Document of The World Bank FOR OFFICIAL USE ONLY Report No: 74445-PG PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 4.8 MILLION (US$ 7.3 MILLION EQUIVALENT) TO THE INDEPENDENT STATE OF PAPUA NEW GUINEA FOR A PNG ENERGY SECTOR DEVELOPMENT PROJECT January 22, 2013 SUSTAINABLE DEVELOPMENT PAPUA NEW GUINEA, TIMOR-LESTE AND THE PACIFIC ISLANDS EAST ASIA AND PACIFIC REGION This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank's policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective Oct 31, 2012) Currency Unit = Kina 2.05 Kina = US$1 1.5400 US$ = SDR 1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BOOT Build, Own Operate, Transfer CAS Country Assistance Strategy CPS Country Partnership Strategy DEC Department of Environment and Conservation DNPM Department of National Planning and Monitoring DPE Department of Petroleum and Energy DPEnt Department of Public Enterprises ED-DPE Energy Division, Department of Petroleum and Energy EIP Electricity Industry Policy EMP Environmental Management Plan ESIA Environment and Social Impact Assessment ESMAP Energy Sector Management Assistance Programme ESMF Environment and Social Management Framework GDP Gross Domestic Product GEF Global Environment Facility GIS Geographic Information System GoPNG Government of Papua New Guinea ICCC Independent Consumer and Competition Commission IPBC Independent Public Business Corporation IPP Independent Power Producer IPZ Interim Protection Zone KI Kokoda Initiative LNG Liquefied Natural Gas LTDS Long Term Development Strategy M&E Monitoring and Evaluation NB Naoro Brown NEC National Executive Council OCCD Office of Climate Change and Development OTML Ok Tedi Mine PAP Project-affected People ii PDO Project Development Objectives PMU Project Management Unit PNG Papua New Guinea PNGEDL Papua New Guinea Energy Development Limited PNGSDP Papua New Guinea Sustainable Development Program PPA Power Purchase Agreement PPIAF Public Private Infrastructure Advisory Facility PPL PNG Power Limited PPP Public Private Partnership RAP Resettlement Action Plan RC Regulatory Contract REDD Reduction in Emissions from Deforestation and Forest Degradation RPF Resettlement Policy Framework SESA Strategic Environmental and Social Assessment TOR Terms of Reference WB World Bank WPPL Western Province Power Limited Regional Vice President: Ulrich Zachau Country Director: Franz Drees-Gross Sector Director: John Roome Sector Manager: Michel Kerf Task Team Leader: Wendy Hughes 111 PAPUA NEW GUINEA PNG Energy Sector Development Project Table of Contents I. STRATEGIC CONTEXT .................................................................................................. 1 A. Country Context............................................................1 B. Sectoral and Institutional Context.......................................... 3 C. Higher Level Objectives to which the Project Contributes ........................... 9 II. PROJECT DEVELOPMENT OBJECTIVES ............................................................. 10 A. PDO ............................................................. 10 Project Beneficiaries ................................................... 10 PDO Level Results Indicators.............................................. 10 III. PROJECT DESCRIPTION ........................................................................................... 11 A. Project components ........................................ ............... 1 B. Project Financing ................................................... 13 Lending Instrument .................................................... 13 Project Cost and Financing ...................... ................... 13 C. Lessons Learned and Reflected in the Project Design........................... 14 IV. IMPLEMENTATION .................................................................................................... 14 A. Institutional and Implementation Arrangements ..................... ......... 14 B. Results Monitoring and Evaluation ....................................... 18 C. Sustainability......................................................... 18 V. KEY RISKS AND MITIGATION MEASURES ........................................................ 19 VI. APPRAISAL SUMMARY ............................................................................................. 20 A. Economic and Financial Analysis ............................... ........ 20 B. Technical ........................................................ 21 C. Financial Management....................... ................... 21 D. Procurement ...................................................... 21 iv E. Social (including Safeguards) .......................................... 21 F. Environment (including Safeguards) ..................................... 25 ANNEX 1: RESULTS FRAMEWORK AND MONITORING........................................... 29 ANNEX 2: DETAILED PROJECT DESCRIPTION......................................................... 34 ANNEX 3: IMPLEMENTATION ARRANGEMENTS .................................................... 41 ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)................ 58 ANNEX 5: IMPLEMENTATION SUPPORT PLAN......................................................... 62 ANNEX 6: NAORO BROWN HYDROPOWER PROJECT TECHNICAL ANNEX ........ 65 ANNEX 7: STRATEGY FOR COMMUNICATION AND CONSULTATION WITH INDIGENOUS COMMUNITIES IN THE NAORO BROWN HYDROPOWER PROJECT AREA ................................................................................................................... 76 v PAD DATA SHEET Independent State of Papua New Guinea PNG Energy Sector Development Project PROJECT APPRAISAL DOCUMENT East Asia and Pacific Region EASNS Basic Information Date: January 22, 2013 Sector: Power Country Director: Franz Drees-Gross Themes: Infrastructure services for private sector development (70%); Rural services and infrastructure (30%) Sector Manager/Director: Michel Kerf / John Roome EA Category: B Project ID: P101578 Lending Instrument: TAL Team Leader(s): Wendy Hughes Joint IFC: No Borrower: Independent State of Papua New Guinea Responsible Agency: Energy Division, Department of Petroleum and Energy Contact: Mr. Vore Veve Title: Director Telephone No.: (675) 322-4200 Email: vore_veve@datec.net.pg Responsible Agency: PNG Power Limited Contact: Mr. Lawrence Solomon Title: Director, Strategy and Marketing Telephone No.: (675) 324-3200 Email: 1solomon@pngpower.com.pg Project Implementation Period: Start Date: February 2013 End Date: January 2017 Expected Effectiveness Date: August 2013 Expected Closing Date: January 2017 Project Financing Data(US$M) Loan [ ] Grant [ X] Other: GEF Grant [X ] Credit [ ] Guarantee For Loans/Credits/Others Total Project Cost: 9.25 Total Bank Financing: 8.20 Total Cofmancing: Financing Gap: Financing Source Amount(US$M) BORROWER/RECIPIENT 1.05 IBRD IDA: New 7.30 Vi IDA: Recommitted 0.00 Others: GEF 0.90 Financing Gap Total 9.25 Expected Disbursements (in US$ Million) FiscalYear FY13 FY14 FY15 FY16 FY17 Annual 0.3 3.1 3.1 1.3 0.4 Cumulative 0.3 3.4 6.5 7.8 8.2 Project Development Objective(s) The proposed Project Development Objectives (PDO) are to (i) strengthen policy development and strategic framework for renewable energy and rural electrification; and (ii) attract investors for sustainable development of new hydropower generation to supply the Port Moresby electricity grid. Components Component Name Cost (US$ Millions) Institutional and Policy Development for Renewable Energy and Rural 2.0 Electrification Technical Assistance for Preparation and Planning for Port Moresby Hydropower 6.5 Supply Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [X] Does the project require any waivers of Bank policies? Yes [ ] No[ X] Have these been approved by Bank management? Yes[] No[ ] Is approval for any policy waiver sought from the Board? Yes [ ] No[ X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X Vii Legal Covenants Name Recurrent Due Date Frequency Article V section 5.01 Effectiveness Description of Covenant The Subsidiary Agreement has been executed on behalf of the Recipient and the Project Implementing Entity, in form and substance satisfactory to the Association. The Co-financing Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled, in form and substance satisfactory to the Association. Article V section 5.02 Effectiveness Description of Covenant The Subsidiary Agreement has been duly authorized or ratified by the Recipient and the Project Implementing Entity and is legally binding upon the Recipient and the Project Implementing Entity in accordance with its terms. Prior to Disbursement Schedule 2, Section IV B 1 under Category (1)(a)(b) and(c) Description of Covenant DPE Financial Management Manual in form and substance satisfactory to the Association. Schedule 2, Section IV B 1 Prior to Disbursement under Category (2) Description of Covenant (a) the PPL Financial Management Manual; and (b) the Financial Management Action Plan; all in form and substance satisfactory to the Association. Schedule 2, Section IA September 30, 2013 and thereafter On-going Description of Covenant Establish by September 30, 2013, and thereafter maintain until completion of the Project, an oversight committee (the Electricity Management Committee). Schedule 2, Section IA July 31, 2013 and thereafter On-going Description of Covenant Establish by July 31, 2013, and thereafter maintain, or cause the Naoro Brown Project Developer to maintain, until completion of the Project, two expert panels (the Social and Environmental Expert Panel and the Dam Safety Expert Panel). Schedule 2, Section IA On-going Description of Covenant Maintain within DPE until the completion of the Project, a project management unit (the DPE-PMU). Schedule 2, Section IA On-going Description of Covenant Maintain within PPL until the completion of the Project, a project management unit (the PPL-PMU). Team Composition Bank Staff Name Title Specialization Unit Wendy Hughes Lead Energy Specialist, TTL Energy EASNS Suman Babbar Consultant Infrastructure financing EASNS V111 Roberto Aiello Senior Energy Specialist Energy EASNS Tomoko Matsukawa Senior Financial Officer Finance FEUFS Tendai Gregan Energy Specialist Energy EASNS Barry Trembath Consultant Hydropower engineering EASNS James Monday Senior Environmental Engineer Environmental safeguards EASTS Rikard Liden Senior Hydropower Specialist Hydropower TWIWA Asger Christensen Consultant Social Development EASNS Simon Peter Gregorio Consultant Social Development EASNS Mark Woodward Sustainable Development Leader Sustainable Development EASPS 'Ana Tu'ionuku ETC Energy EASNS Erik Johnson Senior Operations Officer Operations EASNS Aleta Moriarty Communications Officer Communications EAPXT Nicole Forrester Program Assistant Operations EACNF Margaret Ali Team Assistant Operations EACGF Tanya Mas Team Assistant Operations EACGF Cristiano Nunes Senior Procurement Specialist Procurement EASR1 Kylie Coulson Senior Financial Management Financial Management EAPFM Specialist Isabella Micali Drossos Senior Counsel Legal LEGES Marjorie Mpundu Senior Counsel Legal LEGES David Whitehead Financial Management Specialist Financial Management EASFM Haiyan Wang Senior Finance Officer Disbursement CTRLN Leiping Wang Senior Energy Specialist, Peer Energy EASIN Reviewer Pravin Karki Senior Hydropower Specialist, Hydropower SASDE Peer Reviewer Jie Tang Senior Energy Specialist, Peer Energy EASTS Reviewer Non Bank Staff Name Title Office Phone City Locations Country First Administrative Location Planned Actual Comments Division Papua New Guinea Port Moresby 1x  I. STRATEGIC CONTEXT A. Country Context 2 1. The population of PNG is about 7.3 million with a land area of 463,000 km2, giving a population density of about 16 people/km2. About 15% of the population lives in urban areas. The rural areas are sparsely populated with low access to infrastructure. PNG has substantial natural wealth, including forestry, minerals and water resources. The economy has been highly dualistic, although this is starting to break down. The "enclave-based" formal sector is focused mainly on the large-scale export of natural resources. The informal sector is based mainly on the subsistence and semi-subsistence activities of the majority rural population. Recent resource- sector investments are propelling the emergence of a non-resource, modem private sector concentrated in urban areas. The PNG population is organized in small, fragmented social groups, speaking over 800 distinct languages. Allegiance to local, clan-based groups is frequently strong and more immediate than a national identity, a situation which poses a challenge to pursuit of a national vision. 2. One of the development challenges facing PNG is bridging this broad social and economic span: sophisticated private sector operations in mining and other sectors on the one hand and on the other, traditional, subsistence livelihoods for much of the population. Energy is a cross-cutting sector which affects all households, businesses and industries. Effective development of a sustainable energy sector targeting both increased access to electricity and more reliable power supply on the existing grids would have broad social development benefits for households including in the rural areas, as well as positive impact on the formal economy. 3. The proposed Project would help identify and set the stage to achieve the significant social benefits which would result from sustainable and inclusive development of the energy sector. Through the support for development of the Renewable Energy Policy, Rural Electrification Policy and Rural Electrification Strategy, the proposed Project would help create the policy framework for broad-based social benefits from an improved energy sector. The strong emphasis on consultation, including targeted consultation with women, both in the policy and strategy development, and in the preparation for the planned Naoro Brown hydropower project, would promote socially-sustainable, gender-equitable energy sector development that explicitly factors in the needs and concerns of both the formal and traditional elements of the economy and PNG society. 4. PNG has enjoyed markedly improved economic fortunes since the mid-2000s. The global commodity price boom and stronger macroeconomic management underlie much of the reversal from the declining real incomes and macroeconomic volatility of the preceding 10 years. GDP growth is expected to average 7.5 percent per annum between 2010 and 2012. This follows only a mild impact from the global downturn of 2009 on PNG's economy, which expanded by 5.5 percent, outperforming most other developing economies and its regional peers. This follows several years of 6 to 7 percent annual GDP growth. While sharply higher global commodity prices have supported incomes, the non-minerals sector has led this resurgence, benefiting from private investment in the newly liberalized telecommunications and aviation sectors, for example. Improved fiscal management did much to transform windfall gains from higher 1 commodity prices into sustained growth, particularly through fiscal rules ensuring the savings of windfall minerals revenues. A sovereign wealth fund framework has been enacted to stabilize the stream of revenues to the government from resource and energy production. It contains strong transparency and governance arrangements, although much of the operational details remain to be drafted and enacted. 5. PNG's economic outlook remains solid. The central driver is the stream of new investments in the country's productive capacity. The current US$ 16 billion PNG-LNG (liquefied natural gas) project appears to be on track to deliver its first cargos in late 2014, with construction having peaked in 2012. The Government expects the LNG project to expand GDP by as much as one-quarter in 2014 and 2015 (little of the construction activity is expected to be retained in the local economy), and national income by about 8 percent. The project is forecast to start generating significant revenues for the government late this decade. Final investment decisions on a second LNG project, potentially with even larger production potential, and on a number of other large resource projects, are expected during 2013. 6. Risks to PNG's outlook are significant, in both directions. In the short-term, they are predominately to the downside, and focus on supply and demand volatility and fiscal pressures. Inflation has been high through recent years, and is expected to remain between 5 and 10 percent into the medium-term. Reflecting the maturing economy and strength in demand in recent years, recent inflationary pressures are largely emerging from domestic capacity constraints. The normal tools of monetary policy are inhibited by the structure of the financial sector, especially the structural excess liquidity. The supply constraints driving inflation, particularly of skilled labor, in the construction sector and of land for development, are also limiting the scope for higher output growth and the efficiency of government development capital spending. While supply is responding, it is doing so with a lag, creating risks of a capacity overhang as demand wanes. This is especially significant in the labor market, with large numbers gaining their first exposure to formal employment and others attracted into specialized technical training, but with many short-term positions set to expire as construction of the PNG-LNG project winds down. Meanwhile there are risks of ongoing political uncertainty following national elections held in July 2012. These elections have been no more violent or problematic than those in 2002 and 2007. However there may be a return to short-lived coalition governments, following a Supreme Court decision overturning a political integrity law that limited the ability of Members of Parliament to change affiliation between elections. Such pressures may worsen the quality of spending, just as government revenues are compressed by volatile global commodity prices and declining production and profitability of existing resource projects. 7. Into the longer-term, the potential stream of resource projects following the PNG-LNG project presents a major upside potential in terms of growth and revenue. The demand for electricity on the Port Moresby grid has grown rapidly in the recent years and projections suggest this will continue for several years. There are other natural gas projects under discussion, but the Exxon Mobil LNG project is primarily for export. There is provision for limited domestic gas off-take at the gas field, but there is no provision for pipeline capacity to supply gas in Port Moresby. As a result, PNG Power cannot plan near-term generation expansion based on gas- fueled generation. 2 8. In addition to natural gas, PNG has abundant, untapped hydropower resources. Available studies indicate a potential of at least 10,000MW, ranging from micro- to mega- project scales. A more comprehensive assessment would likely show a greater potential, considering the mountainous terrain and high rainfall in many parts of the country. Just a fraction of this hydropower potential - less than 250MW - has been harnessed to date, yet about 90% of the population has no access to electricity, and power supply in the urban centers is insufficient to reliably meet demand. Development of hydropower offers the prospect of clean, sustainable, cost-effective electricity supply. Socially-responsible preparation and development of hydropower resources, in combination with efficient, complementary thermal alternatives such as gas-fired generation, would make a significant contribution to social and economic development in PNG for decades. B. Sectoral and Institutional Context Key Electricity Sector Institutions 9. Key sector institutions are: * Department of Petroleum and Energy (DPE) has responsibility for policy, strategic direction and planning in the energy sector. Under the Electricity Industry Policy approved in December 2011, discussed below, DPE's responsibilities have expanded to include the position of Chair of and Secretariat to the Electricity Management Committee (EMC). It is also intended that DPE will take over the function of technical regulation of the sector from PNG Power (subject to approval by the Independent Consumer and Competition Commission). * Independent Public Business Corporation (IPBC) holds the Government's ownership interest in state-owned enterprises including PNG Power, and handles commercial aspects, monitoring and oversight. * Independent Consumer and Competition Commission (ICCC) is responsible for the economic regulation of electricity retail tariffs. The current Regulatory Contract (RC) for PNG Power covering the period 2002-2012 has been extended until the next RC is finalized. The next RC is expected to be in place by the end of February 2013. * PNG Power Limited (PPL) is the state-owned, vertically-integrated electricity utility with licenses for generation, transmission, distribution and retail covering most of the main urban centers. PPL was created in July 2002 when the electricity assets, liabilities and undertakings of the Government-owned statutory corporation Elcom (formerly the Electricity Commission of PNG) were transferred to PNG Power Limited. PPL is incorporated under the Companies Act and 100% owned by the General Business Trust of which the IPBC is the trustee. 3 * Western Province Power Limited, a wholly-owned subsidiary of PNG Sustainable Development Program Limited (PNGSDP) , has a license for electricity generation, distribution and supply activities in the Western Province. Western Power's mandate is development-oriented, with a focus on small scale (<10MW) power supply that would be unlikely to be commercially viable without targeted financial support. Power Supply in PNG 10. There is no national power grid in PNG, due in part to the country's very rugged, mountainous terrain, high population dispersion, low income level, capital constraints, and the development priorities of GoPNG. Instead, Papua New Guinea has three separate main power grids owned and operated by PPL: * Port Moresby; * Ramu Valley serving Lae, Madang, and the Highlands; * Gazelle Peninsula (Rabaul) serving East New Britain Province. 11. These three islanded networks are mixed hydro-thermal power systems. PPL also 2 operates 14 other small systems , all of which are thermal based with the exception of two that have mini-hydro schemes supplemented by diesel power. Table 1 shows installed capacity and peak demand for the three main systems and the smaller centers. 1 PNGSDP was established in 2002 as an independent entity, when BHP Billiton divested its 52 percent shareholding in the Ok Tedi Mine (OTML) following concerns about the long-term environmental impact of the mine, and the social and economic repercussions of this impact. PNGSDP has the task of applying the funds coming from OTML which are assigned for the development of PNG, and in particular the Western Province. PNGSDP's objective is to support selected sustainable development programs through projects and initiatives to benefit PNG. Western Province Power Ltd (WPPL) is a wholly-owned subsidiary of PNGSDP. The purpose of this entity is to drive the PNGSDP rural electrification mandate in Western Province and the rest of PNG. PNGSDP and Origin Energy (Australia) each own 50% of PNG Energy Development Ltd (PNGEDL). The purpose of the company is to support and participate in commercially viable, environmentally and socially sustainable energy developments greater than 10MW. 2 Asian Development Bank is providing financing under the "Small Towns Project" to assist PPL in converting up to six of the smaller grids to hydropower supply. The financing agreement was signed in early 2011. 4 Table 1: Current Generation Installed Nameplate Capacity and Current Site Rating System Type Capacity Site Rating Peak Demand Energy (MW) (MW) (MW) (GWh) Port Moresby Hydro 68 58 Thermal 107 84 98 394 Total 175 142 Ramu Hydro 89 83 Thermal 55 39 60 293 Total 144 122 Gazelle Hydro 10 9 Thermal 11 9 9 39 Total 21 18 Other Centers Hydro 2 2 Thermal 34 18 16 75 Total 36 20 TOTAL Hydro 169 152 Thermal 207 150 183 801 Total 366 302 12. Included in the above is a 24MW diesel unit Independent Power Producer (IPP) supplying the Port Moresby grid under a power purchase agreement with PPL. 13. PNG Power's power systems were predominantly built in the late 1960s and early 1970s, prior to PNG's independence in 19753. Since that time, there has been relatively little expansion of the geographic coverage of the existing PNG Power networks due to the inadequacy of resources to expand beyond the urban centers, but the loads on the networks have grown. 14. There is at least 280MW of additional capacity outside these grids belonging to other entities. Most of this is privately-owned and operated for dedicated power supply to certain mining operations. Many of these are diesel systems, but a privately-owned 58MW hydropower system provides power to the Ok Tedi mine (OTML), and the Lihir Gold mine is largely powered by privately-owned geothermal power. Gas turbine power plants in the Highlands are fuelled by natural gas from the Hides gas field. In some cases, privately-owned generators inject power to the PPL systems under power purchase arrangements with PPL. Western Province Power Ltd. (WPPL) owns and operates some isolated grids in Western Province. 15. Beyond the grids operated by PPL, WPPL and major mines, power is supplied via: * mini-grids in provincial and district administration centres under the oversight of the provincial governments (formerly called 'C-centers'); * stand-alone diesel generators for clinics, churches and schools; and 3 Although the WB has had limited involvement in the energy sector recently, the WB has a long history of supporting hydropower in PNG. Most of the large scale hydropower built in PNG during the 1970s and 1980s was financed by the World Bank. Investment loans helped finance the Upper Ramu (Ramu 1) and Yonki hydropower schemes that supply the two main power grids in PNG (Ramu and Port Moresby), as well as expansion of the country's transmission and distribution networks. 5 * household generators (diesel, solar). 16. It is estimated that about 10 % of PNG's population has access to electricity. The GoPNG has set a target in its Development Strategic Plan 2010-30 of achieving 70% access by 2030. Efforts to date have been largely ad hoc. GoPNG has recognized the need for a coordinated approach, beginning with developing a rural electrification policy and strategy. PNG Power Ltd. (PPL) 17. PPL currently supplies around 91,000 customers with 800,000 MWh/yr of electricity. Sales revenue for 2011 was K625m. Net profit before tax declined in 2008 to K5.8 million largely because of higher fuel and maintenance costs, but PPL remains profitable. During 2007- 2008 capital expenditure increased to KI 15.8m in 2007 and Kl36.8m in 2008, up from a low level of Kl8m in 2004, which has been funded primarily by borrowings and a K65m equity infusion. Gearing is currently moderate at 34% debt/equity. 18. The performance of PNG's power sector improved in the period 2002-2011, following the deterioration in services in the 1990s that arose from that decade's political and economic instability and uncertainty in PNG. PPL was near bankrupt in 2002, with its generation and network assets run down, and reliability poor. Between 2002 and 2011, the changes in the power sector's policy and regulatory framework, together with significant efforts on the part of PPL, helped to place the sector on a much better footing. Key changes include: a) in 2002, the establishment of an independent regulator, the ICCC, and a Regulatory Contract covering the 10 year period 2002-20114. The ICCC implements a form of revenue cap regulation in relation to PPL and sets license conditions for other electricity market participants; b) PPL improving its financial performance between 2003 and 2011, with increased revenues and sustained profitability; c) PPL investing in new plants and rehabilitating existing plants. New investments include: the Yonki Toe of Dam hydro station and a transmission line to the Hidden Valley gold mine. The Rouna 2 hydropower station has been refurbished, thereby restoring some generation capacity for Port Moresby. These infrastructure investments by PPL have been funded by internally generated cash flow and through a major PGK 418 million debt facility established with a syndicate of PNG financial institutions. 19. However, PNG's power sector faces a number of serious, ongoing challenges, including: * Little generation reserve margin, and transmission and distribution networks are at capacity or overloaded, resulting in poor reliability of the power systems in the event of generator or network outages; * Generator maintenance scheduling is challenging, given lack of spare capacity and the cost of running diesel-based generation to replace off-line hydropower. Because of this, routine maintenance tends to be done on an opportunistic basis. Hydro generators are the last to be serviced given the opportunity cost of taking them out of service and operating diesel and/or the load shedding that would take place; 4 The current RC has been extended until a new RC is in place. The new RC is expected to be in place by the end of February 2013,). 6 * Significant de-rating of existing hydro-generation capacity due to inadequate servicing of the hydro generators over time. PPL is currently implementing a rehabilitation program for its hydro generators to restore capacity; * Relatively high electrical losses, which in 2011 were estimated to be around 20% on average, with some areas such as the Highlands experiencing significantly higher losses. PPL is currently developing a program to reduce losses; * A growing dependence on diesel generation, in the absence of access to natural gas and development of further hydropower; * Unpaid electricity bills, particularly those of some government departments. 20. A national uniform tariff is used (which charges the same price for customers within a specific group, regardless of location). The cross-subsidies that arise from this are viewed as necessary to maintain affordability of electricity access in high cost areas. Power prices are expected to rise to fund new power sector infrastructure (including power purchase commitments under-pinning new private sector development). The current RC between PPL and ICCC was due to expire in December 2012. PPL submitted a proposed RC for the next 5-year period and this has been subjected to public consultation. The current RC has been extended while a new RC is being finalized. The new RC is expected to be in place by the end of February 2013, taking into account the government's recently-approved Electricity Industry Policy (EIP). This policy includes a move away from the national uniform tariff towards pricing that is more cost- reflective, whilst still maintaining some cross-subsidies to ensure affordability in high-cost areas. Demand Growth for the Port Moresby System 21. An updated demand forecast was prepared in September 2012. PNG Power is preparing a new set of load forecasts, as part of its preparations for developing a revised fifteen-year plan. The main source of uncertainty is the projected load for the Port Moresby system. Port Moresby's load is now expected to grow more rapidly because of economic growth stimulated in part by the construction and commissioning of the LNG export terminal in Port Moresby harbour. Currently available projections for growth in energy demand on the Port Moresby grid show energy demand growing at about 10% for the next four years and then gradually settling down to an average growth of 3.8% in the next 15 year period6. The combination of demand growth and upcoming retirement of some existing thermal plants indicates that the proposed approximately 80 MW of capacity planned for the Naoro Brown project would be essentially fully committed7 by 2017, the earliest expected commissioning date. The LNG plant will have its own dedicated power supply, separate from the PPL system. However the activity linked to the LNG export terminal will place increasing demands on the PPL grid. 6 PPL projections. 7 Through a combination of meeting demand growth and substituting for existing diesel-fired generation. 7 Role of Natural Gas 22. PNG has large natural gas resources as well as hydropower potential. Currently there is no provision for gas to be available for domestic use in Port Moresby outside the Exxon Mobil LNG project, but other natural gas projects are under discussion in PNG. Given the electricity demand growth projections, new capacity is needed in the near-to-medium term and the unit cost of hydropower would be much lower than for a non-gas thermal alternative. It is possible that in the future natural gas might be available for domestic use in Port Moresby and would be considered in future planning exercises. Considerations would include: natural gas and hydropower generation can be complementary; hydropower is a clean, renewable energy resource that might otherwise not be utilized while natural gas can be exported; domestic natural gas might be better used for cooking, heating and air conditioning with hydropower used to generate electricity. Electricity Industry Policy (EIP) 23. After an extensive period of consultations, the Electricity Industry Policy was approved by the National Executive Council (NEC) in December 2011. The Policy addresses three strategic objectives of the Government: * Improving access in the provision of electricity services; * Improving reliability of electricity supply; and * Ensuring that power is affordable for consumers. 24. Key elements of the policy include attracting the private sector to new power generation, improving government management of the sector under the guidance of an Electricity Management Committee (EMC), moving away from uniform tariffs towards cost-reflective pricing, and transferring the technical regulation of the sector to DPE. Private Sector Investment Climate 25. GoPNG hosted a two-day workshop in September 2010 focusing on financing and safeguards aspects of development of new hydropower in PNG. The event was attended by representatives from the private sector and multilateral and bilateral institutions. There was clear interest from all parties, with the private sector stressing the requirement of a clearly defined risk mitigation structure. At least two hydropower projects, larger than the Naoro Brown project, are in various stages of assessment or preparation, with some level of involvement of the private sector expected. Public Private Partnership (PPP) Policy, Bill and proposed PPP Center 26. A Public Private Partnership (PPP) Policy has been adopted by Government. The PPP Bill is a work in progress and will provide the mechanism for establishing a PPP Centre, which will act as a focal point for supporting PPPs, including providing policy guidance, assessment of the viability of PPP schemes and direct involvement in the procurement process. The PPP Bill 8 sets out a structured approach for delivering PPPs, from identification through to contract execution. 27. The process of recruiting staff for the PPP Center cannot begin until the PPP Law is in place and it is unlikely that the PPP Centre would be fully operational until at least a year after the Bill is passed. It is intended to launch the selection process for the Naoro Brown Project Developer by the third quarter of 2013, and it is likely that the Naoro Brown project would need to be subject to transitional arrangements as it would not benefit from the full support of the PPP centre. Specifically, PPL would continue to spearhead the preparation of the Naoro Brown project including hiring transaction advisors to help prepare the Naoro Brown project for bidding and selection of the Naoro Brown Project Developer. This would be done within the overall framework of the PPP policy and under the guidance of an oversight committee - the Electricity Management Committee - consisting of key ministries. As the PPP Center is established, designated staff would be involved in the Naoro Brown preparation process, as appropriate, to provide hands-on experience and on-the-job training in a transaction. C. Higher Level Objectives to which the Project Contributes 28. The GoPNG has recently developed three documents setting out the national long and medium term vision and strategic direction. The Vision 2050 highlights a diversification from minerals wealth towards broader growth, employment and improved service delivery. The Development Strategic Plan (DSP) 2010-2030 provides more guidance on national priorities, and the Medium Term Development Plan 2011-2015 articulates specific actions and deliverables, and the strategies through which they are to be implemented. Development of a strategic approach in the energy sector and a target of increasing access to electricity from the current level of less than 10% to 70% by 2030, and specific 5-year goals with regards to increased use of hydro and improved energy sector management capacity, are of particular relevance for the proposed Project. The GoPNG is in the process of developing a strategy toward climate compatible development, including a focus on low carbon growth development paths. The Interim Action Plan for Climate Compatible Development (public consultations were undertaken in 2010-2011) prioritizes readiness activities for a future Reduction in Emissions from Deforestation and Forest Degradation (REDD) while looking for economic growth opportunities that minimize future emissions. The proposed Project contributes to achieving the higher level GoPNG objectives in the energy sector. 29. The proposed Project is fully aligned with the current WBG Country Partnership Strategy (CPS) for the period FY13-FY16, which was approved by the WB Board of Executive Directors in December 2012. In the context of discussions on the CPS, the Government has signaled its desire for a continued high priority on strategic renewable energy sector work in the WBG program. The development of the Project has been closely coordinated with IFC. IFC and MIGA were represented at the September 2010 Hydropower workshop in Port Moresby. 9 II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 30. The proposed Project Development Objectives (PDO) are to (i) strengthen policy development and strategic framework for renewable energy and rural electrification; and (ii) attract investors for sustainable development of new hydropower generation to supply the Port Moresby electricity grid. Project Beneficiaries 31. Beneficiaries of the technical assistance supported under the Project would be the institutions responsible for developing energy sector policy in PNG and for preparing the Naoro Brown Hydropower project. If successful, the proposed Project would stimulate downstream investment in the energy sector both for rural areas and for new supply to Port Moresby. Beneficiaries of the anticipated subsequent investment would include (i) the portion of the PNG population which does not currently have access to a reliable, affordable, sustainable supply of electricity, since strengthening the policy environment for rural and renewable energy and preparation of a rural electrification strategy are essential steps towards significantly increasing access to sustainable electricity supply; and (ii) current and potential new customers of PNG Power, in particular on the Port Moresby grid, since technical Assistance supported by the proposed Project would lead to a lower cost and better reliability of power supply on the Port Moresby grid than would be possible without the Project. 32. Climate Finance, including any carbon offset mechanism within the compliance and/or voluntary carbon markets, is expected to be mobilized in connection with the Project activities as such benefits are considered important for the long-term viability of the programs. 33. Global environmental benefits would result from implementation of new hydropower, rather than diesel-based generation, to supply the Port Moresby grid, and as a result of a low carbon growth rural electrification strategy, supported by appropriate policies. PDO Level Results Indicators (i) Rural and Renewable Energy policies submitted to Cabinet and rural electrification strategy completed following a participatory process; (ii) Financing for the Naoro Brown hydropower project is at an advanced stage; (iii) Planning study is completed as a key input to preparing future hydropower projects for investment. 10 III. PROJECT DESCRIPTION 34. Three broad areas for possible World Bank-supported technical assistance were identified based on GoPNG priorities: * Technical assistance in the areas of policy and strategy in the electricity sector, with a focus on rural and renewable energy; * Capacity building to assist the Government in preparing for its role in new hydropower projects; * Technical assistance in developing the Naoro Brown hydropower project to supply the Port Moresby grid, and setting the stage for further hydropower developments in the Port Moresby area. 35. The Project description and scope are based on these priority areas. A social development approach is embodied in the proposed project design. As PNG develops its approaches and strategies in the energy sector and, in particular, the approach to the preparation of the Naoro Brown Hydropower project, GoPNG recognizes the importance of serious attention to both social development aspects and to social and environmental safeguards. Thus the work of developing appropriate instruments and doing appropriate consultation is built into the technical assistance. The proposed Project would fund technical assistance activities, including some drilling activities required to complete the feasibility study, and would not fund investment. The rationale for funding technical assistance is to provide timely resources to assist in guiding the preparation necessary for subsequent, key investments, including in social and environmental aspects. As the implementation proceeds and if the GoPNG were to request financing support for investments following on from this technical assistance, the World Bank would be pleased to consider such requests. A. Project components 36. The Project would consist of two components: 37. Component 1: Institutional and Policy Development for Renewable Energy and Rural Electrification, to be implemented by the Department of Petroleum and Energy, the Energy Division. (a) Energy Policy Development (i) Development of a renewable energy policy for the GoPNG. (ii) Development of a rural electrification policy for the GoPNG. (b) Institutional and Strategy Development (i) Strategic environmental and social assessment of the policies to be developed; 11 (ii) Development of a rural electrification strategy for the Recipient, including inter alia (A) initial data to define resources and demand for rural electrification; (B) an analysis of alternative models of community and rural electrification initiatives, including cost structure, as input to the process for developing tariffs for electricity supply; and (C) a methodology for screening social and environmental aspects of rural electrification initiatives. (c) Capacity Building (i) Strengthening the capacity of GoPNG's institutions, for their role in oversight of the preparation and the development of electricity projects in the medium term including the Naoro Brown Hydropower Project, with inter alia the environmental and social safeguard aspects. (ii) Strengthening Project management through effective and efficient operational management, procurement and financial management, including through initial operation of DPE regional offices and training. 38. Component 2: Technical Assistance for Preparation and Planning for Port Moresby Hydropower Supply to be implemented by PNG Power Ltd. (a) Preparation of the Naoro Brown Hydropower Project for Port Moresby Strengthening the institutional capacity of the Project Implementing Entity in the areas of technical, financial, legal, economic, social, environmental (including the Social and Environmental Expert Panel, the Dam Safety Expert Panel and the Environmental and Social Management Framework, further feasibility study work including drilling and grouting trials, preparation of a geological baseline assessment), communications, procurement, and Project management as required to: (i) prepare the Naoro Brown Hydropower Project; (ii) select a Naoro Brown Project Developer; and (iii) provide support through financial close and technical assistance required for additional assessments and feasibility studies and economic analysis. (b) Improved Planning Related to Hydropower Supply for Port Moresby (i) A three-basin inventory study of the Brown, Vanapa and Angabanga Basins; (ii) Institutional strengthening and capacity building for the Project Implementing Entity, the Electricity Management Committee and supporting staff, in areas critical for implementation of improved performance and implementation of hydropower projects, such as planning capacity, project evaluation, preparation and negotiation of power purchase agreements, procurement, financial management, social and environmental aspects and communications. 12 B. Project Financing Lending Instrument 39. The International Development Association (IDA) and the Global Environment Facility (GEF) would provide co-financing for the proposed Project. The lending instrument would be an IDA credit. The GEF financing would be a grant to GoPNG and would not finance any of the Component 2 activities. The PNG Energy Sector Development Project would be implemented over four years, February 2013 to January 2017. 40. For Component 1 activities, approximately US$ 1 million of the IDA credit plus the US$ 0.9 million GEF grant would be available for the Component 1 implementing agency, Energy Division of the Department of Petroleum and Energy, to undertake agreed activities. 41. The remaining IDA credit - approximately US$ 6.3 million would be made available from GoPNG to PNG Power to undertake Component 2 activities. This amount represents the cost estimate plus contingencies. Consistent with the GoPNG's draft on-lending policy, since the technical assistance activities to be financed under Component 2 of the Project focus on preparation and planning, the activities are considered upstream of a commercial investment and hence the GoPNG intends to provide these funds as a grant to PPL based on a Subsidiary Agreement. 42. Retroactive financing from the IDA Credit would be available up to US$650,000 and from the GEF grant up to US$100,000 for a total retroactive financing amount of up to US$750,000. Project Cost and Financing Project Components Project IDA Credit % IDA GEF % GEF cost Credit Grant Grant 1. Institutional and Policy Development 2,000,000 960,000 48% 855,000 43% for Renewable Energy and Rural Electrification 2. Preparation and Planning for Port 6,500,000 5,740,000 88% 0 0% Moresby Hydropower Supply Total Baseline Costs Physical contingencies 0 0 0 Price contingencies 750,000 600,000 45,000 Total Project Costs 9,250,000 7,300,000 900,000 Interest During Implementation 0 0 0 Front-End Fees 0 0 0 Total Financing Required*4 9,250,000 7,300,000 79% 900,000 10% Retroactive financing (up to US$750,000) would be available. "The difference between Project cost and financing is made up by the counterpart funding from GoPNG (US$0.25m in-kind and cash for project management, external audit, consultations and consensus-building) and PPL (US$0.80m 13 in-kind for project management and cash - already paid - for the Naoro Brown Feasibility Study, consultations and related work). C. Lessons Learned and Reflected in the Project Design 43. A key lesson learned from other WB-assisted projects in PNG is the importance of information sharing and consultations from an early stage. Equally important is the proper identification of the stakeholder groups and their representatives, in particular with respect to land ownership and use related to infrastructure development that would be stimulated by the technical assistance to be provided under the proposed Project. WB experience supporting activities in the mining sector has demonstrated the importance of including women-focused consultations to ensure that views from women are included in the input to the policy, strategy and social assessment processes. Another lesson is that Technical Assistance support is more effective when there are real plans and opportunities to put it into practice, such as the proposed support for preparation of the Naoro Brown project. The World Bank has learnt substantive lessons about designing sustainable hydropower projects that have the highest benefit for people, while minimizing negative social and environmental impacts. Policy and technical advice will benefit from this experience. Moving forward with a Low Carbon or "Green growth" approach requires a strong development rationale and perceived domestic benefits. The proposed Project supports a focus on low-carbon growth in the energy sector that directly addresses GoPNG development priorities. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 44. The proposed Project would involve two implementing agencies: (i) the Energy Division at the Department of Petroleum and Energy (ED-DPE) and (ii) PNG Power Ltd. (PPL). 45. The Energy Division has a small staff and in the past has remained relatively low-profile in the Department, as the major focus of DPE in the past few years has been the Exxon Mobil LNG project. Now that the key LNG Project implementation is underway, GoPNG and DPE are re-focusing on the energy sector. Under the Electricity Industry Policy, significant strengthening and expansion of the Energy Division is planned for the next two years and beyond. None of the current staff at the Energy Division have been involved in WB-supported projects. Capacity for undertaking WB procurement and financial management will need to be developed further during implementation of the proposed Project. A DPE Project Management Unit (PMU) has been set up, headed by a senior staff member in the Energy Division. Capacity strengthening in project management, financial management and procurement would be supported under the proposed Project. 46. PNG Power Limited has strong technical staff, although lacking experience in WB procurement and financial management procedures as PNG Power has not undertaken a WB- supported project in over a decade. Capacity for undertaking WB procurement and financial management will need to be developed further during implementation of the proposed Project and the Project includes provision for this support. A PMU has been set up at PNG Power, with 14 existing staff from the utility headed by the PMU manager (a senior staff member), and including a financial management specialist and an environmental specialist. Initially the team members would not be required full-time for the PMU activities. As implementation proceeds, the requirements on the PMU would increase. The need for additional PNG Power staff time and / or specialist consultant support for the PMU will be determined as implementation proceeds. Component 2 of the proposed Project includes funding to strengthen project management and hire technical specialists as required, for example in communications and safeguards aspects. 47. With respect to implementation of Component 2.1: Preparation of the Naoro Brown hydropower project for Port Moresby, PNG Power is well-placed in terms of power sector expertise to manage the process for preparing the Naoro Brown hydropower project. However it is recognized that ultimately the key decisions will be made by GoPNG through the Electricity Management Committee (EMC). The EMC is chaired by the Secretary for Petroleum and Energy. Other permanent members include the Secretaries for Treasury and Planning and the Managing Director for IPBC and a representative from the PNG Chamber of Commerce and Industry. Other members (for example, from Department of Environment and Conservation (DEC) or the ICCC) may be co-opted to the Committee as required. The EMC will be supported by a secretariat housed in the Energy Division of the Department of Petroleum and Energy. A working-level committee has also been established that will report to the EMC and so it is expected that, in general, recommendations on the Naoro Brown Hydro Project will first be reviewed by this working group before being submitted to the EMC for a final decision. As and when the PPP Center in Treasury is established, designated staff may be invited to join the EMC itself or its working group. PNG Power will report to the EMC or its working group on a regular basis so that both the Committee and its Working Group are well-informed regarding the progress and issues as decision points are reached. Component 1 of the proposed Project includes funding for Technical Assistance related to GoPNG's role in the Naoro Brown hydropower project so that specialist input can be brought in as and when DPE and / or the Electricity Management Committee requires it. 48. Submissions to the EMC regarding the Naoro Brown Hydropower Project would also be provided for information to ICCC. This would help ensure that ICCC remains abreast of the preparation and is able to draw attention early on to any issues which may need to be addressed with respect to the regulatory process. 49. With respect to the safeguards aspect of the proposed Project and Component 2.1 in particular, a clear plan of responsibilities and support required to fully address the safeguards aspects associated with the Project has been prepared. A draft of this Environment and Social Management Framework (ESMF) was made publicly-available for consultations and disclosure in February 2011. Further details are provided in Section VI: Appraisal Summary and in Annex 3. 50. Financial management, disbursement and procurement arrangements are discussed in Section VI and in Annex 3. 15 Capacity Strengthening 51. The strategy of supporting a technical assistance project rather than waiting for an investment opportunity is essentially in recognition of the need for early TA and capacity strengthening in order to set up the processes for new investment. While capacity building is not explicitly a Project development objective, it is recognized that in order for the proposed Project to meet the stated objectives, capacity strengthening in the energy sector will be needed. Capacity building efforts have started, and are following a two-track approach: (i) Sector wide capacity building as part of the overall energy sector dialog underpinning the proposed Project, and (ii) Project-specific capacity building focused on strengthening capacity of the implementing agencies to implement the proposed Project. 52. Sector wide capacity strengthening. This is targeted at the broader set of energy sector stakeholders with the objective of increasing awareness of experience and lessons from elsewhere that can be factored into development of PNG's energy sector. Examples of sector wide capacity strengthening that have taken place or are planned are discussed below. Further opportunities will be identified as Project implementation gets underway and in coordination with DNPM, DPE and Development Partners. * Workshop on Sharing the Benefits of New Hydropower in PNG: Environmental, Social and Financing Aspects of Medium and Large Hydropower. A two-day Workshop on "Sharing the Benefits of New Hydropower in PNG" in September 2010 in Port Moresby was jointly hosted by the Department of National Planning and Monitoring and Department of Petroleum and Energy. Government departments, international and domestic private sector, civil society representatives and other stakeholders in PNG participated. The workshop was supported and attended by development partners. Speakers included government officials from PNG and representatives of countries with active private hydropower development, namely Nepal and Laos, as well as private sector developers, commercial lenders and governments' advisors. Discussion included options for financing and bidding modalities, perspectives of host governments, developers and lenders, as well as financing products available from commercial sources and donor/official institutions. DNPM has indicated that they plan to work with Development Partners to hold workshops on various topics in the energy sector on an annual or bi- annual basis. * A study visit to Lao PDR took place in October 2011. Lao PDR has significant recent experience in hydropower development. The purpose of the study visit was to facilitate information exchange and first-hand interaction with a range of key stakeholders (e.g. Government, private sector, NGOs, etc). * Support from a PPIAF grant to assist GoPNG in formulating elements of a broad strategy for hydropower development in PNG resulted in the paper: Options Assessment for Structuring and Financing New Hydropower in PNG. Presentation and discussions related to this activity took place in 2011. The paper was finalized in early 2012. * The GoPNG has requested support from the WB for the development of a high-level national electrification rollout vision and guiding principles as a precursor for detailing 16 policies and strategies. Funding from the WB's Energy Sector Management Assistance Program (ESMAP) has been obtained to support this activity, which will complement the proposed Project. As part of the process, a workshop is planned for the first half of 2013 aimed at: (i) providing power sector stakeholders in PNG with an update on international experience on the guiding principles for the development of an electrification roll out plan, with a particular focus on successful models, financing structures and sources, and social and environmental issues; and (ii) facilitating discussion between PNG energy sector stakeholders and counterparts from other countries in government, private sector and financing organizations who have recent, hands-on experience in development of rural electrification in other countries. The WB team will work with GoPNG to bring in additional support from other donors, such as IFC, ADB, JICA, and others. Meetings with NGOs and think-tanks in PNG provide an update on progress of the proposed Project and, more generally, discuss the Project in the context of stakeholders' broader energy sector objectives and goals. 53. Project-specific capacity strengthening. This targets primarily the implementing agencies, but would extend to key counterparts within Government - e.g. DEC, Electricity Management Committee - in technical areas as needed. WB missions will supplement the capacity building through in-depth discussions and, especially for procurement and financial management, focused Project-specific training sessions during missions. Support would be provided in technical areas, procurement, financial management and project management. * Technical areas. Technical specialists would be hired under the Project to provide the necessary technical expertise (see Annex 3 for a summary of the procurement plan). The terms of reference for the technical assistance would specifically include provision for on-the-job training and knowledge transfer to the relevant Government agencies and PPL. To the extent feasible, where international consultant expertise is required, international consultants would be encouraged to partner with local experts both to gain the benefit of local knowledge as well as to build capacity of local experts through close interaction with specialists from elsewhere. * Project management. Support is included to strengthen project management. As the PMU managers are agency staff (not consultants), on-the-job learning would be retained within the agencies. * Fiduciary. Procurement and Financial Management capacity building would include training for the relevant PMU staff, largely through training sessions provided by the WB. Several training events were organized during project preparation and agency staff participated. PMU staff would be encouraged to attend similar training sessions throughout Project implementation. * Training. Funds are allocated for dedicated training activities for both DPE and PPL. The specific training requirements would be discussed as implementation proceeds and agreed on a 6-monthly basis. 17 B. Results Monitoring and Evaluation 54. Annex 1 provides details of the results and monitoring framework for the project. For results related to Component 1, the results indicators are linked to development of policy and strategy documents. The PDO level result indicator would be submission of the policies to Cabinet and completion of the rural electrification strategy. Monitoring and Evaluation (M&E) would be straightforward, based on supervision of the progress of the development of the documents and the final submission to Cabinet. Arrangements for monitoring and evaluation of the intermediate results indicators - essentially the selection of the consultants to assist in preparing the documents and the deliverables under the contracts and consultations of draft documents - would involve the DPE PMU reporting on a quarterly basis on the progress according to the procurement plan and contract management milestones. This M&E would be integrated into the PMU management responsibilities. The incremental cost would be covered by the financing under the proposed Project of an assistant PMU manager who would manage the day-to-day process of consultant selection, contract implementation monitoring, and preparation of quarterly project reports. 55. For the PDO-level results related to Component 2, the monitoring and evaluation of the PDO level and intermediate results indicators for the Project would be the responsibility of the PNG Power PMU. Arrangements for monitoring and evaluation of the intermediate results indicators would involve the PNG Power PMU reporting on a quarterly basis on the progress according to the procurement plan and contract management milestones. This M&E would be integrated into the PMU responsibilities. The incremental cost would be covered by PNG Power, though there is provision under Component 2 to provide additional support for the PMU if needed. Reporting 56. The DPE PMU is required to report on the status of project implementation to the Electricity Management Committee (EMC) when required and also to the Department of National Planning & Monitoring as soon as this project is captured under the Public Investment Program and funded through the development budget as of 2013 and onwards. C. Sustainability 57. Over the course of preparation of the proposed Project the Borrower has undertaken a number of actions demonstrating commitment to working with the WB and other development partners to begin to address key energy sector issues. The focus on strategic thinking and careful preparation of new hydropower development - a major element of the proposed WB assistance - was demonstrated by DNPM and DPE jointly hosting a two-day workshop on "Sharing the Benefits of New Hydropower in PNG: Environment, Social and Financing Aspects" in September, 2010 in Port Moresby which provided power sector stakeholders in PNG with an overview of recent international experience in hydropower development, with a particular focus on financing structures and sources and safeguard issues. DNPM has indicated that it intends to work with development partners to host similar events on key energy sector topics. Planning for a 2013 workshop on Increasing Access to Electricity is underway. 18 58. Another key step is the launch of a joint intra-governmental and development partner consultation chaired by DNPM that will take place twice a year. DNPM has stated that it intends the energy sector to be an example for other sectors in terms of intra-governmental communication and development partner coordination. As a result of the progress in coordination within the energy sector, the scope and objectives of the proposed WB-supported Project have been broadly discussed and endorsed by all key GoPNG stakeholders. The formalization of this mechanism is expected to be an important factor in the sustainability of the Project's objectives. 59. PNG Power, the implementing agency for Component 2, has demonstrated strong ownership of the Project through commitment of a significant amount of its own funds to preparation of the feasibility study for the Naoro Brown project. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Stakeholder Risk High Implementing Agency Risk - Capacity High - Governance Low Project Risk - Design Substantial - Social and Environmental Substantial - Program and Donor Low - Delivery Monitoring and Sustainability Moderate - Other (Reputational) Low Overall Implementation Risk High 60. Capacity Risk. Capacity constraints at both the sector and project levels pose a risk of delays in implementation and decision-making. The strategy of providing WB support under a technical assistance project rather than waiting for an investment opportunity is essentially in recognition of the value-added of up-front capacity strengthening in order to develop the environment and undertake preparation activities needed for new investment, including in social and environmental aspects. Risk mitigation measures include capacity building activities carried out during preparation of the Project, in addition to the support proposed to be provided under the Project, as discussed in paragraphs 43-45 above. Both DPE and PNG Power have participated in introductory training on WB procurement, FM and disbursement. Further training will be provided throughout implementation. 19 61. Risk associated with Social and Environmental Aspects of the Naoro Brown Hydropower Project. Risks would include the following: (i) Impacts from the subsequent development of the Naoro Brown project - preparation of which is supported under the proposed TA - could negatively affect the environment and people in the Naoro Brown (NB) project area. To address this risk, an Environment and Social Management Framework (ESMF) has been prepared, setting out the measures to assess, reduce, mitigate and manage potential social and environmental impacts and, importantly, the elements of a Naoro Brown Information and Consultation Strategy. TA to support implementation of this ESMF is included in the proposed Project. This is discussed further in Section VI. (ii) Dissatisfaction with the process of addressing land-owner issues could lead to delays in NB project preparation. A clear process for land-owner identification and consultation will be established and implemented under the proposed Project. Further details are included in the ESMF and in Annexes 3 and 8 of this document. 62. Potential Reputational Risk associated with development of Naoro Brown Hydropower project after completion of the proposed TA Project. There may be a reputational risk for the WB deriving from the fact that the proposed Project provides TA for the preparation of the Naoro Brown Hydropower project. The proposed Project would end before the development of the Naoro Brown project. Unless the Bank is involved in the financing of the Naoro Brown development (i.e. under a subsequent operation), the Bank will have no responsibility for, or ability to enforce, compliance with implementation of safeguards arrangements developed and agreed during the TA Project implementation period. If the Naoro Brown Developer were not to comply with the agreed safeguards approach, negative results could affect WB reputation due to the WB support for preparation of the Naoro Brown Hydropower project. This risk would be mitigated by ensuring that implementation of the safeguard measures agreed during implementation of the proposed PNG Energy Sector Development Project are included in the bidding process and final agreement with the selected Naoro Brown Hydropower project Developer, making the Naoro Brown Developer responsible for developing the Naoro Brown Hydropower project in accordance with the agreed approach to addressing social and environmental aspects. GoPNG and PNG Power have specifically sought Bank technical assistance support in order to benefit from WB experience on sustainable hydropower development. Both GoPNG and WB view the proposed Project as a first step in a longer term WB engagement in the energy sector, and all parties recognize the importance of GoPNG enforcement of the Naoro Brown Hydropower Project Developer's responsibilities with respect to the social and environmental aspects. 63. Further details of risk and migration measures are included in Annex 4. VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 64. The proposed Project would provide technical assistance and capacity strengthening for Government agencies and PNG Power aimed at strengthening the enabling environment in the electricity sector and attracting investment. The proposed Project would not by itself have 20 quantifiable economic and financial benefits as it supports technical assistance, not investment. However, the Project would set the stage for investment in rural electrification and the technical assistance provided would include assessment of financial and economic aspects of various models. The Project would also support the preparation of the Naoro Brown Hydropower project. As part of preparation, the Naoro Brown Project would be subject to the usual economic and financial viability assessments. The Naoro Brown Hydropower Project Developer and financiers would also fully assess these aspects. The result of the proposed WB-supported Project would be an improved quality and likely earlier delivery of benefits than without the Project, and potentially improved economic and financial outcomes as a result of good preparation. B. Technical 65. The activities supporting preparation of the Naoro Brown Hydropower included in the proposed Project include support for technical assessment, expert review and guidance on all technical aspects of preparation of the Naoro Brown hydropower project. Additional technical information related to the Naoro Brown hydropower project is provided in Annex 7. C. Financial Management 66. The Project proceeds for Components 1 and 2, including overseeing the Designated Accounts, will be managed by the Energy Division of the Department of Petroleum and Energy and PNG Power Ltd (PPL) respectively. A financial management (FM) capacity assessment has been conducted by the Bank and actions to strengthen the Project's financial management capacity were agreed with the relevant implementing agencies at appraisal. The FM assessment concluded that with the implementation of these proposed actions, the financial management arrangements will satisfy the Bank's minimum requirements under OP/BP 10.02. Annex 3 provides additional information on financial management aspects. D. Procurement 67. An assessment of the capacity of the Implementing Agencies to implement procurement actions for the Project was carried out. DPE procurement risk was rated as "high" and PPL's risk as "substantial". The crucial issues/risks concerning the procurement component for implementation of the Project were identified as DPE's lack of procurement expertise and PPL's lack of experience with International Financing Institutions' procurement policies. Given the Project's technical assistance nature, funds would primarily finance consulting services (firms and individuals) with some non-consulting services and minor goods. A time-bound risk mitigation action plan, which includes actions ranging from the set-up of the Project Management Units to establishment of a filing system (more details in Annex 3) has been proposed and the overall risk is expected to be reduced to an overall rating of "substantial" during implementation. E. Social (including Safeguards) 68. The Environment and Social Management Framework is the safeguards instrument for the proposed Project. The ESMF sets out the approach to addressing safeguards aspects for the 21 overall PNG Energy Sector Development Project. It covers both Component 1, which focuses on policy and strategy development, and Component 2 which provides technical assistance for the preparation of the Naoro Brown Hydropower Development project and improved project management and planning related to hydropower to supply Port Moresby. The ESMF sets out the approach to identifying and addressing potential social and environmental aspects, including -inter alia- the public consultation and communication strategy, and the institutional arrangements. 69. Consultations on the proposed PNG Energy Sector Development Project with civil society organizations started in December 2010, and will continue on an ongoing basis. Consultations on the draft Environment and Social Management Framework (ESMF) with civil society representatives took place in Port Moresby in February 2011 and April 2012. The ESMF was officially endorsed by the Department of Environment and Conservation in April 2012. 70. Key stakeholders for policy and strategy development under the proposed PNG Energy Sector Development Project would be people living outside the main urban centers who currently do not have access to reliable, affordable electricity supply; local government bodies striving to improve service delivery in rural areas; and potential service providers, both public and private. The process for developing the policy and strategy documents under Component I would include significant consultation across broad geographical areas and a wide range of stakeholders including both women and men in the groups mentioned above. 71. The proposed Project would finance technical assistance, not investments. However, under Component 2, part of the technical assistance related to additional feasibility study activities for preparation of the Naoro Brown Hydropower Project would involve drilling a series of holes on the right abutment of the proposed dam site for grouting trials, to determine the feasibility of a grouting solution to the seepage identified during phase 2 of the feasibility study. Consultations would be undertaken before mobilizing the drilling services, and appropriate measures put in place in accordance with the process set out in the Environmental and Social Management Framework (ESMF). Consideration will be given to transporting the drilling equipment to the site by helicopter. If this is not technically or financially feasible, PPL would upgrade the existing road to the site. Procedures to be followed in this instance - including consultations - are set out in the ESMF. 72. Activities supported under Component 2 of the proposed Project are aimed at catalyzing the development of the Naoro Brown Hydropower Project, which would have social impacts. The technical assistance under the proposed Project includes providing technical advice and guidance to GoPNG, PNG Power and the selected Naoro Brown Hydropower Project Developer on assessing, addressing and mitigating potential social impacts. Safeguards documents and studies financed under the proposed PNG Energy Sector Development Project would be prepared in compliance with WB standards and safeguards policies, as well as meeting PNG requirements. Any civil works related to the Naoro Brown Hydropower Project undertaken while this proposed PNG Energy Sector Development Project is under implementation would be undertaken in compliance with WB policies, even if WB is not financing the civil works. During the period of implementation of the proposed PNG Energy Sector Development Project, WB would provide review of all safeguard documents related to the Naoro Brown Hydropower Project. As 22 explained in paragraph 62, the selected Naoro Brown Hydropower Project Developer would be legally obligated to develop the hydropower project in accordance with the approach set out during preparation. 73. With respect to the Naoro Brown Hydropower Project, the ESMF sets out the roles and responsibilities of the Government, PNG Power and the prospective Naoro Brown Hydropower Project Developer. PNG Power would undertake the preparatory work, including a Preliminary Social Assessment for the Naoro Brown Hydropower project area. Once the Developer is in place, the Developer will be responsible for the Environmental and Social Impact Assessment (ESIA) and Resettlement Action Plan in coordination with the detailed design work for the Naoro Brown Hydropower project. The Preliminary Social Assessment will be an input to the ESIA. 74. The Preliminary Social Assessment for the Naoro Brown Hydropower project would be financed under Component 2 of the proposed PNG Energy Sector Development Project. It would begin soon after approval of the proposed WB credit. This would include information on socio- economic and cultural conditions including, where possible, collection of gender-disaggregated data, a preliminary identification of land ownership and rights, as well as arrangements to manage the possible impacts through information sharing and consultation with Naoro Brown Hydropower Project project-affected people. The findings and recommendations of this study would inform the preparation of the Naoro Brown Hydropower Project Information and Consultation Strategy. Under Component 2 of the proposed PNG Energy Sector Development Project, specialist support would be available to assist PNG Power in developing and implementing this Naoro Brown Hydropower Project Information and Consultation Strategy. The target populations for communications would include both people expected to be affected directly by the Naoro Brown Hydropower Project, and a broader stakeholder group including NGOs and other interested parties. 75. The social safeguard policies that would be triggered by development of the Naoro Brown Hydropower project - if the WB were to be involved in financing the development of the Naoro Brown Hydropower Project - are OP4.10: Indigenous Peoples; OP4.12 Involuntary Resettlement; and, potentially, OP 4.11: Physical Cultural Resources. The social safeguards documents required to be developed once the Naoro Brown Hydropower project Developer is in place are: the Environment and Social Impact Assessment (ESIA) including an Information and Consultation Strategy; Resettlement Policy Framework (RPF); and Resettlement Action Plan (RAP). Terms of Reference for these activities, developed to be in compliance with WB safeguard guidelines, will be included in the bidding documents for the selection of the Naoro Brown Hydropower Project Developer, and in the legal agreement with the selected Developer. 76. The key stakeholders for the activities to support preparation of the Naoro Brown Hydropower project would be project-affected people including land-owners and users. Direct physical impact by the Naoro Brown Hydropower Project on the population and landscape is expected to be fairly modest if properly managed. The Naoro Brown Hydropower Project would have land acquisition impacts deriving from the dam, reservoir, power house, access roads, transmission line as well as construction-related impacts from the construction labor camp(s), material excavation sites, and sites for dumping of spoils, which all would require land either 23 temporarily or permanently. Displacement and resettlement is not anticipated, but a final determination can only be made when the technical design of the Naoro Brown Hydropower project is more advanced. 77. The population in the Naoro Brown project area - the Mountain Koiari - exhibits the four characteristics that identify indigenous peoples.8 The instrument for reaching agreement on entitlements for land acquisition and for long-term use of the area would be a Naoro Brown Information and Consultation Strategy developed under the Preliminary Social Assessment. The parties to the consultation process will on the one hand be PNG Power and later the private sector Naoro Brown Hydropower Project Developer, and on the other hand the communities in the Naoro Brown catchment area that own or have interests in the land, water, and other natural resources to be used by the Naoro Brown Hydropower project. The consultations process would include gender-focused consultations, in particular to ensure that the views and inputs of women are sought in an environment conducive to their participation. 78. There is currently no documentation available of archaeological or other physical cultural resource sites within the proposed Naoro Brown Hydropower project area. The nearest known sites are located on the Sogeri Plateau and in the Laloki valley outside the Naoro Brown Hydropower project area. However, the presence of these sites close to the Naoro Brown Hydropower project area suggests that similar sites may exist within the Naoro Brown Hydropower catchment area. In addition, the contemporary culture of the population in the Naoro Brown Hydropower project area could include structures and/or places of spiritual and religious importance. Impacts, if any, on archaeological or contemporary sites of cultural importance are still to be determined under the ESIA, and the EMP will include procedures to manage chance finds occurring during construction of any artifact/site of archeological significance, or any contemporary structures and/or places of spiritual and religious importance that would be affected by civil works under the Naoro Brown Hydropower project. 79. Since the inception of the Naoro Brown Hydropower project feasibility study, PNG Power has made a number of visits and held discussions with people living in Madilogo village (the village nearest the proposed dam site) to inform and agree with villagers and their representatives about the undertaking of the feasibility study. In early December 2010, the feasibility study consultants presented the initial findings to PNG Power providing an indication of the likely size and location of the Naoro Brown Hydropower project, which in turn provides an indication of the location and types of environmental and social impacts which might be expected. In January 2011, PNG Power held consultations at Madilogo Village. People from other villages that may potentially be affected by the civil works and / or the reservoir (including Naoro and Ebologa) also participated. PPL provided an update to the villagers on the potential physical developments proposed and the scope of potential environmental and social impacts as per the initial feasibility study report. The meeting provided the villagers an early opportunity to understand the proposed Naoro Brown Hydropower project and have an opportunity to voice their questions and concerns. The feasibility study consultants and PPL undertook further 8 These characteristics are (a) self-identification as members of a distinct indigenous cultural group and recognition of this identity by others; (b) collective attachment to geographically distinct habitats or ancestral territories in the project area and to the natural resources in these habitats and territories; (c) distinctive customary cultural, economic, social, or political institutions, and (d) an indigenous language. 24 consultation and information dissemination during continued preparation of the feasibility study in 2011. Most recently, in April 2012, PPL coordinated another consultation at Madilogo Village. 80. WB OP 4.10 stipulates that when indigenous peoples are the sole or overwhelming majority of direct project beneficiaries, the elements of an Indigenous Peoples Plan should be included in the project design, and a separate plan is not required. The Mountain Koiari would be the sole or overwhelming majority of direct beneficiaries of the benefit stream that would flow from the Naoro Brown Hydropower Project to communities in the Naoro Brown Hydropower Project area, and the Naoro Brown Hydropower Project Information and Consultation Strategy is a central component of the overall design of the technical support for the preparation of the Naoro Brown Hydropower Project, under Component 2 of the proposed PNG Energy Sector Development Project. The Information and Consultation Strategy would establish compliance with OP 4.10 by defining arrangements that provide for a process of free, prior, and informed consultation to ensure that the people in the Naoro Brown Hydropower Project area receive culturally appropriate economic and social benefits, that adverse impacts are minimized, mitigated, and compensated, and that the Naoro Brown Hydropower Project has broad community support. The main elements of the Naoro Brown Hydropower Project Information and Consultation Strategy are outlined in the ESMF, and in Annex 8: Strategy for Communication and Consultation with Indigenous Communities in the Naoro Brown Hydropower Project Area. F. Environment (including Safeguards) 81. The proposed PNG Energy Sector Development Project would finance technical assistance, not investments. Under Component 2, the technical assistance related to additional feasibility study activities for preparation of the Naoro Brown Hydropower Project would involve drilling for grout testing and is discussed in paragraph 71. Activities supported under Component 2 of the proposed Project are aimed at catalyzing the development of the Naoro Brown Hydropower Project9, which would have environmental impacts. The technical assistance under the proposed Project includes providing technical advice and guidance to to GoPNG, PNG Power and the selected Naoro Brown Hydropower Project Developer on assessing, reducing and mitigating potential environmental issues that may arise in order to develop a sustainable project. The environmental safeguard policy that is triggered by the proposed PNG Energy Sector Development Project is OP 4.01: Environmental Assessment. As discussed in Section E above, the Environment and Social Management Framework (ESMF) is the safeguards instrument for the proposed Project. 82. The environmental safeguard policies that would be triggered by development of the Naoro Brown Hydropower Project, if the WB were to be involved in financing the development, are OP 4.01: Environmental Assessment; OP 4.04: Natural Habitats; and potentially OP 4.36: Forests (whether or not this policy is triggered would be determined during further preparation of 9 The Naoro Brown catchment area lies within the area of interest of the "Kokoda Initiative", a joint understanding between Papua New Guinea and Australia on the Owen Stanley Ranges, Brown River Catchment and Kokoda Track Region. Annex 3 provides further information on the Kokoda Initiative. 25 the Naoro Brown Hydropower Project). Environmental Safeguards Documents required to be developed once the Naoro Brown Hydropower project Developer is in place are the Environment and Social Impact Assessment (ESIA), Environmental Management Plan (EMP); and Dam Safety Plan. Terms of Reference for these activities, developed to be in compliance with WB safeguard guidelines, will be included in the bidding documents for the selection of the Naoro Brown Hydropower Project Developer, and in the legal agreement with the selected Developer. 83. The Environmental and Social Management Framework (ESMF) sets out the list and broad scope of studies and safeguards instruments to be prepared during implementation of the proposed Project; institutional arrangements defining the roles and responsibilities for safeguards compliance, and approach to public consultation. 84. Draft Terms of Reference for the Environmental Impact Assessment (ESIA), Resettlement Policy Framework (RPF), Environmental Management Plans (EMP) and Resettlement Action Plan (RAP) are expected to be ready in early 2013, and summaries would be translated into Tok Pisin and disclosed in Port Moresby and at a local information center(s) in the Naoro Brown Hydropower project area. When completed, the Resettlement Policy Framework, Environmental Management Plans (EMP) and Resettlement Action Plan (RAP) would also be disclosed in Port Moresby and at a local information center in the Naoro Brown Hydropower Project area, including summaries translated into Tok Pisin. A local information center and meeting venue would be established in the Naoro Brown Hydropower Project area, and information materials would be developed, which can convey understanding of the Naoro Brown Hydropower Project to people who may be illiterate and / or may not understand maps and engineering drawings. 85. Financing is included in the proposed PNG Energy Sector Development Project for all the safeguard-related studies and specialist advisors which are the responsibility of GoPNG or PNG Power. For the Naoro Brown Project ESIA, EMP, RAP and implementation of the RAP, and Dam Safety Plan, all of which would be the responsibility of the to-be-selected Naoro Brown Hydropower Project Developer, the Terms of Reference would be included in the bidding documents issued to prospective Naoro Brown Hydropower Project developers. The bidding documents, and subsequent legal agreements would make clear the responsibilities of the Naoro Brown Hydropower Project Developer with respect to safeguard aspects of the Naoro Brown Hydropower Project, and bids would be required to budget appropriately for these activities. 86. During the period of implementation of the proposed PNG Energy Sector Development Project, WB would provide review of all safeguard documents related to the Naoro Brown Hydropower Project. Safeguards documents and studies financed under the proposed PNG Energy Sector Development Project would be prepared in compliance with WB standards and safeguards policies, as well as meeting PNG requirements. Unless WB becomes involved in the financing of the Naoro Brown Hydropower Project (i.e., under a subsequent project), ensuring compliance with WB standards and policies for documents financed by the Naoro Brown Hydropower Project Developer and / or for those undertaken after the closing of the proposed PNG Energy Sector Development Project would be the responsibility of GoPNG. 26 87. Any civil works related to the Naoro Brown Hydropower Project undertaken while this proposed PNG Energy Sector Development Project is under implementation would be undertaken in compliance with WB policies, even if WB is not financing the civil works. This is stated in the Environment and Social Management Framework for the proposed PNG Energy Sector Development Project. 88. For the Naoro Brown Hydropower Project, PPL intends to re-open an existing old logging road to Madilogo Village which would include rebuilding a bridge across the Naoro River near the end of the logging road, and possibly extending the road by up to 5 km to access proposed drilling site(s), to provide access to facilitate completion of the feasibility study, including the grout testing process, possibly drilling along part of the proposed tunnel route, and for public consultations. The work is expected to start once the funding for the preparation of the Naoro Brown Hydropower Project (i.e., the proposed PNG Energy Sector Development Project) is approved. Social and Environmental screening studies in the Naoro Brown Hydropower Project area were recently completed as part of the Naoro Brown Hydropower Project feasibility study. Based on the findings of these reports and the fact that the proposed work would primarily involve re-opening an existing road, it is expected that any adverse environmental impacts of this proposed rehabilitation work would be construction-related only. The proposed work is planned to be completed within the existing alignment. There is only one village - Edebu - located about 9 km up the logging road, but at some distance from the road itself. Other than Edebu village located off the logging road, there are no habitations in the area. Land acquisition and resettlement are not anticipated in connection with the re-opening of the existing road. Land acquisition may be needed with respect to the possible road extension of up to 5km, but resettlement is not anticipated. PPL will prepare, disclose and hold consultations on a Resettlement Policy Framework. In compliance with Environment Assessment OP4.01, for the work on the existing road, PNG Power will prepare an Environmental Management Plan (EMP) that will be attached to the civil works contract. Once the details of the road extension are known, assessments will be conducted as necessary, and consultations according to the RPF will be undertaken. 89. PPL is also considering (though currently there are no definite plans or budget) possibly re-opening another old logging road which leads to within 5km of the planned power house site. If this work were to proceed, it would involve an additional 5km of new road to reach the power house site. The 5km of new road would require land acquisition. In this regard the above- mentioned Resettlement Policy Framework would cover any land acquisition aspects. G. Other Safeguards Policies triggered 90. The proposed PNG Energy Sector Development Project does not trigger any other WB safeguards policies. 91. However, activities supported under the proposed PNG Energy Sector Development Project are aimed at catalyzing the development of the Naoro Brown Hydropower Project. Hence the Environmental and Social Management Framework (ESMF) for the proposed PNG Energy Sector Development Project specifies that the Terms of Reference (TOR) for a Dam Safety Plan for the Naoro Brown Hydropower Development Project, in accordance with the WB OP 4.37: 27 Dam Safety, will be included in the bidding documents issued to prospective developers, and subsequent legal agreements. The bidding documents would make clear the responsibilities of the Naoro Brown Hydropower Project Developer with respect to dam safety aspects of the Naoro Brown Hydropower project, and bids would be required to budget appropriately for these activities. The legal agreements with the selected Developer would require development and implementation of a Dam Safety Plan, according to the agreed Terms of Reference. 92. During preparation of the Naoro Brown Hydropower project, PNG Power would finance a Dam Safety Panel of Experts (with financing under the proposed PNG Energy Sector Development Project). Maintaining the Panel would become the responsibility of the Naoro Brown Hydropower Project Developer once the Developer is in place. This requirement would be included in the bidding documents and the subsequent legal agreements with the Naoro Brown Hydropower project Developer. 28 Annex 1: Results Framework and Monitoring PAPUA NEW GUINEA: Energy Sector Development Project Results Framework Project Development Objective (PDO): The proposed Project Development Objectives (PDO) are to (i) strengthen policy development and strategic framework for renewable energy and rural electrification; and (ii) attract investors for sustainable development of new hydropower generation to supply the Port Moresby electricity grid. Cumulative Target Values** Data Responsi Description PDO Level bility for (indicator Unit of Source/ Results Measure Baseline Freq. Methodolog Data definition Indicators* MYR YR 2 YR3 YR 4 Collectio etc.) n Indicator One: Identified Significant Consultants Active Policies Rural As needed On-going DPE Status of Rural and policies and gaps in rural in place for consultations submitted to electrification supervision PMU documents Renewable strategy and key studies. on draft Cabinet. strategy (drafts for energy policies completed. renewable policies across completed. review, etc.) submitted to energy government Consultations Cabinet and rural policy and entities and begin on Rural electrification strategy non-gov't Electrification strategy framework. partners; strategy. completed environmental following and social participatory implications process. assessed. Indicator Two: Financing at No NB NB Developer Sources of Financiers' As needed On-going PNG Deliverables Financing for the an advanced financing. Developer selected; ESIA, financing due diligence supervision Power as per the Naoro Brown stage. selection design and identified. completed. PMU Transaction Hydropower process costing Advisor's Project is at an underway; underway. Consultations contract; advanced stage. Information Information as per agreed reports from and and plan. consultation Consultation Consultation process. Strategy Strategy being adopted. implemented. Indicator Three: Study Out-dated Study (three- Based on three- As needed On-going PNG Deliverables Planning study is completed as studies with basin basin supervision Power as per the completed as a basis for insufficient inventory) inventory, and PMU consultants' key input to [] future POM- detail to launched to update on contract. selecting future based support good assess energy sector hydropower hydropower. planning. options and growth, projects for determine determination 29 investment. sequence of of next future hydropower hydropower project to to supply supply POM POM. grid. INTERMEDIATE RESULTS Intermediate Result (Component One): Institutional and Policy Development for Renewable Energy and Rural Electrification Intermediate Strategy No strategy TOR Analysis of GIS Rural As needed On-going DPE Status of Result indicator completed discussed alternative Stocktaking electrification supervision PMU documents one: and finalized models of and strategy (drafts for Elements of Rural with input community and Development completed. review, etc.) electrification from rural of a Stage 1 strategy prepared advisor. electrification "Potential Inventory of projects Rural available, including cost Electrification relevant GIS structure Projects" data and undertaken. Database; resources. Environmental and Social Screening methodology for rural electrification projects; Consultations on draft strategy underway. Intermediate SESA No SESA in Draft SESA Implications of SESA As needed On-going DPE Status of Result indicator completed. place. under draft rural and completed. supervision PMU documents two: preparation; renewable (drafts for Strategic mapping of energy policies review, etc.) Environmental roles and analyzed; and Social responsibiliti Plan to address Assessment es institutional (SESA) completed. challenges completed proposed. Intermediate Staff at DPE Lack of in- All TOR for On-the-job On-the-job Result indicator and other house technical training takes training takes three: GoPNG capacity and specialist place on all place on all 30 Improved Departments experience support applicable TA applicable TA GoPNG with skills to in target include consultancies. consultancies. institutional take the lead areas. provision of DPE staff DPE staff capacity in the in on-the-job effectively effectively energy sector to subsequent training; present draft present draft support future implementati DPE assigns policy rural investment in on of at least one documents at electrification rural and policies and staff person consultation strategy renewable strategy. to work and consensus- documents at energy. closely with building consultation each events. and consensus- technical building consultant; events. PMU staff attends training in FM and consultant selection. Intermediate Result (Component Two): Technical Assistance for Preparation and Planning for Port Moresby Hydropower Supply Intermediate Clear Ad hoc PPL Institutional Developer Arrangements Result indicator process consultations continues arrangements refines and are in place One: Naoro defined and ; lack of information that ensure that continues for Brown in use for understandin sharing in agreements are implementation monitoring Hydropower continuing, g of land potentially- honored by of the ICS. the Project meaningful ownership in affected both the NB implementatio consultation consultations potentially- villages; project and the n of process with people affected land-owner involved agreements progresses in a to be areas. identificatio communities; on way that results affected by n in Institutional entitlements in decisions that the progress; arrangements and benefits responds to the [] development Information for handling of and interests and of the Naoro and complaints and maintaining concerns of both Brown Consultation grievances that records on the women and men Hydropower Strategy are accepted by management in the Naoro Project. (ICS) as per the involved and resolution Brown the ESMF communities of complaints. Hydropower developed in and that Project area, and consultative provide for advances the manner. timely objectives of the resolution; Naoro Brown Hydropower 31 Project. Intermediate Developer in No Transaction Transparent Developer As needed On-going PNG Deliverables Result indicator place Developer. Advisors in process for mobilized. supervision Power as per the two: Developer place; developer PMU Transaction for Naoro Brown Electricity selection Advisor's Hydropower Management agreed; contract. Project selected Committee Electricity following activated; Management transparent strategy for Committee process. Developer meeting as selection required; all agreed; pre- social and qualification environmental launched. requirements (as per ESMF) included in bidding documents issued to potential developers. Intermediate PPL has PPL lacks 3-basin 3-basin PPL staff As needed On-going PPL PMU Status of Result indicator tools and planning inventory inventory interacts supervision studies (drafts three: capacity for tools for consultants completed; effectively for review, Improved future future selected next with Electricity etc.) institutional hydropower hydropower hydropower Management capacity at PPL development development project Committee. related to planning. selected. preparation and planning for PPL staff PPL lacks Selection hydropower can experience and development, take the lead with management effectively approach to of specialist PPL staff manage involving consultants interacts engagement private required for effectively with private sector in preparation with Electricity sector. development of the Naoro Management of Brown Committee in hydropower. Hydropower setting out Project is on options and time and decisions effective. required. Good 32 management of Transaction Advisors produces on- time progress in the project. *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually. 33 Annex 2: Detailed Project Description PAPUA NEW GUINEA: Energy Sector Development Project 1. Three broad areas for possible World Bank-supported technical assistance were identified based on GoPNG priorities and areas of focus for other development partners: * Technical assistance in the areas of policy and strategy in the electricity sector, with a focus on rural and renewable energy; * Capacity building to assist the Government in preparing for its role in new hydropower projects. * Technical assistance for developing the Naoro Brown Hydropower Project to supply the Port Moresby grid and setting the stage for further medium and large hydropower developments in the Port Moresby area; 2. The Project description and scope are based on these priority areas. The proposed Project would fund technical assistance activities, including some drilling activities required to complete the feasibility study, and would not fund investment. The rationale for funding technical assistance is to provide timely resources to assist in guiding the preparation necessary for subsequent, key investments, including in social and environmental aspects. As the implementation proceeds and if the GoPNG were to request financing support for investments following on from this technical assistance, the World Bank would be pleased to consider such requests. A. Project components 3. The project could consist of two components: Component 1: Institutional and Policy Development for Renewable Energy and Rural Electrification. Implementing Agency: Department of Petroleum and Energy (Energy Division). This would focus on policy development (Renewable Energy and Rural Electrification), institutional and strategy development (Strategic Environmental and Social Assessment and Rural Electrification Strategy), and capacity strengthening for the GoPNG's role in development of the Naoro Brown hydropower project and other hydropower projects that may be considered in the medium term. Strong emphasis would be placed on an inclusive, gender-sensitive consultation process as an integral part of the policy and strategy development. DPE intends to open regional offices in Kokopo, Mt. Hagen and Lae as part of fulfilling DPE's mandate under the Electricity Industry Policy. These regional offices will provide a full-time presence for the Energy Division of DPE in the regions and, among other functions, will serve as the regional centers for coordinating consultations on the policy and strategy development supported under the proposed Project. Component 1 includes an allocation for operating costs which could contribute to the initial establishment of these three Energy Division regional offices. Key activities would include: 34 Energy Policy Development * Renewable Energy Policy. The GoPNG is preparing a plan for Climate-Compatible Development. An Office of Climate Change and Development (OCCD) has been created. An Interim Action Plan for Climate Compatible Development was prepared in June 2010 and has been circulated for public consultation. It prioritizes readiness activities for a future Reduction in Emissions from Deforestation and Forest Degradation (REDD) while seeking economic growth opportunities that minimize future emissions. The Renewable Energy Policy will be developed within the framework of the overall Climate-Compatible Development plan. This activity would support consultations and consensus-building among stakeholders including the OCCD's technical working group on Low Carbon Growth, and drafting of the policy document. * Rural Electrification Policy. A draft policy was prepared in 2004 but never finalized. This activity would include review and updating of the draft policy, taking into account the many developments in the sector since the draft was prepared. It includes support for consultations and consensus-building among stakeholders. Institutional and Strategy Development * A Strategic Environmental and Social Assessment (SESA) would be prepared as an input to downstream implementation of both the Renewable Energy Policy and the Rural Electrification Policy. The SESA would assess the implications of these policies and make recommendations regarding (i) the establishment of the requisite institutional, regulatory and decentralization framework, and (ii) integration of the management of any environmental and social issues into subsequent planning decisions for the location and scale of energy investments, alternatives, mitigation measures and monitoring activities. * Preparation of a Rural Electrification Strategy. In the GoPNG planning documents and the Electricity Industry Policy (EIP), increasing access to affordable reliable electricity supply is highlighted as a priority to achieve broad-based economic development and improved standard of living. While there is room for improvement in the urban centers, the supply of electricity in rural areas is very limited. The rural electrification strategy will consider the full range of options for increasing access, including grid extension, mini-grid and off-grid approaches, and the roles of public sector, private sector and NGO and community organizations. One aspect of the strategy - in line with the EIP -would likely include efforts to attract private sector to supply non-commercially viable areas through a competitive process based on the lowest level of subsidy required. Important elements to be included in the rural electrification strategy include (i) a reasonable definition of the projects / opportunities to be offered, (ii) an assessment of the different cost structures and levels of service provision characteristic of the range of resources and supply models that might be appropriate across PNG, as an input to the tariff-setting process, and (iii) a process for screening social and environmental aspects of rural electrification projects. 35 4. A number of entities are already involved in implementing electrification projects in areas outside the main grids. Incorporating the experience from on-going initiatives would be an important element in developing the strategy. Input from potential participants and beneficiaries would be critical. Elements of the strategy preparation would include: * GIS Stocktaking and Development of a Stage 1 "Potential Rural Electrification Projects" Database. This would involve preparation of Geographic Information System (GIS) database overlays of population, infrastructure (e.g. roads, energy infrastructure, telecoms) and possible renewable energy resources (e.g. for small scale hydropower). * Analysis of alternative models of community and rural electrification projects including cost structure, as an input to the ICCC process of developing tariffs for electricity supply in areas outside the PNG Power exclusive supply areas. * Environmental and Social Screening methodology for rural electrification projects. Consultative Process 5. Strong emphasis would be placed on an inclusive, gender-sensitive consultation process as an integral part of the policy and strategy development. DPE intends to open regional offices in Kokopo, Mt. Hagen and Lae as part of fulfilling DPE's mandate under the Electricity Industry Policy. These regional offices will provide a full-time presence for the Energy Division of DPE in the regions and, among other functions, will serve as the regional centers for coordinating consultations on the policy and strategy development supported under the proposed Project. Component 1 includes an allocation for operating costs which could contribute to the initial establishment of these three Energy Division regional offices. Capacity Strengthening * Preparing for DPE / GoPNG role in new hydropower power generation developments. In the future, GoPNG as the custodian of the national water resources will likely play a pivotal role in several aspects of the development of new hydropower, including the Naoro Brown Hydropower Project, which could require specialist expertise. This activity would provide initial specialist support for targeted activities related to GoPNG role in hydropower development. Additional specific activities including training would be defined as and when new projects move forward. * Project Management Support, including, hiring an Assistant PMU manager, Procurement specialist, and Financial Management specialist as needed. Component 2: Technical Assistance for Preparation and Planning for Port Moresby Hydropower Supply. Implementing Agency: PNG Power. 6. Past studies have established the potential for hydropower development on both the Brown River the adjacent Vanapa River. As demand for electricity in Port Moresby grows, it is anticipated that a series of hydropower plants may be developed. Taking into account the long lead times in developing hydropower projects, initial activities to prepare the Naoro Brown 36 Hydropower Project, assess the potential for and optimal sequencing of subsequent projects are included in the proposed project. Two sub-components are proposed. Preparation of the Naoro Brown Hydropower Project for Port Moresby. 7. Generation from new hydropower will be significantly less expensive than the cost of generating electricity from diesel, the only feasible alternative currently available (as there is currently no provision for domestic natural gas supply in Port Moresby). The GoPNG and PNG Power are interested to develop lower cost hydropower generation as soon as possible. Moreover hydropower is a clean and renewable energy resource. PNG Power has hired international consultants to undertake the feasibility study of the Naoro Brown Hydropower Project to supply the Port Moresby grid with about 80 MW. The feasibility study was largely completed in late 2011, although some further work, including drilling to test grouting solutions to address seepage identified in phase 2 of the feasibility study, is still required. The concept proposed for development of the Naoro Brown Hydropower Project is a private sector-led approach. This is in line with the Electricity Industry Policy approved in December 2011, and reflects the fact that PNG Power does not have the resources to develop this as a public sector project. A properly structured IPP/PPP would additionally enable shifting of commercial risks to the private sector and benefit from construction and operational expertise of the private sector. 8. Given the imperative to move forward with development of new hydropower to supply Port Moresby as soon as possible, the proposed approach is as follows: * PPL, the key state entity currently with skilled manpower and power sector-related expertise, would manage the process for developing the IPP/PPP. * The Electricity Management Committee (EMC), chaired by the Secretary for Petroleum and Energy, will be the key supervising and decision-making body. The other permanent members of the EMC include the Secretaries for Treasury and Planning and the Managing Director for IPBC and a representative from the PNG Chamber of Commerce and Industry. Other members (for example, from DEC or the ICCC) may be co-opted to the Committee as required. The EMC will be supported by a secretariat housed in the Energy Division (Department of Petroleum and Energy). A working-level committee has also been established that will report to the EMC and so it is likely that recommendations on the Naoro Brown Hydropower Project will first be reviewed by this working group before being submitted to the EMC for a final decision. As and when the PPP Center in Treasury is established, designated staff may be invited to join the EMC itself or its working group. PNG Power would report to the EMC or its working group on a regular basis so that the Committee is well-informed regarding the progress and issues as decision points are reached. * Consultants hired by PNG Power largely completed the feasibility study in late 2011, although some further work to assess options to address seepage is required. * PNG Power would implement a Naoro Brown Communication and Consultation Plan for potential Project-affected People (PAPs) and other stakeholders. With advice from the WB and input from the Electricity Management Committee and stakeholder consultation, 37 PNG Power will prepare TOR for the safeguards-related aspects of the project, to be undertaken by the selected Naoro Brown Hydropower Project Developer. * PNG Power would hire financial, technical and legal advisors ("Transaction Advisors"). * PNG Power would hire Panels of Experts (dam safety and social / environmental). Once the Naoro Brown Hydropower Project Developer is in place, maintaining these Expert panels will become the Developer's responsibility (and will be included in the bidding and legal agreements). * With the assistance of the advisors and under the oversight of the Electricity Management Committee, PNG Power would undertake a transparent process to select a private sector Naoro Brown Hydropower Project Developer. * The Developer would be responsible for the social and environmental impact studies, as per the prepared TOR, in coordination with the detailed design work. * Day-to-day supervision of the Developer regarding the technical, social and environmental aspects would be the responsibility of PNG Power (with specialist support). The Electricity Management Committee would provide overall guidance as appropriate. With regard to the environmental aspects, Department of Environment and Conservation would have a role in reviewing and approving the EIA and EMP. As per the EIP, the technical regulator (under the EIP this role is intended to be transferred from PNG Power to DPE) would enforce environmental and safety regulation in the electricity industry as an added component to its technical regulatory functions. This function would be carried out in close consultation with DEC. The economic regulator, ICCC would be provided with current information to help ensure that ICCC remains abreast of the preparation and is able to draw attention early on to any issues which may need to be addressed with respect to the regulatory process. * Once the required GoPNG approvals are in place, the Developer would mobilize financing for the Naoro Brown Hydropower Project. It is expected that the financing would be limited recourse on the basis of a long-term power purchase agreement (PPA) which would commit PNG Power to buy the electricity generated and/or capacity made available by the project. Based on the advice from PNG Power's transaction advisors and the decision of the GoPNG, through the Electricity Management Committee, the financing for the project could include some public equity. It could also include some concessional borrowing and / or guarantees to supplement commercial lending and improve the terms and extend the tenor of the commercial financing to achieve a sustainable tariff. ICCC, responsible for economic regulation, would have a role in approving the pass-through of PNG Power's costs under the PPA to consumers. * Following financial close the Naoro Brown Hydropower Project would be constructed and operated by the Developer and begin commercial operation supplying electricity to the Port Moresby grid. 38 * One option to be considered is a "Build Own Operate Transfer" (BOOT) approach, in which ownership of the project would be transferred to GoPNG at the end of a specified concession period, e.g. 25 years. The lifetime of the asset would be significantly longer than that if properly maintained, thus providing the government with an operating asset with considerable residual lifetime. PPL, as power purchaser, would also have a key role in reviewing the Operation Strategy and would dispatch the power and energy from the Project. In a BOT arrangement PPL would also carefully review maintenance arrangements since the project would eventually pass to GoPNG. 9. Activities to be financed under the proposed Project related to the preparation of the Naoro Brown project to supply Port Moresby would include: * Naoro Brown Transaction Advisors (legal, technical and financial). As part of the advisory work, financial advisors would assist PNG Power in determining the tariff implications of the Power Purchase Agreement; * Additional feasibility study work (i.e. Preparation of Geological Baseline Survey including additional drilling to assess options for limiting seepage from the reservoir and, subject to further review, possibly some drilling along the tunnel route, and information dissemination with affected communities); * Preliminary social assessment, including Information sharing and consultation strategy, land owner identification, land use mapping and consultations; Resettlement Policy Framework; * Project Economic Analysis; * Dam Safety Expert panel. (Once the Developer is in place, this would become the responsibility of the Developer); * Social and Environmental Expert Panel. (Once the Developer is in place, this would become the responsibility of the Developer); * Social and Environmental specialists; * Communications consultant; * Environmental baseline survey work; * Other preparation activities and specialist support identified during implementation, for example additional preparation work following the completion of the feasibility study and as might be recommended once the transaction advisors are in place; * Project Management support. 39 Improved Planning Related to Hydropower Supply for Port Moresby 10. Proposed activities related to the improved planning and identification of subsequent hydropower projects for supply to Port Moresby would include: * Three-basin inventory study of the Brown, Vanapa and Angabanga basins; * Training, institutional strengthening and capacity building in areas critical for implementation of improved performance and implementation of the next hydropower project. This could include planning capacity, project evaluation and preparation and negotiation of power purchase agreements. 11. Although the three-basin inventory study may be produced in collaboration with PNG Power, it will ultimately be the property of, and submitted to, the Electricity Management Committee and its secretariat in DPE. Similarly, proposed training, institutional strengthening and capacity building will increasingly be directed towards the EMC and its secretariat as their capability and responsibilities expand. 40 Annex 3: Implementation Arrangements PAPUA NEW GUINEA: Energy Sector Development Project 1. The International Development Association (IDA) and the Global Environment Facility (GEF) would provide co-financing for the proposed Project. The lending instrument would be an IDA credit on blend terms. The GEF financing would be a grant to GoPNG and would not finance any of the Component 2 activities. The proposed PNG Energy Sector Development Project (PGESDP) would be implemented over four years, 2013 to 2017. 2. For Component 1 activities, approximately US$ Im IDA plus US$ 900,000 GEF grant would be available for the implementing agency, i.e. Energy Division of the Department of Petroleum and Energy, to undertake activities in Component 1. 3. The remaining IDA amount - approximately US$ 6.3 million would be made available from GoPNG to PNG Power to undertake Component 2 activities. This amount represents the cost estimate plus contingencies for Component 2. Consistent with the GoPNG's draft on- lending policy, since the technical assistance activities to be financed under Component 2 of the Project focus on preparation and planning, the activities are considered upstream of a commercial investment and hence the GoPNG intends to provide these funds as a grant to PPL based on a Subsidiary Agreement. 4. Retroactive financing from the IDA Credit would be available up to US$650,000 and from the GEF grant up to US$100,000 for a total retroactive financing amount of up to US$750,000. Project institutional and implementation arrangements Project administration mechanisms 5. The project would have two components and two implementing agencies: * Component 1: Institutional and Policy Development for Renewable Energy and Rural Electrification will be implemented by the Energy Division of the Department of Petroleum and Energy. This would focus on policy development, institutional and strategy development, and capacity strengthening for the GoPNG's role in development of the Naoro Brown hydropower project and other electricity sector projects that may be considered in the medium term. * Component 2: Technical Assistance for Preparation and Planning for Port Moresby Hydropower Supply will be implemented by PNG Power Ltd. The first sub-component focuses on activities required to prepare the Naoro Brown Hydropower Project to supply the Port Moresby grid, under a private sector-led approach. The second sub-component focuses on activities to improve planning with respect to hydropower supply to Port Moresby. 41 6. The Electricity Management Committee (EMC) is an intra-departmental committee established to provide oversight of the development of the electricity sector including, for example, the Naoro Brown Hydropower Project. The EMC will provide the necessary "whole of government" input and decision making that is required to successfully plan and develop a hydropower project. The Electricity Management Committee includes: Department of Petroleum and Energy (Chair), Department of National Planning and Monitoring, Treasury, IPBC and a representative from the PNG Chamber of Commerce and Industry. Other members may be co- opted as required, for example, Department of Environment and Conservation, ICCC, and other key government stakeholders. 7. The funds from the proposed PNG Energy Sector Development Project for PPL will be made available by the GoPNG via a Subsidiary Agreement between the government and PPL. 8. Capacity constraints that need to be addressed include: * A lack of familiarity with World Bank procurement, financial management and safeguards procedures in the implementing agencies; * Capacity weaknesses in technical areas including energy policy formulation, power system planning, project management, communications; * Weaknesses in co-ordination across government ministries involved in infrastructure planning, public consultation, financing and project approval. 9. The project design addresses these capacity constraints via: * Strengthening of the technical and planning capacity in the Energy Division, DPE and PPL. * Training of PPL and DPE staff in World Bank procurement and financial management policies, processes and procedures. * For DPE, the appointment of an Assistant PMU Manager, who would be a full-time local consultant to handle the day-to-day aspects of project implementation including contract management. * For DPE, financing the appointment of Renewable and Rural Energy Advisor, who would be part time and would provide the technical expertise for definition of the Terms of Reference for the major consultancies, assist in technical evaluation of bids, assist in guiding consultants and reviewing draft reports. * Technical assistance for specialist support for GoPNG'S role in the Naoro Brown Hydropower Project and other hydropower projects expected to be developed in the medium term. * The GoPNG convening and maintaining the Electricity Management Committee. 42 * For Component 2, funding to strengthen PPL's project management and to hire technical specialists as required, for example in procurement, communications and safeguards. Financial Management, Disbursements and Procurement Financial Management 10. The FM capacity assessment identified the following principal risks: a) project financial staff do not have experience with Bank financed projects; b) deficiencies identified with regard to internal controls; and c) lack of timely external audits. Mitigation measures to be agreed include: a) FM training to be provided to all project financial staff before and during project implementation; b) a brief financial management manual will be prepared and issued to standardize project FM procedures and provide guidance to project financial staff on Bank requirements; and c) the terms of reference for the required external audits are agreed with the Bank. 11. The FM risk pre-mitigation has been assessed as "High" and post-mitigation has been assessed as "Substantial". 12. FM training: FM training has been provided to the PPL PMU and the DPE PMU. Continued training opportunities will be provided on an on-going basis during Project implementation. 13. FM conditions: There would be three FM-related disbursement conditions: For disbursement on Component 1: (i) DPE will adopt a Financial Management Manual for the Project satisfactory in form and substance to the World Bank. The FM Manual will include as annexes: (a) format of Interim Financial Reports (IFRs) and (b) the TOR for external audit as discussed below. For disbursement on Component 2: (ii) PPL will adopt a Financial Management Manual for the Project satisfactory in form and substance to the World Bank. The FM Manual will include as annexes: (a) format of IFRs and (b) the TOR for external audit as discussed below. 14. Budgeting. Each implementing agency develops an annual budget. Project funding and expenditure will be subjected to quarterly budget vs. actual expenditure variance analysis as part of the IFRs. 15. Funds flow. The project proceeds (IDA and GEF) will flow from the Bank into project designated accounts (DA) to be set up at and managed by DPE and PPL for their respective components. Each implementing agency will be directly responsible for the management, maintenance and reconciliation of DA activities for their component, including preparation of withdrawal applications and supporting documents for Bank disbursements. 16. Accounting and financial reporting. The administration, accounting and reporting of the project finances by DPE will be set up in accordance with the provisions of the Public Financial Management Act and applicable World Bank financial management requirements. Funding to the PPL will be in accordance with a subsidiary agreement with the GoPNG, and the management of 43 project finances in PPL will be in accordance with their existing finance procedures and applicable World Bank financial management requirements. 17. DPE and PPL will each be responsible for managing, monitoring and maintaining project accounting records for their respective components. Original supporting documents will be retained by the originating implementing agency. Unaudited IFRs will be prepared by each implementing agency on a quarterly basis. The financial reports will include an analysis of actual and budgeted expenditure for the current period, and for the cumulative expenditure to date. The format will be developed and agreed by the implementing agencies and the World Bank and completed reports will be forwarded to the World Bank within 45 days of the end of each calendar quarter. 18. The PMU in each implementing agency will utilize a computerized accounting package, with PGAS used by DPE and Oracle by PPL. The task team will monitor the accounting process, especially during the initial stage, to ensure that complete and accurate financial information will be provided in a timely manner. 19. Internal control. There will be reliance on existing financial policies and procedures in each of the implementing agencies. To assist the PMUs in managing the Bank-specific requirements of the project, a brief FM manual will be developed to provide guidance on financial reporting, disbursement and audit requirements. 20. The existing internal audit functions of DPE and PPL will provide additional oversight of the PMUs. 21. Audit. The project finances (IDA for PPL and both IDA and GEF for DPE) will be included in the financial statements for each agency, and will require an annual external audit, due to the World Bank six months after the close of the financial year. For DPE, this will be a separate audit of the project's financial statements. For PPL, this will be the normal company audit, which will also cover the IDA project funds, with the project's finances included as a note to the accounts. The ToRs for the external audits will be agreed with the World Bank and be included in the Financial Manual as described above. Disbursements 22. Three disbursement methods are available for the project: advance, reimbursement and direct payment. Supporting documents required for Bank disbursement under different disbursement methods will be documented in the Disbursement Letter issued by the Bank. 23. Each implementing agency will open and manage a designated account (DA) in local currency at a commercial bank acceptable to the Bank. The ceilings of the DAs will be determined and documented in the Disbursement Letter. 24. The project funds will be disbursed against eligible expenditures as in the following table: 44 25. For IDA: Category Amount of the Credit Percentage of Allocated Expenditures to be (expressed in SDR) Financed (inclusive of Taxes) (1)(a) Goods and Services for 530,000 100% Part 1 of the Project (1)(b) Operating Costs for Part 100,000 100% 1 of the Project (1)(c) Training for Part 1 40,000 100% (2) Goods, Services, and 4,130,000 100% Training for Part 2 of the Project TOTAL AMOUNT 4,800,000 26. Retroactive financing will be applied for this project. The date of eligible expenditures and the amount for the retroactive financing will be determined according to the Bank's policy and specified in the financing agreement. Procurement 27. Procurement Risk Assessment: An assessment of the capacity of the Implementing Agencies (PPL and DPE) to implement procurement actions for the Project was carried out in December 2010. The assessment reviewed the organizational structure for implementing the Project and the interaction between the staff responsible for procurement and other national agencies. The overall Project risk for procurement is "high", consistent with the CPAR. The agencies risks were assessed as "high" for DPE and "substantial" for PPL. Most of the issues/ risks concerning the procurement component for implementation of the Project have been identified as: DPE's lack of procurement expertise and PPL's lack of experience with International Financing Institutions' procurement policies. The below action plan has been proposed and with the implementation of the mitigation measures the overall risk is expected to be reduced to "substantial" during implementation. PNG Power Limited Factor Risk Mitigation Measure Indicative Target Timeframe** Staffing Staff without experience with IFI's Agree and implement a training program Training program was procurement policies may lead to (internal/ external) to be implemented over agreed at negotiations. improper implementation of procurement the life of the project that is both relevant and Implementation will be activities under the project (in terms of practical. This plan would focus on Project on-going. efficiency, competition, transparency) Management Unit Staff. 45 Procurement Adviser for a period of time By effectiveness commensurate with the project procurement load'o Procurement Possible delays in project implementation Preparation of a realistic procurement plan Procurement Plan was Planning due to weak procurement planning and and quarterly status monitoring updates. finalized at monitoring. negotiations. Quarterly status monitoring updates will being after effectiveness. Bidding Poorly prepared shortlists could lead to As to ensure that all firms on shortlist are During implementation documents,(pre) inefficiencies (e.g. nonresponsive qualified the agency will treat the firms' qualification, short proposals) and/or low quality services. written representations skeptically, and will listing, and evaluation take up references from the proposed firms' criteria clients. Also, the agency will consider in addition to the information asked for in the request for EOJs, key factors as a consultant's reputation of integrity and impartiality rooted in independence from third parties. Technical specifications/TORs are vague Involve technical staff and end users in During implementation or restrictive to few bidders/firms. preparation of specifications or agree to hire competent consultants to draft TS/TORs. Evaluation and Lack ofunderstanding/expertise of As to ensure that all evaluators are qualified During implementation Award of contract evaluation factors resulting in improper experts, the agency will reach agreement with evaluation and incorrect awards. the Bank on the minimum qualification criteria for members of the Evaluation Committee, which is to be appointed shortly before proposals submission. Review of Disincentive to participation due lack of Meticulous application of the Consultant's During implementation Procurement transparency in the procurement process. Guidelines provisions in terms of Decisions and transparency (e.g. publication of the general Resolution of procurement notice, request for expressions of Complaints interest or contract award notices). Procurement Unreliable oversight of operations. Include appropriate coverage of procurement During implementation Oversight aspects to meet project requirements in the audit TOR. Need to distinguish between compliance and performance audits so that auditors know what to do. Department of Petroleum and Energy Accountability for Delays in processing procurement within DPE to appoint assistant PMU Manager, By effectiveness Procurement the Borrower's internal structure. whose tasks will include procurement Decisions in the responsibilities. Implementing Agency Internal Manuals and Staff have limited practical guidance on The PMU Manager to meet with By effectiveness Clarity of the the steps of the PNG internal procurement representatives of CSTB and apply the Procurement Process process, which could lead to received instructions on PNG internal implementation delays. procurement process. Record Keeping & Improper filing facilitates abuse. PMU to prepare and apply filing instructions By effectiveness Document that clearly describe what records should be Management Systems kept in the contract file and for how long. Include auditing of filing practices in TOR for During implementation audits. Staffing Absence of procurement staff may lead to Agree and implement a training program Training program was improper implementation of procurement (internal/ external) to be implemented over agreed at negotiations. 10 Due to consistency and efficiency gains, DPE and PPL agreed to jointly select the Procurement Advisor. Each agency would sign a separate contract and would ensure that Terms of References and other contractual conditions are consistent. 46 activities under the project (in terms of the life of the project that is both relevant and Implementation will be efficiency, competition, transparency). practical. This plan would focus on Project on-going. Management Unit Staff. Hiring of the following external expertise: (1) By 3 months after Assistant PMU Manager (full-time local effectiveness consultant to handle the project implementation); (2) Renewable and Rural Energy Advisor (be part time and will provide the technical expertise); (3) Procurement Adviser for a period of time commensurable with the project procurement load. Procurement Possible delays in project implementation Preparation of a realistic procurement plan Procurement Plan was Planning due to weak procurement planning and and quarterly status monitoring updates. finalized at monitoring. negotiations. Quarterly status monitoring updates will being after effectiveness. Bidding Poorly prepared shortlists could lead to As to ensure that all firms on shortlist are During implementation documents,(pre) inefficiencies (e.g. nonresponsive qualified the agency will treat the firms' qualification, short proposals) and/or low quality services. written representations skeptically, and will listing, and evaluation take up references from the proposed firms' criteria clients. Also, the agency will consider in addition to the information asked for in the request for EOJs, key factors as a consultant's reputation of integrity and impartiality rooted in independence from third parties. Technical specifications/TORs are vague Involve technical staff and end users in During implementation or restrictive to few bidders/firms. preparation of specifications or agree to hire competent consultants to draft TS/TORs. Advertisement, Pre- Inappropriate advertising leading to PMU to establish and implement an By effectiveness bid/proposal reduced competition, incomplete or advertising instruction note in line with the Conference and defective bids. Bank Guidelines requirements (i.e. the Bid/Proposal General Procurement Notice). Submission Evaluation and Lack ofunderstanding/expertise of As to ensure that all evaluators are qualified During implementation Award of contract evaluation factors resulting in improper experts, the agency will reach agreement with evaluation and incorrect awards. the Bank on the minimum qualification criteria for members of the Evaluation Committee, which is to be appointed shortly before proposals submission. Review of Disincentive to participation due lack of Meticulous application of the Consultant's During implementation Procurement transparency in the procurement process. Guidelines provisions in terms of Decisions and transparency (e.g. publication of the general Resolution of procurement notice, request for expressions of Complaints interest or contract award notices). Contract Lack of control over contract Adopt as much as possible Lump-Sum type By effectiveness Management and management could cause disputes and contracts, as type of contract is easier for the Administration implementation delays. agency to administer because no matching of inputs to payments is required (to be included in the procurement plan). DPE to appoint the Assistant PMU Manager During implementation Renewable as the counterpart project manager. The Assistant Manager will also be responsible for undertaking a formal assessment of the Consultant's Performance. (through a Consultant Performance Evaluation Form). ** This does not reflect effectiveness conditions. Instead these are agreed actions with an indicative timeframe which will be closely monitored and reported on. 47 28. Guidelines: Procurement for the proposed Project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January 2011, and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated January 2011; and the provisions stipulated in the Financing Agreement. 29. Procurement Scope: Given the project's technical-assistance nature, funds are expected to financing largely consulting services (firms and individuals) with some non-consulting services (geological survey and test drilling) and minor goods. To accelerate project implementation PPL will progress with the procurement of key contracts as outlined in the procurement plan. The procurement will be carried out in accordance with Bank's Procurement and Consultant Guidelines for these contracts and any other procurement that commenced before project effectiveness in order for the contracts to be eligible for Bank financing. 30. Thresholds: Prior-review and procurement method thresholds recommended for the project are indicated in below. These thresholds may be revised during project implementation, based on risk assessment updates. All the prior review contracts would be stated in the Procurement Plan. Selection Prior Review Threshold Applicability Method FIRMS QCBS QBS > US$100,000 In accordance with the authorizing CQS circumstances provided in the LCS Consultant's Guidelines SSS All Individuals Prior Review Threshold Applicability Competitive > US$50,000 In accordance with the authorizing Selection All TORs are subject to prior circumstances provided in the review. Consultant's Guidelines Sole Source All Short list comprising entirely of national consultants: The ceiling for short-lists of consultants composed entirely of national consultants would be US$200,000. In the event that sufficient numbers of qualified national firms are not available for effective competition, then the short-list would consist of both national and international consultants Procurement Prior Review Threshold Applicability Method Goods and Non- consulting Services ICB All Estimate >= US$100,000 Shopping First three contracts Estimate <= US$ 50,000 48 31. Procurement Plan: The implementing agencies developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan was finalized at negotiations and would be available at agencies' head office. It would also be available in the Project's database and in the Bank's external website. A summary of the project procurement plan is provided the below. More than 10 major consulting services contracts are envisaged. The plan will be updated every year to reflect project implementation needs. All retroactive financing would require prior review. Summarized Procurement Plan (Key Contracts) Ref. No. Description of Assignment Estimated Selection Contract Prior/ Comments Cost (US$) Method Signature Post Date PPL ESDP/PPL/C/1 Transaction Advisor 1,400,000 QCBS Mar-13 Prior Eligible for retroactive financing ESDP/PPL/C/2 Social Safeguards Assessment - individual 100,000 Individual Jan-13 Prior Eligible for retroactive financing ESDP/PPL/C/3 Environmental Safeguards Specialist - individual 100,000 Individual Jan-13 Prior Eligible for retroactive financing ESDP/PPL/C/4 Project Economic Analysis 500,000 QCBS May-13 Prior ESDP/PPL/C/5-7 Dam Safety Panel (3 individuals) 250,000 Individual Jan-13 Prior ESDP/PPL/C/8-10 Social & Environmental Panel (3 individuals) 250,000 Individual Jan-13 Prior ESDP/PPL/C/11 Naoro Brown Communications & Consultation 100,000 CQS Feb-13 Prior Eligible for retroactive financing ESDP/PPL/C/12 Procurement Advisor 90,000 Individual Nov-12 Prior Eligible for Consultant retroactive financing ESDP/PPL/C/13 Specialist technical support - Individuals 100,000 Individual Feb-13 Prior Consultant ESDP/PPL/C/14 Preliminary Social Impact Assessment and 400,000 QCBS Feb-13 Prior Eligible for resettlement Policy Framework retroactive financing ESDP/PPL/C/15 Additional Feasibility Study (including grout 700,000 SSS Feb-13 Prior Eligible for testing and Geological Survey) retroactive financing ESDP/PPL/C/16 Environmental Baseline 350,000 QCBS Apr-13 Prior Eligible for retroactive financing ESDP/PPL/C/17 Three Basin Inventory Study 550,000 QCBS May-13 Prior (Brown, Vanapa, Angabanga) DPE DPE/201 1/01 Renewable and Rural Energy Advisor 180,000 Individual Feb-13 Prior Eligible for Consultant retroactive financing DPE/2011/02 Renewable Energy and Rural Electrification 1,000,000 QCBS July-13 Prior Policy and Rural Electrification Strategy DPE/2011/03 Strategic Institutional ESA 150,000 QCBS Oct-13 Prior 49 DPE/2011/04 GIS stock-taking assignment 50,000 Individual Jul-13 Prior Eligible for Consultant retroactive financing DPE/2011/05 Assistant PMU manager (full time local) 50,000 Individual Feb-13 Prior Eligible for Consultant retroactive financing DPE/2011/06 Specialist technical support in hydro power- 100,000 Individual Oct-13 Prior individuals (tbd) Consultant DPE/2011/07 Project Evaluation 25,000 Individual Jun-16 Post Consultant DPE/2011/08 Financial Management Advisor (part-time) 30,000 Individual Feb-13 Prior Eligible for Consultant retroactive financing DPE/2011/09 Procurement Advisor (part-time) 45,000 Individual Nov-12 Prior Eligible for Consultant retroactive financing 32. Procurement Post Review: Procurement review missions will be carried out twice a year during the project's first year and then annually. A sample of 20% of contracts not subject to prior review will be post reviewed, but may be reduced to 15%, following satisfactory findings. Implementation Schedule 33. Component 1 is to be completed by Feb 2016. Both the Renewable Energy Policy and Rural Electrification Policy are planned to be completed and submitted to NEC by Feb 2015, and the Rural Electrification Strategy drawn up and agreed to by Feb 2016. However the timing required for adequate consultation and consensus-building is uncertain and could add as much as 6 months to the timeline. 34. Component 2 Key project milestones and best-case timing considering a privately led development of the Naoro Brown hydropower project would be as set out below. However, hydropower projects are complex and issues may be identified during the course of preparation which could delay the best-case timing. Also, financing will to some extent be dependent on factors external to the project and unexpected developments may complicate the process of reaching financial close. Hence the implementation may take up to 12 months longer than the "best-case" scenario. Transaction Advisors in place Jun 2013 Pre-qualification request for potential developers Nov 2013 Pre-qualification Jan 2014 Issuance of Bidding Documents to prequalified developers Mar 2014 Receipt of proposals May 2014 Selection of Developer Sep 2014 Award of development rights Nov 2014 Financial close Apr 2015 Completion of construction 2018 50 Figure 1 shows the key activities and responsibilities for taking the Naoro Brown hydropower project through to financial closure. SCEMATICOR KEYAfIVITIESANDRESPONSIBILIT YMR NAORO BROWN HYDROPOWERPROJECT THROUGH FINANCIALCLOSE [ PLwithTA under WB financing aoro Brown Project Developer - PN- TAavailable under DPE component ofWB-fibanced project Feasbility Studycompeted Deveoper Seltd FinanCialCose Technical Prepare detaied design and obtain license TransactonAdvisors technical, legal, financial) TransactionAivors assist PPL in review of etanled desgn assessfinancingstructuresand cost implications prepared by Develper and assist PPL and GoPNG in deciding a strategy; prepare tender documents which will incltd TOR for ESIA and EMP); assist PPL in selection of I Negotiate Power Purchase Agreement with PPL; secure financing Fnani nBown Projet Develope FLgal IjTransactionAdvisors assist PPL in negotiations of Power Purchase Agreement with Developer Economic Naoro Brown Project Economic Assessment I Information dissemination to communities likely to be affected Prepare ResettementAtion Plan (RAP) inaccordance with TOR PrelaminarySial Assessment: Land owner Identification, and use I Consutations with ProjectAfected people and agreement on Social mapping and Consultations with Project Affected People (i}complete land owner identification; (ii) compensation and I (El} benefits Prepare TOR for Resettlement Action Plan [RAP) to be incldid in tender dcuments forsponsor seetion I Review RAP Prepare ESIA and Environmental Management Plan (EMP} Environment PrepareTOR for ESIAand EMPto be included intender document RevaESIAandEMP for selection of Naoro Brown Project Deveoper EA a nd EAo _b ania AE arrani o v. II Damsafety panel of experts advies PPL and GoPNG Overs gtCommittee OversightI Soial and Environmental panel of exp its advIses PPL and GorNGoOversight Committee Safeguards - Environmental and Social 35. The proposed PNG Energy Sector Development Project would finance technical assistance, not investments. However, part of the technical assistance related to additional feasibility study activities would involve drilling a series of holes on the right abutment of the proposed dam site for grouting trials, to determine the feasibility of a grouting solution to the seepage identified during phase 2 of the feasibility study. Consultations would be undertaken before mobilizing the drilling services, and appropriate measures put in place in accordance with the process set out in the Environmental and Social Management Framework (ESMF). Consideration will be given to transporting the drilling equipment to the site by helicopter. If this is not technically or financially feasible, PPL would upgrade the existing road to the site. Procedures to be followed in this instance - including consultations - are set out in the ESMF. 36. Activities supported under Component 2 of the proposed Project are aimed at catalyzing the development of the Naoro Brown Hydropower Project, which would have social impacts. The technical assistance under the proposed Project includes providing technical advice and 51 guidance to GoPNG, PNG Power and the selected Naoro Brown Hydropower Project Developer on assessing, addressing and mitigating potential social and environmental impacts. Table A3.1 summarizes the Social and Environmental implementation arrangements for Activities related to Preparation of the Naoro Brown Hydropower Project, for which the implementing agency is PNG Power. Table A3.2 summarizes the Environmental and Social approach for the other components of the Project. Further details are set out in the PNG Energy Sector Development Project Environmental and Social Management Framework (ESMF). 52 Table A3.1: Activities related to Preparation of the Naoro Brown hydropower project: Implementing Agency: PNG Power Project Component Safeguards Approach and Activities Activities before Selection of Activities after Selection of Naoro during Preparation and Naoro Brown Hydropower Brown Hydropower Project Implementation of proposed PNG Project Developer Project Developer but before Energy Sector Development Project financial close. 2.1 Preparation of Naoro Brown Safeguards Approach involves the The Naoro Brown The selected Naoro Brown Hydropower Project for Port following three steps: Feasibility study was largely Hydropower Project Developer will Moresby consisting of 11: completed in late 2011 (paid for and prepare ESIA, EMP, Dam Safety (i) Access Roads. Step 1: Six key safeguard documents commissioned by PNG Power) Plan and RAP, in line with the (ii) Transmission Lines are required. which includes detailed Terms of TORs (iii) 19m high Concrete gravity dam, Reference for the preparation of intake structure, headrace tunnel, 0 Safeguards Documents ESIA and EMP. penstock, power house and tailrace required are: pipe. f Environment and Social Impact - PNG Power (with the (iv) 150ha reservoir/sto rage. Assessment (ESIA). assistance of consultants financed - Information and Consultation under the proposed PNG Energy Strategy. Sector Development Project) will - Environmental Management undertake the RPF. As part of the Plan (EMP). preparation of the RPF, preliminary - Resettlement Policy Framework social mapping will be undertaken. (RPF). - Resettlement Action Plan (RAP). - Dam Safety Plan. o PNG Power assisted by the World Bank will prepare the TORs for the RPF, RAP and Dam Safety Plan. 0 TOR for ESIA and EMP will be prepared by Feasibility Study eConsultants, with review from WB to Based on preliminary findings of the feasibility study. To be updated as feasibility study is completed and design work undertaken 53 ensure the TOR are in compliance with WB safeguards policies. o The TOR for the ESIA, EMP, Dam Safety Plan and RAP will be included in bidding documents for selection of Project Developer, and responsibility for implementation will be included in the relevant legal agreements with the selected Developer. Step 2: Oversight Monitoring - Panel of Experts for Dam Safety - PNG Power assisted by the The work of both Panels of Experts World Bank will prepare detailed and the Environmental and Social - Panel of Experts for Social and terms of reference for Panel of Advisers will continue to financial Environmental Safeguards Experts, and the Environmental and close. Social advisers. Environmental and Social Advisers will - Initially the two expert Department of Environment and assist PNG Power in review of all panels will be hired by PNG Power Conservation (DEC) will review and aspects of the ESIA. RPF, RAP and (with funds from the proposed PNG clear the ESIA. entitlement plans Energy Sector Development Proj ect). All safeguards documents will be - Electricity Management Bidding documents and shared with the World Bank for Committee including key departments subsequent legal agreements will review based on compliance with and agencies will review and provide specify that responsibility for WB policies while the WB- oversight throughout the process. 12 maintaining these expert panels will supported project is under be taken up by the selected Naoro preparation or active. Brown Hydropower Project Developer. Step 3: Communication Strategy o PNG Power to conduct Project Developer as part of consisting of: consultations with potential PAPs developing ESIA, EMP and RAP, and other stakeholders, mostly on and entitlement programs will o gConsultations with Project sharing information on the project as consult with PAPs and other Affected Peoples (PAPs), NGO's and it becomes available. stakeholders on ongoing basis other stakeholders. 12 There is provision under Component 1 for hiring specialist support to assist the oversight committee as required 54 - Communication Strategy for broader consultations. Table A3.2 Environmental and Social approach for the other components of the Project Project Component Safeguards Approach for each Activities During Implementation of TA Project component or relevant activity of the TA Project Component 1 to be implemented by the Department of Petroleum and Energy 1.1 Energy Policies Preparation of a Strategic - DPE assisted by the WB will prepare the terms of reference for - Renewable Energy Policy Institutional Environmental and Social the SESA. - Rural Electrification Policy Assessment (SESA) of the Renewable - DPE will hire a consultant to prepare the SESA. Energy Policy and the Rural - The World Bank will review the SESA and provide its comments Electrification Policy, to provide GoPNG to the DPE. guidance on institutional and regulatory issues to ensure environmental and social sustainable management of the implementation of these policies. The assignment would include development of a plan to support implementation of SESA recommendations. 1.2 Development and Implementation - No safeguards actions required. - No safeguards actions required. of Rural Electrification Strategy - GIS Stock Taking and Development of "Potential RE Projects - Analysis of Alternative Models for RE Projects - Social and Environmental Capacity Building for RE - Preparation of Rural Electrification Strategy 55 1.3 Technical Support for DPE related Oversight monitoring of the safeguards to new generation projects aspects of Naoro Brown Hydropower Project. This could include technical support to the Electricity Management Committee (and/or its secretariat), DPE and Department of Environment and Conservation (DEC) to be determined as needed, for example to: - Assist DPE / GoPNG in oversight monitoring of safeguards aspects of Nauro Brown project. - Assist DEC with reviewing ESIA report for Naoro Brown. Component 2.1 Naoro Brown See Table A3.1 See Table A3.1 implemented by PNG Power Sub Component 2.2 to be implemented by PNG Power Three basin Inventory Study (Brown Preliminary Environmental and Social TA consultant hired by PNG Power under this sub-component to undertake Vanapa, Angabanga) scoping to inform decision making this study will also include environmental and social scoping of these process. options. 56 The Kokoda Initiative 37. The Governments of Australia and PNG signed a Second Joint Understanding 2010-2015 on the Owen Stanley Ranges, Brown River and Kokoda Track Region. The vision is sustainable development of this region and protection of its special natural, cultural and historic values. The Kokoda Initiative (KI) Area of Interest will be subject to a broad assessment of natural, cultural and historic values and within which a regional tourism strategy will be developed and potentially other economic activities. The Interim Protection Zone (IPZ), which includes much of the Naoro and Brown Rivers catchment area, represents the core area for possible legal protection of the Brown River Catchment area and most of the Kokoda Track. The IPZ incorporates the Brown, Naoro and Goldie Rivers - the priority areas in Central Province for future development of hydropower and water supply for Port Moresby. The KI is housed within the Department of Environment and Conservation. PPL and representatives of the KI have discussed the planned development of the Naoro Brown Hydropower Project. As a result of these discussions, it has been agreed that the reservoir for the Naoro Brown Hydropower Project will be sized and designed so as not flood the Kokoda Track. This specification was incorporated as a constraint in the feasibility study. PPL will continue to update the KI team as the preparation of the Naoro Brown Hydropower Project progresses. Monitoring & Evaluation 38. Annex 1 sets out the Results Framework and indicators that will be used to monitor and evaluate the project. Role ofPartners 39. Coordination among Development Partners is good. DNPM has begun hosting semi- annual development partner consultations on the energy sector. All development partners currently active in the energy sector (ADB, JICA, WB, IFC) are participating. ADB will finance a Port Moresby Power System Master Plan for prioritizing investments, and development of a computer-based power system model for assessing impacts and benefits from alternative system development scenarios. The study started in July-20 11. Work on the transmission aspects of the Power Moresby grid will feed into definition and design of the transmission infrastructure required to connect the proposed Naoro Brown Hydropower Project to the Port Moresby grid. JICA is focusing assistance on the Ramu / Highlands grid, including an updated Master Plan. EIB, JICA and ADB have participated in a joint mission with the WB team and supported the September 2010 workshop on Hydropower in PNG. The development of the proposed Project has been coordinated with IFC. IFC and MIGA were represented at the Hydropower workshop in Port Moresby in September 2010. 57 Annex 4: Operational Risk Assessment Framework (ORAF) PAPUA NEW GUINEA: Energy Sector Development Project Negotiations and Board Package Version Project Development Objective(s) The proposed Project Development objectives (PDO) are to (i) strengthen policy development and strategic framework for renewable energy and rural electrification; and (ii) attract investors for sustainable development of new hydropower generation to supply the Port Moresby electricity grid. PDO Level Results 1. Rural and Renewable energy policies submitted to Cabinet and rural electrification strategy completed following a Indicators: participatory process. 2. Financing for the Naoro Brown hydropower project is at an advanced stage. 3. Planning study is completed as a key input to preparing future hydropower projects for investment. 1. Project Stakeholder Risks Rating High Description : Risk Management: Decisions / support from multiple entities within GoPNG will be (i) Continued broad-based discussions across range of GoPNG Departments with interests and required to implement the project. There is a potential risk of lack responsibilities in the energy sector. of communication or disagreement on specific issues within GoPNG leading to delays. (ii) Support for DNPM's semi-annual stakeholder discussions on power sector. Some NGOs may be "preemptively skeptical" about Bank Group (iii) WB outreach to NGOs to share accurate information. involvement and / or opposed to hydropower development. (iv) Implementation arrangements for Component 2 include Electricity Management Committee which will facilitate coordinated information-sharing and decision-making within GoPNG related to the preparation of the Naoro Brown project. (v) GoPNG has emphasized the need for exhaustive consultations with landowners with respect to the Naoro Brown project and under Preliminary Social Assessment and ESIA, the genealogical census mapping along with the Information and Consultation Strategy will furnish the information and approach to identify all relevant groups and engage them constructively on impacts and benefits. Resp: Stage: Due Date: On-going Status: (i), (ii), (iii): WB (i), (ii), (iii): Preparation In progress 58 (iv): GoPNG and implementation. (v): PPL (iv): Implementation. (v): Implementation. 2. Implementing Agency Risks (including fiduciary) 2.1. Capacity Rating: High Description : Risk Management: Lack of capacity leads to delays in project preparation and (i) A PMU has been set up in each implementing agency, initially with existing staff from within implementation. DPE and PNG Power respectively. As the work load increases, the capacity of the PMUs could be augmented with Project funding. DPE would hire a full-time assistant PMU manager and a part-time technical advisor to immediately supplement capacity. (ii) Technical assistance and capacity building is the core of the proposed project. (iii) Both DPE and PNG Power have participated in introductory training on procurement, FM and disbursement provided by WB. Procurement training was provided during a February 2011 mission. A further session will take place during Q1 CY2013 in Port Moresby and subsequently by VC. A procurement training action plan has been agreed at negotiations. Resp: Stage: Preparation and D Status: WB, PPL and DPE implementation. In progress 2.2. Governance Rating: Low Description : Risk Management: Government does not move forward with the implementation of The implementation of the Electricity Industry Policy is overseen by a multi-ministerial the Electricity Industry Policy (EIP). committee whose composition ensures broad support from across the political spectrum in Parliament and the executive branch, avoiding the polarized contexts where other industries and sectors have stalled. The policy implementation is also a central part of the dialogue with multiple donors, which further reduces risk and ensures a more inclusive and multi-stakeholder approach to the sector. Under separate TA, the WBG is supporting the DPE with developing high level principles for the preparation of a National Electrification Roll Out Plan, as well as with Renewable Energy resource mapping and a third party access grid code, all of which support the implementation of the EIP. The ADB will finance TA support to DPE for the implementation of the EIP. Resp: [Stage: Preparation and Du.ae O-on Status:lIn DPE and PPL Iimplementation. progress 3. Project Risks 3.1. Design Rating: Substantial Description : Risk Management: Despite general support for the concept of bringing private sector The strategy of doing a technical assistance project rather than waiting for an investment into new generation, there is a lack of capacity and experience on opportunity is essentially in recognition of the need for early TA and capacity strengthening in how this is to be accomplished. There is a risk that this could slow order to set up the process for new investment both in rural electrification and in the Naoro Brown 59 decision making. hydropower project. Continued broad-based capacity-building is the key mitigation measure. Capacity building efforts have started, including a workshop on WB safeguards policy and experience with hydropower; a workshop on Financing and Safeguards aspects of medium and large hydro; and technical assistance to develop a third party access grid code. DNPM has launched a semi-annual intra- governmental consultation on energy sector issues involving key GoPNG departments and development partners. Resp: Stage: Status: GoPNG, PPL, WB Preparation and Due Date : On-going In progress implementation. 3.2. Social & Environmental Rating: Substantial Description: RiskManagement: Electrification projects have both positive and negative social A major element of Project design is to properly address social and environmental aspects. impacts. While people in villages in the area that may be impacted by the Naoro Brown hydropower project are generally A strategy of social and environmental mapping and impact assessment, information-sharing and positive now, there is a risk that expectations in terms of the consultation for preparation of the Naoro Brown project is defined in the Project and in the ESMF. benefits that they expect may not be met. Stage: Other potential risks are that possible negative social Preparation (in terms of environmental impacts associated with the Naoro Brown project project design) and are not fully mitigated; and special interests could delay A mj emn of Proec design PPL, GoPNG, WB and environmental Due Date: On-going In progress mapping and implementation of the ESMF). 3.3. Program & Donor Rating: Low Description: Risk Management: Conflicting donor discussions or support cause confusion. Semi-annual energy sector meetings hosted by DNPM. Joint or over-lapping missions when possible. ADB will fund the "Port Moresby Power Grid Development project" covering transmission and distribution upgrades, the development of the Kirakira Zone Substation, the refurbishment of the Rouna 1 hydro power station upgrade, and the Sirinumu hydro Toe of The Dam Rehabilitation. WB, ADB and PPL are working closely to ensure good coordination. Resp: Stage: Preparation and D Status: PPL, GoPNG, WB implementation. In progress 3.4. Delivery Monitoring & Sustainability Rating: Moderate Description : Risk Management: Contracts management is inadequate. (i) A PMU has been set up in each implementing agency, initially with existing staff from within DPE and PNG Power respectively. As the work load increases, the capacity of the PMUs could be augmented with Project funding. DPE would hire a full-time assistant PMU manager and a 60 part-time technical advisor to immediately supplement capacity. As a signal of their proactivity and willingness to ensure implementation momentum, even before Board approval of the project, the DPE launched recruitment of four staff with project management experience who are not specifically tied to the IDA credit but whose participation in the same unit will augment overall capacity. (ii) DPE to adopt as much as possible Lump-sum type contracts as such type of contract is easier to administer than time-based contracts. Stage: Preparation and . Status: Resp: DPE, PPL, WB Due Date : On-going Inposs implementation In-progress 3.5. Other Rating: Low Description: Risk Management: There may be a reputational risk for the WB deriving from the fact This risk would be mitigated by ensuring that implementation of the safeguard measures agreed that the proposed Project provides TA for the preparation of the during implementation of the proposed PNG Energy Sector Development Project are included in Naoro Brown Hydropower project. The proposed Project would the bidding process and final agreement with the selected Naoro Brown Hydropower project end before the development of the Naoro Brown project. Unless Developer, making the Naoro Brown Developer responsible for developing the Naoro Brown the Bank is involved in the financing of the Naoro Brown Hydropower project in accordance with the agreed approach to addressing social and development (i.e. under a subsequent operation), the Bank will environmental aspects. GoPNG and PNG Power have specifically sought Bank technical have no responsibility for, or ability to enforce, compliance with assistance support in order to benefit from WB experience on sustainable hydropower implementation of safeguards arrangements developed and agreed development. Both GoPNG and WB view the proposed Project as a first step in a longer term during the TA Project implementation period. If the Naoro Brown WB engagement in the energy sector, and all parties recognize the importance of GoPNG Developer were not to comply with the agreed safeguards enforcement of the Naoro Brown Hydropower Project Developer's responsibilities with respect to approach, negative results could affect WB reputation due to the the social and environmental aspects. WB support for preparation of the Naoro Brown Hydropower project. Resp: Stage: Preparation an Due Date: On-going Status: WB, GoPNG, PPL implementation. In progress 4. Overall Risk Implementation Risk Rating High Comments: While there are some potentially high impact risks, on balance there is strong ownership from across government and PNG Power. The proposed Project also targets a broad-based set of beneficiaries. One risk is of delays due to inter-governmental decision making. Much progress has been made in improving the communications of relevant government ministries and Treasury and Department of National Planning have been involved from the early stages of preparation. A second risk is related to social aspects including land-owner issues related to the preparation of the Naoro Brown project. A plan for Information-sharing and Consultations beginning early and continuing throughout Project implementation are designed to mitigate this risk. 61 Annex 5: Implementation Support Plan PAPUA NEW GUINEA: Energy Sector Development Project Implementation Strategy Key risk area Support Strategy 1. Intra-government decision making delays in the following areas: approvals to get policies Through input in design of the relevant consultancies, regular interaction through the processes required prior to and follow up with DPE, and continuing the practice of meeting with a submission to Cabinet. wide range of stakeholders during supervision missions, WB will encourage and support the consultation process and consensus-building outreach. Once the consultancies to develop the renewable energy policy and renewable electrification policy and strategy are underway, it would be important to have a locally-based team member who can participate in many of the consultation meetings both in Port Moresby and in other locations to keep the team well-informed of the issues that are raised so that any potential obstacles can be identified early and discussed with counterparts to find solutions. - key points during Naoro Brown Analysis of the options will be presented by Advisors funded under the Hydropower Project preparation e.g. Project, but decisions will be required throughout the process by financing structure; basis for selecting GoPNG. WB support to address this risk has already begun with Developer; actions needed by GoPNG to parallel capacity building activities (e.g. the September 2010 workshop make the project viable (e.g. off-take on hydropower) and will continue through: (i) Regular, on-going guarantee, tariff actions). involvement of technical experts from WB team, available to discuss the options with GoPNG officials and provide an "independent sounding board", where possible sharing relevant experience from elsewhere; (ii) coordinated efforts with other development partners, and making use of funding opportunities offered through the WB, to support activities to generally increase the exposure of GoPNG officials to experience in private sector-led financing of hydropower in other countries. 2. Special or competing interests delay Naoro Brown Hydropower Project preparation: Lack of communication and WB team will continue to emphasize with counterparts the importance consultation could be source of of good communication in building support for the project. It would legitimate opposition from potentially- also be important to have a locally-based team member participating in affected groups. many of the consultation meetings to keep the team well-informed of the issues that are raised so that any potential obstacles can be identified early and discussed with counterparts to find solutions. - Disagreement regarding which The plan for determining the land owners, land users and their interested parties are legitimate representation is set out in the ESMF. WB team (particularly TTL and stakeholders, and who is mandated to social specialist) will closely monitor the adherence to the activities and represent these could lead to delays. seek expert input from outside experts with specific knowledge of any difficult issues as they arise. - Anti-hydro NGOs could Involve WB communications team from initial stages and draw on influence communities who otherwise experience from WB experience with other hydropower projects. would be positively engaged. Support the GoPNG and PPL in emphasizing the benefits. 3. Safeguards Risks Environmental and Social Management Framework sets out the approach to identifying and addressing potential social and environmental aspects. WB supervision team will include both social development and environmental specialists - who not only know their technical areas well but are very familiar with WB policies and 62 application of these policies. They will closely monitor the content and quality of TOR, reports, evaluations. The specialists will also participate regularly in missions as part of on-going capacity building. 4. Implementation agency risks Technical WB supervision team will include specialists in the critical areas with the greatest need for client support: social assessment; communications; structuring and financing hydropower projects; hydropower technology. Involvement will range from support in preparing TOR; reviewing technical evaluation reports for key consultant selections; review of draft reports. Specialists will participate in supervision missions which will also be used as regular capacity building opportunities. Fiduciary In addition to regular supervision on FM and procurement, there will be a focus on strengthening the locally-based support in procurement and disbursement. The CMU has allocated time and staff resources for two designated POM national staff to join the implementation support team beginning at /decision appraisal, who will be the first 'port of call' for counterparts (one on disbursement and one on PR). The objective would be to provide the implementing agencies with access to quick - sometimes informal - support and feedback. Simple issues can be sorted out quickly before formal submissions are made. Implementing agency staff will "learn on the job" more effectively if they are able to build professional relationships with support staff in the CO. This would be intended to improve the quality of formal submissions so that the turn-around is faster, and fewer iterations are required. Plans are in place for regular in-country fiduciary training provided by WB staff from the SYD hub supplemented by colleagues from regional offices in Manila and Jakarta; experience in PNG has shown a great openness to capacity building provided by professionals from other 'successful' larger Asian economies. Support on procurement and disbursement is a high priority during the first 12 months as counterparts navigate the WB processes for the first few times. Implementation Support Plan (ISP) Area of Focus First 12 months Remainder of the project Technical inputs needed Structuring and financing private-sector led Same as first 12 month, with the hydropower; technical aspects of addition of expert review in hydropower design; locally-based staff to renewable and rural electrification participate where possible in consultation areas. meetings; communications specialist. Specialist input (hydrologist, economist) depending on issues arising. Fiduciary Requirements High priority: consultant selection, Less support anticipated as all procurement filing, disbursement processes will be covered in the procedures need to be presented at project experience during the first 12 launch, with more detailed training for months. FM specialist will continue PMU members immediately post-launch. to conduct quarterly reviews of A counterpart in the CO should be able to interim financial reports (IFRs) and assist with standard disbursement annual reviews of audits, and follow procedures. Procurement specialist and FM up of issues arising. specialist to visit both PMUs at least twice in first 12 months (after launch). FM specialist will also conduct quarterly reviews of interim financial reports (IFRs) and annual reviews of audits, and follow up of issues arising. 63 Safeguards Experienced Environmental specialist Same as for first 12 months. (knowledge of hydropower issues) and social development specialist. Both must be very familiar with WB policies. TTL Regular presence: at least 4 visits 3-4 visits / year depending on progress Prospects for integration with This project will play a catalytic role in the strategic re-positioning of the WBG, other activities and thus will enjoy additional focused time and attention from senior country management. The CMU views this project as serving as the platform for a much broader and strategic engagement in building "increased and more gender-equitable access to inclusive physical and financial infrastructure" pillar of the FY2013-2016 CPS approved by the Board in December 2012. The CMU feels the renewable energy sector should be the catalyst for discussions around possible IBRD or enclave lending under the current CPS, and together with the ResRep and Director (IFC) have agreed that this work would be the centerpiece of a more formalized and higher-profile WBG "sustainable development and climate change" portfolio in PNG, complemented by adaptation and DRR (since mitigation and REDD are covered at GoPNG request by other partners). The ISP will be reviewed at least once a year to ensure that is continues to meet the implementation support needs of the project. Resource Requirements for First 12 Months Trips to PNG Staff Weeks Technical Financing 1 4-5 Hydropower engineer 1 3-4 Communications 1 3 Hydrologist 0/1 1 Economist 0 2-3 Safeguards Social Development 2 7-8 Environmental 2 4 Fiduciary Procurement 3 3-4 Financial Management 2-3 2-3 Disbursement 1 2 Country Office Local support for consultations 4 internal trips 5 support Disbursement 0 2 Procurement 0 3-4 TTL 4-5 12 CMU Country Manager 0 3-5 leadership 64 Annex 6: Naoro Brown Hydropower Project Technical Annex PAPUA NEW GUINEA: Energy Sector Development Project Naoro Brown Hydropower Project Technical Annex (Hydropower Aspects) Background 1. River Systems To the North of Port Moresby, there are four river systems all of which discharge into the Gulf of Papua. They are: * The Laloki River (immediately to the North) that has already been developed for domestic water supply and hydroelectricity. At the upstream end is the Sirinumu Reservoir which provides substantial storage. Downstream, in cascade, are the Rouna 2, Rouna 1 and 3, and Rouna 4 developments which are currently in various stages of rehabilitation. * The Brown River (further to the North) and its tributaries, the Naoro and the Ovea. The total catchment area of the Brown River Basin is 1370 km2 (taken at Brown at Karema). * Further to the north again is the Vanapa River which at the downstream end runs west, but about 25 km from the coast it turns to the north so that the river basin generally is parallel to the coast with the western divide being about 20 km from the coast. At the upstream end of the Vanapa basin is the Guimu River basin and there are large potential storage sites close to the divide so that catchment diversions may be envisaged in either direction (i.e. to Vanapa or towards the coast into the Angabanga Basin). * North of the Vanapa is the Angabanga River which becomes wider towards its northern end. 2. While there are smaller potential storages there are also major potential storages at the upstream end of the Vanapa and Angabanga Basins (see later details). Previous Studies 3. The most relevant previous studies are the Monenco February 1989 study13 and the August 1983 Gibb studyl4, the former effectively being an update of a 1980 feasibility study. The Gibb feasibility study was a full feasibility study which included all elements normally present except subsurface excavation. However, in view of the nature of the project which is mostly underground, the nature of the rock which is generally volcanic and therefore extremely variable along the tunnel route can be expected to be very variable, surface geological mapping was adequate. The Monenco study incorporated additional information, primarily hydrometric 1 Brown and Vanapa River Basins - Hydro Inventory Study. Monenco Consultants Limited Montreal, Canada 14 Gibb Australia in association with Mertz & McLellan & Partners and Willing and Partners Pty Ltd. 65 data, which had become available since 1983. Therefore the Monenco study was effectively a "desk study". The Gibb study details the potential storages at the upstream end of the Vanapa catchment: * The Lake Kosipe Reservoir: This is located at the extreme upstream end of the Ivani River, an upper tributary of the Angabanga River. There is a very shallow flat swampy area which provides an ideal situation for storage;" the dam would be located where the Ivani river leaves the broad plain area downstream of the Kosipe mission."15 * The Lake Guimu Water Storage: This storage would be located on the Guimu River which flows north from the reservoir storage into the Angabanga catchment. A 1980 feasibility study proposed a reservoir at an elevation of 2890 m created by a rock fill dam. Associated with the Guimu Project is a run-of-river diversion project called (at that time) the Mt. Albert Edward Project. This would develop a gross head of 319m between a tributary of the Guimu River. A diversion weir would be constructed in a narrow gorge transferring water into the Guimu River itself via a tunnel about 4km to a surface power station. 4. The Monenco study concluded "that the previous studies had identified the major concentrations of head available in both the Brown and Vanapa River Basins. Moreover, these previous studies did not overlook any locations where major storage reservoirs could be developed for regulation of stream flows. Based on the foregoing, the layouts documented by Gibb were accepted as a sound basis for estimation of energy potentials and project costs and subsequently selection of the most suitable sites as candidates for early development." 5. Although the report and the associated methodology are considered to be "state of the art" at the time of report preparation, some variation to the conclusions is appropriate considering the current status of the PNG generation system. 6. The report used various combinations of "firm" and "secondary" energy for evaluation of the economic viability of the various projects. Considering that the PNG Power system is now a mixed hydro thermal system, the use of average energy is more appropriate. 7. The major findings to be drawn from the Monenco study are that: 8. For the Brown River Basin: * Elevation of Top of Catchment (including lora Diversion) is at about 2,200 m; * Main head concentrations: u/s end 1,000 m and d/s end Naoro Brown 500 m; * Overall Development Potential (assuming 60% system load factor) is about 2,400 GWh and 500 MW; Since the report dates from 1982, it is not known whether the Kosipe mission still exists. 16 This assessment is based on US Federal Energy Regulation Commission (FERC) studies in the 1970s. Using extensive LOLE studies it was concluded that if the mixed system had a reasonable proportion of thermal generation then average energy and average capacity (as limited by mechanical availability and head but not energy) were the appropriate criteria to be used. 66 9. For the Vanapa River Basin: * Elevation of Top of Catchment (including IGuimu Diversion) 2,850 m and Albert Edward Diversion 3,200 m; * Main head concentration: u/s end (up to 1,400 m) and d/s Udava (200 m); * Overall Development Potential (assuming 60% system load factor): is about 5,000 GWh and 1,000 MW. Overall Conclusions 10. The Monenco report concluded: * "The Udava Project [which developed about 600 GWh and has cost of 3.75 Toea/kwh] "has lowest cost by significant margin but......is large in comparison relative to the present load in Port Moresby. The Udava ........will be developed as the need arises......"; * "Run of River development of the Naoro Brown [480 to 500 GWh at a cost of 4.7 to 5.0 Toea/kWh] site is best choice for commencing development of the hydroelectric potential of the Brown river basin." 11. For reasons of matching new supply to demand, because the Naoro Brown project is located closer to Port Moresby, and the feasibility study is well underway, these conclusions are considered to be still valid. The main things that have changed are: (i) the Port Moresby system is now a mixed hydro thermal system and with complementary operation of the hydro, all energy from the Naoro Brown project could be utilized provided there is daily storage or preferably weekly storage; (ii) the value of thermal energy has increased dramatically while hydro capital costs have also increased but at a much lesser rate than fuel costs. These factors will not affect comparative energy costs. The Proposed Naoro Brown Project 12. The feasibility study for the Naoro Brown scheme is being carried out by Entura (consulting arm of Hydro Tasmania). The preliminary findings of the feasibility work were presented in December 2010. The feasibility study was largely concluded in late 2011, though some further work related to geological assessment, in particular regarding the identified seepage issue, is recommended. 13. The proposed project takes advantage of a gross head of about 520 m which occurs across a large loop formed as the Naoro River flows north from Madilogo village to join the westerly-flowing Brown River. 14. Hydrology. The catchment area is about 274 km2. The majority of hydrology data was sourced from the department of Environment and Conservation (DEC) in Port Moresby and included Tideda database, continuous flow and rainfall data on the Naoro River and Brown Rivers in the project area; daily flows digitised back to 1955 for a downstream site on the Brown 67 River; and long-term data from two neighbouring catchment sites. Monthly rainfall data was sourced from National Weather Service (NWS) at a site near the upper boundary of Naoro catchment and in Port Moresby. 15. Water Loss Investigation. Earlier studies had indicated potential water loss in the reach of the Naoro River near Madilogo Village. Conclusion of the water loss investigation indicate that there is water loss of about 0.7 m3/S located approximately 800 m upstream of Madilogo village, returning to the river approx. 800 m downstream of Madilogo village. The preferred dam site would be upstream of the water loss area. 16. Geology of the area. Five distinct geological units dominate the study area: o Kagi Metamorphics - most widely distributed rocks in the area, generally high to extremely high strength with some weakness along the foliation plane and parallel to rock fabric; o Oveia Diorite - igneous rocks that have intruded into the older Kagi Metamorphics; o Efogi Volcanics - predominantly basalt, ranging from very high strength few vesicles to highly vesicular which is lower in strength; o Alluvium - upstream of Madilogo, medium dense sand to fine gravel; o Residual Soils - veneer of soil and colluvium covers the bedrock, no more than 3m thick. 17. Possible Arrangments. The options Study considered three arrangements, shown in the following figure17: o Upstream Option: Dam site upstream of water loss issue (i.e. just upstream of Madilogo Village); o Downstream Option: Dam site downstream of Madilogo village; o Vabuiagi Option: Dam site downstream of the confluence of the Naoro River with the Vabuiagi (also called Fagume) River. 17 Source: Entura presentation on initial findings of the Naoro Brown Feasibility Study, December 2010. 68 General rra nVeibntagf0Option Three Pmorhious Sits Visitedl xentura Coomparson of options is summarized in the fllowing table. Aoiable Gmurn. LTA Flow E,~rg TuOmmAce Storage Head Lenigi (dam heit OPTION 1 ood 562om 16.9 mos - 12 im average (pstrea (I9m) OPTION2 Por 53m 169m/s 2%less [km average downstream (0m) fian Option Madilogo) i OPTION 3 Needs lage 252m 26m s 30%less 7km poru(exra (Fagaue) da (64m) (n,ly alf) 50% m,re fn Option but larger 2km) 18. The arrangement considered is essentially nm of-river though the feasibility study seeks to provide weekly storage subject to the constraint of not flooding äay part of the Kokoda Trail, to benefit from the following advantages which would increase the electricity output from the available head and flow, and would also yield improvements to the overall system operation of the Port Moresby grid. For example: • Reduceed spill at the dam: o Flexibility to generate efficiently since turbines can be tru at optimum efficiency except when the dam is spilling, when they would operate with wicket gates fully optn o System and portfolio benefits can be provided. 69 * Better ability to follow system loads. Hydropower with at least daily storage has very good load following capability in addition to other ancillary benefits such as frequency and voltage regulation, spinning reserve and black start capability. Quick start capability also makes it excellent for cold reserve, thus capacity is often increased simply to provide reserve capacity for the system. All of these factors provide the ability to coordinate with loads and other generation sources resulting in improved system operational flexibility: o Reduced lost generation potential if load is too low but inflows are too high; o Displacement of higher cost generators is possible across a wider timeframe, not dependent on inflow. * Ability to provide on demand support: o Peaking capability; o Voltage support (synchronous condenser at low load with reduced spill) and spinning reserve (frequency support); o Increase system security as unit(s) can be started quickly in case of failure at another station. 19. Preferred Arrangement. Based on the factors noted above and the potential for achieving some level of storage without exceeding the flood plain and without flooding the Kokoda Trail, the preferred arrangement would be the Upstream Option. 20. Proposed Dam, Reservoir, tunnel and power station would have approximately the following characteristics: * The dam site approximately 1 km upstream of the Madilogo village, where a 20m high dam produces an 11 Mm3 storage that provides weekly regulation. * Approximately 234 ha reservoir surface area (approximately 3ha/MW). * An intake structure on the left bank just upstream of the dam structure. * A 10.4 km unlined headrace tunnel, with a 4.25m dia. horseshoe cross-section, from the intake to a surge shaft. * A 400m long x 3.25m dia. vertical shaft going from the headrace tunnel to the power tunnel. * A 1.7 km power tunnel which is steel lined for approximately 1 km and concrete lined the remainder. * A surface power station housing 4 x 20 MW Pelton Turbines, with a gross head of 558 m and a design discharge of 16.9 m3/s. 21. As part of this feasibility study, Entura has obtained the following input data: * LiDAR survey for the project area. * All of the available hydrological data. 18 If the system goes down for any reason then hydropower can be used to "reboot" the system. 70 * Undertaken a water loss investigation program along this reach of the Naoro River. * Undertaken geological drilling at the proposed dam site. 22. Based on the geological investigation undertaken at the dam site, it was shown that the vesicular basalt on the right abutment is highly permeable. Therefore to seal off the reservoir a cut-off will be required on the left abutment. This cut-off would need to extend 300m to the NNE and extend to a depth of 40-50m. Even with this geological issue, the proposed dam site is still the preferred site for the Naoro Brown project. An allowance in the cost estimate has been included to address this geological risk. 23. A significant length of access road totaling about 73 km is required from Edebu to the power station site, an intermediate tunnel portal and the dam site. The proposed transmission route generally follows the access road from the power station site to Edebu, then generally following the Hubert Murray highway with the connection to the Port Moresby transmission grid at the Moitaka Substation. 24. Environmental flow discharges during the dry season will need to be determined based on the environmental baseline work (to be undertaken as part on the proposed World Bank- supported TA project). During the dry season, there are low flows of around 5.8 m3/S (i.e. flow exceeded 95% of the time). The analysis was conducted using environmental flow rates from Om3/s to 3m3/s. The required flow rate would be determined after the environmental baseline has been completed and this would be factored into the final design and cost estimates. 25. The long term average flow of the Naoro River at the proposed dam site is estimated to be 16.9 m3/s. With the design discharge and storage provided, the scheme provides between 68.8 % (3m3/s environmental flow) and 81% regulation (0m3/s environmental flow). The estimated average annual energy produced from the scheme is between 469 and 550 GWh (including 2% transmission losses), with good operation flexibility to meet the peak load requirements of Port Moresby. 26. Hydraulic modeling has indicated that the proposed Naoro Brown project will not impact on the Kokoda Track during both normal and flood operation of the storage. 27. The construction program indicates a total design and construction time of 4.5 to 5 years, with the critical path going through the access road construction and tunnel construction. 28. The preliminary cost estimate for the Naoro Brown project includes an allowance for the cost of addressing the seepage, land compensation costs for the reservoir area, hydropower infrastructure, access roads and transmission line. The estimated unit cost of energy ranges between 3.0 c/kWh (low cost estimate, no environmental flow) to 4.4 c/kWh (high cost estimate, 3m3/s environmental flow. 29. Based on this feasibility study, the Naoro Brown project is economically viable compared to alternatives. 71 30. The recommended next step is to assess options for addressing the identified geological risk of seepage around the right abutment of the proposed dam. The key elements that need to be undertaken to address this issue are: * Grouting trials for the right abutment cut-off; and * Detailed seepage analysis to define the final extent of the cut-off. Environmental and Social Considerations are covered in the main document and in Annex 3. Need for Future Studies 31. While the Port Moresby system can accommodate a largely run-of-river development at this stage, it is evident that the next development should include more significant energy storage for the system. The large potential storages were referred to earlier in this annex. However, as would have been appropriate at the time of the study, it was envisaged that development would proceed from the bottom to the top of the basin. It now appears that the best plan may be to develop the storages in the north and divert the flow towards the coast. From DEM data it appears there may be a catchment area of some 3200 km2 (c.f. Brown catchment area of 1370 km2) with an overall fall of about 3000m over a distance of about 25km. This could be developed in stages. At this stage, any hydrological estimates would be speculative, but at such high elevations it can be anticipated that rainfall will be high. 32. It is evident that further (beyond the Naoro Brown project) hydropower development of the Brown, Vanapa and Angabanga River Basins could provide hydropower for Port Moresby for many years to come. If a supply of natural gas becomes available to supply electricity to Port Moresby, hydropower could be a good complement. Depending on the price of natural gas in the future, new hydro could well be competitive. However, it is also clear that there is a need to update and extend the information available for these basins, not only to take account the Angabanga catchment, but also to take into account the current and projected status of the Port Moresby system and the availability of better mapping techniques and hydrological knowledge. Such studies form part of the proposed project. 72 Attachment A Extract from Monenco Report 1. Additional stream-flow data collected since 1983 have provided a stronger base for estimation of stream flows at the project sites than was possible at that time. Distribution of flows within the two river basins is somewhat different from that previously envisaged. As a result, flows available at many of the sites are either larger or smaller than those used by the Gibb Report.19 2. Energy potential for run-of-river development prospects have been based on the daily flow duration curves developed for each site. The definition of firm energy used previously has been accepted for purposed of reviewing the inventory of sites: i.e. firm energy is that which corresponds to the use of the flow which is equaled or exceeded 95% of the time. Secondary energy potential was determined on the basis of the additional water above the 95% probability flow, which could be used through the turbines. Turbine discharge capacities equal 50%, 75%, 100% and 150% of the long-term average flow were assumed in an attempt to define the optimum site. 3. For sites with some storage potential a simplified simulation model was used to determine what flow regulation would be possible, before deriving comparable estimates of firm and secondary energy. Three different full supply levels were studied in an attempt to define the optimum amount of storage. As for the run-of-river sites four turbine sizes were tested. 4. Cost estimates were based on the layouts presented by GIBB. Quantities of work were adjusted for change in plant installations and dimensions of hydraulic conduits, resulting from the revised estimation of the available stream-flow. After analysis of Gibb's unit prices and subsequent trends in construction costs in Papua New Guinea and elsewhere in the world, the GIBB unit prices were escalated by 26.5% to bring them to 1988 levels. 5. Unit costs if installed capacity and energy were calculated as a guide for economic comparison of the various development prospects. BROWN RIVER BASIN PROJECT RANKING 6. For the Brown River Basin the unit costs are tabulated in Table 2.3 and in Table 3.1. The order in which the projects are listed in Table 2.3 is from the least expensive to most expensive, based on the unit cost of the firm plus half the secondary energy from the best project alternative in each set of three alternatives. Table 3.1 presents the rankings of the schemes based on five different assumptions as to how much secondary energy will be useful. In this tabulation only the best alternative tested for each scheme is listed under each energy assumption, even though that choice does not remain constant as the energy assumption is changed. 7. From examination of these tables it can be seen that the (text missing)20 river schemes, with or without the Naoro Dam and the Fagume Diversion, has the lowest unit costs once 25% or 19 Gibb Australia in association with Mertz & McLellan & Partners and Willing and Partners Pty Ltd. 20 Text in the original document (only available in hard copy) is unreadable. 73 more of the secondary energy can be used. Its least-attractive configuration has a margin over the next best option ranging from about 450% at this level of secondary use to more than 310%. More- over, its initial capital cost is lower than that of its closest competitors. Thus, the run-of-river development of the Naoro Brown project, most of the other schemes are less costly to build and will become more attractive in comparison with thermal alternatives. After selection of the better schemes for development of specific river reaches it appears probably that full development of the Brown River basin will comprise the following projects: * Naoro Brown, with the Fagume Diversion and the Naoro Storage Dam; * Myola-Efogi plus the lora Diversion; * Oveia-Brown "A"; * Lower Brown Dam No3; * Brown-Brown "A" or "B"; * Naoro-Naoro "B" (possibly including Tahu/ Inimu Diversion); * Oveia Storage Dam; 8. The total installation might be as high as 450 MW, with a firm energy potential of some 1200 GWh per year and additional secondary energy potential of about the same amount. 9. For the Vanapa River Basin sites the unit cost are tabulated in tables 2.4 and 4.1, once again in ascending order. From examination of these tables it can be seen that the Udava site has the lowest unit costs by a significant margin, regardless of the assumption made about secondary energy use. Because it is so large relative to the present load in Port Moresby it was deem necessary to consider the somewhat smaller prospect at Sauwo also. Together with the options including the diversion of the Dubu to Udava intake and the diversion of the Sigufe to the Sauwo intake, these projects rank in the first four places regardless of the energy assumption made. The unit cost of energy from the fifth place scheme is higher that Udava's by over 70% when only firm energy is considered and by 27% when 100% of the secondary energy is assumed usable. Comparable figures against Sauwo are 33% and 9%, respectively. 10. The construction of either the Udava or Sauwo would open up the basin, providing basic access and transmission facilities which would significantly lower the capital cost of many of the other schemes. Also the availability of the head and power facilities at either location would enable an immediate benefit to be realized by diverting water from the Irani River by construction of the Kosipe-Woitape Storage reservoir and power diversion. This would, in turn, allow other projects to be realized as a result of greater benefits and/ or lower costs. 11. In summary it appears probably that the Udava (with Dubu Diversion), Sauwo (with Sigufe Diversion), Kito Creek plus Diversions and Vanapa Dam schemes will be developed as need arises. If the inter-basin diversions from the Ivani and Guimu Rivers are determined to be politically and environmentally acceptable, development of the Kosipe-Woitape and Guimu 74 schemes will add to the potentials of the Udava, Sauwo and Vanapa Dam schemes. Will probably make the lower Vanapa scheme attractive, and might make Bori-Bori and even Ononge attractive eventually. The Basin's total power potential is given in approximate form in the following tabulation: Installed Firm Energy Secondary Energy Classification Capacity Potential Potential MW GWh/year GWh/year Probable: Udave + Dubu, Sauwo + Sigufe, 450 1350 1550 Kito Creek plus Diversions, Vanapa Dam Dependent on interbasin diversions: (1) Kosipe-Woitape, Lower Vanapa, 250 1100 600 Benefits at Udava, Sauwo and Vanapa Dam (2) Bori-Bori and Ononge 80 225 270 75 Annex 7: Strategy for Communication and Consultation with Indigenous Communities in the Naoro Brown Hydropower Project Area PNG ENERGY SECTOR DEVELOPMENT PROJECT (P101578) Strategy for Communication and Consultation with Indigenous Communities in the Naoro Brown Hydropower Project Area 1. The Naoro Brown (NB) hydropower project is located in the upper reaches of the Naoro Brown catchment area comprising 274 square km within the Kairuku-Hiri District of the Central Province. Within this District, the NB project area comprises five Wards of the Koiari Rural Local-Level Government. The NB project area is characterized by a very low population density of around 5 persons per sq.km and dispersed small settlements. There are 14 villages of which 13 are inhabited by Mountain Koiari, while a cluster of settlements at Edebu at the lower end of the NB project area also include some Mountain Koiari, who have settled from locations outside the NB catchment area. According to the 2000 Census, the resident population in the project area is 1,415, and another 8,737 persons have migrated from the area to Port Moresby and other locations. Livelihoods in the Naoro Brown catchment area are based on subsistence shifting cultivation supplemented by use of natural resources (e.g. fishing in the rivers). The outmigration from the area is due to lack of income opportunities together with lack of education and health services. The migrants retain links to their villages of origin including land rights. 2. The World Bank's OP 4.10 on Indigenous Peoples would be triggered by the development of the Naoro Brown Hydropower Project since the Mountain Koiari shares the four characteristics that identify indigenous peoples.21 Since the land, water, and other natural resources in the NB project area are all held under customary tenure arrangements by the Mountain Koiari communities, both the land required for specific civil works components and the access to use the area and its water resources for the NB project will require agreements on entitlements to customary land owners and settlers with permissive rights granted in the past. The basis for reaching agreement on entitlements for land acquisition and for the long-term use of the area for hydropower will be the establishment of arrangements which enable a process of free, prior, and informed consultation that starts early in the NB project preparation phase and that results in broad community support for the NB project. The parties to this consultation process will on the one hand be PNG Power and later the NB Project Developer, and on the other hand the population in the NB project area comprising the Mountain Koiari communities in the upper Naoro Brown catchment area that own or have interests in the land, water, and other natural resources. Thus, the Mountain Koiari are the sole direct beneficiaries of the benefit stream that will flow from the Naoro Brown Hydropower project to communities in the NB project area. 3. Little is known about the specific socio-economic and cultural conditions in the NB project area, and a social impact assessment will be undertaken (as part of the Preliminary Social 21 These characteristics are (a) self-identification as members of a distinct indigenous cultural group and recognition of this identity by others; (b) collective attachment to geographically distinct habitats or ancestral territories in the project area and to the natural resources in these habitats and territories; (c) distinctive customary cultural, economic, social, or political institutions, and (d) an indigenous language. 76 Assessment and the ESIA) to furnish the information that will inform (a) the design of a Naoro Brown Information and Consultation Strategy applicable to the preparation, implementation, and operation of the NB project, (b) the determination of the social impacts and the people impacted by the NB project, (c) the development of a Land Acquisition and Resettlement Policy Framework that lays out the principles for management of land acquisition impacts and access to use land and water in the NB project area, and (d) the development of a Resettlement Action Plan (or Abbreviated Resettlement Plan) to manage the land acquisition that will be needed for civil works and any resettlement if that will be required. 4. The approach described above complies with the requirements for project preparation laid out in para 6 of World Bank OP 4.10 (Indigenous Peoples) which involve (a) a screening to establish whether indigenous peoples are present in the project area, (b) a social assessment, and (c) a process of free, prior, and informed consultation to ascertain broad community support for the project and determine the specifics of the benefit stream it will provide to the communities in the project area, and the entitlements for compensation and assistance that will be provided to those affected by land acquisition for project civil works (and in the event of any displacement and resettlement). 5. OP 4.10 (para 12) stipulates that when indigenous peoples are the sole or overwhelming majority of direct project beneficiaries, the elements of an Indigenous Peoples Plan should be included in the project design, and a separate plan is not required. As described above, this is the case with the Naoro Brown hydropower project, and the Naoro Brown Information and Consultation Strategy, which is a central component of the overall design of WB-financed assistance for the preparation of the Naoro Brown Hydropower Project under the proposed PNG Energy Sector Development Project, will establish compliance with the policy by defining arrangements that provide for a process of free, prior, and informed consultation to ascertain broad community support for the NB project so that the people in the NB project area receive culturally appropriate economic and social benefits, and that adverse impacts are minimized, mitigated, and compensated. The key elements of the Naoro Brown Information and Consultation Strategy will include: a. An approach to information dissemination and consultation on the NB project across the affected area that ensures (i) that both men and women receive timely and adequate information to make informed decisions, (ii) that the consultations are undertaken at locations and with groups of people that are meaningful in terms of the rights and interests in the project area, (iii) that the approach itself is accepted by the involved social groups and their representatives, and (iv) that it results in decisions that responds to the interests and concerns of both women and men in the NB project area, and advance the objectives of the NB project. b. Institutional arrangements and staffing (including identifying and addressing capacity building needs) to enable ongoing consultation during NB project preparation, implementation, and operation; c. Institutional arrangements that ensure that agreements are honored by both (i) the NB project (e.g. timely, transparent, and equitable provision of agreed entitlements involving compensation for losses, and lease or benefit sharing entitlements), and (ii) the 77 involved communities (e.g. access to land for civil works or restrictions on logging to ensure catchment area sustainability). d. Institutional arrangements for handling of complaints and grievances that are accepted by the involved communities and that provide for timely resolution. e. Arrangements that ensure documentation comprising (i) records on consultations, (ii) monitoring of the implementation of agreements on entitlements and benefits, and (iii) records on the management and resolution of complaints. 6. This Strategy for Communication and Consultation with Indigenous Communities will be translated into Tok Pisin and disclosed in Port Moresby and at a local information center in the NB project area, as will the Naoro Brown Information and Consultation Strategy and a summary of the RAP when accepted by the involved social groups and their representatives and finalized. The strategy will then be disseminated to the communities in the NB project area, and documentation on consultations, on provision of entitlements and benefits, and on management and resolution of complaints will also be made available in Tok Pisin to communities in the NB project area. 78