The World Bank Electricity Supply Reliability Project (P116748) REPORT NO.: RES39814 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF ELECTRICITY SUPPLY RELIABILITY PROJECT APPROVED ON MAY 26, 2011 TO REPUBLIC OF ARMENIA ENERGY & EXTRACTIVES GLOBAL PRACTICE EUROPE AND CENTRAL ASIA REGION Regional Vice President: Cyril E Muller Country Director: Sebastian-A Molineus Regional Director: Lucio Monari Practice Manager/Manager: Sameer Shukla Task Team Leader(s): Emil Zalinyan The World Bank Electricity Supply Reliability Project (P116748) ABBREVIATIONS AND ACRONYMS AF Additional Financing ARAP Abbreviated Resettlement Action Plan CPF Country Partnership Framework ECA Europe and Central Asia EIRR Economic Internal Rate of Return EMP Environmental Management Plan ESRP Electricity Supply Reliability Project ETNIP Electricity Transmission Network Improvement Project FIRR Financial Internal Rate of Return HVEN High Voltage Electric Networks IBRD International Bank for Reconstruction and Development km Kilometers kV Kilovolt MTAI Ministry of Territorial Administration and Infrastructure OTL Overhead Transmission Line PDO Project Development Objective RVP Regional Vice President TPP Thermal Power Plant The World Bank Electricity Supply Reliability Project (P116748) BASIC DATA Product Information Project ID Financing Instrument P116748 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 26-May-2011 31-Dec-2019 Organizations Borrower Responsible Agency Republic of Armenia High Voltage Electric Networks Project Development Objective (PDO) Original PDO The project development objective is to increase the reliability and capacity of the transmission network. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-83880 02-Jul-2014 06-Aug-2014 03-Feb-2015 31-Dec-2019 37.50 19.42 18.08 IBRD-80550 26-May-2011 01-Jun-2011 28-Nov-2011 31-Dec-2019 39.00 33.66 5.34 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Electricity Supply Reliability Project (P116748) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The project is financed with the original US$39 million loan (No. 8055-AM) and US$37.5 million Additional Financing (AF) loan (No. 8388-AM). 2. Project Status: The project implementation progress has slowed down due to significant delays with the completion of ongoing works and the commencement of the procurement of a new activity. Despite the slow progress, the Project’s development objective remains achievable, and the Borrower’s performance continues to be satisfactory. Measures have been taken to strengthen the implementation capacity of the project implementing entity, including contract management. Time-bound actions have been agreed to expedite the resolution of pending issues and implementation of remaining activities. The detailed progress and the agreed actions are described below. 3. Part A: Strengthening of the power transmission network. This component finances the rehabilitation of two transmission lines and four substations. 4. Part A.1: Provision of works, goods, and technical assistance for the rehabilitation of the existing power transmission line from Hrazdan Thermal Power Plant (TPP) to Shinuhayr substation and existing Lalvar - Noyemberyan power transmission lines, including compensation and grievance mechanisms for land acquisition and resettlement. The High Voltage Electric Networks (HVEN) – the implementing entity of the project - completed the replacement of the 220kV transmission line from Hrazdan TPP to Shinuhayr substation with a total length of 230km and the line is currently energized and used for electricity transmission. 5. The progress with the replacement of the 110kV Lalvar-Noyemberyan overhead transmission line (OTL) has been slow due to delays with land acquisition. As of December 4, 2019, 23km of the total 25km was completed. The completion of works and commissioning of the transmission line is expected by the end of 2020. 6. Part A.2: Provision of works, goods, and technical assistance for: (i) rehabilitation and extension of Haghtanak substation, and (ii) rehabilitation of Charentsavan-3, Vanadzor-1 and Zovuny substations. The rehabilitation of Haghtakan substation was completed as of the end of May 2019 and the substation is already operational. The rehabilitation of Vanadzor-1 substation is in progress and expected to be completed by the end of 2020. The remaining works include replacement of 110kV busbars and insulators, installation of fire alarm and air conditioning system and commissioning of 110kV and 6kV equipment and relay protection. 7. Reconstruction of Charentsavan-3 substation was temporarily suspended by HVEN in October 2017 because it was planning to complete the installation works using its own staff. The rationale for this approach was to reduce the total construction cost considering the previous Government’s intention to significantly constrain the growth of public debt considering the fiscal constraints. Therefore, HVEN instructed the contractor to carry out only the supply of equipment. However, in June 2018, the new Government and the management of HVEN revisited the approach to completion and determined that completion of the substation using HVEN’s in-house manpower would take longer than completing it with the specialized contractor. The financing of the substation will continue to be supported by the Project. 8. HVEN is currently exploring the following two options for completing the facility: a. Option 1: Extend the contract with the existing contractor to complete the supply and installation; b. Option 2: Have a new contract to complete the substation: If Option 2 is pursued, the key next steps are:  Prepare a cost estimate for completion by January 20, 2020. The World Bank Electricity Supply Reliability Project (P116748)  Prepare a revised works completion schedule, including a timeline for the procurement of a new contractor by February 15, 2020.  Procure a new contractor by August 30, 2020. 9. The decision on the option for completion of the substation will be made by HVEN, in consultations with the Bank, by December 27, 2019. 10. The bidding process for Zovuni substation has not started yet because of delays with the finalization of the bidding package. It is being delayed for the following reasons: a. Delayed effectiveness of the previous restructuring. The rehabilitation of Zovuni substation was included in the project scope during the June 2017 restructuring processed in response to the restructuring request letters from the Ministry of Finance, dated November 10, 2016, and April 19, 2017. However, the Amendment to the Loan Agreement only became effective on April 16, 2018, with significant delay. The reason for the delay was that the Government, together with HVEN, had been contemplating another restructuring request to either supersede or supplement the already approved ones, mainly in response to fiscal constraints. However, the pressure on public debt has subsided, and the new Government is willing to complete the rehabilitation of this important substation. b. The structural changes in the new Government and the high turnover of HVEN management. Since the effectiveness of the previous restructuring, Armenia had a change of the Government in 2018 and, more frequently, the leadership of HVEN. Over the past year and a half, the top management of HVEN was replaced twice with the current general director of HVEN being appointed to that position in late December 2018. This significantly impacted the decision-making processes related to investments, including procurement of new activities. c. Introduction of some modifications to the Bank’s standard bidding document for design, supply and installation of plants that would address the specific concerns of HVEN. HVEN’s experience under the recent single-responsibility design, supply, and installation contracts suggests that there were numerous instances of discrepancies between the installed types/ quantities of transmission line and substation equipment and those specified in the invoices and packing lists used for customs clearance. Those discrepancies cause major problems for HVEN because any difference between actual installed quantities/types and those cleared at the customs constitutes a breach of law leading to imposition of big fines on HVEN as the recipient and the owner of the shipped goods. This also results in significant delays with the release of the goods from the customs terminal and consequently delays with project implementation. To address those critical problems, the top management of HVEN proposed to introduce the following key modifications to the Bank’s standard bidding document:  the contractor is responsible for customs clearance of goods supplied from abroad,  payments to the contractor are made upon achievement of certain milestones,  the transfer of ownership of installed goods takes place from the contractor upon achievement of each milestone. 11. The Bank reviewed and submitted its comments on the draft bidding document submitted by HVEN on August 5, 2019. The Bank will take further action once the updated bidding document is received, which is expected by December 24, 2019. The World Bank Electricity Supply Reliability Project (P116748) 12. The Closing Date of the Project is proposed to be extended by 12 months till December 31, 2020, to allow for completion of ongoing works․ However, rehabilitation of Zovuni substation and completion of Charentsavan-3 substation would require further extension of the project, which, as agreed with the Government of Armenia, will be discussed with the Bank subject to having the final bidding document for Zovuni substation acceptable to the Bank and satisfactory progress with the chosen option on Charentsavan-3 substation by April 30, 2020. 13. Part B: Technical assistance to help HVEN implement the project and strengthen its capacity. The key activity under this component is the support provided to HVEN for technical supervision of the rehabilitation works of transmission lines and substations. In August 2019, HVEN sought and obtained the Bank’s no-objection to extend the implementation support and supervision contracts with the Joint Venture Decon international GmbH and CONSULTERA Unternemensberatung GmbH (Germany) till December 31, 2019. This contract with the implementation support consultant needs further extension to ensure uninterrupted technical supervision of ongoing works. 14. Environmental Safeguards: HVEN has shown a satisfactory track record in environmental performance throughout the life of the Project. To address potential environmental impacts, HVEN prepared site-specific EMPs for substations, which contain mitigation and monitoring plan along with their implementation arrangements. The EMPs were reviewed by the World Bank Environmental Specialist, which found it in full compliance with the National EA requirements and World Bank Operational Policies. HVEN uses consultant services for supervision works under the project. HVEN has an environmental and social safeguards specialist, who undertakes quality control of supervision consultants and conducts field trips to the sites of the project. 15. Social Safeguards: For the Hrazdan-Shinuhayr OTL, six Abbreviated Resettlement Action Plans (ARAPs) have been prepared and implemented. In total, 702 households with 3,018 family members have been affected in the Hrazdan- Shinuhayr line. There is no physical displacement involved. Most of the impacts related to loss of unused land plot or crops and/or trees. A total of 466 private land plots were acquired. Another eight cases are pending due to technical/legal reasons. In all these eight cases, compensation has been transferred to an escrow account with either a notary (six cases) or the court (two cases). For six cases the court has requested additional documents to accept the cases. The issues in these cases primarily involve an absence of the project affected persons from Armenia and/or lack of respective contact details, death of PAPs and nonexistence of identified and/or reachable heirs. 16. For the Lalvar-Noyemberyan OTL, two ARAPs have been prepared. Both ARAPs are currently under implementation. A total of 105 households with 363 family members will be affected under both the ARAPs. There is no physical displacement involved so far. Currently, of 116 land plots (60 private; and 56 community/state-owned), 79 have been acquired (32 privately owned; 47 community/state-owned). Additionally, 28 cases have been presented to court and compensation amounts for these cases have already been transferred to the notary or court deposit accounts. Owners of the land plots under expropriation in the courts have agreed to the proposed acquisition, however, lack proper documentation. Nine other community-owned land plots are in the process of being acquired by the project. HVEN has agreed to expedite the remaining cases so that ARAP implementation can be completed. 17. Contract Management: HVEN’s contract management capacity has deteriorated, but measures are being put in place to strengthen it. In particular, contracts for consulting services were allowed to expire resulting in repeated requests for retroactive extensions of expired contracts. To strengthen its contract management capacity HVEN will pool additional experienced staff and work proactively with the contractors and consultants that will involve monthly coordination meetings between the Bank project team and HVEN, including contractors/consultants to ensure timely identification and resolution of implementation issues. In addition, during the mission in October 2019, the Bank team delivered a training The World Bank Electricity Supply Reliability Project (P116748) on contract management for the project implementation staff of HVEN. It was agreed that HVEN would provide at least monthly progress reports on high value contracts. 18. Financial Management. The financial management arrangements under the project are overall satisfactory and acceptable to the Bank and there are no overdue audits under the project. 19. Rationale for Restructuring: The restructuring of the project is necessary for the project to meet its development objective. The extension of the closing date of the project by 12 months would provide sufficient time for (a) completion of the RAP and replacement of Lalvar-Noyemberyan transmission line expected by end of 2020, (b) the completion of the rehabilitation of Vanadzor-1 substation expected by the end of 2020. Meanwhile, the extension would also give the Ministry of Territorial Administration and Infrastructure (MTAI) and High Voltage Electric Networks of Armenia (HVEN) additional time to finalize the bidding document for Zovuni substation and decide on the contractual arrangements for completion of the rehabilitation of Charentsavan-3 substation. 20. The current management of HVEN and MTAI are strongly committed to implementing the remaining activities. The completion of Lalvar-Noyemberyan transmission line and the rehabilitation of Vanadzor-1, Charentsavan-3, and Zovuni substations are essential for ensuring reliable power supply to consumers and electricity distribution substations across the country. The project objective remains relevant to the energy sector strategy of the Republic of Armenia. It is aligned with CPF Objective 3 “Enhance connectivity and access to reliable infrastructure (transport, energy, digital)” of Focus Area 1 of Armenia Country Partnership Framework FY19-FY23. 21. The proposed restructuring also envisages cancellations of US$3.5 million of the original IBRD Loan amount (Loan 8055-AM) and $1.5m of the Additional Financing (Loan 8388-AM) to ESRP given the savings under the project. The savings are generated due to strong competition during the bidding processes. II. DESCRIPTION OF PROPOSED CHANGES 22. The proposed changes include the following: (a) Cancellation of US$3.5 million of the total size of the Loan No. 8055-AM. (b) Cancellation of US$1.5 million of the total size of the Loan No. 8388-AM. (c) Revision of the Category 1 of the Eligible Expenditures (Loan No. 8055-AM) from US$35,902,000 to US$32,402,000. (d) Revision of the Category 1 of the Eligible Expenditures (Loan No. 8388-AM) from US$37,400,000 to US$35,900,000. (e) Extension of the Closing Date of the Loan No. 8055-AM from December 31, 2019 to December 31, 2020. (f) Extension of the Closing Date of the Loan No. 8388-AM from December 31, 2019 to December 31, 2020. (g) PDO Level Result Indicators will have a YR6 target (proposed new final year) added given the extension of the Project Closing Date by one year. No change in the YR6 targets compared to the YR5 targets. The World Bank Electricity Supply Reliability Project (P116748) (h) Intermediate Result Indicators will have YR6 target added given the extension of the Project Closing Date by one year. No change in the YR6 targets compared to the YR5 targets. Appraisal Summary Appraisal Summary Change in Economic and Financial Analysis Explanation: The economic and financial analyses of the project was updated to estimate the flow of economic and financial benefits and costs given the revised capital costs from the contracts signed by HVEN for Hrazdan TPP-Shinuhayr SS and Lalvar-Noyemberyan transmission lines, Haghtanak, Charentsavan-3, and Vanadzor-1 substations and the project implementation progress. Economic analysis. The main economic benefits are (a) the reduction of operating and maintenance costs (O&M) due to lower frequency of equipment failures that allows for the reduction of the spending on recurrent repairs, (b) avoided increase in un-served energy due to increased frequency of outages (due to equipment failures) leading to power supply interruptions at end-user level, and (c) the reduction of technical losses. The technical loss reduction was valued at the long-run average incremental cost (LRAIC) of electricity generation. Avoided increase in un-served energy was valued as the weighted average willing-to-pay (WTP) for residential and non-residential consumers estimated at $0.29/kWh. The main economic cost is the economic cost of the rehabilitation of the substations and the replacement of the transmission lines, exclusive of taxes and duties. The applied economic discount rate was 8%. The updated economic analysis yielded an EIRR of 14.8 percent and NPV of US$71.7 million exclusive of GHG benefits and an EIRR of 14.8% percent and NPV of $72.3 million inclusive of GHG benefits. Financial analysis. The main financial benefit is the incremental revenue from transmission of electricity due to reduced frequency of outages and reduction of technical losses. The main financial cost is the financial cost of the investments, inclusive of taxes and price contingencies. The updated financial analysis of the project yielded FIRR of 4.5 percent and NPV of US$11.7. III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ The World Bank Electricity Supply Reliability Project (P116748) Economic and Financial Analysis ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Disbursements Arrangements ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Strengthening Component 1: Strengthening of 69.80 Revised of the power transmission 64.80 the power transmission network network Component 2: Technical Component 2: Technical 6.50 No Change 6.50 assistance assistance TOTAL 76.30 71.30 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE The World Bank Electricity Supply Reliability Project (P116748) LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications 30-Jun-2018, 31- IBRD-80550 Effective 30-Jun-2016 31-Dec-2020 30-Apr-2021 Dec-2019 IBRD-83880 Effective 31-Dec-2018 31-Dec-2019 31-Dec-2020 30-Apr-2021 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation LOAN IBRD- Disburs RESTRUCTUR USD 39,000,000.00 3,500,000.00 05-Dec-2019 35,500,000.00 80550-001 ing ING, COST SAVINGS LOAN IBRD- Disburs RESTRUCTUR USD 37,500,000.00 1,500,000.00 05-Dec-2019 36,000,000.00 83880-001 ing ING, COST SAVINGS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-80550-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: IBRD80550 G,CW,CS,NONE-CS,TR,AUD,OC 35,902,500.00 32,678,500.20 32,402,500.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: IBRD80550 LAND ACQ/GRIEV MECHANISM 2,000,000.00 933,291.03 2,000,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: Refund of PPA 1,000,000.00 622,185.00 1,000,000.00 The World Bank Electricity Supply Reliability Project (P116748) Total 38,902,500.00 34,233,976.23 35,402,500.00 IBRD-83880-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: GD, CW, Non-CS, CS, TRNG, Aud, IOC 37,400,000.00 19,322,126.36 35,900,000.00 100.00 100.00 Total 37,400,000.00 19,322,126.36 35,900,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2011 0.00 0.00 2012 782,285.00 782,285.00 2013 5,422,804.51 5,422,804.51 2014 1,027,357.65 1,027,357.65 2015 9,801,501.34 7,801,501.34 2016 5,592,473.69 6,079,226.81 2017 9,360,984.29 9,649,852.93 2018 23,520,542.02 4,827,300.00 2019 20,992,051.50 12,546,359.64 2020 0.00 9,900,160.47 2021 0.00 0.00 OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  Moderate Macroeconomic  Substantial The World Bank Electricity Supply Reliability Project (P116748) Sector Strategies and Policies  Moderate Technical Design of Project or Program  Low Institutional Capacity for Implementation and  Substantial Sustainability Fiduciary  Substantial Environment and Social  Substantial Stakeholders  Low Other Overall  Substantial . The World Bank Electricity Supply Reliability Project (P116748) . Results framework COUNTRY: Armenia Electricity Supply Reliability Project Project Development Objectives(s) The project development objective is to increase the reliability and capacity of the transmission network. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline End Target Increase the reliability of the transmission system Outages per year on the target section of the transmission line 14.00 3.00 (Number) Action: This indicator has been Revised Average interruption frequency per year in the project area 0.20 0.08 (Number) Action: This indicator has been Revised Customers served in the project area (Number) 62,000.00 362,000.00 Action: This indicator has been Revised Average interruption frequency per year for customers of the Special Economic Zone served by Haghtanak substation 0.20 0.05 (Number) Action: This indicator has been Revised Plant and equipment failures per year in target substations 8.00 2.00 (Number) Action: This indicator has been Revised The World Bank Electricity Supply Reliability Project (P116748) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline End Target Increase the capacity of the transmission system Increased capacity of the targeted section of the transmission 250.00 380.00 line (Megawatt) Action: This indicator has been Revised PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target Component 1: Strengthening of the power transmission network Total number of substations rehabilitated under the project 0.00 4.00 (Number) Action: This indicator has been Revised Transmission lines constructed or rehabilitated under the project 0.00 255.00 (Kilometers) Action: This indicator has been Revised Transmission lines constructed under the project (Kilometers) 0.00 255.00 Action: This indicator has been Revised Percent of registered project related grievances (disaggregated by gender) responded to within stipulated service standards for 100.00 100.00 response times (Percentage) Action: This indicator has been Revised IO Table SPACE The World Bank Electricity Supply Reliability Project (P116748) The World Bank Electricity Supply Reliability Project (P116748)