, to be responsible for management and implementation o f (a) EdC rural grid extension; (b) construction of the 115kV transmission line and substation; (c) National Control Center; and (d)TA for institutional strengthening. The PMUwill be under the Director for Corporate Planning and Project Department and comprise professional staff invarious disciplines (including but not limitedto technical, procurement, contract management,quality/cost/schedule control, environmental, land acquisition and resettlement). One MIMEstaff will be selectedto join this PMUand i s expected to facilitate necessary coordination with Government agenciesrelatedto project implementation. (b) One PMUwill be hosted by MIME,to be responsible for: (a) TA activities related to MIME and REFwhile the REF i s not yet established; and (b) the setting-up of the REF (organizational chart inAppendix 2). Once the REFi s established (the REFBoard has organized the REF Secretariat to runday-to-day operations of the REF),the PMUwould cease to exist. The REFSecretariat will also be responsible for payment of TA activities related to MIMEafterwards. FundsFlow: IDA and GEFfunds will bechanneled through the respective SAs as described above to EdC, MIMEand REF;and through direct payment for EAC. IDA and GEF will deposit an advance within the authorized allocation to the SAs basedon the ImplementingAgencies' applications. The ImplementingAgency will use the SA to finance IDA'Sand GEF's share of eligible expenditures under the Project inboth foreign and local currencies, and then claimfor replenishment of the SA. For some expenditures with the amount over the minimumapplication size set up inthe Disbursement Letter, the ImplementingAgencies may submit withdrawal applications to request IDA and GEF to make payments directly to the suppliers. Disbursementfrom the SAs. The disbursement from the SAs will require the signatures o f (a) in case of EdC - the Project Director or his designate and the Director of Finance and Accounting Department or his designate; (b) incase of MIME- the Minister of Economy and Finance or his designate and the Minister of Industry, Mines and Energy or his designate; and (c) incase of the - 92 - REF-Minister of Economy andFinance or his designateand the representative fromthe REF Board. Withdrawal ofZDAfunds. Disbursement of IDA funds will be basedon SOEs, Withdrawal Applications (WA) or Direct Payment Applications. EdCand MIMEREFshall each prepare WASto be submitted to IDAfor their respective Special Accounts and through MEFdeal with IDA replenishments. Signatures on the IDA WASshall be the Minister of Economy and Finance or his designate and: (a) incase of EdC - the Project Director of EdC or his designate; (b) in case of MIME- the Minister of Industry, Mineand Energy or his designate. Direct Paymentfor EAC. The Direct Payment Application preparedby EAC will require the signature o f (a) the Ministry of Economy and Finance or his designate; and (b) the Chairman- Secretary of State of EAC or his designate. Government counterpart funds will be channeledthrough the Counterpart FundAccount to be maintainedby each implementingagency. The Counterpart FundAccount at EdC shall receive an initial deposit of US$40,000 from MEFand will be recorded as EdC's capital. The Counterpart Fund Account at MIMEand EACshall eachreceive an initialdeposit of US$lO,OOO and US$3,000, respectively fromMEF. The Counterpart FundsAccounts will be periodically replenished from the Government (monthly or when the amounts withdrawn equal 20% of the initial deposit, whichever comes first). Accounting Organization and Staffing: The financial management arrangements for the proposed Project will be handledas follows: EdC - under the ExternalFinancialManagement Division of Finance and Accounting Department of EdC. The division is responsible for all externally funded projects, accounting and reporting, preparation of SOEs and Withdrawal Application for submission to IDA, supplier records and processing and filing of disbursement vouchers and supporting documents. The Manager of External FinancialManagement Division will be designated as the Project Accountant. The accounting transactions of the proposed project will be consolidated with the corporate accounting transactions to produce the consolidated corporate financial statements at the end of the year. MIME-as the experiencesinprocurement, disbursement and accounting are low within MIME,EdCwill helpduring the transitionin:(i)preparation of SOEs andWithdrawal Application for submission to IDA; (ii) maintaining of the accounting books; and (iii) preparation of consolidated FMRs for MIME-TA and EAC-TA activities. Once the REF i s established, the Project Accountant to be engagedunder the REFwill help maintain the above tasks. REF-under the ProjectAccountant to beengagedunder REF,he/she will also: (i) handle the disbursement arrangement and accounting books for MIMEactivities once the MIME-PMUi s ceased; and (ii) preparation of consolidated FMRsfor MIME-TA, REF and EAC-TA activities. EAC - under the Financial and Pricing department of EAC. As the experiences in procurement, disbursement and accounting are low within EAC, the accounting department of EAC will be closely supervised by EdC in: (i) preparation of Withdrawal Application for direct payment; (ii) maintaining of the accountingbooks; and (iii) preparation of FMRs. - 93 - EdC, MIMEPMU/REFand EAC would beresponsible for ensuring that IDA guidelines and procedures are followed on disbursements, auditing and overall financial management. This will include maintainingthe Project's books of accounts, monitoring overall project disbursements, requesting replenishment of the Special Accounts and the Counterpart FundsAccounts, coordinating with the MEFon annual counterpart fundrequirements, preparing withdrawal applications for the MEFto submit to IDA, producingquarterly FinancialManagement Reports (FMRs),preparingannual financial statements,and having them audited by an external auditor acceptable to the IDA. Accounting; Policies and Procedures: EdC- Currently, the bookkeeping of all externally funded projects andEdC as a whole are carried out on Excel spreadsheets that is not automated. Meanwhile, the ACCPAC accounting software has been implemented in 1997, but only the General Ledger module i s beingutilized to keep track of accounting records of EdC. There are severalissues with using dual accounting systems and runningthem inparallel: (a) the report produced from ACCPAC i s unnecessarily used to confirm the accuracy of the report produced in the Excel spread sheet; (b) adequate software technical support i s not available in Cambodia (EdC i s not sure whether all problems can be resolved as some problems could not be solved in the past); (c) ACCPAC cannot providethe financial statements inthe format requiredby MEF; (d) according to EdC, information is not available inKhmer language; and (e) only one person i s designated to maintainthe information. As a result, EdCprefers to maintain both systems to cross check figures butresults induplication of work. Since the Government is planning to introduce International Accounting Standards(IAS) this year, there i s no reason for maintaining a dual accounting system and for not utilizing ACCPAC to its fullest capacity as ACCPAC i s capable of providing the accounting books compliance with IAS. Therefore, (i)anewversionoftheACCPACaccountingsoftwareforbothGeneralLedgerand Inventory modules or an alternative software acceptable to IDA will be financed under the Project; and (ii)consultantwillbehired,undertheProject,toimplement: a (a) the two modules for EdC; and (b) the computerized accounting system for the Project Accounting usingACCPAC or an alternative software acceptableto IDA; (c) design the chart of accounts, and train the staff inrunning the software to full operation. The TA will include the hiringthe consultant on-board duringon-the-job training for 4 months inorder that EdC staff acquire enough experience in operating the computerized system. Inaddition, acomputerized CustomerBillingsystem,namedGentrack(theNewZealand product), has been utilized since 1995. The revision of the software to print the Khmer language on the invoice will be financed by ADB. REF- As the REFwill beanew organization, it was agreedthat aconsultant would design, implement, and initially operate a financial management system with proper procedures and controls, according to the REF Operational Manual, duringthe first few years of the REF'S - 94 - operation. The consultant, who would also provide the necessarytraining of REF staff, would slowly phase-out as capacity is built within the organization. Accounting policies will be inaccordancewith I A S applicable for project accounting. The accounting system will contain: (a) a chart of accounts and a coding system capable of capturing transactions classified by project components and IDA disbursement categories; (b) use of the cash method of accounting; (c) a double entry accounting system; and (d) the production of annual financial statements and quarterly FMRs acceptableto IDA. Internal Audit. EdC usedto have an internal audit department (IAD),but the department has ceased operating since 2000 due to the inability of the-departmentto effectively carry out the assignedtasks. EdC has reestablished this department in October 2003. Initially, three personnel were appointed and will obtain internal audit training provided by MEF. Currently, MEFwas granted a TA by ADB to provide training to State-Owned Enterprises and line ministry audit personnel on internal audit, law and sub-decree, etc. ADB will also support the additional audit training to be providedby the resident financial advisor. Planning and Budgeting:The External Financial Management Division of EdC, the REF Secretariat, and the accounting department of EACwill be responsible for annual plans and budgetsof the Project, with the inputs from responsible units.This should help ensurethat financial resources are available for project implementationand coordinated with the procurement plans. Reportingand Monitoring: The project ImplementingAgencies shall provide IDA with FMRs in accordance with the Guideline to Borrowers issued on November 30, 2002. The FMRs shall include: (a) Discussion of Project Progress; (b) a Balance Sheet; (c) Sources and Uses of Funds by Disbursement Categories; (d) Uses of Funds by Project Activities; (e) OutputMonitoring Report; and (f)Procurement Status Report. The reports shall emphasize linkages between expenditures and physical progress. The FMRformats for EdC and the REF (including MIME and EAC) have been designed and agreed with EdC and MIMEPMU. EdC and the REFwill be responsible for submitting the FMRsto IDA on a quarterly basis within 45 days of the quarter end starting the first quarter following Project's first disbursement. Additional output monitoring report and key performance indicators will be identified and developed to suit project needs duringimplementation as appropriate. Responsibility for submitting the FMRs will be as follows: ImplementingAgency FMRs DueDate EdC Consolidated FMRs for all Quarterly, starting components implementedby the quarter of June EdC. 30,2004 REF Consolidated FMRs for: (a) Quarterly, starting REFsub-grants and TA; and (b) the quarter of TA for MIMEand EAC. September 30, 2004 MIME To be consolidated under REF N.A. EAC To be consolidated under REF N.A. However, inorder to have a clear view of all activities, a Consolidated FMRs for the whole project may be requested duringimplementation as appropriate. -95 - Financial Management Action Plan: It has been agreedthat the ImplementingAgencies shall carry out a time-bound action plan as statedbelow for strengthening their financial management system. Actions IResponsibility I I DateBy Completion I I Financial Management Systemand Reporting I I ~ ~~ ~~ ~ 1. Putinplace aproject accounting systemat the REF/Consultant June 30,2004 REF(manual accounting systemusingExcel spread sheet) capable of producingFMRs, annual financial statements and required statutory reports. 2,Fully utilize the existing computerized accounting I EdC/Consultant June 30, 2004 Financial and Administration Manual (FAM) I I 3. REFto finalize and adopt the FAM, satisfactory to REF/Consultant June 30,2004 IDA. Training 4. Provide training to REF staff inmaintaining REF/Consultant June 30,2004 manual accounting records. Audit Arrangement I I 5. Appoint an independent auditor acceptable to IDA EdC/REF October 30, 2004 to carry out the audit of the Project in accordance with TORSsatisfactory to IDA. - 96 - Annex 7: Project Processing Schedule Project Schedule Planned Actual Time taken to prepare the project (months) FirstBankmission (identification) 03/15/00 07/12/99 Appraisal mission commencement 09/15/03 09/15/03 Negotiations 10/21/03 11/12/03 Planned date of Effectiveness 02/28/04 03/31/04 Board Date 12/16/03 Prepared by: Staff of the MIMEand EdC, under the direction of a Steering Committee for the project and in co-ordination with the MEFand the Ministry of Environment. The Government team worked with the assistancefrom a team of internationaland local consultants. Preparation assistance: Japanese PHRD, Finnida grant, GEFpreparation grant, IDAPPF, ESMAP Bank staff who worked on the Project included: Name Specialty Rebecca Sekse ITask Team Leader/Financial Analysis Chandrasekar GovindarajaldJonExemohit Rural and Renewable Energy Specialist Khanna Enriaue Crousillat Task TeamLeader/Economist Yuling Zhou Procurementlproject implementation Kurt Schenk Engineering and cost estimates Glenn MorgadBemieBaratz Environmental Assessment Youxuan Zhu Social Scientist Lanfranco Blanchetti-RevellfleckGhee Social Scientist Mei WangKarin Nordlander Legal Counsel Robert P.Taylor Energy Specialist Rosa MuletdOmowunmiLadipo Disbursement Officer Soudalath Silaphet Project Assistant Chrisantha Ratnayake Peer Reviewer Mac Cosgrove-Davies Peer Reviewer Peter Cordukes Peer Reviewer - 97 - Annex 8: Documents inthe Project File REFand REFInterimPMU; MIME,September2003. The Royal Decree for establishment of the Rural and Renewable Electrification Fund; Project ImplementationPlan for the Grid-Extension sub-component; Second draft of the detailed Implementation Plan for the Renewable Energy sub-component; Final draft MiniHydro Pre-Investments study; Finalreport of Solar Market survey "Investing inSolar Photovoltaics inCambodia; FinancingPhotovoltaic Householdelectrification in Cambodia: Suitability of Emerging Delivery Models Photovoltaic market DevelopmentinCambodia: Potentialinvolvement of ESCO and batteriedappliance traders Final draft of detailed incrementalcost calculations. Pre-investment Study of Community Scale Hydro Projects Renewable Energy Action Plan: An investment Guide for Renewable Electricity Development RREFreports REFVol. 1- Organizationand Management of REF,November 2001 REFVol. 2 -Proceduresfor the REF,November 2001 REFVol. 3 -Subsidy Principles, November 2001 National Rural and Renewable Electricity Policy, MIME,March 2003 REEstudy report REEinterimassociation buildingreport Evaluationof ImplementingOptions and Alternative FundingMechanisms Designedto Encourage Greater Private Sector Participation in Cambodia's ProvincialElectricity Sector; Draft Report; K.W.Wentzel, Enertech, Intl. ;March2003. Renewable Energy -Based Rural Electrification Five Year Action Plan; MIME;September 2003 Proceedings from the Renewable Electricity Action PlanNational ParticipatoryWorkshop 2, November 2002. Renewable Energy Action Plan, An Investment Guide for RenewableElectricity Development, May 2003 Procurement Capacity Assessment Report Project ImplementationPlan, October 2003 Environmental and Social Impact Assessments T/L Feasibility Study Rural Electrification Strategy and Implementation Programme Resettlement and Rehabilitation Action Plan and Policy Framework Bank Mission Aide Memoires PhnomPenhPower RehabilitationProject, Staff Appraisal Report, December 1995 PhnomPenhPower RehabilitationProject, Implementation CompletionReport, March 2001 Cambodia Country Assistance Strategy - Report No. 20077-KH Cambodia Power Sector Strategy - Report No. 19382-KH Power Trade Strategy for the Greater Mekong Sub-region - Report No. 19067-EAP Private Solutions for InfrastructureinCambodia Cambodia Rural Electrification FundStrategy Reports Energy Lessons inPrivateProvision of Rural InfrastructureServices, Rural Electrification in South East Asia: Cambodia, Laos, Vietnam; FinalReport, October 2002 Cambodia Power Sector Strategy 2003-2020; Royal Government of California; MIME;February 2003 Electricity Act - 98 - Samples of Model Documents and Licenses Business Plan for Electricit6 du Cambodge Assessment of EdC's Capacity to Implement Project Procurement Acleda Bank Limited; Annual Report, 2001 Overseas Cambodia Investment Corporation; Investment Guideline; Cambodia Toda and Canadian Bank Limited, 2002 Overseas Cambodian Investment CorporationLtd; Annual Report 2001. Power Trade Agreement between the Ministry of Industry Mines and Energy of the Royal Government of Cambodia, and the Ministry of Industry of the Government of the Socialist Republic of Vietnam, July 3, 2000 Agreement between the Royal Government of Cambodia and the Government of the Socialist Republic of Vietnam on the Power Sector Cooperation. Power PurchaseAgreement for the Supply of Power at HighVoltage Level from Thot-Not to PhnomPenh Via Chau Doc and Takeo between Electricite du Cabodge and Electricity of Vietnam, July 24, 2000. ProposedDraft, Amendment No. 1,the Power PurchaseAgreement for the Supply of Power at HighVoltage Levelfrom Thot-Not to PhnomPenhVia Chau Doc and Takeo between Electricite du Cambodge and Electricity of Vietnam, October 2003. Power PurchaseAgreement between EdC and Khmer Power Company Limited; September 2003. Asian DevelopmentBank Memorandumof Understanding; Tripartete Meeting for TA 4076; Power Distribution and GMS Transmission Project and PartialReview of LoanNo. 1794- C A M (SF); ProvincialPower Supply; February 2003. Ethnic Minorities Development Strategy; Kingdom of Cambodia, Inter-Ministerial Resettlement Committee; November 2003. Resettlement Policy Framework; Kingdomof Cambodia, Inter-Ministerial Resettlement Committee; November 2003. Resettlement Action Plan; Royal Government of Cambodia, Asian DevelopmentBank, Inter- Ministerial Resettlement Committee, Ministryof Economy and Finance, Ministry of Industry, Mines and Energy; November 2003. - 99 - Annex 9: Statement of Loansand Credits CAMBODIA: Rural Electrification and Transmission Project 27-0ct-2003 Differencebetweenexpected and actual OriginalAmount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO71207 2004 KH-Prov. & Rural Infrastructure Project 0.00 20.00 0.00 0.00 19.72 0.00 0.00 PO70542 2003 KH-Health Sector Supporl Project 0.00 17.20 0.00 0.00 25.75 -2.92 0.00 PO73311 2003 KH-PROV & PERI-URBWATER 0.00 16.90 0.00 0.00 20.46 0.00 0.00 PO71146 2003 KH- RURAL INVESTMENT & LOCAL GOVERNAN 0.00 22.00 0.00 0.00 23.04 1.46 0.00 PO70875 2002 KH-Land Management and Administration 0.00 24.30 0.00 0.00 25.21 1.85 0.00 PO71247 2002 KH Eco. & PS Capacity Building Project . 0.00 5.50 0.00 0.00 6.19 1.37 0.00 PO71445 2002 KH Demobilization and Reintegration . 0.00 18.40 0.00 8.85 7.81 -3.95 0.00 PO73394 2001 KH-Flood Emergency Rehabilitation Proj 0.00 35.00 0.00 0.00 16.07 1.30 0.00 P065798 2000 KH-BIO& PROTEC AREAS M 0.00 1.91 0.00 0.00 1.31 0.83 0.98 P052006 2000 KH BIO & PROT AREA M 0.00 0.00 2.75 0.00 1.98 3.72 1.42 PO58544 2000 KH - Cambodia SAC 0.00 30.00 0.00 0.00 15.42 26.89 0.00 PO60003 2000 KH-Forest Concession Mgt & Control Pilot 0.00 4.82 0.00 0.00 3.14 3.04 0.00 PO59971 2000 KH-EDUCATION QUALITY IMPROVEMENT 0.00 5.00 0.00 0.00 0.26 0.40 0.00 PO04030 1999 KH-Road Rehab. 0.00 45.31 0.00 0.00 21.92 22.49 0.00 PO50601 1999 KH-SOCIALFUND II 0.00 25.00 0.00 0.00 2.35 -6.68 0.00 PO58841 1999 KH-NORTHEAST VILLAGE 0.00 5.00 0.00 0.00 0.51 0.65 0.67 PO45629 1998 KH-URBAN WATER SUPPLY 0.00 30.96 0.00 0.00 2.97 3.87 2.07 PO04033 1997 KH-AGRICULTURAL PRODUCTIVITY IMPROVE 0.00 27.00 0.00 0.00 12.96 14.36 13.46 Total: 0.00 334.30 2.75 8.85 207.07 68.68 18.59 - 100- CAMBODIA STATEMENT OF IFC's Held andDisbursedPortfolio June 30 - 2003 InMillions US Dollars Committed Disbursed IFC IFC ~ ~~~~~ FYApproval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2003 Amanresort 1.20 0.00 0.00 0.00 1.20 0.00 0.00 0.00 2000 SEF ACLEDA Bank 0.00 0.49 0.00 0.00 0.00 0.49 0.00 0.00 2003 SEF Hagar Soya 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Portfolio: 1.20 0.49 0.00 0.00 1.20 0.49 0.00 0.00 Aumovals PendineCommitment FYApproval Company Loan Equity Quasi Partic 2004 AcledaBank RI 0.00 0.00 0.00 0.00 2000 SEFACLEDA Bank 0.00 0.00 0.00 0.00 Total PendingCommitment: 0.00 0.00 0.00 0.00 - 101- f I Annex 10: Country at a Glance CAMBODIA: Rural Electrificationand Transmission Project East POVERTYand SOCIAL Asia & Low- Cambodia Pacltlc income I Developmentdlamond' 2002 Population,mid-year (millions) 12.5 1,838 2,495 Lifeexpectancy GNI per capita (Atlas method, US$) 280 950 430 I GNI (Atlas method, US$ billions) I & T 3.5 1,740 1,072 Average annual growth, 1996-02 Population ("6) 2.2 1.o 1.9 GNI Labor force (%) 2.6 1.2 2.3 Gross per primary I Most recentestimate (latest year available, 1996-02) capita enrollment Poverty (% ofpopulationbelownationalpoveftyline) 36 Urban population ("6of totalpopulation) 18 38 30 Lifeexpectancyat birth (years) 54 69 59 infant mortality (per 1,000live births) 90 33 81 Childmalnutrition (% of childrenunder5) 45 15 Access to improved water source Access to an improvedwater source (56ofpopulation) - 30 76 76 Illiteracy (% ofpopulation age 154 I 31 13 37 Gross primaryenrollment (56of SChOOl-agepopulation) 110 106 95 Cambodia Male 117 105 103 - - Low-incomeoroup Female 103 106 87 KEY ECONOMIC RATIOS and LONG-TERMTRENDS 1982 1992 2001 2002 I Economlcratlos' GDP (US$ billions) 2.0 3.4 3.7 Gross domestic investmenVGDP 9.8 17.9 Trade Exportsof goods and servicedGDP 15.7 53.2 I Gross domestic savingdGDP 6.9 9.8 Gross national savingdGDP 7.6 Current account balance/GDP -4.7 -3.1 InterestpaymentdGDP 0.0 0.1 0.2 Total debt/GDP 92.4 79.3 79.1 Total debt service/exports 1.2 1. Presentvalue of debtlGDP 87.5 Presentvalue of debvexports 133.8 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) - Cambodia GDP 5.5 4.8 6.3 4.5 GDP per capita 2.2 2.2 4.2 2.6 Low-incomegroup 1 STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growthof Investmentand GDP (%) (% of GDP) Agriculture .. 47.8 36.9 # Industry .. 13.2 21.9 Manufacturing 5.1 Services .. 39.1 41.2 97- 98 69 Privateconsumption .. 83.6 84.2 .. -15- Generalgovernmentconsumption 9.5 6.0 GDi Importsof goods and services &GDP I Growthof (average annualgrowth) 1982-92 1992-02 2o01 2o02 exportsand Imports(%) i ::- Agriculture 5.1 1.7 3.9 Industry 6.0 9.8 15.5 Manufacturing 6.1 9.2 , Services 5.8 5.4 2.5 0 Privateconsumption 1.7 2.2 Generalgovernmentconsumption 3.1 13.1 Gross domestic investment .. 10.5 25.5 Exports *imports Importsof goods and services .. 12.2 12.6 `The diamondsshow four key indicatorsin the country (in bold)comparedwith its income-groupaverage. Ifdata are missing, the diamond will be incomplete. - 102- Cambodia PRICESand GOVERNMENT FINANCE 1982 1992 2001 2002 Domesticprices lnflatlon(%) (% change) * T Consumerprices -0.6 Implicit GDP deflator 75.4 -2.6 3.1 Governmentfinance (% of GDP,includescurrent grants) Current revenue 6.5 12.2 - Currentbudget balance -3.0 1.5 I I Overall surpluddeficit -3.3 -6.0 GDPdeflator +CPI TRADE 1982 1992 2001 2002 (US$millions) Exportand Importlevels (US$ mill.) Total exports (fob) 265 1,451 Rubber 12 I L T Logsand sawn timber 25 2,000 Manufactures 1,500 Total imports (cif) 351 1,950 1 ,ooo Food Fuel and energy 5M) I Capital goods 0 01 Exportprice index (1995=1W 08 07 08 ea w 02 Importpriceindex (1995=100) HExpolls Imports Terms of trade (1995=100) BALANCE of PAYMENTS 1982 1992 2001 2002 (US$ millions) Currentaccountbalance to GDP (%) 1 ~xportsof goods and services 314 1,681 Importsof goods and Services 373 2,006 Resourcebalance -59 -325 Net income 0 -118 Netcurrent transfers 14 Current account balance -93 -105 Financingitems (net) 171 Changesin net reserves -86 Memo: Reservesincludinggold (us$mil/iOnS) Conversionrate (0% lccaMUS$I 1,266.6 3,916.3 3,912.1 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$millions) :omposltlon of 2002 debt ( U S mlll.) Total debt outstanding and disbursed 9 1,831 2,703 2,907 IBRD 0 0 0 0 IDA 0 0 238 306 Total debt service 0 13 21 21 IBRD 0 0 0 0 IDA 0 0 1 2 Compositionof net resourceflows Officialgrants 21 99 186 Officialcreditors 0 0 91 146 Privatecreditors 0 0 0 0 Foreigndirect investment 0 33 113 Porffolioequity 0 0 0 World Bank program Commitments 0 0 63 30 .\ IBRD E Bilateral Disbursements 0 0 40 47 B IDA -- D Other multiiateral - F Private Principalrepayments 0 0 0 0 G Shower .-- Netflows 0 0 40 47 Interestpayments 0 0 1 2 Nettransfers 0 0 38 45 - 103 - Annex 11:Resettlement and Social Safeguards LandAcquisitionand Resettlement The proposed Cambodia RuralElectrificationand Transmission Project will consist of three components: (1) Rural Electrification (RE) Component; (2) Transmission Component; and (3) TA Component. The REComponent will include bothgrid extension and off-grid RE.For the transmission component, certain amount of land acquisition and resettlement will be required, which i s mainly causedby acquiring land for substations, building tower bases, and clearingright of way (ROW) under the T/Ls. For the RE component, while constructionof MV and LV requires little land acquisition and resettlement, small land acquisition might be requiredfor the constructionof minihydro and some MV facilities. Followingthe Bank policy on involuntary resettlement, a resettlement policy framework for the REcomponent and a resettlement action plan for the transmission component were prepared in2001, and updated in 2003. Inaddition, althoughthere are no ethnic minorities inthe project areas for bothtransmission and grid extension components, becausethe REFi s a national programand its activities may benefit ethnic minority populations, an ethnic minority development strategy has been developed for the REFcomponent. This summary is basedonthese three documents. ResettlementActionPlanfor the TransmissionComponent The Transmission Component will consist o f (i)a 220kV double circuit T/L from West Phnom Penh (WPP) to the Vietnamese border; (ii) two new substations in WPP and Takeo (TSS); and (iii) connectionandreinforcementofthe115kVgridinPhnomPenh.Thecomponentwill 115kV be financed by IDA and ADB, with ADB financing all 220kV elements and IDA financing all 115kV elements. Based on agreement between ADB and IDA missions, one common RAP has beenpreparedbased on an early draft. Scope of Resettlement The RAP for transmission component was based on 100% census survey of all affected people and social economic survey among 25% of potentially affected families. According to updated survey, the whole component will acquire a total of 8.94 ha of land areas for both substations and tower bases. About 96% of acquired land areas are paddy land. Along with land acquisition, a total of 149 households and 745 persons will be relocated from the right of way. Among total impacts, significant portion of resettlement is under 220 kV component funded by ADB. For the whole component, a total of four Provinces (including PhnomPenh Municipality), 15 Districts, 37 Communes, and 120Villages will be affected by the Project. Most of suchimpact i s relatively minor, causedby the clearance of ROW (30 m) and land acquisition of tower bases. The more significant impact is those affected by land acquisition intwo substations (23 households) and those to be physically relocated along the transmission alignment (149 households), with a total of 172 households. Removal of 7,300 economic trees, primarily sugar palm, might also have significant impacts for some affectedhouseholds. Most of those are likely to be the owners of residencesrequiring relocation, as the trees tend to be clustered around built up residential areas. Inaddition, during project construction, some temporary impacts might take place either inor outside the ROW and substation boundaries for access road, storage areas, borrow pits and work areas. Compensation will be basedat replacement value for suchimpacts, which will be determined duringproject implementation. - 104 - Table 1.Scope of Resettlement Impact for Transmission Component Components Land Household Number of Number of Acquired affected by Relocated trees to be ha. land loss6 Households' removed ADB 220kVTL 3.70 370 140 7,112 220kV Substations 5.20 23 IDA 115kVTL 0.04 93 9 184 Total 8.94 486 149 7,296 Social economic conditions The project areas consist mainly of rice fields invery flat terrain with scatteredvillages, houses and trees. The villages are located mostly along roads, with some small businessesalso developed along the sides of major roads. The major economic activity i s rainfed lowland rice farming. Other farming activities include vegetables and tree crops, small-scale livestock production and collecting fish, frogs and crabs inrice fields and channels. By far the most common primary occupation was farming (87% of respondents), with rice beingthe main source of income. Reported annual household incomes ranged from to US$2,737 to only US$13, with a median of US$183 and an average of US$249. About 87% of surveyed Affected Persons (Aps) would be classifiedas at or below the national poverty line at US$14 per capitdmonth. The literacy rates for the general populationin the 176communes alongthe ROW is nearly 69% with 83% for males and 57% for females. Inthe general population along the T/L ROWS,some 35% have not completed their Primary Education, 22% have com leted Primary Education, 9% Lower Secondary, and 2% have a Secondary Education or above! All affected people interviewedidentified themselves as ethnic Khmer. No indigenous or other ethnic minorities have been identified inthe surveys. About 23% of surveyed populationcould be considered as being vulnerable groups, such as female headedhouseholds, elderly without support, disabled, and inextreme poverty, and certain form of assistancewill be provided duringresettlement implementation. Objective and Principles Efforts have been made to minimize the number of houses affected and to completely avoid sensitive sites such as temples and schools. For those where impact could not be avoided, adequatecompensation and rehabilitationmeasures will be providedinorder to ensure that APs will be able to restore or even improve their livelihood after resettlement. The number of affected households by substations i s based on actual survey. The number of affected by T/L i s basedon assumption that each tower base will affect one household. 'Among relocatedhouseholds, one commercial scale chicken farm will be affected at Krang Chake village, requiring the relocation of a chicken shed within the same site. The corresponding percentages for the 127 APs household heads along the 220kV Line who are required to shift their residences are 29% having some schooling, 39% completed Primary School, 19% Lower Secondary, and 13% having a Secondary Education or above. - 105 - The Project's resettlement and compensation are to be inaccordance with World Bank requirements and Cambodian law. The objectives and principlesfor resettlement and compensation to be adopted to implement the Bank' policies for the Project are as follows: 1. The livelihood for A P s following the Project shallbe better or at least equal to livelihood levels before the Project. 2. The Project shall be designed so that resettlement and associatedimpacts are minimized 3. Compensation and resettlement shall be carried out before land acquisition and construction; this needsto be taken into account inthe development of the project schedule. 4. Compensation shall be basedon replacement value with no deduction for depreciation, demolition or the value of salvagedmaterials. 5. The preferred form of compensation for lost land is land of equivalent value, including productivity, area and location. However if the area of land taken i s small (less than 20% of total landholding), then cash compensation shall be acceptable. 6. All A P s shall be eligible for compensation, regardless of whether they hold legal title to the land they occupy Legal framework and compensation policies Cambodian law requires that land can only be compulsorily acquired where it i s in the national interest and that insuch case, fair compensation must be paid inadvance. This i s consistent with the Bank's policies, which go beyondthis and have further specific requirements. Although Cambodian law does not recognize private ownership incertain cases, such as inexisting ROWS, this does inany casenotprevent compensationbeingprovidedto meet with the Banks' policies, through other means than direct compensation under the law. While the individual's rights to ownership and compensation are protected inthe new LandLaw, there is no clearly defined mechanism for land acquisition and amounts of compensation. For different Bank projects, ad hoc inter-ministries committee was often set up to review and adopt compensation rates. For this Project, inorder to ensure that adopted compensations are reflecting replacement values, a set of compensation standards has been developed, basedon detailed survey of replacement values among various assets, such as land, structures, and various attachments. For acquired farmland, compensation rate will be set at US$O.1to US$5.6 per square meter based on replacement value and market prices, including the location factor. For removedhouses, compensation will be set at US$7 to US$283 per square meter, averaging US$2000per house. For removed attachments, detailed compensation rates will be developed based on replacement cost. Inaddition, the Project will provide various moving and transition allowance for the APs, such as US$40 per household for moving allowance, US$40 per household for transition assistance, and US$20 per household for those vulnerable households. RehabilitationApproaches and Options For those affected by house demolition, they will be provided compensation at replacement value to rebuildtheir new houses either within the same housing plots, or at new housing plots within the same villages. The cost associatedwith purchasing new housing plots, installing relevant facilities and moving expenses will all be paid under the Project. The affected households will be consulted for the location of new housingplots, which will be comparable with their current locations. - 106 - For those affected by land acquisition, adequate compensation and rehabilitation will be provided. For those affected by land acquisitionof tower basesunder TLs, due to little land areas involved, ranging from only 4 square meters for the 115kV T L to about 100 square meters under the 220 kV T L ,cashcompensation will bemadeto affected individuals. For those affected under two substations, the land acquisition could take quite large proportion of their land holdings, averaging 22% for TSS and 37% for WPP. Extensive consultations have been carried among affected families. Most of affected families seem to prefer cashcompensation, since the compensation provided under the Project would allow them to either purchase existing paddy from the market or engage inother income generation activities. Further consultation will be carried out prior to resettlement implementation. Consultation and disclosure Extensive consultation and disclosure had been carried out duringthe resettlement planning stage, and the draft RAP had been translated into local language and distributed to affected provinces and districts. For the updated RAP, a resettlement information booklet has been prepared inboth English and Khmer,which had been distributedamong the APs and other stakeholders at the end of September. In addition, the summary of the final RAP (including detailed compensation rates after approval by IRC) will also be placed inpublic places accessible to the APs, such as inEdC offices inPhnomPenh and Takeo, and selectedvillages along the alignment. Inorder toensurethat AP's complaints oncompensation andrehabilitationareaddressedina timely and satisfactory manner, a well definedgrievance redress mechanism will be established under the Project. The PMO inEdC will establisha Committee for the consideration of complaints and grievances, with members from EdC, IRC at both national and local levels, Commune Committee Members; Independent Monitoring Organization (IMO) (Observer role); and local village officials. The community consultationprogram will provide contact details for submission of complaints and grievances. This will include aphone contact and addressfor written submissions. However, as this is not a practical means of communicationfor many people inremote areas, it will also be necessary to establish an appropriate alternative avenue for those who are illiterate or for whom these are not appropriate avenues. There will be no fees or charges required of those wishing to have a complaint heard. Follow up checks of this will be included inthe scope of the IMO. Institutional Arrangement The main responsibility for resettlement implementationi s EdC, under the general supervision of MIMEandMEF.MEFwill fundtheimplementationofthe RAP,andEdCwill, incoordination with relevant agencies, manage and supervise the overall Project, includingresettlement activities. A special resettlement and environment unit will be established at EdC to handle resettlement implementation for all projects under EdC. To strengthen institutional capacity for resettlement, TA such as workshops, training, and study tour, i s provided under the Credit for staff of EdC and IRC. Local Authority Sub-Committees will be established duringproject implementation. The Sub- Committee will be headedby the Provincial Governor and members will be the District Governors, Chief of Communes, and head of Villages, along the ROW. Duringresettlement implementation, Commune Councils of the affected communities will play a key role in facilitating and coordinating with the resettlement team. They will help to organize public - 107- meetings and consultations, guide the RAPteam duringthe Detailed Measurement Survey's (DMS's) revalidating inventory, facilitate inconflict resolution and witness with signature the agreed inventory list of affected assets of eachhousehold. Resettlement Cost Estimate The total resettlement cost for the transmission component i s estimated at US$2.0 million, which includes a 20% contingency. This is based on a Replacement Cost Survey carried out inApril 2003 and the inclusion of an Income Restoration Strategy for loss of income-producing trees, which raised the overall budget from a previous US$1.9 d o n . Among total costs (US$2.0 million), 5% for permanent land acquisition, 40% for house demolition and relocation, 25% for temporary impact and 20% for income restoration for sugar palms. Monitoringand Evaluation An IMOwill be appointed to monitor the resettlement and compensation process and verify that compensation, resettlement and rehabilitation have been implemented inaccordance with the agreedRAP.To ensure the resettlement objective, the IMO should also carry out income surveys among a group of sample households to monitor changes of income and livelihood and identify issues associatedwith the process of resettlement and restoration. Resettlement Policy Framework for RE Component For bothon-grid distribution sub-projects and off-grid REF sub-projects under the RE component, although little land acquisition are expected for MV and LV connections, small land acquisition might be requiredfor the construction of minihydro and some MV facilities. Since detailed project selection and design has not yet been prepared, a resettlement policy framework and procedure guidelines has been developed to ensure that any land acquisition and resettlement will follow the same resettlement policy as under the transmission component. The proposed resettlement policy framework developed includes key elements, such as resettlement principles, project description, potential impacts and resettlement screening procedure, legal framework, organizational structure, consultation and grievance procedure, and monitoring arrangement. According to the policy framework, an abbreviated resettlement plan will be prepared by the implementation agency if less than 200 people are affected by a sub- project. If more than 200 people are affected, then a RAP will be prepared. The screening of resettlement impacts will be the responsibility of two implementation agencies, EdC for the on- grid component, and PMUMIME(or the REF once it i s set up) for REFsub-projects. Ethnic Minority Development Strategy for the REF Component Although there are no ethnic minorities inthe project areas for both transmission and grid extension components, becausethe REFi s anational programand its activities may benefit ethnic minority populations, an ethnic minority development strategy has,been developed for the REFcomponent. The proposed ethnic minority development strategy will include a screening process, followed by social assessment and development of an indigenous people development plan, which will be incorporated into the application and approval process for REFsub-projects, identifying sub-projects that involve ethnic minorities and setting a consultative process inplace where this is the case. - 108 - Linkageof 220kV T/L inVietnam The proposed Transmission Component will connect the 220kV T/L between Thot Not and the border point (via Chau Doc) inVietnam with atotal of 98 km, which will enable EdC to purchase low cost electricity from Vietnam. Becausethe 220kV T/L inVietnam i s "directly and significantly related with the Bank assistedproject", the Bank resettlement policy should also apply inaccordancewith new Bank OP 4.12. Since this 220kV T/L inVietnam including two switchyards will also be funded with cost saving from the existing IDA Credit, aRAPfollowing the Bank OP has beendeveloped and approved by the Bank. - 109 - Annex 12: EnvironmentalManagementPlan A. 220kV Interconnection to Vietnam (ADB Financed) A.l 109kmTransmissionLine A.1.1 Mitigation Plan Environmental Issue Mitigating Measure Implementation ResDonsibilitv Construction Loss o f Tree Resources Trees that can survive pruning to c3 mwill be Contractor* pruned Vegetation to be cleared will be marked prior to clearance Trees to remain are to be clearly marked Vegetation to be removed manually, no pesticides to be used Crop and Land Construction techniques and machinery Contractor* Disturbance selected to minimize disturbance Construction timed to avoid disturbance of crops within one month of harvest wherever possible Existingroaddtracks to be used wherever possible. When new access roads are to be constructed alignment should cause minimum losddamage and impact to local land use pattern. Placement of fill indraindcanals not permitted Excavatedsoil (e.g. for tower footings) placed along roadsides or wherever requested by landowners (no fees) Concrete batching plants to be located on existing disturbedllow productivity sites. Only officially licensedplants permitted Wildlife Impact: Trees up to 3 mretained inROW Contractor* Habitat Loss Trees that can survive pruning to c3 mwill be pruned Workers restricted from harvesting or collecting woodltree products At the freshwater swamD area suecial + - 110- precautions are to be taken to avoid fish spawning and waterfowl habitat areas. Air quality Concrete batching plants to be located Contractor* I downwind and away from inhabited areas Soil Erosion No significant activity during monsoon Contractor* Groundcover to be left undisturbed as much as possible Trees cut only to ground level; tree stumpshoots retained Soil removed from tower foundation excavation disposed in accordance with local community (along roads or houses) and disposal site revegetated Fuel or hazardous materials securely stored at Contractor* Contamination least 20m from any surface water and above flood level Proper wastewater treatment, water supply 7 + and waste disposal facilities for workforce Noise Activities to be conducted during daytime Contractor* hours and local residents informed of construction schedule Cultural Resources Alignment should be designed to avoid areas Contractor* of cultural significance Chance find procedures should be established and incorporated into constructioncontract bidding documents. Operation Wildlife Impact: Silhouettes of birds of prey attached to Contractor* Flight Death and conductors Electrocution Markers (e.g. colored balls) attached to wires to improve birdvisibility Perch guards andlor conductor insulation Screens to prevent monkeys/arboreal animals from climbing towers Designto comply with international standards Contractor* Interference for electromagnetic interference from AC power lines Bundle conductors to mitigate corona effect r Design and manufacture components to avoid high electrical stress Public Health Designto meet international standards (IEC: Contractor* International Electro-Technical Commission) for ground level exposure to electric and magnetic fields I WorkerPublic Safety All sites certified clear of UXO by Cambodian Contractor* - 111- Mine Clearance Authority, CMAC) prior to construction Signs and fences to prevent trespassing Loss o f Agricultural Tower footing design should minimize Contractor* Productivity permanent land use requirement, and should allow access for farming in and around footing area. A.1.2 Monitoring:Plan Monitoring Parameter Construction Loss of Tree Resources Crop and Land Disturbance Wildlife Impact: Habitat Loss I Air quality Soil Erosion Water Quality and Soil Contamination Noise Cultural Resources Observation On Once, after EDC Site FlightDeathand transmission construction Engineer in Electrocution lines and/or PMU towers Observation Along Once, after EDC Site Interference Right-of-way construction Engineer in PMU Electric and Along Once, after Contractor * magnetic field Right-of-way line i s measurement energized - 112 - WorkerPublic Contractor will berequiredto receive CMAC certification that the Safety work area is mine free prior to the start of any construction Loss of Observation At tower During EDC Site Agricultural footings construction Engineer in Productivity and after PMU completion A.1.3 InstitutionalStrengthening 0 Training The Contractor is to provide training to EDC PMUEnvironmental Office staff for one month, in Cambodia, in: environmentalplanning environmentalimpact assessment environmentalmonitoring environmentalimpacts and effects environmentaldata analysis Inaddition, the Contractor, is to providea one week study tour to EDCPMU EnvironmentalOffice staff inhis home country. Designand construction contractor to prepare an occupational healthand safety plan and provide training to all staff prior to their starting any work assignment - 113 - A.2 West PhnomPenh Substation InPlan Environmental Issue Mitigating Measure I Implementation I Construction Responsibility Embankments covered with topsoil and Design and Construction planted with cover and fenced to prevent Contractor* grazing Borrow pits to be rehabilitated and revegetated Site prepared above 1in 10year flood Design and Construction Contamination Contractor* Transformers sited inimpervious and bunded areas for 110%of oil capacity and reserve tanks Drainage traps with oiYwater separators installed Proper wastewater treatment, water supply and waste disposal facilities for workforce PCBs are prohibited from use Design and Construction - Contractor*/EDC Site certified clear of UXO prior to II Contractor required to construction received CMAC clearance* Proper design to limit lightning strike Design ConsultantPMU Setback of housing inaccordance with Design ConsultantPMU Cambodian and World Bank noise standardslguidelines Setback of housing inaccordance with I Design ConsultantPMU - field IRPNINIRC standards to minimize electric and magnetic field exposure (6-7 meters, minimum) I * To be specifie inthe biddocument - 114 - A.2.2 MonitorinnPlan Monitoring Monitoring Monitoring Frequency Responsibility I Construction I Erosion Oncelweek and EDC site after rain Environment Office inPMU Water Quality Oncelweek EDC and Soil Environment Office inPMU Once, when EDC Materials transformer i s Environment delivered Office inPMU zero WorkerPublic Safety 0 Mines CMAC Project CMAC Contractor* certification for construction establishes mines area frequency EDC Environment Housing Observation Vicinity of Once, before 1 Office inP M U setback project construction construction area Observation Substation (Lightning strike construction Engineer design) Noise Observation Substation and invicinity of commissioning Engineer localresidents Electric and Along Once, after Contractor* Magnetic Field magnetic field Right-of-way substation i s measurement A.2.3 Institutional Strengthening Presented inSection A.1.3, above - 115 - A.3 Takeo Substation A.3.1 Mitiga )nPlan EnvironmentalIssue Mitigating Measure Implementation Responsibility Construction Erosion Embankments covered with topsoil and Design and Construction planted with cover and fenced to prevent Contractor* grazing Borrow pits to be rehabilitated and revegetated Water Quality and Soil Site prepared above 1in 10 year flood Design and Construction Contamination Contractor* Transformers sited inimpervious and bunded areas for 110%of oil capacity and reserve tanks Drainage traps with oiVwater separators installed Proper wastewater treatment, water supply and waste disposal facilities for workforce Hazardous Materials PCBs are prohibited from use Design and Construction Contractor*/EDC WorkerPublic Safety Site certified clear of UXO prior to Contractor required to construction receive CMAC clearance* Operation Public Safety Proper design to limit lightning strike Design ConsultantPMU Noise Setback of housing in accordance with Design ConsultantPMU Cambodian and World Bank noise standarddguidelines Electric and magnetic Setback of housing inaccordance with DesignConsultantPMU field IRPAANIRC standards to minimize electric and magnetic field exposure (6-7 meters, minimum) * To be specifie inthe biddocument - 116 - A.3.2 MonitorinpPlan Monitoring Measurement Monitoring Monitoring Monitoring Parameter Technique Location Frequency Responsibility Construction Erosion Observation At substation Once/week EDC site and after rain Environment Office inP M U Water Qualit Observation At substation Once/week EDC and Soil site Environment Contaminatic Office inPMU Hazardous Supplier At substation Once, when EDC Materials certification site transformer is Environment that PCB delivered Office inPMU content of transformer oil i s zero Worker/Publi Safety 0 Mines CMAC Project CMAC certification for construction establishes Consultant* mines area frequency Housi Observation Vicinity of Once, before EDC Setbac project construction Environment construction Office inP M U area Operation Public Safet: Observation Substation Once, after PMUSite (Lightning construction Engineer strike design) Noise Observation Substation and Once, during PMUSite invicinity of commissioning Engineer local residents Electric and Electric and Along Once, after Contractor* Magnetic Fie magnetic field Right-of-way substation i s measurement energized A.3.3 Institutional Strengthening Presented in Section A.1.3, above - 117- InstitutionalArrangements for Environmental Management Institutional arrangements for environmental management of the three project components consisting of: 109kmT/L (A.l), West Phnom Penh Substation (A.2), and Takeo Substation (A.3), will be conducted as follows: The Environment Office inthe EDC PMUwill collect all monitoring data. The data will be submitted to the Project ImplementationConsultant environmental expert who will be responsible for analyzing the data. Consequently, the Project Implementation Consultant will prepare a quarterly monitoring report to the PMU.The PMUthen, submits this report to EDC management with any recommendations. EDC Management will then instruct the PMUregarding any further actions. Ifseriousenvironmentalissuesisidentifiedwhichrequiresimmediateaction, a the Project Implementation Consultant directly informs the PMUEnvironment Office who contacts EDCmanagement immediately. - 118 - Environmental Issue Mitigating Measure Implementation Resnonsibilitv Construction Dust Wet surfaces during hot, dry andlor Contractor* windy conditions Noise Limitconstruction activities to daytime Contractor* hours. If nighttime construction is necessary, local population will be notified in advance Disruptionof traffic Place warning signs at appropriate Contractor* patterns locations Consult with local population well in advance of construction activity Land use at new pole Design to minimize pole footprint Design consultant placements Hazardous Materials N o PCBs to be used for substation Contractor* transformers or any other electrical equipment (specify inbiddocuments) Operation Electric and Magnetic Design to meet standards Design consultant c Fields B.2 MonitoringP1; 1 Monitoring Measurement Monitoring Monitoring Monitoring Parameter Techni ue Location Frequency Responsibility Construction I Dust I Observation Construction Dry, windy Environment Office of EDC site weather PMU Noise Observation Construction Daily Environment Office of EDC site P M U Construction Once EDC P M U Site Engineer traffic patterns site Land use at II Observation Construction During EDC P M U Site Engineer new pole site construction placements and after completion Hazardous Receipt of EDC office of Once, during Design Materials certification PMU tender ConsultantEnvironment that any procedure Office of PMU equipment is free from PCBs Along Once, after Contractor* Right-of- line is Way energized - 119 - B.3 Institutional Strengthening Presentedin Section A.1.3, above InstitutionalArrangements for EnvironmentalManagement Institutional arrangementsfor environmental management of the 115kVTransmission System Reinforcement will be the same as described above for the three project components consistingo f 109 kmT L (A.1),West PhnomPenh Substation (A.2), and Takeo Substation (A.3). - 120 - EdCRural Electrification(RE) C.l GridExtension ExtensionCriteria-General Non-urban areas not provided with electricity by EDC or MIME Villages within 40 kmsurrounding EDC's distribution grid Villages with reasonable access to roads, population already living alongside the road (for ease of installatiodoperatiodmaintenance) Villages where population is make a partial contribution to electrification and can pay their electric bills Villages that have development potentialhncome generating opportunities (agriculture, forestry, handicrafts, etc.) and need electricity to develop this potential Villages where electrification investments will support Government programs to halt internal migration, reduce nomadic farming and deforestation, or assist commune/villagedevelopment Villages which are included inthe list of other development assistanceprograms or projects for developing infrastructure such as: transportation, water supply, healthclinics, schools, etc. Likely elements: Gridextension could involved constructionactivities which include: (a) transformers, (b)poles, and other supporting mechanisms, (c) conductors and (d) electricity meters Environmental Checklist Criteria Ifany of the followingfactors areconsidered significant, anEnvironmentalManagement Plan(EMP, see format below) shouldbe prepared. Change inlanduse or land surface contours (altering runoff patterns) Possible use of herbicides to keep area free of vegetation (usually for fire control) Possible use of PCBs (transformers or capacitors) Soil erosion (land clearing) Tree removal or pruning Public exposure to electric and magnetic fields Interference with localaesthetic characteristics Permanent loss of productive land from support structure placement Environmentally sensitive area involved (protected area, sensitive ecosystems) Culturally sensitive area involved (temples, historically/archaeologically significant etc.) Access road construction Potential impacts to aidwater quality Potentialrisk to public healthlsafety Possible significant increase innoise levels duringconstruction - 121- Environmental Management Plan (EMF') Generic Form Mitigation Plan Environmental Issue Mitigating Measure Implementation Responsibility Construction Operation Monitoring Measurement Monitoring Monitoring Monitoring Parameter Technique Location Frequency Responsibility Construction I Operation I I I I I Zmplementation Schedule:A brief schedule indicating the start and end of all mitigating and monitoring activities. The schedule should be integrated with the overall implementation schedule of the specific grid extension activity. Znstitutional Arrangements: The EMF'will be prepared by the project sponsor and submitted to the EdC PMUwho will incorporate this information into their appraisal of the subproject and their overall decision to support the project proposal. - 122- C.2 RuralElectrificationFund Environmental Screening. Criteria Will the project take place on a new or existing site? Will the impact on landwater affect the income or lifestyle of any local people? Will the impact on aidlandwater affect the local environment? Are there any impacts that affect a large region andor are long duration (months or years)? Will there be a potential impact to the health of local people? GENERICENVIRONMENTALMANAGEMENTPLANS Mitigation Plan Environmental Issue Mitigating Measure Implementation Responsibility Construct Noise Limit construction activities to daytime Contractor* hours. If necessary, nighttime construction, but local population must be informed Dust Water sprinkle site during hot, dry and or Contractor* windy weather Set up physicalbarriers around the construction site Operation Noise Designplant to meet Cambodian or Design Contractor* international standards, specify standard inequipment biddocument Air Emissions Design plant to meet Cambodian Design Contractor* standards or World Bank guidelines (whichever is stricter), specify standards in equipment bid document Locate plant downwind and as far Contractor* away from residentialareas as possible Power producer Use low sulfur diesel fuels * To be specified inbid document - 123 - I Monito bMonitoring Measurement Monitoring Monitoring Monitoring Parameter Technique Location Frequency Responsibility Observation Construction MIME-PMU Site Residential activity or residential complaints Dust Visual Construction IIHot, dry windy II MIME-PMU Site weather or Working Group residential complaints loperation 1 Noise Acoustimeter Construction Twice/year or MIME-PMU Site upon complaints Working Group Residential of local residents (Office of Areas Standards and I Efficiency) Air Emissions Exhaust gas Diesel Exhaust Once/year MIME-PMU analyzer Working Group (Office of Standards and Efficiency) - 124- MiniHydro(0.75-5 MW) MitiEation Plan Environmental Issue Mitigating Measure Implementation Responsibility ~ ~~ ~ Construction Water quality Design site to minimize erosiodsediment Contractor * runoff (management of drainage and runoff,) Dust Spray dry surfaces during dry windy Contractor * weather Site alteration Isolate borrow pits and rehabilitate after Contractor* (Borrow pits) construction Hazardous materials Proper storage of chemical and fuels. Contractor* Limit access (keep locked) Loss of rare and Identify critical habitats Contractor*, in endangered species Prepare habitat protection plan consultation with Change project site Ministryof Environment to approve Operation Changes inwater quality Air injection Power producer (upstream and Remove vegetation prior to filling downstream) Sediment transportlerosion Flushing Downstreadupstream Ifsignificant, change site Power producer hydrology change (or Downstream regulating ponds flow regulation) impact Implement habitat protection plan on aquatic ecosystemshiodiversity and water use characteristics Introduction of exotic Reduce water residence time Power producer pest species * To be specified - 125 - Monitoring; Plan Monitoring I Measurement I h!bO!bzi-iig Monitoring Monitoring Parameter Techniaue Freauencv ResDonsibilitv Construction I I Water quality Turbidity meter Construction Once/month MIME-PMU (suspendedsolids) sitehiver or Working group stream (MIME Laboratory) Dust I Observation I Construction Once/month MIME-PMU site Working group (MIME Laboratory) Site alteration Observation At Borrow Pit Once/month MIME-PMU Working group (MIME Laboratory) Hazardousmaterials I Observation 1 Construction Once/month MIME-PMU site Working group (MIME Laboratory) Loss of rare and Observation I I Construction Once/month MIME-PMU endangeredspecies site Working group (MIME Laboratory) Operation Changes in water Once/month MIME-PMU quality (upstreamand Working group downstream) of dam (MIME Laboratory) Sediment Turbidity meter Upstream Once/month MIME-PMU transporderosion Working group (MIME Laboratory) ~ Downstreadupstream Quarterly MIME-PMU hydrology change (or downstream Working group flow regulation)impact of dam (MIME on aquatic Laboratory) ecosystemshiodiversity and water use characteristics Introductionof exotic Quarterly MIME-PMU pest species downstream Working group of dam (MIME Laboratory) - 126 - Micro Hydro (average 50kW) Mitigation Pla Environmental I ssue MitigatingMeasure Implementation Responsibility Construction Water quality Design site to minimize erosiodsediment Contractor* runoff (management of drainage and runoff) ~ ~~ Hazardous materials Proper storage of chemicaland fuels. Contractor* Limitaccess(keep locked) Loss of rare and Identify critical habitats IMinistry of Environment endangered species Prepare habitat protection plan approval required from Change project site Contractor * Operation Changes in water quality Air injection Operator (upstream and Remove vegetation prior to filling downstream) Remove upstream pollution sources Sediment Sediment bypass systems Operator transportlerosion Flushing Dredging Downstreadupstream Ifsignificant, change site Operator hydrology change (or Downstream regulating ponds flow regulation) impact Implement habitat protection plan on aquatic ecosystemshiodiversity and water use characteristics Passage of aquatic Fishladders Operator species Elevators Guidance systems Introduction of exotic Reduce water residence time Operator pest species * To be specified 1biddocument - 127 - Monitoring Plan Monitoring Measurement Monitoring Monitoring Parameter Techniaue Monitoring Location IFreauencv ResDonsibilitv Construction I Water quality Turbidity meter Construction Once/month MIME-PMU (suspendedsolids) sitehiver or Working group stream (MIME Laboratory) Hazardousmaterials Observation Construction Once/month MIME-PMU site Working group (MIME Laboratory) Loss of rare and Observation Construction Once/month MIME-PMU endangeredspecies site Working group I (MIME Laboratory) Operation Changes inwater PH, COD, TSS, MIME-PMU quality (upstreamand photometer downstream Working group 7- downstream) of dam (MIME Laboratory) Sediment Turbidity meter Upstream Once/month MIME-PMU Working group I (MIME Laboratory) Downstreadupstream I Observation Upstreamand Quarterly MIME-PMU hydrologychange (or downstream Working group flow regulation)impact of dam (MIME on aquatic Laboratory) ecosystems/biodiversity and water use characteristics Introductionof exotic Observation MIME-PMU pest species downstream Working group of dam (MIME Laboratory) - 128 - Environmental Issue Mitigating Measure Implementation Resuonsibilitv Operation Disposal of spent Sell to scrap collector for recycling Solar power consumer batteries, lead and acid Monitoring Measurement Monitoring Monitoring Monitoring Parameter Technique Location Frequency Responsibility Operation Disposal Observation At consumer site Twice/year MIMEWorking Group Znstitutional Arrangements: The EMP will be preparedby the power producer after receiving instruction from the MIMEPMUregarding the nature and scope of the issues to be addressed. The power producer will then submit the EMP to the MIME PMUwho will incorporatethis information into their appraisal of the subproject andtheir overall decision to support the project proposal. Institutional Strengthening: MIMEwill purchase four (4) acoustimeters and one (1) exhaust combustion gas analyzer (including training) to support their monitoring program. - 129 - Annex 13A: RuralElectrificationFund Objectives The Government will establish a Rural Electrification Fund (REF) as a public institution-with administrative, managerial, technical and financial autonomy under the laws of the Kingdom of Cambodia. The objectives for which the REF i s established are to promote equitable rural electrification coverage in the Kingdom of Cambodia by facilitating the population's access to electricity for economic, social and household uses. In its support of investment projects, the REF will in particular promote the exploitation of the economic potential for the application of well proven, technically and commercially, of new and renewable energy technologies inrural areas. According to the royal decree establishing the REF, i t s mandate will last until it achieves the government's policy goals on rural electrification. The sources of funding for the REF will include various donors, power transmission businesses, power supply businesses, urban consumers, andor government. The REFwill use its resourcesto co-finance on a grant basis the implementation of projects consistent with its objectives such as: (a) providing general support activities for the preparation and implementation of rural electrification projects in Cambodia such as promotion campaigns, gathering of information on rural investment opportunities and costs, and promotion of productive uses of electricity; (b) providing private sector and local community output-based investments inrural electrification projects; and, (c) promoting the commercialization of well proven, technically and commercially, of new and renewable energy technologies. Governance and organizational structure The Ministry of Industry.Mines and Energy (MIME)will have policy oversight of the REF.Inparticular, MIMEwill submit to the PrimeMinisterfor appointment nominatedcandidatesfor members of the Board of the REFBoard and monitor the compliance of REFfunding policies and strategies with the national objectives for rural electrification. The Ministryof Economy and Finance will be responsible for the mobilization of national and international sources of funding for the REF. The Annual Meetinn of Stakeholders will act as the key consultative organ for the Ministries and for the Board of the REF. Before the end of eachfiscal year, the Minister of Industry, Mines and Energy will convene a meeting of REFStakeholders to be attended by the following: e A representative for each donor providing funds to the REF; e Senior representatives from the concerned ministries (involved inrural electrification); e Representatives from financial institutions, rural electrificationenterprises, suppliers of rural electrification goods and services, and NGOs involved inrural electrification and renewable energy projects; and, e Members of the REFBoard and the ExecutiveDirector of the REFSecretariat. The purposes of the meeting will be to provide for the presentation by REF Board and discussions with stakeholders o f e The draft Annual REFReport containing a status of the national rural electrificationprogram. e A preliminary report on the end-of-year financial situation of the REF. - 130- 0 A draft Boardresolutionfor the optimal allocationand use of REFfunds for the next fiscal year, including: (a) allocation of the annual REFfunds to investment subsidies, to general rural electrification and renewable energy support programs, and to the REF operational expenses such as payments to the Board, the Secretariat and the Payments Agent; (b) eligibility criteria for grant support to rural electrification and renewable energy projects; and (c) REF subsidy rates for the next financial year. The Board of the REF (REFB) will consist o f The Minister of Industry, Mines and Energy or hisher representative as Chairman of the Board; The Secretary of State of the Ministryof Economy andFinance or hidher representative; The Chairman of Electricity Authority of Cambodia (EAC) or hisher representative; The Under Secretary of State or hisher representative, fromthe Ministryof RuralDevelopment; A representative of donors, recommendedto the Minister of Industry, Mines and Energy by the donors; A representative of the financial sector recommended to the Ministerof Economy and Finance by the Cambodia Bankers Association; A representative of firms involved inrural electrification development projects, recommendedto the Ministerof Industry, Mines and Energy; A representative of non-governmental organizations or internationalorganizations involved in rural electrification development projects, recommended to the Minister of Industry, Mines and Energy; A Commune Mayor, representingrural consumers. The members of the Board will holdoffice for a duration of two years which upon expirationmay be renewed only once for another two (2) years term. All members of the REFBoard will have the right to vote on all matters requiring the decisions of the REF. These decisions of the REFBoard will be based on the majority vote. All members of the REFBoard will be given notice of the date and time, place and objective of the session inwhich the decision will be voted on. The REFwill keep a record of the Board proceedings, findings and decisions. The REFBoard decisions, with their explanations, will be published as soon as the decisions are made unless the REFBoard has reasonable causes to withhold or delay the publication. The functions of the Board will be as follows: 0 To act as the advisory board on policy issues related to rural electrification and the commercialisation of well proven, technically and commercially, of new and renewable energy technologies to the Ministryof Industry,Mines and Energy; 0 To adopt its own procedures for conducting meetings and other administrativematters relatedto the execution of its functions. 0 To approve the appointment of a duly qualified independent and internationally recognized firmto carry out the external audits of the REFand the Payments Agent. 0 At the end of eachfinancial year, adopt the annual policies and procedures for the use of REF funds for the next financial year, inparticular concerning: (a) the allocation of the annual REF budget to funds for investment subsidies, ruralelectrification support programs and projects, REF operational expenses including the cost of the Payments Agent, and new and renewable energy programs and projects; (b) eligibility criteria for REFgrant support; and, (c) REF subsidy rates for the financial year. 0 Hire or dismiss the ExecutiveDirector of the REFSecretariat. 0 Define procedures for tendering of out-sourced programs and consulting tasks and payments to project sponsors. - 131- 0 Approve the organizational structure, personnel policies and internal work procedures of the REF; the annual work programof the REF; the annual operational budget of the REF; and, the annual accounts of the REF; 0 Monitor the management and operational performance of the REFSecretariat, including the payment procedures for sub-contracts. 0 Contract the REFPayments Agent and supervise its performance and the flow of funds to subsidy recipients. The REFSecretariat will be managedby anExecutive Director, who will be appointed by the Board on the basis of public competitive selection. The Executive Director will be responsible for the daily management of the REF. The specific functions of the Executive Director will be definedinthe employment contract signed with the Board. The Board will also ensure that the remuneration of REF Secretariat staff i s competitive with prevailing salaries offered by the private sector and shall not be bound by the terms established under the State regulations for civil service salaries and terms of employment. The REFSecretariat will have the following functions: 0 To generate and provide information to communities, investors, consultants, and financial institutions costs and benefits of rural electrification and new and renewable energy projects; potentialinvestment opportunities, and the terms and procedures of technical and financial support programs. 0 To evaluate and approve applications for the REFgrant funds to rural electrification and new and renewable energy projects and disclose, inter alia, the names of the approved projects, a brief descriptions of the approved projects, the names of the grant beneficiaries, and the amount of each grant approved. 0 To undertake planning and project preparation activities needed to keep up the momentum of the Government's rural electrification programsupport. 0 To monitor and evaluate the performance of supported programs and projects and maintain a national rural electrification database on rural electrification projects inCambodia. 0 To carry out any other functions as the Board will direct it to carry out. The administration of payments to beneficiaries of REFgrants will be undertaken by the REF Payments Agent contracted by the Board through public tender for the procurement of the service: banks, accounting firms or similarly qualified institutions acceptableto the Board may participateinthe tender. To avoid conflicts of interest, all employees of the REF, including their spouses and children will not be permitted to hold any official, advisory or consulting role with, own stocks or bonds of, or have any economic interest in the beneficiaries of the REFgrants. Furthermore, all employees of the REF will be prohibited to accept, any gift or gratuity, different from that generally applicable to the public, from any above-mentioned beneficiaries of the REFgrants. The REFwill establish and maintain a financial management system, including records and accounts, and prepare financial statements in accordancewith international accounting standards to adequately reflect the operations, resources and expenditures related to the REF. The auditor will within four (4) months after the end of each financial year, submit his audit report to the REFBoard, to the Minister of Industry, Mines and Energy, the Minister of Economy and Finance, and to each donor of the REF.A donor may require to appoint the auditor of its choice and at its cost to audit the books of the REFand the Payments Agent and may have a provision to this effect inits agreement with the REF.The REF will ensure that the funds from the REFare used for intended purposes and procurement of goods, works and services under the rural electrification projects to be financed by the REFfunds are performed, pursuant to the laws and - 132- regulations on procurement of the Kingdomof Cambodia, inaccordancewith economy and efficiency principles, and in a competitive and transparent manner. Programmechanisms The REF, incoordination with EAC, will float Requestsfor Proposals to serve particular areas, based on the least cost principle. The REF Secretariat will align applications forms with the forms used by the EAC inthe license applications - requestedtechnical, institutional, financial andother information - to minimize the transaction costs for developers and for the REF-EAC appraisal process. Criteria for pre-screening of REFinvestment prants Application form fully filled out. Copy of the feasibility report attached. 0 Copy of the applicationto EAC for the generatioddistributionlicense attached; and or copy of the license itself. Copy of the application for project loan attached. Copies for all relevant approval documents attached; or if, not yet processed, of the applications for approval. 0 Project eligible for REF-grant support, falling into one of the following categories: a) Isolatedgrid project with diesel generator (gridextension by REEs); b) Isolatedgridproject servedby micro-hydro; c) Micro-hydro plant connected to national grid; d) Mini-hydroplant connected to national grid; e) Off-grid solar home systems. Criteria for approval of REFinvestment grants All categories of REF-supportedprojects Compliance with regulatory conditions a) All neededlocalplanning approvals have been obtained; b) An EIA, ifrequired,has beenperformed and approved by the pertinent authorities; c) EAC has issueda license for the project; d) No other party applied to EAC for a license for the same project inresponseto the publication by EAC of the license application, within the time limit established by the Electricity Act and EAC regulations. 0 Compliance with technical conditions: a) The technical norms and standards for rural electrification and for renewable energy are fulfilled; the least cost design i s used. b) The cost of individual major investment items is inline with the level of local costs according to the data bank on rural electrification costs established by REFor EAC. 0 Financial viability of the project: a) there is strong evidence of financial closure; b) the commercialbank for providing the debt finance for the projecthas agreedto finance the project and finalized its due diligence assessment (copies of the draft loan agreement and the banks project appraisal document are attached) c) the REFevaluation confirms the banks assessment of financial viability and ability of the project's cashflow inearly years to service the debt payments. - 133 - 0 Institutional viability of the project: a) project applicant i s a legal person; or actively engaged inbecomingregistered as a legalperson (such as a co-operative or a company). b) projects are not to be managedor majority-owned by the public sector and must demonstratelocal community support. 0 Compliance with World Bank standards for social and environmental safeguards. Criteria specgicfor distribution projects 0 The tariff calculation formula usedto establish the tariff schedule, submitted to EAC for approval, takes the REF-investmentsubsidy into account. 0 Potentialconsumers have expressedtheir interest inthe project by paying a deposit. Criterion specijicfor grid-connectedhydropowerplants EdC has signed a PPA with the developer or a letter of intent. Criterion specijicfor SHS 0 The solar company is eligible for access to REF-grants, being on the approved dealer list for solar home systems (SHS). Inclusion inthe list i s subject to confirmation by the REF that the solar home systems marketed by the solar company inCambodia comply with REFquality standards for SHS. REFgrant rate schedule(for first year of operations) New household connection(diesel): US$45/new connection Mini-hydro (0.75-5 MW): US$4OO/kW installed 0 Micro-hydro (average 50 kW): US$4OO/kW installed Solar Home Systems: US$lOO/set of 40 Wp Triggers for disbursement of REFgrants Isolated grid project with diesel generator,isolated grid project served by micro-hydro, and hydro connectedto national grid Firstpayment: 40% after start of construction, basedon declaration by project developer of signingof contracts amounting at least to 50% of total investment sum, written confirmationby contractors having signed the listed contracts, and declaration of project developer providing planned time schedule for completion of construction. Secondpayment: 40 % at finalization of construction, basedon certification by chartered engineer that system i s complete and complies with specification and i s operational. 0 Finalpayment: 20% after three months of operation, basedon certification by chartered engineer and/or confirmation by EAC or EdC. Solar Home Systems 0 Single payment: 100% upon receipt of detailed schedules inhard copy and inread-only soft copy format of REF-compliant SHS installed along with grant disbursement request. The solar company will also forward a declaration confirming that the schedules exactly matchthe - 134 - information given inCustomer Acceptance Receipts (CARS)and that the original CARSwill be kept available for inspection by authorized personnel. Copies of customforms for imports of SHS or SHS-components will be provided. The solar company has signed a declaration confirming that the original customforms will be kept available for inspection The REFOperational Manual will establish procedures for control checks on information received from project developers, evaluations inthe event of irregularities, and sanctions for breach of subsidy award contracts. Cost-sharedTA for project developers The REFwill provide technical assistanceto the private sector, NGOs and rural communities inorder to buildtechnical andbusiness capacity andpreparefeasibility studies for good quality proposals for REF funding. Targeted business sectors The targeted business sectors involved inthe supply side of rural electrification will include: Project developers (professional private investors as well as CBOs); Renewable energy technology (RET) and rural electrification (RE) consultants, construction companies and other businesses involved inthe production, installation, supply of equipment, O&M and other rural electrification related services; Financial intermediaries providing loans to rural electrification and renewable energy investments. Scope of support Support to the supply side inrural electrification covers TA at all stages -- pre-investment; start up and early business and market development, business improvement and growth: Business DevelopmentAssistance to agents involved in the implementation of grid based RE-projects - project developers and small utility operators, NGOs assisting local communities indevelopinglocal electricity supply, consultants preparingfeasibility studies, and constructors. Business Development Assistance to companies involved in the commercialization of renewable energy technologies, comprising dealers, retailers, and leasers of solar home systems. Capacity buildinginthefinancial sector to banks and micro-finance institutions inthe appraisal of RE and RET investment projects. TA inmanagement, finance, customer relations, billing and invoicing and O&M to community owned and small scaleprivate RE-utilities. Promotion of productive uses of electricity inon-farm and off-farm production. TA to small and medium scale rural enterprises on the financial feasibility of investments inelectricity consuming equipment, and the preparation of business plans for investments making productive use of electricity. Promotion of technical norms and standards and quality control, including the verification of the accuracy of electric meters. As a general rule: Recipients of TA to businesses in the supply side of RE are charged a fee equal to 50% of the specific cost of the service. e TA to businesses for enhancing their productive uses of electricity i s provided free of charge. - 135 - Monitoring and Evaluation (M&E) M&Ereports will bepreparedto providethe REFBoard, the Government andco-financing donors and multilateral banks with information on: 1. The status of nationalREandthe role of the REFherein, making use of output indicators for the REF. 2. The socio-economic impact of REprojects (impact indicators for the REF). 3. The effectiveness of REFprocedures and the relevancy and cost-effectiveness of REF-financed support programs (program quality indicators for the REF). Monitoring and evaluation will be undertaken through self-evaluation and through contracted external consultants, funded from the REFoperating budget. As inputsto the preparation of the Annual REF Report, the REFSecretariat will prepare assessments and evaluations of the effectiveness of REF procedures and REF support projects. The M&Eof the impact of REon rural transformationwill be entrusted to externalconsultants, reporting directly to the REFBoard. Approximately US$200,000 will be budgeted inthe pilot REF, financed by IDA and GEF, for external consultant contracts for M&E, in addition to the portion of the REFSecretariat budget for M&E. The RE Planning and Monitoring & Evaluation Unit (REPMEU) of the REFSecretariat will be the responsible implementing entity for M&E-activities within the REF.Normally, REPMEUwill write the TOR for anM&Eactivity and contract the consultants. Inthe case of M&Eactivities initiatedby foreign donors and multilateral development banks, REPMEUwill be responsible for facilitating required local assistanceto the M&E-team contracted by these. The RE-Datu base developed and'maintained by REPMEUwill be of key importance for the monitoring work. It will store quantitative information from REF-grant applicationforms (feasibility study: number of households in community, economic activities, number of householdhusiness owned generators) and from REF-grant disbursement forms (project completion form: number of connected households, type of productive uses and estimated productive loads, kmof MV- and LV-lines,number of poles and transformers and cost data). It will also store quantitative and synthesize qualitative data from M&E reports. REPMEUwill, inclose consultation with the contractedconsultants for the capacity buildingcomponents, develop efficient M&E procedures for REF supported capacity building activities. One standard procedure i s that participants at training courses are requestedto fill out a questionnaire at the end of the seminar on the quality and relevancy of receivedtraining. Type of Report Comments REFS - Quarterly progress Short standard format report with quantitative data on outputs+ short observations on items calling for attention - Annual REF Status Report Quantitative data on RE by REFS on effectiveness of procedures, programs and subsidy levels + REF-outputs + self-evaluation+ synthesis of conclusions of evaluation reports prepared by outside consultant - Mid-term review Evaluation by outside consultant contracted by donors - End-of-term report Quantitative data + self-evaluation+ evaluation report prepared by donor-contracted consultant Outsourced TA-activities: - Quarterly progress Short standard format report with quantitative data on outputs + short observations on items calling for attention - Annual status report Quantitative data + conclusions from self-evaluation - 136- - Mid-term review Evaluation by outside consultant contracted by REFS - End-of-term project report Quantitative data+ self-evaluation + evaluation report prepared by REFS-contracted consultant Socio-Economic Impact of REF Responsibility for M&Eout-sourced to outside institution Ad-hoc M&EReports Evaluation reports requestedby donors and executed by donor- contracted consultants or by consultants contracted by REFS on behalf of donor The Annual REFReport will cover the following performance indicators that will be monitored by the REF: 1.Rural GridElectrification Status The number of communities and agglomerations inCambodia that have been electrified during the year; new households getting electricity service; percentageand number of communities by category of size that remain without electricity service Progressinrural electrification coverage (percentage of rural populationliving in electrified areas) and rural connection rate (percentage of rural householdshaving electricity service). The number of rural enterprises (including those inthe broadly defined agriculture sector) that have been connected duringthe year and their estimated load. The number of healthclinics and schools that have been electrified duringthe year and the percentageand number of national clinics that remain without electricity service 2. Sales of solar home systems Annual sales of solar pv systems for isolated households and institutions. 3.Promotion of grid-connected generators using renewable energy Number of micro-hydro plants, total installed capacity and annual generation of electricity. Number of mini-hydro plants, total installed capacity and annual generation of electricity. Number of biomass-fueled power plants, total installedcapacity and annual generation of electricity. 4. Socio-economic impacts Productive use impact. The impact of electricity (i) onthe improvement and quality of social services - health, education, public administration- (ii) on commercial business activities - the creation of new agro-industrialbusinessesand services, development of productivity and quality enhancement inexisting agro-industrialbusinessesand services- and (iii) linksto other infrastructure investments such as water, road and telecommunications. Impact on household welfare. Benefits from improved lighting and better access to radio and, above all, TV. Poverty impact of supported RE-projects.Connection rates of poor households; poverty impacts from indirect access to electricity. The equity impact of REFsubsidies REEandrenewable energy businessdevelopment impacts. Number of new businessesand scaling up of existing businesses. - 137 - Indicators for the above are collected usinga methodology containing participatory and survey elements. 5. Impacts on costs of RE and on rural tariffs and quality of service 0 Evolution inthe costs of RE over time, adjustedfor differences in customer density and other cost- affecting factors 0 Evolution in rural tariffs over time, adjustedfor differences in customer density and other cost- affecting factors. 0 Average number of hours per day in which electricity is supplied to households by the REEs. Indeterminingtheoverallpolicies,procedures,workprogramandbudgetoftheREF,theBoardwill monitor the following aspects of the effectiveness of REF investment subsidies: 0 The annual balance between the supply of grant funds (forecast payments for the year) and the demand for funds (accumulated grant finance requestedby applicants) 0 The impact of REFinvestment subsidies on reducingthe cost of investment for project developers (subsidy inpercent of the cost of investment). 0 The importance of RE-investment subsidies for facilitating financial closure of projects 0 Whether other instruments for investment support, such as guaranteeschemes for loans, for example, would be a cost effective mean to enhancethe impact of REinvestment subsidies on the acceleration of RE. 0 The extent of free-rider effects (giving subsidies to projects, which would have beencarried out also inthe absenceof a subsidy; or offering lower tariffs to consumers who would havebeen willing to pay a higher tariff). 0 The evolution over time in the cost of subsidy per connected customer. 0 Extent of "perverse" (investment distorting) incentives of procedures used for the processing of applications and for the form for payment of awarded subsidies M&E of the effectiveness of RE-support TAprograms Key outuut indicators are: 0 Number of feasibility studieshusiness plans prepared with REF-financedTA. 0 Number of technicians inRE-constructionand/or operation trained inREF-financed courses number of trainedrural and renewable electricity employees indifferent institutions. 0 Number of solar energy technicians trained inREF-financed courses. 0 Numberof bank staff trainedinappraisal of RE-and renewable energy projects. Key impact indicators are: 0 Evolution inthe quality of feasibility studies, which are attached to the applications for REF investment subsidies. 0 Evolution inthe penetration of least cost technologies and quality of constructionwork. 0 Evolution inthe unit price of components and of services. 0 Evolution inthe quality of business plans presentedby project developers to banks for loan finance for REand RET projects. 0 Evolution inthe percentage of timely repayment of loans by REEs to financial institutions. 0 Evolution inthe quality of project appraisal by financial intermediaries, inter alia witnessed in repayments of loans Annex 13B :Status of REFSub-project Pipeline A number of preparatory studies were undertaken by the team inassociation with the stakeholders as part of preparation activities. This annex summarizes the findings of the studies and lists some projects that are ready for further development. Mini-Hydroprojects: A pre-investment study was conducted to identify potential mini-hydro projects. Over 68 previously identified sites were screenedbased on criteria such as distance from demand center, distance from transmission line, existence of mediumvoltage lines indemand centers, location on suitably sized rivers, and social and environment impacts. Fromthe initial screening, a total of 28 sites were identifiedfor a desk study. Basedon further screening ,a set of 17 sites were identified for site visits to get first hand knowledge of project sites and carry out preliminary technical and sociallenvironmental assessments. Based on this approach, a pipeline of projects identified for further development and support under the REF. The project pipeline proposed for development is: > 0TurouTraoprojectinKampotprovince. > PhnumBataudownstreamand 0 Sla projects inKohKongprovince. > Stung Sva Slab project inKampong Spoe province. > Tunsang upstream,Tunsang downstreamprojects inKohKongprovince. > StungSiem Reap and Upper StungSiem Reapprojects inSiem Reap province. The first three pipelineprojects are considered the most likely to be developed by the private sector due to the followingreasons: Production cost i s between US$0.03 and O.OB/kwh without capital subsidy. Developmentcost i s less than US$1,700kW without capital subsidy. Favourable project location. Favorable topographic and hydrological conditions. I m m 3 I 140 Rural Electric Enterprises: Inorder to assess the market demand, an initial survey (A survey of 45 Rural Electricity Entrepreneurs) of rural electricity entrepreneurswas conducted to determine to what extent these businesses were supplying electricity to rural consumers. The survey demonstrated that private sector participationinrural electrification was substantial and estimated that there were more than 600 privately owned and operated firms were supplying power to between 60,000 and 120,000 households. These businesseshad substantial investments exceeding US$12 million and were willing to invest more in expanding their services if there was long termpotential and given assurances that grid extension policies would be properly coordinated by the EAC. Inorder to determine REE's interest inworking together as a group to improve their businessclimate and technical capabilities, formation of two private business associations representing 67 REEs inBattambang and Banteay Meanchaey was supported. Further,the project also assistedindetailed analysis of three REEson atechnical level andto determine if there was interest, potential and value inlinkingindependent isolated grids. The results indicatedthat if the REEs were provided a small subsidy per household hook-up to fund upgrades inthe generating and distribution equipment, then REEs could produce and sell quality power at a price equal to or slightly higherthan national utility could provide through grid extension at a much higher price per hook-up. Details of the three sample projects are providedbelow, but considering the earlier market assessment as well as discussions with financial institutions such as ACELEDA that already have REEclients (for working capital support), the demand for REEproject proposals is not seen as a problemby the team. Project Location Customers System Energy name/establishment configuration sold/year date Kouk Ampil REE, Phnom Smapov 295 HH Total 70 kW 30,060 kWh Established 1995 commune, (3OkW+4OkW) Battambang Length of distribution line 5,700 meters Conductor size 2x16 "2 Krapeu Choeung PhonomSampov 75 HH Total 15 kW 2,256 kWh REE,establishedin commune, capacity; Total of 1998 Battambang 2150 meters of distribution line. Conductor size i s 2x2.50 "2 Paoy Svay REE, Takream 30 HH 10KW capacity; 1,236 kWh established 1999 commune, 1,330 meters of Battambang distribution line. Conductor size i s 2x2.5 "2 Solar PV market: Several consultant studies were undertaken duringpreparationto assess the market for solar home systems inCambodia. These include (1)Investing in solar Photovoltaics inCambodia: Market study and business models; (2) Market Development and promotion plan for SHS; (3) FinancingPV Household Electrification inCambodia and (4) Photovoltaic market development in Cambodia (UNDP/FINESSE). Based on the information and analysis available to date, there is already a commercial market for PV basedtelecommunication relay stations. However, PV as means to serve basic electricity 141 needs inrural Cambodia i s yet to be tested and established. Today battery charging i s the main source of electricity inrural Cambodia with over 50% of rural families or over 1.15 million households exercising this option. This representsa large global market potential for Solar Home Systems (SHS) in Cambodia. The solar market assessment study estimates that that the exploitablemarket potential for households systems could be between 250,000 and 450,000 units, if capital cost buy down subsidies of about $3.5 /Wp were offered. Approximately 85% of the market appears to be inthe 30-40 Wp systems, that offer the capacity to supply one (or two) lamps and a B&W TV. Currently, three companies import and sell almost all solar products in Cambodia, including systems for telecommunications and solar home systems; Khmer solar company, Metrofieldengineering Co. Ltd and R.MAsia Ltd.An estimated 250 kWp of solar panels have beeninstalledthus far. Inaddition, several internationalPV manufacturers such as Photowatt, Shell (Siemens), Solarex, unisolar and BP Solar have either a national or local presence. VillageMicro Hvdro Projects: Inorder to identify a pipeline of village/micro hydro projects, a pre- investment study was conducted inpartnership with the Asian DevelopmentAssistance Facility (ADAF) of the New Zealand Ministry of ForeignAffairs and Trade. Based on preliminary screening, 45 potential micro hydro projects were identified in9 provinces rangingincapacity between 10 kW and 500 kW. Six (6) priority communes were identified for conducting detailed studies and social and energy assessments were conducted using a range of qualitative and quantitative research methods. The social assessmentsutilized a variety of PRA techniques to gather information from different social, ethnic, age, income and gender groups inthe commune inorder to gaina more detailed understandingof the issuesfromthe perspectives of the various groups within the community. The first pipeline representsthe projects considered most likely to be developed because: - Reliable safe electricity supply was rankedfirst, secondor thirdindevelopment priority within the community. - Favorable socio economic conditions exist inthe community. - Capacity of the community supports sustainabledevelopment. - Community mobilization will not be time consuming. - Economic internal rate of returnis between 8 and 13% and the average incrementaleconomic cost i s between US$0.2and US$0.24/kwh without capital subsidy. - Projects are located near the communities. - Favorabletopographic and hydrological conditions. Detailedbelow are the details of the initial pipeline of sub-projects that could be developed. MAP SECTION
Groupe de la Banque mondiale · Project Appraisal Document
Cambodia - Rural Electrification and Transmission Project
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