Document of The World Bank Report No: 53412-AL RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF ENERGY COMMUNITY OF SOUTH EAST EUROPE PROGRAM (Albania Component ­ KESH Project) NOVEMBER 22, 2010 ABBREVIATIONS AND ACRONYMS DCA Development Credit Agreement ECSEE Energy Community of South East Europe KESH Albanian Power Company OST Transmission System Operator (Operatori i Sistemit Transmisioni) PA Project Agreement PIU Project Implementation Unit SDR Special Drawing Rights Regional Vice President: Philippe H. Le Houerou Country Director: Jane Armitage Sector Manager: Ranjit J. Lamech Task Team Leader: Arturo S. Rivera 2 Energy Community of South East Europe Program (Albania Component ­ KESH Project) P090656 CONTENTS Page A. SUMMARY ................................................................................................................ 4 B. PROJECT STATUS.................................................................................................... 4 C. PROPOSED CHANGES ............................................................................................ 5 ANNEX 1: RESULTS FRAMEWORK AND MONITORING ......................................... 7 ANNEX 2: EXTENSION OF CLOSING DATE ............................................................... 8 3 Energy Community of South East Europe Program (Albania Component ­ KESH Project) Project No. P0 90656 Credit No. 4087-ALB RESTRUCTING PAPER SUMMARY The ECSEE-APL2 Credit of SDR 17.7 million (US$27 million equivalent) was approved by the Board on June 28, 2005, and declared effective on December 21, 2005. EBRD provides parallel financing of US$20 million. The objective of the project is to extend the lifetime and improve the quality of the bulk power transmission system in Albania through replacement of transmission equipment and provision of TA to the Transmission System Operator, OST and the Albanian Power Company, KESH. As a result of reforms, the vertically integrated power company, Albania Power Company (KESH), also the main implementing agency of the project was unbundled into three independent joint stock power companies comprising generation (KESH), transmission service company (OST) and distribution (OSSH). This restructuring paper proposes: (i) amendments to the Legal Agreements (DCA and PA) to reflect the unbundling of the power sector and substitution of implementing entity; (ii) an extension of the Closing Date from January 31, 2011, to June 30, 2012; and (iii) revision of the key performance indicators (Annex 1). PROJECT STATUS Project implementation, construction and associated disbursements have picked up substantially since March of this year. Previously, the project had long delays due to protracted procurement disputes on the key Supply and Install contract for the investment component--rehabilitation of substations in extremely poor conditions. The contract was finally signed with KESH in May 2009, however, the transfer of the contract to OST (the implementing agency after the unbundling) did not take place at that time due to: (i) the unbundling and privatization process which slowed down the needed due diligence of implementation and financial management capacity of OST; (ii) in the absence of this due diligence and transfer of contractual responsibilities to OST, OST could not mobilize or open the L/C with the contractor; and (iii) delays during the process of unbundling and privatization in the transfer of assets and liabilities among KESH, OST and OSSH. Therefore, and as recommended by a QAG review, the project team conducted a due diligence of OST and, subsequently, reviewed and provided its no objection to the reassignment of contractual responsibilities from KESH to OST in February 2010. With these actions taken, OST has managed to open the LC, has updated the implementation 4 schedule and mobilized the contractor, which has in turn led to progress in implementation and an increase in disbursement from 14% to 24% of the Credit amount. At the time of the due diligence mission and given the delays and lack of amended contractual responsibilities, the project team downgraded the project to `MU' (March 2010). With the actions already taken and with the approval of this restructuring and effectiveness of the amendments to the legal agreements, the goal is to reach a `MS' rating in the next six months. The project team confirms that: (i) the project development objectives remain the same and continue to be achievable provided the closing date is extended to June, 2012 and (ii) implementation is likely to progress at a faster pace, as already shown over the last few months, with OST as the new implementing agency. The audit report for the year ending December 30, 2009, with accompanying Management Letter have been submitted to the Bank. The auditors issued unqualified opinion on project financial statements, but qualified-disclaimer of opinion on OST and KESH financial statements. An action plan was agreed upon to fully implement recommendations of the auditors on: (i) complete transfer and registration of assets from KESH to OST; (ii) finalization of contractual arrangements with KESH regarding line losses, (iii) reconciliation and agreement on Loans including on-lending agreements with KESH; and, (iv) full compliance with International Financial Reporting Standards in presentation of OST financial statements. There are no changes in the environmental category and no new safeguards are being triggered by the restructuring. The Disbursement Schedule will be updated after approval of the restructuring. PROPOSED CHANGES · Amendments to Legal Agreements. As a result of the unbundling and in line with the objective of the project, management of the project was transferred to the transmission company OST. In order to reflect the changes and legally formalize the obligations and responsibilities of OST, the DCA and PA need to be amended. The project team agreed to this arrangement during the last supervision mission in February 2010. · Results/indicators. During the last supervision mission of February 2010, it was also agreed to revise the performance indicators (Annex 1) to enable better monitoring of progress towards achievement of the development objectives. · Closing date. See Annex 2 5 6 ANNEX 1: Results Framework and Monitoring Energy Community of South East Europe Program (Albania Component ­ KESH Project) Project No. P0 90656 Credit No. 4087-ALB Project Development Objective (PDO): The objective of the project is to extend the lifetime and improve quality of the bulk power transmission system in Albania through replacement of transmission equipment and provision of TA to the Transmission System Operator, OST and the Albanian Power Company, KESH. Revised Project Development Objectives: No change PDO Level Results Indicators Core D=Dropped UOM Baseline Cumulative Target Values* Frequency Data Responsibility C=Continued Source/Metho for Data N= New dology Collection R=Revised YR 2004/05 YR 1 YR2 YR3 for `C' YR 2009/10 2010 2011 2012 for `N' ECSEE APL: Regional market C - - Regional market Twice a Substation OST liberalization. is functioning year Operation Capacity to transmit electricity is C 6000 GWh - Equal or greater Twice a Substation OST maintained at or above base year Operation levels. TSO functioning improved based C TSO - Final Twice a Substation OST on implementation of established recommendations year Operation recommendations from technical with limited submitted and assistance. operational decisions taken to capability. implement them. Procurement procedures for C Existing Final Twice a Substation OST import of electricity improved. procurement recommendations year Operation procedures are submitted and cumbersome decisions taken to and result in implement them delays and non- by appropriate compliant bids. changes in relevant legislation. Increased availability of N 85.42% -- 98.5% Twice a Substation OST rehabilitated substations availability rate -- availability rate year Operation Reduced number of energy N 50 outages/year -- 20 outages/ year Twice a Substation OST outages in the rehabilitated -- year Operation substations INTERMEDIATE RESULTS Intermediate Result (Component 1) Progress in rehabilitation of C 0% - 100% Twice a Substation OST substations - year Operation Intermediate Result (Component 2) Progress in technical assistance C 0% - 100% Twice a Substation OST - year Operation Training and other technical N Lack of OST has Training Business and Twice a Substation OST support provided and appropriate appropriate identified and other financial planning year Operation business, financial planning and business, concrete appropriate and procurement procurement arrangements financial training technical functions in OST developed planning and and assistance developed procurement capacity provided arrangements. building needs 8 ANNEX 2 Extension of Closing Date Energy Community of South East Europe Program (Albania Component ­ KESH Project) Project No. P0 90656 Credit No. 4087-ALB 1. The Closing Date for the Albania ECSEE APL 2 project will be extended from January 31, 2011 to June 30, 2012. 2. Briefly summarize project implementation progress and confirm whether project objectives continue to be achievable. Please see Section B of the main text. 3. The proposed extension is necessary for the urgent completion of works under the main investment component. There were long procurement delays with the Supply and Install contract for rehabilitation of the substations which are in extremely poor condition. The rehabilitation work constitutes a major component of the project. The contract became effective in April 2010, and implementation and completion of the contract will run until the end of 2011. 4. This is a second extension of the Closing Date for a cumulative extension period of 2 years and 11 months through June, 30, 2012.