Sri Lanka - Energy Services Delivery Project

Document of The World Bank Report No: 16063-CE PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 16.9 MILLION AND A GEF TRUST FUND GRANT IN THE AMOUNT OF SDR 4.2 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR AN ENERGY SERVICES DELIVERY PROJECT February 27, 1997 Energy and Project Finance Division Country Department 1 South Asia Region  CURRENCY EQUIVALENTS Currency Unit = Sri Lankan Rupee (Rs.) US$1.00 Rs 53 (July 1996) Fiscal Year Government of Sri Lanka and Commercial Banks January 1 to December 31 Development Finance Corporation of Ceylon April 1 to March 31 ADB Asian Development Bank ASTAE Asia Alternative Energy Unit ASTEN Asia Technical Department, Environmental and Natural Resources Division AU Administrative Unit AWDR Average Weighted Deposit Rate BOC Bank of Ceylon CAS Country Assistance Strategy CBOC Commercial Bank of Ceylon CBSL Central Bank of Sri Lanka CEA Central Environment Authority CEB Ceylon Electricity Board DFCC Development Finance Corporation of Ceylon DFI Development Finance Institution DSM Demand Side Management EA Environmental Assessment EEBC Energy Efficient Commercial Building Code of Practice ESD Energy Services Delivery FIL Financial Intermediation Loan GDP Gross Domestic Product GEF Global Environment Facility GOSL Government of Sri Lanka ICB International Competitive Bid IRR Internal Rate of Return ITDG Intermediate Technology Development Group kW Kilowatt kWh Kilowatt-hour MOFP Ministry of Finance and Planning MW Megawatt MWp Megawatt Peak NBF Not Bank Financed NCB National Competitive Bid NDB National Development Bank NEAP National Environmental Action Plan NGO Non-Governmental Organization O&M Operations and Maintenance OED Operations Evaluation Department PCI Participating Credit Institution PE Pre-Electrification PFDP Private Finance Development Project PHRD Policy and Human Resource Development PPA GEF Project Preparation Advance PPF Project Preparation Facility PV Photovoltaic SAl EF South Asia Country Department 1, Energy & Project Finance Division SHS Solar Home System SIL Specific Investment Loan SMI Small and Medium Industries SOE Statement of Expenses SPPA Standard Power Purchase Agreement SPPT Small Power Purchase Tariff TA Technical Assistance UNDP United Nations Development Programme WP Watts Peak Vice President: Mieko Nishimizu Acting Director: Fakhruddin Ahmed Division Chief: Per Ljung Staff Member: Loretta Schaeffer  Sri Lanka Energy Services Delivery Project TABLE OF CONTENTS PROJECT FINANCING DATA .........................................................................1I BLOCK 1: PROJECT DESCRIPTION ..........................................................................2 1. Project development objectives ..........................................................................2 2. Project components ..........................................................................2 3. Benefits and target population ..........................................................................2 4. Institutional and implementation arrangements ..............................................................3 BLOCK 2: PROJECT RATIONALE .............................................5 5. CAS objective(s) supported by the project .....................................................................5 6. Main sector issues and Government strategy ................................................................5 7. Sector issues to be addressed by the project and strategic choices .........5.....- ........... 5 8. Project alternatives considered and reasons for rejection ..............................................6 9. Major related projects financed by the Bank and/or other development agencies .........6 10. Lessons learned and reflected in the project design ................................................... . 7 11. Indicators of borrower commitment and ownership ..................................................... . 7 12. Value added of Bank support ..........................................................................8 BLOCK 3: SUMMARY PROJECT ASSESSMENTS . ......................................................................... 8 13. Economic Assessment ..........................................................................8 14. Financial Assessment ..........................................................................9 15. Technical Assessment ..........................................................................9 16. Institutional Assessment ..........................................................................9 17. Social Assessment ......................................................................... 10 18. Environmental Assessment ......................................................................... 10 i 9. Participatory Approach ......................................................................... 10 20. Sustainability ......................................................................... 11 21. Critical Risks ......................................................................... 11 22. Possible Controversial Aspects ......................................................................... 12 BLOCK 4: MAIN LOAN CONDITIONS ......................................................................... 12 23. Effectiveness Conditions ......................................................................... 12 BLOCK 5: COMPLIANCE WITH BANK POLICIES ......................................................................... 12 List of Annexes: I Project Design Summary 2 Detailed Project Description Draft Operating Policy Guidelines for the ESD Credit Program 3 Estimated Project Costs 4A Cost Benefit Analysis Summary, Pilot (3MWN) Windfarm Component 4B Cost Benefit Analysis Summary, Solar Home Systems Representative Subproject 4C Cost Benefit Analysis Summary, Village Hydro Representative Subproject 4D Cost Benefit Analysis Summary, Mini-Hydro Representative Subproject 5 Financial Summary 6 Procurement, Disbursement and Auditing Arrangements 7 Project Processing Budget and Schedule 8 Documents in the Project File 9 Status of Bank Group Operations in Sri Lanka 10 Sri Lanka at a Glance 11 Terms of Reference: Administrative Unit 12 Country Map of Sri Lanka   INTERNATIONAL DEVELOPMENT ASSOCIATION South Asia Region Country Department I Project Appraisal Document Sri Lanka Energy Services Delivery (ESD) Project Date: February 20, 1997 0 Draft 0 Final Task Manager: Loretta Schaeffer Country Manager: Roberto Bentjerodt Project ID: LK-PA-10498 (IDA) LK-GE-39965 (GEF) Sector: Energy POC: Environment, Private Sector Lending Instrument: FIL/SIL PTI: El Yes 0 No Project Financing Data a Loan 0 Credit E Guarantee For Loans and Credits: Amount (US$/SDR): 24.2 million/ 16.9 million Proposed Terms: 0 Multicurrency Q Single currency Grace period (years): 10 years Q Standard Variable El Fixed E LIBOR- based Years to maturity: 40 years Commitment fee: Standard (a variable rate between 0 and 0.5% of the undisbursed credit balance set annually by the Executive Directors of IDA) .T .. ......... " I....... ..........I.......... ........ .......... I'l............................................................................................................................................................................ Financing plan (US$m) Source Local Foreign Total Government 1.9 0.0 1.9 Participating Credit Institutions 5.5 8.2 13.7 Entrepreneurs 4.0 5.6 9.6 Global Environment Facility (GEF) 2.1 3.8 5.9 IDA 9.1 15.1 24.2 Total 22.6 32.7 . 55.3 Borrower: Democratic Socialist Republic of Sri Lanka Guarantor: N/A Responsible agency(ies): Ministry of Finance and Planning (MOFP), Ceylon Electricity Board (CEB) Estimated IDA disbursements (Bank FY/US$M) 1997 1991 1299 200 2001 2002 Annual 0 2.6 3.4 5.4 6.6 6.2 Cumulative 0 2.6 6.0 11.4 18.0 24.2 Estimated GEF disbursements (Bank FY/US$M) Annual 0 0.8 0.9 1.5 1.5 1.2 Cumulative 0 0.8 1.7 3.2 4.7 5.9 Expected effectiveness date: June 1997 Closing date: Dec.2002  Project Appraisal Document Page 2 Country: Sri Lanka Project Title: Energy Services Delivery Block 1: Project Description 1. Project Development Objectives (see Annex I for key performance indicators): In order of importance, the project objectives are to: a) Promote the provision by the private sector, NGOs and cooperatives of grid-connected and off-grid energy services using environmentally sustainable renewable energy technologies; b) Strengthen the environment for Demand Side Management (DSM) implementation; and c) Improve public and private sector performance to deliver energy services through renewable energy and DSM. Selected Performance Indicators a) Installation of at least 26 MW of grid and off-grid renewable energy capacity including service up to 32,000 off-grid customers; b) CEB issuance of Energy Efficient Commercial Building Code of Practice (EECB); and c) (I) CEB annual update of Small Power Purchase Tariff (SPPT); (2) signing by CEB of at least 5 SPPA contracts by mid-term evaluation; 12 by project completion; and (3) generation planning models prepared by CEB which incorporate intermittent, non- dispatchable renewable energy generating sources. ............................................................................................................................................................I................................................................................................ 2. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Component Cost Incl. Contingencies % of Total (US$M) The ESD Credit Component, channeled through private Participating Credit Institutions 48.9 88.0 (PCIs), would provide medium and long-term financing to private sector firms, NGOs, and cooperatives for solar home system and village hydro pre-grid electrification, grid- connected mini-hydro schemes, and other renewable energy investments. Grant cofinancing from the Global Environment Facility (GEF) would be available for solar home system and village hydro subprojects. The Pilot Grid-Connected Wind Farm Component would finance a CEB-executed pilot 3.8 7.0 grid-connected wind farm project of approximately 3 MW. This pilot project is expected to demonstrate the commercial viability and long-run economic potential of wind power in Sri Lanka, and to catalyze future private sector windfarm development. The Capacity Building Component would provide training and technical support for 2.6 5.0 renewable energy and energy efficiency initiatives by both the public and private sector. Total 55.3 100.0 enefits and target population: The primary direct project benefits are: a) the addition of about 26 MW of environmentally sustainable generating capacity, including a Pilot Wind Farm, grid-connected mini-hydros, and electricity services to up to 32,000 rural customers through solar home systems and village hydro schemes. This comes at a time of severe capacity shortf.ill, when CEB is aggressively pursuing thermal power capacity additions. b) development of sustainable markets for grid and off-grid renewable energy technologies. c) strengthening of demand side management and energy conservation capabilities within the CEB and the Sri Lankan architecture/engineering community. d) for the GEF eligible technologies (village hydro and solar home systems), benefits include the mitigation of greenhouse gas emissions through displacement of conventional technologies. The primary programmatic benefits are: a) incorporation of environmentally sustainable renewable energy technologies within the planning framework for grid-connected power generation (wind, and mini-hydro) and pre-grid rural electrification (solar home systems and village hydro). b) acceptance by consumers, project developers and financial institutions of the viability of grid and off-grid renewable energy systems for electricity production and delivery. c) incorporation of DSM and energy efficiency measures in standard building design practices. Target Population Mlini-hydro - Private investors  Project Appraisal Document Page 3 Country: Sn Lanka Project Title: Energy Services Delivery Solar Home Systems and Village Hydro - Private investors, non-governmental organizations (NGOs), or village cooperatives will provide energy services to currently unserved rural households Wind Farm and Capacity Building - Ceylon Electricity Board (CEB) .4 ~ ~ ~ ~ ~ ..................... -............................I..........I.......... ........ .................................................... 4. nsituioal and implementation arrangements: Implementation period: Five years (1997-2002) Executing agencies: Ministry of Finance and Planning, Ceylon Electricity Board Institutional and implementation arrangements for the Project are based on a Project Implementation Plan, discussed and agreed with the Bank during appraisal (see Project files). Project coordination: For the ESD Credit Program Component, the Ministry of Finance and Planning would onlend the proceeds of the credit component to eligible PCIs, which would, in turn, onlend these proceeds, along with complementary financing out of their own resources, to eligible subborrowers.I The GOSL has selected the Development Finance Corporation of Ceylon (DFCC) to create an Administrative Unit (AU) to administer the Credit Program. The GOSL and the DFCC are currently negotiating an Administration Agreement. The AU would be responsible for (i) administration of the Credit Program; (ii) administration of the GEF grants; and (iii) technical assistance related to off-grid subprojects. The Credit Program would support subprojects up to 5 MW in capacity per project. (Larger projects could seek financing via the Private Sector Infrastructure Development [PSID] Project. -- Cr. 2880-CE.) US$5.0 million of the Credit Program proceeds would be reserved for off-grid subprojects (e.g., solar home system and village-hydro schemes) until the Mid-Term Review which would consider the need for continued earmarking of funds. The maximum IDA refinancing amount under the Credit Program would be US$3.0 million per project or the PCI's single borrower exposure limit, whichever is lower. Operating policy guidelines and proposed on-lending arrangements for the ESD Credit Program are patterned after those used in the ongoing Private Finance Development Project (PFDP -- Cr. 2484-CE) and are presented in Annex 2. These guidelines define the onlending mechanism, including the onlending rate, the terms and conditions, the responsibility of the Administrative Unit, procurement procedures, disbursement procedures, and audit requirements. Eligibility criteria for PCIs, including commercial banks, development finance institutions (DFIs), merchant banks, and leasing companies, are given in Annex 5, Part I. The onlending rate to PCIs would be a variable rate equal to the Average Weighted Deposit Rate (AWDR), or another appropriate rate to be determined during project implementation by GOSL in consultation with IDA. The GOSL would assume the foreign exchange risk. The onlending rate to PCls would be adjusted semi-annually to reflect market conditions. PCIs would assume the credit risk and set their own lending rates in agreement with their clients. Subloan maturities would vary according to individual subprojects but would not exceed 10 years, including a maximum 2-year grace period. Private enterprises, NGOs and cooperatives operating in Sri Lanka are potentially eligible subborrowers, subject to PCI credit-worthiness assessment. In addition to administering the Credit Program component, the AU would administer GEF grant funds to: (i) support off-grid subproject preparation activities; (ii) cofinance off-grid subprojects; and (iii) provide off-grid project support through promotional activities, provision of grant funding for verification of solar home systems, and consumer education and protection. The final date for submitting subproject applications to PCIs will be three years after Credit Effectiveness. The closing date for disbursement will be five years after Credit Effectiveness. Each subproject proposal would include a timetable for implementation. GEF Technical Assistance (TA) grants would be available to help project developers prepare feasibility studies, business plans and bank loan documentation for off-grid subprojects . Grants would be disbursed on a reimbursement basis up to 90% of the cost of preparation of a solar home system subproject (up to US$6,500) and 95% of the cost of consulting services for preparation of a village hydro subproject (up to US$9,000). Reimbursement would be triggered by (i) PCI approval of a subproject on the basis of a bank loan application package supported by a complete feasibility study/business plan; (ii) presentation of eligible expenses; and (iii) submission of subloan disbursement request equal to or exceeding the GEF grant amount. Only expenses incurred after September 1, 1996 would be eligible for reimbursement. Each subproject developer would be eligible for only one grant. Subloans may also include lease investments.  Project Appraisal Document Page 4 Country: Sri Lanka Project Title: Energy Services Delivery For the Wind Farm and Capacity Building Components: * The CEB will be responsible for implementing the Pilot Grid Connected Wind Farm Component. An Engineer, Procure, and Construct (EPC) contractor will be selected by the CEB to implement the wind farm on the basis of an international competitive bid, subject to IDA guidelines. The EPC contractor would provide one year of system operation as well as operations and maintenance training to CEB staff. * The CEB Pilot Wind Farm Project Manager would report to the CEB Deputy General Manager (Generation Planning) and oversee all phases of subproject procurement and operation. These include the bidding process, negotiations, contract award, installation, training of CEB staff, acceptance testing, system turnover, operations, maintenance, monitoring, and preparation of semi-annual performance reports. * The onlending rate to the CEB for the Wind Farm Component will be 13% with a 17-year maturity including 2-year grace. * The CEB, through its Additional General Manager (Planning) will oversee the capacity building activities of the Pre- Electrification (PE) Unit and the DSM Unit. ...... .. ....... .. ....................................................................................................................-................................I.................................................... ................................. Project oversight (policy guidance, etc.): The CEB will submit to IDA at the beginning of each calendar year, evidence of public announcement of the annual Standardized Small Power Purchase Agreement (SPPA) non-negotiable Tariff update. Accounting, Financial Reporting and Auditing arrangements: The Credit Program Component * The AU will maintain the ESD Credit Program-related statistical records, incorporating, among other things, (i) approval of subprojects and disbursement made in respect thereof; (ii) classification of subprojects by grid-connected hydros, off-grid village hydros, solar home systems and others; (iii) classification of subprojects by size and geographical distribution; and (iv) classification of subloans and grants approved by size, maturity pattern and geographical distribution. * The AU will maintain separate disbursement records and accounts with respect to each PCI under the ESD Credit Program; keep on file supporting disbursement documents as well as bank accounts relating to disbursements; and maintain a Project Account. All records, documents and accounts are to be maintained in accordance with sound accounting practices for independent audits and for review by IDA and GEF missions. * The AU will prepare/submit quarterly statistical reports on the ESD Credit Program and other periodic reports (including semi- annual PCIs' loan collection performance reports) as required by GOSL and IDA. * An annual external audit is required of the Project Account and Special Account, and a separate opinion on Statement of Expenditures (SOEs), not later than four months after the close of each fiscal year * An annual external audit is required of each PCIs' financial statements, within four months of the end of the fiscal year, to confirm their continued compliance with the PCI eligibility criteria. The Pilot Wind Farm and Capacity Building Components * The CEB will submit to IDA audited project expenditures (Statement of Expenditures and Special Account) within six months of CEB's fiscal year end as well as unaudited financial accounts within 4 months, and audited accounts within 6 months of fiscal year end. * The CEB will ensure that invoices from the EPC contractor are paid in accordance with the CEB/EPC contract and maintain a record of invoices and financial records for the EPC contract and Pilot Wind Farm operation in accordance with sound accounting practices. * The CEB will provide GOSL and IDA semi-annual reports on the pilot wind farm and capacity building components presenting the progress achieved during the semester against the implementation plan agreed with IDA from time to time. Monitoring and Evaluation arrangements; IDA will review progress under the project on the basis of periodic reports provided by the AU and the CEB and mount supervision missions for comprehensive review of project implementation (including performance indicators). In addition to its regular supervision, IDA and the GOSL will jointly conduct a Mid-Term Review about two years after the Credit Effectiveness. The Review would examine emerging best practices as well as constraints, if any, to project implementation and ways to address these constraints. The Credit Line Component * IDA will examine and approve the eligibility of potential PCIs and monitor the eligibility status of approved PCIs on the basis of periodic reports submitted by each PCI through the AU. * IDA will also review: (i) the first two subloan proposals, irrespective of size, presented by each PCI, (ii) all subproject proposals (including the related environmental assessment) above the "free limit" established for each PC; (iii) each PCI's first solar home system subloan proposal, and (iv) each subproject developer's first solar home system subloan proposal. IDA will provide  Project Appraisal Document Page 5 Country: Sr Lanka Project Title: Energy Services Delivery comments on subloan proposals promptly, and approve them as appropriate, assuring itself that they are consistent with the developmental objectives of the ESD Project and Operating Policy Guidelines for the ESD Credit Program and GEF Grant funds. The Pilot Wind Farm and Capacity Building Components. Regarding these two CEB executed components, IDA will: * approve selection of the Pilot Wind Farm Engineer, Procure, and Construct (EPC) contractor, after verifying that the selection has followed the Bank's procurement guidelines. * review semi-annual reports concerning the Pilot Wind Farm and monitor progress in procurement, construction, and operation of the Pilot as well as related private sector wind power development. * monitor the progress of and review draft materials prepared by the DSM and PE Units, including the Code of Practice for Energy Efficient Commercial Buildings, DSM Implementation Strategy, brochures, training programs, etc. * facilitate assistance to the CEB from electric power utilities with relevant experiences in grid-interconnection and modeling of non-dispatchable power generation sources. * provide prior authorization for major goods, works, and services expenditures under the Capacity Building component. Block 2: Project Rationale 5. CAS objective(s) supported by the project: (CAS: Report No. 15633-CE, Board Date: May 21, 1996): The proposed project supports the three CAS objectives of enhancing: (i) environmentally sustainable energy development; (ii) promoting private sector delivery of energy services; and (iii) enhancing efficiency in the power sector. ESD investment and TA support for small-scale private power investments would complement the Private Sector Infrastructure Development (PSID) Project (Cr. 2484-CE), designed for large-scale investments and further the CAS objective of encouraging private sector investment in infrastructure projects. The CAS objective of improved efficiency in the power sector would be supported by: (i) development of least-cost grid-connected and off-grid renewable energy resources based on avoided cost principles; and (ii) capacity building in renewable energy and DSM. 6. Main sector issues and Government strategy: Public sector investments in power generation have lagged behind Sri Lanka's rapidly growing demand. Investments in core infrastructure have increased marginally since 1990, to about 4.5% of GDP. However, this level remains well below levels in other lower and lower-middle income countries such as Indonesia (5.5-6%), Thailand (6-6.5%), and the Philippines (7%)2. In contrast, demand for power continues to increase at 8% or more annually. Daily power cuts in 1996 underscore the urgent need for new generating capacity and improved efficiency. The GOSL strategy for redressing these deficiencies has two components: (i) creation of a regulatory and policy environment which encourages private investments to supplement public resources; and (ii) improving the efficiency of energy services delivery. To this end, the CEB has contracted with Price Waterhouse under a PHRD grant to examine the legal and regulatory framework and policy incentives required to promote private sector participation in power sector development. Also, IDA has initiated a study on power sector restructuring to review problems and issues and recommend suitable restructuring strategies for the sector. These studies will support a separate GOSL exercise to articulate long-term sector reform strategy and a Policy Paper on Power Sector Reform. 7. Sector issues to be addressed by the project and strategic choices: The project would address serious issues of capacity and efficiency in the sector through fostering private provision of energy services. Even before the current capacity shortfall, CEB experienced difficulties in utilizing available donor financing, due to management weakness and a cumbersome procurement process. The recent power shortage has compounded these difficulties and spurred the GOSL to investigate options for restructuring the power sector and encouraging private participation in the generation and delivery of energy services. The project would enhance the enabling environment for: (i) private investments in renewable energy services delivery through application of a standardized small power purchase agreement and non-negotiable tariff (lack of which effectively impeded development of small grid-connected power projects); and (ii) DSM implementation. The project would also enhance consumer awareness of renewable energy services and help the financial community become familiar with privately developed renewable energy projects. During project preparation, consideration was given to an alternative project design which relied heavily on public sector delivery of renewable energy services. For off-grid (PV and village hydro) subprojects, the CEB could have maintained ownership of the 2 "Sri Lanka in the Year 2000 - An Agenda for Action," joint Sri Lankan and World Bank Study, March 1996.  Project Appraisal Document Page 6 Country: Sn Lanka Project Title: Energy Services Delivery equipment, adopting a tariff schedule sufficient to maintain its standard rate of return on investment and thereby reducing the cost for such off-grid services to the ultimate beneficiary (the rural households). The private sector's role would have been confined to supply of equipment and services. This alternative was not adopted, due to CEB's serious implementation constraints. The strategic choice taken was to focus the project on private sector implementation. ..................................................... .................................................................................................................................................................... .................. ............... 8. Project alternatives considered and reasons for rejection: * Additional Renewable Energy Technologies - In addition to the Pilot Wind Farm component, the ESD Project would support village hydro, mini-hydro, and photovoltaic technologies through the Credit Program. While the Credit Program Operating Guidelines do not exclude other technologies (such as biomass and solar thermal), these are not expected to be supported by the ESD Project because of market and/or technical immaturity. Biomass power systems, for example, show good technical promise, but have not yet demonstrated commercial market viability in Sri Lanka. Enhancing the basis for commercial development of biomass power is one of the aims of the parallel UNDP/GEF-assisted Renewable Energy and Energy Efficiency Capacity Building Project (see para 9 below). * Alternative size of the Credit Program Component - Given the large number of potential subprojects already identified and the strong interest expressed by seven potential PCIs (paras 3 through 5 of Annex 2), a larger credit program could have been pursued to meet the potential demand. However, it was decided that the amount allocated for this component should be large enough to justify the proposed administrative and financial arrangement and yet small enough to ensure a reasonable pace of disbursements. Taking these criteria and the availability of IDA funds into account, an allocation of US$19.7 million equivalent is considered a reasonable amount for the credit program component. 9. Major related projects financed by the Bank and/or other development agencies (completed, ongoing, and planned) Sector Issue Project Latest Form 590 Ratings Bank-financed Projects in Sri Lanka: IP DO Improved efficiency and strengthening of financial Private Finance Development Project - PFDP - (Cr. S S intermediation; domestic resource mobilization; 2484-CE) UD$60 million, signed in FY1993, provision of investment finance expected closing date FY 1998 Need for rehabilitation of CEB distribution systems, Second Power Distribution and Transmission Project S S efficient expansion of transmission facilities and (Cr. 2297-CE) US$50 million, signed in FY92, institutional strengthening. expected closing date FY98 Lack of funding mechanism to encourage large-scale Private Sector Infrastructure Development Project - S S infrastructure projects undertaken by the private sector PSID - (Cr. 2880- CE) US$77million, signed in FY96, expected closing date FY02 Bank-Financed Projects Outside qf Sri Lanka: First World Bank/GEF-supported solar home system Indonesia Solar Home Systems Project (ID-PE- S S project 35544) US$20 million, signed in FY97, expected closing date FY02 First World Bank/GEF-assisted small-scale India Renewable Resources Development Project S S Renewable Energy project (Ln. 3544-IN) US$115, signed FY93, expected closing date FY99 Indonesia Renewable Energy for Small Power Project - RESP - (ID-PE-42882), planned for FY97 Other Development Agencies: Grid extension for rural electrification as well as ADB - Second Power System Expansion Project reinforcement/expansion ofthe distribution and US$80.0 million, 1995-2000; under implementation transmission system  Project Appraisal Document Page 7 Country: Sn Lanka Project Title: Energy Services Delivery Support of policy and institutional reforms in the tree- ADB - Plantation Rehabilitation Project US$60.0 crop subsector to increase productivity and million. 1996-2001; under implementation profitability (the project envisages approximately $1.5 million in total project costs for rehabilitation of micro-hydro power plants on tea estates) Capacity building in the areas of small hydro and UNDP/GEF - Sri Lanka Renewable Energy and wind resource assessment, biomass technology Energy Efficiency Capacity Building Project US$1.5 commercialization, small hydro and DSM capacity million (GEF) US$0.3 million (UNDP); under building in private sector preparation 10. Lessons learned and reflected in the project design: * Solar home system projects must: (i) overcome the first cost barrier created by their high initial cost (relative to conventional alternatives) to gain an adequate potential market size; (ii) establish responsive and sustainable PVsales and distribution infrastructure; and (iii) provide quality products and services. (World Bank Technical Paper Number 324, Best Practices for Photovoltaic Household Electrification Programs, 1996) Solar home system subprojects supported by the ESD Credit Program will offer consumer level financing to address the first cost barrier and maTket size issues, allowing dealers to create the necessary infrastructure. All solar home systems will be required to comply with technical specifications, ensuring quality products and services. Solar home system projects should. (i) operate on afull cost-recovery basis; (ii) provide adequate consumer information; and (iii) ensure adequate management skills in local implementing organizations. (World Bank Technical Paper Number 304, Photovoltaic Applications in Rural Areas of the Developing World, 1995) All solar home system subproject proposa]s will be reviewed by the lending PCI and most will also be reviewed by the Bank. These elements will be included in the reviews. * Implementation of a standardized small power purchase agreement (SPPA) and tariff, derivedfrom (i) published purchase prices not to exceed the utility 's avoided cost; and (ii) standard and efficient small power market,, are central to the realization of a sustainable and efficient small power market (Indonesia Second Rural Electrification Project; Ln.3845-IND). An SPPA and tariff acceptable to the Bank were approved by the CEB in December 1996. * Community ownership of village hydro schemes improves village self-help capabilities, strengthens community relations within the village, aids cost recovery and promotes environmental awareness. (Consultancy and Professional Services (Pvt.) Limited, "Review of Existing Village Hydro Schemes," July 1995, see Project File) Community ownership has been the norm for Sri Lankan village hydro schemes to date and is expected to continue under the Project. * Rigorous economic andfinancial analysis of rural electrification projects and an increased attention to cost recovery are key to successfulproject implementation. (OED Report #13291, Rural Electrification in Asia: A Review of Bank Experience, June 1994) Economic and financial analyses are required for all ESD Credit Program subprojects. * Demonstration of commercial renewable energy technologies can remove information barriers andfacilitate widespread replication. The wind farm component of the India Renewable Resources Development Project (Ln. 3544-IN/Cr. 2449-IN) has helpedfinance 26 MW of wind capacity to date, and has catalyzed commercial development of an additional 470 MW. (Mid- Term Evaluation Report of the India Renewable Resources Development Project, November 1995) This is a fundamental tenet of ESD Project design. * Government incentives, including taxes, duties, and subsidies, must be consistent with national and sectoral objectives for maximum long-term impact. (Mid-Term Evaluation Report of the India Renewable Resources Development Project, November 1995.) During ESD Project preparation, the GOSL agreed to rationalize import duties on photovoltaic modules, thus removing a major barrier to utilization of this technology. * CEB procurement delays and shortage of experienced staff can result in serious implementation problems. (May 1996 Supervision Report of the Sri Lanka, Second Power Distribution and Transmission Project, Cr. 2297-CE) CEB's involvement in ESD procurement has been minimized. Advanced action on Pilot Wind Farm EPC procurement has demonstrated CEB willingness to move quickly on this component. 11. Indicators of borrower commitment and ownership: Ministry of Finance and Planning: The MOFP has requested and utilized PPF funds for financing of two off-grid pilot subprojects (one village hydro, one solar home system) through commercial channels. It has also rationalized the import tariff for photovoltaic modules and requested retroactive financing of off-grid subprojects. Ceylon Electricity Board: The CEB has used PPF funds preparation of a Feasibility Study and Tender Package for the Pilot Wind  Project Appraisal Document Page 8 Country: Sn Lanka Project Title: Energy Services Delivery Farn and preparation of a DSM Action Plan. During project preparation, the CEB created a Pre-electrification Unit to provide technical support and training for the ESD Credit Program subproject developm.ent and a Demand Side Management Unit to implement DSM activities. The CEB has prepared and recently published a SPPA and Non-Negotiable Power Purchase Tariff for small (under 10 MW) private power producers such as grid-connected mini-hydro issuance. It has issued a Request for Proposals for the Pilot Wind Farm.. Finally, the CEB has undertaken a collaborative CEB/Urban Development Authority/ private sector preparation of a DSM Action Plan. Ministry of Transport, Environment, and Women's Affairs: The Ministry, which prepared the Sri Lanka National Environmental Action Plan (EAP) has endorsed the request for GEF support for the ESD project. The EAP emphasizes need for renewable energy development as well as end use energy efficiency activities. Private SectoriNGO: Strong interest in the ESD Credit Program has been expressed by private domestic banks, two development finance institutions (DFIs), and one merchant bank, all of which appear to meet eligibility criteria for participation. The private banks have highlighted the need for retroactive financing so as to facilitate lending to off-grid subproject developers. The NGO commitment is evident in their review and comment on technical specifications for off-grid (solar home system and village hydro) installations as well as their assistance in preparation of subprojects for ESD Credit Program financing. Projects under preparation to be ready by ESD Project effectiveness (June 1997) include 3 solar home system, 2 village hydro, and at least 5 mini-hydro schemes. ...... ....I..............................................I.................................. .......................................... ................I.......I.......................... ............I...............I................... 12. Value added of Bank support: The Bank urged rationalization of PV module import tariff (now reduced from 35% to 10%, consistent with other similar commodities.) The Bank has assisted in preparation of the SPPA and Non-Negotiable Power Purchase Tariff for small power producers. It has helped prepare technical specifications for solar home systems as well as design of private sector renewable energy investments and will review most solar home system subprojects prior to approval. The Bank has also catalyzed public and private sector cooperation on DSM actions (including a Code of Practice for Energy Efficient Commercial Buildings and Load Research initiatives) and helped mobilize the following grant support for alternative energy development in Sri Lanka: - $5.9 million cofinancing from the GEF for the ESD Project - $1.5 million from the GEF and $335,000 from the UNDP for the parallel UNDP/GEF Sri Lanka: Renewable Energy and Energy Efficiency Capacity Building Project Block 3: Summary Project Assessments (Detailed assessments are in the project file. See Annex 8) 13. Economic Assessment I Cost-Benefit Analysis (see Annex 4) g Cost Effectiveness Analysis Economic assessments were performed in constant dollars for the Pilot Wind Farm as well as representative ESD Credit program subprojects (solar home system, village-hydro, and mini-hydro). Results are given below: Net Present Value (NPV) of Pilot Wind Farm and Representative Credit Program Subproiects (12% Discount Rate) Componen NPV ($Million5l EIRR Pilot Wind Farm 0.1 14% ESD Credit Program Solar Home System 0 12% Village Hydro (8.5 kW serving 100 households) 0 12% Mini-Hydro (580 kW, grid-connected) 0.2 18% Notes: * For the GEF-eligible technologies of wind, solar home systems, and village hydro, GEF grants are included as economic and financial benefits in accordance with OP 10.04. The GEF grant size was calculated as the "incremental cost" necessary to make the current economic costs of the renewable energy technologies equal to the conventional alternatives. This results in a zero net present value. GEF support is required to make these projects economically viable. Since conservative assumptions were used in the economic analysis, the risk of the NPVs falling below the above values is considered low. * In the case of off-grid subprojects (PV and village hydro), the economic benefits were based on the avoided expenditures in kerosene lighting and battery use. Additional benefits accrue to the household from increased convenience and safety, improved indQor air quality, and a higher quality of light (more consistent illumination, better color rendering). However, since data is insufficient to calculate these benefits, they are not included in the analyses. Experience gained in this and other projects (e.g.,  Project Appraisal Document Page 9 Country: Sr Lanka Project Title: Energy Services Delivery the Indonesia Solar Home Systems Project), may permit quantification of these benefits for future projects. Fiscal Impact (for all ESD components): The project does not burden the GOSL with any subsidies and will impact the economy positively by generating revenues from taxes and duties on private sector subprojects; reducing government investment in grid- connected generation in the longer term by promoting private investment; promoting private supply of off-grid power to rural households with full cost recovery and no GOSL subsidy (as compared with the conventional subsidy required for grid-connected household rural electrification); and reducing pressure for government investment in uneconomic extension of the rural power grid. The SPPA Tariff is based on CEB avoided energy costs, and, as such, creates a payment stream which is sustainable from CEB's perspective, and reliable from the project sponsor's perspective. 14. Financial Assessment (see Annexes 4 and 5): Financial analyses were performed for the Pilot Wind Farm as well as representative solar home systems, village hydro and mini hydro subprojects. The financial analyses were performed from the perspective of the subproject sponsor to confirm the financial viability of proposed subproject categories. Import duties and taxes, income tax, and financing costs all were included in subproject costs. Financial rates of return are given in real terms. Pilot Wind Farm: FIRR 11%. The financial benefits for the Pilot Wind Farm are CEB's avoided cost of generation. Solar Home Systems: FIRR 19%. The analysis for the solar home system subproject reflects the assumptions given in the business plan for the pilot subproject, financed by the Project Preparation Facility. Since the NGO sponsoring this subproject has prior experience in solar home system programs, their estimated financial benefits, reflecting willingness to pay as shown by the proposed customer payments, were used in the financial analysis. Village Hydro (8.5kW serving 100 households): FIRR 22%. The pilot village hydro subproject is the first village hydro to use commercial financing (all previous village hydros relied on donor funding). Since the consumer surplus associated with village hydro is unknown, the financial analysis conservatively assumed only the avoided financial cost as benefits. Mini-Hydro (580 kW, grid-connected): FIRR 13%. Financial benefits are (a) the power purchase tariff from CEB; and (b) avoided payments to CEB when micro-hydro power displaces grid service. Participating Credit Institutions (PCls) for the ESD Credit Program should be privately owned and controlled and meet the eligibility criteria, presented in Annex 5, as under the ongoing Private Finance Development Project (Cr. 2484-CE). This will require, (a) compliance with Ministry of Finance and Planning/ Central Bank guidelines on prudential regulations, capital adequacy, classification of risk assets, provisioning, single borrower exposure limits, sector exposure limits, and disclosure and reporting requirements; (b) fulfillment of such specific financial soundness criteria as a minimum cash collection ratio of 80%, a minimum return on average equity of 9%, a maximum portfolio affected by arrears as a percentage of total portfolio of 20%, a maximum debt equity ratio of 8: 1, minimum capital adequacy ratios of 4% and 8% for tier-l and tier-2, respectively as required by the Central Bank. Detailed financial data presented by four domestic private commercial banks, two development financial institutions (DFIs) and one merchant bank confirm their ability to meet the eligibility criteria. These institutions have expressed strong interest in ESD Credit Program participation. Statistical highlights of their financial standing and performance are provided in Annex 5. A detailed assessment of their eligibility is available in the Project File. chnical Assessment: (see Annex 2 - Detailed Project Description) The renewable energy and DSM technologies supported by the ESD project are technically sound and demonstrated worldwide. Technical viability is further supported by Sri Lanka's prior experience with mini-hydro, village hydro, and solar home systems, and by resource and feasibility studies for wind power. s Istit utional Assessment: Executing agencies and Project management * MOFP/DFCC - ESD Credit Program: The MOFP has satisfactorily implemented IDA credit programs. As in previous programs, the MOFP will contract out the day -to- day administrative duties to the ESD Credit Program to the Development Finance Corporation of Ceylon (DFCC), a well run, reputable DFI, to create and manage an Administrative Unit (AU) for the ESD Credit Program. In addition to record keeping and periodic reporting, the AU (acting for the GOSL) will process disbursement requests for subloans and GEF grant funds approved by PCIs under their free limit and those requests above the free limit approved by IDA. The AU will also undertake off-grid subproject support activities. The role and responsibilities of the AU are detailed in the TOR (Annex 12). Although the DFCC has not previously administered an IDA Credit program, it is  Project Appraisal Document Page 10 Country: Sn Lanka Project Title: Energy Services Delivery familiar with IDA's procedures and has assigned a competent manager to head the AU whose staffing arrangement appears adequate. * CEB - Pilot Wind Farm and Capacity Building: The CEB has adequate experience under previous IDA projects in implementing similar project components. The Pilot Grid-Connected Wind Farm would allow the CEB to address grid integration issues, demonstrate commercial viability, and prepare for anticipated subsequent private sector wind farm development. The Pilot Wind Farm and Capacity Building components will be supervised by the Deputy General Manager (Generation Planning). To avoid procurement delay problems, the CEB agreed to an accelerated procurement schedule for the Wind Farm and, in keeping with this schedule, has released the Request for Proposals in January 1997. If the CEB is restructured, both the Pilot Wind Farm and Capacity Building component experience are transferable to the new utility entities. 17. Social Assessment: Project preparation included extensive consultation with local NGOs and as well as public and private sector stakeholders. The proposed project would have a positive social impact by providing initial electrification services to up to 32,000 rural households currently without access to grid service. Women and children are expected to benefit the most from these off-grid services. The improved lighting will allow time to undertake additional income generating activities. Women also note that better lighting enables them to respond more quickly to infant needs at night. Children benefit from the additional time to study, watch television or listen to the radio. 18. Environmental Assessment: Environmental Category QA 0 B nc The proposed project would yield net positive environmental effects. The off-grid electrification sub-projects would reduce use of kerosene and lead-acid automotive batteries. No significant negative impacts are envisaged from the run-of-river village-hydro projects, as demonstrated by the 20 existing village hydro projects. Because of their small size and the fact that in many cases civil works are already in place, the grid-connected mini-hydro sub-projects are also unlikely to cause significant environmental damage. No resettlement is envisioned because the Project does not involve land acquisition. Power generated from renewable energy sources or saved through DSM would correspondingly reduce emissions from fossil fuel burning, with benefits to the local and global environment. PCIs would ensure that project sponsors obtain GOSL and IDA-mandated environmental clearances, where necessary. Mini-hydro subprojects will be reviewed by the Central Environment Authority. An environmental review for the Pilot Wind Farm has confirmed that it will have minimal environmental impacts, entails no relocation of local population and would be located more than one mile outside the Bundala and Yala wildlife reserves. ........... ........................................... .......... ..................................................... .............................................................I............................................................. 19. Participatory Approach: Identification/Preparation Implementation Operation Private Sector Subproject developers IS/CON/ IS/CON/COL IS/CON/COL NGOs - (Sarvodaya, SoLanka, ITDG Energy IS/CON/COL IS/CON/COL IS/CON/COL Forum) Local Financial Institutions IS/CON IS/CON/COL IS/CON/COL UNDP IS/CON/COL IS/CON/COL IS/CON/COL [Information sharing (IS); consultation (CON); and collaboration(COL).] Project identification/preparation included extensive collaboration with private sector, NGOs, local financial institutions, and donor stakeholders which is expected to continue during project implementation: Private Sector - The Project has been prepared at the request and in consultation with the beneficiaries, many of whom are in the private sector. Mini-hydro project developers in particular, have met frequently with the project preparation team to assess progress and offer advice. They have made very clear their interest in accessing the ESD Credit Program. NGOs - Sri Lankan NGOs active in renewable energy, including Sri Lanka's two largest NGOs, Sarvodaya and Sanasa, as well as several others more directly focused on energy issues, have been key participants in project preparation: (i) Sarvoday has undertaken the PPF-funded solar home system pilot project of 300 systems, and plans to expand this effort to at least 5,000 systems under the ESD Credit Program; (ii) SoLanka, an NGO which focuses on provision of solar home systems, has advised on issues in this area; (iii) the Intermediate Technology Development Group (ITDG), has supported early development of village hydro in Sri Lanka, installed the first 20 systems with donor support, and provided consultant assistance to the PPF-funded Pathavita Village Hydro pilot project; (iv) the Energy Forum, a consultative group including these and other NGOs, as well as CEB, academic, and private sector parties interested in promotion of renewable energy in Sri Lanka, coordinated comments on ESD Project design as well  Project Appraisal Document Page 11 Country: Sn Lanka Project Title: Energy Services Delivery as specifications for village hydro and solar home systems; and (v) Sanma, has expressed interest in a solar home system project. These and other NGOs are expected to take an active role in ESD Project implementation and operation. Local Financial Institutions - Development finance institutions as well as private banks have participated in project preparation, offering suggestions based on experience with previous SMI projects as well as the ongoing Private Finance Development Project. These financial institutions requested that the Project include retroactive financing, so they could begin project development immediately. Donors - Project preparation included extensive collaboration with UNDP to ensure complementarity between the proposed project and the UNDP/GEF Renewable Energy and Energy Efficiency Capacity Building Project. Collaboration with additional donors, in particular GTZ, and USAID is anticipated during project implementation and operation. ...... .............................................................................................................................................................................................. ................... ....................... 20. Sustainability: The sustainability of the mini-hydro subprojects would derive from an enabling regulatory environment, strengthened institutions, and appropriate incentives for stakeholders. These include the SPPA and Non-Negotiable Tariff and interconnect specifications for small private power producers. The project would also strengthen CEB's planning capacity, support the growth of a commercial infrastructure, strengthen the capabilities of the banking sector in lending for alternative energy projects, and use local institutions to deliver energy services. Financial participation from stakeholders and the establishment and enforcement of technical standards would also contribute to long term sustainability of mini-hydro sub-projects which would not receive any GEF grants. The sustainability of the GEF-supported off-grid solar home system, village hydro and Pilot Wind Farm subprojects would be ensured by technical and financial performance after the GEF grant ends. Pilot projects will help demonstrate the affordability of commercial delivery of solar home system and village hydro services. The Project ensures sustainability by: (i) mandating appropriate technical specifications for equipment; (ii) requiring project sponsors to develop credible servicing plans; (iii) certifying subproject commissioning, and, for solar home systems, providing a consumer education and protection service as well as spot- checking of systems. Future village hydro and solar home systems are expected to benefit from cost reductions due to economies of scale and learning curve cost reductions, mainly in the delivery and financing mechanisms but also in locally manufactured components. The pilot windfarm performance is expected to encourage replicability by private developers and local manufacture of some components, thereby reducing prices, as has been the case in southern India's windfarm development. The long-term sustainability of demand-side management energy savings and financial benefits are based on application of the Load Research Program and Code of Practice for Energy Efficient Commercial Buildings as well as a pilot design competition for new buildings which will heighten awareness and demonstrate benefits of compliance with the Code. ... a l.... R is... k s :.......................................................................................................... ............... ....... . . ....... ............................... ........ .................................................................. 21.Critical Risks: Project Outputs to Development Rating Risk Minimization Measure Objectives Interest rates increases may constrain Moderate GOSL in dialogue with IMF on a potential Extended Structural renewable energy investments Adjustment Facility (ESAF) which includes fiscal controls Interest of PCIs in financing renewable Low - i) The AU Consumer Education and Protection Facility and mandated energy wanes Moderate technical standards will enhance product performance and long- term sustainability of off-grid subprojects. ii) Mini-hydros can be highly profitable, thus sustaining PCI interest. CEB does not maintain commitment to Low GOSL/Bank power sector dialogue continues to stress private sector private power and timely revision of participation (SPPA and Tariff agreed as conditions of negotiations). small power purchase tariff Public/private sector cooperation in DSM Moderate TA to DSM Unit aims at promoting the public/private sector links. falters Power outages (resulting in reduced Moderate Many mini-hydro plants will gain the bulk of their revenue from power power sales by private developers) may sales to co-located estates. These sales should not be affected by power cause financial hardship cuts. Wind power development fails to attract Moderate CEB's semi-annual reports on the Pilot Wind Farm will keep the future private sector development private sector informed of progress as well as CEB's assessment of future wind power development. The private sector has already expressed interest in wind power development.  Project Appraisal Document Page 12 Country: Sn Lanka Project Title: Energy Services Delivery Drought or low-wind conditions could Low Subproject technical designs and business plans, appraised by PCIs, reduce financial viability of renewable must account for abnormal weather conditions energy subprojects Project Components to Outputs Private sector (both PCIs and subproject Low i) Strong PCI and subproject developer interest was a major impetus developers) loses interest or is unable to to ESD Project development; prepare subprojects ii) The SPPA and Tariff have been adopted by CEB; iii) GEF Grant support is available for off-grid subproject preparation; iv) Retroactive financing, requested during appraisal by prospective PCIs and developers, is available for off-grid subprojects; v) Market assessments indicate strong potential demand; vi) The capacity building component aims at strengthening local alternative energy expertise; and vii) The complementary UNDP/GEF project supports a broader capacity building effort CEB procurement delays Low Advanced procurement of Windfarm underway (bid package issue was condition of negotiations) CEB loses commitment to renewable Low GOSLlBank dialog continues to stress importance of renewables and energy and DSM DSM in capacity expansion and load control. Overall project risk rating Low 2 oss ble Controversial Aspects: CEB's labor union has expressed strong opposition towards privatization of energy services delivery, specifically private development of large power facilities. In this regard, however, the small size (under 5 MW) of the mini-hydro plants, envisioned under the ESD Credit Program, are not expected to generate controversy. Block 4: Main Loan Conditions 23. Effectiveness Conditions: (a) Signing of Subsidiary Loan Agreement (acceptable to IDA) between the GOSL and the CEB; (b) Signing of a Project Administration Agreement (acceptable to IDA) between the GOSL and the DFCC for administrative and technical assistance functions for the ESD Credit program (including related GEF grant); and (c) Signing of Participation Agreements and Demonstration of Compliance with Conditions of Participation, satisfactory to IDA, between GOSL and at least two eligible PCIs. Block 5: Compliance with Bank Policies g This project complies with all applicable Bank policies. a [Management approved exceptions to the following Bank policies: -------------------------------------------------- The project complies with all other applicable Bank policies.] [signature] f[signature] Task Manager: Loretta aeffer Country Nanago r rodt  Annex 1 Page 1 of 2 Annex I Project Design Summary Narrative Summary Key Performance Indicators Monitoring and Supervision Critical Assumptions CAS Objective (CAS Objective to Bant 1. Enhance environmentally Continued compliance with National Environmental Continuing Bank dialogue Mission) sustainable development Action Plan (NEAP) power sector provisions on power sector GOSL maintains commitment restructuring to power sector reform 2. Promote private sector delivery of energy services Project Development (Development Objectves to Objectves: CAS Objective) 1. Promote the provision by 1.1 Installation of at least 26 MW of grid and off- 1 DFCCIAU quarterly 1. Private sector interest the private sector, NGOs grid renewable energy capacity by end of reports sustained and cooperatives of grid- 2002 including service to 32,000 off-grid connected and off-grid customers by end of project energy services using 1.2 At least one power purchase agreement for a environmentally private wind power project signed by CEB sustainable renewable energy technologies 2. Strengthen the 2. CEB issuance of Energy Efficient Commercial 2. CEB semi-annual 2. DSM pubic/private secor environment for DSM Building Code of Practice (EECB) reports cooperation implementation 3. Improved public and 3.1 CEB annual update of Small Power Purchase 3. Annual newspaper 3.1 CEB (or possible new private sector performance Tariff (SPPT) announcement of restructured utility entitles) to deliver energy services 3.2 Signing by CEB of a least 5 SPPA contracts SPPT by CEB maintain commitment to through renewable energy by mid-term evaluation; 12 by Project private power and timely and DSM completion revision of SPPT 3.3 Generation planning models prepared by CEB 3.2 PCI interest sustained which incorporate intermittent, non- dispatchable renewable energy generating sources Project Outputs Outputs to Devlopment Objectives) 1. Renewable energy 1.1 Standard Small Power Purchase Agreement 1. DFCC/AU quarterty 1.1 Agreed SPPA and Power subprojects (SPPA), non-negotiable power purchase Tariff reports Purchase Tariff in place 1.2. Reduced power sales by 1.2 Installation of about 16 MW (about 15 private developers caused subprojects) of grid and off-grid renewable by inability to transmit energy capacity by end of project (7 MW by power will not cause mid-term review) undue finandal hardship 1.3 Stable Interest Rates 1.4 Drought or low-wind conditions do not affect subproject viability 2. Pilot Wind Farm 2. Commissioning of a Pilot Wind Farm of about 2. CEB semi-annual wind 2 Wind power development 3 MW by 5/98 farm reports attracts private sector investors 3. Training and materials to 3.1 At least 15 CEB staff/private sector 3. CEB semi-annual enhance private, NGO, and developerslNGO staff trained to deliver technical assistance public sector capability, energy services via renewable energy reports development by mid-term evaluation 3.2 A guide for practical implementation of existing grid interconnection specifications by mid-term evaluation 4. Code of Practice for 4. Public review and completion of EECB Code Energy Efficiency in (by Mid-Term Review and end of Project, Commercial Buildings respectively) 5. Load Research Program 5.1 Review of draft Load Research program by Mid-Term Review; load research program start-up by end of Project 5.2 on premises load metering of at least 10 major consumers  Annex 1 Page 2 of 2 Project Components Disbursement of IDA and GEF funds according to (Components to Outputs) (See Annex 2 for a detailed schedule: description.] IDA GEF (USSm) (US$m) 1. ESD Credit Program 1 20.8 3.9 1. Verfied through regular 1.1 Private sector interest and project monitoring ability to prepare subprojects 1.2 Active participation of PCls 2. Pilot Wind Farm 2. 2.3 0.9 2. Verified through regular 2.1 Effective CEB project monitoring procurement and implementation 2.2 Continued CEB focus on renewable energy and DSM during restructuring process 3. Capacity Building in 3. t1 3. Verified through regular 3 CEB focus on renewable Renewable Energy and project monitoring energy and DSM during DSM Total_24_2_5_9_restructuring process __ __ __ _ __ __ _ __ __ _ Total 24.2 5.9_ _ _ _ _ _ _ _ _ _ _ _ _  Annex 2 Detailed Project Description Project Component 1 - Energy Services Delivery Credit Program - US$47.7 million (total cost of component) Description 1. The ESD Credit Program would make funds available to Participating Credit Institutions (PCIs) to provide medium and long-term financing to private enterprises, NGOs and cooperatives for household solar photovoltaic (PV) and village-hydro off-grid electrification, grid-connected mini- hydro schemes and other renewable energy subprojects up to 5 MW. IUS$5.0 million of the Credit Program proceeds would be reserved for off-grid subprojects (e.g., solar home system and village-hydro schemes) until the Mid-Term Review of the Project, after which time reallocation of the reserved funds may be considered. An Administrative Unit (AU) to be established within the DFCC will administer the Component on behalf of the GOSL on a fee basis. 2. Grant cofinancing from the GEF would be made available through PCIs to developers of off-grid PV and village hydro subprojects. Grant funds will help subproject developers cover costs for consultant services to prepare feasibility studies, business plans and PCI loan documentation for off-grid subprojects. GEF funds will also be used for AU off-grid project promotional efforts as well as solar home system verification and implementation of a consumer education and protection service. 3. As of July 1996, a pipeline of mini-hydro, village hydro, and solar home system projects totaling over $58.0 million in total project costs had been identified for potential financing through the Credit Program Component. Additional subprojects are likely to be forthcoming once the proposed IDA Credit is approved and potential PCIs sign Participation Agreements with the GOSL: Mini-hydro 4. A World Bank-assisted study confirms the technical, economic and financial viability of rehabilitating at least 100 grid-connected mini-hydro schemes (under 2 MW). Conservative CEB estimates indicate a potential of about 90 MW for mini hydro (under 10 MW). A national hydropower assessment, currently underway, is expected to identify additional opportunities. As of January 1994, there were approximately 60 isolated mini-hydro facilities. The CEB has recently begun accepting power from two privately-developed mini-hydro plants (the 1.2 MW Dik Oya Plant and the 140 kW Deniyaya facility). In addition, the Chief Electrical Inspector has issued letters of preliminary approval for 10 more sites. Village hydro 5. Existing village hydro systems range from 0.5 to 25 kW, at an average all-inclusive cost of $275/household. These systems already serve about 20 isolated Sri Lankan villages in hilly areas with high rainfall, which, have been installed and managed by village cooperatives, with assistance from donor-supported Integrated Rural Development Projects, NGOs and the National Development (formerly Janasaviya) Trust Fund (Poverty Alleviation Project, Cr. 2231-CE). Under the GEF Project Preparation Advance (PPA), more than 30 villages have requested preparation 1 Larger projects could seek financing via the Private Sector Infrastructure Development (PSID) Project.  Annex 2 Page 2 of 10 assistance for off-grid village hydro subprojects which range in size from 1.5 to 60 kW and, in total, could serve nearly 4,800 households. In addition, a call for expressions of interest by Intermediate Technology Development Group (ITDG - a local NGO active in village hydro), has yieldeu requests from about 140 villages for assistance in developing their own village hydro schemes. While all of these may not prove technically or economically viable, they indicate significant village hydro market potential. Solar home systems 6. Since 1982, about 5,000 individual solar home systems have been installed in Sri Lanka at an all-inclusive cost of $300-$700/household. This initial market activity has produced a nascent local PV supply industry. Approximately 300,000 Sri Lankan rural households currently use automotive batteries to power lights, televisions and radios. These households represent a first market for off-grid solar home systems and village hydro subprojects. The proposed Project will also provide pre-grid renewable energy services to some of the additional 1.4 million households in rural Sri Lanka without grid access. Under the GEF PPA, four developers are already preparing solar home system subprojects and two others have expressed interest. Projected sales of about 37,000 systems over a five-year period are indicated by currently available solar home system business plans. Wind 7. Wind resources in coastal areas of the Hambantota District were closely measured from 1987 to 1993. These measurements indicate an average windspeed of 6.8 meters per second at 40 meters, sufficient for commercial development of wind power in the Hambantota area. A recent consultant report has concluded that wind resources in the region could support up to 200 MW of commercial wind power development. The CEB used an IDA Project Preparation Facility (PPF) to complete a feasibility study and prepare the bid package for the Pilot Wind Farm. 8. The identified pipeline includes 37 potential grid-connected mini-hydro subprojects with capacities ranging from 250 kW to 4,665 kW. Collectively, these facilities would add approximately 35 MW to the CEB Grid. 9. Seven financial institutions have expressed strong interest in participating in the ESD Credit Program Component and have provided detailed financial data which confirm their ability to meet the agreed eligibility criteria for participation. Collectively these potential PCIs are comprised of domestic private commercial banks, development finance institutions (DFIs) and merchant banks. In addition, a leasing company has expressed strong interest in participating, but intends to clarify tax implications before requesting to be considered as a PCI. 10. Given the large number of potential subprojects noted in paragraph 3 and the strong interest expressed by seven potential PCIs, there is reasonable certainty that the proposed IDA credit and GEF grant amounts (IDA $19.7 million, GEF $3.8 million) could be committed within three years following credit effectiveness. On-lending Arrangements 11. On-lending arrangements and operating policy guidelines for the ESD Credit Program are patterned after those used in the ongoing Private Finance Development Project (PFDP - Cr. 2484- CE). For subprojects below their free-limit (and except for certain projects discussed in paragraph 7), PCIs will submit refinancing applications directly to the AU. IDA prior project approval is not required, although PCIs are responsible for maintaining subproject documentation on file including the PCIs assessment of creditworthiness of the subborrower, a brief description of project and  Annex 2 Page 3 of 10 procurement methods, and a list of goods and services to be financed (for a complete list of documentation see page 8 of this annex). All reimbursement applications shall be submitted directly to the AU and shall include a summary description of the subproject and subproject developer, and the terms and conditions of the subloan. Reimbursement requests will be paid to the applicant PCIs from a Special Account in the Central Bank of Sri Lanka (CBSL), which the AU will operate. 12. PCIs will submit the following directly to IDA for reviews and approval: (i) each PCI's first two subloan proposals (irrespective of size), (ii) subloan proposals in excess of the free limit; (iii) each PCI's first solar home systems subloan proposals, and (iv) each subproject developer's first solar home systems subloan proposal. In addition to the documentation required for projects below free-limits, subproject proposals to IDA shall include appraisal of the subproject, cash flow projections for subborrower and the project, assessment of technical and commercial feasibility, and financial and economic justification for the project (see page 8 of this Annex). In addition all reimbursement requests for contracts above the prior review limits shall be submitted directly to IDA. Reimbursement requests shall include a summary description of the subproject and subproject developer as well as the terms and conditions of the subloan, and will be paid to the applicant PCIs from a Special Account in the Central Bank of Sri Lanka (CBSL), which the AU will operate. On-lending Terms and Conditions 13. GOSL to PCJs: The proceeds of the Credit Program Component would be onlent to PCls in rupees (i.e., GOSL will bear all foreign exchange risk) for a term equivalent to a composite amortization schedule with a maximum of 15 years, including a maximum of 5 years grace. The onlending rate to PCIs will be a variable interest rate equal to the Average Weighted Deposit Rate (AWDR) of all interest-bearing deposits of all branches of domestic commercial banks, or another appropriate rate to be determined during project implementation by GOSL in consultation with IDA. The interest rate for new and existing loans would be subject to revision every 6 months. Refinancing for each subproject will be limited to US$ 3.0 million or the single borrower exposure limit of concerned PCI (whichever is lower) as well as 60% of the total PCI subloan amount. 14. PCIs to Sub-Borrowers: PCIs will be free to set their lending rate in agreement with their clients. Subloan maturities will be limited to 10 years, including a maximum 2 year grace, and not to exceed the useful economic life of the equipment financed. Disbursement 15. The Credit Component will have a 5-year disbursement period as indicated on page 1 of the Project Appraisal Document. IDA will reimburse the PCIs for 60% of eligible subloan expenditures. Reimbursement is available for project-related expenditures made within 120 days prior to receipt of the reimbursement application and supporting subproject documentation. For expenditures below the prior review limits, PCIs will submit reimbursement applications and full documentation directly to the AU who will ascertain the eligibility of the expenditures and notify the CBSL to make payments from the Special Account to the PCI for eligible expenditures. For expenditures above the prior review limits, the AU will submit reimbursement applications to IDA for review/approval.  Annex 2 Page 4 of 10 Credit Program Operation(see pages 8 - 10 of this Annex for the Operating Policy Guidelines) 16. PCI Eligibility: Under the PFDP Credit, only private commercial banks and development finance institutions (DFIs) which meet specific eligibility criteria have been allowed to participate. These are: the NDB, DFCC, Hatton, Sampath, CBOC, and Seylan Banks. The ESD Credit Program would adopt the PFDP eligibility criteria (see Project Files and Annex 5) for DFis and commercial banks. The six PCIs under PFDP, all of which have expressed interest in the ESD Credit program, would be eligible in principle by virtue of their continued compliance with PFDP eligibility criteria. PCI eligibility criteria also have been prepared for merchant banks, leasing companies, and NGOs (see Project Files). Candidate institutions would be able to apply for PCI status at any time during the ESD Credit Program commitment period. Assessment of eligibility of the potential PCIs for the ESD Credit Program will be given in the Project Files. A condition of effectiveness will be the signing by at least two PCIs, of a Participation Agreement with the GOSL (satisfactory to IDA). The Agreement will include a clause that the PCI will at all times comply with the eligibility criteria and maintain the minimum ratios as shown therein. 17. Eligible Subproiects: Eligible subprojects include investments by private enterprises, NGOs, and cooperatives for grid-connected mini-hydro facilities (not to exceed 5 MW in generating capacity), off-grid village hydro schemes which comply with the current Village Hydro Technical Specifications on file at the AU, solar home systems project which comply with the current Specifications for Solar Home Systems, and other renewable energy investments. 18. Subloan Applicant Eligibility Criteria: Eligible subloan applicants include any private enterprise, NGO and cooperative operating in Sri Lanka, subject to the PCIs credit-worthiness assessment. GEF Grants 19. Cofinancinc of Off-Grid Subproiects: Grant cofinancing would be made available through PCIs to developers of off-grid PV solar home system and village-hydro projects. Grant financing will be limited to $400 per kW of installed village hydro capacity, up to US$20,000 per installation, and $100 per PV solar home system with a module rating not less than 30 W. For PV solar home systems, beneficiaries will submit installation certificates to the AU through their PCI. The AU will subsequently release grant funds to the PCI upon verification of eligibility (see the Project File for the complete Terms of Reference for the AU). Similarly, the AU will release grant cofinancing of village-hydro schemes subject to certification by a Chartered Engineer that the facility is complete, operational, and in compliance with IDA-approved Specifications for Village-Hydro Schemes. 20. Subproject Preparation Grants: In addition to cofinancing of off-grid subprojects, grant funds will be available to subproject developers to help prepare feasibility studies, business plans and PCI loan documentation for off-grid subprojects. Up to 90% of the preparation costs for a solar home system subproject (maximum grant $6,500) and 95% of the preparation costs for a village-hydro subproject (maximum grant $9,000) can be reimbursed. The preparation grants cover only independent consulting services directly attributable to subproject preparation. The cost of off-grid project developers' direct project preparation efforts are ineligible for compensation. Reimbursement would require off-grid subproject developers to submit the following documentation to the AU through their PCI: (i) PCI approval of the subproject on the basis of a completed feasibility study/business plan/bank loan application package, (ii) presentation of eligible expenses, and (iii) a disbursement request equal to or exceeding the grant amount. Off-grid project preparation activities previously paid for by GEF and/or IDA are not eligible for subproject preparation grants.  Annex 2 Page 5 of 10 21. Off-Grid Project Support: GEF funds will also be channeled to the AU for the following off-grid support activities: * Off-Grid Project Promotion: A promotional effort will be carried out by the AU to increase awareness among potential customers regarding energy service delivery through village hydro and solar home systems * Solar Home System Design Verification: GEF Grant funds will be available to PCls for hiring consultants to verify that solar home system designs meet IDA-approved specifications and that systems are installed properly (as required for GEF Grant cofinancing and IDA refinancing, respectively). * Consumer Education and Protection Facility: A Facility will be maintained and publicized by the AU for investigating unresolved consumer complaints against dealers and seeking appropriate solutions. Responsibilities of AU 22. An Administrative Unit (AU) established within the DFCC will administer the Component on behalf of the GOSL on a fee basis. The Terms of Reference for the AU are presented in Annex 12. The AU's responsibilities will include: (a) Administration of the ESD Credit Program Component including processing refinancing applications and disbursement requests for loans approved by PCIs under their free-limit and those approved by IDA for loans exceeding PCIs' free-limits; (b) Administration of the GEF Grant Funds in Support of the ESD Credit Program Component including processing requests for disbursement of GEF Grant Financing; and (c) Off-Grid Project Support Activities, including: * Off-Grid Project Promotion - The AU will implement a promotional effort to increase awareness among potential customers regarding village hydro and solar home systems. This should include both promotional and educational messages regarding realistic expectations of system performance, other benefits, costs, lifetime, and warranties. The promotional effort should be aimed at enabling consumers to make informed purchase decisions. Details of the promotion campaign will be developed by the AU in close consultation with IDA. * Solar Home System Verification - The AU will maintain a list of consultants acceptable to IDA who are capable of verifying that the solar home system proposed in the subloan application meets the Specifications for Solar Home Systems (see Project Files). The AU will also administer TA funds for PCIs to retain consultants for this purpose. If a subborrower changes elements of the solar home system design during the course of the subproject, re-verification will be required. Such re-verification will not be eligible for TA funds. The AU also will administer TA funds for PCIs to retain consultants to verify serial numbers given on grant applications and to confirm on a sampling basis the compliance of installed systems with the PV Specifications. Upon receipt of a PCI report of irregularities, the AU will follow up with remedial action. If the remedial action is unsuccessful and suspension from the Credit Program is required, the AU will  Annex 2 Page 6 of 10 notify all PCIs. Consumer Education and Protection Facility - The AU will maintain and publicize a Consumer Protection Facility. The Facility would investigate unresolved consumer complaints against dealers and seek appropriate resolution. Project Component 2 - Pilot Wind Farm - US$3.5 million (total cost of component) 23. The Pilot Wind Farm of approximately 3 MW would be executed by the CEB on an Engineer, Procure, and Construct (EPC) basis. The CEB would be responsible for monitoring, operation, and maintenance of the facility. The Pilot would be located in the Hambantota District which has sufficient wind resources to support up to 200 MW of commercial-scale wind farms. 24. The Pilot Wind Farm would entail no relocation of local population and would be located well outside of the Bundala and Yala wildlife reserves. The size of the Pilot Wind Farm has been selected to: (i) give CEB practical operational experience in grid integration issues for such intermittent generation sources; (ii) demonstrate the viability of wind power in Sri Lanka; and (iii) encourage subsequent private sector development of wind resources. 25. The CEB has prepared and issued the Pilot Wind Farm Bid Package. Prior to issuing the EPC contract, the CEB will finalize wind farm site selection. Subsequent to signing the EPC contract, the CEB will ensure that the contractor implements the Pilot in a timely manner, and monitors its operation and performance. The CEB will also make available to prospective private sector wind farm developers semi-annual reports concerning the technical, economic, and financial performance of the Pilot Wind Farm. 26. Onlendina Rate: The onlending rate to the CEB for the Pilot Wind Farm Component will be 13% with a 17 year maturity, including 2 years grace. Project Component 3 - Capacity Building - US$2.4 million (total cost of component) 27. CEB Pre-Electrification Unit: Capacity building to the CEB's PEU would broaden the Unit's expertise in off-grid project preparation. Funds would also enhance the PEU's ability to train staff from CEB, private sector, and non-governmental organizations. To this end, funds would be provided to the CEB's Pre-Electrification Unit to procure equipment as well as retain local consultants with expertise in technical, financial, institutional, or business matters related to renewable energy project design and development. Consultants would: (a) develop and conduct training courses for CEB staff as well as private sector and NGO personnel; and (b) assist CEB staff in feasibility study preparation and other services related to off- grid project support. 28. Capacity Building funds would also support two overseas training courses involving up to two CEB staff (one for each course). These courses would focus on (a) practical experience in implementation of the U.K. G-59 Engineering Recommendation for grid interconnection of small power producers; and (b) utility grid integration of wind power systems.  Annex 2 Page 7 of 10 29. DSM Unit. Capacity building to the CEB's DSM Unit would consist of: (a) design and implementation of a Code of Practice for Energy Efficient Commercial Buildings; (b) development of institutional capacity in the energy-related public and private sectors to incorporate the Code of Practice into building design and operations and to monitor the energy savings; (c) demonstration of energy efficiency building design through design competition incentives; and (d) support to CEB in implementation of a DSM Strategy and Load Research Program. 30. This effort would require load research equipment procurement as well as international and local expertise to advise and train the various stakeholders (government agencies, building associations, owners and developers) involved in the process.  Annex 2 Page 8 of 10 Table A.1: Operating Policy Guidelines for the ESD Credit Program Measure Arrangement/Entity Loan Amount and Total: US$23.5 million Financing Sources IDA: US$19.7 million and GEF: US$3.8 million Borrower Democratic Socialist Republic of Sri Lanka Executing Agency Development Finance Corporation of Ceylon (DFCC) / Administrative Unit (AU) Estimated Commitment Three years after Credit Effectiveness Period Interest Rates Service Charge to GOSL Standard IDA Service Charge. Interest Rate to o Average Weighted Deposit Rate (AWDR) which is the weighted average of the interest rates Participating Credit paid to depositors by all commercial banks on interest-bearing term deposits, as issued weekly Institutions (PCIs) by the Central Bank, or another appropriate rate to be determined during project implementation by GOSL in consultation with IDA. o Rate subject to revision (both new and existing loans) every 6 months. Interest Rate from PCIs to To be determined by PCIs in agreement with their clients. Final Borrowers Maturity Structure of Credit and Subloans IDA to GOSL Standard IDA terms with 40 years maturity PCIs to GOSL Composite amortization schedule (aggregated from the individual subloans) with a maximum of 15 years, including a maximum of 5 year grace. Subloans Maximum 10 years, including maximum 2 year grace. Maximum maturity not to exceed useful economic life of equipment financed. Applicant Eligibility Criteria Any private enterprises, NGOs and cooperatives operating in Sri Lanka are potentially eligible, subject to PCIs' creditworthiness assessment. Eligible Subprojects o Private investment proposals for: (a) grid-connected mini-hydro (with capacity not more than 5MW); (b) off-grid village hydro; (c) solar home systems; and (d) other renewable energy investments. o Funds cannot be used for financing or acquisition of existing assets (including land) or refinancing of existing debts. Maximum amount of Maximum US$3.0 million for any one subproject, or single borrower exposure limit of concerned rediscounting PCI, whichever is lower. Portion of Subloan Maximum 60% of PCI total loan amount for a specific subproject. Rediscounted Other Measures Responsibility of o Process disbursement requests for loans approved by PCIs under their free limit and process Administrative Unit (AU) disbursement requests for loans above PCIs free limit approved by IDA. Process disbursement requests for GEF grant co-financing. o With respect to subloans and GEF grant cofinancing, maintain disbursement records and accounts of each PCI, keep supporting disbursement documents, and keep bank accounts relating to disbursement. Maintain Project Accounts. o Inform IDA from time to time regarding the progress of the Project, provide regular reports on the progress of the Project, and assist IDA and GEF supervision and/or evaluation missions. o Maintain ESD Credit line-related statistical records. o Monitor timely preparation and submission of subproject completion reports.  Annex 2 Page 9 of 10 o Submit quarterly statistical reports on the ESD Project and other periodic reports (e.g., semi- annual collection performance report) as required by IDA and GEF. o Perform other tasks and functions as are necessary to achieve the objectives of the Project. Loan Approval Procedures The following are subject to approval by IDA: (I) the first two subloan proposals, irrespective of size, presented by each PCI, (ii) subloan proposals above the "free limit", (iii) each PCI's first solar solar home systems subloan proposal, and (iv) each subproject developer's first solar home systems subloan proposal. Environmental Assessment In accordance with national standards and procedures. Requirements Subloan Documentation Subloans involving rediscounting below "free limit" (to be determined on the basis of experience of Requirements PCI in term lending). o PCI assessment of creditworthiness of subborrower; o Brief description of project and procurement methods; o List of goods and services to be financed; o Project costs and financing; o Terms and Conditions of subloans; o Timetable for implementation; o Evidence of environmental clearance: and o Economic justification for the project. Additional information for rediscounting above the "free limit:" o Description and Appraisal of the project; o Cash flow projections for subborrower and the project; o Assessment of technical and commercial feasibility; and o Financial and economic justification for the project. Procurement Procedures o Bid packages over US$2.0 million for goods contracts, US$3.0 million for works contracts and US$5.0 million for turnkey contracts are subject to International Competitive Bidding requirements. o All non-ICB contracts subject to established commercial practices (quotations from at least 3 suppliers in accordance with World Bank Guidelines). An opinion from an independent expert acceptable to IDA on the reasonableness of quoted prices is required if three quotations are not received. Import of second hand equipment subject to independent inspection as to its operational condition and the reasonableness of the price. Disbursement Procedures o Eligibility of expenditures below prior review limits would be ascertained by AU and disbursements of expenditures for all subloans would be made on the basis of PCIs' submission of full documentation. Detailed documentation evidencing expenditures to be kept by AU for external audits and for review by World Bank missions. For expenditures above the prior review limits, AU to submit reimbursement applications to IDA for review/approval. o Reimbursement available for project-related expenditures made within 120 days prior to World Bank receipt of subloan/subproject proposals together with corresponding subproject documentation. o AU would have the authority to notify the Central Bank of Sri Lanka (CBSL) to make payments from the Special Account to the PCI and would be responsible for keeping track of this Account. Audit Requirements o Annual external audit required of Project Account and Special Account, and separate opinion on Statement of Expenditures (SOEs). o AU will be responsible for maintaining disbursement documentation for PCls.  Annex 2 Page 10 of 10 o Annual external audit required of PCIs' financial statements and its compliance with the eligibility criteria. Exchange Risk GOSL would bear all foreign exchange risk. Assessment of Compliance Supervision Department of Central Bank of Sri Lanka or other relevant regulatory agencies for with Prudential Regulations each PCI would confirm that PCIs conform with prudential regulations, taking into account by PCIs eligibility criteria. GEF Grant Arrangements Village Hydro Solar Home System Basis and Amount of GEF $400 per kW installed, up to a maximum of $100 per system with module of 30W or greater Grant Cofinancing $20,000 Trigger for Release of Certification by a Chartered Engineer that Presentation of Installation Certificate and Grant Cofinancing system is complete, complies with confirmation of eligibility. Specifications, and is operational. Grant Cofinancing Subloan disbursement period One year, beginning on the date of subloan Allocation Period approval (and annual anniversary dates if applicable) Project Preparation Grant 95% of Preparation Costs up to $9,000 90% of Preparation Costs up to $6,500 Amount Preparation Grant Eligible Fees of an independent consultant directly attributable to subproject preparation. Only expenses Expenses incurred after September 1, 1996 would be eligible. Each subproject developer would be eligible for only one grant. Trigger for Project Presentation of eligible expenses and submission of disbursement request equal to or exceeding Preparation Grant Release the GEF grant amount Off-Grid Project Promotion AU will prepare TOR for promotional campaign (in consultation with IDA), contract consult and oversee project promotion efforts Solar Home System n.a. AU will prepare TORs (in consultation with IDA) Verification for design verification, installation verification and spot checks of installation compliance; AU will maintain list of qualified consultants for above and provide grant funds for PCI to contract consultants; AU will (a) maintain serial number list of PV modules imported for use in ESD Credit program and (b) verify eligibility of modules and households for GEF grants: AU will follow-up on design and installation irregularities and seek remedial action. I f the remedial action is unsuccessful and suspension from the Credit Program is required, the AU will notify all PCIs. Solar Home System n.a. AU will prepare TOR for Consumer Education Consumer Education and and Promotion Facility (in consultation with IDA), Protection Facility GEF grant provided to AU to cover costs of maintaining and publicizing the facility which will investigate unresolved consumer complaints against dealers and to seek appropriate solutions.  Annex 3 Estimated Project Costs (including contingencies) Project Component Local Foreign Total US$ million ESD Credit Program 20.6 28.3 48.9 Pilot Wind Farm 0.6 3.2 3.8 Capacity Building 1.6 2.0 2.6 Total Project Cost 21.8 33.5 55.3 Financing Plan (US$ million) Private Sector Project Component IDA GEF PCIs Entrepreneurs CEB/GOSL Total ESD Credit Program Mini Hydro 14.4 - 10.1 6.3 0.1 30.8 Village Hydro 0.3 0.1 0.1 0.1 0.1 0.7 Solar Home Systems 5.0 2.9 3.5 3.0 - 14.4 Business Development - 0.3 - 0.2 - 0.5 Off-Grid Support - 0.5 - - 0.7 1.2 Subtotal 19.7 3.8 13.7 9.6 0.9 47.7 Wind Farm 2.1 0.8 - - 0.6 3.5 Capacity Building PE Unit - 0.3 - - 0.2 0.5 DSM Unit 1.0 0.7 - - 0.2 1.9 Subtotal 1.0 1.0 - - 0.4 2.4 PPF* 0.3 0.3 Unallocated 1.1 0.3 1.4 Total Project Cost 24.2 5.9 13.7 9.6 1.9 55.3 The PPF is $340,000  Annex 4A Cost Benefit Analysis Summary Pilot (3 MW) Windfarm Component (US$ Millions - Constant 1996 Prices) Table 4A. 1 - Summary of Economic and Financial Analysis Present Value of Flows Fiscal Impact Economic Financial Analysis Analysis' Taxes Subsidies Benefits 2.8 2.8 Costs 2.7 2.9 .2 Net Benefits: IRR: 14% 11% Nature of Benefits: The Pilot Wind Farm will give the Ceylon Electricity Board (CEB) practical operational experience in grid interconnection of wind power, and demonstrate the viability of wind power for electric power generation in Sri Lanka. Main Beneficiaries: Ceylon Electricity Board and future private sector developers and investors. Main Assumptions: See Table 4A.2. Table 4A.2 Main Assumptions for Economic and Financial Analysis Economic Assumptions Name Sri Lanka Pilot Windfarm Location Sri Lanka South Coast Total Installation 2925.00 kW Annual Prduction 6 83 GWhla Capacity Utlizing Factor 26 7% Avoided Cost of Power 3360 27 Rp/MWh Power Sales Price 3360 27 Rp/MWh Capacity of the first year 100% Standard Conversion Factor 90% GEF Grant 0 88 $US millions Exchange rate 53 00 Rp/US$ Standard Discount Rate 12% Number of Turbines 13 International Inflation 2 5% Turbine Cost 1175 US$/kW Additional Assumptions for Financial Analysis Interest rate of loan 0 13 %la Share of Loan 50% Term of Loan 17 Year Grace Period 2 Depreciation Period 3 Import Duty 10% VAT on Imports 0% Value added tax rate on output 0% Value added tax rate on input 0% VAA tax rate 0% Income tax rate 0% 1 Given the focus on private sector provision of renewable energy services, the financial analysis incorporated elements of concern to private investors such as taxes, duties, and financing terms and conditions, as well as financial costs.  Annex 4B Cost Benefit Analysis Energy Services Delivery (ESD) Credit Program Component' Solar Home Systems Representative Sub-Project (US$ Thousands - Constant 1996 Prices) Table 4B.1 - Summary of Economic and Financial Analysis Present Value of Flows Fiscal Impact Economic Financial Analysis Analysis2 Taxes Subsidies Benefits 1,343 1,405 Costs 1,338 1,245 3 Net Benefits: IRR: 12% 19% Nature of Benefits: a) To the economy: (i) Reduction in kerosene and battery usage; (ii) Demonstration of a commercially viable private sector/NGO executed off-grid electrification initiative; (iii) Mobilization of investment from private investors, village cooperatives and NGO enterprises at the village grassroots level; (iv) Reduced government investment in rural electrification through subsidized grid-electrification; (v) Protection of environment by avoided use of fossil fuels. b) To Consumers: Access to clean and better quality electricity service to 5,000 rural households currently without electric power. (Additional consumer benefits from improved quality of service are not included in the analysis.) Main Beneficiaries: a) This NGO-supported subproject would serve 2,200 medium income rural households in the Galle district providing pre-electrification services; ESD Credit Program support of solar home system subprojects would have the following additional beneficiaries b) Private investors /NGOs at the village grassroots level; c) Local private sector entrepreneurs. Main Assumptions: a) Ability to pay: Target households income per month exceed Rs. 3,000 and meet the- affordability criteria. b) GEF grant: Grant cofinancing of $100 per solar home system. c) Economic Assumptions: (i) Discount rate: 12%; (ii) Exchange rate: Rs. 53/US$; (iii) Currency/US$; 1996 prices. d) Market Share: 30 Watt system: 30%; 4OWatt system: 42%; and 50 Watt system: 30%. e) Benefits: Avoided expenditures on kerosene for lighting and on automotive battery charging for television, radio, etc. Additional consumer benefits of convenience, improved safety, better indoor air quality, and higher quality of light were not included due to a lack of adequate valuation data. This analysis is for one representative Solar Home System subproject. The ESD Credit Line is expected to support several such projects which, cumulatively, would install 30,000 systems. 2 Given the focus on private sector provision of renewable energy services, the financial analysis incorporated elements of concern to private investors such as inflation, taxes, duties, and financing terms and conditions. Present values of benefits and costs are given in nominal terms. 3 The NGO project sponsor for this case study is tax exempt.  Annex 4C Cost Benefit Analysis Energy Service Delivery (ESD) Credit Program Component Village Hydro Representative Sub-Project (US$ - Constant 1996 Prices) Table 4C.1 - Summary of Economic and Financial Analysis Present Value of Flows Fiscal Impact Economic Financial Analysis Analysis1 Taxes Subsidies Benefits 23,316 26,633 ' 3,793 Costs 23,400 17,4873 1,402 - Net Benefits: IRR: 12% 22% Nature of Benefits: (a) Demonstration of a commercially viable private sector village cooperative executed off-grid electrification initiative; (b) Access to clean and better quality electricity service to about 100 unelectrified rural households; (c) Mobilization of investment from private investors, village cooperatives and NGOs at the village grassroots level; (d) Positive environmental benefits from carbon displacement by avoided use of fossil fuels and enhancement of quality of community life; and (e) The economic benefits for this analysis take into account only the avoided net household monthly expenditure on energy sources (kerosene, batteries and charging fee) an average of Rs. 128. Kerosene prices reflect imported CIF cost. Additional consumer benefits related to convenience, improved safety, better indoor air quality, and higher quality of light were not included, due to lack of adequate valuation data. Main Beneficiaries: (a) 100 medium and low income rural households4; (b) Village cooperatives; (c) Local small private investors. Main Assumptions: See table 4C.2. Table 4C.2 Main Assumptions for Economic and Financial Analysis Economic Assumptions Total Installation (kW) 15 00 Annual Production (GWH/a) 0 07 Capacity Utlizing Factor (%) 50 0% Number of Customers 150 Customers using Batteries (before village hydro) 20% Year1 1997 Exchange rate (Rp/US$) 53 GEF Grant ($US millions) 6000 Additional Assumptions for Financial Analysis Interest rate of loan (%/a) 18% Share of Loan 60% Term of Loan (Year) 10 Grace Period (Years) I Depreciation Period (Years) 10 Business Turnover Tax 15% Import Duty 6% Capacity of the first year 100% Standard Conversion Factor 90% Value added tax rate on output 5.5% Value added tax rate on input 5.5% VAA tax rate 0% Income tax rate for yrs 1-7 35% Income tax rate for yrs 7-30 35% Standard Discount Rate 12% 1 Given the focus on private sector provision of renewable energy services, the financial analysis incorporated elements of concern to private investors such as taxes, duties, and financing terms and conditions. 2 Financial benefits greater than economic benefits because the financial avoided costs are higher than the economic avoided costs 3 Financial costs lower than economic costs because "sweat equity" not included as financial cost value of this sweat equity estimated at about $7,300, more than offsetting the taxes. 4The ESD Credit Line is expected to support about 20 such village hydro subprojects, serving a total of about 2,000 households.  Annex 4D Cost Benefit Analysis Grid-Connected Representative Mini-Hydro Sub-Project' (US$ Thousands) Table 4D. 1 - Summary of Economic and Financial Analysis Present Value of Flows Fiscal Impact Economic Financial Analysis AnalysiS2 Taxes Subsidies Benefits 944 894 50 Costs 730 793 56 Net Benefits: IRR: 18% 13% Nature of Benefits: (a) Market expansion of a commercially viable private sector-executed grid- connected electrification initiative; (b) Mobilization of private investment; (c) Reduced reliance on fossil fuels; (d) Environmental benefits from carbon displacement by avoided use of fossil fuels. Main Beneficiaries: Private sector developers and tea estate management companies. Main Assumptions: See tables 4D.2. Table 4D.2.Main Assumptions for Economic and Finanacial Analyses Economic Assumptions Name Sn Lanka Minihydro Location Ellapita Ella Total Installation (kW) 580 00 Annual Production (GWH/a) 2.26 Capacity Utlizing Factor (%) 44 5% Avoided Cost of Power (Rp/MWh) 3368 55 Year1 1997 Exchange rate (Rp/US$) 5300 Capacity of the first year 100% Additional Assumptions for Financial Analysis Interest rate of loan (%/a) 18% Share of Loan 49% Term of Loan (Year) 7 Grace Period (Year) 2 Depreciation Period. 20 Import Duty 0% VAT on Imports 0% Power Sales Price (Rp/MWh) 3368.55 Standard Conversion Factor 90% GEF Grant ($US millions) 0 Value added tax rate on output 6% Value added tax rate on input 0% VAA tax rate 0% Income tax rate for yrs 1-7 15% Income tax rate for yrs 7-30 35% Standard Discount Rate 12% 1 This representative subproject would add 580 kW to the CEB grid. The ESD Credit Program is expected to support a total capacity addition of approximately 21 MW. 2 Given the focus on private sector provision of renewable energy services, the financial analysis incorporated elements of concern to private investors such as taxes, duties, and financing terms and conditions.   Annex 5 Page 1 of 4 Annex 5 SRI LANKA ENERGY SERVICE DELIVERY (ESD) PROJECT FINANCIAL SUMMARY Part I of this Annex presents the eligibility criteria for participating credit institutions (PCls). The second part of this Annex provides financial highlights of potential PCIs which demonstrate their capability to meet the eligibility criteria. Part 1: Eligibility Criteria for Participating Credit Institutions A. For all Participating Credit Institutions (PCls) 1. Except as IDA shall otherwise agree, each PCI shall satisfy the following criteria in order to be eligible to participate under the Project. (a) in the case of commercial banks and development finance institutions (DFIs), eligibility criteria established under the ongoing Private Finance Development Project (PFDP) and those under the proposed Energy Service Delivery (ESD) Project; (b) in the case of merchant banks and leasing companies, eligibility criteria set out in section C below; and (c) not disqualified from participating in other IDA or ADB credit operations. 2. In order to become eligible to participate in the ESD Credit Program and to maintain their eligibility, credit institutions must be privately owned and controlled, and meet the following criteria. (a) IDA should receive a satisfactory statement approved by the Board of Directors of the institutions outlining: (i) proposal as to how they would plan to utilize the credit facility, how they would get internally organized to market the ESD scheme, evaluate the subproject proposals and manage subsequent follow-up monitoring and loan recoveries; (ii) name of the senior officer who will be in charge of ESD credit operation and key team staff; (iii) newly established institutions which are not PCIs under the PFDP should submit the institution's business strategy and operating policies; and (iv) details of their existing term lending programs and portfolio management scheme, if any. (b) Except as IDA shall otherwise agree, a profitable operation for at least two full years of operation preceding its application for participation, aKtested to by unqualified audit reports from independent private auditors acceptable to IDA. B. Eligibility Criteria under ESD Project for Commercial Banks and DFIs 3. Compliance with Ministry of Finance and Planning/Central Bank guidelines on prudential regulations, capital adequacy, classification of risk assets, provisioning, single borrower exposure limit, sector exposure limits, and disclosure and reporting requirements.  Annex 5 Page 2 of 4 4. A confirmation from external auditors acceptable to IDA that, at the date of its application for participation and subsequently at the end of its financial year, the credit institution met the following financial criteria, ratio requirements and exposure limits calculated in accordance with IDA standard guidelines: (a) a minimum total cash collection ratio of principal and interest on term loan portfolio calculated on a rolling twelve month basis of 80%; (b) a minimum total cash collection ratio of principal only on term loan portfolio calculated on a rolling twelve month basis of 80%; (c) a minimum after tax profit equivalent to 9% p.a. on average shareholders' funds; (d) a minimum debt service cover ratio of 1.25 times (only for DFIs and similar institutions); (e) a maximum portfolio infection rate of 20%; (f) a maximum debt equity ratio of 8:1; (g) minimum capital adequacy ratios of 4% and 8% for tier-1 and tier-2, respectively as required by Central Bank of Sri Lanka (CBSL) guidelines; (h) loans to any one party or to any one group of companies must not exceed 10% of PCI's total assets; and (i) loans to any one sector, as defined in the UN Standard Classification of Economic Activities, must not exceed 30% of PCI's total loan portfolio. C. For Merchant Banks and Leasing Companies 5. A confirmation from external auditors acceptable to IDA that, at the date of its application for participation and subsequently at the end of its financial year, the credit institution met the following financial criteria, ratio requirements and exposure limits calculated in accordance with IDA standard guidelines: (a) the financial soundness criteria listed in paragraph (4) above; (b) profitable operation at least two full years of operation preceding its application for participation as per paragraph (2) above; and (c) merchant bank or leasing company in question is privately owned and controlled. 6. Compliance with pertinent laws and regulations regarding capital adequacy, classification of assets, non-accrual of interest and provisioning, exposure limits, etc. 7. In the absence of relevant regulatory framework, merchant banks or leasing companies that wish to participate in the Credit Program should adopt and comply with their own financial policies acceptable to IDA, which might be tighter than the eligibility requirements listed in paragraph (4) above. A Confirmation from external auditors acceptable to IDA that, at the date of its application for participation and subsequently at the end of its financial year, the credit institution is in full compliance with its own financial policies. Any changes in financial policies of these institutions would be subject to prior review and approval by IDA.  Annex 5 Page 3 of 4 Part II: Financial Highlights of Potential PCIs 8. Four private domestic commercial banks namely, Hatton National Bank (HNB), Sampath Bank, Seylan Bank, Commercial Bank of Ceylon (CBOC), the two DFIs namely National Development Bank (NDB) and Development Finance Corporation of Ceylon (DFCC), and one merchant bank namely Vanik Incorporation Ltd. have been evaluated. Detailed assessment of their eligibility is available in the Project File. As can be seen from statistical financial highlights presented in Table below, seven financial institutions noted above demonstrate their ability to meet the eligibility criteria. More specifically, these institutions have the following characteristics: * They are privately owned and controlled, and have been profitable at least for three years. * Their cash collection ratio of principal and interest ranged from 84.0% to 96.0% in 1995 as against the minimum of 80% (stated in the eligibility criteria).. * Their cash collection ratio of principal only ranged from 86.8% to 96.0% in 1995 as against the minimum of 80%. Their (after tax) return on average equity ranged from 10.6% to 31.8% in 1995 as against the minimum of 9%. * Debt service cover ratio of the two DFIs ranged 1.9 times to 2.9 times in 1995 as against the minimum of 1.25 times. * Loans outstanding affected by arrears (for over 180 days) ranged from 0.6% to 14.7% as of December 31, 1995 (and March 31, 1966 for DFCC) as against the maximum of 20%. * The core capital (to risk-adjusted assets) ratio (or tier 1 capital adequacy ratio) ranged from 6.8% to 27.2% at the end of 1995 as against the minimum of 4%. The total net worth to risk- adjusted assets (or tier 2) ratio ranged from 8.8% to 27.2% at the end of 1995 as against the minimum of 8%. * Their (long-term) debt to equity ratio ranged from 0.2: 1 to 2.8: 1 at the end of 1995 as against the maximum of 8: 1. * They confirmed that their loans to any one party or to any group of companies did not exceed 10% of their total assets and that loans to any one sector, as defined in the UN Standard Classification of Economic Activities did not exceed 30% of their total loan portfolio at the end of 1995. 9. Their participation in the ESD credit program will be subject to: (a) a confirmation from the Central Bank of Sri Lanka (CBSL) that, at the date of their application for participation, the credit institutions (commercial banks and DFls) are in compliance with CBSL's regulations; (b) a confirmation from the external auditors acceptable to IDA that, at the date of their applications for participation, the credit institutions meet the specific financial soundness criteria noted in the eligibility criteria; and (c) submission of a (Board approved) statement referred to in paragraph 2-(a) of the Eligibility Criteria. In the case of merchant banks (and/or leasing companies) for which regulatory framework and supervision system have yet to be established, the institutions should adopt and comply with their own financial policies acceptable to IDA. Their participation will be subject to: (i) a confirmation from external auditors acceptable to IDA that, at the date of their application, the institutions are in full compliance with their own financial policies acceptable to IDA and that the institutions fully meet the financial soundness criteria listed in paragraph 4 of the Eligibility Criteria; and (ii) submission of a (Board approved) statement referred to in paragraph 2-(a) of the Eligibility Criteria.  Financial Highlights of Potential Participating Credit Institutions (PCIs) Financial Highlights 31-Dec-95 31 -Dec-95 31-Dec-95 31-Dec-95 31-Dec-95 31-Mar-96 31-Dec-95 PCls HNB Sampath Seylan CBOC NDB DFCC VANIK Number of Branches 61 23 83 36 3 3 1 Number of Employees 2,690 901 2,426 1,845 223 201 146 KEY FINANCIAL FIGURES: Total Assets (Rs million) 30,085 11,935 26,515 19,065 16,623 15,277 3,731 Paid up Capital (Rs million) 120 354 396 125 175 302 425 Shareholders Funds (Rs million) 2,138 940 1,138 2,058 3,514 3,779 990 Net Profit After Tax (Rs million) 483 241 290 329 636 590 82 Interest Income on Loans as % of Ave Loans Outstanding 19.6% 19.4% 20.5% 17.6% 17.3% 20.1% 24.5% Interest Expenses as % of Ave Borrowing 8.8% 9.4% 10.3% 8.2% 13.3% 13.3% 19.5% Interest Spread 10.8% 10.0% 10.2% 9.4% 4.0% 6.8% 5.0% Operating Expenses as % of Ave. Total Assets 4.3% 4.6% 4.1% 5.0% 1.3% 1.8% 4.9% Net Profit After Tax as % of Average Total Assets 1.8% 2.2% 1.2% 1.8% 4.2% 4.5% 2.9% Net Profit After Tax as % of Average Equity 25.0% 30.2% 31.8% 18.0% 21.4% 16.7% 10.6% Capital Adequacy Ratio - Tier - 1 9.5% 13.3% 6.8% 13.6% 20.4% 27.2% 25.1% - Tier - 2 10.4% 14.5% 8.8% 13.9% 22.6% 27.2% 25.1% Cash Collection Ratio - Principal Only 86.0% 88.0% 87.0% 96.0% 87.4% 86.8% 92.0% - Princ. & Interest 86.0% 84.0% 86.3% 96.0% 86.0% 89.9% 92.0% Portfolio Affected by arrears (%) 4.0% 9.5% 14.7% 11.9% 4.0% 8.1% 0.6% Long Term Debtto Equity Ratio 0.32:1 0.22:1 0.36:1 1.01:1 2.34:1 2.24:1 2.8:1 Debt Service Cover Ratio (times) NA NA NA NA 1.9 2.9 1.3 NA = Not Applicable aq U (D (D Ln 0  Annex 6 Page 1 of 5 Annex 6 Procurement, Disbursement and Auditing Arrangements Procurement ESD Credit Line Component: * ICB for goods contracts in excess of $2.0 million. * ICB for works contracts in excess of $3.0 million. * ICB for turnkey contracts in excess of $5.0 million. * Established commercial practices will be utilized for all non-ICB contacts. Three quotes will be required to ensure competitive prices. An opinion from an independent expert acceptable to IDA on the reasonableness of quoted prices will be required for all contracts where 3 quotes are not received. The PCls will be required to maintain details of the procurement methods used by sub-borrowers and to monitor the utilization of subloan funds for procurement through regular site supervision visits; Administrative Unit staff and IDA field supervision missions will continue to review implementation of these procedures. Wind Farm and Capacity Building Components: * ICB for goods contracts in excess of $200,000.